Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
The aggregate market value of the registrant's common equity held by non-affiliates as of September 30, 20172019 was $576,947,503$743,865,220 based on the closing price of $17.99$22.98 as reported on the New York Stock Exchange. Solely for the purposes of this calculation, directors and officers of the registrant are deemed to be affiliates.
As permitted by General Instruction G of Form 10-K, certain portions, as expressly described in this report, of the registrant's Definitive Proxy Statement for the 20182020 Annual Meeting of Stockholders to be filed with the SEC are incorporated by reference into Part III of this Annual Report on Form 10-K.
THERMON GROUP HOLDINGS, INC.
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED MARCH 31, 20182020
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K ("this annual report") includes forward-looking statements within the meaning of the U.S. federal securities laws in addition to historical information. These forward looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are included throughout this annual report, including in the sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and include, without limitation, statements regarding our industry, business strategy, plans, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. When used in this discussion, the words "anticipate," "assume," "believe," "budget," "continue," "contemplate," "could," "should," "estimate," "expect," "intend," "may," "plan," "possible," "potential," "predict," "project," "will," "would," "future" and similar terms and phrases are intended to identify forward-looking statements in this annual report.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows. The statements include but are not limited to statements regarding: (i) our plans to strategically pursue emerging growth opportunities in diverse regions and across industry sectors; (ii) our plans to secure more new facility, or Greenfield, project bids; (iii) our ability to generate more facility maintenance, repair and operations or upgrades or expansions, or MRO/UE, revenue from our existing and future installed base; (iv) our ability to timely deliver backlog; (v) our ability to respond to new market developments and technological advances; (vi) our expectations regarding energy consumption and demand in the future and its impact on our future results of operations; (vii) our plans to develop strategic alliances with major customers and suppliers; (viii) our expectations that our revenues will increase; (ix) our belief in the sufficiency of our cash flows to meet our needs for the next year; (x) our ability to integrate acquired companies; (xi) our ability to successfully achieve synergies from acquisitions; and (xii) our ability to make required debt repayments.
Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, (i) the outbreak of the novel strain of coronavirus (COVID-19); (ii) general economic conditions and cyclicality in the markets we serve; (ii)(iii) future growth of energy, chemical processing and power generation capital investments; (iii)(iv) our ability to operate successfully in foreign countries; (v) our ability to deliver existing orders within our backlog; (iv)(vi) our ability to effectively integrate THS product lines into our existing sales and market channels; (vii) the imposition of certain operating and financial restrictions contained in our debt agreements; (viii) tax liabilities and changes to tax policy; (ix) our ability to bid and win new contracts; (v)(x) our ability to successfully develop and improve our products and successfully implement new technologies; (xi) competition from various other sources providing similar heat tracing and process heating products and services, or alternative technologies, to customers; (vi)(xii) our revenue mix; (xiii) our ability to acquire smaller value added companies; (xiv) changes in relevant currency exchange rates; (vii)(xv) impairment of goodwill and other intangible assets; (xvi) our ability to attract and retain qualified management and employees, particularly in our overseas markets; (xvii) our ability to protect our trade secrets; (xviii) our ability to protect our intellectual property; (xix) our ability to protect data and thwart potential cyber-attacks; (xx) a material disruption at any of our manufacturing facilities; (xxi) our dependence on subcontractors and third-party suppliers; (xxii) our ability to profit on fixed-price contracts; (xxiii) our ability to achieve our operational initiatives; (xxiv) potential liability related to our products as well as the delivery of products and services; (viii)(xxv) our ability to comply with foreign anti-corruption laws; (xxvi) export control regulations or sanctions; (xxvii) changes in U.S. and foreign government administrative policy; (xxviii) geopolitical instability in Russia and Ukraine and related sanctions by the U.S. government; (xxix) our ability to comply with the complex and dynamic system of laws and regulations applicable to domestic and international operations; (ix) our ability to protect dataoperations, including U.S. government tariffs and thwart potential cyber attacks; (x) our ability to continue to generate sufficient cash flow to satisfy our liquidity needs; (xi) a material disruption at anythe United Kingdom’s referendum vote; (xxx) environmental and health and safety laws and regulations as well as environmental liabilities; and (xxxi) climate change and related regulation of our manufacturing facilities; (xii) our dependence on subcontractors and suppliers; (xiii) our ability to obtain standby letters of credit, bank guarantees or performance bonds required to bid on or secure certain customer contracts; (xiv) our ability to attract and retain qualified management and employees, particularly in our overseas markets; and (xv) the extent to which federal, state, local, and foreign governmental regulations of energy, chemical processing and power generation products and services limits or prohibits the operation of our business.greenhouse gases. Any one of these factors or a combination of these factors could materially affect our future results of operations and could influence whether any forward-looking statements contained in this annual report ultimately prove to be accurate. See also Item 1A, "Risk Factors" for information regarding the additional factors that have impacted or may impact our business and operations.
Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required to do so under applicable securities laws.
PART I
References in this annual report to "we," "our," "us," the "Company," or "Thermon" mean Thermon Group Holdings, Inc. and its consolidated subsidiaries taken together as a combined entity. A particular fiscal year is the twelve months ended on March 31 of the given calendar year (e.g. "fiscal 2018,2020," "fiscal 2017"2019" and "fiscal 2016"2018" mean the Company's fiscal years ended March 31, 2018,2020, March 31, 20172019 and March 31, 2016,2018, respectively). Thermon Group Holdings, Inc. is a holding company that conducts all of its business through its subsidiaries, and its common stock is listed on the New York Stock Exchange under the symbol "THR."
ITEM 1. BUSINESS
Business Overview
We are one of the largest providers of highly engineered industrial process heating solutions for process industries. For over 6065 years, we have served a diverse base of thousands of customers around the world in attractive and growing markets, including oil & gas, chemical processing, power generation, transportation, mining and power generation. We are a global leader and one of the few thermal solutions providers with a global footprint.other industrial markets. We offer a full suite of products (heating units, heating cables, temporary power solutions and tubing bundles and control systems) andbundles), services (design optimization, engineering,(engineering, installation and maintenance services) and software (design optimization and control systems) required to deliver comprehensive solutions to some of the world's largest and most complex projects. With a legacy of innovation and sustained investment in research and development, Thermon has established itself as a technology leader in hazardous or classified areas. We serve our customers through a global network of sales and service professionals and distributors in more than 30 countries and through our ten manufacturing facilities on three continents. These global capabilities and longstanding relationships with some of the largest multinational oil & gas, chemical processing, power and engineering, procurement and construction ("EPC") companies in the world have enabled us to diversify our revenue streams and opportunistically access high growth markets worldwide. For fiscal 2018, approximately 63% of our revenue was generated outside of the United States.
During fiscal years 2015 and 2016, we acquired three companies, Unitemp Corporation ("Unitemp"), Sumac Fabrication Company Limited ("Sumac") and Industrial Process Insulators, Inc. ("IPI"), adding complementary products and services to our core thermal solution offerings. Additionally, in October 2017, we completed the acquisition of CCI Thermal Technologies Inc. (now Thermon Heating Systems, or "THS"), allowing Thermon to greatly expand our product offerings and the end markets we serve. We continue to actively pursue both organic and inorganic growth initiatives that serve to advance our corporate strategy.
