Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

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 September 30, 2026 was the second quarter of fiscal 2027.

Spin-off of Performance Technologies business

On October 1, 2026, we completed the previously-announced spin-off of our Performance Technologies business, which was contributed to our wholly-owned subsidiary, Platinum SpinCo Inc. ("SpinCo") prior to its spin-off and combination with Gentherm Incorporated ("Gentherm") in a Reverse Morris Trust transaction. Gentherm, a Michigan-based corporation, is a global leader of innovative thermal management and pneumatic comfort technologies. We have retained our Data Centers and Commercial HVAC segment businesses, creating a pure-play climate solutions company.

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As a result of the merger, our shareholders received newly-issued Gentherm stock, representing post-transaction ownership of approximately 44 percent of Gentherm. Immediately prior to transaction closing, we received a cash distribution of $156.0 million from SpinCo. In addition, we received a cash transfer of $42.6 million from SpinCo, which was based primarily upon estimates of SpinCo's net working capital, cash, and indebtedness, each as defined in the Separation Agreement. The cash transfer amount is subject to post-closing adjustment provisions of the Separation Agreement. We used the cash received in October 2026 to repay $198.6 million of outstanding borrowings under our revolving credit facility. SpinCo financed the cash payments through the issuance of $250.0 million of third-party debt on October 1, 2026, which was then transferred to Gentherm as part of the transaction.

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We have incurred expenses to separate the Performance Technologies business and to facilitate the transaction, including fees for transaction advisory, legal, accounting, tax, and other professional services. Through September 30, 2026, we incurred disposition-related costs totaling $36.2 million. We estimate that additional costs directly related to the transaction during the second half of fiscal 2027 will total $20.0 million to $25.0 million.

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In the third quarter of fiscal 2027, we will derecognize SpinCo's net assets against shareholders' equity. As a result of this distribution, no gain or loss will be recognized in our consolidated statement of operations. In addition, the Reverse Morris Trust transaction was structured to be generally tax-free for U.S. federal income tax purposes for the Company and our shareholders. We will report the Performance Technologies business as a discontinued operation starting with the third quarter of fiscal 2027.

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We recently announced that, subject to shareholder approval and the completion of other regulatory steps, we intend to change the name of our company to Modexus Solutions, Inc. Our common stock will continue to trade on the New York Stock Exchange under our current ticker symbol, "MOD." As part of the spin-off transaction, Gentherm acquired the Modine brand, domains, and trademarks and the Performance Technologies business will continue to go to market as Modine. We will continue using the Modine brand in certain businesses (the Heat Transfer Solutions and HVAC Technologies businesses within our Commercial HVAC segment) under a license with Gentherm.

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Fiscal 2026 acquisitions

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. On May 31, 2025, we acquired LBW Holding Corp. ("L.B. White") for $110.5 million. On July 1, 2025, we acquired Climate by Design International ("Climate by Design") for $64.4 million. We report the financial results of these businesses within our Commercial HVAC segment.

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Second quarter highlights

Net sales in the second quarter of fiscal 2027 increased $255.5 million, or 35 percent, from the second quarter of fiscal 2026, primarily due to higher sales in our Data Centers and Commercial HVAC segments. Cost of sales increased $215.0 million, or 37 percent. Gross profit increased $40.5 million. Gross margin declined 160 basis points to 20.7 percent, primarily due to lower gross margin in the Data Centers segment, largely driven by higher material costs. Selling, general and administrative ("SG&A") expenses increased $20.4 million, primarily due to $14.1 million of disposition-related costs and higher compensation-related expenses. Operating income of $97.8 million during the second quarter of fiscal 2027 increased $24.3 million from the prior year, primarily due to higher gross profit and the absence of a $4.1 million impairment charge recorded in the prior year, partially offset by higher SG&A expenses.

Year-to-date highlights

Net sales in the first six months of fiscal 2027 increased $446.8 million, or 31 percent, from the same period last year, primarily due to higher sales in our Data Centers and Commercial HVAC segments. Cost of sales increased $389.7 million, or 36 percent, from the same period last year. Gross profit increased $57.1 million. Gross margin declined 250 basis points to 20.7 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. SG&A expenses increased $38.8 million, primarily due to $21.2 million of disposition-related costs and higher compensation-related expenses. Operating income of $172.6 million during the first six months of fiscal 2027 increased $23.4 million from the prior year, primarily due to higher gross profit and the absence of a $4.1 million impairment charge recorded in the prior year, 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 six months ended September 30, 2026 and 2025:

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

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Second quarter net sales of $994.4 million were $255.5 million, or 35 percent, higher than the second quarter of the prior year, primarily due to $214.7 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 $52.6 million, primarily driven by higher sales of heat transfer solutions and HVAC technologies products. Foreign currency exchange rates unfavorably impacted sales by $3.0 million.

