Modine Manufacturing (NYSE:MOD) executives emphasized a major portfolio shift and continued acceleration in its data center cooling business during the company’s fiscal third-quarter 2026 earnings call. Management also raised full-year fiscal 2026 revenue and earnings guidance, citing strong growth in its Climate Solutions segment and margin improvement at the consolidated level.
Performance Technologies spinoff plan and Gentherm combination
President and CEO Neil Brinker opened by revisiting Modine’s previously announced plan to spin off its Performance Technologies (PT) segment and combine it with Gentherm. Brinker said Modine expects to receive approximately $210 million in cash, while Modine shareholders would receive stock in the new business through a tax-free distribution representing 40% of the combined ownership.
Following the deal, Modine’s remaining operations will consist of its Climate Solutions segment plus corporate support functions. Brinker said the company has prioritized growth investments there, including six acquisitions over the past three years and significant capital expenditures tied to expanding data center capacity.
Climate Solutions growth led by data centers
Management pointed to another quarter of strong growth in Climate Solutions. Brinker reported segment revenue increased 51% year over year, including acquisitions, with organic revenue growth of 36%. Data center sales rose 78% in the quarter, which Brinker highlighted as the primary driver.
Modine provided updates on its capacity expansion program. Brinker said the company commissioned four new chiller lines during the quarter, including the first two lines in Jefferson City, Missouri. He said four additional lines are scheduled to come online in the fourth quarter, including the final two lines in Grenada, Mississippi, and the first two lines in Dallas. Modine also began initial production in Franklin, Wisconsin, adding capacity for products currently produced in Calgary, including air handling units and modular data centers.
Brinker said the company is not concerned about building too much capacity, stating that current projections “fully support” the capacity being added based on known demand from existing customers. He also said Modine posted record order intake in the quarter, which he said reinforced confidence in the strategy and projections. Brinker added that manufacturing lines offer flexibility, noting chiller lines can be converted to produce modular data centers or large air handling units.
Management also addressed questions about next-generation chips operating at higher temperatures and implications for cooling. Brinker said higher ambient water temperatures in liquid cooling loops could reduce energy required for mechanical cooling by leveraging “free cooling” options. He pointed to a newly launched 3-megawatt TurboChill chiller platform designed to provide advanced free cooling heat rejection for high-density, next-generation GPU power data centers.
Brinker reiterated Modine’s previously shared target of delivering more than $1 billion in data center sales this fiscal year and said the company remains on track. He also reaffirmed that current capacity expansion is intended to support $2 billion in data center sales by fiscal 2028, adding that updated projections call for 50% to 70% annual growth in data center revenue over the next two years.
Segment performance: PT margins improve, Climate Solutions scales
Executive Vice President and CFO Mick Lucarelli said Performance Technologies revenue increased 1% year over year, including a 3% decrease in heavy-duty equipment sales offset by a 6% increase in on-highway product sales. Despite end-market challenges and typical third-quarter seasonality, PT adjusted EBITDA improved 38% and the adjusted EBITDA margin increased 400 basis points to 14.8%.
Lucarelli attributed PT margin gains to cost reductions and operating efficiencies in labor, overhead, and materials, as well as pricing benefits related to tariff recovery through surcharges and pass-through mechanisms. He also said SG&A expenses in PT were nearly $7 million lower year over year due to business reorganization. Looking ahead, Lucarelli said Modine expects a sequential revenue ramp in PT in the fourth quarter driven primarily by seasonal patterns.
In Climate Solutions, Lucarelli said third-quarter sales increased 51%. He said data center revenue grew $130 million, or 78%, and management anticipated 31% sequential growth in data center products in the third quarter with “significant incremental volumes” expected in the fourth quarter. HVAC technology sales increased $35 million, or 48%, driven by acquisitions and stronger heating product sales. Heat Transfer Solutions sales grew 14%, or $17 million, due mainly to higher coils and coatings demand.
Climate Solutions adjusted EBITDA improved 29% in the quarter. Lucarelli said adjusted EBITDA margin improved sequentially to 17.9% and that Modine expects further margin improvement in the fourth quarter driven by increasing data center volumes, leverage from capacity investments, and ongoing integration of three recent acquisitions.
Consolidated results and pension plan termination impact
On a consolidated basis, Lucarelli said third-quarter sales increased 31%, driven by Climate Solutions. Gross profit increased 24%, aided by higher data center volume and margin improvement in PT. SG&A expenses increased 9% due to higher costs in Climate Solutions, partially offset by cost savings in PT.
Adjusted EBITDA rose 37%, with adjusted EBITDA margin improving 70 basis points to 14.9%. Adjusted earnings per share increased 29% to $1.19. Lucarelli noted that adjusted EPS excluded a $116 million non-cash settlement loss recorded in connection with the termination of Modine’s U.S. pension plan. He said the project was completed, removing a liability from the balance sheet and eliminating ongoing administrative time and expense.
Cash flow, leverage, and raised fiscal 2026 outlook
Free cash flow was negative $17 million in the third quarter. Lucarelli said the result reflected inventory builds and higher Climate Solutions capital expenditures tied to preparing for additional data center sales growth, plus $24 million of cash payments primarily related to the U.S. pension plan termination and restructuring.
Net debt was $517 million, up $238 million from the prior fiscal year, reflecting three acquisitions completed earlier in the year and incremental data center investments. Lucarelli said Modine’s leverage ratio was 1.2 and that the company expects it to decline further by fiscal year-end based on the earnings and cash flow outlook. He said Modine anticipates generating positive free cash flow in the fourth quarter and now expects fiscal 2026 capital expenditures of $150 million to $180 million, with some data center investments carrying over into the next fiscal year.
For fiscal 2026, Modine raised guidance, now expecting:
- Total sales growth: 20% to 25%
- Climate Solutions sales growth: 40% to 45% (up from 35% to 40%), with data center sales expected to grow in excess of 70%
- Performance Technologies sales: flat to down 7%
- Adjusted EBITDA: $455 million to $475 million
During Q&A, Lucarelli said Climate Solutions was still on track for more than 200 basis points of sequential margin improvement in the fourth quarter, putting the segment in the 20% to 21% margin range. He also cautioned that PT margin is expected to dip temporarily in the fourth quarter due to material pass-through timing, tariff recovery timing, and inventory cleanup tied to 80/20 initiatives and plant conversions, with a rebound expected in the first quarter to “14-plus percent” levels.
Brinker said record data center order intake was primarily driven by existing customers and described growing visibility in the data center pipeline, saying Modine is now looking out as far as five years. He also said Modine is engaged in discussions around long-term supply agreements and would be willing to do such agreements for all its capacity, adding that if LTAs are signed, Modine expects to communicate them publicly.
About Modine Manufacturing (NYSE:MOD)
Modine Manufacturing Company (NYSE:MOD) is a global provider of thermal management solutions serving automotive, commercial transportation, heavy-duty off-highway, industrial, HVAC and refrigeration markets. The company designs, manufactures, tests and markets a broad array of heat-transfer products that manage temperature and energy efficiency for engines, power electronics and building climate control systems.
Its product portfolio includes heat exchangers, condensers, radiators, evaporators, charge air coolers, fan systems and associated controls.
