MOD Q1 Earnings Top Estimates on Data Center Growth, Sales Miss

MOD currently carries a Zacks Rank #4 (Sell).

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MOD's Margins Face Supply Chain Pressure

Gross profit rose 10% year over year to $182 million. However, gross margin contracted 340 basis points to 20.8%, reflecting lower margins across all three operating segments.

Adjusted EBITDA increased 5% to $106.5 million, while the corresponding margin declined 270 basis points to 12.2%. Operating income slipped 1% to $74.8 million as higher gross profit was offset by increased expenses supporting growth and the planned Performance Technologies separation.

Modine's Data Centers Business Expands Rapidly

Data Centers revenues jumped to $348.6 million from $183.7 million a year earlier, primarily driven by higher sales to hyperscale customers in North America. Americas sales grew 112%, while EMEA sales advanced 18%.

The segment's adjusted EBITDA rose 27% to $51.7 million, though adjusted EBITDA margin fell to 14.8% from 22.1%. Supply shortages limited production and caused labor inefficiencies and weak overhead absorption. Management estimated that excess labor and under-absorbed overhead reduced the margin by 450-550 basis points.

MOD's Commercial HVAC Sales Rise 22%

Commercial HVAC sales increased 22% to $261.6 million. Growth reflected higher coil sales to data center customers and $19.7 million of incremental revenues from acquired businesses. Organic sales increased 6%.

Adjusted EBITDA advanced 7% to $41.6 million, while the margin declined to 15.9% from 18.1%. Profitability was affected by acquisition-related business mix, manufacturing consolidation inefficiencies and a greater proportion of lower-margin coil sales. Management expects the segment's margin to improve sequentially through fiscal 2027.

Modine's Performance Technologies Sales Fall

Performance Technologies revenues declined 3% to $277.8 million. Weak automotive and commercial vehicle demand more than offset higher sales to power-generation customers. Organic sales decreased 4%.

Adjusted EBITDA fell 3% to $36.2 million, while the margin edged down 10 basis points to 13%. Higher material and tariff costs pressured results, with contractual recoveries lagging cost increases. A $2 million reduction in selling, general and administrative expenses partly mitigated these headwinds.

MOD's Expenses Increase to Support Growth

Selling, general and administrative expenses rose 22% to $103.3 million, driven by Data Centers investments, acquired Commercial HVAC operations, incentive compensation and separation-related spending. As a percentage of sales, however, SG&A expenses decreased to 11.8%.

The quarter included $3.9 million of restructuring expenses and $7.1 million of costs tied to the planned Performance Technologies spin-off and merger with Gentherm. The transaction remained on schedule for completion in the fourth quarter of calendar 2026, subject to approvals and closing conditions.

Modine's Cash Flow Reflects Capacity Spending

Net cash provided by operating activities increased to $41.4 million from $27.7 million. Free cash flow was negative $5 million compared with positive $0.2 million a year earlier, mainly because capital expenditures rose to $46.4 million as the company expanded Data Centers production capacity.

MOD ended the quarter with $95.3 million in cash and cash equivalents and total debt of $528.2 million. Net debt increased to $432.9 million from $362.8 million at the end of fiscal 2026, largely due to treasury-stock purchases associated with employee equity awards.

MOD Reaffirms Fiscal 2027 Outlook

Modine maintained its fiscal 2027 guidance for net sales growth of 20-35% and adjusted EBITDA of $650-$680 million. The outlook includes Performance Technologies for the full fiscal year and implies adjusted EBITDA growth exceeding 40%.

Data Centers sales are projected to increase 60-80%, while Commercial HVAC revenues are expected to grow 5-10%. Management expects companywide margins to improve sequentially, including a 200-250-basis-point increase in the second quarter, as component availability, production throughput and cost recovery improve.

Peer Releases

Johnson Controls International plc JCI reported third-quarter fiscal 2026 (ended June 2026) adjusted earnings of $1.42 per share, which beat the Zacks Consensus Estimate of $1.32. The bottom line increased 35.2% year over year. Total revenues (continuing operations) of $6.61 billion surpassed the consensus estimate of $6.43 billion in the quarter.

The top line increased 9.3% year over year, whereas organic revenues increased 10%. Johnson Controls anticipates fiscal 2026 organic revenue growth to be about 8% from the prior-year level. Operating leverage is expected to be 45-50%. It expects adjusted earnings per share to be approximately $5.05 and adjusted free cash flow conversion of about 100%.

Vertiv Holdings VRT delivered second-quarter 2026 adjusted earnings of $1.52 per share, up 60% year over year. The results beat the Zacks Consensus Estimate by 6.29%, supported by higher sales volume, operating productivity and margin expansion. Net sales increased 24.1% year over year to $3.27 billion but missed the consensus estimate by 3.41%.

Organic sales rose 18%, while acquisitions and favorable foreign exchange contributed 5% and 1%, respectively. For 2026, Vertiv forecasts net sales in the range of $13.8 billion to $14.2 billion. Adjusted earnings are projected to be in the range of $6.65 to $6.75 per share, while adjusted operating profit is expected to be between $3.29 billion and $3.37 billion.

Lennox International LII came out with second-quarter 2026 adjusted quarterly earnings of $7.72 per share, beating the Zacks Consensus Estimate of $7.63 per share. This compares to earnings of $7.82 per share a year ago. Revenues were $1.55 billion, up 3% over the same period last year but missing the Zacks Consensus Estimate of $1.56 billion.

For 2026, the company expects its revenue growth to be approximately 8%, reflecting a 5% contribution from completed acquisitions. Earnings per share are forecast in the range of $23-$24, and free cash flow is guided in the range of $750-$850 million for the year.

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