FPS — FY2026 (ended June 30, 2026) Annual Report Analysis

Revenue nearly doubles on the data-center build-out, but the capacity ramp ate the gross margin

Forgent Power Solutions (NYSE: FPS) makes the electrical distribution equipment — transformers, switchgear, automatic transfer switches, prefabricated "eHouses" and power skids — that moves electricity from the grid into data centers, power plants and factories. In its first annual report as a public company, covering the fiscal year that ended June 30, 2026, revenue rose 89% to $1.42 billion and net income rose more than sixfold. The more interesting number is the one that went the other way: gross margin fell almost two percentage points, because the five new manufacturing campuses that made the growth possible were not yet running full.

Forgent listed on the NYSE on February 6, 2026 at $27.00 per share and did three follow-on offerings in the five months after (at $29.50, $47.00 and $49.00). The fiscal year therefore contains roughly seven months of private-company results and five months of public ones, which matters for how the per-share figures below are read.

The numbers

All figures are for fiscal 2026 (year ended June 30, 2026) versus fiscal 2025 (year ended June 30, 2025).

Notes on the per-share figures: GAAP earnings per share exist only for the post-IPO stub period of February 6 to June 30, 2026, and were $0.30 both basic and diluted, on 243.5 million weighted-average Class A shares. The company's own Adjusted Diluted EPS of $0.68 is calculated on 304.7 million shares — it assumes every Class B share is swapped into Class A — and has no prior-year comparison because the corporate structure did not exist then. Backlog is the dollar value of orders received but not yet shipped and recognized as revenue; the prior-year figure above is implied by the 256% increase management discloses, not separately stated in the filing.

What actually drove the revenue

Growth came from the two most customized parts of the product line, not from volume across the board. Revenue by offering:

Powertrain Solutions — bundles of custom equipment integrated into a single delivered system, skidded or housed together — went from an eighth of revenue to a quarter of it in one year. Management attributes the overall increase to "growing demand for our products across our end markets, particularly with our data center and grid customers, and new campuses commencing production in the current year to meet customer demand." By end market, data centers were about 59% of fiscal 2026 revenue, the grid 21%, industrial 10% and other 10%, with substantially all revenue from North America.

That mix shift is worth pausing on, because it makes the margin story harder rather than easier to explain away. Forgent states plainly that it "typically earn[s] higher profit margins on engineered to order Custom Products and Powertrain Solutions than on Standard Products," and those two categories rose from 91.6% to 94.9% of revenue. Mix moved in the company's favour and gross margin still fell.

Why the gross margin fell anyway

Gross margin — the share of revenue left after the direct cost of building the product, before selling and administrative costs — went from 36.9% to 35.0%. The filing gives three specific reasons, all of them consequences of growing the factory footprint faster than the output: "under-absorbed labor costs related to accelerated headcount growth, under-absorbed fixed overhead relating to new campuses ramping toward their target production rates, and one-time startup costs at new campuses."

"Under-absorbed" is the load-bearing word. A factory's rent, equipment depreciation and salaried staff cost the same whether it runs at 40% or 90% of capacity; when a new plant opens, those fixed costs land in cost of goods sold before the volume does, and margin drops until output catches up. Forgent added 1.8 million square feet — roughly four-fifths of its current 2.3 million square foot footprint — across fiscal 2025 and 2026 under a capacity expansion plan it says was substantially completed in fiscal 2026, and now operates 12 facilities across Minnesota, Texas, California, Maryland and Mexico with about 3,000 full-time and 450 temporary employees. The margin decline is therefore better read as the timing cost of that expansion than as price or competitive pressure, and it should reverse as the new campuses fill — but that is a forecast, not something the fiscal 2026 numbers demonstrate.

Where the earnings leverage came from — and where it didn't

Operating margin improved 3.3 points even as gross margin fell, which means every point of the improvement came from below the gross profit line:

• Selling, general and administrative costs grew slower than revenue (+79.7% to $262.9 million, or 18.5% of revenue versus 19.4%), despite absorbing $58.6 million more payroll, $20.2 million more professional services and $12.9 million of one-time IPO bonuses.
• Amortization of intangibles fell $10.8 million to $47.9 million, "driven by backlog from certain acquisitions being fully amortized in the current fiscal year." This is a non-cash accounting step-down from Forgent's acquisition history, not an operating improvement, and it will not repeat at the same size.

Below the operating line, the 508% jump in net income overstates how much the business itself improved, for two reasons worth separating out:

1. Interest expense carried a one-off. It rose only slightly to $57.1 million, but that includes "the write-off of approximately $10.0 million of deferred financing costs related to refinancing our 2023 Credit Agreement." Strip that out and the ongoing interest burden was closer to $47 million, down from $54.8 million, because the December 2025 refinancing and a June 2026 repricing both cut the rate.
2. The tax rate dropped sharply. The effective tax rate was 16.8% versus 23.4%, helped by the fact that the portion of profit belonging to the non-controlling interest is not taxed at the company level, by favourable discrete adjustments on the 2024 federal return, and by research and development credits. Had fiscal 2026 pre-tax income been taxed at the prior year's rate, net income would have been roughly $97.6 million rather than $106.0 million.