Our legacy thermal solutions product - also referred to as heat tracing - providesproducts provide an external heat source to pipes, vessels and instruments for the purposes of freeze protection, temperature and flow maintenance, environmental monitoring, and surface snow and ice melting. We offer both electric and steam heat tracing, as both are utilized to a significant extent in our end markets. Customers typically purchase our products when constructing a new facility, which we refer to as "Greenfield projects", or when performing maintenance, repair and operations on a facility's existing heat-traced pipes or upgrading or expanding a current facility, which we refer to collectively as "MRO/UE." A large processing facility may require our heat tracing for a majority of its pipes, with the largest facilities containing hundreds of thousands of feet of heat-tracing cable and thousands of control points. While our products represent a fraction of the total cost of a typical processing facility, they are critical to the safe and profitable operation of the facility. These facilities are complex, with numerous classified areas that are inherently hazardous - and where product safety concerns are paramount. We believe that our strong brand and established reputation for safety, reliability and customer service are critical contributors to our customers' purchasing decisions.
Our customers' need for MRO/UE solutions provides us with attractive recurring revenue streams. Customers typically use the incumbent heat tracing provider for MRO/UE projects to avoid complications and compatibility problems associated with switching providers. We typically begin to realize meaningful MRO/UE revenue from new Greenfield installations one to three years after completion of the project as customers begin to remove and replace our products during routine and preventative maintenance on in-line mechanical equipment, such as pipes and valves. As a result, our growth has been driven by new facility construction, as well as by servicing our continually growing base of solutions installed around the world, which we refer to as our installed base. Approximately 63%60% of our revenue for fiscal 20182020, excluding THS,CCI Thermal Technologies Inc., now Thermon Heating Systems ("THS"), was derived from such MRO/UE activities.
In April 2015, we expanded our product offerings beyond our legacy heat tracing products and now offerto include temporary electrical power distribution products through our acquisition of Sumac product line. SumacFabrication Company Limited ("Sumac"). These temporary electrical power distribution products (branded as "Thermon Power Solutions") are sold in many of the same markets as our thermal solution offerings, which we believe will provideprovides an attractive complementary offering to our customers that engage in new facility construction as well as maintenance, turnaround and expansion activities.
Our newest industrial process heating offerings - made possible through the acquisition of THS in October 2017 - give us the ability to access a much broader footprint of a typical refining or heavy manufacturing facility where our legacy products have generally been required. With our full suite of heating products, we can now extend well beyond the external heating of pipes offered by heat tracing. Our family of environmental heating products (branded as “Ruffneck” and “Catadyne”) range from electric or gas-powered space heating for personnel operating in harsh and hazardous environments to specific components in the same environments that need special protection. THS also offers a broad spectrum of capabilities in the process heating line.
Immersion, circulation, and other highly-engineered forms of process heating (branded as “Caloritech”) protects process fluids as they reside in tanks or vessels or in-transit through the plant. One can think of our legacy capabilities as heating “from the outside,” whereas our additional capabilities provide us the products to heat “from within.” THS holds an “N-stamp,” or Nuclear Component Certification, allowing us to serve the nuclear power sector with heating and filtration products. These highly specialized filters use advanced mediums and specialized metals to perform under extreme heat and pressure. These products are branded as “3L Filters.” Lastly, our “Fastrax” and “Hellfire” lines, as well as some “Caloritech” products,we provide a full-spectrum offeringof heating products like our “Hellfire”, “ArcticSense” and some “Caloritech” offerings to the rail and transit industry. In both rolling stock and rail infrastructure, THS is a market leader in providing heat to rail cars, tracks, and switches throughout the world.
Our corporate offices are located at 100 Thermon Drive, San Marcos, TX 78666.7171 Southwest Parkway, Building 300, Suite 200, Austin, Texas 78735. Our telephone number is (512) 396-5801.690-0600. Our website address is www.thermon.com. Copies of the charters of the committees of our board of directors, our code of business conduct and ethics and our corporate governance guidelines are available free of charge on our Investor Relations website located at http://ir.thermon.com. All reports that we have filed with the Securities and Exchange Commission ("SEC"), including this Annual Report on Form 10-K and our Current Reports on Form 8-K, can be obtained free of charge from the SEC's website at www.sec.gov or through our Investor Relations website. In addition, all reports filed with the SEC may be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549-1090. Information regarding the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0330. None of the information on our website or any other website identified herein is incorporated by reference in this annual report and should not be considered a part of this annual report.
