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Item 2. Management’s Discussion and Analysis

2025-10-29 compared with 2025-07-31 · 152 added, 89 removed, 130 unchanged (65% of the section changed)

2 unchanged sentences

Our fiscal year ends on March 31 and, accordingly, all references to quarters refer to our fiscal quarters.

The quarter ended June 30, 2025 was the first quarter of fiscal 2026.

The quarter ended September 30, 2025 was the second quarter of fiscal 2026.

Fiscal 2026 acquisitions

5 unchanged sentences

White”) for $110.5 million.

Headquartered in Onalaska, Wisconsin with additional manufacturing and distribution operations in Georgia, L.B.

Headquartered in Wisconsin, with additional manufacturing and distribution operations in Georgia, L.B.

White has annual sales of approximately $75.0 million and is a leading provider of specialty heating solutions, including direct-fired forced air, radiant, indirect-fired, and electric heating solutions, for the agriculture, construction, and special event industries.

White holds a leading position in the swine and poultry agricultural heating markets in North America and is a market leader in portables heating.

On July 1, 2025, we acquired Climate by Design International (“Climate by Design”) and paid $64.1 million upon closing.

On July 1, 2025, we acquired Climate by Design International (“Climate by Design”) for $64.4 million.

Based in Minnesota, Climate by Design specializes in desiccant dehumidification technology and critical process air handlers and has annual sales of approximately $45.0 million.

See Note 2 of the Notes to Consolidated Financial Statements for further information.

First quarter highlights

Net sales in the first quarter of fiscal 2026 increased $21.3 million, or 3 percent, from the first quarter of fiscal 2025, primarily due to higher sales in our Climate Solutions segment, partially offset by lower sales in our Performance Technologies segment.

See Note 2 of the Notes to Condensed Consolidated Financial Statements for further information.

Second quarter highlights

Net sales in the second quarter of fiscal 2026 increased $80.9 million, or 12 percent, from the second quarter of fiscal 2025, primarily due to higher sales in our Climate Solutions segment, partially offset by lower sales in our Performance Technologies segment.

Cost of sales increased $81.6 million, or 17 percent.

Gross profit increased $2.8 million and gross margin declined 40 basis points to 24.2 percent.

Selling, general and administrative (“SG&A”) expenses increased $2.1 million.

Operating income of $75.7 million during the first quarter of fiscal 2026 increased $1.3 million from the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Gross profit decreased $0.7 million.

Gross margin declined 290 basis points to 22.3 percent, primarily due to lower gross margin in the Climate Solutions segment, largely driven by temporary operating inefficiencies associated with our rapid expansion of data center manufacturing capacity.

Selling, general and administrative (“SG&A”) expenses decreased $1.6 million.

We recorded a $4.1 million impairment charge in our Performance Technology segment related to a technical service center and administrative support facility in Germany, which we expect to sell during the second half of fiscal 2026.

Operating income of $73.5 million during the second quarter of fiscal 2026 decreased $1.8 million from the prior year, primarily due to the impairment charge, partially offset by lower SG&A and restructuring expenses.

Year-to-date highlights

Net sales in the first six months of fiscal 2026 increased $102.2 million, or 8 percent, from the same period last year, primarily due to higher sales in our Climate Solutions segment, partially offset by lower sales in our Performance Technologies segment.

Cost of sales increased $100.1 million, or 10 percent, from the same period last year.

Gross profit increased $2.1 million, yet gross margin declined 170 basis points to 23.2 percent.

SG&A expenses increased $0.5 million.

Operating income of $149.2 million during the first six months of fiscal 2026 decreased $0.5 million from the prior year, primarily due to the impairment charge recorded during the second quarter, partially offset by higher gross profit and lower restructuring expenses.

