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Item 2. Management’s Discussion and Analysis

2026-02-05 compared with 2025-10-29 · 146 added, 118 removed, 164 unchanged (62% of the section changed)

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

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

The quarter ended December 31, 2025 was the third quarter of fiscal 2026.

Recent announcement

In January 2026, we announced that we entered into definitive agreements with Gentherm Incorporated (“Gentherm”), whereby we will spin-off and simultaneously combine our Performance Technologies segment businesses with Gentherm in a Reverse Morris Trust transaction.

Gentherm, a Michigan-based corporation, is a global leader of innovative thermal management and pneumatic comfort technologies.

The transaction is intended to establish Gentherm as a scaled leader in thermal management.

We will retain our Climate Solutions segment businesses, creating a pure-play climate solutions company focused on the data center and commercial HVAC and refrigeration markets.

Under the terms of the agreement, at the time of the spin-off of our Performance Technologies segment businesses, our shareholders will receive newly-issued Gentherm stock, representing ownership of approximately 40 percent of the combined company.

In addition, immediately prior to transaction closing, we will receive cash proceeds of $210.0 million, subject to adjustment.

In total, the transaction value is approximately $1.0 billion.

We anticipate this transaction will close by the end of calendar 2026, subject to approval by Gentherm’s shareholders and other closing conditions, including regulatory approvals.

Under the Reverse Morris Trust structure, the transaction is intended to be generally tax-free for U.S.

federal income tax purposes for the Company and our shareholders.

To facilitate this transaction, we expect to incur significant fees for transaction advisory, legal, accounting, tax and other professional services.

While we are in the early phases of the process, we currently estimate that these fees and other costs directly related to the transaction will total approximately $30.0 million to $40.0 million.

Fiscal 2026 acquisitions

We recently acquired three businesses within our Climate Solutions segment, each supporting our growth strategy by expanding our product portfolio and broadening our customer base.

During the first and second quarter of fiscal 2026, we acquired three businesses within our Climate Solutions segment, each supporting our growth strategy by expanding our product portfolio and broadening our customer base.

On April 1, 2025, we acquired substantially all of the net operating assets of AbsolutAire, Inc.

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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.

Third quarter highlights

Net sales in the third quarter of fiscal 2026 increased $188.2 million, or 31 percent, from the third quarter of fiscal 2025, primarily due to higher sales in our Climate Solutions segment.

Cost of sales increased $151.7 million, or 32 percent.

Gross profit decreased $0.7 million.

Gross profit increased $36.5 million.

Gross margin declined 120 basis points to 23.1 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.

Selling, general and administrative (“SG&A”) expenses increased $7.3 million.

Operating income of $89.3 million during the third quarter of fiscal 2026 increased $30.0 million from the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses.

During the third quarter of fiscal 2026, we recorded a $116.1 million non-cash pension termination charge in connection with the termination of our primary U.S.

pension plan.

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.

Net sales in the first nine months of fiscal 2026 increased $290.4 million, or 15 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 $251.8 million, or 17 percent, from the same period last year.

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SG&A expenses increased $7.8 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.

We recorded a $4.1 million impairment charge in our Performance Technologies segment during the second quarter of fiscal 2026 related to the pending sale of our technical service center and administrative support facility in Germany, which we expect to close during the fourth quarter of fiscal 2026 or the first quarter of fiscal 2027.

Operating income of $238.5 million during the first nine months of fiscal 2026 increased $29.5 million from the prior year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses and the impairment charge recorded during the second quarter.

During the third quarter of fiscal 2026, we recorded a $116.1 million non-cash pension termination charge in connection with the termination of our primary U.S.

pension plan.

CONSOLIDATED RESULTS OF OPERATIONS

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,

The following table presents our consolidated financial results on a comparative basis for the three and nine months ended December 31, 2025 and 2024:

Three months ended December 31,

Nine months ended December 31,

(in millions)

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Interest expense

Other expense – net

Earnings before income taxes

Pension termination charge

Other (expense) income – net

(Loss) earnings before income taxes

Provision for income taxes

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.