Company History
Thermon, Inc., our principal operating subsidiary in the United States, was founded as a partnership in October 1954 and later incorporated in Texas in 1960. At that time, our primary product was a thermally conductive heat transfer compound invented by our founder, Richard Burdick. Under Mr. Burdick's leadership, we experienced steady growth by diversifying our products and expanding our geographic reach. Mr. Burdick and his family maintained a controlling interest in us until August 2007, when the controlling interest was sold to an affiliate of the Audax Group private equity firm. During Audax's tenure as our majority owner, we positioned ourselves to take advantage of rising demand in the energy end market and secured significant capital projects.
On April 30, 2010, an investor group led by entities affiliated with CHS Capital LLC and two other private equity firms, which we refer to collectively as our "former private equity sponsors", acquired Audax's controlling interest in us. The acquisition and related transaction expenses were financed through the issuance of senior secured notes and an equity investment by our former private equity sponsors and certain members of our current and former management team. As used in this annual report, the "CHS Transactions" refer collectively to such acquisition, the equity investment in us by CHS, our other former private equity sponsors and certain members of our management team and related financing transactions.
In May 2011, we completed the initial public offering of our common stock (or "IPO"), and our common stock became listed on The New York Stock Exchange under the ticker symbol "THR." Our former private equity sponsors sold shares of our common stock in both the IPO and a secondary public offering in September 2012. As of March 31, 2013, our former private equity sponsors had sold or otherwise disposed of all of their shares of common stock in the Company.
On March 2, 2015, we acquired substantially all of the operating assets and assumed certain operating liabilities of Unitemp located in Cape Town, South Africa in a $3.9 million cash transaction. Unitemp, formerly a distributor of Thermon's thermal solutions in South Africa, offers heating, sensing, portable instruments, monitoring and control solutions to industrial customers throughout Sub-Saharan Africa. On April 1, 2015, we acquired a 75% controlling interest in the business previously operated by Sumac for approximately $11.0 million in cash and up to $5.9 million of potential additional contingent cash consideration, which was settled for $5.8 million in fiscal 2017. Sumac is based in Fort McMurray, Alberta, Canada and designs and manufactures temporary electrical power distribution equipment that is used in hazardous-location and general purpose areas within industrial facilities. On JulyDuring the fiscal year ended March 31, 2015,2020, we acquired the remaining 25% non-controlling interest for $4.5 million and hold 100% of the capital stockequity interest of IPI, an insulation contractor located in Port Neches, Texas serving the U.S. refining, petrochemical, power and energy, marine and pulp and paper industries, in a $21.8 million cash transaction. IPI has a significant presence in the Texas and Louisiana Gulf Coast region.Sumac.
In October 2017, we, through a wholly-owned subsidiary, acquired 100% of the equity interests of CCI Thermal Technologies Inc. and certain related real estate assets for $262.0$262.4 million CAD (approximately $204.2$204.6 million USD at the exchange rate as of October 30, 2017) in cash. Such subsidiary and CCI Thermal Technologies Inc. amalgamated immediately after the closing of the acquisition to form Thermon Heating Systems, Inc. ("THS"), an indirect, wholly-owned subsidiary of the Company. THS is engaged in industrial process heating, focused on the development and production of advanced heating and filtration solutions for industrial and hazardous area applications and is headquartered in Edmonton, Alberta,Oakville, Ontario, Canada. THS markets its products through several diverse brands known for high quality, safety and reliability, and serves clients in the energy, petrochemical, electrical distribution, power, transit and industrial end markets globally. We believe we will behave been able to leverage our existing global sales force to further expand the reach of THS's product offerings.