CONSOLIDATED RESULTS OF OPERATIONS

The following table presents our consolidated financial results on a comparative basis for the three months ended June 30, 2025 and 2024:

Three months ended June 30,

The following table presents our consolidated financial results on a comparative basis for the three and six months ended September 30, 2025 and 2024:

Three months ended September 30,

Six months ended September 30,

(in millions)

2 unchanged sentences

Restructuring expenses

Impairment charge

Operating income

3 unchanged sentences

Provision for income taxes

Comparison of the three months ended June 30, 2025 and 2024

First quarter net sales of $682.8 million were $21.3 million, or 3 percent, higher than the first quarter of the prior year, primarily due to $40.1 million of higher sales in our Climate Solutions segment, driven by sales growth to hyperscale and colocation data center customers in North America and $10.0 million of incremental sales from the acquired AbsolutAire and L.B.

White businesses.

The higher sales in Climate Solutions were partially offset by lower sales in our Performance Technologies segment, which decreased $23.5 million, largely due to market weakness.

Comparison of the three months ended September 30, 2025 and 2024

Second quarter net sales of $738.9 million were $80.9 million, or 12 percent, higher than the second quarter of the prior year, primarily due to $88.0 million of higher sales in our Climate Solutions segment, driven by sales growth to hyperscale and colocation data center customers in North America and $28.1 million of incremental sales from the acquired L.B.

White, Climate by Design, and AbsolutAire businesses.

The higher sales in the Climate Solutions segment were partially offset by lower sales in our Performance Technologies segment, which decreased $11.2 million, largely due to market weakness.

Foreign currency exchange rates favorably impacted sales by $9.4 million.

First quarter cost of sales increased $18.5 million, or 4 percent, primarily due to higher sales volume and a $6.5 million unfavorable impact of foreign currency exchange rates.

In addition, cost of sales was unfavorably impacted by higher raw material costs, which increased approximately $2.0 million, and to a lesser extent, higher labor and inflationary costs.

These drivers, which increased cost of sales, were partially offset by lower warranty expense, which decreased approximately $3.0 million.

In addition, cost of sales was favorably impacted by the absence of a $1.6 million inventory purchase accounting adjustment recorded during the first quarter of fiscal 2025 at Corporate related to Scott Springfield Mfg.

As a percentage of sales, cost of sales increased 40 basis points to 75.8 percent, primarily due to the unfavorable impact of lower sales and higher material costs in the Performance Technologies segment.

As a result of higher sales and higher cost of sales as a percentage of sales, first quarter gross profit increased $2.8 million, yet gross margin declined 40 basis points to 24.2 percent.

First quarter SG&A expenses increased $2.1 million, or 3 percent.

Second quarter cost of sales increased $81.6 million, or 17 percent, primarily due to higher sales volume in the Climate Solutions segment and a $7.8 million unfavorable impact of foreign currency exchange rates.

In addition, cost of sales was unfavorably impacted by temporary operating inefficiencies in the Climate Solutions segment, largely due to the rapid expansion of manufacturing capacity for data center products, and higher raw material costs, which increased approximately $5.0 million.

These drivers, which increased cost of sales, were partially offset by lower sales volume and improved operating efficiencies in the Performance Technologies segment.

As a percentage of sales, cost of sales increased 290 basis points to 77.7 percent, primarily due to the absence of commercial pricing settlements and the recognition of sales tax credits in Brazil, both of which favorably impacted the prior year, higher material costs, and temporary operating inefficiencies.

As a result of higher sales and higher cost of sales as a percentage of sales, second quarter gross profit decreased $0.7 million and gross margin declined 290 basis points to 22.3 percent.

Second quarter SG&A expenses decreased $1.6 million, or 2 percent.

As a percentage of sales, SG&A expenses decreased by 160 basis points.

The increase in SG&A expenses includes higher compensation-related expenses in the Climate Solutions segment, supporting the segment’s growth and including incremental expenses from the acquired AbsolutAire and L.B.

White businesses.

The decrease in SG&A expenses was driven by lower compensation-related expenses in the Performance Technologies segment, which included the benefits of previous restructuring actions, and lower incentive compensation expense.

These drivers, which decreased SG&A, were partially offset by higher compensation-related expenses in the Climate Solutions segment, supporting the segment’s growth and including incremental expenses from the acquired businesses.

Other costs directly associated with acquisition and integration activities increased $2.3 million.

