Annual Report for Fiscal Year Ending 03-31, 2026 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

At Modine, we are Engineering a Cleaner, Healthier World ™. Our mission is to use our thermal management expertise to help our customers improve indoor air quality, reduce energy and water consumption, lower harmful emissions, enable cleaner running vehicles, and use more environmentally friendly refrigerants. We operate in four continents, in numerous countries, and employ approximately 13,200 persons worldwide.

We sell customer-centric thermal management solutions in a wide array of commercial, industrial, and building HVAC&R markets. In addition, we are a leading provider of engineered heat transfer systems and high-quality heat transfer components for use in on- and off-highway OEM vehicular applications. Our primary product groups include i) Data Centers; ii) Heat Transfer Solutions; iii) HVAC Technologies; iv) Heavy-Duty Equipment; and v) On-Highway Applications.

Company Strategy

Our purpose of Engineering a Cleaner, Healthier World™ guides our strategic direction. We are committed to evolving our product portfolio in pursuit of highly engineered, mission-critical thermal solutions. We are strategically investing in end markets where we see the highest growth prospects. These markets continue to shift to low-carbon energy solutions, driving demand for cleaner, more efficient thermal management.

We first announced our vision for a "new" Modine in late fiscal 2021. Over the last five fiscal years, we have simplified and re-segmented our organization and have aligned resources around specific strategies and market-based verticals. Our leadership and teams have embraced 80/20 principles and have created a high-performance culture that focuses resources on products and markets with the highest sustainable growth opportunities and best return profiles, while simplifying and improving our processes. Through initiatives based upon 80/20 principles, we have achieved significant improvements in our profit margins since we started our transformational journey.

In fiscal 2026, we continued our strategic transformation. Following our 80/20 discipline, we significantly expanded our Data Centers business and production capacity to meet increasing customer demand. We see great opportunity in growing our Data Centers business in light of trends in high-performance computing, with significant data center growth fueled by increased AI usage. In addition, we acquired three businesses during fiscal 2026, AbsolutAire, L.B. White, and Climate by Design, which contributed to growth in our HVAC Technologies business. In January 2026, we entered into definitive agreements with Gentherm, whereby we will spin-off and simultaneously combine our Performance Technologies segment businesses with Gentherm in a Reverse Morris Trust transaction. Gentherm, a Michigan-based corporation, is a global leader of innovative thermal management and pneumatic comfort technologies. This transaction, which we expect will close by the end of calendar 2026, will transform our company into a pure-play climate solutions company focused on the data center and commercial HVAC&R markets.

Entering fiscal 2027, we are committed to executing our strategic priorities, including further expanding our Data Centers business and completing the transaction with Gentherm. We will continue to apply our strategic pillars across our businesses to drive value creation. We aim to capitalize on our expertise in thermal management to provide differentiated solutions and sustain market leadership. We are focused on leveraging our product portfolio to accelerate growth, with particular focus on long-term growth drivers tied to secular mega-trends. We will continue to elevate our 80/20 discipline throughout our businesses and use 80/20 to guide our daily decision making. Finally, we will continue to evolve our portfolio to increase shareholder value.

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Development of New Products and Technology

Every day, we leverage our technical expertise, building on more than 100 years of excellence in thermal management, to advance our purpose. We are dedicated to utilizing technology and solutions with sustainable impacts. Our ability to provide customizable solutions to meet the ever-evolving needs of our customers is one of our greatest competitive strengths.

We partner with our customers and use a systems-based approach to ensure our solutions work seamlessly with their other components. Our thermal solutions enable our customers to stay ahead of new and emerging regulations, particularly those involving increasingly stringent energy efficiency, emissions, and fuel economy standards.

We maintain numerous state-of-the-art technology centers, dedicated to the development and testing of products and technologies. The technology centers are located in Racine, Wisconsin; Grenada, Mississippi; Allen, Texas; Leeds, United Kingdom; Pocenia, Italy; Söderköping, Sweden; Mezökövesd, Hungary; and Sao Paulo, Brazil. Customers know our reputation for innovation and rely on Modine to provide high quality products and technologies.

Strategic Planning and Corporate Development

We employ both short-term (one-to-three year) and longer-term (five-to-seven year) strategic planning processes, which enable us to continually assess our opportunities, competitive threats, and economic market challenges.

We devote significant resources to global strategic planning and development activities to strengthen our competitive position. During fiscal 2026, we significantly expanded production capacity in our Data Centers business and integrated three acquired businesses, AbsolutAire, L.B. White, and Climate by Design, into our Climate Solutions segment. We will continue to pursue growth opportunities, particularly to grow our global, market leading positions in the data center and commercial HVAC markets. We have provided our businesses with the tools that they need to be successful, including dedicated resources to create an entrepreneurial environment and to challenge the status quo.

Operational and Financial Discipline

We are using 80/20 principles to guide our path forward toward commercial excellence. Through closely analyzing our customer and product data, we are focusing our commercial and operational actions in areas that drive increased profitability and also in areas requiring improvement. Our Climate Solutions and Performance Technologies segments have embraced the tenets of 80/20 and are driving transformative change.

Our fiscal 2026 annual cash incentive plan for our management team was based upon two performance metrics: growth in net earnings before interest, taxes, depreciation, amortization, and certain other adjustments ("Adjusted EBITDA") and Adjusted EBITDA as a percentage of net sales. The incentive plan's performance goals were established for each operating segment as well for the consolidated Company. In addition, we provide a long-term incentive compensation plan for officers and certain key leaders throughout our organization to attract, retain, and motivate these employees who are responsible for driving the long-term success of our company. The fiscal 2026 plan is comprised of performance-based share awards and restricted stock awards. The performance-based awards for the fiscal 2026 through 2028 performance period are based upon a target three-year average growth in Adjusted EBITDA and a target three-year average cash flow return on invested capital.