Industry Overview
We estimate that the market for industrial process heating design and parts was approximately $3.2$4.0 billion in annual revenue in 2017. With our2019. The October 2017 acquisition of THS our addressable market in fiscal 2018 grew by almost $1.0 billion in annual revenue, consisting of the process heating ($800 million) and transportation ($180 million) industries. This diversified theThermon's product and service mix to encompass the broader industrial process heating industry, which includes industrial heat tracing. We estimate that the industrial heat tracing market is composed of approximately 60% electric heat tracing and 40% steam heat tracing. While some environments welcome a conversion to electric heat tracing, a significant number of applications will remain protected by steam - due to both safety and the fact that many processes generate steam as a by-product, making it readily available. The industrial electric heat tracing industry is fragmented and consists of more than 30 companies that typically only serve discrete local markets with manufactured products and provide a limited service offering. The market for steam heat tracing solutions is equally as fragmented, but served by fewer companies, as the applications can be extremely high-temperature - requiring specific domain knowledge and manufacturing and installation techniques that are unique. Much like electric and steam heat tracing, the global process heating market is highly fragmented. Industrial process heating providers differentiate themselves through the quality and reputation of their products, the length and quality of their customer relationships and their ability to provide comprehensive solutions. Large multinational companies drive the majority of spending for the types of major industrial facilities that require process heating, and we believe that they prefer providers who have a global footprint and a comprehensive suite of products and services. We believe we are one of only a few companies that meet these criteria.
The major end markets that drive demand for process heating include oil & gas, chemical processing and power generation. We believe that there are attractive near-to medium-termlong-term trends in each of these end markets.
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· | Oil & Gas. Process heating is used to facilitate the processing, transportation and freeze protection of energy products in both upstream and downstream oil and gas applications. According to the International Energy Agency ("IEA"), natural gas supplies 22% of the energy used worldwide, and makes up nearly a quarter of electricity generation and plays a crucial role as a feedstock for industry. Also, IEA estimates that global oil and gas upstream capital spending will increase over 5% in 2018. The oil and gas end market accounted for approximately 38% of the total market for industrial process heating in 2018,2019, or approximately $1.2$1.5 billion in revenue. As globalGlobal oil prices continuehave significantly declined in the last twelve months to recoverthe lowest levels on record due to the impact of both reduction in demand due to the COVID-19 pandemic as well as the current over-supply from oil producing regions. Customers have responded with reduced capital spending forecasts in the recent depression, Thermon is well-positioned to take advantage of the near-to medium-term growth trends associated with this primary end market.near term. |
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· | Chemical Processing. Process heating is required for temperature maintenance and freeze protection in a variety of chemical processing applications. Factors that may impact process heating demand in chemicals end markets include the rapid industrialization of the developing world, a shift in base chemical processing operations to low-cost feedstock regions, a transition of Western chemical processing activities from commodity products to specialty products and environmental compliance. The IEA estimates that new global petrochemicals capacity will account for 25%33% of oil-demand growth by 2023.2030. We estimate that the chemicals end market (including petrochemical) accounted for approximately 14% of the total market for industrial process heating in 2018,2019, or approximately $460$560 million in revenue. |
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· | Power Generation. Process heating is required for high-temperature product maintenance, freeze protection and environmental regulation compliance in coal and gas facilities and for safety systems in nuclear facilities. An important driver of demand for process heating solutions for power generation is increasing demand for electricity worldwide. We estimate that the power generation end market accounted for approximately 7% of the total market for industrial process heating in fiscal 2018,2019, or approximately $230$280 million in revenue. According to the IEA's World Energy Outlook 2017,2019, electricity currently accounts for 19% of final energy consumption, a share that is expected to increase as demand growth for electricity outpaces all other fuels. According to the rising force among worldwide end-usesIEA's World Energy Outlook 2018's Stated New Policies Scenario, electricity will account for 24% of energy, accounting for 40% of the estimated increase in globalfinal energy consumption in 2040 - the same share of growth that oil accounted for during the last 25 years.2040. |