These drivers, which increased SG&A expenses, were partially offset by lower compensation-related expenses in the Performance Technologies segment, including the benefit of recent restructuring actions.

Restructuring expenses during the first quarter of fiscal 2026 primarily consisted of severance expenses, the majority of which were recorded in the Performance Technologies segment.

Compared with the first quarter of fiscal 2025, restructuring expenses decreased $0.6 million, primarily due to lower severance expenses in the Performance Technologies segment, partially offset by higher severance expenses in the Climate Solutions segment.

Operating income of $75.7 million in the first quarter of fiscal 2026 increased $1.3 million compared with the first quarter of fiscal 2025, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Other net expenses increased $3.9 million compared with the first quarter of fiscal 2025, primarily due to net foreign currency transaction losses of $3.4 million.

In the first quarter of fiscal 2025, the net impact of foreign currency transactions was a gain of $0.2 million.

Interest expense during the first quarter of fiscal 2026 decreased $1.7 million compared with the first quarter of fiscal 2025, primarily due to lower average outstanding borrowings on our revolving credit facility, and to a lesser extent, favorable changes in interest rates.

The provision for income taxes was $14.0 million and $18.8 million in the first quarter of fiscal 2026 and 2025, respectively.

The $4.8 million decrease was primarily due to changes in the mix and amount of foreign and U.S.

Restructuring expenses decreased $1.4 million compared with the second quarter of fiscal 2025, primarily due to lower severance expenses in the Performance Technologies segment, partially offset by higher severance expenses in the Climate Solutions segment.

During the second quarter of fiscal 2026, we recorded a $4.1 million non-cash impairment charge in the Performance Technologies segment related to a technical service center and administrative support facility in Germany, which we expect to sell during the second half of fiscal 2026.

Operating income of $73.5 million in the second quarter of fiscal 2026 decreased $1.8 million compared with the second quarter of fiscal 2025, primarily due to the $4.1 million impairment charge, partially offset by lower SG&A and restructuring expenses.

Interest expense during the second quarter of fiscal 2026 increased $0.9 million compared with the second quarter of fiscal 2025, primarily due to higher average outstanding borrowings on our revolving credit facility, partially offset by favorable changes in interest rates.

The provision for income taxes was $18.9 million and $20.0 million in the second quarter of fiscal 2026 and 2025, respectively.

The $1.1 million decrease included favorable changes in the mix and amount of foreign and U.S.

earnings, as compared with the same period in the prior year.

We are currently assessing the impact of the One Big Beautiful Bill Act (“OBBBA”) that was enacted in the U.S.

on July 4, 2025.

The OBBBA permanently extends certain expiring provisions of the Tax Cuts and Jobs Act, including 100% bonus depreciation and domestic research cost expensing.

It also includes modifications to the international tax framework.

The legislation has multiple effective dates, with certain provisions being implemented through our fiscal 2027.

The decrease in the provision for income taxes for fiscal 2026 was partially offset by impacts associated with provisions of the One Big Beautiful Bill Act (“OBBBA”) on state deferred taxes and the utilization of foreign tax credits, which increased the income tax provision during the second quarter of fiscal 2026 by $3.1 million.

The Company is continuing to assess provisions of the OBBBA that are expected to impact future periods.

Comparison of the six months ended September 30, 2025 and 2024

Fiscal 2026 year-to-date net sales of $1,421.7 million were $102.2 million, or 8 percent, higher than the same period last year, primarily due to $128.1 million of higher sales in our Climate Solutions segment, including $38.1 million of incremental sales from the acquired businesses and organic sales growth to hyperscale and colocation data center customers.

The higher sales in the Climate Solutions segment were partially offset by $34.7 million of lower sales in our Performance Technologies segment, largely due to market weakness.

Foreign currency exchange rates favorably impacted sales by $17.5 million.

Fiscal 2026 year-to-date cost of sales of $1,091.4 million increased $100.1 million, or 10 percent, primarily due to higher sales volume in the Climate Solutions segment and a $14.3 million unfavorable impact of foreign currency exchange rates.

These drivers, which increased cost of sales, were partially offset by lower sales volume and improved operating efficiencies in the Performance Technologies segment.

