Thermon Group Holdings, Inc. Aktie

Good day, and thank you for standing by. Welcome to the CECO Environmental post-closing update on Thermon transaction. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Marcio Pinto, Vice President of Integration and Investor Relations, please go ahead.

Thank you, Liz, and thank you for joining us on the CECO Environmental post-closing call on the Thermon transaction. On the call with me today, I have Todd Gleason, Chairman and Chief Executive Officer; and Peter Johansson, Chief Financial Officer. So, in today's call, we will provide updates on the post-acquisition integration and our initial full year outlook as a combined company.

We look forward to providing additional financial information when we hold our second quarter earnings call later this summer. As a reminder, this call's webcast and presentation are available on our website, and today's discussion includes forward-looking statements that are subject to risks and uncertainties, including the ones described in our SEC filings, as we have also noted in our presentation legal disclosures. As always, we will leave time at the end of the call for analyst questions. And with that, I'll turn the call over to Todd.

Thanks, Marcio, and good day, everyone. We appreciate the opportunity to provide an update now that we have officially closed the acquisition of Thermon. Let me start by thanking our great employees as we maintain focus on delivering for our customers and driving meaningful results, all while balancing a major set of integration activities.

We announced the transaction at the end of February, and our teams wasted no time preparing for a productive and timely integration. Activities are well underway, and my excitement continues to grow as we work closely with the Thermon business leaders, just a ton of opportunities.

Let's please move to Slide #3. Welcome to the new CECO. The combination advances our portfolio of leading industrial solutions, one that has an $8 billion sales pipeline, which is very well positioned for some of the most important secular tailwinds, power generation and electrification, data centers and AI, semiconductor and general industrial reshoring as well as industrial water and infrastructure.

The new CECO has greater scale, a more balanced portfolio, higher margins and our balance sheet is well positioned to fund a range of investments. As a quick update on bookings and market trends, CECO stand-alone has already booked a record quarter with well over $550 million in new orders before June, and we still have a month to go in the quarter.

The legacy Thermon business continues to build strong momentum with new products such as Liquid Load Banks and medium voltage heaters. The combination will drive even more growth. Simply put, it is an exciting new CECO and builds upon our track record of growth.

Please go to Slide #4. Let's discuss our integration status. Having personally been part of major integrations at previous companies, I can't say enough about how important a successful day 1 is to our employees and our customers. And by almost every measure, we had an excellent day 1 and week 1.

Integration teams are working on multiple work streams to bring the 2 companies together functionally and operationally. We're off to a great start capturing cost and growth synergies and moving with speed on key decisions. I want to thank Bruce Thames, Thermon's outgoing CEO, for his leadership and partnership to ensure we have had so many positive engagements.

Our integration management office has detailed plans in place and already driving programs to meet or exceed the announced $40 million of synergies. Over the next few quarters, we look forward to providing updates on our progress. Our preliminary assessment is we are ahead of schedule, and we expect to maintain this great momentum.

This year, we expect $15 million of run rate synergies, of which at least $5 million will hit the bottom line prior to the end of 2026. With respect to growth synergies, we are in position to accelerate new product sales as well as coordinate commercial teams to maximize large project pursuits where solutions from each company are relevant.

We are also rapidly exploring geographic opportunities and how we can expand Thermon's offerings globally. Additionally, the detail in CECO's $8 billion sales pipeline provides tremendous insights into exciting opportunities across the enterprise.

While we are just getting started on actualizing commercial synergies, we do expect to generate 1 to 2 points of additional organic growth for the legacy Thermon business. These commercial synergies are all upside from the original deal economics.

And from a talent and culture perspective, we have expanded our Board to include 2 very experienced directors from Thermon as both Victor Richey and Marcus George joined to help us advance our strategic transformation. These additions, along with a blended corporate and business unit leadership team adds depth and talent. Candace Harris-Peterson, who joins my senior team as our new Chief Human Resources Officer, will be instrumental in partnering with me and others to advance our focus on talent development and a high-performance culture.

Moving to Slide 5. Let me quickly highlight a few key points. On the right side of the slide -- we highlight the tremendous shareholder value CECO has generated over the past 5 to 6 years. This has been the result of a proven business model, and the acquisition of Thermon advances and strengthens our business model.

When the stock market closed yesterday, our market capitalization was approximately $4.7 billion. We've come a long way from CECO's market cap of less than $250 million when I joined as CEO in July of 2020. While we have benefited at times from good market dynamics and a healthy global economy, the implementation of a more dynamic growth and transformation business model has really driven a ton of the value creation.

We have intentionally focused on 2 main pillars, as shown on the left side of the slide. We drive business transformation via organizational design and through performance culture and processes. By eliminating unnecessary structure and aligning people, incentives and our win right values, our high-performance design has yielded top quartile growth and performance.

And going forward, we are adding operational excellence and 80/20 to our business transformation playbook. Along with the business transformation, we also have programs in place to drive what we call portfolio transformation. Portfolio transformation is both organic, where we have invested heavily in global expansion, new talent, new market penetration programs and new solutions. And portfolio transformation is also inorganic, aided by our programmatic M&A programs.

We have a proven model of making accretive strategic acquisitions and executing on those new business additions to drive even more growth. Having more scale and more business balance, thanks to this transformational acquisition will accelerate our overall capabilities and open up new opportunities for additional value creation.

Now let's wrap up with Slide #6. We are pleased to provide updated guidance for the full year 2026. I acknowledge this is a bit of a busy slide, but we felt it was important to provide these details. The section on the left side of the slide provides a reference to recent historic actual results for legacy CECO and legacy Thermon. It also shows what was our most recent full year '26 outlook for stand-alone CECO.

As a reminder, Thermon was on a different financial calendar than CECO. So they recently reported their full year 2026 results, which ended on March 31, 2026. Additionally, because of the pending transaction with CECO, Thermon had not provided guidance for the coming year. The middle section is our updated guidance for full year 2026 on a combined basis. This incorporates Thermon as a wholly owned business group within CECO starting June 1. The 7 months of combination are captured in this updated outlook.

The details of this guidance are as follows: -- we currently expect full year orders to be over $2 billion as both CECO and Thermon are experiencing strong momentum. We are guiding for full year revenue of between $1.275 billion to $1.375 billion, which is up approximately 20% at the midpoint on a similar year-over-year basis.

And we expect full year adjusted EBITDA of between $195 million and $225 million, up approximately 25% on a year-over-year basis, including the approximate $5 million of cost synergies that we expect to realize to the bottom line in the next 7 months.

As a reminder, this guidance does incorporate only those 7 months of Thermon, so not the full year impact. And the $5 million of cost synergies is the actual amount we anticipate recognizing this year from the $15 million of run rate savings. The balance of those run rate savings will be recognized in 2027, along with additional synergies created and captured in that period. So synergies are meaningful this year, but even more impactful in 2027.

The right side of the slide shows our combined full year financials on a pro forma basis. For 2026, this pro forma financial profile would show the combined company at $1.5 billion to $1.6 billion of sales with adjusted EBITDA of between $250 million to $280 million, which includes around $10 million of synergies on a 12-month basis.

No matter how we view the combination, CECO generates strong double-digit sales growth and robust EBITDA and EBITDA margins. Analytically, we expect CECO to be a Rule of 30 or Rule of 40 company with between 15% to 25% top line growth and high teens to low 20s EBITDA margins for years to come. We hope this detail has been helpful. We would now like to open up the line for questions. Operator?

[Operator Instructions] Our first question comes from Aaron Spychalla with Craig-Hallum.

First for me, just on the guidance, I just want to confirm no real change on kind of legacy CECO. It's just all incorporating Thermon. And then on commercial synergies, you kind of highlighted 1 to 2 basis points of growth. Can you just kind of unpack that a little bit and where some of those come from with some of the CECO projects?

Yes. So you're right, Aaron. Fundamentally, we're incorporating some synergies, of course, now in our combined initial outlook for the full year. We expect to have more visibility and potentially a different outlook as we go forward and report our second quarter earnings and also going forward from there. So we've essentially taken what had been the CECO outlook, coupled with the forecast and the visibility we have on the Thermon growth and performance for the balance of the year, and we're introducing this today as a great place for us to start.

As far as commercial synergies go, -- we've already hit the ground running on incorporating Thermon product lines into various large-scale projects where we would see and our customers importantly, would see the need for some of their solutions, where maybe Thermon didn't have a relationship in a power gen market or industrial market, but we see that there's going to be a heat trace need or an immersion heater need or something similar. So we've already been working to bring those products into the customers' program and it helped to drive some sales. And it's early days, but we're already seeing what we believe will be millions of dollars of growth this year.

We're also starting to coordinate internationally ways that we can bring our commercial teams together to go and we believe, take advantage of some of the best market trends that are happening around the world. So those items, coupled with our operational and supply chain teams are just going to get started now on helping to evaluate additional ways to leverage different supply chain models so that we can accelerate some of the new product introductions over the next 6 to 12 months.

If you look at Thermon's approximate $550 million worth of sales for the full year, most recently completed for them, we believe that these areas that I just mentioned as well as some others could easily add $5 million to $10 million worth of growth going forward. And it's exciting, you think about, Aaron, that we had a $7 billion to $8 billion sales pipeline and Thermon had a very nice sales pipeline, but nothing near that size just because of their shorter cycle business model.

They just didn't have the same visibility to big projects coming, but the detail in that sales pipeline is tremendous, literally almost a line item detail across these industrial projects where we can now identify solutions that Thermon is basic in, and we can introduce the parties together to really open up some new sales opportunities for the Thermon businesses because of our robust sales pipeline. So those are just some of the answers. There's many more, and we'll be providing more commercial updates on wins and opportunities that we're working together as we go forward.

Our next question comes from Bobby Brooks with Northland Capital Markets.

I was curious just how you're thinking about on the personnel front, it was specifically kind of with like the go-to-market teams, commercialization teams. How are you thinking of balancing the new Thermon teams added with your own internal teams? Are there going to be some teams that get collapsed and just go under the CECO team? Just wanted to get some thoughts on that.

Yes. Thanks, Bobby, and thanks for the question. As is our normal and will continue to be our operating model. The businesses we acquire are leaders, and they know their markets. And the people that are running those businesses are the experts. CECO brings certain capabilities internationally and opportunities to work together across these very niche industrial spaces. But the Thermon business knows what they're doing and the teams know what they're doing. And there's just going to be a lot of coordinated activity. We expect especially in markets where one might have a leading position and the other might be interested in navigating that leading position. But there will be in the business units, no collapsing of Thermon businesses inside of CECO.

We make acquisitions. We invest in those businesses so that they grow. Certainly, we can add talent, and we can move some people between businesses because they're ready for market career opportunities and to help drive market development opportunities. But we're super thrilled with the talent that's at Thermon. And they're going to continue to lead their businesses and their business functions within those operations.

