Thermon Group Holdings Inc.
05/21/2026 | Press release | Distributed by Public on 05/21/2026 11:53
Annual Report for Fiscal Year Ending March 31, 2026 (Form 10-K)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified in its entirety by reference to our consolidated financial statements and related notes included elsewhere in this annual report. The discussions in this section contain forward-looking statements that involve risks and uncertainties, including, but not limited to, those described in Item 1A, "Risk Factors." Actual results could differ materially from those discussed below. Please refer to the section entitled "Forward-Looking Statements."
Overview
For a complete overview of our business, please refer to Item 1. "Business" disclosed above in this annual report.
Recent Developments. On February 23, 2026, the Company entered into a definitive merger agreement (the "Merger Agreement") with CECO Environmental Corp. ("CECO") to combine the two companies in a stock-and-cash two-step merger transaction valued at approximately $2.2 billion (the "Merger"). The Merger is expected to create a global industrial leader in mission-critical environmental and thermal solutions by combining CECO's capabilities in environmental systems with the Company's leadership in industrial process heating, heat tracing, and temperature management. Upon completion of the Merger, which is subject to customary closing conditions and regulatory and stockholder approvals, the combined company will operate under the CECO Environmental Corp. name and is expected to benefit from enhanced scale, expanded product offerings, and increased exposure to long-term secular growth trends. The transaction is expected to close in June 2026. See also "Risks Relating to the Pending Merger with CECO Environmental" under Item 1A, "Risk Factors" for information regarding the additional risk factors related to the Merger.
The Company has incurred, and anticipates incurring additional, significant transaction-related costs in connection with the Merger, including legal, accounting, financial advisory, and other professional fees, of which approximately $13 million was incurred during the three months ended March 31, 2026.
Revenue. Our revenues are derived from providing customers with a full suite of innovative and reliable process heating solutions, including advanced heating and filtration solutions for industrial and hazardous area applications. Revenue recognized at a point in time based on when control transitions to the customer is generally related to our product sales. Point in time revenue does not typically require engineering or installation services. Revenue recognized over time generally occurs on our projects where engineering or installation services, or a combination of the two, are required. We recognize revenue related to such projects in a systematic way that reflects the transfer of goods or services, or a combination of goods and services, to the customer.
We believe that our pipeline of planned projects, in addition to our backlog of signed purchase orders, provides us with visibility into our future revenue. Historically, we have experienced few order cancellations, and the cancellations that have occurred in the past have not been material compared to our total contract volume or total backlog. The small number of order cancellations is attributable in part to the fact that a large portion of our solutions are ordered and installed toward the end of large project construction. Our backlog at March 31, 2026 was $254.9 million as compared to $240.3 million at March 31, 2025. The timing of recognition of revenue out of backlog is not always certain, as it is subject to a variety of factors that may cause delays, many of which are beyond our control (such as, customers' delivery schedules and levels of capital and maintenance expenditures). When delays occur, the recognition of revenue associated with the delayed project is likewise deferred.
Cost of sales. Our cost of sales includes primarily the cost of raw material items used in the manufacture of our products, cost of ancillary products that are sourced from external suppliers and construction labor costs. Additional costs of sales include contract engineering costs directly associated with projects, direct labor costs, shipping and handling costs, and other costs associated with our manufacturing/fabrication operations. The other costs associated with our manufacturing/fabrication operations are primarily indirect production costs, including depreciation, indirect labor costs, warranty-related costs and the costs of manufacturing support functions such as logistics and quality assurance. Key raw material costs include polymers, copper, stainless steel, insulating material, electronic components and other miscellaneous parts related to products manufactured or assembled. We cannot provide any assurance that we will be able to mitigate potential raw material shortages or be able to pass along raw material cost increases, including the potential impacts of tariffs, to our customers in the future, and if we are unable to do so, our results of operations may be adversely affected.
Operating expenses. Our selling, general, and administrative expenses ("SG&A") are primarily comprised of compensation and related expenses for sales, marketing, pre-sales engineering and administrative personnel, as well as other
sales related expenses and other expenses related to research and development, insurance, professional fees, the global integrated business information systems, and provisions for credit losses.
Key drivers affecting our results of operations. Our results of operations and financial condition are affected by numerous factors, including those described under the caption "Risk Factors" in Item 1A of this annual report. These factors include the following:
•Impact of product mix. Typically, our customers require our products as well as our engineering and construction services. The level of service and construction needs affect the profit margin for each type of revenue.