As a percentage of sales, cost of sales increased 170 basis points to 76.8 percent, primarily due to higher material and labor costs and the absence of commercial pricing settlements and sales tax credits, which favorably impacted the prior year.

As a result of higher sales and higher cost of sales as a percentage of sales, gross profit increased $2.1 million and gross margin declined 170 basis points to 23.2 percent.

Fiscal 2026 year-to-date SG&A expenses increased $0.5 million.

As a percentage of sales, SG&A expenses decreased by 90 basis points.

Other costs directly associated with acquisition and integration activities increased $3.7 million.

These drivers, which increased SG&A expenses, were partially offset by lower compensation-related expenses in the Performance Technologies segment, which included the benefits of previous restructuring actions, and lower incentive compensation expense.

Restructuring expenses during the first six months of fiscal 2026 decreased $2.0 million compared with the same period last year, primarily due to lower severance expenses in the Performance Technologies segment, partially offset by higher severance expenses in the Climate Solutions segment.

Operating income of $149.2 million in the first six months of fiscal 2026 decreased $0.5 million compared with the same period last year, primarily due to the $4.1 million impairment charge, partially offset by higher gross profit and lower restructuring expenses.

Interest expense during the first six months of fiscal 2026 decreased $0.8 million compared with the same period last year, primarily due to favorable changes in interest rates, partially offset by higher average outstanding borrowings on our revolving credit facility.

Other net expenses during the first six months of fiscal 2026 increased $3.9 million compared with the same period last year, primarily due to an increase in net foreign currency transaction losses.

The provision for income taxes was $32.9 million and $38.8 million during the first six months of fiscal 2026 and 2025, respectively.

The $5.9 million decrease included favorable changes in the mix and amount of foreign and U.S.

earnings, as compared with the same period in the prior year.

The decrease in the provision for income taxes for fiscal 2026 was partially offset by impacts associated with provisions of the OBBBA on state deferred taxes and the utilization of foreign tax credits, which increased the income tax provision during the second quarter of fiscal 2026 by $3.1 million.

The Company is continuing to assess provisions of the OBBBA that are expected to impact future periods.

SEGMENT RESULTS OF OPERATIONS

The following is a discussion of our segment results of operations for the three months ended June 30, 2025 and 2024:

The following is a discussion of our segment results of operations for the three and six months ended September 30, 2025 and 2024:

Climate Solutions

Three months ended June 30,

Three months ended September 30,

Six months ended September 30,

(in millions)

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Operating income

Comparison of the three months ended June 30, 2025 and 2024

Climate Solutions net sales increased $40.1 million, or 11 percent, from the first quarter of fiscal 2025 to the first quarter of fiscal 2026, primarily due to higher sales volume and a $6.1 million favorable impact of foreign currency exchange rates.

The higher sales volume includes sales growth to hyperscale and colocation customers in North America and $10.0 million of incremental sales from the recently-acquired AbsolutAire and L.B.

White businesses.

Compared with the first quarter of the prior year, sales of data center and HVAC technologies products increased $24.3 million and $17.2 million, respectively.

Sales of heat transfer solution products decreased $1.4 million.

Climate Solutions cost of sales increased $28.0 million, or 11 percent, from the first quarter of fiscal 2025 to the first quarter of fiscal 2026, primarily due to higher sales volume and a $4.7 million unfavorable impact of foreign currency exchange rates.

These increases were partially offset by lower warranty expense, which decreased approximately $3.0 million.

As a percentage of sales, cost of sales decreased 20 basis points to 71.6 percent, primarily due to favorable sales mix.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.1 million and gross margin improved 20 basis points to 28.4 percent.

Climate Solutions SG&A expenses increased $3.9 million compared with the first quarter of the prior year.

Comparison of the three months ended September 30, 2025 and 2024

Climate Solutions net sales increased $88.0 million, or 24 percent, from the second quarter of fiscal 2025 to the second quarter of fiscal 2026, primarily due to higher sales volume and a $5.1 million favorable impact of foreign currency exchange rates.