Net (loss) earnings

Comparison of the three months ended December 31, 2025 and 2024

Third quarter net sales of $805.0 million were $188.2 million, or 31 percent, higher than the third quarter of the prior year, primarily due to $183.8 million of higher sales in our Climate Solutions segment, driven by sales growth to hyperscale and colocation data center customers in North America and Europe and $42.8 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 $16.3 million.

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.

Third quarter cost of sales increased $151.7 million, or 32 percent, primarily due to higher sales volume in the Climate Solutions segment and a $12.9 million unfavorable impact of foreign currency exchange rates.

As a percentage of sales, cost of sales increased 120 basis points to 76.9 percent, primarily due to the temporary operating inefficiencies.

As a result of higher sales and higher cost of sales as a percentage of sales, third quarter gross profit increased $36.5 million and gross margin declined 120 basis points to 23.1 percent.

Third quarter SG&A expenses increased $7.3 million, or 9 percent.

As a percentage of sales, SG&A expenses decreased by 220 basis points.

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.

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.

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 increase in SG&A expenses was driven by higher compensation-related expenses in the Climate Solutions segment, supporting the segment’s growth and including incremental expenses from the acquired businesses, partially offset by lower compensation-related expenses in the Performance Technologies segment, which included the benefits of previous restructuring actions.

Other costs directly associated with acquisition and disposition activities increased $2.3 million, primarily driven by costs for legal and other professional services in connection with the proposed Reverse Morris Trust transaction with Gentherm.

Restructuring expenses decreased $0.8 million compared with the third quarter of fiscal 2025, primarily due to lower severance expenses in the Performance Technologies segment and at Corporate.

These decreases were partially offset by higher costs related to transferring production for certain product lines in the Performance Technologies segment and higher severance expenses in the Climate Solutions segment.

Operating income of $89.3 million in the third quarter of fiscal 2026 increased $30.0 million compared with the third quarter of fiscal 2025, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Interest expense during the third quarter of fiscal 2026 increased $2.7 million compared with the third quarter of fiscal 2025, primarily due to higher average outstanding borrowings on our revolving credit facility, partially offset by favorable changes in interest rates.

During the third quarter of fiscal 2026 and in connection with the previously-announced plan termination, we recorded a $116.1 million non-cash pension termination charge to recognize actuarial losses that were included within accumulated other comprehensive loss on our consolidated balance sheet.

Other net expense of $2.8 million during the third quarter of fiscal 2026 represents a $3.9 million decline compared with other income of $1.1 million during the third quarter of fiscal 2025.

The net expense in fiscal 2026 was primarily due to net foreign currency transaction losses of $2.4 million.

In the third quarter of fiscal 2025, the net impact of foreign currency transactions was a gain of $1.8 million.

The provision for income taxes of $8.3 million decreased $4.7 million from the third quarter of fiscal 2025.

The impact of higher operating earnings in fiscal 2026, which caused an increase in the income tax provision, was more than offset by a $13.1 million net income tax benefit related to the $116.1 million pension termination charge recorded in the third quarter of fiscal 2026.

The $13.1 million net income tax benefit from the pension termination charge included a $16.8 million income tax detriment resulting from disproportionate income tax effects in accumulated other comprehensive loss.

In addition, impacts associated with provisions of the One Big Beautiful Bill Act (“OBBBA”) on state deferred taxes and the utilization of foreign tax credits increased the income tax provision during the third quarter of fiscal 2026 by $0.6 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.

Comparison of the nine months ended December 31, 2025 and 2024

Fiscal 2026 year-to-date net sales of $2,226.7 million were $290.4 million, or 15 percent, higher than the same period last year, primarily due to $311.9 million of higher sales in our Climate Solutions segment, including organic sales growth to hyperscale and colocation data center customers in North America and Europe and $80.9 million of incremental sales from the acquired businesses.

The higher sales in the Climate Solutions segment were partially offset by $30.9 million of lower sales in our Performance Technologies segment, largely due to market weakness.

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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 percentage of sales, cost of sales increased 150 basis points to 76.8 percent, primarily due to temporary operating inefficiencies, higher material 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 $38.6 million and gross margin declined 150 basis points to 23.2 percent.