We tend to experience lower margins from our design optimization, engineering, installation and maintenance services, which are typically large projects tied to our customers' capital expenditure budgets and are comprised of more than $0.5 million in total revenue. For clarity, we will refer to these as "Over time large projects." Our results of operations in recent years have been impacted by the various construction phases of Over time large projects. We are typically designated as the heat tracing or heating system engineering provider of choice by the project owner. We then engage with multiple contractors to address incorporating various heat tracing solutions throughout the overall project. Our largest projects may generate revenue for several quarters. In the early stages of an Over time large project, our revenues are typically realized from the provision of engineering services. In the middle stages, or the material requirements phase, we typically experience the greatest demand for our heat tracing cable, at which point our revenues tend to accelerate. Revenues tend to decrease gradually in the final stages of a project and are generally derived from installation services and demand for electrical panels and other miscellaneous electronic components used in the final installation of heat tracing cable, which we frequently outsource from third-party manufacturers.
Projects that do not require installation and maintenance services are smaller in size and representative of maintenance, repairs and small upgrades necessary to improve efficiency and uptime. These small projects are typically tied to our customers' operating expense budgets, are generally less than $0.5 million in total revenue, and have relatively higher profit margins. We will refer to such projects as "Over time small projects."
The most profitable of our sales are derived from selling our heating products, for which we recognize revenue at a point in time. We also tend to experience lower margins from our outsourced products, such as electrical switch gears and transformers, than we do from our manufactured products. Accordingly, our results of operations are impacted by our mix of products and services.
We estimate that Point in time and Over time revenues have each contributed the following as a percentage of total revenue in the periods listed:
| Year-Ended March 31, 2026 | Year-Ended March 31, 2025 | Year-Ended March 31, 2024 | |||||||||||||||
| Point in time | 70 | % | 71 | % | 61 | % | |||||||||||
| Over time: | 30 | % | 29 | % | 39 | % | |||||||||||
| Small projects | 12 | % | 14 | % | 15 | % | |||||||||||
| Large projects | 18 | % | 15 | % | 24 | % | |||||||||||
Our Over time revenue includes (i) products and services which are billed on a time and materials basis, and (ii) fixed fee contracts for complex turnkey and other solutions such as some engineered products. For our time and materials service contracts, we recognize revenues as the products and services are provided over the term of the contract.
Our fixed fee projects typically offer our customers a comprehensive solution for heat tracing from the initial planning stage through engineering/design, manufacture, installation and final proof-of-performance and acceptance testing. Turnkey services also include project planning, product supply, system integration, commissioning and ongoing maintenance. Fixed fee projects, containing multiple deliverables, are customer specific, do not have an alternative use and have an enforceable right to payment, and thus are treated as a single performance obligation with revenues recognized over time as work progresses.
For revenue recognized under fixed fee contracts, we measure the costs incurred that contribute towards the satisfaction of our performance obligation as a percentage of the estimated total cost of production (the "cost-to-cost method"), and we recognize a proportionate amount of contract revenue, as the cost-to-cost method appropriately depicts performance towards satisfaction of the performance obligation. Changes to the original cost estimate may be required during the life of the contract and such estimates are reviewed on a regular basis. Sales
and gross profits are adjusted using the cumulative catch-up method for revisions in estimated contract costs. Reviews of estimates have not generally resulted in significant adjustments to our results of operations.
Point in time revenue represents goods transferred to customers at a point in time and is recognized when obligations under the terms of the contract with the customer are satisfied; generally this occurs with the transfer of control upon shipment.
•Cyclicality of end users' markets. Demand for our products and services depends in large part upon the level of capital and maintenance expenditures of our customers and end users, in particular those in the energy, oil, gas, chemical processing and power generation industries, and firms that design and construct facilities for these industries. These customers' expenditures historically have been cyclical in nature and vulnerable to economic downturns. Large projects historically have been a substantial source of revenue growth, and large project revenues tend to be more cyclical than maintenance and repair revenues. A sustained decrease in capital and maintenance spending or in new facility construction by our customers could have a material adverse effect on the demand for our products and services and our business, financial condition and results of operations.
•Acquisition strategy. In recent years, we have been executing on a strategy to grow the Company through the acquisition of businesses that are either in the process heating solutions industry or provide complementary products and solutions for the markets and customers we serve. Refer to Note 2, "Acquisition," for more discussion.