Compared with the second quarter of the prior year, sales of data center, HVAC technologies, and heat transfer solution products increased $67.4 million, $17.1 million, and $3.2 million, respectively.

The higher data center product sales include sales growth to hyperscale and colocation customers in North America and Europe.

The higher HVAC technologies product sales are primarily driven by $28.1 million of incremental sales from the acquired L.B.

White, Climate by Design, and AbsolutAire businesses, partially offset by lower sales of other heating and indoor air quality products.

The increase in sales of heat transfer products was partially offset by the absence of commercial pricing settlements with heat pump customers in Europe, which had a favorable impact during the prior year.

Climate Solutions cost of sales increased $82.3 million, or 32 percent, from the second quarter of fiscal 2025 to the second quarter of fiscal 2026, primarily due to higher sales volume, temporary operating inefficiencies, largely due to the rapid expansion of manufacturing capacity in the U.S.

for data center products, and higher raw material costs, which increased approximately $4.0 million.

In addition, cost of sales was negatively impacted by $4.1 million from foreign currency exchange rates.

As a percentage of sales, cost of sales increased 440 basis points to 75.4 percent, primarily due to the temporary operating inefficiencies, the absence of the commercial pricing settlements in the prior year, and higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $5.7 million and gross margin declined 440 basis points to 24.6 percent.

Climate Solutions SG&A expenses increased $7.3 million compared with the second quarter of the prior year.

As a percentage of sales, SG&A expenses decreased by 60 basis points.

The increase in SG&A expenses includes higher compensation-related expenses, which increased approximately $6.0 million, including expenses from the acquired businesses.

This increase was partially offset by lower amortization expense, which decreased $1.2 million, and decreases across other general and administrative expenses .

The increase in SG&A expenses was primarily driven by higher compensation-related expenses and increases across other general and administrative expenses, including costs to support strategic growth initiatives.

The higher compensation-related expenses, which increased approximately $6.0 million, also included expenses from the acquired businesses.

These increases were partially offset by lower amortization expense, which decreased $2.2 million.

The lower amortization expense was primarily driven by an order backlog intangible asset, which we recorded in connection with our acquisition of Scott Springfield Mfg.

and finished amortizing during the first quarter of fiscal 2026.

Restructuring expenses increased $1.1 million compared with the first quarter of fiscal 2025, primarily due to higher severance expenses and equipment transfer costs.

Operating income of $66.9 million increased $7.1 million from the first quarter of fiscal 2025 to the first quarter of fiscal 2026, primarily due to higher gross profit, partially offset by higher SG&A and restructuring expenses.

Restructuring expenses increased $0.9 million compared with the second quarter of fiscal 2025, primarily due to higher severance expenses, partially offset by lower equipment transfer costs.

Operating income of $62.2 million decreased $2.5 million from the second quarter of fiscal 2025 to the second quarter of fiscal 2026, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Comparison of the six months ended September 30, 2025 and 2024

Climate Solutions year-to-date net sales increased $128.1 million, or 18 percent, from the same period last year, primarily due to higher sales volume, and an $11.2 million favorable impact of foreign currency exchange rates.

Compared with the same period in the prior year, sales of data center, HVAC technologies, and heat transfer solutions products increased $91.7 million, $34.3 million, and $1.8 million respectively.

The higher data center product sales include sales growth to hyperscale and colocation customers in North America and Europe.

The higher HVAC technologies product sales are primarily driven by $38.1 million of incremental sales from the acquired businesses.

Climate Solutions year-to-date cost of sales increased $110.3 million, or 21 percent, from the same period last year, primarily due to higher sales volume and an $8.8 million unfavorable impact of foreign currency exchange rates .

In addition, cost of sales was negatively impacted by temporary operating inefficiencies, largely due to the rapid expansion of manufacturing capacity in the U.S.

for data center products, and higher raw material costs, which increased approximately $4.0 million.

As a percentage of sales, cost of sales increased 220 basis points to 73.6 percent, primarily due to the temporary operating inefficiencies, the absence of the commercial pricing settlements in the prior year, and higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $17.8 million and gross margin declined 220 basis points to 26.4 percent.