We're going to look at ways as we've done historically at CECO to create a more streamlined organization where appropriate. And like I said, our global teams are going to evaluate better opportunities for us to introduce each other to new geographic markets or vertical markets. But the Thermon business is going to continue to lead as a niche leader across its businesses, and we're just going to invest in their success.

Yes. Super helpful. I appreciate that. And you guys have definitely have a long track record of doing that with your previous acquisitions. And maybe kind of to flip the question a little bit is you mentioned there, there's opportunities for each side of the business to make those kind of warm handshake introductions where you might not already have a strong foothold. I was curious to hear from the CECO perspective, what end markets might Thermon have really good inroads to that CECO might not necessarily have made that's kind of top of mind.

Look, each of us brings incredible relationships with a variety of end markets. Thermon has footholds in various geographies that we just don't have the same type of depth of relationship. Thermon has very strong relationships with also areas of channel, whether it's distributors and others, where -- while that's not necessarily our model, we have -- we would love to evaluate ways that we can partner with distribution organizations, and we just don't have those same types of relationships.

No doubt, as Thermon introduces new products and data centers, as they -- we're both in gas -- oil and gas and infrastructure. So where we win, they win differently. There's ways for us to continue to compare notes just like the legacy CECO businesses, we often find ourselves at the same trade shows. We often find ourselves at the same industry conferences, and we learn from each other.

I was joking with some of the Thermon team members last week that I heard from both Thermon legacy employees as well as legacy CECO employees that went to the Industrial Boiler Show that they ended up hanging out together along with customers, most of that show because we solve challenges in the boiler industry differently, but we have a lot of the same opportunity. So there's just going to be a lot of cross-selling and cross sharing.

And I can tell you, too, our cultures already get along, and that's important. I've been part of combinations where cultural combinations were the biggest challenge. It wasn't the economics. It was the culture. And certainly, we have some personality differences at various levels of how corporates are run and strategies are delivered.

But at the operational level, our engineering solutions focus as well as Thermon's engineering solutions focus, our focus on quality, our focus on productivity, that's what our customers care about. And where they're strong with the customers, they're going to welcome the CECO opportunities. And where we're strong with our customers, they're going to welcome the Thermon opportunities because we all focus on the same quality.

That's great to hear about the culture fit. I think folks really underappreciate how important that is. And just my last question is, any specific end markets that the team has circled as most compelling product like, kind of, cross-synergy selling or just introducing to new customers, whether it's a legacy CECO relationship to Thermon or a legacy Thermon relationship to CECO. Any specific end markets you might call out?

Well, look, I would call -- the answer is yes and no, Bobby. The answer is no in the sense that we have a lot of opportunity, especially internationally. But it's early days. Obviously, commercial teams can't really start working together until you've combined. So we've now been combined for a week.

That doesn't mean that we can't have integration discussions. It doesn't mean that if we're at an industrial conference that we can't talk and identify ways that we could work together. But 1 week in now, we can actually start working together and having phone calls and starting to partner. So those conversations are more in front of us than they are behind us. But it goes without saying the biggest market at the moment is power generation.

And when CECO books $100 million to $300 million projects, I can assure you that, that's a big circle around that industry because there's going to be process heating needs and Thermon is a leader there. And so we can now bring those solutions into our very large complex projects with the GE Vernova and the Siemens and others with respect to what they have as best-in-class power generation solutions.

The other thing I'd say is I remain very excited about our growing international and industrial water capabilities. And you can imagine that heat trace when it comes to water solutions and water skids is a very critical component to a lot of that infrastructure.

Our ability to work together to create advanced solutions that provide even more efficiency, uptime, reliability and safety for our customers in industrial water over the coming years, I think, is going to be a big circle around that market opportunity as well. Those are some of the answers that we've identified to date.

Our next question comes from Rob Brown with Lake Street Capital Markets.

Just wanted to follow up on -- I think you mentioned the Liquid Load Bank product at Thermon. What's sort of the opportunity there? And how does that -- how might that fit into the legacy CECO...

Well, I know Bruce and Tom Cerovski and David Bunton and so many people at Thermon put a lot of focus and effort into launching not just the Liquid Load Bank, but the medium voltage and their other new suite of products over the last couple of years, but specifically over the last 9 to 12 months.

Liquid Load Bank is one that they highlighted a lot in our discussions and with investors over the last 6, 9 months. Rob, I think you know that. As data centers and artificial intelligence goes much stronger towards liquid cooled solutions. Having a Liquid Load Bank is an important solution for that configuration to ensure that as you transition and as you start up and as you manage the liquid-cooled solutions within those data centers, then you have the most effective and meaningful configuration.

I would just say it's preliminary. But so far, the Liquid Load Bank interest from customers, major customers in data center infrastructure are very encouraging that the orders -- which they mentioned on some of their calls of well over 100 Liquid Load Banks and growing to several multiples of that in the near future, we think, are -- provide an exciting opportunity. This is a product line singularly that adds points of growth to Thermon in the coming years.

And so a business that we feel was already starting to be at mid- to high single-digit growth as a Thermon company. Now it's starting to approach high single-digit, low double-digit growth before we even start to introduce some of these synergies. And I would say leading the charge is probably Liquid Load Banking.

Okay. Great. And then on the orders, I think you talked about an uptick even in -- before the June activity. But what sort of the order pipeline look like at this point? Is it very similar kind of momentum? And how do you see the order activity sort of cadence for the rest of the year?

Well, it's similar momentum. It's an interesting time, Rob. We've gone record after record in the last few quarters now for quite a while. Obviously, we booked at stand-alone CECO -- I think it was $449 million of orders in Q1, and we booked essentially that in April. We had a very nice May, and we have a great pipeline for June. And we see the third quarter and fourth quarter pipeline also looks extremely strong.

Now booking $300 million orders is somewhat unique, but not something that we don't see in front of us again. So our pipeline across the board looks very attractive. I think some of the businesses where -- we're just building even more momentum now in terms of semiconductor, in terms of water, that momentum continues to build.

We think that, that's going to have a stronger second half of the year than we had in the first half. The power gen remains incredibly strong, whether it's to support the rebuilding of the -- of just power infrastructure in the grid or certainly all of the headlines associated with data centers and AI. There's no shortage of demand for electrification, digitization, power generation.

I think we're just seeing ongoing momentum. And Thermon is as well across their businesses. It will be interesting depending on what happens with the Iran war, if that moderates, will there be a Middle East rebuild as well? We're starting to see some opportunities there. But no telling when that conflict ends, and we're not predicting anything in our guidance is already cautious of that not necessarily ending anytime soon. But we remain interested in the outcome of that because it probably speaks to some additional opportunities as well.

That concludes today's question-and-answer session. I'd like to turn the call back to Todd Gleason for closing remarks.

Well, thank you. Thanks for the questions and the interest in our update today. We look forward to seeing many of you at upcoming investor events. And as always, if you have any questions, we would be happy to help in any way. And with that, we'll go ahead and end the call. I want to once again thank Team CECO, which now includes the great new addition of the Thermon leaders and employees around the world. Welcome to what we know is an exciting new start to our future together, and we look forward to continuing to perform at a very high level. Thanks, everybody.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Greetings, and welcome to the Thermon Group Holdings Third Quarter Fiscal 2026 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I will now turn the conference over to your host, Ivonne Salem, Vice President, FP&A and IR. Thank you. You may begin.

Good morning, and thank you for joining Thermon Group's Third Quarter Fiscal 2026 Results Conference Call. Leading the call today are CEO, Bruce Thames, Chief Financial Officer, Jan Schott; and Chief Operating Officer, Tom Sorocky. Earlier this morning, we issued an earnings press release, which has been filed with the SEC on Form 8-K and is also available on the Investor Relations section of our website. Additionally, the slides for this conference call can be found in our IR website under News and Events IR calendar Earnings Conference Call Q3 2026.

During the call, we will discuss some items that do not conform to generally accepted accounting principles. We have reconciled those items to the most comparable GAAP measures in the tables at the end of the earnings press release. These non-GAAP measures should be considered in addition to and not a as substitute for measures of financial performance reported in accordance with GAAP. A I would like to remind you that during this call, we might make certain forward-looking statements regarding our company.

Please refer to our annual report and most recently quarterly report filed with the SEC for more information regarding our forward-looking statements, including the risks and uncertainties that could impact our future results. Our actual results might differ materially from those contemplated by these forward-looking statements, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law.

Today's call will begin with remarks from our CEO, Bruce Thames, who will provide a review of our recent business performance. including an update on our strategic initiatives. Following Bruce, our Chief Operating Officer, Tom Cerovski, will share an update on our progress and opportunities in the data center market and medium voltage heaters which are 2 key components of our organic growth plans going forward. After Tom, our CFO, Jan Schott, will provide a review of our third quarter financial results. Bruce will then wrap up our prepared remarks with an update on our business outlook. At the conclusion of these prepared remarks, we will open the line for questions.

With that, I'll turn the call over to Bruce.

Thank you, Ivonne, and good morning to everyone joining us on the call today. I'll begin my commentary with our third quarter highlights, which you can find on Slide 4. We I'm exceptionally proud to announce that we achieved record-breaking results in the third quarter, delivering the highest revenue, profitability and bookings in our company's history. These outstanding outcomes are a testament to our unwavering commitment to executing our strategic initiatives and to the dedication and excellence demonstrated by our entire Thermon team across the globe.

Our strategic actions have positioned us well to capitalize on significant secular trends that are reshaping the industrial landscape, including the growth of data centers, increasing demand for power generation, the global shift towards decarbonization and accelerating electrification. We believe that our recent booking strength and pipeline growth illustrate improving macro conditions, coupled with renewed capital project momentum that are reinforced by strong customer relationships, all supporting a positive outlook for the remainder of the fiscal year with momentum continuing into 2027.

Now turning to our quarterly results in more detail. Our third quarter revenues were up 10% from last year which combined with our solid margin execution resulted in a 12% increase in adjusted EBITDA. Our third quarter adjusted EBITDA margin was just over 24% and which brings our trailing 12 months adjusted EBITDA margin to nearly 23%, illustrating the strong earnings potential of our business. We remain committed to our Thermon business system initiatives and our margin priorities, and we're very pleased by our recent profitability conversion.

While I'm encouraged by our third quarter operating results, I'm most excited about the strong order trends and the building momentum we're now seeing in our business. Orders in the third quarter increased by 14% year-over-year resulting in a book-to-bill ratio of approximately 1.1x, with our total bid pipeline up up 8% at quarter end with nearly 80% of these opportunities coming from our diversified end markets. Large project orders in the quarter were up approximately 60% year-over-year driven by LNG project activity, midstream gas processing and a large sustainable aviation fuels project in Asia.