Results of Operations
The following table sets forth data from our statements of operations for the periods indicated.
| Consolidated Statements of Operations Data | Fiscal Year Ended March 31, | Change | |||||||||||||||||||||
| (Dollars in thousands) | 2026 | 2025 | $ | % | |||||||||||||||||||
| Sales | $ | 536,263 | $ | 498,207 | $ | 38,056 | 8 | % | |||||||||||||||
| Cost of sales | 293,207 | 275,311 | 17,896 | 7 | % | ||||||||||||||||||
| Gross profit | 243,056 | 222,896 | 20,160 | 9 | % | ||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative expenses | 158,290 | 129,307 | 28,983 | 22 | % | ||||||||||||||||||
| Deferred compensation plan expense/(income) | 599 | 452 | 147 | 33 | % | ||||||||||||||||||
| Amortization of intangible assets | 13,428 | 13,681 | (253) | (2) | % | ||||||||||||||||||
| Restructuring and other charges/(income) | - | (301) | 301 | (100) | % | ||||||||||||||||||
| Income from operations | 70,739 | 79,757 | (9,018) | (11) | % | ||||||||||||||||||
| Other income/(expenses): | |||||||||||||||||||||||
| Interest expense, net | (7,995) | (10,325) | 2,330 | (23) | % | ||||||||||||||||||
| Other income/(expense) | 1,482 | 687 | 795 | 116 | % | ||||||||||||||||||
| Income before provision for income taxes | 64,226 | 70,119 | (5,893) | (8) | % | ||||||||||||||||||
| Income tax expense | 19,655 | 16,604 | 3,051 | 18 | % | ||||||||||||||||||
| Net income | $ | 44,571 | $ | 53,515 | $ | (8,944) | (17) | % | |||||||||||||||
| As a percent of sales: | |||||||||||||||||||||||
| Gross profit | 45.3 | % | 44.7 | % | 60 bps | ||||||||||||||||||
| Selling, general and administrative expenses | 29.5 | % | 26.0 | % | 350 bps | ||||||||||||||||||
| Income from operations | 13.2 | % | 16.0 | % | (280 bps) | ||||||||||||||||||
| Net income | 8.3 | % | 10.7 | % | (240 bps) | ||||||||||||||||||
| Effective tax rate | 30.6 | % | 23.7 | % | 690 bps | ||||||||||||||||||
Year Ended March 31, 2026 ("fiscal 2026") Compared to the Year Ended March 31, 2025 ("fiscal 2025")
Revenues. The $38.1 million increase in fiscal 2026 compared to fiscal 2025 was driven primarily by higher project-related and point in time activity, as well as contributions from the F.A.T.I. Acquisition, which completed in October 2024. Since the acquisition in October 2024, we have significantly expanded the F.A.T.I. business which has been bolstered by robust demand for electrification solutions in Europe as well as targeted commercial and operational initiatives. We experienced revenue growth in all geographic segments, with the exception of APAC, during fiscal 2026 compared to fiscal 2025. Revenue growth also reflected continued progress in portfolio diversification, with approximately 70% of total revenue derived from non-oil and gas end markets, including industrial, commercial, power generation, and other diversified applications.
For fiscal 2026, revenue recognized at a point in time represented 70% of total revenue, reflecting strong demand for core products and improved pricing realization, while revenue recognized over time accounted for the remaining 30%. This compares to 71% point in time revenue and 29% over time revenue in fiscal 2025.
Segment performance varied during fiscal 2026 compared to fiscal 2025.
US-LAM revenue increased by $7.3 million, or 2.8%, to $263.3 million. The increase reflected growth in both revenue recognized at a point in time and revenue recognized over time. Point in time revenue increased by $3.9 million, or 2.0%, while over time revenue increased by $3.4 million, or 5.3%.
Canada revenue increased by $4.9 million, or 3.1%, to $163.8 million. The increase was driven primarily by higher revenue recognized over time, which increased by $4.1 million, or 8.4%, reflecting improved project activity. Revenue recognized at a point in time increased modestly by $0.8 million, or 0.7%.
EMEA revenue increased by $26.2 million, or 57.9%, to $71.6 million. The increase was driven by significant growth in revenue recognized at a point in time, which increased by $22.9 million, or 86.3%, as well as an increase of $3.3 million, or 17.6%, in revenue recognized over time. F.A.T.I. contributed $26.4 million in fiscal 2026, compared with $6.6 million for a partial year in fiscal 2025.