Segment Information - Strategy, Market Conditions and Trends

Each of our operating segments has separate strategic and financial plans. Segment financial results are reviewed by our CODM. These plans and results are used by our CODM to evaluate the performance of each segment and to make decisions on the allocation of resources.

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

Climate Solutions (65 percent of fiscal 2026 net sales)

Our Climate Solutions segment provides energy-efficient, climate-controlled solutions and components for a wide range of applications, including data centers, schools, greenhouses, healthcare systems, warehouses, residential garages, manufacturing and construction sites, poultry and swine facilities, and other commercial and industrial applications. The Climate Solutions segment sells data center, heat transfer solutions, and HVAC technologies products to customers in North America, EMEA, and Asia Pacific. Data center products include chillers, dry coolers, precision air handling units, CRAC and CRAH units, fan walls, rear-door heat exchangers, CDUs, and immersion solutions. In addition, the Data Centers business sells modular data center solutions, replacement parts, maintenance service and control solutions for existing equipment and new building management controls and systems. Heat transfer solutions include heat exchanger coils, anti-corrosion coating products, commercial and industrial refrigeration products, and power generation and transmission cooling solutions. HVAC technologies products include heating products, including unit heaters, roof-mounted direct- and indirect-fired makeup air units, duct furnaces, infrared units, and perimeter heating products. HVAC technologies products also include indoor air quality products, including single packaged unit ventilators, ceiling cassettes, modular chillers, air handling units, condensing units, and desiccant dehumidifiers. We sell our products and solutions both directly to commercial and industrial OEM and end user customers and through wholesalers, distributors, consulting engineers, contractors and data center management customers.

During fiscal 2026, Climate Solutions segment sales increased $621 million, or 43 percent, compared with the prior year, primarily driven by higher sales of data center and HVAC technologies products, which increased $468 million and $102 million, respectively. We have rapidly expanded our Data Centers business, investing to expand our manufacturing capacity, particularly in the U.S. and Canada, to support the significant sales growth to both hyperscale and colocation customers during fiscal 2026. The higher HVAC technologies product sales include $119 million of incremental sales from three businesses - AbsolutAire, L.B. White, and Climate by Design - that we acquired during fiscal 2026. These acquisitions expanded our heating and indoor air quality product portfolios and broadened our customer base. We are seeing the benefits of our strategic growth initiatives.

Effective April 1, 2026, we reorganized our Climate Solutions segment and split it into two separate segments: 1) Data Centers and 2) Commercial HVAC. We believe that managing these businesses independently will allow our teams to better deploy our 80/20 strategy to capitalize on growth opportunities and optimize profit margins and cash flow. We are especially excited about opportunities to grow our Data Centers segment and are prioritizing the expansion of this business and our manufacturing footprint to meet increasing customer demand. We expect strong growth in the data center cooling markets in fiscal 2027, supported by sustained global reliance on digital technologies and anticipated significant investments in data center infrastructure, particularly in the U.S. In light of this strong growth, however, market demand is currently outpacing supplier capacity for certain components that we purchase to manufacture our data center products. We began experiencing supply shortages in the fourth quarter of fiscal 2026. These component shortages are negatively impacting our production schedules for the first quarter of fiscal 2027. We are actively working with our supply chain, including qualifying new vendors, to mitigate the supply constraints. As we work to grow our businesses, we will continue to apply our strategic pillars to drive value creation. We will leverage our deep expertise in thermal management to bring highly-engineered, mission-critical thermal solutions to our customers and to capitalize on growth opportunities supported by mega-trends in the areas of digitalization, climate change, and urbanization, which are increasing the needs for energy-efficient cooling solutions and HVAC technologies products. We are also focused on applying 80/20 principles within our manufacturing facilities and expect to achieve production efficiency improvements as a result.

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Performance Technologies (35 percent of fiscal 2026 net sales)

The Performance Technologies segment provides products and solutions that enhance the performance of customer applications and develops solutions that provide mission-critical energy for a variety of end market applications. The segment also provides solutions that increase fuel economy, reduce harmful emissions and maximize range in zero emission applications. The segment's Heavy-Duty Equipment business provides heat exchangers and cooling modules for off-highway markets, including agricultural and construction. In addition, the Heavy-Duty Equipment business sells cooling module generator sets that provide mission-critical stationary power. Heavy-Duty Equipment products primarily include powertrain cooling products, such as radiators, condensers, charge air coolers, oil coolers, and engine cooling modules; and Gensets. The segment's On-Highway Applications business provides heat exchangers and cooling systems for commercial vehicle, automotive, bus and specialty vehicle customers. Its products and solutions include products for traditional powertrains, including aluminum and stainless steel engine oil coolers, EGR coolers, charge air coolers, transmission and retarder oil coolers, chillers, condensers, fan shrouds, and surge tanks. In addition, the On-Highway Applications business provides products and solutions for zero-emission and hybrid passenger car, commercial vehicle, bus and specialty vehicles, including complete battery thermal management systems, electronics cooling packages, battery chillers, battery cooling plates, coolers and casings for electronics cooling, and coolers for e-axles.

