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Item 2. Management’s Discussion and Analysis

2025-07-31 compared with 2025-02-05 · 119 added, 154 removed, 100 unchanged (73% 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, 2024 was the third quarter of fiscal 2025.

Acquisitions and dispositions

On March 1, 2024, we acquired Scott Springfield Mfg.

(“Scott Springfield Manufacturing”), a Canadian-based manufacturer of air handling units, for consideration totaling $184.1 million.

On July 1, 2023, we acquired Napps Technology Corporation (“Napps”), a Texas-based manufacturer of air- and water-cooled chillers, condensing units and heat pumps, for consideration totaling $5.8 million.

These acquisitions expanded our data center and indoor air quality product portfolios and support our growth strategy and mission of improving indoor air quality.

We have reported the financial results of these businesses within the Climate Solutions segment since the acquisition dates.

In October 2023, we sold three automotive businesses based in Germany.

The sale of these businesses, which produce air- and liquid-cooled products for internal combustion, diesel and gasoline engines for the European automotive market, supports our strategic prioritization of resources towards higher-margin technologies.

In December 2024, we signed a definitive agreement to sell our technical service center and administrative support facility in Germany to a real estate investment firm for €11.5 million ($11.9 million).

Earlier this fiscal year, we closed the technical service center and reduced headcount in light of the sale of the three automotive businesses in Germany.

We expect the sale transaction will close during the first half of fiscal 2026, subject to remaining closing conditions.

We expect to record a gain on sale, net of costs to sell, of approximately $3.0 million when the transaction is completed.

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

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.

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

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

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

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

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

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

Third quarter highlights

Net sales in the third quarter of fiscal 2025 increased $55.4 million, or 10 percent, from the third quarter of fiscal 2024, primarily due to higher sales in our Climate Solutions segment, partially offset by lower sales in our Performance Technologies segment.

The higher Climate Solutions segment sales included $73.6 million of incremental sales from the acquired Scott Springfield Manufacturing business.

The lower Performance Technologies segment sales included an $8.0 million impact of the disposition of three automotive businesses in Germany during the third quarter of fiscal 2024.

First quarter highlights

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

Cost of sales increased $18.5 million, or 4 percent.

Gross profit increased $22.3 million and gross margin improved 160 basis points to 24.3 percent.

Selling, general and administrative (“SG&A”) expenses increased $14.0 million and included higher compensation-related expenses and incremental expenses from Scott Springfield Manufacturing, including amortization expense for acquired intangible assets.

Operating income of $59.3 million during the third quarter of fiscal 2025 decreased $2.4 million from the prior year, primarily due to higher SG&A and restructuring expenses and the absence of a $4.0 million gain on sale of three automotive businesses in Germany in the third quarter of fiscal 2024, partially offset by higher gross profit.

Year-to-date highlights

Net sales in the first nine months of fiscal 2025 increased $132.0 million, or 7 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.

The higher Climate Solutions segment sales included $168.1 million of incremental sales from the acquired Scott Springfield Manufacturing and Napps businesses.

The lower Performance Technologies segment sales included a $54.2 million impact of the disposition of three automotive businesses in Germany during the third quarter of fiscal 2024.

Cost of sales increased $44.5 million, or 3 percent, from the same period last year.

Gross profit increased $87.5 million and gross margin improved 310 basis points to 24.7 percent.

SG&A expenses increased $52.3 million and included higher compensation-related expenses and incremental expenses from Scott Springfield Manufacturing, including amortization expense for acquired intangible assets.

Operating income of $209.0 million during the first nine months of fiscal 2025 increased $15.1 million from the prior year, primarily due to higher gross profit, partially offset by higher SG&A and restructuring expenses and the absence of a $4.0 million gain on sale of three automotive businesses in Germany in fiscal 2024.

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

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

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

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, 2024 and 2023:

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, 2025 and 2024:

Three months ended June 30,

(in millions)

2 unchanged sentences

Restructuring expenses

Gain on sale of assets

Operating income

Interest expense

Other income (expense) – net

Other expense – net

Earnings before income taxes

Provision for income taxes

Comparison of the three months ended December 31, 2024 and 2023

Third quarter net sales of $616.8 million were $55.4 million, or 10 percent, higher than the third quarter of the prior year, primarily due to $106.8 million of higher sales in our Climate Solutions segment, driven by $73.6 million of incremental sales from the acquired Scott Springfield Manufacturing business and organic sales growth to hyperscale and colocation data center customers.