APAC revenue decreased by $0.3 million, or 0.9%, to $37.6 million. Revenue recognized at a point in time declined by $3.3 million, or 13.8%, due to lower product sales and timing of customer orders, while revenue recognized over time increased by $3.0 million, or 22.2%, reflecting higher project activity. The increase in over-time revenue partially offset the decline in point-in-time revenue.
Separately, revenue was positively affected in fiscal 2026 by foreign exchange rate impacts of approximately $6.1 million.
Gross profit. The increase in gross profit and gross margin were driven primarily by higher sales volumes, improved execution on project activity, pricing realization, and operational productivity improvements, partially offset by mix impacts and inflationary cost pressures.
Selling, general and administrative expenses. The increase in SG&A expense was driven primarily by higher variable compensation costs associated with performance above plan as well as charges approximating $12.9 million related to the announced Merger with CECO. SG&A as a percentage of sales increased by 350 basis points related to the above.
Deferred compensation plan expense/(income). The change in deferred compensation plan activity is primarily attributable to market fluctuations in the underlying balances owed to employees. This compensation plan expense/(income) is materially offset in Other income/(expense) where the Company records market gains/(losses) on related investment assets.
Amortization of intangible assets. The change in amortization of intangible assets is attributable to ordinary recurring amortization commensurate with the balances held in each fiscal 2026 and 2025.
Restructuring and other charges/(income). In the first quarter of fiscal 2025, we enacted a reduction-in-force as well as the closure of our Denver manufacturing facility as part of consolidating our overall manufacturing footprint. The sale of our Denver facility land and building resulted in a gain of $3.0 million, which more than offset the costs incurred for the reduction in force and facility consolidation. No such activity was present in fiscal 2026.
Interest expense, net. Interest expense, net declined compared to fiscal 2025, driven primarily by a reduction in the average interest rate to 5.51% from 6.44%. In addition, a lower average outstanding balance of $142.1 million in fiscal 2026, compared to $156.8 million in fiscal 2025, further contributed to the favorable change in interest expense. We amended our credit facility in fiscal 2026. See Note 12, "Long-Term Debt," for additional information.
Other income/(expense). The change in other income/(expense) primarily relates to market fluctuations in the underlying investments associated with our non-qualified deferred compensation plan. These unrealized gains and losses on investments were materially offset by deferred compensation plan expense/(income) as noted above.
Income taxes. Income tax expense was $19.7 million, or 30.6%, on pretax income of $64.2 million in fiscal 2026 as compared to income tax expense of $16.6 million, or 23.7%, on a pretax income of $70.1 million in fiscal 2025. Substantially all of the $12.9 million of SG&A expense related to the CECO Merger is not deductible for tax purposes, resulting in an increase of our effective tax rate of approximately 5.0% in fiscal 2026. Tax expense in fiscal 2025 included a $1.0 million, or 1.4%, reduction associated with the release of an uncertain tax position. See Note 17, "Income Taxes," for further information.
Net income. The change in net income is explained by the changes noted in the sections above.