Much of this activity is tied to the value chain around natural gas for both power generation and LNG export facilities as well as continued momentum in renewables in the Eastern Hemisphere. While these orders helped grow our installed base, the execution time lines are more protracted than our flow business and will begin to convert in our fiscal '27. The power sector is another area where we also believe Thermon is well positioned with offerings ranging from emissions monitoring solutions with our tubing bundle products to temperature management with our Genesis heat tracing control systems to auxiliary boilers for conventional and nuclear power generation.

While early in what appears to be a large CapEx cycle, our pipeline of opportunities in this sector has now grown to $180 million, up 58% and year-over-year with over 60% of the opportunities in the U.S. market. Another area of emerging growth in the U.S. is in the reshoring of manufacturing where customers are restarting shuttered facilities, or expanding production in existing facilities across pharmaceuticals, chemicals, steel and other industries. Last quarter, I highlighted that we received our first order for our new [indiscernible] liquid load bank solution. I'm pleased to report that we delivered these first units during the third quarter, and more importantly, we continue to see bookings and extremely strong quoting activity for our data center products. Tom Surovski, our COO, will provide a more detailed update on the data center market later on this call.

Another important driver during the quarter was the continued rebound in our large project business for the second consecutive quarter. As we've discussed on recent calls, our large CapEx order rates were improving, which led us to ramp up our engineering capacity to handle the increased project workload including the launch of our new global engineering center in Mexico earlier this year.

The increase in our engineering team has enabled us to move through the design phase on several large projects which has translated to improved financial results in our large project business with a third quarter CapEx revenues up 37% versus the third quarter of last year. Based on our strong third quarter results, combined with the building momentum in new orders and backlog growth, we're once again raising our guidance for fiscal 2026, which I will detail in my closing remarks.

I'd like to now turn the call over to Tom Sorocky, our Chief Operating Officer, who will provide a more detailed update on the data center market and medium voltage heaters. Tom?

Thank you, Bruce, and good morning to everyone. Moving on to Slide 6. I'd like to provide an update on our liquid load bank solutions for the data center market, which has quickly become a meaningful growth opportunity for Thermon. As we've discussed on prior calls, the recent shift to liquid cool data centers driven by investment in artificial intelligence, or AI, has created a rapidly accelerating demand for liquid load banks to validate critical cooling systems and power infrastructure.

Thermon has moved aggressively to position the company to benefit from this trend in both the short term and long term. As Bruce highlighted, we shipped the first 20 units of our newest designed liquid load bank solutions and also began installation and commissioning during the quarter, and the momentum for this product continues to grow. It is important to note that we moved from initial development to shipping units in just 6 months highlighting the ingenuity, responsiveness and agility of our team.

Loading activity remains robust as our quote log has doubled sequentially to $60 million. We continue to expect a significant ramp in orders for our liquid load bank solutions, and we are currently expanding production to support what we believe will be a multiyear growth opportunity. Another exciting opportunity for Thermon is our participation in the medium voltage heaters market. Medium voltage heaters are heaters that look like and function like traditional process heaters but operate at significantly higher voltages. This creates a large and growing market for these high-performance leaders that operate at higher efficiencies, higher power densities, a smaller footprint have lower installation costs and less auxiliary equipment.

Thermon's medium-voltage heater pipeline has expanded to over $150 million benefiting from our global electrification trends and the superior nature of a product. Our sales and marketing activities for these heaters are also an extension of the efforts of our current commercial teams in existing industries with existing skill sets and with existing customers, allowing us to move quickly to capture market share. These heaters also benefit from the secular tailwinds and the macroeconomic trends regarding decarbonization and electrification in industrial heating.

Aside from the previously mentioned features and benefits, these electric heaters can perform at the highest levels of efficiency and have no emissions, where a combustion-based heater would operate at lower efficiencies and is not emissions free. It is also worth noting that from a competitive perspective, there are significant barriers to entry into the medium-voltage heater market. Although this is well within Thermon's strike zone of expertise in heat transfer and thermodynamics, this is a capability we have developed over a number of years with our deep and extensive engineering talent.

These heaters come with international certifications and approvals that require exhaustive and compliance reviews. Quite frankly, these medium voltage heaters are difficult to engineer and even harder to manufacture. Thermon is a leader in this space, and we are on our front foot ahead of a very, very short list of competitors that have even attempted to participate in this space. We've secured our third medium-voltage heater order, which increases our backlog for this product to over $11 million.

We are currently quoting opportunities and selling manufacturing slots for these heaters into our FY '27 and FY '28 fiscal years. Last, we are also scaling our manufacturing processes and leveraging our global manufacturing footprint to increase capacity for these heaters. This technology is well within our strengths and capabilities, and we are utilizing our global engineering and operations team to meet the growing customer demand for these products. With that update on the exciting products of liquid load banks and medium-voltage heaters, I will now turn it over to Jan for a detailed review of our third quarter results. Jan?

Thank you, Tom, and good morning, everyone. I'll walk through our third quarter financial performance, followed by updates on working capital, cash flow and our balance sheet and liquidity. Moving to Slide 7. In Revenue for the quarter was $147.3 million, a year-over-year increase of 10%. The growth this quarter reflects more favorable spending patterns including continued improvements in large project spending by customers, ongoing momentum in electrification and decarbonization in Europe and benefits from pricing. With the [indiscernible] acquisition, reaching its 1-year anniversary this past October, all of the growth this quarter is now considered organic.

Our OpEx revenues were $122 million during the third quarter an increase of 5% compared to last year, driven by increased spending from our installed base and pricing. OpEx revenues represented 83% of total revenues for the quarter. Large project revenue was $25.4 million for the third quarter, up 37% from last year. As Bruce mentioned earlier, momentum in our major project markets is now flowing through to our results with several projects progressing from engineering into execution this quarter. Our engineering teams remain fully utilized and the active bid pipeline gives us confidence that the strength will continue into the new calendar year.

Our gross profit was $68.7 million during the third quarter, an increase of 11% compared to last year. The increase in gross profit was the result of operating leverage from increased volumes, price, tariff mitigation and productivity gains enabled by our Thermon business systems. As a result, gross margins were 46.6% for the third quarter, up from 46.2% last year. We were pleased to see our gross margin performance continue this quarter given the higher mix of large project revenue. We also saw this trend last quarter, which is encouraging.

Adjusted EBITDA was $35.6 million for the quarter, up from $31.8 million last year, an increase of 12%. The increase was driven by our solid revenue growth, sustained gross margin improvement and disciplined cost management, partially offset by continued investments in growth initiatives and higher performance-based compensation. Adjusted EBITDA margin was 24.2% during the third quarter, up 50 basis points from last year. GAAP earnings per share for the quarter was $0.55, up modestly from $0.54 in the prior year.

Adjusted earnings per share was $0.66, up 18% from $0.56 last year. Third quarter orders grew 14% to $158.2 million compared to last year. As Bruce noted earlier, this included strong activity across LNG, midstream gas processing and a major SAP project in Asia. Our book-to-bill ratio for the quarter was 1.1x and up from 1.0x a year ago. Backlog increased 10%, driven by a positive book-to-bill for the quarter and favorable project timing even as we delivered record revenue this quarter. Turning to performance by geography. USLAM delivered a solid 10% year-over-year increase driven by sustained demand across large capital projects and continued pricing discipline.

Canada posted a 1% revenue increase supported by heightened project activity. In EMEA, activity remained robust with revenue increasing 37%. This growth reflects strong execution across our legacy business as well as rising demand tied to electrification and decarbonization trends in Europe. Meanwhile, APAC delivered 9% revenue growth, supported by continued momentum in project activity.

Turning to Slide 8 for an update on our balance sheet and liquidity. Working capital was $190 million at quarter end. Capital expenditures were $4.9 million for the quarter compared to $1.4 million last year, reflecting our investments to support growth initiatives, including our liquid load bank and medium-voltage heater product lines. We generated $13.1 million of free cash flow in the third quarter, up from $8.4 million last year, reflecting healthy operating performance and moderated by growth-focused investments.

Year-to-date free cash flows was $25.7 million, up from $23.9 million in the prior year period, highlighting continued discipline even as we invest to support growth. We did not repurchase shares in the third quarter. Cumulative repurchases since the beginning of fiscal 2025 stood at $36 million, 4% of our shares outstanding. We still have $38.5 million remaining under our existing authorization. We ended the quarter with net debt of $96.3 million and a net leverage ratio of 0.8x.

In summary, we continued our financial discipline during the third quarter and remain focused on maintaining a strong balance sheet. We have $141 million in total cash and available liquidity as of quarter end, providing us ample financial flexibility to execute on our balanced capital allocation strategy, which remains focused on driving growth, both organically and through strategic acquisitions, while balancing opportunistic share repurchases and debt reduction.

With that, I will turn the call back over to Bruce.

Thanks, Jan. As we shared on this call, we were very pleased with our third quarter results and are encouraged by the continued momentum we're seeing across many of our end markets. This team has spent considerable time and energy over the past several years, repositioning the business for growth. So it's very rewarding to see this hard work beginning to pay off. Based upon our strong results through the first 3 quarters of the year and the continued momentum in our business, we're raising our full year 2026 financial guidance for revenue and adjusted EBITDA.

As we detail on Slide 9, our fiscal 2026 financial guidance calls for revenue in a range of $516 million to $526 million, representing 5% growth over prior year at the midpoint. We're raising adjusted EBITDA guidance to a range of $114 million to $120 million, representing 7% growth over prior year at the midpoint. Our guidance continues to assume that the current tariff structures remain in place and any future announcements do not have a notable positive or negative impact on input costs or customer sentiment and the improved business trends we've seen are sustained.

Turning now to Slide 10. We believe we're strategically positioned to benefit from several powerful macroeconomic drivers including reshoring, electrification, decarbonization, power and data centers. We're in an extremely strong financial position with more than sufficient financial flexibility to continue pursuing our strategic priorities, including the disciplined allocation of capital, all with an ongoing focus on generating long-term value for our shareholders. That completes our prepared remarks. We're now ready for the question-and-answer portion of our call.

[Operator Instructions] And your first question comes from Brian Drab with William Blair.

Congratulations on the great results. been covering the company for a long time, and I know a lot of people have been expecting Thermon to put up results like this. And I usually don't take time to do this congratulating on the calls, but it's worth, I think it's deserving for sure. I was wondering, can you talk about the 46% plus gross margin that quarters in a row the sustainability of that, what has structurally changed if it has and you're doing that in the face of improving large project activity where you typically see somewhat lower gross margin?

Yes. That's a great point, Brian. The mix is shifting towards more large projects. There's a number of things that are really driving the improved gross margins the Thermon business system, we've been able to systematically drive productivity and efficiency gains that are translating into bottom line results. I think that's something that's in place and will continue to drive going forward. Price has been another area where we've certainly gained some incremental in the marketplace. We also are seeing the benefit of operating leverage.