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Second quarter cost of sales increased $215.0 million, or 37 percent, primarily due to higher sales volume and approximately $40.0 million of higher material costs, including higher component and raw material costs and tariffs. Cost of sales was favorably impacted by $2.5 million from foreign currency exchange rates. As a percentage of sales, cost of sales increased 160 basis points to 79.3 percent, primarily due to the higher material costs, partially offset by higher average selling prices.

As a result of higher sales and higher cost of sales as a percentage of sales, second quarter gross profit increased $40.5 million, or 25 percent, and gross margin declined 160 basis points to 20.7 percent.

Second quarter SG&A expenses increased $20.4 million, or 24 percent. As a percentage of sales, SG&A expenses decreased 90 basis points. The increase in SG&A expenses was primarily driven by $14.1 million of costs incurred related to the Reverse Morris Trust transaction with Gentherm. In addition, compensation-related expenses increased approximately $6.0 million and included increases in the Data Centers segment, supporting the segment's growth. These drivers, which increased SG&A expenses, were partially offset by lower costs associated with acquisition activities, which decreased $2.3 million.

Restructuring expenses decreased $0.1 million compared with the second quarter of fiscal 2026, primarily due to lower severance expenses in the Commercial HVAC segment, partially offset by 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 to reduce the carrying value of a technical service center and administrative support facility in Germany to estimated fair value, less costs to sell. We expect to sell the facility by the end of calendar 2026.

Operating income of $97.8 million in the second quarter of fiscal 2027 increased $24.3 million, or 33 percent, compared with the second quarter of fiscal 2026, primarily due to higher gross profit and the absence of the impairment charge in the prior year, partially offset by higher SG&A expenses.

Interest expense during the second quarter of fiscal 2027 increased $0.2 million compared with the second 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 net expenses of $1.3 million decreased $0.2 million compared with the second quarter of fiscal 2026, primarily due to lower pension benefit costs, which decreased $1.2 million, as we completed the termination of our primary U.S. pension plan during the third quarter of fiscal 2026. This decrease was partially offset by foreign currency transaction losses, which increased $0.9 million.

The provision for income taxes was $57.7 million and $18.9 million in the second quarter of fiscal 2027 and 2026, respectively. The $38.8 million increase was primarily due to $29.5 million of income tax expense recorded in the second quarter of fiscal 2027 related to legal entity restructuring and unfavorable changes in the mix and amount of foreign and U.S. earnings. In preparation for the Reverse Morris Trust transaction with Gentherm, we completed several legal entity restructuring steps during the second quarter of fiscal 2027 to separate the Performance Technologies business from our other businesses. In addition, income tax detriments related to non-deductible compensation increased $5.4 million compared with the same period in the prior year. These drivers, which increased the current-year tax provision, were partially offset by the absence of impacts associated with the One Big Beautiful Bill Act, which increased tax expense during the second quarter of 2026 by $3.1 million.

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Comparison of the six months ended September 30, 2026 and 2025

Fiscal 2027 year-to-date net sales of $1,868.5 million were $446.8 million, or 31 percent, higher than the same period last year, primarily due to higher sales volume and, to a lesser extent, higher average selling prices. Sales in our Data Centers segment increased $379.6 million, primarily driven by sales growth to hyperscale data center customers in North America. In addition, sales in our Commercial HVAC segment increased $100.0 million, primarily driven by higher sales of HVAC technologies products, including $19.7 million of incremental sales from the acquired L.B. White and Climate by Design businesses, and higher sales of heat transfer solutions products. The higher sales in the Data Centers and Commercial HVAC segments were partially offset by lower sales in our Performance Technologies segment, which decreased $6.3 million. Foreign currency exchange rates favorably impacted sales by $3.1 million.

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Fiscal 2027 year-to-date cost of sales of $1,481.1 million increased $389.7 million, or 36 percent, primarily due to higher sales volume and approximately $61.0 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 $2.3 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 250 basis points to 79.3 percent, primarily due to the higher material costs and the operating inefficiencies, partially offset by higher average selling prices.

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As a result of higher sales and higher cost of sales as a percentage of sales, gross profit increased $57.1 million, or 17 percent, and gross margin declined 250 basis points to 20.7 percent.