| Consolidated Statements of Operations Data | Fiscal Year Ended March 31, | Change | |||||||||||||||||||||
| (Dollars in thousands) | 2025 | 2024 | $ | % | |||||||||||||||||||
| Sales | $ | 498,207 | $ | 494,629 | $ | 3,578 | 1 | % | |||||||||||||||
| Cost of sales | 275,311 | 283,065 | (7,754) | (3) | % | ||||||||||||||||||
| Gross profit | 222,896 | 211,564 | 11,332 | 5 | % | ||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative expenses | 129,307 | 123,820 | 5,487 | 4 | % | ||||||||||||||||||
| Deferred compensation plan expense/(income) | 452 | 1,231 | (779) | (63) | % | ||||||||||||||||||
| Amortization of intangible assets | 13,681 | 10,158 | 3,523 | 35 | % | ||||||||||||||||||
| Restructuring and other charges/(income) | (301) | 984 | (1,285) | (131) | % | ||||||||||||||||||
| Income from operations | 79,757 | 75,371 | 4,386 | 6 | % | ||||||||||||||||||
| Other income/(expenses): | |||||||||||||||||||||||
| Interest expense, net | (10,325) | (8,845) | (1,480) | 17 | % | ||||||||||||||||||
| Other income/(expense) | 687 | 1,148 | (461) | (40) | % | ||||||||||||||||||
| Income before provision for income taxes | 70,119 | 67,674 | 2,445 | 4 | % | ||||||||||||||||||
| Income tax expense | 16,604 | 16,086 | 518 | 3 | % | ||||||||||||||||||
| Net income | $ | 53,515 | $ | 51,588 | $ | 1,927 | 4 | % | |||||||||||||||
| As a percent of sales: | |||||||||||||||||||||||
| Gross profit | 44.7 | % | 42.8 | % | 190 bps | ||||||||||||||||||
| Selling, general and administrative expenses | 26.0 | % | 25.0 | % | 100 bps | ||||||||||||||||||
| Income from operations | 16.0 | % | 15.2 | % | 80 bps | ||||||||||||||||||
| Net income | 10.7 | % | 10.4 | % | 30 bps | ||||||||||||||||||
| Effective tax rate | 23.7 | % | 23.8 | % | |||||||||||||||||||
Year Ended March 31, 2025 ("fiscal 2025") Compared to the Year Ended March 31, 2024 ("fiscal 2024")
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2025, filed with the SEC on May 22, 2025, for a discussion of the results of operations in fiscal 2025 as compared to fiscal 2024.
Contingencies
We are involved in various legal and administrative proceedings that arise from time to time in the ordinary course of doing business. Some of these proceedings may result in fines, penalties or judgments being assessed against us, which may adversely affect our financial results. In addition, from time to time, we are involved in various disputes, which may or may not be settled prior to legal proceedings being instituted and which may result in losses in excess of accrued liabilities, if any, relating to such unresolved disputes. As of March 31, 2026, management believes that adequate reserves have been established for any probable and reasonably estimable losses. Expenses related to litigation reduce operating income. We do not believe that the outcome of any of these proceedings or disputes would have a significant adverse effect on our financial position, long-term results of operations, or cash flows. It is possible, however, that charges related to these matters could be significant to our results of operations or cash flows in any one reporting period.
For information on legal proceedings, see Note 14, "Commitments and Contingencies" to our consolidated financial statements contained elsewhere in this annual report, which is hereby incorporated by reference into this Item 7.
To bid on or secure certain contracts, we are required at times to provide a performance guaranty to our customers in the form of a surety bond, standby letter of credit or foreign bank guaranty. On March 31, 2026, we had in place standby letters of credit, bank guarantees and performance bonds totaling $11.4 million to back our various customer contracts. In addition, our Indian subsidiary also has $3.9 million in customs bonds outstanding. Refer to Note 14, "Commitments and Contingencies" for more information on our letters of credit and bank guarantees.
In connection with the Merger with CECO, the Company has entered into an engagement with Morgan Stanley for financial advisory and related services, pursuant to which fees of approximately $33.1 million may become payable. As of the reporting date, no liability has been recorded for these fees, as the services giving rise to the obligation had not yet been rendered.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations and funds available under our revolving credit facility. Our primary liquidity needs are to finance our working capital, capital expenditures, debt service, share repurchases and potential future acquisitions.
Cash and cash equivalents. At March 31, 2026, we had $52.3 million in cash and cash equivalents. We manage our global cash requirements by maintaining cash and cash equivalents at various financial institutions throughout the world where we operate. Approximately $25.2 million, or 48%, of these amounts were held in domestic accounts with various institutions and approximately $27.1 million, or 52%, of these amounts were held in accounts outside of the U.S. with various financial institutions. While we have cash needs at our various foreign operations, excess cash is available for distribution to the U.S. through intercompany dividends.
Generally, we seek to maintain a cash and cash equivalents balance between $30.0 and $40.0 million. We will encounter periods where we may be above or below this range, due to, for example, inventory buildup for anticipated seasonal demand in fall and winter months, related cash receipts from credit sales in months that follow, debt maturities, restructuring activities, larger capital investments, severe and/or protracted economic downturns, acquisitions, share repurchases, or some combination of the above activities. The Company continues to manage its working capital requirements effectively through optimizing inventory levels, doing business with creditworthy customers, and extending payment terms with its supplier base.
In connection with the Merger with CECO, the Company has also entered into an engagement with Morgan Stanley for financial advisory and related services. Refer to Note 14, "Commitments and Contingencies" for more information.