Climate Solutions year-to-date SG&A expenses increased $11.2 million, yet decreased 40 basis points as a percentage of sales.

The increase in SG&A expenses was primarily driven by higher compensation-related expenses and increases across other general and administrative expenses.

The higher compensation-related expenses, which increased approximately $12.0 million, includes expenses from the acquired businesses.

This increase was partially offset by lower amortization expense, which decreased $3.3 million.

Restructuring expenses during the first six months of fiscal 2026 increased $2.0 million compared with the same period last year, primarily due to higher severance expenses, partially offset by lower costs related to transferring production and warehousing for certain product lines.

Operating income of $129.1 million during the first six months of fiscal 2026 increased $4.6 million from the same period last year, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Performance Technologies

Three months ended June 30,

Three months ended September 30,

Six months ended September 30,

(in millions)

2 unchanged sentences

Restructuring expenses

Impairment charge

Operating income

Comparison of the three months ended June 30, 2025 and 2024

Performance Technologies net sales decreased $23.5 million, or 8 percent, from the first quarter of fiscal 2025 to the first quarter of fiscal 2026, primarily due to lower sales volume in North America, largely due to market weakness and our strategic exit from lower-margin business in connection with 80/20 product rationalization initiatives.

This decrease was partially offset by a $2.0 million favorable impact of foreign currency exchange rates.

Compared with the first quarter of the prior year, sales of on-highway application and heavy-duty equipment products decreased $14.6 million and $4.2 million, respectively.

Performance Technologies cost of sales decreased $11.9 million, or 5 percent, from the first quarter of fiscal 2025 to the first quarter of fiscal 2026, primarily due to lower sales volume and, to a lesser extent, improved operating efficiencies.

These drivers, which decreased cost of sales, were partially offset by higher material costs, which increased $2.0 million and a $1.8 million unfavorable impact of foreign currency exchange rates.

Comparison of the three months ended September 30, 2025 and 2024

Performance Technologies net sales decreased $11.2 million, or 4 percent, from the second quarter of fiscal 2025 to the second quarter of fiscal 2026, primarily due to lower sales volume in North America, largely due to market weakness, our strategic exit from lower-margin business in connection with 80/20 product rationalization initiatives, and, to a lesser extent, the absence of sales tax credits recognized in Brazil during the prior year.

These decreases were partially offset by higher average selling prices, and a $4.3 million favorable impact of foreign currency exchange rates.

Compared with the second quarter of the prior year, sales of on-highway application and heavy-duty equipment products decreased $6.5 million and $0.3 million, respectively.

Performance Technologies cost of sales decreased $5.2 million, or 2 percent, from the second quarter of fiscal 2025 to the second quarter of fiscal 2026, primarily due to lower sales volume and, to a lesser extent, improved operating efficiencies.

These drivers, which decreased cost of sales, were partially offset by a $3.7 million unfavorable impact of foreign currency exchange rates and higher raw material costs, which increased approximately $1.0 million.

As a percentage of sales, cost of sales increased 130 basis points to 81.1 percent, primarily due to the unfavorable impact of lower sales and higher material costs, partially offset by improved operating efficiencies.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $6.0 million and gross margin declined 130 basis points to 18.9 percent.

Performance Technologies SG&A expenses decreased $4.9 million compared with the first quarter of the prior year.

Performance Technologies SG&A expenses decreased $6.6 million compared with the second quarter of the prior year.

As a percentage of sales, SG&A expenses decreased by 190 basis points.

The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $6.0 million and included the benefit of recent restructuring actions.

Restructuring expenses decreased $1.7 million compared with the first quarter of the prior year, primarily due to lower severance expenses in Europe, partially offset by higher severance expenses in North America.

Operating income of $26.5 million decreased $5.0 million from the first quarter of fiscal 2025 to the first quarter of fiscal 2026, primarily due to lower gross profit, partially offset by lower SG&A and restructuring expenses.

The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $8.0 million and included the benefits of previous restructuring actions.

Restructuring expenses decreased $2.4 million compared with the second quarter of the prior year, primarily due to lower severance expenses in Europe.