And I would also note that when you look at the project mix we have today, it is largely design and supply with much less what we call turnkey or additional content around field labor around installation or third-party materials that we would have, conduit wire, switches, breakers, relays and the like. So that all helps improve the margin profile of these projects. As we look at our backlog going forward, we still have a very significant backlog building around large projects that are heavily weighted towards design and supply so those margins, I think, would be sustained.

I would go on to say that typically, our Q3 is always the highest gross margin just due to the mix around heating season and just operating leverage on the incremental volume. So having said that, when you look at our business on a seasonality basis, I think we can continue to drive similar margins going forward. The key here is understanding that Q3 is typically the peak and it will fall off somewhat in Q4 and Q1 and then begin to rebuild in Q2 and Q3 of next year. So that's just the normal cadence of the margin profile of our business.

Okay. And this shift to more design and supply versus projects with the significant labor content. Is that something that was by design, like by your design? Or is that more a function of trends in the overall market?

It's a little of both. We focus there, particularly, but then there's also been a shift with some of the general contractors and also the EPCs to be able to bring more of that fueled labor and installation in-house. So it's been a bit of a mix of both.

Okay. And then on the data center side, just really good momentum there clearly. Can you talk about how your conversations with the potential customers in the industry have evolved? Are you talking to the data center construction contractors, the HVAC contractors, the hyperscalers themselves, all of the above?

Brian, this is Tom. Thank you for your congratulations. Look, the answer to your question is all of the above. We've formed some relationships through our discovery process and design thinking of developing these projects. We did a lot of customer research and feedback before we launched the project and launched the products. But we are forming relationships with, let's say, a rental companies out there that specifically rent equipment into this market, there's also a burdening group of companies that do nothing but commissioning of data centers and meet the testing around insurance and regulatory compliance.

And then as you said, we've also worked directly with end users. In some cases, they're installing these units and load banks permanently and it will become a fixture of their overall asset. So look, the answer is we worked with all types of customers and informed relationships through many different end of channels.

And your next question comes from Justin Ages with CJS Securities.

Another question on the liquid load banks. In the past, you've mentioned the market size around $80 million, $90 million. Just wondering if your assumptions have changed there? And I know you gave some detail on the competitive landscape for the medium voltage heaters. But any detail you can give us on the landscape for these liquid load banks would be helpful as well, please.

Great question. We have not updated our management estimates of what we believe the market to be, I think will stay consistent for now with what we put in previous communications and what we've mentioned earlier. I will say the market is robust, but the most important thing is our quote log is actually doubled, I believe, sequentially quarter-over-quarter. We're now at about $60 million. So we believe this will be a -- both a short-term material impact on our potential FY '27 results and then also a longer-term multiyear opportunity.

I think data centers is something that many different companies out there that are selling electrical and other types of products. We're still trying to get our arms around how big this growth cycle is and how long it will last, but it's clearly very large, and it's clearly multiyear.

That's helpful. And then on the CapEx guidance, you said 2.5% to 3% this year. This quarter it was 3.3% ahead of sales. Just wondering if these investments in these 2 new growth platforms as we look peak into '27 and '28, if it's going to be a bit higher as you guys are ramping for growth there?

Yes. That's a great question. We are making more -- when you think about just in our over the last 5 years or more, our CapEx has probably averaged around 2.5%. We've got these 2 opportunities, which are significant organic growth opportunities, and we are making investments to scale manufacturing. And so we're in the process of finalizing our plans for next year, but we would expect CapEx to be in probably closer to that range next year and just investing for growth in these 2 different platforms. And really, that's to build capacity both in the Western Hemisphere as well as in the Eastern Hemisphere to grow and scale these products.

Your next question comes from Aaron Spychalla with Craig Hallum Capital Group.

Bruce, Jan and Tom. Maybe first for me on the medium voltage opportunity. You talked about the pipeline and the backlog and scaling the manufacturing. Can you just kind of talk about how you see that progressing over the next couple of years given that pipeline? And kind of how growth can look as you kind of scale manufacturing?

Yes. No, thanks, Aaron. Great question. This is a very, very early stage of engagement with customers on the medium voltage. As I've said, we've taken 3 orders we have worked down some of the backlog, but the existing backlog right now at the end of Q3 was $11 million. Again, just to repeat, quote pipeline on that is over $150 million.

This is another opportunity for us that we believe is both large and multiyear. We have begun the process of investment there both on the CapEx and OpEx side to increase capacity, again, both in the Eastern Hemisphere and the future in the West -- I'm sorry, in the Western Hemisphere and then future investment in the Eastern Hemisphere to be able to build these heaters and meet customer demand. This has been a tailwind for us.

Again, there's -- the other thing to keep in mind, this has a very large competitive moat around it in terms of the capabilities to build seaters. But it will certainly be something that is multiyear and have impact on not just FY '27, but a material impact on years in the future.

All right. Appreciate that. And then you kind of called out LNG in midstream as nice growth drivers. Can you just talk a little bit more about how your offering fits in that market where that business is today and how you see that ramping moving forward?

Yes. So yes, LNG midstream kind of thinking through those. What we're seeing is certainly the LNG export facilities, particularly, we do quite a bit in LNG liquefaction. And so we -- in the first quarter of this year, we had secured about 5 projects for LNG and those begin to execute in our Q2 of this year and continued into our Q3. We also booked some additional LNG projects when you think about our products, there is a number of different applications. We have even the medium voltage heaters are used for natural gas regeneration, which -- and then our heat tracing products are used extensively just due to the colder temperatures and the -- to freeze protect on a lot of different valves in piping.

We also have immersion heater opportunities in various applications there, and then our tubing bundles are sold in there. So it's really a broad swath of our products for LNG. And then we think about moving upstream to increase production in natural gas. One of the areas where we do a lot of work is in midstream gas processing particularly in fractionators. And so we've secured some orders in that -- those areas as well with some nice projects emerging here, particularly in the U.S. around increased natural gas production and processing.

And then all of that also ties to just the increased power demand and the shift towards combined cycle power generation with some of the legislative changes that are increasing demand for natural gas as well. So all of those tie in pretty well in our demand drivers for our products and services.

[Operator Instructions] Your next question comes from Jon Braatz with Kansas City Capital.

Bruce, going back to gross margins, they've been very strong despite the higher CapEx revenues. And you talked a little bit about the reasons. But independent of those reasons, given the strength of the market, are you just seeing better margins in that business than maybe you had seen years ago, initial margins?

Our project margins are healthy. I would say, John, as I reflect back, they are not necessarily above what we've seen at in large CapEx cycles we -- the company historically -- I mean, you go back to the '13 time frame had enjoyed exceptional gross margins and project activity when there was just a super cycle in the oil sands. So I would say we're not at those levels, but on a relative basis, our project margin profile has improved, and the mix has had a big impact on that as well. So I think it's a little of both the mix of design and supply as well as just the overall market conditions for pricing and the nature of the projects we're executing have both helped with price and gross margins.

Okay. All right. The second question, please. The fact the acquisition last year has been very successful. How you see that going forward, what you -- what else are you doing to maybe improve the revenue outlook for that operation and the profitability? What's the [indiscernible] in 2027?

Yes. Great question. That business has performed exceptionally well. A few things to note One is we continue our commercial efforts there in Europe and the Eastern Hemisphere, which have been quite successful. A lot of the CapEx investments that we talked about, both Jan in the prepared remarks as well as just questions I answered earlier, are related to scaling capacity there in the low -- we are building capacity for our medium voltage heaters there, and we'll begin to be completely vertically integrated and be able to produce those in Europe for Europe in the Eastern Hemisphere and that's going to be a significant growth driver.

In less than 18 months, we've essentially doubled that business. We expect that to be -- to double that business over the next 2 to 3 years. And that would be really serving the increased demand for electrification as well as the market opportunity represented by medium voltage heaters. So that business, we would expect to continue to build and grow. And as we look at that, our product portfolio, quite frankly, is has historically had immersion heaters and the like. But having that manufacturing capacity there in Europe has really enabled and unlock the next level of growth. So it's really been a great success story really commercially and operationally.

[Operator Instructions] We'll pause for a couple of moments while we poll for questions. And there are no additional request for questions. So at this time, I'll hand the floor back to Bruce Thames for closing remarks. Thank you.

Thank you, Diego, and thank you all for joining on the call today. We appreciate your interest in Thermon. And if we don't talk to you in the coming months, we look forward to providing an update on our full year financial results in the May time frame. So thank you all for joining today.

Thank you. This concludes today's conference. All parties may disconnect.

Greetings, and welcome to the Thermon Earnings conference call fiscal year 2026 quarter 2. [Operator Instructions] As a reminder, this conference is being recorded.

And it is now my pleasure to introduce to you, Ivonne Salem, Vice President of FP&A and Investor Relations. Thank you, Ivonne. You may begin.

Good morning, and thank you for joining Thermon Group's Second Quarter Fiscal 2026 Results Conference Call. Leading the call today are CEO, Bruce Thames; Chief Financial Officer, Jan Schott; and Chief Operating Officer, Tom Cerovski. Earlier this morning, we issued an earnings press release, which has been filed with the SEC on Form 8-K and is also available on the Investor Relations section of our website. Additionally, the slides for this conference call can be found in our IR website under News & Events, IR Calendar, Earnings Conference Call Q2 2026.

During the call, we will discuss some items that do not conform to generally accepted accounting principles. We have reconciled those items to the most comparable GAAP measures in the tables at the end of the earnings press release. These non-GAAP measures should be considered in addition to and not as a substitute for measures of financial performance reported in accordance with GAAP. I would like to remind you that during this call, we might make certain forward-looking statements regarding our company. Please refer to our annual report and most recently quarterly report filed with the SEC for more information regarding our forward-looking statements, including the risks and uncertainties that could impact our future results. Our actual results might differ materially from those contemplated by these forward-looking statements, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments, or otherwise, except as might be required by law.

Today's call will begin with remarks from our CEO, Bruce Thames, who will provide a review of our recent business performance, including an update on our strategic initiatives. Following Bruce, our Chief Operating Officer, Tom Cerovski, will share an update on our progress and opportunities in the data center market, which is a key component of our business diversification strategy. After Tom, our CFO, Jan Schott, will provide a financial update and review. Bruce will then wrap up our prepared remarks with an update on our business outlook. At the conclusion of these prepared remarks, we will open the line for questions.

With that, I'll turn it over to Bruce.

Thank you, Ivonne, and good morning to everyone joining us on the call today.

I'll begin my commentary with our second quarter highlights, which you can find on Slide 4. As we committed in our Q1 call, the Thermon team delivered exceptional second quarter results with solid incoming orders, strong revenue conversion, and robust profit capture that exceeded expectations across the board. Our reported revenues were up 15% from last year, which combined with our strong margin execution and operating leverage resulted in a 29% increase in adjusted EBITDA. These second quarter results, combined with a backlog that is up 17% year-over-year and improved visibility position us well for the balance of the year.