During fiscal 2026, Performance Technologies segment sales decreased $31 million, or 3 percent, compared with the prior year, primarily due to lower sales volume in North America, largely due to general market weakness and the strategic exit of lower-margin business. In light of the lower sales volume, we focused on cost containment measures during fiscal 2026 and significantly lowered our selling, general and administrative ("SG&A") expenses, which benefitted from recent restructuring actions.

In January 2026, we entered into definitive agreements to spin-off and simultaneously combine our Performance Technologies segment business with Gentherm in a Reverse Morris Trust Transaction. We expect the transaction will close by the end of calendar 2026 and are focused on executing the steps necessary to facilitate a smooth and timely transaction. Gentherm, a Michigan-based corporation, is a global leader of innovative thermal management and pneumatic comfort technologies. We believe this transaction will provide a renewed focus on investment and growth opportunities for the Performance Technologies business, while positioning us to further focus on the data center and commercial HVAC&R markets. Until the transaction closes, we are continuing to manage this business as our Performance Technologies segment, using our strategic pillars rooted in 80/20 principles as our guide.

Consolidated Results of Operations

Pending Reverse Morris Trust Transaction

As discussed earlier in this report, we have entered into definitive agreements with Gentherm, whereby we will spin-off and simultaneously combine our Performance Technologies segment businesses with Gentherm in a Reverse Morris Trust transaction. We anticipate this transaction will close by the end of calendar 2026, subject to approval by Gentherm's shareholders and other closing conditions, including regulatory approvals. The transaction is intended to establish Gentherm as a scaled leader in thermal management. We will retain our Climate Solutions segment businesses, creating a pure-play climate solutions company focused on the data center and commercial HVAC&R markets.

Under the terms of the agreement, at the time of the spin-off of our Performance Technologies segment businesses, our shareholders will receive newly-issued Gentherm stock, representing ownership of approximately 40 percent of the combined company. In addition, immediately prior to transaction closing, we will receive cash proceeds of $210 million, subject to adjustment, which will be used to pay down our long-term debt obligations. Based upon the Gentherm stock price, the transaction was valued at approximately $1 billion when we entered into the agreement. Under the Reverse Morris Trust structure, the transaction is intended to be generally tax-free for U.S. federal income tax purposes for the Company and our shareholders. To facilitate this transaction, we expect to incur significant fees for transaction advisory, legal, accounting, tax and other professional services. We currently estimate that these fees and other costs directly related to the transaction will total approximately $45 million to $55 million.

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Fiscal 2026 acquisitions

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

On April 1, 2025, we acquired substantially all of the net operating assets of AbsolutAire for $11 million. AbsolutAire is a Michigan-based manufacturer of direct-fired heating, ventilation, and make-up air systems.

On May 31, 2025, we acquired L.B. White for $111 million. Headquartered in Wisconsin, with additional manufacturing and distribution operations in Georgia, L.B. White is a leading provider of specialty heating solutions, including direct-fired forced air, radiant, indirect-fired, and electric heating solutions, for the agriculture, construction, and special event industries.

On July 1, 2025, we acquired Climate by Design for $64 million. Based in Minnesota, Climate by Design specializes in desiccant dehumidification technology and critical process air handlers.

Fiscal 2024 acquisitions and dispositions

During fiscal 2024, we acquired two businesses within our Climate Solutions segment. On March 1, 2024, we acquired Scott Springfield Manufacturing, a Canadian-based manufacturer of air handling units, for consideration totaling $184 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 $6 million.

In October 2023, we sold three automotive businesses based in Germany. Sales from these three businesses totaled $54 million in fiscal 2024.

See Note 2 of the Notes to Consolidated Financial Statements for further information regarding acquisitions and dispositions.

Fiscal 2026 highlights

Fiscal 2026 net sales increased $598 million, or 23 percent, from the prior year, primarily due to higher sales in our Climate Solutions segment, driven by higher sales of data center products and $119 million of incremental sales from the three businesses that we acquired during fiscal 2026. Cost of sales increased $510 million, or 26 percent, primarily due to the higher sales volume. Gross profit increased $87 million. Gross margin declined 190 basis points to 23.0 percent and was negatively impacted by temporary operating inefficiencies associated with the rapid expansion of our Data Centers business and higher material costs in both of our operating segments. SG&A expenses increased $28 million and included higher costs associated with our strategic acquisition and disposition activities. Operating income of $342 million during fiscal 2026 increased $59 million from the prior year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses. During fiscal 2026, we recorded a $116 million non-cash pension termination charge in connection with the termination of our primary U.S. pension plan.

Fiscal 2025 highlights

Fiscal 2025 net sales increased $175 million, or 7 percent, from the prior year, primarily due to higher sales in our Climate Solutions segment, partially offset with lower sales in our Performance Technologies segment. Cost of sales increased $58 million, or 3 percent. Gross profit increased $118 million and gross margin improved 310 basis points to 24.9 percent. SG&A expenses increased $58 and included higher compensation-related expenses and higher expenses from Scott Springfield Manufacturing, including amortization expense for acquired intangible assets. Operating income of $283 million during fiscal 2025 increased $42 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 million gain on the sale of three automotive businesses in Germany in fiscal 2024.

The following table presents our consolidated financial results on a comparative basis for fiscal years 2026, 2025 and 2024.