Share repurchases
On May 22, 2025, the Company announced that the board of directors had refreshed the authorization back to $50.0 million for the repurchase of the Company's outstanding shares of common stock, exclusive of any fees, commissions or other expenses related to such repurchases. As of March 31, 2026, we have $38.5 million of remaining unused and authorized availability under the Repurchase Program. The Repurchase Program does not include a specific timetable or price targets and may be suspended or terminated at any time. Shares may be purchased through open market or privately negotiated transactions at the discretion of management based on its evaluation of prevailing market conditions and other factors. Refer to Note 6, "Net Income per Common Share" for more information.
Senior secured credit facility
See Note 12, "Long-Term Debt" to our consolidated financial statements and accompanying notes thereto included in Item 8 of this annual report for additional information on our senior secured term loan and revolving credit facilities, which are hereby incorporated by reference into this Item 7. At March 31, 2026, we had $19.7 million outstanding borrowings under our revolving credit facility and $94.3 million of available capacity thereunder, after taking into account the borrowing base and letters of credit outstanding, which totaled $1.0 million. From time to time, we may choose to utilize our revolving credit facility to fund operations, acquisitions or other investments, despite having cash available within our consolidated group in light of the cost, timing and other business considerations.
As of March 31, 2026, we had $121.4 million of outstanding principal on our term loan facilities, net of deferred debt issuance costs. Each of the term loans will amortize as set forth in the table below, with payments due on the first day of each January, April, July and October, with the balance of each term loan facility due at maturity.
| Quarterly Installment Dates | Principal Amount | |||||||
| December 31, 2025, through September 30, 2026 | 1.250% | |||||||
| December 31, 2026, through June 30, 2030 | 1.875% | |||||||
Future capital requirements
Our future capital requirements depend on many factors as noted throughout this report. We believe that, based on our current level of operations and related cash flows, plus cash on hand and available borrowings under our revolving credit facility, we will be able to meet our liquidity needs for the next 12 months and the foreseeable future.
We expect our capital expenditures to approximate 3% to 3.5% of revenue in fiscal 2027. Additionally, we will be required to pay $7.8 million in principal payments and approximately $6.1 million in interest payments on our long-term debt in the next 12 months. Our estimate of interest expense above was derived from our variable interest rates at March 31, 2026, and is subject to change. See further details in Note 12, "Long-Term Debt." We also have payment commitments of $1.7 million, mostly related to long-term information technology contracts, of which $1.0 million are due within the next 12 months.
| Selected Cash Flow Data: | Year Ended March 31, | ||||||||||||||||
| (Dollars in thousands) | 2026 | 2025 | 2024 | ||||||||||||||
| Total cash provided by/(used in): | |||||||||||||||||
| Operating activities | $ | 46,795 | $ | 63,118 | $ | 65,955 | |||||||||||
| Investing activities | (13,081) | (14,970) | (109,522) | ||||||||||||||
| Financing activities | (17,316) | (56,419) | 56,533 | ||||||||||||||
|
Free Cash Flow(1)
|
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| Cash provided by operating activities | $ | 46,795 | $ | 63,118 | $ | 65,955 | |||||||||||
| Less: Cash used for purchases of property, plant, and equipment | (13,931) | (10,249) | (11,016) | ||||||||||||||
| Free Cash Flow | $ | 32,864 | $ | 52,869 | $ | 54,939 | |||||||||||
(1) "Free Cash Flow" is a non-GAAP financial measure, which we define as net cash provided by operating activities less cash used for the purchase of property, plant, and equipment. Free Cash Flow is one measure management uses internally to assess liquidity. Our calculation may not be comparable to similarly titled measures reported by other companies. See further discussion of Non-GAAP Financial Measures below.
Year Ended March 31, 2026 ("fiscal 2026") Compared to the Year Ended March 31, 2025 ("fiscal 2025")
Net cash provided by/(used in) operating activities. Net cash provided by operating activities declined primarily due to relatively greater cash used in working capital needs, such as accounts receivable and inventory, which resulted from improved business activity and demand for liquid load bank products. Additionally, net income was lower in fiscal 2026, mainly as a result of the transaction costs in connection with the Merger with CECO. This collective use of cash was partially offset by higher non-cash activity, such as increased stock compensation expense.