On a trailing 12-month basis, our revenues and adjusted EBITDA have reached records of $509 million and $114.1 million, respectively. We believe our performance reflects the strength of our strategy, the resilience of our business model, and the outstanding execution by our global team despite a volatile macroeconomic backdrop. I'm incredibly proud of our team's ongoing efforts to execute our margin improvement initiatives, including tariff mitigation measures, demonstrating steady progress towards our longer-term EBITDA margin objectives.

Together, these actions enabled us to generate 23.2% adjusted EBITDA margins in the second quarter with adjusted EBITDA margins growing to 22.4% on a trailing 12-month basis. While we've been pleased with the steady progress, additional opportunities to drive further EBITDA margin expansion remain. This quarter is illustrative of the earnings power of our business, and we remain committed to driving EBITDA margin expansion over the longer term.

Our unwavering commitment to our strategic growth initiatives has us well positioned to benefit from a strengthening macro backdrop and several favorable secular demand trends, including reshoring, electrification, decarbonization, and rising power demand. This is evident when looking at our total bid pipeline, which was up 11% at quarter end with nearly 80% of the opportunities coming from our diversified end markets, including power generation, renewables, commercial, and data centers. I'm also very excited to report that this update will include details of our first order for the new Poseidon liquid load bank. We're seeing extremely strong quoting activity for our data center solutions and expect order activity to accelerate in the coming quarters. Tom Cerovski, our Chief Operating Officer, will provide a more detailed update on the data center market later on this call.

The team continued to demonstrate disciplined financial management during the second quarter, and we ended the period with net leverage at 1x with total liquidity of $129 million. Our M&A pipeline remains active, and we're excited by our strong capital position, which provides us with the capacity and flexibility to act decisively on opportunities to deploy capital in alignment with our strategic priorities. We are encouraged by the strengthening trends in our business and anticipate this momentum continuing into the third quarter.

During the first half, we've established a new global engineering center in Mexico to handle the increased project workload driven by the backlog growth we experienced coming into this fiscal year. During the second quarter, we saw a 41% increase in large CapEx revenues, driven by 2 large North American LNG projects as these move through the design phase into execution. Based upon these factors, we are well positioned to deliver strong second half results and are pleased to raise our full year 2026 financial guidance, which I will cover in more detail in my closing remarks.

Before I turn it over to Tom, I'd like to take some time to provide an update on our strategic growth initiatives, which are centered around our 3D strategy of decarbonization, digitization, and diversification shown here on Slide 5. We believe our focused commitment to our strategic pillars has us well positioned to benefit from several strong secular drivers to generate sustained organic growth moving forward.

Turning now to Slide 6. I will begin with an update on our digitization opportunity. Since launching the Genesis Network, we've received extremely positive customer feedback with over 86,000 installed circuits, up from 58,000 at the end of fiscal '25. We are now beginning to leverage our digital technology capabilities across a broad spectrum of Thermon Solutions, including commercial heat tracing, rail and transit, and data center product offerings. Our customers need real-time operational awareness and analytics to more effectively manage their business and provide actionable insights to help unlock predictive maintenance, enhance performance, and energy efficiency. This differentiated hardware and software platform helps create value for customers, which drives growth and improves retention while delivering enhanced returns.

Turning now to Slide 7. I'd like to provide an update on an exciting area of growth in the decarbonization space represented by medium voltage heaters. The electrification megatrend is driving momentum to replace hydrocarbon-fired heating systems with electrical solutions, especially in Europe. Medium voltage heaters offer a compelling alternative with higher efficiency, zero emissions, lower initial capital costs, and lower maintenance expenses, all while providing a higher level of control. Our Quantum medium-voltage heater product line was launched in 2024, offering voltages from 3,600 volts to 7,200 volts. Our first 2 orders totaling nearly $10 million are now being produced for customers in the U.S. and the Middle East.

This market is estimated to be growing at a 17% compounded annual growth rate to $263 million in 2030 with a very short list of competitors. Given Thermon's differentiated capabilities in heat transfer analysis and design, we are leveraging legacy customer relationships in the chemical, general industrial, oil and gas, and food and beverage end markets to grow share. We are seeing strong order momentum with a solid pipeline of high probability opportunities as we work to scale our capacity in both North America and Europe.

I would now like to turn the call over to Tom Cerovski, our newly appointed Chief Operating Officer, who will provide an update on diversification into the data center market. Tom?

Thank you, Bruce, and good morning to everyone.

Moving on to Slide 8. I'm excited to share updates on a key end market that is now central to our overall business diversification strategy. As we've discussed on prior calls, the unprecedented investments in data centers driven by AI adoption represent a significant and long-term growth opportunity for Thermon. The recent shift to liquid cooled data centers has created a rapidly accelerated demand for liquid load banks to validate critical cooling systems and power infrastructure. Thermon is uniquely positioned to capture this opportunity, leveraging our legacy solutions.

Given the pace of this market, we are proud of how quickly our team has executed. In just 4 months from project kickoff, we completed prototype builds for our Poseidon and Pontus liquid load bank solutions and customer demonstrations are already underway. The response has been outstanding. Our quote log now totals roughly $30 million and continues to grow, and we've secured our first order for 20 Poseidon units. Based on management estimates, the liquid load bank market is projected to grow at a 21% CAGR from $84 million in 2024 to $386 million by 2032. We are targeting a 20% to 25% market share within the next 24 to 36 months, and this early traction gives us confidence in achieving that goal.

Customers are excited about our differentiated design, which offers clear advantages over our competitors, including compliance with the ASME pressure vessel code, Canada Registration or CRN number for Canadian customers and industry-leading power density or kilowatt to weight ratio and our pursuit of UL and cUL product certification. The combination of these features and benefits position Thermon well to emerge as the trusted partner for mission-critical data center applications.

Beyond liquid load banks, remember that Thermon also has significant pull-through opportunities for our traditional product solutions in data center applications, including electric heat tracing, environmental heaters, immersion heaters, tubing bundles and removable heat blankets. As data center growth accelerates, our commercial team is actively developing channels with owners and operators, HVAC contractors, commissioning firms, and rental houses to ensure Thermon is top of mind for these data center projects.

Capitalizing on these opportunities in the data center market is a great example of our strategy in action, creating value for customers and shareholders through innovation and disciplined execution. We look forward to sharing more updates on this exciting growth opportunity in the quarters ahead.

With that update, I'll turn it over to Jan for a detailed review of our second quarter results. Jan?

Thank you, Tom, and good morning, everyone. I will review financial results for the quarter, give an update on working capital and free cash flow and conclude with comments on the balance sheet and liquidity.

Moving to Slide 9. Revenue for the quarter was $131.7 million, a year-over-year increase of 15%. The growth this quarter reflects more favorable spending patterns following tariff uncertainty, improved trends in large project revenues and continued momentum from F.A.T.I. As expected, we also benefited from backlog conversion in the quarter, stemming from previous supply chain disruptions and delayed projects. Excluding F.A.T.I., organic revenue grew 9% year-over-year.

Our OpEx revenues were $107 million during the second quarter, an increase of 10% compared to last year. Excluding the contributions from F.A.T.I., OpEx revenues increased 3% from last year. OpEx revenues represented 81% of total revenues for the quarter. Large project revenue was $24.7 million during the second quarter, up 41% from last year. As we highlighted in last quarter's call, we saw several CapEx projects move from engineering to execution early in the second quarter. We expect this momentum to continue through the balance of the year. Our gross profit was $61 million during the second quarter, an increase of 20% compared to last year.

Revenue growth benefiting from pricing, combined with efficient execution and tariff mitigation measures contributed to the increase in gross profit. As a result, gross margin was 46% for the second quarter, up from 44% last year. The gross margin improvement was notable given the higher mix of large project revenue for the quarter. Adjusted EBITDA was $30.6 million for the quarter, up from $23.8 million last year, an increase of 29%. Volume growth, gross margin improvement, and disciplined cost management partially offset continued investments in growth initiatives.

Adjusted EBITDA margin was 23.2% during the second quarter, up from 20.8% last year. GAAP earnings per share for the quarter was $0.45, up 61% from $0.28 in the prior year. Adjusted earnings per share was $0.55, up 45% from $0.38 last year. Second quarter orders were flat compared to the same period last year. On an organic basis, bookings declined 4% year-over-year, primarily driven by rail and transit following last year's significant surge. Momentum from F.A.T.I., where we continue to benefit from broader decarbonization trends helped offset the organic decline. Our overall book-to-bill ratio for the quarter was 1.0x, down modestly from the prior year, consistent with timing variability in project awards. Backlog increased 17% on a reported basis and was up 4% organically due to the positive book-to-bill in the quarter, combined with project timing.

Turning to performance by geography. Year-over-year sales in USLAM were up 8% compared to the prior year, driven by the ramp in several large CapEx projects. Revenue in Canada increased by 10%. Trends in EMEA remained strong with revenue doubling, driven by solid performance in our organic business and contributions from F.A.T.I. In contrast, APAC experienced a 4% decline, primarily due to ongoing uncertainties surrounding global trade policies with China.

Moving to Slide 10 for an update on our balance sheet and liquidity. Working capital increased by 10% to $172 million at the end of the quarter, driven by F.A.T.I. higher inventory in preparation for fall heating season and materials purchased in advance of tariffs. CapEx was $3.1 million during the quarter compared to $1.9 million last year, which includes capital investments to support growth initiatives.

Free cash flow during the quarter was $4.4 million, down from $6.7 million last year as we invested working capital in inventory build, increased project activity, and the timing of shipments. We repurchased $6 million in shares during the second quarter, bringing our total shares repurchased since the start of fiscal '25 to $36 million. We currently have $39 million remaining under our current authorization as of the end of the quarter. We ended the quarter with net debt of $110 million and a net leverage ratio of 1.0x.

In summary, we continued our financial discipline during the second quarter and remain focused on maintaining a strong balance sheet. We have $129 million in total cash and available liquidity as of quarter end, providing us with ample financial flexibility to execute on our balanced capital allocation strategy, which remains focused on driving growth, both organically and through strategic acquisitions, while balancing opportunistic share repurchases and debt reduction.

With that, I will turn the call back over to Bruce.

Thanks, Jan. We're obviously very encouraged by our second quarter results and the accelerating momentum across our markets, particularly the move of several large projects from engineering to execution. I'm proud of our team's disciplined execution on margin initiatives, including swift and effective actions to mitigate the impact of tariffs, combined with meaningful progress on our margin expansion efforts. With this momentum continuing into our fiscal third quarter, we are on track to deliver a strong second half to our fiscal year. Based upon the improving visibility in our business, we are pleased to raise our full year 2026 financial guidance for both revenue and adjusted EBITDA.