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Year ended March 31, 2026 compared with year ended March 31, 2025

Fiscal 2026 net sales of $3,181 million were $598 million, or 23 percent, higher than the prior year, primarily due to $621 million of higher sales in our Climate Solutions segment, including organic sales growth to hyperscale and colocation data center customers in North America and Europe and $119 million of incremental sales from the acquired L.B. White, Climate by Design, and AbsolutAire businesses. The higher sales in the Climate Solutions segment were partially offset by $31 million of lower sales in our Performance Technologies segment, largely due to market weakness. Foreign currency exchange rates favorably impacted sales by $63 million.

Fiscal 2026 cost of sales of $2,450 million increased $510 million, or 26 percent, primarily due to higher sales volume in the Climate Solution segment and a $50 million unfavorable impact of foreign currency exchange rates. In addition, cost of sales was unfavorably impacted by temporary operating inefficiencies in the Climate Solutions segment, largely due to the rapid expansion of manufacturing capacity for data center products, and higher raw material costs, which increased $28 million and included the impact of tariffs. These drivers, which increased cost of sales, were partially offset by lower sales volume in the Performance Technologies segment. As a percentage of sales, cost of sales increased 190 basis points to 77.0 percent, primarily due to temporary operating inefficiencies, higher material costs, and the absence of commercial pricing settlements and sales tax credits, which favorably impacted the prior year.

As a result of higher sales and higher cost of sales as a percentage of sales, gross profit increased $87 million and gross margin declined 190 basis points to 23.0 percent.

Fiscal 2026 SG&A expenses increased $28 million, or 8 percent. As a percentage of sales, SG&A expenses decreased 160 basis points. The increase in SG&A expenses includes higher compensation-related expenses in the Climate Solutions segment, supporting the segment's growth and including incremental expenses from the acquired businesses. Other costs directly associated with acquisition and disposition activities increased $18 million. These drivers, which increased SG&A expenses, were partially offset by lower compensation-related expenses in the Performance Technologies segment, which included the benefits of previous restructuring actions, and lower incentive compensation expense.

Restructuring expenses during 2026 decreased $7 million compared with the prior year, primarily due to lower severance expenses in the Performance Technologies segment and at Corporate, partially offset by higher severance expenses in the Climate Solutions segment and higher costs related to transferring production for certain product lines.

During fiscal 2026, we recorded a $4 million non-cash impairment charge in the Performance Technologies segment related to a technical service center and administrative support facility in Germany, the sale of which is pending.

During fiscal 2026, we recorded a $4 million loss at Corporate resulting from the settlement of a loan facility that we had provided to the buyer of our Austrian automotive business in fiscal 2022.

Operating income of $342 million in fiscal 2026 increased $59 million compared with the prior year, primarily due to higher gross profit and lower restructuring expenses, partially offset by higher SG&A expenses and the impairment charge and loss on sale of assets in fiscal 2026.

Interest expense in fiscal 2026 increased $6 million compared with the prior year, primarily due to higher average outstanding borrowings, partially offset by favorable changes in interest rates.

During fiscal 2026 and in connection with the termination of our primary U.S. pension plan, we recorded a $116 million non-cash pension termination charge to recognize actuarial losses that were included within accumulated other comprehensive loss on our consolidated balance sheet.

Other net expense during fiscal 2026 increased $5 million compared with the same period last year, primarily due to net foreign currency transaction losses, which increased $6 million compared with fiscal 2025.

The provision for income taxes of $63 million decreased $6 million from fiscal 2025. Higher operating earnings and the impact of provisions of the One Big Beautiful Bill Act ("OBBBA") increased the income tax provision in fiscal 2026. These increases were more than offset by a $13 million net income tax benefit related to the U.S. pension plan termination and the impact of changes in the mix and amount of foreign and U.S. earnings. The $13 million net income tax benefit related to the pension termination charge included a $17 million income tax detriment resulting from disproportionate income tax effects in accumulated other comprehensive loss. The impacts associated with provisions of the OBBBA on state deferred taxes and the utilization of foreign tax credits increased the income tax provision during fiscal 2026 by $6 million. The Company is continuing to assess provisions of the OBBBA that are expected to impact future periods.

Year ended March 31, 2025 compared with year ended March 31, 2024

Fiscal 2025 net sales of $2,583 million were $175 million, or 7 percent, higher than the prior year, primarily due to $333 million of higher sales in our Climate Solution segment, partially offset by $158 million of lower sales in our Performance Technologies segment. The Climate Solutions sales increase included $240 million of higher sales from the Scott Springfield Manufacturing and Napps businesses, which we acquired in fiscal 2024, and organic sales growth to hyperscale and colocation data center customers. The lower sales in our Performance Technologies segment included a $54 million impact from the disposition of three automotive businesses in Germany during the third quarter of fiscal 2024. Fiscal 2025 sales were negatively impacted by $18 million from foreign currency exchange rates.

Fiscal 2025 cost of sales of $1,940 million increased $58 million, or 3 percent, primarily due higher sales volume and, to a lesser extent, higher labor and inflationary costs. These increases were partially offset by improved operating efficiencies and a $13 million favorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales decreased 310 basis points to 75.1 percent, primarily due to the favorable sales mix, higher average selling prices, and improved operating efficiencies.

As a result of higher sales and higher cost of sales as a percentage of sales, gross profit increased $118 million and gross margin improved 310 basis points to 24.9 percent.

