Modine (MOD) Q1 2026: Data Center Revenue Outlook Raised 45% as $100M Capacity Build Unleashes Growth
Modine’s Q1 2026 marked a decisive leap in data center ambition, with a $100 million capacity expansion and a bold 45% data center revenue growth outlook for the year. The company is executing a dual-pronged strategy: scaling organically in high-growth climate solutions while layering in targeted HVAC acquisitions to broaden its portfolio. With a record data center backlog and accelerating customer demand, Modine’s capital allocation and operational realignment signal a new phase of transformation, but also introduce execution and integration risk as the company pushes hard on multiple fronts.
Summary
- Data Center Acceleration: Modine’s $100 million expansion targets surging North American demand and sets up a path to $2 billion in data center revenue by 2028.
- Portfolio Realignment: Strategic acquisitions and site conversions are deepening HVAC scale and shifting focus from legacy vehicular markets.
- Margin Rebound Watch: Management signals margin improvement in the second half as volumes ramp and cost recovery mechanisms kick in.
Performance Analysis
Modine’s Q1 saw a 3% overall sales increase, underpinned by an 11% revenue gain in the climate solutions segment and a 15% jump in data center sales, even as the performance technologies (PT) segment remained pressured by weak vehicular demand and product line exits. Climate solutions, now the company’s primary growth engine, benefited from both organic momentum and the initial contributions of two HVAC-focused acquisitions (Absolute Air and LB White). These acquisitions, along with the recently closed Climate by Design International (CDI), are expected to add $100 million in incremental revenue this year.
Gross margin declined 40 basis points to 24.2%, primarily due to lower PT volumes and higher material costs, with EBITDA margin also down 40 bps to 14.9%. Management attributes current margin softness to near-term investments in capacity and integration, but expects margin improvement in the second half as new data center lines come online and cost recovery from tariffs and materials flows through. Free cash flow was flat, reflecting inventory build for second-half data center deliveries and $5 million in restructuring and M&A costs. Net debt increased to $403 million, driven by acquisition activity and capital expenditure.
- Data Center Revenue Surge: Management now expects 45% data center growth in fiscal 2026, up from a prior 30%+ view, with second-half sales set to accelerate over 80% YoY.
- HVAC Acquisition Integration: Absolute Air, LB White, and CDI are broadening Modine’s heating and air quality portfolio, with integration efforts focused on stabilizing margins and leveraging excess manufacturing capacity.
- Performance Technologies Drag: Segment sales fell 8%, with lower heavy-duty equipment and on-highway application volumes, though cost cuts partially offset the top-line weakness.
The big picture: Modine’s transformation is now firmly anchored in climate solutions and data center infrastructure, with legacy PT businesses increasingly de-emphasized. Capital is being aggressively redeployed to meet a record data center backlog, but the near-term margin and cash flow profile reflects the strain of this rapid pivot.
Executive Commentary
"We recently announced $100 million investment to expand manufacturing capacity across four US sites, including a new facility in Dallas, Texas area... This expansion is a necessary response to the extraordinary demand we're seeing, especially in North America. With our current funnel of opportunities, we believe that we can approach $2 billion of data center revenues in fiscal 28. This is a lofty goal, but one that we believe is achievable."
Neil Brinker, President and Chief Executive Officer
"While we're currently growing revenue at an exceptional rate, we're also increasing our investments in manufacturing and engineering resources to support future growth. For example, we're once again raising our fiscal 26 outlook for data center revenue growth to 45%. As capacity comes online and revenue grows, we expect the EBITDA margin to increase, especially in fiscal 27."
Mick Muccarelli, Executive Vice President and Chief Financial Officer
Strategic Positioning
1. Data Center Infrastructure Scale-Up
Modine is executing a local-for-local capacity expansion, investing $100 million across four US sites to support data center cooling demand. This expansion is timed to customer build schedules, with existing sites being retooled in the next few quarters and greenfield facilities coming online by fiscal year-end. Management’s confidence is grounded in a record backlog and multi-year visibility, with customer commitments and strategic partnerships driving the accelerated outlook.
2. HVAC Technology and Portfolio Diversification
Three recent acquisitions—Absolute Air, LB White, and CDI—are deepening Modine’s presence in heating and indoor air quality, supplementing the organic growth engine of data center cooling. Integration focus is on leveraging the 80-20 strategy, a business discipline prioritizing high-margin, high-growth segments, to drive both revenue and cost synergies. Management expects incremental HVAC revenue of $100 million this year, with margin improvement as integration matures and manufacturing capacity is optimized.