As we detail on Slide 11, our revised fiscal 2026 financial guidance calls for revenue in a range of $506 million to $527 million, representing 4% growth at the midpoint. We are raising adjusted EBITDA guidance to a range of $112 million to $119 million, representing 6% growth at the midpoint. Our guidance continues to assume that the current tariff structures remain in place and any future announcements do not have a notable positive or negative impact on input costs or customer sentiment and the improved business trends we've seen are sustained. As I've outlined in the past, we remain highly focused on effectively managing the factors within our control.

As you can see here on Slide 12, we've made significant progress in our 3D growth strategy over the last 5 years, driving double-digit top line growth with adjusted EBITDA growing at 2x the rate despite the contraction in large CapEx spending we experienced in fiscal '25.

Turning now to Slide 13. We believe we are strategically positioned to benefit from several powerful secular drivers, including reshoring, electrification, decarbonization, power, and data centers. We're in an extremely strong financial position with more than sufficient financial flexibility to continue pursuing our strategic priorities, including the disciplined allocation of capital, all with an ongoing focus on generating long-term value for our shareholders.

That completes our prepared remarks. We are now ready for the question-and-answer portion of our call.

[Operator Instructions] And the first question comes from the line of Justin Ages with CJS Securities.

I wanted to start on the large CapEx side, which was a nice surprise there. In the prepared remarks, you mentioned a couple of LNG projects in North America and some momentum. Are you expecting more in the same business, more in LNG there? Or is there some other large CapEx projects that are kind of coming into focus?

Yes, Justin, last quarter, we spoke about 5 projects we won in LNG. And certainly, that's an area where we're seeing growth. And so we really focused when we came into the year on about -- our backlog was up about 29% year-over-year. We really were -- had a big backlog of work in engineering. Since we've established a global engineering center in Mexico and have staffed that up, and that team has begun has become productive. And what we're seeing there is those projects move from the design phase into execution, and we saw a couple of those move forward in the second quarter of this year, which led to our CapEx -- large CapEx revenues being up 41% year-over-year. So we do expect that flow to continue through the back half of the year. And as we look forward, our LNG pipeline is up 140% year-over-year when we look at those opportunities. So we are seeing some robust activity in the LNG market.

And then shifting to the digitization. Nice update you guys hit that 50% growth that you laid out from the 58,000. Can you just give us a little more detail on what drives those efforts? Is it additional sales? Is it really the tip of the spear that differentiates your product from competitors?

Yes. So I think it's actually a few things. One is, it is the tip of the spear, and it really helps differentiate us from the competition and improves our win rate so that we can grow the installed base. It also increases really the customer engagement throughout the life cycle of the asset, which really helps us to capture those recurring revenues over time. So that's one of the big benefits that we see from the digitization effort. And the things we highlighted this quarter is we built this platform of both software and hardware, and we're now leveraging that across a wide range of Thermon solutions in the marketplace. So thus far, we've really introduced it into the industrial heat tracing end markets and product lines. It's also now being offered in our commercial line of heat tracing products, which we just launched in the last year with the EVO controller. And then we're also moving that into rail and transit for switch heating, particularly around our Hellfire units. And then our most recent launch of the Pontus and Poseidon load banks include these software and hardware tools in these units as well. So we really see this as being an enabler across a wide range of our solutions in the marketplace.

And the next question comes from the line of Brian Drab with William Blair.

Gross margin is really solid in the quarter, obviously. But that was also in a quarter where you had some of the CapEx projects stepping up. Can you talk about that dynamic, maybe the margins in some of the bigger projects that are coming through? And I mean, is everything else that you're doing offsetting maybe some lower margin big projects? Or do these projects have really good margins?

Brian, this is Jan. I'll take that question. Yes, you're actually spot on. We did have, I guess, large projects, as you know, typically don't have as good a margins as our rest of our projects. And so we did have an unfavorable impact from those. But offsetting that this quarter were just we had increased volumes, so operating leverage from that. We also had our Thermon Business Systems productivity gains that we continue to see really help our margins really be solid. We had pricing that we saw flow through in the quarter. So we did see a benefit from that. Our tariff mitigation efforts are absolutely helping. And obviously, those work in tandem with price and then new product introduction. And so I think you'll continue to see -- we're very focused on, I would say, the adjusted EBITDA margin, not so much the gross margin. And as you saw, I think on Slide 3, our trailing 12 months gross margin is at 45%. We did see higher this quarter, and it was really due to all those contributing factors. But we'll continue to push for continued expansion in our margins. And I think our aspirational goal is to get to 24%. The midpoint of our revised guidance is at 22.4%.

So in terms -- I know you said to focus on EBITDA margin, but can I ask though, for the second half of the year, directionally how to think about gross margin? And I guess the 22.4%, it looks like for EBITDA margin, that means kind of sustaining this -- at least sustaining this 23% level is probably the goal for the second half of the fiscal year?

Yes, absolutely. I think that would be the goal. For gross margins, I think we'll continue to see strong margins. If you look at that historical rate, I think that should be instructive for what we would expect for the balance of the year.

And then maybe I'll just ask one more for now. It's great to see these larger projects releasing or moving to execution in the LNG industry. I think you said 2 moved to execution, but there's 5 in the pipeline. What is the potential timing for the other 3 to move to execution? And then secondly, are there other large projects in the funnel that might release outside of LNG?

Yes, Brian, I don't want to over-index on LNG. Those were the 2 larger projects we saw move forward this quarter. But if you look, and I would say more broadly, our business was up about 15% year-over-year. Our diverse end markets were up roughly 15% equivalent and oil and gas was up similarly. So this is not an outsized move in oil and gas. And so I'd like to make sure we don't over-index on that. So yes, there are a much broader range of projects that are beginning to move through execution, and they include a whole host of other end markets, whether that's -- we do have some in the chemical, petrochemical. We have some also in power, certainly in other areas around our other end markets as well. So we are seeing -- it's more broad-based move. And when we looked at last year, we did see a contraction in CapEx spending, and that was not in any given sector. It was fairly broad-based. And so the shift we're seeing now is also fairly broad-based when we see these projects coming back and moving to execution in the back half of the year.

And just really quickly, the data center opportunity and the medium voltage center opportunity are really new and building. How much of that impact the second quarter results? Or is that, that's really more just coming in the next few quarters, really?

Right. That's a great question. There's 0 impact in the second quarter. And these projects -- this -- we're just beginning to book orders, which Tom had noted in the prepared remarks. So we won our -- secured our first order, which we're excited about. We've got a growing quote log that we feel we've got some high probability opportunities there. And then with medium voltage, we've secured our first 2 orders. Those are being built as we speak. And we're working to scale capacity in both North America as well as in Europe, so we can grow that business going into our fiscal '27. So we're excited about both of those areas for growth, and we're really well positioned with a differentiated product offering and a fairly narrow range of competitive -- when we look at the competitive landscape, we're really well positioned.

All right. Congratulations on the great results.

Thanks, Brian.

Thanks, Brian. One clarifying thing I just want to point out is, obviously, the gross margin going forward will be dependent upon the mix. So that's kind of the -- if there were any headwinds, that would be it.

Understood. Not surprising, yes.

And the final question comes from the line of Chip Moore with ROTH.

Congrats as well. Bruce, I guess, I think we've addressed most of the key items. I guess for me, just maybe following up on your last comments around scaling capacity for medium voltage heaters and the opportunity in data center. Just how -- it seems like you have a lot of organic opportunity in front of you. How are you thinking about organic investment versus inorganic? And are you still tracking bolt-ons? And just what are your priorities here?

Well, Chip, great question. First and foremost, our priority is investment in organic growth initiatives, and that has not and will not change. But we are fully funding that really through additions in our SG&A to be able to support the growth in that business as well as through CapEx spending to enable that growth by scaling our capacity in our factories. So that is all embedded in our guidance and underway. As Jan had noted in her prepared remarks, our balance sheet is in a really great position, and we have a strong pipeline of opportunities that we are very focused on really looking for those -- that next inorganic growth opportunity that will augment our 3D strategy going forward. And so we are very focused on really moving forward and looking at those inorganic growth opportunities. So really thinking about the business driving that organic growth, which we've identified these couple of key areas, but also really the inorganic piece is going to be important to continue to drive growth in the business going forward.

And maybe one last one that just popping my head, Bruce. The government shutdowns out there, is there any risk of delays at all on projects or anything like that or any impact at all?

Yes. We really don't have any exposure to government contracts. So it's really a nonevent for us. So it's really not a problem.

And ladies and gentlemen, that does conclude the question-and-answer session. I would like to turn the floor back over to Bruce Thames for any closing remarks.

Thank you all for joining us here today. We appreciate your interest in Thermon and looking forward to giving you an update for our third quarter in the January, February time frame. Thank you.

Thank you. That does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

Greetings, and welcome to the Thermon's Earnings Conference Call Q1 Fiscal Year 2026. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce you to your host, Ivonne Salem, Vice President, FP&A and IR. Thank you, Ivonne. You may begin.

Good morning, and thank you for joining Thermon Group's First Quarter Fiscal 2026 Results Conference Call. Leading the call today are CEO, Bruce Thames; and Chief Financial Officer, Jan Schott. Earlier this morning, we issued an earnings press release, which has been filed with the SEC on Form 8-K and is also available on the Investor Relations section of our website. Additionally, the slides for this conference call can be found in our IR website under News & Events, IR Calendar, Earnings Conference Call Q1 2026.

During the call, we will discuss some items that do not conform to generally accepted accounting principles. We have reconciled those items to the most comparable GAAP measures in the tables at the end of the earnings press release. These non-GAAP measures should be considered in addition to and not as a substitute for measures of financial performance reported in accordance with GAAP.

I would like to remind you that during this call, we might make certain forward-looking statements regarding our company. Please refer to our annual report and most recently quarterly report filed with the SEC for more information regarding our forward-looking statements, including the risks and uncertainties that could impact our future results. Our actual results might differ materially from those contemplated by these forward-looking statements, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as it might be required by law.

Today's call will begin with remarks from our CEO, Bruce Thames, who will provide a review of our recent business performance, including an update on our strategic initiatives, followed by a financial update and review from our CFO, Jan Schott. Bruce will then wrap up our prepared remarks with an update on our business outlook. At the conclusion of these prepared remarks, we will open the line for questions.

With that, I will turn the call over to Bruce.

Well, thank you, Ivonne, and good morning to everyone joining us on the call today. At a high level, I'm pleased to report that the team delivered resilient performance in the first quarter as they navigated a complex and rapidly evolving market landscape. The outcomes we achieve underscore the strength of our long-term vision and strategic initiatives, which are intentionally focused on driving a higher quality, more profitable revenue mix. Combined with proactive tariff mitigation efforts, these actions enabled us to achieve gross margin improvement over prior year, affirming the effectiveness of our operational framework and the agility of our organization.