The higher sales in Climate Solutions were partially offset by lower sales in our Performance Technologies segment, which decreased $48.7 million, largely due to market weakness and an $8.0 million impact from the disposition of three automotive businesses in Germany during the third quarter of fiscal 2024.

Third quarter cost of sales increased $33.1 million, or 8 percent, primarily due to higher sales volume and, to a lesser extent, higher raw material costs, which increased approximately $4.0 million, and higher labor and inflationary costs.

These drivers, which increased cost of sales, were partially offset by improved operating efficiencies.

As a percentage of sales, cost of sales decreased 160 basis points to 75.7 percent, primarily due to favorable sales mix.

As a result of higher sales and lower cost of sales as a percentage of sales, third quarter gross profit increased $22.3 million and gross margin improved 160 basis points to 24.3 percent.

Third quarter SG&A expenses increased $14.0 million, or 21 percent.

As a percentage of sales, SG&A expenses increased by 120 basis points.

The increase in SG&A expenses includes higher compensation-related expenses, which increased approximately $11.0 million and included incremental expenses from the acquired Scott Springfield Manufacturing business and increased incentive compensation resulting from improved financial results.

In addition, SG&A expenses in the third quarter of fiscal 2025 included $4.6 million of incremental amortization expense for acquired intangible assets.

These increases were partially offset by lower environmental charges related to previously-owned facilities in the U.S., which decreased $1.0 million.

Restructuring expenses increased $6.7 million compared with the third quarter of fiscal 2024, primarily due to higher severance expenses in the Performance Technologies segment.

We recorded a $4.0 million gain on sale at Corporate during the third quarter of fiscal 2024 as a result of the sale of three automotive businesses based in Germany.

Operating income of $59.3 million in the third quarter of fiscal 2025 decreased $2.4 million compared with the third quarter of fiscal 2024, primarily due to higher SG&A and restructuring expenses and the absence of the $4.0 million gain on the sale of the automative businesses in Germany.

These drivers, which negatively impacted operating income, were partially offset by higher gross profit.

Interest expense during the third quarter of fiscal 2025 increased $0.4 million compared with the third quarter of fiscal 2024, primarily due to higher borrowings on our revolving credit facility, which we used to fund a portion of the purchase price for the acquisition of Scott Springfield Manufacturing, partially offset by favorable changes in interest rates.

The provision for income taxes was $13.0 million and $10.3 million in the third quarter of fiscal 2025 and 2024, respectively.

The $2.7 million increase was primarily due to the absence of a $3.1 million tax benefit related to the sale of the automotive businesses in Germany during the third quarter of fiscal 2024.

Comparison of the nine months ended December 31, 2024 and 2023

Fiscal 2025 year-to-date net sales of $1,936.3 million were $132.0 million, or 7 percent, higher than the same period last year, primarily due to $254.6 million of higher sales in our Climate Solutions segment, including $168.1 million of incremental sales from the acquired Scott Springfield Manufacturing and Napps businesses and organic sales growth to hyperscale and colocation data center customers.

The higher sales in Climate Solutions were partially offset by $122.6 million of lower sales in our Performance Technologies segment, including a $54.2 million impact from the disposition of three automotive businesses in Germany during the third quarter of fiscal 2024.

Fiscal 2025 year-to-date cost of sales of $1,458.5 million increased $44.5 million, or 3 percent, primarily due to higher sales volume and higher labor and inflationary costs, partially offset by lower raw material costs, which decreased approximately $2.0 million, and improved operating efficiencies.

In addition, we recorded $1.6 million of cost of sales at Corporate during the first quarter of fiscal 2025 related to an inventory purchase accounting adjustment for the acquisition of Scott Springfield Manufacturing.

As a percentage of sales, cost of sales decreased 310 basis points to 75.3 percent, primarily due to favorable sales mix, higher average selling prices, improved operating efficiencies, and the favorable impact of commercial pricing settlements and the recognition of sales tax credits in Brazil within the Climate Solutions and Performance Technologies segments, respectively.

As a result of higher sales and lower cost of sales as a percentage of sales, gross profit increased $87.5 million and gross margin improved 310 basis points to 24.7 percent.

Fiscal 2025 year-to-date SG&A expenses increased $52.3 million, or 26 percent.

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

The increase in SG&A expenses includes higher compensation-related expenses, which increased approximately $37.0 million and included incremental expenses from the acquired businesses and increased incentive compensation resulting from improved financial results.

In addition, SG&A expenses in the first nine months of fiscal 2025 included $13.9 million of incremental amortization expense for acquired intangible assets.