Fiscal 2025 SG&A expenses increased $58 million, or 21 percent. As a percentage of sales, SG&A expenses increased by 150 basis points. The increase in SG&A expenses included higher compensation-related expenses, which increased $45 million and included higher expenses from the acquired businesses and increased incentive compensation resulting from improved financial results. In addition, SG&A expenses included $17 million of higher amortization expense for acquired intangible assets. These increases were partially offset by lower environmental charges related to a previously-closed manufacturing facility in the U.S. and lower costs directly associated with the acquisition and integration of Scott Springfield Manufacturing. The environmental charges and acquisition-related costs were recorded at Corporate and both decreased $2 million compared with the prior year.

Restructuring expenses during 2025 increased $13 million compared with the prior year, primarily due to higher severance expenses and product line transfer costs in the Performance Technologies and Climate Solutions segments.

We recorded a $4 million gain on sale at Corporate during fiscal 2024 as a result of the sale of three automotive businesses based in Germany.

Operating income of $283 million in fiscal 2025 increased $42 million compared with the prior year, primarily due to higher gross profit, partially offset by higher SG&A and restructuring expenses and the absence of the $4 million gain on the sale of the automotive businesses in Germany.

Interest expense in fiscal 2025 increased $2 million compared with the prior 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 $69 million and $51 million in fiscal 2025 and 2024, respectively. The $18 million increase was primarily due to higher earnings and the absence of a $3 million income tax benefit recorded in fiscal 2024 related to the sale of three automotive businesses in Germany. These drivers, which increased the provision for income taxes, were partially offset by changes in the mix and amount of foreign and U.S. earnings in the current year compared to the prior year.

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 that managing these businesses independently will allow us to better deploy our 80/20 strategy focused on capitalizing on growth opportunities, particularly in our Data Centers business, and optimizing profit margins and cash flow. Beginning for fiscal 2027, we will report three operating segments: 1) Data Centers; 2) Commercial HVAC and 3) Performance Technologies.

Climate Solutions

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Year ended March 31, 2026 compared with year ended March 31, 2025

Climate Solutions net sales increased $621 million, or 43 percent, in fiscal 2026 compared with the prior year, primarily due to higher sales volume. In addition, foreign currency exchange rates favorably impacted sales by $38 million. Compared with the prior year, sales of data center, HVAC technologies, and heat transfer solutions products increased $468 million, $102 million, and $45 million, respectively. The higher data center product sales include sales growth to hyperscale and colocation customers in North America and Europe. The higher HVAC technologies product sales are primarily driven by $119 million of incremental sales from the acquired L.B. White, Climate by Design, and AbsolutAire businesses, partially offset by lower sales of other indoor air quality products. The increase in sales of heat transfer products, driven by higher sales of heat transfer coils for commercial and residential applications, was partially offset by the absence of commercial pricing settlements with heat pump customers in Europe, which had a favorable impact during the prior year.

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Climate Solutions cost of sales increased $513 million, or 50 percent, in fiscal 2026, primarily due to higher sales volume and, to a lesser extent, temporary operating inefficiencies, largely due to the rapid expansion of manufacturing capacity in the U.S. for data center products, and higher raw material costs, which increased $18 million and included the impact of tariffs. In addition, cost of sales was negatively impacted by $29 million from foreign currency exchange rates. As a percentage of sales, cost of sales increased 350 basis points to 74.6 percent, primarily due to the temporary operating inefficiencies, higher material costs, and the absence of the commercial pricing settlements in the prior year. Due to the increasing market demand for data center cooling products, demand for certain key components is currently outpacing supplier capacity. We began experiencing supply shortages in the fourth quarter of fiscal 2026. These component shortages are negatively impacting our production schedules for the first quarter of fiscal 2027.

As a result of the higher sales and higher cost of sales as a percentage of sales, gross profit increased $108 million and gross margin declined 350 basis points to 25.4 percent.

Climate Solutions SG&A expenses increased $32 million, or 20 percent, compared with the prior year. As a percentage of sales, SG&A expenses decreased 180 basis points. The increase in SG&A expenses was primarily driven by higher compensation-related expenses and increases across other general and administrative expenses. The higher compensation-related expenses, which increased $29 million, included expenses from the acquired businesses. This increase was partially offset by lower amortization expense, which decreased $7 million.

Restructuring expenses increased $2 million in fiscal 2026, primarily due to higher severance expenses.

Operating income of $321 million during fiscal 2026 increased $73 million from the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Year ended March 31, 2025 compared with year ended March 31, 2024

Climate Solutions net sales increased $333 million, or 30 percent, in fiscal 2025 compared with the prior year, primarily due to higher sales volume, including $240 million of higher sales from the Scott Springfield Manufacturing and Napps businesses, which we acquired in fiscal 2024. Compared with the prior year, sales of data center and HVAC technologies products increased $350 million and $50 million, respectively. The increase in sales of data center products includes sales from the acquired Scott Springfield Manufacturing business and organic sales growth to hyperscale and colocation customers. Sales of heat transfer solutions products decreased $67 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 cost of sales increased $214 million, or 26 percent, in fiscal 2025, primarily due to higher sales volume, higher raw material costs, which increased $9 million, and, to a lesser extent, higher labor and inflationary costs. These increases were partially offset by lower warranty expense, which decreased $4 million, and improved operating efficiencies. As a percentage of sales, cost of sales decreased 210 basis points to 71.1 percent, primarily due to favorable sales mix and the favorable impact of commercial pricing settlements.

As a result of the higher sales and lower cost of sales as a percentage of sales, gross profit increased $119 million and gross margin improved 210 basis points to 28.9 percent.

Climate Solutions SG&A expenses increased $47 million compared with the prior year. As a percentage of sales, SG&A expenses increased 80 basis points. The increase in SG&A expenses includes higher compensation-related expenses, which increased $24 million, and $17 million of higher amortization expense related to acquired intangible assets.