The cleanest read on underlying operating performance is Adjusted EBITDA, which grew 90.9% against revenue growth of 88.5% — that is, the business scaled almost exactly in proportion, with the adjusted margin essentially flat at 22.7%. The company's adjustments are not trivial in size, though: $18.8 million of sponsor fees, $21.2 million of "public company readiness costs," $18.8 million of post-acquisition integration and consulting fees, $10.0 million of equity compensation and $5.4 million of acquisition earnouts. The sponsor fees and IPO-readiness costs genuinely should not recur now that the company is public; the integration and earnout costs will recur if Forgent keeps acquiring, which it lists as a long-term strategy.

Takeaway: The $3.0 billion backlog — up 256% and equal to 2.1 times fiscal 2026 revenue — is the number that matters most, because it converts this year's margin decline from a warning into a timing problem. Forgent has already paid the fixed costs of five new campuses; the orders needed to fill them are signed. The risk is no longer whether demand shows up, but whether the plants can be staffed and ramped fast enough to turn that backlog into revenue at the margins the older plants used to earn.

Cash and the balance sheet: growth is not yet self-funding

Operating cash flow was $109.1 million against $106.0 million of net income — respectable on the surface, but only because customers are pre-paying. Working capital consumed $124.5 million: receivables absorbed $172.7 million and inventory $142.9 million "to support orders in backlog," offset by $153.0 million more deferred revenue (customer deposits taken against that backlog), $68.5 million of payables and $42.8 million of accrued expenses. Against $115.9 million of capital spending, free cash flow was therefore about negative $6.8 million, and cash fell from $111.3 million to $97.5 million.

None of the offering proceeds helped. This is a consequence of the "Up-C" structure Forgent used to go public: the company sits above an operating LLC ("Opco"), and the $491.8 million raised in the IPO plus $1.7 billion from the first two follow-ons were used to buy Opco units from the pre-IPO owners, not to fund the business. The filing is explicit that the company "did not retain any of the proceeds from the sale of Class A common stock by the Selling Stockholders." Public shareholders bought out the sponsor; the factories were funded by debt, customer deposits and operating cash.

Two structural liabilities come with that arrangement and are now on the balance sheet:

• A $338.9 million payable under the Tax Receivable Agreement, which commits Forgent to pay pre-IPO owners 85% of the tax savings it realizes from the share exchanges. Recognizing it required management to conclude it will generate enough future taxable income to use those benefits; the auditor (BDO USA) flagged this as the filing's single critical audit matter. It is a real future cash obligation, roughly the size of one year of Adjusted EBITDA, owed to the sellers rather than reinvested.
• A $281.0 million net deferred tax asset, up from a $63.3 million net liability, arising from the same basis step-up. It is most of the reason total assets grew from $1.54 billion to $2.23 billion.

Debt itself looks manageable. The December 2025 refinancing put $600 million of term loans in place maturing December 2032, repriced downward in June 2026 to SOFR plus 2.25%, with $598.5 million outstanding and the $250 million revolver undrawn. Net of $97.5 million of cash, that is roughly 1.5 times Adjusted EBITDA.

What to watch in fiscal 2027

Forgent gives no formal guidance in this filing, as is normal for a 10-K. What the document does support:

• Absorption is the swing factor for earnings. Capital spending on the expansion is "substantially completed," so fiscal 2027 should see capex moderate while the new campuses' fixed costs are spread over higher volume. If the gross margin does not recover toward the 36.9% of fiscal 2025 as that happens, the explanation for this year's decline stops being a ramp story.
• Backlog conversion, not backlog growth, is the test. Deferred revenue of $263.9 million and $3.0 billion of orders give unusual visibility for a manufacturer, but the company cautions that "orders included in our backlog may not generate margins equal to our historical operating results" and that it has "limited historical experience" judging realization on a combined-business basis — Forgent was assembled from acquisitions beginning in 2023.
• A customer concentration appeared this year. One customer was about 11% of revenue and 15% of receivables in fiscal 2026; in fiscal 2025 no customer exceeded 10% of either. That is the arithmetic of large data-center projects, but it is a new exposure.
• Input costs and Mexico. About a third of the manufacturing footprint (773,000 of 2.3 million square feet) is in Mexico, and the company does not hedge copper, steel or aluminum, relying instead on short-dated quotes and price-adjustment clauses. Tariffs or a commodity spike would hit margins before contracts reprice.
• Dilution continues and controls are untested. A fourth offering closed July 6, 2026 at $49.00 per share, lifting the company's ownership of Opco to 90.18% and Class A shares outstanding to 274.5 million as of September 8, 2026. Separately, this annual report contains no management assessment or auditor attestation of internal control over financial reporting, under the SEC's transition period for newly public companies — so the first real test of Forgent's financial controls is still ahead.

The fiscal 2026 result is what a well-timed capacity bet looks like in its most expensive year: demand confirmed, orders booked, and the profit from them still sitting in backlog rather than in the income statement.