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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 businesses.

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

Other costs directly associated with acquisition and disposition activities increased $6.0 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.

Restructuring expenses during the first nine months of fiscal 2026 decreased $2.8 million compared with the same period last year, primarily due to lower severance expenses in the Performance Technologies segment and at Corporate, partially offset by higher severance expenses in the Climate Solutions segment and higher costs related to transferring production for certain product lines in the Performance Technologies segment.

Operating income of $238.5 million in the first nine months of fiscal 2026 increased $29.5 million compared with the same period last year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses and the $4.1 million impairment charge.

Interest expense during the first nine months of fiscal 2026 increased $1.9 million compared with the same period last year, primarily due to higher average outstanding borrowings on our revolving credit facility, partially offset by favorable changes in interest rates.

Other net expense during the first nine months of fiscal 2026 increased $7.8 million compared with the same period last year, primarily due to net foreign currency transaction losses of $6.6 million.

In fiscal 2025, the net impact of foreign currency transactions was a gain of $0.8 million.

The provision for income taxes of $41.2 million decreased $10.6 million from the first nine months of fiscal 2025.

The impact of higher operating earnings during the current year, which caused an increase in the income tax provision, was more than offset by a $13.1 million net income tax benefit related to the $116.1 million pension termination charge recorded in the third quarter of fiscal 2026.

In addition, impacts associated with provisions of the OBBBA on state deferred taxes and the utilization of foreign tax credits increased the income tax provision during the first nine months of fiscal 2026 by $3.7 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 and six months ended September 30, 2025 and 2024:

The following is a discussion of our segment results of operations for the three and nine months ended December 31, 2025 and 2024:

Climate Solutions

Three months ended September 30,

Six months ended September 30,

Three months ended December 31,

Nine months ended December 31,

(in millions)

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Operating income

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.

Comparison of the three months ended December 31, 2025 and 2024

Climate Solutions net sales increased $183.8 million, or 51 percent, from the third quarter of fiscal 2025 to the third quarter of fiscal 2026, primarily due to higher sales volume.

In addition, foreign currency exchange rates favorably impacted sales by $9.3 million.

Compared with the third quarter of the prior year, sales of data center, HVAC technologies, and heat transfer solution products increased $130.0 million, $34.6 million, and $16.7 million, respectively.

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

The higher HVAC technologies product sales were primarily driven by $42.8 million of incremental sales from the acquired L.B.

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

Climate Solutions cost of sales increased $151.8 million, or 59 percent, from the third quarter of fiscal 2025 to the third quarter of fiscal 2026, primarily due to higher sales volume and, to a lesser extent, 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 $3.0 million.

In addition, cost of sales was negatively impacted by $7.0 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 percentage of sales, cost of sales increased 380 basis points to 75.2 percent, primarily due to the temporary operating inefficiencies and higher material costs.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $32.0 million and gross margin declined 380 basis points to 24.8 percent.

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

Climate Solutions SG&A expenses increased $10.4 million, or 26 percent, compared with the third quarter of the prior year.

As a percentage of sales, SG&A expenses decreased by 180 basis points.

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and finished amortizing during the first quarter of fiscal 2026.

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.

Restructuring expenses increased $0.8 million compared with the third quarter of fiscal 2025, primarily due to higher severance expenses.

Operating income of $83.2 million increased $20.8 million from the third quarter of fiscal 2025 to the third quarter of fiscal 2026, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Comparison of the nine months ended December 31, 2025 and 2024

Climate Solutions year-to-date net sales increased $311.9 million, or 29 percent, from the same period last year, primarily due to higher sales volume.

In addition, foreign currency exchange rates favorably impacted sales by $20.5 million.

Compared with the same period in the prior year, sales of data center, HVAC technologies, and heat transfer solutions products increased $221.7 million, $68.9 million, and $18.5 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.

The higher HVAC technologies product sales are primarily driven by $80.9 million of incremental sales from the acquired businesses, partially offset by lower sales of other indoor air quality products.

