0001104659-26-010790
SEC filingRevenue surged 31% YoY to $805M, driven by Climate Solutions data center growth, but gross margin fell 120 bps due to operating inefficiencies.
For the third quarter of fiscal 2026, Modine reported net sales of $805.0 million, a 31% increase compared to $616.8 million in the prior year period. The growth was primarily driven by a $183.8 million increase in the Climate Solutions segment, fueled by strong demand from hyperscale and colocation data center customers in North America and Europe, as well as $42.8 million in incremental sales from the acquisitions of L.B. White, Climate by Design, and AbsolutAire. Foreign currency exchange rates favorably impacted sales by $16.3 million.
Gross profit increased $36.5 million to $186.1 million, but gross margin declined 120 basis points to 23.1%. The margin compression was attributed to temporary operating inefficiencies in the Climate Solutions segment, largely due to the rapid expansion of manufacturing capacity for data center products. Cost of sales as a percentage of revenue increased to 76.9% from 75.7%.
Selling, general and administrative (SG&A) expenses increased $7.3 million, or 9%, driven by higher compensation costs in Climate Solutions and $2.3 million in costs related to the proposed Reverse Morris Trust transaction with Gentherm. However, SG&A as a percentage of sales improved by 220 basis points to 11.1%. Operating income rose $30.0 million to $89.3 million, with operating margin expanding to 11.1% from 9.6%.
Net income was a loss of $46.8 million, compared to income of $41.2 million in the prior year, primarily due to a $116.1 million non-cash pension termination charge recorded in the quarter. Excluding this charge, adjusted net income would have been significantly higher.
Climate Solutions: Revenue surged 51% to $544.6 million, driven by data center product sales growth of $130.0 million and HVAC technologies sales growth of $34.6 million (including $42.8 million from acquisitions). Gross margin declined 380 basis points to 24.8% due to temporary operating inefficiencies and higher raw material costs. Segment operating income increased $20.8 million to $83.2 million, with operating margin declining to 15.3% from 17.3%.
Performance Technologies: Revenue was essentially flat at $266.0 million, up just 1% YoY. A $7.0 million favorable FX impact and higher average selling prices offset lower sales volume in North America due to market weakness and strategic exits from lower-margin business. Gross margin improved 110 basis points to 18.9% due to higher pricing and improved operating efficiencies. SG&A expenses decreased $6.7 million, or 26%, reflecting benefits from prior restructuring actions. Segment operating income increased $10.0 million to $25.8 million, with operating margin expanding to 9.7% from 6.0%.
Management highlighted the planned spin-off and combination of the Performance Technologies segment with Gentherm in a Reverse Morris Trust transaction, expected to close by the end of calendar 2026. The transaction is intended to create a pure-play climate solutions company focused on data center and commercial HVAC markets. Modine expects to incur $30-40 million in transaction-related fees.
The company is investing aggressively in data center capacity, announcing an incremental $100 million investment over the next twelve months to expand U.S. manufacturing capacity. Capital expenditures for the first nine months totaled $101.2 million, up $44.9 million YoY. The company also borrowed $258.3 million net on credit facilities to support acquisitions and growth initiatives. No specific quantitative guidance was provided for future periods.
As of December 31, 2025, Modine reported cash and cash equivalents of $98.7M and total debt of $616.6M, up from $343.1M at March 31, 2025, primarily due to borrowings for acquisitions. Shareholders' equity increased to $1,121.8M (from $910.2M) driven by retained earnings and OCI. Inventory surged to $542.9M (from $340.9M), reflecting acquisitions and raw material buildup.
The Company disclosed information technology purchase commitments of approximately $35.0M for fiscal 2027-2030 related to cloud, data analytics, and AI services. Additionally, environmental accruals totaled $14.0M, and the supplier finance program had $13.7M outstanding. No other material purchase commitments were noted.
During the nine months ended December 31, 2025, Modine repurchased $6.8M of treasury stock (0.1M shares) under existing authorizations; no new buyback programs were announced. No common dividends were paid. Capital expenditures reached $101.2M (4.5% of sales), up sharply from $56.3M in the prior-year period, driven by Climate Solutions capacity expansion. Debt increased net $273.5M, funded by a new $550M revolving credit facility and a $200M term loan, used partly for three acquisitions totalling $182.4M.
Modine operates two segments. Climate Solutions generated $544.6M in net sales for Q3 FY2026, up 50.9% YoY, with an operating margin of 15.3%. Performance Technologies net sales were $266.0M (+1.5% YoY), with an operating margin of 9.7%. Geographically, Americas contributed 68.5% of total net sales, Europe 24.8%, and Asia 6.7%. Within Climate Solutions, Data Centers drove $296.9M (55% of segment sales), Heat Transfer Solutions $138.0M, and HVAC Technologies $107.1M.
Operating cash flow (CFO) of $53.8M was significantly lower than net earnings of $49.7M, but the gap is largely explained by large non-cash charges (pension termination charge of $116.1M, depreciation/amortization of $59.1M, and stock-based compensation of $14.1M) that boosted cash flow relative to net income. However, massive working capital outflows—particularly a $161.3M inventory build and a $56.4M increase in trade receivables—drained cash, offsetting those non-cash benefits. The accounts payable increase of $93.8M provided some offset.
Capital expenditure intensity rose sharply, with capex of $101.2M representing 188% of CFO, up from 36% in the prior period. This, combined with $182.4M in acquisition spending, drove a $280.1M investing cash outflow. The company funded these outlays primarily through $267.1M in net debt borrowings, resulting in a $251.6M financing inflow.
Free cash flow (not explicitly stated) would be deeply negative given the CFO and capex figures. Share repurchases of $6.8M and dividends to noncontrolling interest of $1.8M were modest relative to the cash consumed by operations and investing. The pension termination charge of $116.1M is a notable one-time item that inflated CFO but did not represent recurring cash generation.