Restructuring expenses during the first nine months of fiscal 2025 increased $16.1 million compared with the same period last year, primarily due to higher severance expenses and product line transfer costs in the Performance Technologies and Climate Solutions segments, respectively.

We recorded a $4.0 million gain on sale at Corporate during the third quarter of fiscal 2024 as a result of the sale of three automotive businesses based in Germany.

Operating income of $209.0 million in the first nine months of fiscal 2025 increased $15.1 million compared with the same period last year, primarily due to higher gross profit, partially offset by higher SG&A and restructuring expenses and the absence of the $4.0 million gain on the sale of the automative businesses in Germany.

Interest expense during the first nine months of fiscal 2025 increased $3.3 million compared with the same period last year, primarily due to higher borrowings on our revolving credit facility, which we used to fund a portion of the purchase price for the acquisition of Scott Springfield Manufacturing.

The provision for income taxes was $51.8 million and $37.8 million during the first nine months of fiscal 2025 and 2024, respectively.

The $14.0 million increase was primarily due to higher earnings and changes in the mix and amount of foreign and U.S.

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

In addition, the provision for income taxes in the prior year was favorably impacted by both the release of a $1.8 million unrecognized tax benefit during the second quarter as well as a $3.1 million tax benefit related to the sale of the automotive businesses in Germany during the third quarter.

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

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

White businesses.

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

Foreign currency exchange rates favorably impacted sales by $8.1 million.

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

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

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

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

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

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

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

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

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

White businesses.

Other costs directly associated with acquisition and integration activities increased $1.4 million.

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

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

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

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

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

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

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

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

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

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

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

on July 4, 2025.

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

It also includes modifications to the international tax framework.

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

SEGMENT RESULTS OF OPERATIONS

Effective April 1, 2024, we moved our Coatings business, which was previously managed by and reported within the Performance Technologies segment, under the leadership of the Climate Solutions segment.

Under this refined organizational structure, the Coatings business is better aligned with the Climate Solution’s Heat Transfer Products business, which serves similar heating, ventilating, air conditioning, and refrigeration (“HVAC&R”) markets and customers.

We believe that unifying these complementary businesses is allowing us to better focus resources on targeted growth opportunities and more efficiently apply 80/20 principles to optimize profit margins and cash flow.

Segment financial information for fiscal 2024 has been recast to conform to the current presentation.

The following is a discussion of our segment results of operations for the three and nine months ended December 31, 2024 and 2023:

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

Climate Solutions

Three months ended December 31,

Nine months ended December 31,

Three months ended June 30,

(in millions)

3 unchanged sentences

Operating income

Comparison of the three months ended December 31, 2024 and 2023

Climate Solutions net sales increased $106.8 million, or 42 percent, from the third quarter of fiscal 2024 to the third quarter of fiscal 2025, primarily due to higher sales volume.

The higher sales volume includes $73.6 million of incremental sales from the acquired Scott Springfield Manufacturing business.

Compared with the third quarter of the prior year, sales of data center cooling and HVAC&R products increased $106.4 million and $13.7 million, respectively.

The increase in sales of data center cooling products includes sales from Scott Springfield Manufacturing and organic sales growth to hyperscale and colocation customers.

Sales of heat transfer products decreased $13.4 million, largely due to lower sales of heat transfer coils for heat pumps and other commercial and residential applications.

Climate Solutions cost of sales increased $73.8 million, or 40 percent, from the third quarter of fiscal 2024 to the third quarter of fiscal 2025, primarily due to higher sales volume and, to a lesser extent, higher raw material costs, which increased approximately $4.0 million.

As a percentage of sales, cost of sales decreased 100 basis points to 71.4 percent, primarily due to favorable sales mix and the impact of higher sales volume.

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

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

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

White businesses.

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

Sales of heat transfer solution products decreased $1.4 million.

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

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

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

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

Climate Solutions SG&A expenses increased $11.3 million compared with the third quarter of the prior year.

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

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

The increase in SG&A expenses includes higher compensation-related expenses, which increased approximately $6.0 million and included expenses from the acquired Scott Springfield Manufacturing business, and $4.6 million of incremental amortization expense related to acquired intangible assets.

Restructuring expenses decreased $0.3 million compared with the third quarter of fiscal 2024, primarily due to lower equipment transfer costs and severance expenses.

Operating income of $62.4 million increased $22.0 million from the third quarter of fiscal 2024 to the third quarter of fiscal 2025, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Comparison of the nine months ended December 31, 2024 and 2023

Climate Solutions year-to-date net sales increased $254.6 million, or 31 percent, from the same period last year, primarily due to higher sales volume, including $168.1 million of incremental sales from the acquired Scott Springfield Manufacturing and Napps businesses.