During the second quarter of fiscal 2026, we recorded a $4.1 million non-cash impairment charge to reduce the carrying value of a technical service center and administrative support facility in Germany to estimated fair value, less costs to sell.

Operating income of $29.7 million decreased $1.1 million from the second quarter of fiscal 2025 to the second quarter of fiscal 2026, primarily due to lower gross profit and the impairment charge recorded in the current year, partially offset by lower SG&A and restructuring expenses.

Comparison of the six months ended September 30, 2025 and 2024

Performance Technologies year-to-date net sales decreased $34.7 million, or 6 percent, from the same period last year, primarily due to lower sales volume, largely due to market weakness, our strategic exit from lower-margin business , and, to a lesser extent, the absence of sales tax credits recognized in Brazil during the prior year.

These decreases were partially offset by a $6.3 million favorable impact of foreign currency exchanges rates.

Compared with the same period in the prior year, sales of on-highway applications and heavy-duty equipment products decreased $21.1 million and $4.5 million, respectively.

Performance Technologies year-to-date cost of sales decreased $17.1 million, or 4 percent, from the same period last year, primarily due to lower sales volume and, to a lesser extent, improved operating efficiencies.

These drivers, which decreased cost of sales, were partially offset by higher raw material costs, which increased approximately $3.0 million, and a $5.5 million unfavorable impact of foreign currency exchange rates.

As a percentage of sales, cost of sales increased 190 basis points to 81.5 percent, primarily due to the unfavorable impact of lower sales and higher material costs, partially offset by improved operating efficiencies.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $17.6 million and gross margin declined 190 basis points to 18.5 percent.

Performance Technologies year-to-date SG&A expenses decreased $11.5 million, or 22 percent, compared with the same period last year.

As a percentage of sales, year-to-date SG&A expenses decreased by 140 basis points.

The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $14.0 million and included the benefits of previous restructuring actions.

Restructuring expenses during the first six months of fiscal 2026 decreased $4.1 million compared with the same period last year, primarily due to lower severance expenses in Europe, partially offset by higher severance expenses in North America.

Operating income of $56.2 million during the first six months of fiscal 2026 decreased $6.1 million from the same period last year, primarily due to lower gross profit and the impair ment charge recorded in the current year, partially offset by lower SG&A and restructuring expenses.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of June 30, 2025 of $124.5 million, and available borrowing capacity under our revolving credit facility.

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of September 30, 2025 of $83.8 million, and available borrowing capacity of $128.8 million under our revolving credit facility.

Given our extensive international operations, approximately $53.0 million of our cash and cash equivalents are held by our non-U.S.

5 unchanged sentences

Net cash provided by operating activities

Net cash provided by operating activities for the three months ended June 30, 2025 was $27.7 million, which represents a $12.8 million decrease compared with the same period in the prior year.

Net cash provided by operating activities for the six months ended September 30, 2025 was $29.1 million, which represents a $68.7 million decrease compared with the same period in the prior year.

This decrease in operating cash flow was primarily due to unfavorable net changes in working capital, as compared with the same period in the prior year.

1 unchanged sentence

Our Climate Solutions segment has increased inventory levels in fiscal 2026, primarily to support growing customer demand for data center products in the U.S.

These drivers were partially offset by the f avorable impact of increases in accounts payable, which largely resulted from the higher inventory levels .

These drivers were partially offset by the favorable impact of increases in accounts payable, which largely results from the higher inventory levels.

Capital expenditures

Capital expenditures of $27.5 million during the first three months of fiscal 2026 increased $0.7 million compared with the same period in the prior year.

We are focused on investments that support our strategic growth initiatives.

We recently announced that we plan to invest $100.0 million over the next twelve months to expand our manufacturing capacity in the U.S.

Capital expenditures of $59.4 million during the first six months of fiscal 2026 increased $19.1 million compared with the same period in the prior year.

During the second quarter of fiscal 2026, we announced a new plan to invest an incremental $100.0 million over the next twelve months to expand our manufacturing capacity in the U.S.

for data center products.