Restructuring expenses increased $3 million in fiscal 2025, primarily due to higher severance expenses and costs related to transferring production and warehousing for certain product lines.

Operating income of $248 million during fiscal 2025 increased $69 million from the prior year, primarily due to higher gross profit, partially offset by higher SG&A expenses.

Performance Technologies

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Year ended March 31, 2026 compared with year ended March 31, 2025

Performance Technologies net sales decreased $31 million, or 3 percent, in fiscal 2026 compared with the prior year, primarily due to lower sales volume in North America, largely due to market weakness and our strategic exit from lower-margin business, and, to a lesser extent, the absence of sales tax credits recognized in Brazil during the prior year. These decreases were partially offset by a $25 million favorable impact of foreign currency exchanges rates and higher average selling prices. Compared with the same period in the prior year, sales of heavy-duty equipment and on-highway applications products decreased $13 million and $4 million, respectively.

Performance Technologies cost of sales decreased $6 million, or 1 percent, in 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 raw material costs, which increased $10 million and included the impact of tariffs, and a $21 million unfavorable impact of foreign currency exchange rates. As a percentage of sales, cost of sales increased 170 basis points to 81.9 percent, primarily due to the higher raw material and tariff costs, partially offset by improved operating efficiencies and higher average selling prices.

As a result of the lower sales and higher cost of sales as a percentage of sales, gross profit decreased $25 million and margin declined 170 basis points to 18.1 percent.

Performance Technologies SG&A expenses decreased $23 million, or 23 percent, compared with the prior year. As a percentage of sales, SG&A expenses decreased 180 basis points. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased approximately $26 million and included the benefits of previous restructuring actions.

Restructuring expenses during fiscal 2026 totaled $12 million, a decrease of $8 million compared with the prior year, primarily due to lower severance expenses, partially offset by higher costs related to transferring production for certain product lines.

During fiscal 2026, we recorded a $4 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 in fiscal 2026 increased $2 million to $110 million, primarily due to lower SG&A and restructuring expenses, partially offset by lower gross profit and the impairment charge recorded in the current year.

Year ended March 31, 2025 compared with year ended March 31, 2024

Performance Technologies net sales decreased $158 million, or 12 percent, in fiscal 2025 compared with the prior year, primarily due to lower sales volume, including a $54 million impact from the disposition of three automotive businesses in Germany during the third quarter of fiscal 2024, and a $17 million unfavorable impact of foreign currency exchange rates. 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 prior year, sales of on-highway applications and heavy-duty equipment products decreased $116 million and $41 million, respectively.

Performance Technologies cost of sales decreased $159 million, or 15 percent, in fiscal 2025, primarily due to lower sales volume and a $13 million favorable impact of foreign currency exchange rate changes. In addition, cost of sales was favorably impacted, to a lesser extent, by improved operating efficiencies and lower raw material costs, which decreased $9 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 240 basis points to 80.2 percent, primarily due to higher average selling prices, improved operating efficiencies, lower material costs, and the favorable impact of 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 margin improved 240 basis points to 19.8 percent. Gross profit of $230 million was consistent compared with the prior year.

Performance Technologies SG&A expenses decreased $4 million, or 4 percent, compared with the prior year. As a percentage of sales, SG&A expenses increased 80 basis points. The decrease in SG&A expenses was primarily due to lower compensation-related expenses, which decreased $1 million, a $1 million favorable impact of foreign currency exchange rates, and decreases across other general and administrative expenses.

Restructuring expenses during fiscal 2025 totaled $20 million, an increase of $8 million compared with the prior year, primarily due to higher severance expenses in North America and product line transfer costs.

Operating income in fiscal 2025 decreased $4 million to $108 million, primarily due to higher restructuring expenses, partially offset by lower SG&A expenses.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow from operating activities, our cash and cash equivalents as of March 31, 2026 of $74 million, and available borrowing capacity of $391 million under our revolving credit facility. Given our extensive international operations, approximately $59 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.

Our primary contractual obligations include debt and related interest payments, lease obligations, obligations for capital expenditures, and pension obligations. During fiscal 2026, we contributed $15 million to fully fund our primary U.S. pension plan and settled all future obligations under the pension plan through a combination of lump-sum payments to participants and the purchase of irrevocable annuity contracts. As a result, we recorded a non-cash pension termination charge of $116 million during fiscal 2026. As of March 31, 2026, our global pension liabilities totaled $12 million.

Operating activities

Net cash provided by operating activities in fiscal 2026 was $249 million, an increase of $36 million from $213 million in the prior year. This increase in operating cash flow was primarily due to higher operating earnings and the favorable impact of customer deposits received during fiscal 2026, partially offset by an increase in working capital, which decreased operating cash flow, as compared with the prior year. The Climate Solutions segment's Data Centers business is growing rapidly. We recently entered into a long-term capacity agreement with one of our data center customers, who made a $165 million up-front deposit intended to support our investments necessary to meet the planned sales volume. In addition, 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.

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Net cash provided by operating activities in fiscal 2025 was $213 million, a decrease of $2 million from $215 million 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.

Investing activities

Capital expenditures

Capital expenditures of $143 million during fiscal 2026 increased $59 million compared with fiscal 2025, primarily due to higher capital spending in the Climate Solutions segment. Our capital spending in fiscal 2026 in the Climate Solutions and Performance Technologies segments totaled $113 million and $28 million, respectively. Capital spending in the Climate Solutions segment primarily includes investments to support expanding production capacity for data center products. Capital expenditures in the Performance Technologies segment include tooling and equipment purchases in conjunction with new and renewal programs with customers.

