MODINE MANUFACTURING CO: revenue up 28% on data centers, but margin squeezed by supply constraints

On July 29, MODINE MANUFACTURING CO reported results for the first quarter of fiscal 2027 (quarter ended June 30, 2026). Revenue rose 28% year-on-year to $874.1 million, net income increased 44% to $73.9 million, but adjusted EBITDA grew only 5% to $106.5 million, and EBITDA margin fell to 12.2% from 13.9% a year earlier. Growth was driven by the Data Centers and Commercial HVAC segments, while margin suffered from temporary supply chain disruptions. At the current price, the stock looks neutral: the LTM EV/EBITDA multiple of 23.9x is slightly above the three-year average of 23.2x, and the portal's model implies only +1% upside to fair value.

Key takeaways

— Revenue rose 28% on data centers, but EBITDA margin fell to 12.2% due to supply constraints

— Net income grew 44% partly due to a one-off tax benefit, not just operational improvements

— Adjusted EBITDA increased only 5% as revenue growth did not convert into profit due to costs

— Free cash flow turned negative due to higher capex for data center capacity expansion

— Leverage remains moderate: net debt/EBITDA LTM at 1.07, but net debt rose to $432.9 million

— EV/EBITDA LTM multiple of 23.9x is slightly above the three-year average of 23.2x, limiting upside

— The company reaffirmed its fiscal year outlook and expects to close the Performance Technologies spin-off in Q4 calendar 2026

Attractiveness

Key figures, USD bn

Revenue rose 28% on data centers, but EBITDA margin fell to 12.2% due to supply constraints

Revenue in the first quarter of fiscal 2027 rose 28% year-on-year to $874.1 million. The main contributors were the Data Centers and Commercial HVAC segments: Data Centers sales jumped 90% to $348.6 million, Commercial HVAC rose 22% to $261.6 million. Performance Technologies sales declined 3% to $277.8 million due to weakness in automotive and commercial vehicle markets.

However, adjusted EBITDA margin fell to 12.2% from 13.9% a year earlier. Gross margin dropped 340 basis points to 20.8%, with declines in all three segments. In Data Centers, margin plunged 960 basis points to 20.2% due to temporary supply chain disruptions, higher material costs, and increased warranty expenses.

The company attributes the margin decline to temporary supply constraints that limited production and raised costs. The report notes that these issues are being addressed: volume and margin improved sequentially during the quarter. Nevertheless, revenue conversion into profit remains weak: adjusted EBITDA grew only 5% to $106.5 million.

Net income grew 44% partly due to a one-off tax benefit, not just operational improvements

Net income in the first quarter of fiscal 2027 rose 44% year-on-year to $73.9 million, and diluted earnings per share were $1.37 versus $0.95 a year earlier. However, this growth was partly due to a one-off tax benefit: the company recorded a tax benefit of $5.7 million compared to a provision of $14.0 million a year earlier.

This tax benefit relates to shares issued for stock-based incentive compensation. The report states that it is expected to be largely offset by the negative impact of nondeductible compensation within the fiscal year. Without this effect, profit would have been lower.

Operating income declined 1% to $74.8 million due to a 22% increase in SG&A expenses to $103.3 million, driven by support for growth in Data Centers, acquisitions in Commercial HVAC, and costs related to the pending spin-off of Performance Technologies. Thus, net income growth does not fully reflect operational dynamics.

Adjusted EBITDA increased only 5% as revenue growth did not convert into profit due to costs

Adjusted EBITDA grew only 5% year-on-year to $106.5 million, despite a 28% increase in revenue. This sharp divergence is explained by faster growth in costs: cost of sales rose 34% to $692.1 million, and SG&A expenses increased 22% to $103.3 million.

In the Data Centers segment, adjusted EBITDA rose 27% to $51.7 million, but segment margin fell to 14.8% from 22.1% a year earlier. In Commercial HVAC, EBITDA increased 7% to $41.6 million with a margin of 15.9% versus 18.1%. In Performance Technologies, EBITDA declined 3% to $36.2 million, with margin falling to 13.0% from 13.1%.

Thus, revenue growth did not translate into proportional profit growth due to temporary operational issues and higher fixed costs. The company expects improvement as supply chain issues are resolved, but in the reported quarter conversion remained weak.

Free cash flow turned negative due to higher capex for data center capacity expansion

Operating cash flow in the first quarter of fiscal 2027 was $41.4 million, up $13.7 million year-on-year. However, capital expenditures rose to $46.4 million from $27.5 million, resulting in negative free cash flow of minus $5.0 million versus positive $0.2 million a year earlier.

The increase in capex is related to expanding production capacity in the Data Centers segment. The company also made cash payments for restructuring and disposition costs of $14.9 million. Despite negative free cash flow, operating cash flow remains positive, and the capex increase is aimed at future growth.

Net debt at the end of the quarter was $432.9 million, up $70.1 million from the end of fiscal 2026. The increase in debt was primarily due to share repurchases under the compensation plan, which reduces the number of shares outstanding.

Leverage remains moderate: net debt/EBITDA LTM at 1.07, but net debt rose to $432.9 million

Net debt at the end of the first quarter of fiscal 2027 was $432.9 million, up $70.1 million from the end of fiscal 2026. The net debt to EBITDA ratio for the trailing twelve months is 1.07, indicating moderate leverage.

The increase in net debt was primarily due to share repurchases under the compensation plan: the company spent $64.6 million on buying back its own shares. This is not related to operational issues but is part of capital management policy.

Interest expense rose to $6.4 million from $5.8 million a year earlier. At the current level of debt and EBITDA, the company remains able to service its obligations, but further debt growth could limit financial flexibility.

EV/EBITDA LTM multiple of 23.9x is slightly above the three-year average of 23.2x, limiting upside

Currently, EV/EBITDA for the trailing twelve months is 23.9, slightly above the three-year average of 23.2. This means the stock is valued slightly above its historical norm, limiting upside potential.

The P/E for the trailing twelve months is 68.1, reflecting a low profit base. Return on equity (ROE) is 24.6%, a high figure that supports the valuation.

The portal's model, based on EBITDA growth and a target multiple, implies only +1% upside to fair value. This suggests that the current price largely reflects growth expectations.

The company reaffirmed its fiscal year outlook and expects to close the Performance Technologies spin-off in Q4 calendar 2026

The company reaffirmed its fiscal 2027 outlook: revenue growth of 20–35% and adjusted EBITDA in the range of $650–680 million. The outlook includes Performance Technologies for the full year, as the spin-off is expected only in the fourth quarter of calendar 2026.

The spin-off and merger of Performance Technologies with Gentherm is expected to close in the fourth quarter of calendar 2026. The company has already cleared several major milestones. After closing, Modine will provide an updated outlook reflecting the continuing business.

The report notes that order backlog nearly doubled over the year, confirming strong demand for products. However, the company faces temporary supply chain issues that it is actively addressing.

Valuation on the latest reported figures

Bottom line

The report showed strong revenue growth of 28% driven by Data Centers and Commercial HVAC, but EBITDA margin fell to 12.2% due to temporary supply chain issues. Net income rose 44%, partly due to a one-off tax benefit. Free cash flow turned negative due to higher capex, and net debt increased to $432.9 million. The EV/EBITDA LTM multiple of 23.9x is slightly above the three-year average, and the portal's model implies only +1% upside. The stock looks neutral: business growth is impressive, but the current valuation already reflects these expectations, and operational risks remain.