Compared with the same period in the prior year, sales of data center cooling and HVAC&R products increased $280.9 million and $31.7 million, respectively.

The increase in sales of data center cooling products includes sales from the acquired Scott Springfield Manufacturing business and organic sales growth to hyperscale and colocation customers.

Sales of heat transfer products decreased $58.2 million, largely due to lower sales of heat transfer coils for heat pumps and other commercial and residential applications, partially offset by commercial pricing settlements with heat pump customers in Europe.

Climate Solutions year-to-date cost of sales increased $167.2 million, or 28 percent, from the same period last year, primarily due to higher sales volume, and, to a lesser extent, higher raw material costs, which increased approximately $7.0 million and higher labor and inflationary costs.

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

As a percentage of sales, cost of sales decreased 180 basis points to 71.4 percent, primarily due to favorable sales mix and the favorable impact of the commercial pricing settlements during the second quarter.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $87.4 million and gross margin improved 180 basis points to 28.6 percent.

Climate Solutions year-to-date SG&A expenses increased $35.5 million and increased 90 basis points as a percentage of sales.

The increase in SG&A expenses includes higher compensation-related expenses, which increased approximately $16.0 million, and $13.9 million of incremental amortization expense related to acquired intangibles assets.

Restructuring expenses during the first nine months of fiscal 2025 increased $1.1 million compared with the same period last year, primarily due to higher costs related to transferring production and warehousing for certain product lines.

Operating income of $186.9 million during the first nine months of fiscal 2025 increased $50.8 million from the same period last year, primarily due to higher gross profit, partially offset by higher SG&A expenses.

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

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

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

and finished amortizing during the first quarter of fiscal 2026.

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

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

Performance Technologies

Three months ended December 31,

Nine months ended December 31,

Three months ended June 30,

(in millions)

3 unchanged sentences

Operating income

Comparison of the three months ended December 31, 2024 and 2023

Performance Technologies net sales decreased $48.7 million, or 16 percent, from the third quarter of fiscal 2024 to the third quarter of fiscal 2025, primarily due to lower sales volume to automotive, off-highway and commercial vehicle customers, largely due to market-related declines.

In addition, the disposition of three automotive businesses in Germany during the third quarter of fiscal 2024 negatively impacted sales by $8.0 million.

Compared with the third quarter of the prior year, sales of air-cooled, liquid-cooled, and advanced solutions products decreased $28.1 million, $20.8 million and $2.4 million, respectively.

Performance Technologies cost of sales decreased $38.4 million, or 15 percent, from the third quarter of fiscal 2024 to the third quarter of fiscal 2025, 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 labor and inflationary costs.

As a percentage of sales, cost of sales increased 50 basis points to 82.2 percent, primarily due to the impact of lower sales volume.

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

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

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

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

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

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

As a percentage of sales, cost of sales increased 240 basis points to 81.8 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 $11.6 million and gross margin declined 240 basis points to 18.2 percent.

Performance Technologies SG&A expenses decreased $1.9 million compared with the third quarter of the prior year.

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

The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $1.0 million, and decreases across other general and administrative expenses.

Restructuring expenses increased $5.3 million compared with the third quarter of the prior year, primarily due to higher severance expenses in North America and Europe.

Operating income of $15.8 million decreased $13.7 million from the third quarter of fiscal 2024 to the third quarter of fiscal 2025, primarily due to lower gross profit and higher restructuring expenses, partially offset by lower SG&A expenses.

Comparison of the nine months ended December 31, 2024 and 2023

Performance Technologies year-to-date net sales decreased $122.6 million, or 12 percent, from the same period last year, primarily due to lower sales volume, including a $54.2 million impact from the disposition of three automotive businesses in Germany during the third quarter of fiscal 2024.

These decreases were partially offset by higher average selling prices and, to a lesser extent, the recognition of sales tax credits in Brazil.

Compared with the same period in the prior year, sales of liquid-cooled and air-cooled products decreased $78.8 million and $50.3 million, respectively.

Sales of advanced solutions products increased $6.7 million.

Performance Technologies year-to-date cost of sales decreased $126.4 million, or 15 percent, from the same period last year, primarily due to lower sales volume and, to a lesser extent, improved operating efficiencies and lower raw material costs, which decreased approximately $9.0 million.

These drivers, which decreased cost of sales, were partially offset by higher labor and inflationary costs.