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Fiscal 2027 year-to-date SG&A expenses increased $38.8 million, or 23 percent. As a percentage of sales, SG&A expenses decreased 80 basis points. The increase in SG&A expenses was driven by $21.2 million of costs incurred related to the Reverse Morris Trust transaction with Gentherm and higher compensation-related expenses, which increased approximately $15.0 million. 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 $4.0 million.

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Restructuring expenses during the first six months of fiscal 2027 decreased $1.0 million compared with the same period last year, 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.

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During the second quarter of fiscal 2026, we recorded a $4.1 million non-cash impairment charge related to a technical service center and administrative support facility in Germany. We expect to sell the facility by the end of calendar 2026.

Operating income of $172.6 million in the first six months of fiscal 2027 increased $23.4 million, or 16 percent, compared with the same period last year, primarily due to higher gross profit, partially offset by higher SG&A expenses.

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Interest expense during the first six months of fiscal 2027 increased $0.8 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.

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Other net expenses during the first six months of fiscal 2027 decreased $4.6 million compared with the same period last year. Compared with the prior-year period pension benefit costs decreased $2.5 million, as we completed the termination of our primary U.S. pension plan during the third quarter of fiscal 2026, and foreign currency transaction losses decreased $2.3 million.

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The provision for income taxes was $52.0 million and $32.9 million during the first six months of fiscal 2027 and 2026, respectively. The $19.1 million increase was primarily due to $29.5 million of income tax expense recorded in the second quarter of fiscal 2027 related to legal entity restructuring, unfavorable changes in the mix and amount of foreign and U.S. earnings, and income tax detriments related to non-deductible compensation, which were $8.0 million higher than the same period in the prior year. These drivers, which increased the current-year tax provision, were partially offset by $26.5 million of income tax benefits recorded during the first quarter of fiscal 2027 related to stock-based compensation awards and the absence of impacts associated with the One Big Beautiful Bill Act, which increased tax expense during the second quarter of 2026 by $3.1 million. 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 that income tax detriments related to non-deductible compensation during the remainder of fiscal 2027 will be higher than the comparable prior-year period and will largely offset the income tax benefits related to stock-based compensation awards recorded during the first quarter of fiscal 2027. As a result, we do not expect the tax benefits related to stock-based compensation will significantly impact our full-year fiscal 2027 effective tax rate.

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SEGMENT RESULTS OF OPERATIONS

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.

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

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Data Centers

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

Data Centers net sales increased $214.7 million, or 95 percent, from the second quarter of fiscal 2026 to the second quarter of fiscal 2027, primarily due to higher sales volume in North America, driven by sales growth to hyperscale customers. This increase was partially offset by a $2.1 million unfavorable impact of foreign currency exchange rates.

Data Centers cost of sales increased $183.0 million, or 108 percent, from the second quarter of fiscal 2026 to the second quarter of fiscal 2027, primarily due to higher sales volume and higher material costs, which increased approximately $27.0 million. In addition, cost of sales was impacted by temporary operating inefficiencies, including the impact of supplier constraints for certain key components. As a percentage of sales, cost of sales increased 470 basis points to 80.3 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 increased cost of sales as a percentage of sales, gross profit increased $31.7 million, or 58 percent, and gross margin declined 470 basis points to 19.7 percent.

Data Centers SG&A expenses increased $6.2 million, or 34 percent, compared with the second quarter of the prior year. As a percentage of sales, SG&A expenses decreased 270 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.

Restructuring expenses increased $0.2 million compared with the second quarter of fiscal 2026, primarily due to higher severance expenses.

Operating income of $61.2 million increased $25.3 million, or 70 percent, from the second quarter of fiscal 2026 to the second quarter of fiscal 2027, primarily due to higher gross profit, partially offset by higher SG&A expenses.

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Comparison of the six months ended September 30, 2026 and 2025

Data Centers year-to-date net sales increased $379.6 million, or 93 percent, from the same period last year, primarily due to higher sales volume in North America, driven by sales growth to hyperscale customers. This increase was partially offset by a $2.1 million unfavorable impact of foreign currency exchange rates.

Data Centers year-to-date cost of sales increased $332.3 million, or 111 percent, from the same period last year, primarily due to higher sales volume and higher material costs, which increased approximately $43.0 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 due to supplier capacity constraints for certain key components, which resulted in unfavorable absorption of manufacturing overhead, facility, and labor costs. As a percentage of sales, cost of sales increased 690 basis points to 80.1 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 increased cost of sales as a percentage of sales, gross profit increased $47.3 million, or 43 percent, and gross margin declined 690 basis points to 19.9 percent.