However, the strength in our margin performance was offset by year-over-year decline in revenues that was largely attributable to temporary delays in backlog conversion and project execution timing. Factors we fully expect will translate into realized revenue in the upcoming quarters. Additionally, we experienced some softness in our incoming order rates following Liberation Day, which we anticipated as a risk coming into our fiscal year and is factored into our full year guidance. As we track our bookings trends through the quarter, we saw a sharp decline in the daily order rate in late April through May, followed by a notable recovery to more normalized levels in June. On a positive note, order momentum has continued to build through the end of July.

While the current market dynamics, particularly surrounding global trade, presents near-term unpredictability, our strategic focus and operational discipline have us well equipped to harness renewed momentum as conditions stabilize. We remain confident in our strategic positioning to benefit from several very long-term secular growth drivers. This positioning, when combined with our robust approach to gross margin enhancement, sets a strong foundation for sustained growth and value creation for our stakeholders.

With that as the backdrop, I'll begin my commentary with the first quarter highlights. As I just discussed, our first quarter revenues were impacted by roughly $10 million in delayed backlog conversion, which contributed to the 5% decline from prior year. These delays, which stem from short-term supply chain challenges and an unanticipated production delay caused by a capital improvement project are not indicative of lost revenue opportunity. They're simply a matter of timing. Our robust backlog, which continues to grow, positions us well to recognize these revenues in the quarters ahead.

While our bookings during the first quarter were down 5% versus last year, we remain confident in our growth outlook. Our strength in bookings over the prior several quarters, the backlog at quarter end, up 27% from last year. The delayed revenues in Q1 and strong order trends at F.A.T.I., all combined to provide a clear path to achieve our revenue plan for the year.

Additionally, our total bid pipeline was up 43% at quarter end, boosted by the Vapor Power acquisition and driven by activity across several key end markets, including chemical, petrochemical, power and nuclear, LNG and renewables. Based on these factors, we remain confident that we're well positioned to generate solid long-term organic growth.

As noted, I was very pleased with the team's execution to deliver strong gross margin performance during the quarter, which was up 30 basis points from last year despite the volume declines and impact of tariffs. The gross margin improvement was a direct function of our strategic shift toward higher-margin OpEx revenues across diverse end markets as well as our tariff mitigation measures, which included actions like prebuying of materials, shifting of sourcing and production and price increases, which began to take effect very late in Q1.

And finally, our disciplined financial management enabled us to maintain our strong balance sheet with leverage of just 1x at quarter end, which provides us the flexibility to execute on our growth strategy, both organic and inorganic, while opportunistically returning capital to our shareholders. Our M&A pipeline remains active, and we continue to search for opportunities to deploy capital to augment our strategic growth initiatives. During the quarter, we returned nearly $10 million in capital through our share repurchase program, and we will continue balancing capital allocation between opportunistic share repurchases and growth investments with a focus on driving returns for our shareholders.

Before I turn it over to Jan, I'd like to take some time to discuss several strategic initiatives that we're very excited about and expect it will be key contributors to our growth in the coming quarters and years. These include an emerging opportunity in the data center market, rail and transit and our most recent acquisition, F.A.T.I.

Turning now to Slide 6. We believe unprecedented investments in the data center market represent an emerging growth opportunity for Thermon. According to an independent study, the global load bank market was roughly $280 million in 2024, with growth projections to $445 million in 2032, representing a 4.8% compounded annual growth rate. With the advent of AI and liquid cooled data centers, the demand for liquid load banks to provide both thermal and electrical loads to test critical cooling systems and power infrastructure has rapidly dropped. Based upon management estimates, we believe the current market opportunity for liquid load banks will grow from an estimated $84 million in 2024 to $386 million in 2032, which represents a compounded annual growth rate of 21%. To serve this growing market, Thermon launched the new Pontus and Poseidon load banks on July 28 of this year.

As data centers shift from air to liquid cooling, we believe that the opportunity for Thermon legacy solutions like heat tracing, environmental heaters, immersion heaters, tubing bundles and removable heating blankets grows accordingly. It's early, but we're already seeing a growing pipeline of project activity with new prospective customers that we anticipate will translate into meaningful growth in this segment for years to come.

Turning now to Slide 7. The rail and transit market is another vertical that we are extremely excited about. The Infrastructure Investment and Jobs Act representing the largest federal investment in public transportation in U.S. history has provided a very favorable demand environment with higher levels of government funding to modernize public transit and passenger rail systems. We're seeing strong order momentum with the rail and transit backlog doubling over the last 12 months. Based on these strong order trends and the longer-term opportunity in this market segment, we're deploying capital and resources to provide -- to rapidly expand capacity to support this growing opportunity.

And finally, the F.A.T.I. acquisition in October of last year has quickly become our fastest-growing acquisition, and we continue to be very excited by the opportunity set for this business. F.A.T.I. strategically positions us to take advantage of the growing electrification market across Europe. While we've seen a shift in U.S. policy that has stalled investment, the electrification market in Europe is experiencing solid growth. We're seeing strong order momentum with our backlog doubling in just the last 6 months, with a solid pipeline of high probability opportunities going forward.

We're extremely encouraged by these opportunities, which highlight the strength of our diversification strategy. Looking ahead, our ability to leverage our technologies across high-growth verticals, such as data centers, transit systems and electrification, positions us to capitalize on dynamic market trends and deliver sustainable shareholder value. This highlights the ingenuity and dedication of our team whose relentless pursuit of excellence allows us to consistently deliver safe, reliable and innovative thermal solutions for our customers. The successes we see today underscore our differentiated position in the industry and reinforce our confidence in the path forward.

With that, I'll turn it over to Jan, who'll provide a more detailed review of our first quarter results before I wrap up with some remarks on our financial outlook. Jan?

Thank you, Bruce, and good morning, everyone. I will review the financial results for the quarter, give an update on working capital and free cash flow and include with comments on the balance sheet and liquidity.

Moving now to Slide 8. I will start with our first quarter operating highlights. Revenue in the first quarter was $108.9 million, a year-over-year decrease of 5%. Excluding revenue contributed from F.A.T.I., first quarter organic revenue decreased 11%. Our OpEx revenues were $93.3 million during the first quarter, a decrease of 4% compared to last year. Excluding the contributions from F.A.T.I., OpEx revenues decreased 11% from the same period last year due to the delayed backlog conversion as well as the impact of tariff uncertainly. OpEx revenues represented 86% of total revenues for the quarter.

Large project revenue was $15.6 million during the first quarter, down 11% from last year. While we noted some improvement in large project bookings last quarter, many of these remain in the engineering phase, and we continue to see project schedules shift to the right. Based upon the current schedules, we anticipate that execution will begin in quarter 2, carrying through the balance of the year.

Our gross profit was $48 million during the first quarter, a decrease of 5% compared to the first quarter last year as the revenue decline was partially offset by a more favorable revenue mix and tariff mitigation measures, including pricing benefits. As a result, gross margin was 44.1% during the first quarter, up from 43.8% last year, owing to improved profitability and OpEx sales, price and productivity enhancements.

Adjusted EBITDA was $21.2 million during the first quarter, down from $23.2 million last year, a decrease of 9% due to the revenue decline, combined with continued investments in growth initiatives. Adjusted EBITDA margin was 19.5% during the first quarter, down from 20.1% last year as the improved gross margins were offset by lower volumes and a modest increase in SG&A due in part to the F.A.T.I. acquisition.

GAAP earnings per share for the quarter was $0.26, up 4% from $0.25 in the prior year. Adjusted earnings per share was $0.36, down 5% from $0.38 last year. The decline was primarily driven by lower sales volumes and increased SG&A expenses, partially offset by improved gross margins and reduced interest expense.

Orders decreased 5% on a reported basis and were down 19% organically. Orders were down across each geography, particularly in APAC due to tariff. While bookings were generally weaker across the board, we did see some pockets of strength in commercial, LNG, and as Bruce already discussed, rail and transit.

Our first quarter book-to-bill was 1.11x, which was flat from the prior year. Backlog increased 13% organically due to the positive book-to-bill in the quarter, combined with project execution timing.

Turning to performance by geography. Year-over-year sales in U.S.-LAM and Canada declined by 17% and 8%, respectively, primarily due to delayed backlog conversion and reduced customer demand amid ongoing market uncertainty related to tariffs. In contrast, EMEA delivered strong growth with revenue more than doubling, driven by solid performance in our organic business and a $6.8 million contribution from the F.A.T.I. acquisition. APAC revenue was $6.6 million, down from $9 million in the prior year period, reflecting softer demand in the region.

Moving to Slide 9, for an update on our balance sheet and liquidity. Working capital increased by 9% to $172 million at the end of the quarter, primarily driven by the F.A.T.I. acquisition and higher inventory as we build stock for the fall heating season and purchased materials in advance of tariffs. CapEx was $2.4 million during the quarter compared to $3.9 million last year, which included capital investments to support growth initiatives in the prior year.

Free cash flow during the first quarter was $8.3 million, down modestly from $8.7 million last year. We repurchased $9.8 million in shares during the first quarter, bringing our total shares repurchased since the start of fiscal 2025 to $30 million. As a reminder, in May, we refreshed our repurchase authorization back to $50 million. So we currently have $44.5 million remaining under our current authorization.

We ended the quarter with net debt of $102.8 million and a net leverage ratio of 1.0x. We recently closed our $240 million credit facility, which extends the maturity to July 2030.

In summary, we maintained our strong financial discipline during the first quarter and continued to execute our balanced capital allocation strategy. We remain focused on maintaining a strong balance sheet and ended the quarter with total cash and available liquidity of $130.8 million. This liquidity provides us with ample flexibility to support our capital allocation needs, and we will continue to prioritize investments in organic and inorganic growth while balancing opportunistic share repurchases and debt reduction.

With that, I will turn the call over to Bruce.

Well, thank you, Jan. And now if you all turn to Slide 10. We remain focused on navigating a dynamic global trade environment with discipline and agility. We're very pleased with our results during the first quarter as our tariff mitigation efforts were a key factor enabling us to drive gross margin improvement despite the revenue weakness and tariff headwinds. With the announcements on August 1 and questions regarding the details about how these new tariffs will be applied, we're currently assessing the impact to our business. As we gain clarity, I'm confident in our team's ability to quickly respond and minimize and mitigate any impacts going forward.

As you can see here, our outlook for fiscal 2026 remains unchanged from our initial expectations. We continue to operate in an uncertain market created by the volatile and rapidly changing trade environment, which makes it very challenging to predict the second and third order impacts from the tariffs, particularly as it relates to customer behaviors impacting demand. Our guidance continues to assume the most recent and any future announcements do not have a notable positive or negative impact on input costs or customer sentiment, and the recovery we've seen in order trends is sustained. While we were able to mitigate the impact of tariffs during the first quarter, we continue to see some margin risk for the balance of the year as the full impact of the tariffs is felt and we gain clarity on the most recent announcements.