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· | Transportation. Process heating is required to safely clear and heat rail switches, melt snow and ice from platforms, and provide comfort heating and defrosting in rolling stock. With over 11.1 million kilometers of operational railway in the world, it is still one of the most economical and safe solutions for passengers and products globally. According to an estimate by IEA, based on International Union of Railways ("UIC"), Urban, passenger and freight rail continues to grow on the same curve as global gross domestic product, or GDP.activity will more than double by 2050 given current trends. Of this growth, the commercial rail and transit sector represents the largest increase at approximately 8.9% through 2028. We estimate that our transportation industry end markets accounted for approximately 6% of the total market for industrial process heating in fiscal 2018,2019, or approximately $180$240 million in revenue. |
Segments
In connection with acquisitions made since fiscal 2015, the Company reviewed its determination of segments. Previously, we aggregated geographic markets into one reportable segment. Based on our review, we revised our segment reporting toWe operate in four reportable segments based on four geographic countries or regions:regions in which we operate: (i) United States and Latin America ("US-LAM"), (ii) Canada, (iii) Europe, Middle East and Asia.Africa ("EMEA") and (iv) Asia-Pacific ("APAC"). Within our four reportable segments, our primarycore products and services are focused on thermal solutions primarily related to the electrical heat tracingindustrial process heating industry. Each of our reportable segments serves a similar class of customers, including large EPCengineering, procurement and construction companies, international and regional oil and gas companies, commercial sub-contractors, electrical component distributors and direct sales to existing plant or industrial applications. Profitability within our segments is measured by operating income. Profitability can vary in each of our reportable segments based on the competitive environment within the region, the level of corporate overhead, such as the salaries of our senior executives, and the level of research and development and marketing activities in the region, as well as the mix of products and services. Since March 2015, we have acquired THS, Unitemp, IPI Sumac and THS.Sumac. THS (formerly known as CCI Thermal Technologies Inc.) develops and produces advanced industrial heating and filtration solutions for industrial and hazardous area applications that closely align with Thermon's core business and serves similar end markets in North America. As such, we have elected to report THS's operations through our US-LAM and Canada reportable segments. Both Unitemp and IPI offer thermal solutions and have been included in our EuropeEMEA and United StatesUS-LAM reportable segments, respectively. Sumac provides temporary power products that differ from our core thermal solutions business. As operating results from Sumac comprise less than 10% of our total sales and operating income, Sumac has been aggregated in our Canada segment. THS, recently acquired in October 2017, has similar economic characteristics as the core Thermon process heating operations. Management intends to integrate THS into the existing Thermon operations as soon as practicable. Therefore, THS has been aggregated in our Canada and United States segments. See Note 17,18, "Segment Information" for financial data relating to our four reportable geographic segments.
Products, Services and ServicesSoftware
Our products include a wide range of electric heat tracing cables, steam tracing components, tubing bundles, and instrument and control products, as well asprocess heaters, environmental heaters and other complementary product lines acquired in recent acquisitions,products and services, including:
self-regulating and power limiting heating cables made with proprietary materials technology, which automatically increase or decreaseregulate heat output as pipe temperature changes as well as constant wattage heating cables;
mineral insulated, or "MI," cable, which is a high performancehigh-performance heat tracing cableproduct made without polymers for generating high temperatures that is typically used inthe highest temperature applications and harsh environments;
long-line skin effect trace heater,heating systems, which can heat lines in excess of 15 miles long from a single power point;
heat traced tubeand insulated tubing bundles for environmental gas sampling systems;
heat transfer compounds and steam tracerstubing for comprehensive steam tracing solutions;
tank heating and insulation systems;
control and monitoring systems for electric tracing of pipes, tanks, hoppers and instrument sampling systems;
turnkey solutions that provide customers with complete solutionscustom builds for heat tracing including applications leveraging the latest connected and secure software, firmware, and electronics technologies;
control and power distribution panel and skid assemblies;
project engineering and management services delivering optimized engineering drawing and specification packages for heat trace systems for complex industrial facilities;
design optimization,automation software that automates, optimizes and ensures accuracy in the generation of thousands of installed CAD drawings, bills-of-materials and specification typical of a large project;
construction and field services for the installation, operation and ongoing maintenance;maintenance of heat trace systems;
products and services from the THS transaction, which include high efficiency explosion-proof gas catalytic heaters, convection heaters designed for rugged industrial applications, electric heaters engineered for industrial processes and environments, advanced gas and liquid filtration systems and highly efficient heat transfer systems for rail track and switch equipment; and
products and services from the Unitemp acquisition,Thermon Power Solutions, which include heating, sensing, monitoring and controlling tools; and
products from the Sumac acquisition, which includeincludes equipment for temporary electric power distribution and lighting products used in energy infrastructure construction projects and maintenance/turnaround projects.
