What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-07-30 compared with 2026-02-05 · 153 added, 205 removed, 105 unchanged (77% 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 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 quarter ended June 30, 2026 was the first quarter of fiscal 2027.

Pending Reverse Morris Trust Transaction

We have 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.

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

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.

We will retain our Data Centers and Commercial HVAC segment businesses, creating a pure-play climate solutions company.

Under the terms of the agreements, 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, which we will use to pay down our long-term debt obligations.

Based upon the Gentherm stock price, the transaction was valued at approximately $1.0 billion when we entered into the agreements in January 2026.

The Reverse Morris Trust transaction is structured 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.

To facilitate this transaction, we have incurred expenses to separate the Performance Technologies business, including fees for transaction advisory, legal, accounting, tax, and other professional services.

Through June 30, 2026, we have incurred disposition-related costs totaling $22.1 million.

We estimate that we will incur $25.0 million to $35.0 million of additional costs directly related to the transaction during the remainder of fiscal 2027.

Fiscal 2026 acquisitions

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.

During fiscal 2026, we acquired three businesses, 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.

(“AbsolutAire”) for $11.3 million.

AbsolutAire is a Michigan-based manufacturer of direct-fired heating, ventilation, and make-up air systems and has annual sales of approximately $25.0 million.

On May 31, 2025, we acquired LBW Holding Corp.

White”) for $110.5 million.

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.

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 Condensed Consolidated Financial Statements for further information.

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.

We report the financial results of these businesses within the Commercial HVAC segment.

First quarter highlights

Net sales in the first quarter of fiscal 2027 increased $191.3 million, or 28 percent, from the first quarter of fiscal 2026, primarily due to higher sales in our Data Centers segment.

Cost of sales increased $174.7 million, or 34 percent.

Gross profit increased $16.6 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 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 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.

Gross profit increased $38.6 million, yet gross margin declined 150 basis points to 23.2 percent.

SG&A expenses increased $7.8 million.

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.

Gross margin declined 340 basis points to 20.8 percent, primarily due to lower gross margin in the Data Centers segment, largely driven by higher material costs and operating inefficiencies associated with our rapid expansion of manufacturing capacity for data center cooling solutions and supplier capacity constraints.

Selling, general and administrative (“SG&A”) expenses increased $18.4 million, primarily due to higher compensation-related expenses and disposition-related costs.

Operating income of $74.8 million during the first quarter of fiscal 2027 decreased $0.9 million from the prior year, primarily due to higher SG&A expenses, partially offset by higher gross profit.

CONSOLIDATED RESULTS OF OPERATIONS

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,

The following table presents our consolidated financial results on a comparative basis for the three months ended June 30, 2026 and 2025:

Three months ended June 30,

(in millions)

2 unchanged sentences

Restructuring expenses

Impairment charge

Operating income

Interest expense

Pension termination charge

Other (expense) income – net

(Loss) earnings before income taxes

Provision for income taxes

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.

Foreign currency exchange rates favorably impacted sales by $16.3 million.

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.

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.

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 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 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.

Other income (expense) – net

Earnings before income taxes

Benefit (provision) for income taxes

Comparison of the three months ended June 30, 2026 and 2025

First quarter net sales of $874.1 million were $191.3 million, or 28 percent, higher than the first quarter of the prior year, primarily due to $164.9 million of higher sales in our Data Centers segment, primarily driven by sales growth to hyperscale data center customers in North America.

In addition, sales in our Commercial HVAC segment increased $47.4 million, driven by higher sales volume, including $19.7 million of incremental sales from the acquired L.B.

White and Climate by Design businesses.

The higher sales in the Data Centers and Commercial HVAC segments were partially offset by lower sales in our Performance Technologies segment, which decreased $7.7 million.

Foreign currency exchange rates favorably impacted sales by $6.1 million.

Fiscal 2026 year-to-date cost of sales of $1,710.3 million increased $251.8 million, or 17 percent, primarily due to higher sales volume in the Climate Solutions segment and a $27.2 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 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.

Fiscal 2026 year-to-date SG&A expenses increased $7.8 million.

As a percentage of sales, SG&A expenses decreased by 130 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 businesses.

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 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.

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, the sale of which is pending.

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.

First quarter cost of sales increased $174.7 million, or 34 percent, primarily due to higher sales volume, approximately $21.0 million of higher material costs, including higher component and raw material costs and tariffs.