3. Performance Technologies Retrenchment
PT segment faces a cyclical downturn in vehicular markets, with management actively reducing costs, reallocating talent, and considering further site consolidations. Selective product line exits and portfolio rationalization are ongoing, with underperforming segments being de-emphasized or prepared for divestiture. Cost recovery mechanisms for tariffs and materials are in place, but near-term growth is expected to remain muted.
4. Modular Data Center Innovation
Modine is collaborating with key customers on modular data center solutions, enabling rapid deployment and scalability. These “data center in a box” offerings reduce build times and labor requirements, and are being tailored for both existing and new customers. Some solutions are exclusive to hyperscale customers, while others will be customized for broader adoption, positioning Modine as a critical partner in next-generation infrastructure build-outs.
5. Capital Allocation and Integration Discipline
Management is pausing further M&A for a few quarters, focusing on digesting recent deals and executing the data center expansion. Credit facility upsizing and extension provide liquidity and flexibility, while a disciplined approach to free cash flow and divestiture proceeds (not yet included in guidance) supports ongoing transformation.
Key Considerations
This quarter marks a pivotal inflection for Modine, as management doubles down on data center scale and HVAC portfolio depth. Investors should weigh the upside of accelerated growth against the integration, execution, and margin risks inherent in such a rapid transformation.
Key Considerations:
- Backlog Visibility: Record data center backlog and multi-year customer commitments underpin the aggressive capacity build and revenue targets.
- Margin Trajectory: Near-term margin softness is expected to reverse in the second half as volumes ramp and cost recoveries flow through, but this depends on execution and integration pace.
- Capital Allocation Balance: Over $140 million deployed in acquisitions and CapEx this quarter, with further investments planned, puts pressure on free cash flow and requires disciplined integration.
- PT Segment Headwinds: Ongoing vehicular market weakness and product line exits limit upside, though cost-outs and selective divestitures may create future optionality.
- HVAC Synergy Realization: Successful integration of recent acquisitions will be key to delivering on the promised scale and margin improvement in climate solutions.
Risks
Modine’s transformation introduces several risks: execution risk in ramping new data center capacity, integration risk from absorbing three acquisitions simultaneously, and continued cyclical weakness in performance technologies. Tariff and material cost volatility, while partially mitigated by pass-through mechanisms, could pressure margins if recovery lags. Guidance assumes no major divestiture proceeds, so delays or disruptions in planned asset sales could impact cash flow and leverage targets.
Forward Outlook
For Q2 and the remainder of fiscal 2026, Modine guided to:
- Full-year sales growth of 10% to 15%, up from 2% to 10% previously
- Climate solutions sales growth of 25% to 35%
- Data center revenue growth of over 45%, with second-half acceleration above 80% YoY
- Performance technologies revenue down 2% to 12%
- Adjusted EBITDA of $440 million to $470 million, a $20 million increase from prior guidance
Management highlighted that margin improvement is expected in the second half, driven by higher volumes and material cost recovery, while free cash flow margin will dip to around 3% of sales due to elevated CapEx and pension funding. No major M&A is planned for the next few quarters, with focus on integration and execution.
- Second-half data center ramp is critical to hitting the new guidance.
- Integration of HVAC acquisitions and realization of synergies are key watchpoints.
Takeaways
Modine’s Q1 2026 signals a new phase of aggressive growth and portfolio transformation, anchored in data center cooling and HVAC scale. Margin and cash flow recovery depend on flawless execution, but the company’s record backlog and customer commitments provide a strong foundation.
- Data Center Scale Is the Growth Engine: Surging North American demand and a record backlog support the $2 billion revenue goal, but require rapid capacity ramp and disciplined execution.
- HVAC Acquisitions Broaden Portfolio, But Integration Is Key: Recent deals offer revenue and margin upside, but successful integration and synergy capture are critical.
- Margin Rebound Hinges on Second-Half Execution: Investors should watch for margin expansion as volumes ramp and cost recoveries flow through.
Conclusion
Modine’s Q1 2026 was a watershed moment, with management leaning hard into data center infrastructure and HVAC expansion. The path to outsized growth is clear, but so is the complexity and risk of integrating new assets and delivering on ambitious targets. Execution in the second half will determine whether Modine’s transformation translates into sustained margin and cash flow gains.
Industry Read-Through
Modine’s results and commentary reinforce the secular surge in North American data center infrastructure demand, with hyperscalers and colocation providers pulling forward build schedules and requiring rapid supplier response. The pivot to modular, scalable solutions and local-for-local manufacturing reflects broader industry trends toward speed, efficiency, and supply chain resilience. For HVAC and industrial peers, the playbook of targeted acquisitions, portfolio rationalization, and capacity investment is increasingly essential to capture digital infrastructure tailwinds and offset legacy market headwinds. Vendors lacking scale, integration discipline, or customer intimacy may struggle to keep pace as the industry transforms.