Electric Heat Tracing Applications
We provide and manufacture criticalall services and components for the installation and operation of an electric heat tracing system, including heating cables, control and monitoring systems, panel and heating systems for tanksskid assemblies, project engineering and hoppers.management services and construction and field services. We customize these products to fit the specific design parameters forrequirements of each client's installation.facility. We offer various electric heating cables, including conductive polymer self-regulating heating cables, power limiting cables, constant wattage heating cables and MI high temperature heating cables.
Self-regulating heating cables- Our self-regulating heating cables are built with proprietary advance polymer compounds that leverage the latest material technology. They are flexible andcut-to-length heading cables engineered to automaticallyinherently increase or decrease heat output as pipe or vessel temperature changes. BSX™ self-regulating cables are designed to provide freeze protection or process temperature maintenance to metallic and non-metallic piping, vessels and equipment. HTSX™ self-regulating heating cable is suitable for heat tracing applications involving crude oil and most chemicals. USX™ offers ultra-high temperature self-regulating heat tracing cable that is both easy to install and provides industry leading performance and reliability.
Power-limiting and constant watt heating cables- Power limiting and constant watt heating cables are flexible parallel resistance cables used to heat trace piping in lengths longer than 500 feet. Such intermediate lengths of pipe are commonly found in pipe racks that connect process units within a plant. These heaters allow longer lengths between power supply points than self-regulating cables. HPT cables offer a power limiting feature along with larger power bus wires to allow delivery of an increased heat output over that found with self-regulating cables.
TEK™ HTEK™ and MIQ™ cables- The TEK™ and HTEK™ series resistance, constant watt heating cables are used where circuit lengths exceed the limitations of parallel resistance heating cables. By using series constant watt heating cables, a single power supply point can energize circuit lengths up to 12,000 feet. MIQ™ high performance mineral insulated heating cables made without polymers and are used for highthe highest temperature maintenance, high temperature exposure and/or high watt density applications that exceed the limitations of thermoplastic insulated cables. MIQ™ cables are composed of a high nickel/chromium alloy sheath, which is well-suited for high temperature service and offers high resistance to stress corrosion in chloride, acid, salt and alkaline environments.
ThermTracTM cableslong line heating systems- A ThermTrac skin effect system provides a cost-effective alternative to conventional resistance heat tracing on long pipelines by eliminating the need for an extensive power distribution system. A ThermTrac system is designed to heat a pipeline in excess of 15 miles long from a single power point. The versatility of the system makes it well-suited for temperature maintenance, freeze protection and heat-up applications. The system generates heat by the resistance of the electrical current flowing through both the conductor and the inner skin of a heat tube.
Steam Heating Solutions
In 1954, we began manufacturing heat transfer compounds that greatly improved the heat delivery of steam tracing systems. Today, in addition to the broad range of heat transfer compounds, we also offer steam tracers and tubing bundles that provide our customers with comprehensive steam tracing solutions. We manufacture our heat transfer compounds in various configurations so that they can be applied to different surfaces, which increases the heat transfer rate of steam or fluid tracers.