Net cash provided by/(used in) investing activities. Cash used in investing activities decreased in fiscal 2026 compared to fiscal 2025. In fiscal 2025, we acquired F.A.T.I., while no acquisitions were made in fiscal 2026. Additionally, fiscal 2025 included $5.8 million of proceeds from the sale of our Denver property, with no similar transaction in fiscal 2026. These fiscal 2025 items resulted in a net use of cash. The relative year over decrease caused by these items was mostly muted by relatively higher capital expenditures in fiscal 2026.
Net cash provided by/(used in) financing activities. Cash used in financing activities decreased in fiscal 2026 compared to fiscal 2025, primarily due to lower payments against term and revolving debt as a result of relatively lower cash flows from operations as described above. Plus, the Company maintained a relatively higher cash balance at the end of fiscal 2026 versus the prior year.
Free Cash Flow (Non-GAAP)
In addition to evaluating our cash flow generation based upon operating, investing, and financing activities, the Company believes that Free Cash Flow as used in this section may provide investors and key stakeholders with another important perspective regarding our performance. The Company does not intend for this non-GAAP metric to be a substitute for the related GAAP measure, nor should it be viewed in isolation and without considering all relevant GAAP measurements. Moreover, our calculation may not be comparable to similarly titled measures reported by other companies. Refer to the reconciliation of cash provided by/(used in) operating activities to Free Cash Flow under "Non-GAAP Financial Measures" below.
We define "Free Cash Flow" as net cash provided by operating activities less cash used for the purchase of property, plant, and equipment. This metric should not be interpreted to mean the remaining cash that is available for discretionary spending, dividends, share repurchases, acquisitions, or other purposes, as it excludes significant, mandatory obligations, such as principal payments on the Company's long-term debt facility. Free cash flow is one measure that the Company uses internally to assess liquidity.
Free Cash Flow totaled $32.9 million for fiscal 2026 as compared to $52.9 million for fiscal 2025, a decrease primarily due to lower cash flows from operations, which stemmed from the investments in inventory and other working capital needs as described above.
Year Ended March 31, 2025 ("fiscal 2025") Compared to the Year Ended March 31, 2024 ("fiscal 2024")
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2025, filed with the SEC on May 22, 2025, for a discussion of net cash provided by operating activities, net cash used in investing activities and net cash provided by (used in) financing activities in fiscal 2025 as compared to fiscal 2024.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements not already disclosed. In addition, we do not have any interest in entities commonly referred to as variable interest entities, which include special purpose entities and other structured finance entities.
Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Our critical accounting policies are those that materially affect our financial statements and involve difficult, subjective or complex judgments by management. Our most significant financial statement estimates include revenue recognition and valuation of goodwill and other intangible assets.
Although these estimates are based on management's best knowledge of current events and actions that may impact the Company in the future, actual results may be materially different from the estimates.
Revenue recognition. Refer to Note 1, "Organization and Summary of Significant Accounting Policies" of our consolidated financial statements included below in Item 8 of this annual report for further discussion.
Valuation of goodwill and other intangible assets. Refer to Note 1, "Organization and Summary of Significant Accounting Policies" of our consolidated financial statements included below in Item 8 of this annual report for further discussion.
Non-GAAP Financial Measures
Disclosure in this annual report of "Adjusted EPS," "Adjusted EBITDA," "Adjusted Net Income," and "Free Cash Flow," which are "non-GAAP financial measures" as defined under the rules of the Securities and Exchange Commission (the "SEC"), are intended as supplemental measures of our financial performance that are not required by, or presented in accordance with, U.S. generally accepted accounting principles ("GAAP"). "Adjusted Net Income" and "Adjusted fully diluted earnings per share" ("Adjusted EPS") represents net income attributable to Thermon before costs related to acceleration of unamortized debt costs, the tax benefit from income tax rate reductions in certain foreign jurisdictions, withholding tax on dividend related to the debt amendment, amortization of intangible assets, transaction-related costs, the income tax effect on any non-tax adjustments, costs associated with our restructuring and other income/(charges), other impairment charges/(income), and loss on debt extinguishment, per fully-diluted common share in the case of Adjusted EPS. "Adjusted EBITDA" represents net income attributable to Thermon before interest expense (net of interest income), income tax expense, depreciation and amortization expense, stock-based compensation expense, impairment and other charges/(income), loss on debt extinguishment, transaction-related costs, expenses associated with our restructuring and other income/(charges), and expenses related to our Enterprise Resource Planning ("ERP") system implementation. "Free cash flow" represents cash provided by operating activities less cash used for the purchase of property, plant and equipment.