Based on these factors, we're reiterating our fiscal 2026 financial guidance that calls for our revenue in a range of $495 million to $535 million and adjusted EBITDA in a range of $104 million to $114 million. While ongoing global trade dynamics present challenges, we remain highly focused on effectively managing the factors within our control. We made significant progress in our diversification growth strategy in recent years and are now strategically positioned to benefit from several powerful secular growth drivers, including reshoring, electrification, decarbonization and power and data centers.

We are in an extremely strong financial position with more than sufficient financial flexibility to continue pursuing our strategic priorities, including the disciplined allocation of capital, all with an ongoing focus on generating the long-term value for our shareholders.

That completes our prepared remarks, and we're now ready for the question-and-answer portion of our call.

[Operator Instructions] First question comes from the line of Brian Drab with William Blair.

First, I just wanted to ask -- I think you said there was a capital improvement or productivity improvement project that led to some production delays. Did you say, is that in the past now or the timing of getting that resolved and then the orders that were delayed when those would ship?

Yes. Yes, Brian, we did have a capital improvement project that took one of our value streams down about twice. As long as we had anticipated in the first quarter, it's now up and fully operational, and it's back to running at historical throughput levels. And again, we would expect those revenues to convert in Q2 and the balance of the year. We also did have some supply chain disruptions that impacted another value stream, and those have been fully resolved as well.

Okay. Got it. And so I know you talked about $10 million in delayed revenue, is that a different issue? Or what's the amount of revenue that is associated with that capital improvement delay?

The supply chain improvement and the capital -- excuse me, the supply chain disruptions and the capital project are roughly 60% of that $10 million. The balance is more in project execution and timing in the quarter.

Got it. Okay. Perfect. And can we talk a little bit about the liquid load bank opportunity in data center? I guess maybe just at the moment, can you just spend a little time just describing what the product is that you're shipping? I know you had a press release on this recently, but just maybe it'd be worth just explaining briefly what the product is. I don't think it's super intuitive for everybody. And what is your order book looking like and/or pipeline looking like for that type of activity? And going in a year from now, like what's sort of the revenue opportunity for that business line?

Yes. Great question. So first and foremost, liquid load banks are actually -- they're actually -- they're based on boiler technology, but essentially, they are used to provide both thermal and electrical loads to test the effectiveness of the cooling systems in these new liquid cooled data centers. They also provide an electrical load so that our customers can test the electrical power distribution systems in those data centers. So historically, they had largely just used inductive and resistive load banks. Our technology allows them to test not only the electrical load, but the thermal loads on those systems as well. And the move from air cooled to liquid cooled has created the demand for these systems.

As we look forward, the pipeline of opportunity is building. We just now have -- just launched these products only a couple of weeks ago, so it's still very early. But we're building that pipeline of opportunities. We're out talking to customers and different types of end users and channels in the market. But we would expect over time to be able to build a 20% to 25% market share in this growing opportunity. And those numbers I covered in the prepared remarks and are outlined in the slide we had in the investor materials.

Okay. And then maybe just one more question. Can you comment more specifically on gross margin expectations for the next quarter and the balance of the year?

Yes. So first of all, as I said earlier, we're pleased with the results in the first quarter. Our outlook had been a little more pessimistic given the impact we anticipated in tariffs. We do expect there to be some margin headwinds in Q2 and beyond. The good news is we're beginning to see pricing come through. By the end of the second quarter, our new prices should be in full effect. And we feel like those are adequate to position us well to fully offset the impact of tariffs as we know it today in the back half of the year.

So overall, our view of performance in Q1 is positive. We do see there could be some potential headwinds in Q2 and our expectations are that pricing will offset cost in the back half of the year. On a trailing 12 basis, I think we're sitting at about 44.8% gross margins. I would think by the end of the year, we should be trending in that same direction.

Our next question comes from the line of Justin Ages with CJS Securities.

Appreciate the color on the data centers. Can you elaborate on the strong demand that you're seeing at F.A.T.I.? And what has changed in the fiscal fourth quarter, the last report?

Yes, Justin. So first of all, we did -- in the fourth quarter, we talked about just the strong demand environment. We've seen that continue. As we noted in prepared remarks, the backlog there has literally doubled since we closed that deal on October 2 of last year. They had a very good first quarter in shipments and bookings were quite strong north of $17 million in the first quarter. So we're seeing very strong demand and the pipeline of opportunities there is quite strong as well.

The bulk of this is really related to electrification opportunities in Europe and the Middle East. The way their regulations there are moving forward. We are seeing significant investments in electrification to be able to convert historical heating sources that have been hydrocarbon-based to electric to reduce Scope 1 emissions. So that has been a very positive trend on the European continent, and we're seeing the same in the Middle East. And a couple of these opportunities that they've secured have been related to LNG export -- liquefaction and export facilities as well, very large heaters for those applications.

So again, we're seeing quite strong demand due to a couple of different market drivers there for F.A.T.I. I think the big impact has been taking that business, plugging it into Thermon's global sales network and being able to effectively develop and close opportunities through Thermon's sales channels to really build that backlog over the last 7 or 8 months.

That's helpful. And then, Jan, maybe you could elaborate on the capital allocation priorities. I know you touched on it in the prepared remarks, but just hoping to see an update on if there's anything in the M&A funnel or how you're approaching share buybacks? Any more color there would be helpful, please.

Sure. Thanks, Justin. The M&A pipeline is still very active. And as we've stated before, we'll continue to look for opportunities that complement our strategy. Besides -- I think that will be something that we're focused on. I think we have done some organic investments, so looking more for inorganic investments. We'll also continue with our share repurchase program. That would be if we don't have opportunities to prioritize growth. So that's always something that we've done when we can buy back shares at attractive levels, if there's nothing or we don't have anything really that's attractive in the M&A pipeline or that we think we can execute on. So we think we have lots of flexibility there. And then I think we're in a good spot with our debt. And so the last part of that would just be debt reduction. But at 1.0x, it's really hard to allocate any free cash flow there.

[Operator Instructions] Our next question comes from the line of Chip Moore with ROTH MKM.

Apologies, I hopped on a few minutes late, so I'm not sure if you addressed it. So just, Bruce, wondering on the heat trace side, pipeline on large projects, what you're seeing. There's been some big FIDs out there and just any color there.

Yes. Chip, so on the pipeline of opportunities, as I noted, we've seen some nice growth year-over-year. It's about 43%. Some of the large project bookings were weaker in the quarter. But as we talked about, the cadence of bookings has improved, and we're seeing some very positive awards that we've received here in early in Q2. And the pipeline of opportunities, again, looks to be robust. We have secured some orders in rail and transit in Q1. There's been some key LNG wins that have been larger projects in scope and certainly, we've had some opportunities in downstream oil, which we secured in the first quarter as well.

I think the key thing to note is that our backlog is up 27% year-over-year and we -- 13% organically, we've seen a big increase in our -- just the engineering load today, and we're staffing up to be able to respond and get those projects designed and be able to convert that to bills of material and ultimately drive revenue. So that has contributed to the revenue delays in Q1. We've seen that -- those projects begin to translate to revenue in Q2, and we would expect that through Q3 and Q4 in the back half of the year.

I think coming in, we had made some assumptions around tariffs and demand and alike and timing of projects. We were thinking the year might be more front-end loaded. Based on what we're seeing today, it looks to be a more typical revenue distribution we would expect with roughly 44% to 45% of revenues in H1 and 55% to 56% of revenues in H2. And that's actually roughly around the 5-year average for the business.

Appreciate the color, Bruce. And maybe if I could sneak in one more on data center. Obviously, those growth numbers out there, we all know those are huge. So interesting to see the opportunity. I'm just wondering, I guess, one on the load bank, I assume this comes on later in construction when these facilities are coming online. And then any thoughts on go-to-market? Do you need a partner there or some proof points or how are you thinking about it more aggressively?

Yes. So first of all, you're right. These are used -- these are really used in 2 ways. One is they can be installed permanently in the facilities and they're used not only for start-up and commissioning testing, but they're used throughout the life cycle of the asset as they do maintenance on their HVAC or the cooling systems. And also as they expand those facilities as new technologies come in, all of those are opportunities or requirements for additional testing.

So you can see part of this could be earlier in the construction phase. And then there's a lot of these that are used temporarily in the commissioning phase, and we see that through rental houses as well as other big hyperscalers, they'll have their own fleets of this equipment. So it is later in the commissioning phase where we see these -- really, it's used predominantly, so later in the build cycle. For the channels to market, we are going direct globally, but we do have potential for new partners in both the rental and technology space that we're working on developing those relationships today.

Our next question comes from the line of Jon Braatz with Kansas City Capital.

A couple more questions on the data center market. And I think you maybe answered it, I'm not quite sure. But would the customer be maybe the data center or the manufacturer of the cooling system? Would you work potentially in conjunction with the cooling provider?

Yes. So it's really both, and it depends on the specific project. In some cases, it could be some of the hyperscalers. In other cases, it's the HVAC contractor that's responsible for the cooling system. And then in some cases, we're actually going through a rental channel to provide these assets on site for the start-up and commissioning phase. So there's really different channels to market. And it depends on really whether this is being installed permanently in the facility or being used just during the start-up and commissioning phase to test the asset.

Okay. If they continue to use it during the life of the data center, is it 1 unit per data center? Or does data centers acquire -- need multiple units?

Hundreds of units.

Okay. Okay. So what's out there now? What -- how are the data centers using -- what are they using now? What's the sort of the competitive landscape in this product area?

So this is an emerging opportunity. It's nascent, and there are a few competitors out there globally for these liquid load banks more traditionally. There have been resistive and inductive load banks, which are more strictly focused for power distribution testing. This is actually for thermal load testing as well as power testing. And this has really emerged with the advent of liquid cooled data center. So this is fairly new to the market.

Okay. Okay. Okay. Good. And I think you addressed this earlier, but in the best case scenario, how quickly do you think we would begin seeing some meaningful revenues from this new product? Are we 6 months away, 9 months, any indication from you?

Yes. So our goals are to begin to generate revenues from this in the back half of the year and begin to build the backlog going into fiscal '27.

Okay. Okay. Will you separately note some of that -- some of those numbers given...

We will, as we begin to develop the pipeline, close orders and begin to ship, we'll highlight that on a go-forward basis.

There are no further questions at this time. I'd like to pass the call back over to Bruce for any closing remarks.

Yes. Thank you, Alicia, and thank you all for joining today. We appreciate your interest in Thermon, and if we look forward to speaking with you, if we don't talk to you before the next call. So thank you all, and enjoy the rest of your day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.