Data Centers year-to-date SG&A expenses increased $10.4 million, or 27 percent, yet decreased 320 basis points as a percentage of sales. 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 $10.0 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 related to our acquisition of Scott Springfield Mfg. Inc., which we finished amortizing during the first quarter of fiscal 2026.

Operating income of $107.5 million during the first six months of fiscal 2027 increased $36.9 million, or 52 percent, from the same period last year, primarily due to higher gross profit, partially offset by higher SG&A expenses.

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Commercial HVAC

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

Commercial HVAC net sales increased $52.6 million, or 23 percent, from the second quarter of fiscal 2026 to the second quarter of fiscal 2027, primarily due to higher sales volume and higher average selling prices. These increases were partially offset by a $1.1 million unfavorable impact of foreign currency exchange rates. Compared with the second quarter of the prior year, sales of heat transfer solutions and HVAC technologies products increased $23.6 million and $15.7 million, respectively. The higher heat transfer solutions product sales were primarily driven by higher sales of heat exchanger coils to customers in the data center market. The higher HVAC technologies product sales were primarily driven by higher sales of heating products.

Commercial HVAC cost of sales increased $43.7 million, or 25 percent, from the second quarter of fiscal 2026 to the second quarter of fiscal 2027, primarily due to higher sales volume and higher raw material costs, which increased approximately $8.0 million. In addition, cost of sales was negatively impacted by higher labor and inflationary costs. As a percentage of sales, cost of sales increased 140 basis points to 76.9 percent, primarily due to higher material costs 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 $8.9 million, or 16 percent, and gross margin declined 140 basis points to 23.1 percent.

Commercial HVAC SG&A expenses increased $2.1 million, or 7 percent, compared with the second quarter of the prior year. As a percentage of sales, SG&A expenses decreased 150 basis points. The increase in SG&A expenses was driven by higher compensation-related expenses, which increased approximately $1.0 million, and increases across other general and administrative expenses.

Restructuring expenses decreased $1.2 million compared with the second quarter of fiscal 2026, primarily due to lower severance expenses.

Operating income of $34.3 million increased $8.0 million, or 30 percent, from the second quarter of fiscal 2026 to the second quarter of fiscal 2027, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses.

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Comparison of the six months ended September 30, 2026 and 2025

Commercial HVAC year-to-date net sales increased $100.0 million, or 22 percent, from the same period last year, 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 $0.9 million. Compared with the same period in the prior year, sales of HVAC technologies and heat transfer solutions products increased $39.2 million and $34.3 million, respectively. The higher HVAC technologies product sales were primarily driven by the incremental sales from the acquired businesses and higher sales of heating products. 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 year-to-date cost of sales increased $85.4 million, or 26 percent, from the same period last year, primarily due to higher sales volume and higher raw material costs, which increased approximately $14.0 million. In addition, cost of sales was negatively impacted by higher labor and inflationary costs and temporary operating inefficiencies largely associated with product line transfers. As a percentage of sales, cost of sales increased 210 basis points to 76.3 percent, primarily due to higher material costs, higher labor and inflationary 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 $14.6 million, or 13 percent, and gross margin declined 210 basis points to 23.7 percent.

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Commercial HVAC year-to-date SG&A expenses increased $7.5 million, or 14 percent, yet decreased 80 basis points as a percentage of sales. The increase in SG&A expenses was driven by higher compensation-related expenses, which increased approximately $3.0 million, 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 during the first six months of fiscal 2027 decreased $0.1 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.

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Operating income of $65.7 million during the first six months of fiscal 2027 increased $7.2 million, or 12 percent, from the same period last year, primarily due to higher gross profit, partially offset by higher SG&A expenses.

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Performance Technologies

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

Performance Technologies net sales increased $1.4 million, or less than 1 percent, from the second quarter of fiscal 2026 to the second quarter of fiscal 2027, primarily due to higher average selling prices, partially offset by lower sales volume largely due to our strategic exit from lower-margin business in connection with 80/20 product rationalization initiatives. Compared with the second quarter of the prior year, sales of heavy-duty equipment products increased $11.3 million and sales of on-highway application products decreased $8.4 million.

Performance Technologies cost of sales increased $2.1 million, or 1 percent, from the second quarter of fiscal 2026 to the second quarter of fiscal 2027, primarily due to higher raw material costs, which increased approximately $4.0 million, and higher labor and inflationary costs. These increases were partially offset by the impact of lower sales volume. As a percentage of sales, cost of sales increased 30 basis points to 81.4 percent, primarily due to higher raw material costs, higher labor and inflationary costs and the unfavorable impact of lower sales volume, 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 decreased $0.7 million, or 1 percent, and gross margin declined 30 basis points to 18.6 percent.