The increase in sales of heat transfer products, driven by higher sales of heat transfer coils for commercial and residential applications, 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 year-to-date cost of sales increased $262.1 million, or 34 percent, from the same period last year, primarily due to higher sales volume and, to a lesser extent, 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 $7.0 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.

In addition, cost of sales was negatively impacted by $15.8 million from foreign currency exchange rates.

As a percentage of sales, cost of sales increased 280 basis points to 74.2 percent, primarily due to the temporary operating inefficiencies, higher material costs, and the absence of the commercial pricing settlements in the prior year.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $49.8 million and gross margin declined 280 basis points to 25.8 percent.

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

Climate Solutions year-to-date SG&A expenses increased $21.6 million, or 18 percent, yet decreased 90 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.

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This increase was partially offset by lower amortization expense, which decreased $5.0 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.

Restructuring expenses during the first nine months of fiscal 2026 increased $2.8 million compared with the same period last year, primarily due to higher severance expenses.

Operating income of $212.3 million during the first nine months of fiscal 2026 increased $25.4 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 September 30,

Six months ended September 30,

Three months ended December 31,

Nine months ended December 31,

(in millions)

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Operating income

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 $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.

Comparison of the three months ended December 31, 2025 and 2024

Performance Technologies net sales increased $3.8 million, or 1 percent, from the third quarter of fiscal 2025 to the third quarter of fiscal 2026, primarily due to a $7.0 million favorable impact of foreign currency exchange rates and higher average selling prices, partially offset by 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.

Compared with the third quarter of the prior year, sales of on-highway application products increased $10.0 million and sales of heavy-duty equipment products decreased $3.1 million.

Performance Technologies cost of sales increased $0.4 million from the third quarter of fiscal 2025 to the third quarter of fiscal 2026, primarily due to a $5.9 million unfavorable impact of foreign currency exchange rates, partially offset by lower sales volume and improved operating efficiencies.

In addition, raw material costs decreased approximately $1.0 million.

As a percentage of sales, cost of sales decreased 110 basis points to 81.1 percent, primarily due to higher average selling prices and improved operating efficiencies, partially offset by the unfavorable impact of lower sales volume.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $3.4 million and gross margin improved 110 basis points to 18.9 percent.

Performance Technologies SG&A expenses decreased $6.7 million, or 26 percent, compared with the third quarter of the prior year.

As a percentage of sales, SG&A expenses decreased 260 basis points.

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.

Restructuring expenses increased $0.1 million compared with the third quarter of the prior year, primarily due to higher costs related to transferring production for certain product lines, partially offset by lower severance expenses.

Operating income of $25.8 million increased $10.0 million from the third quarter of fiscal 2025 to the third quarter of fiscal 2026, primarily due to lower SG&A expenses and higher gross profit.

Comparison of the nine months ended December 31, 2025 and 2024

Performance Technologies year-to-date net sales decreased $30.9 million, or 4 percent, from the same period last year, primarily due to lower sales volume in North America, largely due to market weakness and 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 $13.3 million favorable impact of foreign currency exchanges rates and higher average selling prices.

Compared with the same period in the prior year, sales of on-highway applications and heavy-duty equipment products decreased $11.1 million and $7.6 million, respectively.

Performance Technologies year-to-date cost of sales decreased $16.7 million, or 2 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.

These drivers, which decreased cost of sales, were partially offset by higher raw material costs, which increased approximately $2.0 million, and an $11.4 million unfavorable impact of foreign currency exchange rates.

As a percentage of sales, cost of sales increased 100 basis points to 81.4 percent, primarily due to the unfavorable impact of lower sales, partially offset by improved operating efficiencies and higher average selling prices.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $14.2 million and gross margin declined 100 basis points to 18.6 percent.

Performance Technologies year-to-date SG&A expenses decreased $18.2 million, or 23 percent, compared with the same period last year.

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

As a percentage of sales, year-to-date SG&A expenses decreased 180 basis points.

The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $21.0 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.

Restructuring expenses during the first nine months of fiscal 2026 decreased $4.0 million compared with the same period last year, primarily due to lower severance expenses, partially offset by higher costs related to transferring production for certain product lines.

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.