As a percentage of sales, cost of sales decreased 280 basis points to 80.4 percent, primarily due to higher average selling prices, improved operating efficiencies, lower material costs, and the favorable impact of the sales tax credits recognized in Brazil, partially offset by higher labor and inflationary costs.

As a result of the lower sales and lower cost of sales as a percentage of sales, gross profit increased $3.8 million and gross margin improved 280 basis points to 19.6 percent.

Performance Technologies year-to-date SG&A expenses increased $0.7 million, or 1 percent, compared with the same period last year.

As a percentage of sales, year-to-date SG&A expenses increased by 110 basis points.

The increase in SG&A expenses was primarily due to higher compensation-related expenses, which increased approximately $4.0 million.

This increase was partially offset by decreases across other general and administrative expenses.

Restructuring expenses during the first nine months of fiscal 2025 increased $13.3 million compared with the same period last year, primarily due to higher severance expenses in Europe and North America and product line transfer costs.

Operating income of $78.1 million during the first nine months of fiscal 2025 decreased $10.2 million from the same period last year, primarily due to higher restructuring expenses, partially offset by higher gross profit.

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

As a percentage of sales, SG&A expenses decreased by 100 basis points.

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

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

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

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of December 31, 2024 of $83.8 million, and available borrowing capacity of $210.8 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, 2025 of $124.5 million, and available borrowing capacity under our revolving credit facility.

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

5 unchanged sentences

Net cash provided by operating activities

Net cash provided by operating activities for the nine months ended December 31, 2024 was $158.5 million, which represents a $16.5 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, partially offset by the favorable impact of higher operating earnings.

The unfavorable changes in working capital include a decrease in customer deposits associated with sales contracts with long inventory lead times and higher payments for incentive compensation, as compared with the same period in the prior year.

These unfavorable changes in working capital were partially offset by the favorable impact of lower inventory levels.

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

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 f avorable impact of increases in accounts payable, which largely resulted from the higher inventory levels .

Capital expenditures

Capital expenditures of $56.3 million during the first nine months of fiscal 2025 increased $12.5 million compared with the same period in the prior year.

The fiscal 2025 capital expenditures include investments supporting several of our strategic growth initiatives, including increasing production capacity for data center products.

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

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

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

for data center products.

Business acquisitions

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

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

White and AbsolutAire.

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

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

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

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

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

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.

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.

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

Indebtedness under our credit agreements is secured by liens on substantially all domestic assets.

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

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

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Also, the credit agreements may require prepayments in the event of certain asset sales.

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-quarter times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments (“Adjusted EBITDA”).

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”).

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, 2024, we were in compliance with our debt covenants.

We expect to remain in compliance with our debt covenants during the remainder of fiscal 2025 and beyond.

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

pension plan termination

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

pension plan, subject to approvals from the Internal Revenue Service and the Pension Benefit Guaranty Corporation.

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

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

In connection with the plan termination, we expect to make additional cash contributions in the range of $10.0 million to $20.0 million to fully fund the plan, on a plan termination basis, and to record non-cash pension settlement charges totaling approximately $115.0 million to $125.0 million during 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.

In connection with the plan termination, we expect to make additional cash contributions in the range of $17.0 million to $22.0 million to fully fund the plan, on a plan termination basis, and to record non-cash pension settlement charges totaling approximately $115.0 million to $125.0 million during the second half of fiscal 2026.

Share repurchase program

Our share repurchase program expired in November 2024.

We did not repurchase any common stock under the program during fiscal 2025.

During the first nine months of fiscal 2024, we repurchased $13.3 million of our common stock under the share repurchase program.

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

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

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.

Forward-looking statements

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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 any potential resulting trade war), and military conflicts, including the conflicts in Ukraine and in the Middle East and tension in the Red Sea;

● 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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● 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 delays or modifications initiated by major customers with respect to product or program launches, product applications or requirements;

● 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;

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● Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;

● The impact of a substantial disruption, including any prolonged service outage, or material breach of our information technology (“IT”) systems, and any related delays, problems or costs;

● The impact of the material weakness identified in our internal control over financial reporting related to IT system access in Europe on our financial reporting process;

● The impact of a substantial disruption, including any prolonged service outage, or material breach of our information technology systems, and any related delays, problems or costs;

● Increasingly complex and restrictive laws and regulations and the costs associated with compliance therewith, including state and federal labor regulations, laws and regulations associated with being a U.S.

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

● Costs and other effects of litigation, claims, or other obligations, including those that may be asserted against us in connection with divested businesses.

Strategic risks:

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● 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.

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

Financial risks:

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What changed 10-Q

Item 2. Management’s Discussion and Analysis