In addition, cost of sales was negatively impacted by operating inefficiencies and a $4.8 million unfavorable impact of foreign currency exchange rates.

The operating inefficiencies were primarily in our Data Centers segment, where we incurred higher costs related to the rapid expansion of manufacturing capacity for data center cooling solutions and supplier capacity constraints that temporarily disrupted our production schedules.

As a percentage of sales, cost of sales increased 340 basis points to 79.2 percent, primarily due to the higher material costs and the operating inefficiencies.

As a result of higher sales and higher cost of sales as a percentage of sales, first quarter gross profit increased $16.6 million, or 10 percent, and gross margin declined 340 basis points to 20.8 percent.

First quarter SG&A expenses increased $18.4 million, or 22 percent.

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

The increase in SG&A expenses was driven by higher compensation-related expenses, which increased approximately $10.0 million, and $7.1 million of costs incurred related to the pending Reverse Morris Trust transaction with Gentherm.

The higher compensation-related expenses include increases in the Data Centers segment, supporting the segment’s growth, incremental expenses from acquired businesses in the Commercial HVAC segment, and higher incentive compensation expenses.

These increases were partially offset by lower compensation-related expenses in the Performance Technologies segment, which included the benefits of previous restructuring actions.

In addition, costs associated with acquisition activities decreased $1.7 million.

Restructuring expenses decreased $0.9 million compared with the first quarter of fiscal 2026, primarily due to lower severance expenses in the Performance Technologies segment.

This decrease was partially offset by higher costs related to transferring production for certain product lines.

Operating income of $74.8 million in the first quarter of fiscal 2027 decreased $0.9 million, or 1 percent, compared with the first quarter of fiscal 2026, primarily due to higher SG&A expenses, partially offset by higher gross profit.

Interest expense during the first quarter of fiscal 2027 increased $0.6 million compared with the first quarter of fiscal 2026, primarily due to higher average outstanding borrowings on our revolving credit facility, partially offset by favorable changes in interest rates.

Other income of $0.2 million during the first quarter of fiscal 2027 represents a $4.4 million change compared with other expense of $4.2 million during the first quarter of fiscal 2026.

Compared with the prior-year period, foreign currency transaction losses decreased $3.2 million and pension benefit costs decreased $1.3 million, as we completed the termination of our primary U.S.

pension plan during the third quarter of fiscal 2026.

The benefit for income taxes was $5.7 million in the first quarter of fiscal 2027, compared with a provision for income taxes of $14.0 million in the same period in the prior year.

The $19.7 million change was primarily due to $26.5 million of tax benefits related to stock-based compensation awards, partially offset by a $3.8 million income tax detriment related to nondeductible compensation in the first quarter of fiscal 2027 and changes in the mix and amount of foreign and U.S.

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

The tax benefits related to stock-based compensation awards were primarily driven by performance-based stock awards granted in fiscal 2024, for which shares were issued during the first quarter of fiscal 2027.

We expect the benefit from the $26.5 million of tax benefits recorded in the first quarter will be largely offset by tax detriments related to nondeductible compensation during the remainder of fiscal 2027.

As a result, we do not expect that our full-year fiscal 2027 effective tax rate will be impacted significantly.

SEGMENT RESULTS OF OPERATIONS

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 December 31,

Nine months ended December 31,

Effective April 1, 2026, we reorganized our Climate Solutions segment and split it into two separate operating segments:

1) Data Centers and 2) Commercial HVAC.

We believe managing these businesses independently allows us to better deploy our 80/20 strategy focused on capitalizing on growth opportunities, particularly in the Data Centers business, and optimizing profit margins and cash flow.

Segment financial information for fiscal 2026 has been recast to conform to the current presentation.

The segment realignment had no impact on the financial results of the Performance Technologies segment.

The following is a discussion of our segment results of operations for the three months ended June 30, 2026 and 2025:

Three months ended June 30,

(in millions)

3 unchanged sentences

Operating income

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 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 $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.

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 $8.0 million, also included expenses from the acquired businesses.

Comparison of the three months ended June 30, 2026 and 2025

Data Centers net sales increased $164.9 million, or 90 percent, from the first quarter of fiscal 2026 to the first quarter of fiscal 2027, primarily due to higher sales volume in North America, driven by sales growth to hyperscale customers.

Data Centers cost of sales increased $149.3 million, or 116 percent, from the first quarter of fiscal 2026 to the first quarter of fiscal 2027, primarily due to higher sales volume and higher material costs, which increased approximately $16.0 million.