Business acquisitions

Under our strategy based upon 80/20 principles, we are focused on acquiring businesses that we expect will accelerate our strategic growth in select markets.

During the first quarter of fiscal 2026, we made cash payments totaling $119.0 million to acquire L.B.

White and AbsolutAire.

On July 1, 2025, we paid $64.1 million upon closing for the acquisition of Climate by Design International.

See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding acquisitions.

During the first quarter of fiscal 2026, borrowings on our credit facilities, net of repayments, totaled $172.0 million.

We primarily used the incremental borrowings for funding our acquisitions of L.B.

White and Climate by Design International, which closed on May 31, 2025 and July 1, 2025, respectively.

We are focused on acquiring businesses that we expect will accelerate our strategic growth.

During the first half of fiscal 2026, we made cash payments totaling $182.1 million to acquire L.B.

White, Climate by Design, and AbsolutAire.

See Note 2 of the Notes to Condensed Consolidated Financial Statements for additional information regarding these acquisitions.

During the first six months of fiscal 2026, borrowings on our credit facilities, net of repayments, totaled $224.6 million.

We primarily used the incremental borrowings to fund our acquisitions of L.B.

White and Climate by Design, which closed on May 31, 2025 and July 1, 2025, respectively.

In July 2025, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $400.0 million revolving credit facility and a $200.0 million term loan facility maturing in July 2030.

2 unchanged sentences

Our credit agreements require us to maintain compliance with various covenants, including a leverage ratio covenant and an interest expense coverage ratio covenant, which are discussed further below.

Indebtedness under our credit agreements is secured by substantially all domestic assets, excluding real estate.

Indebtedness under our credit agreements is secured by liens on substantially all domestic assets, excluding real estate.

These agreements further require compliance with various covenants that may limit our ability to incur additional indebtedness;

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We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.

We were in compliance with our debt covenants as of June 30, 2025 and expect to remain in compliance with our debt covenants during the remainder of fiscal 2026 and beyond.

As of September 30, 2025, we were in compliance with our debt covenants.

We expect to remain in compliance with our debt covenants during the remainder of fiscal 2026 and beyond.

pension plan termination

In June 2024, we approved the termination of our U.S.

pension plan, which is pending approval from the Pension Benefit Guaranty Corporation.

We intend to offer certain participants the option to receive their pension benefits in the form of a lump-sum distribution prior to purchasing annuity contracts to transfer our remaining obligations under the plan.

pension plan.

We offered certain participants the option to receive their pension benefits in the form of a lump-sum distribution and plan to purchase annuity contracts to transfer our remaining obligations under the plan.

In connection with the plan termination, we expect to make additional cash contributions in the range of $20.0 million to $25.0 million to fully fund the plan, on a plan termination basis, and to record non-cash pension settlement charges totaling approximately $120.0 million to $125.0 million during the second half of fiscal 2026.

The timing and amount of the final cash contribution and settlement charges could materially differ from our estimates due to the nature and timing of participant settlements, prevailing market and economic conditions, the duration of the termination process, and/or other factors.

Share repurchase program

We did not purchase shares under our share repurchase program during the first quarter of fiscal 2026.

As of June 30, 2025, we had $81.6 million of share repurchase authorization remaining under the repurchase program, which does not expire.

We did not purchase shares under our share repurchase program during the first half of fiscal 2026.

As of September 30, 2025, we had $81.6 million of share repurchase authorization remaining under the repurchase program, which does not expire.

Our decision whether and to what extent to repurchase additional shares under the program will depend on a number of factors, including business conditions, other cash priorities, and stock price.

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● Our ability to successfully exit portions of our business that do not align with our strategic plans.

Business dispositions involve risks, including transaction-related and other costs, damage to or the loss of customer relationships, the diversion of management’s attention from other business concerns, and other effects of litigation, claims, or other obligations, including those that may be asserted against us in connection with disposed businesses.

Business dispositions involve risks, including transaction-related and other costs, damage to or the loss of customer relationships, the diversion of management’s attention from our other business concerns, and other effects of litigation, claims, or other obligations, including those that may be asserted against us in connection with disposed businesses.

Financial risks:

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis