Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
When we use the terms “Modine,” “we,” “us,” the “Company,” or “our” in this report, we are referring to Modine Manufacturing Company. Our fiscal year ends on March 31 and, accordingly, all references to quarters refer to our fiscal quarters. The quarter ended June 30, 2025 was the first quarter of fiscal 2026.
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. (“L.B. 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. L.B. 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.
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 $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 months ended June 30, 2025 and 2024:
Three months ended June 30,
2025
2024
(in millions)
$’s
% of sales
$’s
% of sales
Net sales
$
682.8
100.0
%
$
661.5
100.0
%
Cost of sales
517.4
75.8
%
498.9
75.4
%
Gross profit
165.4
24.2
%
162.6
24.6
%
Selling, general and administrative expenses
84.9
12.4
%
82.8
12.5
%
Restructuring expenses
4.8
0.7
%
5.4
0.8
%
Operating income
75.7
11.1
%
74.4
11.2
%
Interest expense
(5.8)
(0.8)
%
(7.5)
(1.1)
%
Other expense – net
(4.2)
(0.6)
%
(0.3)
—
Earnings before income taxes
65.7
9.6
%
66.6
10.1
%
Provision for income taxes
(14.0)
(2.1)
%
(18.8)
(2.8)
%
Net earnings
$
51.7
7.6
%
$
47.8
7.2
%
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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. Inc. 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.
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SEGMENT RESULTS OF OPERATIONS
The following is a discussion of our segment results of operations for the three months ended June 30, 2025 and 2024:
Climate Solutions
Three months ended June 30,
2025
2024
(in millions)
$’s
% of sales
$’s
% of sales
Net sales
$
397.4
100.0
%
$
357.3
100.0
%
Cost of sales
284.5
71.6
%
256.5
71.8
%
Gross profit
112.9
28.4
%
100.8
28.2
%
Selling, general and administrative expenses
44.7
11.3
%
40.8
11.4
%
Restructuring expenses
1.3
0.3
%
0.2
0.1
%
Operating income
$
66.9
16.8
%
$
59.8
16.7
%
Comparison of the three months ended June 30, 2025 and 2024
Climate Solutions net sales increased $40.1 million, or 11 percent, from the first quarter of fiscal 2025 to the first quarter of fiscal 2026, primarily due to higher sales volume and a $6.1 million favorable impact of foreign currency exchange rates. The higher sales volume includes sales growth to hyperscale and colocation customers in North America and $10.0 million of incremental sales from the recently-acquired AbsolutAire and L.B. White businesses. Compared with the first quarter of the prior year, sales of data center and HVAC technologies products increased $24.3 million and $17.2 million, respectively. Sales of heat transfer solution products decreased $1.4 million.
Climate Solutions cost of sales increased $28.0 million, or 11 percent, from the first quarter of fiscal 2025 to the first quarter of fiscal 2026, primarily due to higher sales volume and a $4.7 million unfavorable impact of foreign currency exchange rates. These increases were partially offset by lower warranty expense, which decreased approximately $3.0 million. As a percentage of sales, cost of sales decreased 20 basis points to 71.6 percent, primarily due to favorable sales mix.
As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $12.1 million and gross margin improved 20 basis points to 28.4 percent.
Climate Solutions SG&A expenses increased $3.9 million compared with the first quarter of the prior year. 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, 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. Inc. 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.
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Performance Technologies
Three months ended June 30,
2025
2024
(in millions)
$’s
% of sales
$’s
% of sales
Net sales
$
285.5
100.0
%
$
309.0
100.0
%
Cost of sales
233.6
81.8
%
245.5
79.4
%
Gross profit
51.9
18.2
%
63.5
20.6
%
Selling, general and administrative expenses
21.9
7.7
%
26.8
8.7
%
Restructuring expenses
3.5
1.2
%
5.2
1.7
%
Operating income
$
26.5
9.3
%
$
31.5
10.2
%
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 $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 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. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, these funds may be subject to foreign withholding taxes if repatriated. We believe our sources of liquidity will provide sufficient cash flow to adequately cover our funding needs on both a short-term and long-term basis.
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Net cash provided by operating activities
Net cash provided by operating activities for the three months ended June 30, 2025 was $27.7 million, which represents a $12.8 million decrease compared with the same period in the prior year. 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 $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.
Debt
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 substantially all domestic assets, excluding real estate. These agreements further require compliance with various covenants that may limit our ability to incur additional indebtedness; grant liens; make investments, loans, or guarantees; engage in certain transactions with affiliates; or make restricted payments, including dividends. 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”). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.
We were in compliance with our debt covenants as of June 30, 2025 and expect to remain in compliance with our debt covenants during the remainder of fiscal 2026 and beyond.
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U.S. pension plan termination
In June 2024, we approved the termination of our U.S. pension plan, which is pending approval from the Pension Benefit Guaranty Corporation. We intend to offer certain participants the option to receive their pension benefits in the form of a lump-sum distribution prior to purchasing annuity contracts to transfer our remaining obligations under the plan. 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. The timing and amount of the final cash contribution and settlement charges could materially differ from our estimates due to the nature and timing of participant settlements, prevailing market and economic conditions, the duration of the termination process, and/or other factors.
Share repurchase program
We did not purchase shares under our share repurchase program during the first quarter of fiscal 2026. As of June 30, 2025, we had $81.6 million of share repurchase authorization remaining under the repurchase program, which does not expire. 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
This report, including, but not limited to, the discussion under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, including information about future financial performance, accompanied by phrases such as “believes,” “estimates,” “expects,” “plans,” “anticipates,” “intends,” and other similar “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Modine’s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under “Risk Factors” in Item 1A. in Part I. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2025. 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 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; changes in interest rates; recession and recovery therefrom; and the general uncertainties about the impact of statutory, regulatory and/or policy changes, including those related to tax and trade that have been or may be implemented in the U.S. or abroad;
● The impact of potential price increases associated with raw materials, including aluminum, copper, steel and stainless steel (nickel), and other purchased component inventory including, but not limited to, increases in the underlying material cost based upon the London Metal Exchange and related premiums or fabrication costs. These prices may be impacted by a variety of factors, including changes in trade laws and tariffs, the behavior of our suppliers and significant fluctuations in demand. 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;
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● 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 mitigate increases in labor costs and labor shortages;
● The impact of public health threats on the national and global economy, our business, suppliers (and the supply chain), customers, and employees; and
● The impact of legislation, regulations, and government incentive programs, including those addressing climate change, on demand for our products and the markets we serve, including our ability to take advantage of opportunities to supply alternative new technologies to meet environmental and/or energy standards and objectives.
Operational risks:
● The impact of problems, including logistic and transportation challenges, associated with suppliers meeting our quantity, quality, price and timing demands, and the overall health of our suppliers, including their ability and willingness to supply our volume demands if their production capacity becomes constrained;
● The overall health of and pricing pressure from our customers in light of economic and market-specific factors and the potential impact on us from any deterioration in the stability or performance of any of our major customers;
● 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 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;
● Costs and other effects of the investigation and remediation of environmental contamination; including when related to the actions or inactions of others and/or facilities over which we have no control;
● Our ability to recruit and maintain talent, including personnel in managerial, leadership, operational and administrative functions;
● Our ability to protect our proprietary information and intellectual property from theft or attack by internal or external sources;
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● 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. public company, and other laws and regulations present in various jurisdictions in which we operate;
● Increasing emphasis by global regulatory bodies, customers, investors, and employees on environmental, social and corporate governance matters may impose additional costs on us, adversely affect our reputation, or expose us to new risks;
● Work stoppages or interference at our facilities or those of our major customers and/or suppliers; and
● The constant and increasing pressures associated with healthcare and associated insurance costs.
Strategic risks:
● 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; and
● 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:
● Our ability to fund our global liquidity requirements efficiently for our current operations and meet our long-term commitments in the event of disruption in or tightening of the credit markets or extended recessionary conditions in the global economy;
● 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;
● 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);
● The potential unfavorable impact of foreign currency exchange rate fluctuations on our financial results; and
● Our ability to effectively realize the benefits of deferred tax assets in various jurisdictions in which we operate.
Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A. of the Company’s Annual Report on Form 10-K for the year ended March 31, 2025. The Company’s market risks have not materially changed since the fiscal 2025 Form 10-K was filed.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.