We believe these non-GAAP financial measures are meaningful to our investors to enhance their understanding of our financial performance and are frequently used by securities analysts, investors and other interested parties to compare our performance with the performance of other companies that report Adjusted EPS, Adjusted EBITDA, or Adjusted Net Income. Adjusted EPS, Adjusted EBITDA, and Adjusted Net Income should be considered in addition to, not as substitutes for income from operations, net income, net income per share, and other measures of financial performance reported in accordance with GAAP. We provide Free Cash Flow as one measure of our liquidity. Note that our calculation of Adjusted EPS, Adjusted EBITDA, Adjusted Net Income, and Free Cash Flow may not be comparable to similarly titled measures reported by other companies.
The following table reconciles net income to Adjusted EBITDA for the periods presented:
| Year Ended March 31, | |||||||||||||||||
| (Dollars in thousands) | 2026 | 2025 | 2024 | ||||||||||||||
| Net income | $ | 44,571 | $ | 53,515 | $ | 51,588 | |||||||||||
| Interest expense, net | 7,995 | 10,325 | 8,845 | ||||||||||||||
| Income tax expense | 19,655 | 16,604 | 16,086 | ||||||||||||||
| Depreciation and amortization | 22,466 | 22,339 | 18,837 | ||||||||||||||
| EBITDA (non-GAAP) | $ | 94,687 | $ | 102,783 | $ | 95,356 | |||||||||||
| Stock-based compensation | 8,244 | 5,244 | 5,754 | ||||||||||||||
|
Transaction-related costs(1)
|
12,894 | 355 | 2,107 | ||||||||||||||
|
Restructuring and other charges/(income)(2)
|
1,334 | 292 | 984 | ||||||||||||||
|
Debt issuance costs(3)
|
523 | - | - | ||||||||||||||
| ERP implementation-related costs | 1,904 | 557 | - | ||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 119,586 | $ | 109,231 | $ | 104,201 | |||||||||||
(1) Fiscal 2026 charges relate to the pending Merger with CECO. Fiscal 2025 charges relate to the October 2024 F.A.T.I. acquisition.
(2) Fiscal 2026 charges associated with cost-cutting measures. Fiscal 2025 charges associated with cost-cutting measures including reduction-in-force and facility consolidation, of which $0.1 million are in cost of sales.
(3) Debt issuance costs related to the July 2025 refinancing of the Company's credit facility.
The following table reconciles net income to Adjusted Net Income and Adjusted EPS for the periods presented:
| Year ended March 31, | ||||||||||||||||||||
| (Dollars in thousands, except per share data) | 2026 | 2025 | 2024 | |||||||||||||||||
| Net income | $ | 44,571 | $ | 53,515 | $ | 51,588 | ||||||||||||||
| Amortization of intangible assets | 13,428 | 13,681 | 10,158 | |||||||||||||||||
|
Transaction-related costs(1)
|
12,894 | 355 | 2,107 | |||||||||||||||||
|
Restructuring and other charges/(income)(2)
|
1,334 | 292 | 984 | |||||||||||||||||
| ERP implementation-related costs | 1,904 | 557 | - | |||||||||||||||||
| Tax benefit from the release of uncertain tax position reserve | - | (1,046) | - | |||||||||||||||||
|
Debt issuance costs(3)
|
523 | - | - | |||||||||||||||||
| Tax effect of adjustments | (4,132) | (3,582) | (2,947) | |||||||||||||||||
| Adjusted net income (non-GAAP) | $ | 70,522 | $ | 63,772 | $ | 61,890 | ||||||||||||||
| Adjusted fully diluted earnings per common share (non-GAAP) | $ | 2.15 | $ | 1.87 | $ | 1.82 | ||||||||||||||
| Fully-diluted common shares - (thousands) | 32,800 | 34,058 | 34,067 | |||||||||||||||||
(1) Fiscal 2026 charges relate to the pending Merger with CECO. Fiscal 2025 charges relate to the October 2024 F.A.T.I. acquisition.
(2) Fiscal 2026 charges associated with cost-cutting measures. Fiscal 2025 charges associated with cost-cutting measures including reduction-in-force and facility consolidation, of which $0.1 million are in cost of sales.
(3) Debt issuance costs related to the July 2025 refinancing of the Company's credit facility.
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