AI’s Power-and-Cooling Boom: The Gap Between Orders and Profits

Modine generated $164.9 million in additional data center revenue in the quarter ended June 2026, compared with a year earlier. Just $15.6 million of that increase reached gross profit.

That equates to approximately 9.5 cents of incremental gross profit for every additional dollar of sales. The comparison is affected by a favorable warranty settlement in the prior-year quarter, but the underlying tension remains: demand for AI cooling equipment is expanding far faster than some manufacturers' ability to profit from it.

Scarcity Has a Cost

The physical constraints behind AI infrastructure spending are substantial. According to the International Energy Agency, a new data center typically takes one to three years to build, while new grid infrastructure can require five to fifteen. Prices for key grid components have nearly doubled over the past five years.

Those delays create opportunities for electrical equipment manufacturers, but they can also defer the projects that generate their revenue. A transformer shortage may strengthen a supplier's negotiating position while preventing a customer's facility from becoming operational.

Thermal infrastructure presents a different challenge. NVIDIA's GB200 NVL72 rack requires approximately 120 kW of cooling capacity, supported by direct liquid cooling systems and specialized distribution components. As hardware configurations become more demanding, suppliers must expand production without compromising the reliability required for continuous operation.

The result is an unusual industrial cycle: equipment scarcity can support stronger pricing even as manufacturing complexity, component shortages and capacity investment absorb the additional revenue.

Modine's recent results make that tension particularly visible.

Its Data Centers segment reported 90% revenue growth, but gross margin declined from 29.8% to 20.2%. Segment operating income increased 33%, while company-wide free cash flow turned negative at $5 million.

Management attributed the margin pressure to North American capacity expansion, supplier constraints, production inefficiencies and higher material costs. The prior-year warranty settlement also inflated the comparison base, making the full 960-basis-point decline an imperfect measure of underlying deterioration.

The more consequential issue is the timing of capital deployment. Modine spent $46.4 million on property, plant and equipment during the quarter, compared with $27.5 million a year earlier. Production capacity is being expanded before the associated investment has fully contributed to earnings and cash generation.

That spending could eventually support better margins through higher utilization and improved production efficiency. Yet stronger demand alone cannot establish whether today's expansion costs will disappear or become a more permanent feature of supplying increasingly complex cooling equipment.

When Cash Arrives Before Revenue

Vertiv's second-quarter results present a notably different financial profile.

Revenue increased 24% to $3.27 billion, including 18% organic growth. GAAP operating profit rose 44%, while adjusted operating margin expanded 410 basis points to 22.6%.

The improvement reflects more than increased sales volume. Management identified productivity gains and favorable pricing relative to costs as important contributors, suggesting that Vertiv has been able to preserve a larger portion of the economic value created by rising infrastructure demand.

Its cash flow deserves closer examination.

Vertiv reported $925 million in adjusted free cash flow for the quarter, supported by $1.10 billion in operating cash flow. Within that figure, operating working capital contributed a positive $451 million.

Deferred revenue increased by approximately $1.17 billion during the quarter, while inventories and receivables absorbed a combined $1.25 billion. Higher accounts payable provided another significant source of working-capital financing.

These movements reveal an important feature of the business: customer billings and supplier payment terms can help finance production before projects are fully delivered.

For equipment manufacturers, that financing structure can reduce the amount of external capital required to support rapid growth. But it also creates timing effects that complicate the interpretation of quarterly cash flow.

Deferred revenue carries an obligation to supply equipment or services in subsequent periods. Inventory must move through production and delivery, and receivables must be collected. Strong cash conversion during an order surge cannot be assumed to persist at the same rate throughout the fulfillment cycle.

Vertiv's profitability improvement is supported by reported operating results. The durability of its exceptionally strong quarterly cash generation is a separate matter.

The Acquisition Premium

Eaton has approached the market from another direction.

Rather than building every capability internally, the company acquired Boyd Thermal in March 2026 for approximately $9.55 billion, net of cash acquired. The transaction extended Eaton's electrical infrastructure portfolio into liquid cooling, combining complementary technologies increasingly required within high-density data centers.

The purchase price is particularly revealing.

When Eaton announced the agreement in November 2025, it valued Boyd Thermal at 22.5 times estimated 2026 adjusted EBITDA, based on a $9.5 billion agreed price. Boyd was forecasting $1.7 billion in 2026 revenue, including $1.5 billion from liquid cooling.

The multiple indicates how much expected growth had already been capitalized into the transaction before Eaton assumed ownership.

The acquisition's effect on reported growth was immediate. In the second quarter of 2026, Eaton's Electrical Global segment revenue increased 44%. Boyd contributed 25 percentage points, compared with 18 from organic growth and one from currency movements.

Operating profit for the segment increased 41%.

Those figures establish that the acquired business substantially expanded Eaton's reported revenue base. They do not establish the acquisition's return on invested capital. The segment also contains Eaton's existing operations, and its consolidated earnings do not isolate the cash returns attributable to the purchase of Boyd.

At 22.5 times forecast adjusted EBITDA, the investment requires considerably more than sustained demand for liquid cooling. Eaton must capture enough of the business's future growth, operating improvements and integration benefits to justify a price that already reflects substantial expectations.

The distinction is particularly important in markets where demand is accelerating faster than supply. An established manufacturer with scarce capabilities can command a premium not only from its customers, but also from companies seeking to acquire it.

Eaton's transaction demonstrates that acquiring exposure to a rapidly expanding industry can be considerably more expensive than the underlying manufacturing assets might suggest.

The Price of Participation

The IEA's infrastructure projections establish a credible basis for sustained investment in power and cooling systems. They say considerably less about how the resulting economic value will be distributed.

A supplier may secure higher equipment prices but spend heavily to expand production. Customer advances may strengthen cash flow before contractual obligations are completed. A manufacturer with attractive growth prospects may command an acquisition price that anticipates much of its future earnings expansion.

Each mechanism affects investment returns differently, even when underlying demand is exceptionally strong.

The market has already demonstrated a willingness to pay substantial premiums for access to specialized infrastructure capabilities. Eaton's purchase of Boyd Thermal illustrates the consequence: some of the anticipated value of the AI cooling market was captured by Boyd's seller before Eaton delivered the first full quarter of post-acquisition results.

The infrastructure shortage may be genuine. Whether its economic benefits ultimately accrue to equipment suppliers, their customers, acquisition sellers or public-market investors remains a question of pricing, capital requirements and execution—not demand alone.

This article is for informational purposes only and does not constitute investment advice.