We also incurred higher expenses related to the rapid expansion of manufacturing capacity in the U.S.

and our production schedules were temporarily disrupted during the first quarter of fiscal 2027 due to supplier capacity constraints for certain key components, which resulted in unfavorable absorption of manufacturing overhead, facility, and labor costs.

We have been and will continue to take actions to secure supply, including working with current partners and qualifying additional suppliers.

These actions began yielding positive results over the course of the first quarter.

In addition, warranty expense increased approximately $4.0 million compared to the prior year, primarily due to the absence of a favorable warranty settlement in the prior year.

As a percentage of sales, cost of sales increased 960 basis points to 79.8 percent, primarily due to higher material costs and the operating inefficiencies associated with the business’s rapid growth and the supplier capacity constraints.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $15.6 million, or 29 percent, and gross margin declined 960 basis points to 20.2 percent.

Data Centers SG&A expenses increased $4.2 million, or 21 percent, compared with the first quarter of the prior year.

As a percentage of sales, SG&A expenses decreased 390 basis points.

The increase in SG&A expenses was primarily driven by costs to support the segment’s strategic growth initiatives, including higher compensation-related expenses, which increased approximately $5.0 million, and increases across other general and administrative expenses.

These increases were partially offset by lower amortization expense, which decreased $1.8 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 $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.

The lower amortization expense was primarily driven by an order backlog intangible asset related to our acquisition of Scott Springfield Mfg.

Inc., which we finished amortizing during the first quarter of fiscal 2026.

Operating income of $46.3 million increased $11.6 million, or 33 percent, from the first quarter of fiscal 2026 to the first quarter of fiscal 2027, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Commercial HVAC

Three months ended June 30,

(in millions)

Cost of sales

Selling, general and administrative expenses

Restructuring expenses

Operating income

Comparison of the three months ended June 30, 2026 and 2025

Commercial HVAC net sales increased $47.4 million, or 22 percent, from the first quarter of fiscal 2026 to the first quarter of fiscal 2027, primarily due to higher sales volume, including $19.7 million of incremental sales from the L.B.

White and Climate by Design businesses acquired during fiscal 2026, and higher average selling prices.

In addition, foreign currency exchange rates favorably impacted sales by $2.0 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 $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.

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 $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.

The higher compensation-related expenses, which increased approximately $19.0 million, includes expenses from the acquired businesses.

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

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.

Compared with the first quarter of the prior year, sales of HVAC technologies and heat transfer solution products increased $23.5 million and $10.7 million, respectively.

The higher HVAC technologies product sales were primarily driven by the incremental sales from the acquired businesses.

The higher heat transfer solutions product sales were primarily driven by higher sales of heat exchanger coils to customers in the data center market.

Commercial HVAC cost of sales increased $41.7 million, or 27 percent, from the first quarter of fiscal 2026 to the first quarter of fiscal 2027, primarily due to higher sales volume and higher raw material costs, which increased approximately $6.0 million.

In addition, cost of sales was negatively impacted by temporary operating inefficiencies, largely associated with product line transfers, and $1.6 million from foreign currency exchange rates.

As a percentage of sales, cost of sales increased 280 basis points to 75.6 percent, primarily due to higher material costs, temporary operating inefficiencies and unfavorable sales mix, partially offset by higher average selling prices.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $5.7 million, or 10 percent, and gross margin declined 280 basis points to 24.4 percent.

Commercial HVAC SG&A expenses increased $5.4 million, or 22 percent, compared with the first quarter of the prior year.

As a percentage of sales, SG&A expenses decreased 10 basis points.

The increase in SG&A expenses was driven by higher compensation-related expenses, which increased approximately $2.0 million from incremental expenses from the acquired businesses, and increases across other general and administrative expenses.

The higher SG&A expenses included incremental expenses from the businesses acquired during fiscal 2026.

Restructuring expenses increased $1.1 million compared with the first quarter of fiscal 2026, primarily due to higher costs related to transferring production for certain product lines.

Operating income of $31.4 million decreased $0.8 million, or 2 percent, from the first quarter of fiscal 2026 to the first quarter of fiscal 2027, primarily due to higher SG&A and restructuring expenses, partially offset by higher gross profit.

Performance Technologies

Three months ended December 31,

Nine months ended December 31,

Three months ended June 30,

(in millions)

2 unchanged sentences

Restructuring expenses

Impairment charge

Operating income

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.