Operating income of $82.0 million during the first nine months of fiscal 2026 increased $3.9 million from the same period last year, primarily due to lower SG&A and restructuring expenses, partially offset by lower gross profit and the impair ment charge recorded in the current year.

Liquidity and Capital Resources

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.

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of December 31, 2025 of $98.7 million, and available borrowing capacity of $216.8 million under our revolving credit facility.

Given our extensive international operations, approximately $80.0 million of our cash and cash equivalents are held by our non-U.S.

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Net cash provided by operating activities

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.

The unfavorable changes in working capital include the impact of higher inventory levels and higher payments for incentive compensation.

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 favorable impact of increases in accounts payable, which largely results from the higher inventory levels.

Net cash provided by operating activities for the nine months ended December 31, 2025 was $53.8 million, which represents a $104.7 million decrease compared with the same period in the prior year.

This decrease was primarily due to an increase in working capital.

The Climate Solutions segment’s Data Center business is growing rapidly, and we have increased inventory levels to support the growing customer demand.

In addition, higher sales have resulted in increased accounts receivable.

The increases in inventory and accounts receivable were partially offset by increases in accounts payable, largely resulting from the higher inventory levels.

The impact of the working capital growth, which decreased operating cash flow, was partially offset by the favorable impact of higher operating earnings.

Capital expenditures

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.

Capital expenditures of $101.2 million during the first nine months of fiscal 2026 increased $44.9 million compared with the same period in the prior year, primarily driven by investments in the Climate Solutions segment to support the growth of our Data Center business.

During the second quarter of fiscal 2026, we announced a 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.

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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.

During the first nine months of fiscal 2026, we made cash payments totaling $182.4 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.

During the first nine months of fiscal 2026, borrowings on our credit facilities, net of repayments, totaled $258.3 million.

We borrowed on our credit facilities to support our strategic growth initiatives, including our acquisitions of L.B.

White and Climate by Design and the rapid expansion of our Data Center business.

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

This credit agreement modified our then-existing revolving credit and term loan facilities, which would have matured in October 2027.

We also amended the agreement governing our Senior Notes, to conform the applicable terms to those of the aforementioned amended and restated credit agreement.

In December 2025, we further amended the credit agreement primarily to increase the borrowing capacity under the revolving credit facility by $150.0 million to $550.0 million.

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.

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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.

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

As of December 31, 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.

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, or other factors.

During the third quarter of fiscal 2026 and in connection with the previously-announced plan termination, we contributed $14.9 million to fully fund our primary U.S.

pension plan and settled all future obligations under the pension plan through a combination of lump-sum payments to participants and the purchase of irrevocable annuity contracts.

As a result, we recorded a non-cash pension termination charge of $116.1 million during the third quarter of fiscal 2026.

Share repurchase program

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.

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

As of December 31, 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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Market risks:

● The impact of potential adverse developments or disruptions in the global economy and financial markets, including impacts related to inflation, energy costs, government incentive or funding programs, supply chain challenges, logistical disruptions, including those related to sea, land or air freight, tariffs, sanctions and other trade issues or cross-border trade restrictions, and military conflicts, including the conflicts in Ukraine and in the Middle East and tension in the Red Sea;

● The impact of other economic, social and political conditions, changes, challenges and unrest, particularly in the geographic, product and financial markets where we and our customers operate and compete, including foreign currency exchange rate fluctuations;

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● Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.

Risks related to the proposed Reverse Morris Trust transaction with Gentherm:

● Our ability to complete the proposed transaction on the terms or in the time frame expected by the parties, or at all;

● The occurrence of any event that could give rise to the termination of the proposed transaction;

● Potential shareholder litigation in connection with the proposed transaction or other litigation, settlements or investigations may affect the timing or occurrence of the proposed transaction or result in significant costs of defense, indemnification and liability;

● Our ability to obtain the anticipated tax treatment of the proposed transaction;

● Greater than expected difficulty in separating the businesses subject to the proposed disposition from our other businesses;

● Disruption of management time from ongoing business operations due to the proposed transaction, or other effects of the proposed transaction on our relationship with our employees, customers, suppliers, or other counterparties.

Forward-looking statements are as of the date of this report;

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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