Performance Technologies SG&A expenses were consistent with the second quarter of the prior year. As a percentage of sales, SG&A expenses decreased 10 basis points.

Restructuring expenses increased $1.0 million compared with the second quarter of the prior year, primarily due to 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. This facility was not included in the spin-off of the Performance Technologies business on October 1, 2026. We expect the sale of this facility will close by the end of calendar 2026.

Operating income of $32.1 million increased $2.4 million, or 8 percent, from the second quarter of fiscal 2026 to the second quarter of fiscal 2027, primarily due to the absence of the impairment charge recorded in the prior year, partially offset by higher restructuring expenses and lower gross profit.

Comparison of the six months ended September 30, 2026 and 2025

Performance Technologies year-to-date net sales decreased $6.3 million, or 1 percent, from the same period last year, 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 $4.3 million favorable impact of foreign currency exchange rates. Compared with the same period in the prior year, sales of on-highway applications products decreased $17.4 million and sales of heavy-duty equipment products increased $12.6 million.

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Performance Technologies year-to-date cost of sales decreased $2.5 million, or 1 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 $4.0 million, higher labor and inflationary costs and a $3.1 million unfavorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales increased 40 basis points to 81.9 percent, primarily due to higher raw material and labor and inflationary costs, partially offset by improved operating efficiencies.

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As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $3.8 million, or 4 percent, and gross margin declined 40 basis points to 18.1 percent.

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Performance Technologies year-to-date SG&A expenses decreased $2.4 million, or 6 percent, compared with the same period last year. As a percentage of sales, year-to-date SG&A expenses decreased 40 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.

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Restructuring expenses during the first six months of fiscal 2027 decreased $0.8 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.

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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 $59.7 million during the first six months of fiscal 2027 increased $3.5 million, or 6 percent, from the same period last year, primarily due to the absence of the impairment charge recorded in the prior year and lower SG&A and restructuring expenses, partially offset by lower gross profit.

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Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of September 30, 2026 of $150.6 million, and available borrowing capacity of $84.2 million under our revolving credit facility. Given our extensive international operations, approximately $94.0 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.

Net cash (used for) provided by operating activities

Net cash used for operating activities for the six months ended September 30, 2026 was $57.1 million, which represents an $86.2 million decrease compared with $29.1 million of net cash provided by operating activities in the same period in the prior year. Increases in working capital caused a decrease in operating cash flow, as compared with the prior year. Our Data Centers segment is growing rapidly. We have increased inventory levels to support the growing customer demand and 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. In addition, income taxes paid during the first six months of fiscal 2027 increased compared with the same period in the prior year, primarily due to the timing of earnings and tax payments.

Capital expenditures

Capital expenditures of $88.5 million during the first six months of fiscal 2027 increased $29.1 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 sales growth.

Business acquisitions

During the first six months of fiscal 2026, we made cash payments totaling $182.1 million to acquire L.B. White, Climate by Design, and AbsolutAire. See Note 2 of the Notes to Condensed Consolidated Financial Statements for additional information regarding these acquisitions.

Debt

During the first six months of fiscal 2027, borrowings on our credit facilities, net of repayments, totaled $287.6 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. Indebtedness under our credit agreements is secured by liens on substantially all domestic assets, excluding real estate. These agreements further require compliance with various covenants that may limit our ability to incur additional indebtedness; 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.

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 September 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.

Financing activities during the third quarter of fiscal 2027 related to the Performance Technologies spin-off

In connection with the Reverse Morris Trust transaction described earlier in this report, we separated our Performance Technologies business and contributed it into SpinCo, a wholly-owned subsidiary. On October 1, 2026, immediately prior to transaction closing, SpinCo borrowed $250.0 million under a term loan facility and made cash payments to us totaling $198.6 million. We used the cash proceeds to repay outstanding borrowings under our revolving credit facility. SpinCo's third-party debt was subsequently transferred to Gentherm as part of the transaction.

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 six months of fiscal 2027 and in connection with the vesting of stock awards, we purchased 224,528 shares for $65.7 million, an increase of $60.0 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 six months of fiscal 2027. As of September 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.

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, 2026. Other risks and uncertainties include, but are not limited to, the following:

Market risks:

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Operational risks:

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Strategic risks related to the recently-completed spin-off of the Performance Technologies business:

Strategic risks related to business growth and optimization:

Financial risks:

Forward-looking statements are as of the date of this report; we do not assume any obligation to update any forward-looking statements.