Comparison of the three months ended June 30, 2026 and 2025

Performance Technologies net sales decreased $7.7 million, or 3 percent, from the first quarter of fiscal 2026 to the first quarter of fiscal 2027, primarily due to lower sales volume in North America.

The lower sales were largely due to market weakness and our strategic exit from lower-margin business in connection with 80/20 product rationalization initiatives.

These decreases were partially offset by a $4.1 million favorable impact of foreign currency exchange rates.

Compared with the first quarter of the prior year, sales of on-highway application products decreased $9.0 million, while sales of heavy-duty equipment products increased $1.3 million.

Performance Technologies cost of sales decreased $4.6 million, or 2 percent, from the first quarter of fiscal 2026 to the first quarter of fiscal 2027, primarily due to lower sales volume and improved operating efficiencies, partially offset by a $3.2 million unfavorable impact of foreign currency exchange rates.

As a percentage of sales, cost of sales increased 60 basis points to 82.4 percent, primarily due to the unfavorable impact of lower sales, 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 $3.1 million, or 6 percent, and gross margin declined 60 basis points to 17.6 percent.

Performance Technologies SG&A expenses decreased $2.4 million, or 11 percent, compared with the first quarter of the prior year.

As a percentage of sales, SG&A expenses decreased 70 basis points.

The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $3.0 million and included the benefits of previous restructuring actions.

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 $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 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 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.

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 $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.

Restructuring expenses decreased $1.8 million compared with the first quarter of the prior year, primarily due to lower severance expenses, partially offset by higher costs related to transferring production for certain product lines.

Operating income of $27.6 million increased $1.1 million, or 4 percent, from the first quarter of fiscal 2026 to the first quarter of fiscal 2027, primarily due to lower SG&A and restructuring expenses, partially offset by lower gross profit.

Liquidity and Capital Resources

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.

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of June 30, 2026 of $95.3 million, and available borrowing capacity of $294.2 million under our revolving credit facility.

Given our extensive international operations, approximately $69.0 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 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.

Net cash provided by operating activities for the three months ended June 30, 2026 was $41.4 million, which represents a $13.7 million increase compared with the same period in the prior year.

This increase was primarily due to favorable net changes in working capital.

Decreases in accounts receivable, primarily driven by a sequential decrease in net sales from the fourth quarter of fiscal 2026, and higher accounts payable levels favorably impacted operating cash flow during the first quarter of fiscal 2027.

Our Data Centers segment production schedules were negatively impacted by supplier capacity constraints during the first quarter of fiscal 2027 and contributed to the sequential sales decrease.

We have been and will continue to take actions to secure supply, including working with current partners and qualifying additional suppliers.

These actions began yielding positive results over the course of the first quarter.

The favorable working capital drivers were partially offset by increases in inventory to support expected sales growth in our Data Centers segment, and higher contract assets related to revenue recognized over time.

Capital expenditures

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.

Capital expenditures of $46.4 million during the first three months of fiscal 2027 increased $18.9 million compared with the same period in the prior year, primarily driven by investments in the Data Centers segment to increase production capacity in support of expected growth in that business.

Business acquisitions

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

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.

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

White and AbsolutAire.

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

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.

During the first three months of fiscal 2027, borrowings on our credit facilities, net of repayments, totaled $91.9 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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Also, the credit agreements may require prepayments in the event of certain asset sales.

As amended, the leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-half times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).

In connection with the pending transaction with Gentherm, we expect to receive $210.0 million, subject to adjustment, immediately prior to transaction closing and plan to use such proceeds to repay principal balances outstanding under our credit agreements.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-half times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).

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 December 31, 2025, we were in compliance with our debt covenants.

As of June 30, 2026, we were in compliance with our debt covenants.

We expect to remain in compliance with our debt covenants during the remainder of fiscal 2027 and beyond.

pension plan termination

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 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.

Purchases of treasury stock

Under our equity compensation plans, participants have the option to sell back shares from their vested awards to satisfy their individual tax withholding obligations.

We hold these purchased shares as treasury shares, which reduces the number of shares outstanding used to calculate earnings per share.

During the first quarter of fiscal 2027 and in connection with the vesting of stock awards, we purchased 219,667 shares for $64.6 million, an increase of $59.5 million compared with the same period last year.

The increase was primarily related to performance-based stock awards granted in fiscal 2024, for which shares were issued during the first quarter of fiscal 2027 after the requisite three-year performance period.