Acquisitions

During fiscal 2026, we made cash payments totaling $182 million to acquire L.B. White, Climate by Design, and AbsolutAire. During fiscal 2024, we made cash payments totaling $186 million to acquire Scott Springfield Manufacturing and Napps. In addition, we paid $12 million during fiscal 2024 to purchase intellectual property and related assets from TMGcore, Inc. These investments support our growth strategy by expanding our product portfolio and broadening our customer base in our Climate Solutions segment. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding acquisitions.

Financing activities

Debt

During fiscal 2026, borrowings on our credit facilities, net of repayments, totaled $79 million. We borrowed on our credit facilities to support our strategic growth initiatives, including our acquisitions of L.B. White and Climate by Design and the rapid expansion of our Data Centers business.

In July 2025, we executed an amended and restated credit agreement with a syndicate of banks that provides for a multi-currency $400 million revolving credit facility and a $200 million term loan facility maturing in July 2030. This credit agreement modified our then-existing revolving credit and term loan facilities, which would have matured in October 2027. We also amended the agreement governing our Senior Notes, to conform the applicable terms to those of the aforementioned amended and restated credit agreement. In December 2025, we further amended the credit agreement primarily to increase the borrowing capacity under the revolving credit facility by $150 million to $550 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. In connection with the pending transaction with Gentherm, we expect to receive $210 million immediately prior to transaction closing. Proceeds from this transaction are required to be applied towards the principal outstanding under our credit agreements.

The leverage ratio covenant within our primary credit agreements requires us to limit our consolidated indebtedness, less a portion of our cash balance, both as defined by the credit agreements, to no more than three and one-half times consolidated net earnings before interest, taxes, depreciation, amortization, and certain other adjustments ("Adjusted EBITDA"). We are also subject to an interest expense coverage ratio covenant, which requires us to maintain Adjusted EBITDA of at least three times consolidated interest expense.

As of March 31, 2026, we were in compliance with our debt covenants. We expect to remain in compliance with our debt covenants during fiscal 2027 and beyond.

Share repurchase program

During fiscal 2026, we did not purchase any shares under our share repurchase program. During fiscal 2025, we repurchased $18 million of our common stock under the program. As of March 31, 2026, we had $82 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 depends on a number of factors, including business conditions, other cash priorities, and stock price.

Critical Accounting Policies

The following critical accounting policies reflect the more significant judgments and estimates used in preparing our consolidated financial statements. Application of these policies results in accounting estimates that have the greatest potential for a significant impact on our financial statements. The following discussion of these judgments and estimates is intended to supplement the significant accounting policies presented in Note 1 of the Notes to Consolidated Financial Statements. In addition, recently issued accounting pronouncements that either have or could materially impact our financial statements are disclosed in Note 1 of the Notes to Consolidated Financial Statements.

Revenue recognition

We recognize revenue based upon consideration specified in a contract and as we satisfy performance obligations by transferring control over our products to our customers, which may be at a point in time or over time. The majority of our revenue is recognized at a point in time, based upon shipment terms. A limited number of our customer contracts for highly-specified products provide an enforceable right to payment for performance completed to date. For these contracts, we recognize revenue over time based upon our estimated progress toward the satisfaction of the contract's performance obligations. We record an allowance for credit losses and we accrue for estimated warranty costs at the time of sale. We base these estimates upon historical experience, current business trends and economic conditions, and risks specific to the underlying accounts receivable or warranty claims.

Impairment of long-lived assets

We perform impairment evaluations of long-lived assets, including property, plant and equipment and intangible assets, whenever business conditions or events indicate that those assets may be impaired. We consider factors such as operating losses, declining financial outlooks and market conditions when evaluating the necessity for an impairment analysis. In the event the net asset values exceed undiscounted cash flows expected to be generated by the assets, we write down the assets to fair value and record an impairment charge. We estimate fair value in various ways depending on the nature of the underlying assets. Fair value is generally based upon appraised value, estimated salvage value, or selling prices under negotiation, as applicable.

The most significant long-lived assets we evaluated for impairment indicators were property, plant and equipment and intangible assets, which totaled $521 million and $197 million, respectively, at March 31, 2026. Within property, plant and equipment, the most significant assets evaluated are buildings and improvements and machinery and equipment. Our most significant intangible assets evaluated are customer relationships, trade names, and acquired technology, all of which are related to our Climate Solutions segment. We evaluate impairment at the lowest level of separately identifiable cash flows, which is generally at the manufacturing plant level. We monitor manufacturing plant financial performance to determine whether indicators exist that would require an impairment evaluation for the facility. This includes significant adverse changes in plant profitability metrics; substantial changes in the mix of customer products manufactured in the plant; changes in manufacturing strategy; and the shifting of programs to other facilities under a manufacturing realignment strategy. When such indicators are present, we perform an impairment evaluation.

During fiscal 2026, we recorded a non-cash impairment charge of $4 million related to technical service center and administrative support facility in Germany, which we expect to sell during fiscal 2027. See Note 2 of the Notes to Consolidated Financial Statements for additional information.

Impairment of goodwill

We perform goodwill impairment tests annually, as of the end of February, unless business events or other conditions exist that require a more frequent evaluation. We consider factors such as operating losses, declining financial and market outlooks, and market capitalization when evaluating the necessity for an interim impairment analysis. We test goodwill for impairment at a reporting unit level. Goodwill resulting from recent acquisitions generally represents the highest risk of impairment, which typically decreases as the businesses are integrated into the Company and positioned for future operating and financial performance. We test goodwill for impairment by comparing the fair value of each reporting unit with its carrying value. We determine the fair value of a reporting unit based upon the present value of estimated future cash flows. If the fair value of a reporting unit exceeds the carrying value of the reporting unit's net assets, goodwill is not impaired. However, if the carrying value of the reporting unit's net assets exceeds its fair value, we would conclude goodwill is impaired and would record an impairment charge equal to the amount that the reporting unit's carrying value exceeds its fair value.

Determining the fair value of a reporting unit involves judgment and the use of estimates and assumptions, which include assumptions regarding the revenue growth rates and operating profit margins used to calculate estimated future cash flows and risk-adjusted discount rates. We determine the expected future revenue growth rates and operating profit margins after consideration of our historical revenue growth rates and earnings levels, our assessment of future market potential and our expectations of future business performance. The discount rates used in determining discounted cash flows are rates corresponding to our cost of capital, adjusted for country- and business-specific risks where appropriate. While we believe the assumptions used in our goodwill impairment tests are appropriate and result in a reasonable estimate of the fair value of each reporting unit, future events or circumstances could have a potential negative effect on the estimated fair value of our reporting units. These events or circumstances include lower than forecasted revenues, market trends that fall below our current expectations, actions of key customers, increases in discount rates, and continued inflationary market conditions. We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill.

At March 31, 2026, our goodwill totaled $292 million, all of which is related to our Climate Solutions segment. We conducted goodwill impairment tests as of February 28, 2026, by applying a fair value-based test and determined the fair value for each of our reporting units exceeded the respective book value. A 10 percent decrease in the estimated fair value of each reporting unit would not have resulted in a different conclusion.

Acquisitions

From time to time, we make strategic acquisitions that have a material impact on our consolidated results of operations or financial position. We allocate the purchase price of acquired businesses to the identifiable tangible and intangible assets acquired and liabilities assumed in the transaction based upon their estimated fair values as of the acquisition date. We determine the estimated fair values using information available to us and engage third-party valuation specialists when necessary. The estimates we use to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments. While we use our best estimates and assumptions, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statement of operations. We also estimate the useful lives of intangible assets to determine the amount of amortization expense to record in future periods. We periodically review the estimated useful lives assigned to our intangible assets to determine whether such estimated useful lives continue to be appropriate. During fiscal 2026, we acquired L.B. White, Climate by Design, and AbsolutAire. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding these acquisitions.

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Pension obligations

During fiscal 2026, we completed the termination of our primary U.S. pension plan. We contributed $15 million to fully fund the plan and settled all future obligations under the pension plan through a combination of lump-sum payments to participants and the purchase of irrevocable annuity contracts. As a result, we recorded a non-cash pension termination charge of $116 million during fiscal 2026.

At March 31, 2026, our global pension liabilities totaled $12 million. The majority of the pension liabilities relate to non-U.S. plans maintained in Germany and Italy. These plans are closed to new participants and are substantially unfunded. Our calculation of the expense and liabilities for our remaining pension plans is dependent upon various assumptions. The most significant assumptions include the discount rate, expected return on plan assets, and mortality rates. We base our selection of these assumptions on historical trends and economic and market conditions at the time of valuation. In accordance with U.S. GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods. These differences impact future pension expense.

See Note 18 of the Notes to Consolidated Financial Statements for additional information.

Income taxes

We operate in numerous taxing jurisdictions; therefore, we are subject to regular examinations by federal, state and non-U.S. taxing authorities. Due to the application of complex and sometimes ambiguous tax laws and rulings in the jurisdictions in which we do business, there is an inherent level of uncertainty within our worldwide tax provisions. Despite our belief that our tax return positions are consistent with applicable tax laws, it is possible that taxing authorities could challenge certain positions.

Our deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. We adjust these amounts to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance if we determine it is more likely than not that the net deferred tax assets in a particular jurisdiction will not be realized. This determination, which is made on a legal entity-by-legal entity basis, involves judgment and the use of estimates and assumptions, including expectations of future taxable income and tax planning strategies. We believe the assumptions that we used are appropriate and result in a reasonable determination regarding the future realizability of deferred tax assets. However, future events or circumstances, such as lower-than-expected taxable income or unfavorable changes in the financial outlook of our operations in certain jurisdictions, could cause us to record additional valuation allowances.

See Note 8 of the Notes to Consolidated Financial Statements for additional information regarding income taxes.

Loss reserves

We maintain liabilities and reserves for a number of loss exposures, including environmental remediation costs, product warranties, self-insurance costs, estimated credit losses associated with trade receivables, regulatory compliance matters, and litigation. Establishing loss reserves for these exposures requires the use of estimates and judgment to determine the risk exposure and ultimate potential liability. We estimate these reserve requirements by using consistent and suitable methodologies for the particular type of loss reserve being calculated. See Notes 15 and 20 of the Notes to Consolidated Financial Statements for additional information regarding product warranties and contingencies and litigation, respectively.

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Forward-Looking Statements

This report, including, but not limited to, the discussion under Item 7. 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 this report and identified in our other public filings with the U.S. Securities and Exchange Commission. Other risks and uncertainties include, but are not limited to, the following:

Market risks

Operational risks

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

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.

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