In fiscal 2023, performance-based cash awards were granted in lieu of performance-based stock awards;

therefore, there were no share purchases related to performance-based awards in fiscal 2026 since the awards were settled in cash.

Modine’s share price appreciated significantly from the grant date of the fiscal 2024 performance-based stock awards ($27.29 per share) to the date of issuance in the first quarter of fiscal 2027 ($295.88 per share).

The share price appreciation increased the value of the shares delivered to participants and the shares delivered back to Modine by participants to satisfy their associated tax withholding obligations.

We did not purchase shares under our share repurchase program during the first three months of fiscal 2027.

As of June 30, 2026, 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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Other risks and uncertainties include, but are not limited to, the following:

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 international political and military conflicts;

● The impact of potential adverse developments or disruptions in the global economy and financial markets, including impacts related to geopolitical tensions and military conflicts, including the conflict between the U.S.

and Iran, 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;

● 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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This risk includes our ability to successfully manage our exposure and our ability to adjust product pricing in response to price increases, including through our quotation process or through contract provisions for prospective price adjustments, as well as the inherent lag in timing of such contract provisions;

● Our ability to be at the forefront of technological advances to differentiate ourselves from our competitors and provide innovative products and services to our customers, the impacts of any changes in or the adoption rate of technologies that we expect to drive sales growth, including those related to data center cooling and electric vehicles, and the impacts of any threats or changes to the market growth prospects for our customers;

● Our ability to be at the forefront of technological advances to differentiate ourselves from our competitors and provide innovative products and services to our customers, the impacts of any changes in or the adoption rate of technologies that we expect to drive sales growth, including those related to data center cooling, and the impacts of threats or changes to the market growth prospects for our customers;

● Our ability to mitigate increases in labor costs and labor shortages;

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● Our ability to maintain current customer relationships and compete effectively for new business, including our ability to achieve profit margins acceptable to us by offsetting or otherwise addressing any cost increases associated with supply chain challenges and inflationary market conditions;

● The impact of product or manufacturing difficulties or operating inefficiencies, including any product or program launches, product transfer challenges and warranty claims;

● The impact of product or manufacturing difficulties or operating inefficiencies, including any product or program launches, product transfer challenges and product warranty and liability claims;

● The impact of delays or modifications initiated by major customers with respect to product or program launches, product applications or requirements, or timing of construction or development projects that incorporate our products and services;

● Our ability to consistently structure our operations in order to develop and maintain a competitive cost base with appropriately skilled and stable labor, while also positioning ourselves geographically, so that we can continue to support our customers with the technical expertise and market-leading products they demand and expect from Modine;

● Our ability to effectively and efficiently manage our operations in response to sales volume changes, including maintaining adequate production capacity to meet demand in our growing businesses while also completing restructuring activities and realizing the anticipated benefits thereof;

● Our ability to effectively and efficiently manage our operations in response to sales volume changes, including maintaining adequate production capacity to meet demand in our growing businesses, particularly in our Data Centers businesses, while also completing restructuring activities and realizing the anticipated benefits thereof;

● Costs and other effects of the investigation and remediation of environmental contamination;

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● The constant and increasing pressures associated with healthcare and associated insurance costs.

Strategic risks:

Strategic risks related to the pending Reverse Morris Trust transaction with Gentherm

● Our ability to complete the pending 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 pending transaction;

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

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

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

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

Strategic risks related to business growth and optimization

● Our ability to realize the sales growth and return on investments anticipated in our Data Centers segment;

● Our ability to identify and execute on other organic growth opportunities and acquisitions, and to efficiently and successfully integrate acquired businesses;

● Our ability to successfully realize anticipated benefits, including improved profit margins and cash flow, from strategic initiatives and our continued application of 80/20 principles across our businesses;

● Our ability to accelerate growth by identifying and executing on organic growth opportunities and acquisitions, and to efficiently and successfully integrate acquired businesses;

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

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● The impact of increases in interest rates in relation to our variable-rate debt obligations;

● The impact of changes in federal, state or local taxes that could have the effect of increasing our income tax expense;

● The impact of changes in federal, state or local tax regulations that could have the effect of increasing our income tax expense;

● Our ability to comply with the financial covenants in our credit agreements, including our leverage ratio (net debt divided by Adjusted EBITDA, as defined in our credit agreements) and our interest coverage ratio (Adjusted EBITDA divided by interest expense, as defined in our credit agreements);

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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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What changed 10-Q

Item 2. Management’s Discussion and Analysis