Our heat transfer compounds create an efficient thermal connection between the heat tracing system and the process equipment. Through the elimination of air voids, heat is directed into the pipe wall primarily through conduction rather than convection and radiation. This requires fewer tracing pipes to maintain specified temperature requirements, substantially reducing operating and investment cost. Steam tracing offers the most cost effectivecost-effective solution for certain heavy oil and natural gas processing applications. We have also patented our SafeTrace® steam tracing products for use in applications with stringent temperature requirements.
Currently, we are adding capabilities to include full steam heating solutions. ThisControls, Monitoring and Software
Our solution includes smart, connected devices and software systems for the design, engineering, procurement, integration, installation,control and insulationmanagement of steam systems that include the steam supply manifold, the condensate return manifold, and the tubing, valves, fittings,a customer’s heat trace system. We offer a range of TraceNet™ control products from a single point controller to a high capacity multi-point control panel. All our controllers and other components that exist in-between.panels can be networked together via wired or wireless communication into a large
Temperature Controls and Monitoring
We supply a wide range of control and monitoring products, from simple mechanical thermostatssolution with capacity to sophisticated microprocessor-basedmanage over 30,000 heat trace circuits within the same customer facility. Our systems that control and monitor the status of electric heat tracing systems. We provide individual units for smaller projects, as well as multi-point controllers that can be integrated into and communicate with a plant'splant’s central data management and control system.
We offer a varietyOur controls and plant management software are built upon internet of temperature control monitoring systems as part of our TraceNet™ family of controllers. TraceNet™ controllers allow the operator to assess operating control parameters and operating conditions throughout the heat tracing system network utilizing our TraceNet™ control solutions. Our controllersthings (IOT) technology that can communicate with up to 4,096 controllers over 32 channels, allowing up to 15,000 heat trace circuits to be monitoreddeployed locally within the same network.secure plant environment. Our smart devices utilize the latest touch technology and industry leading intuitive user interfaces. Users familiar with modern mobile phones and tablets find our latest controllers intuitive to learn and use because of the similarities. These technologies also form a platform for offering easy automatic upgrades and additional value-added services. We actively seek to expandbelieve our TraceNet™ product offerings with the goal of offering the customerscontrol solutions are the most advanced, reliable and easy-to-use monitoring systemssolutions in the marketplace.
Instrumentation
We specialize in pre-insulated and heat-traced tubing bundles with accessories that offer a complete instrument heating system. Our complete range of products includes both electric- and steam-heated bundles containing various types of tubing (such as copper, stainless steel and polymer) and insulation to meet the needs of process and environmental applications. Such applications include transporting samples of gas or liquid in our customized, temperature-controlled tubing bundles to an instrument that typically performs an analysis for purposes of process management or ensuring compliance with internal requirements or applicable environmental laws and regulations.
Hopper Heating
The HT Hopper Heating Module is a self-contained heater designed for operation on surfaces prone to vibration. In cement plants and fossil fuel power facilities, hoppers facilitate the filtering of a facility's ash emissions. Hopper heaters maintain the walls of the hopper at a temperature above the dew point to prevent moisture from combining with ash, thus clogging the filtering equipment. We engineer each system based on the heating requirements of the specific application. The HT Hopper Heating Module has multiple flow paths for electrical current, which eliminates the burnout potential common with series wire-based designs. Protection of the heating element from vibration is accomplished with a cushion layer of insulation that also directs the flow of heat from the module to the surface being heated. The module provides mechanical protection during handling, installation and operation, and its low profile design helps facilitate installation.
TurnkeyProject Services
We provideAs a manufacturer and global expert in process heating solutions, our EPC and end user customers with complete turnkey solutions for their heat tracing needs. often times rely on Thermon to deliver a range of project services, which may include:
•Engineering and design
•Procurement and project management services
•Turnkey services include project planning, product supply, engineering services, system integration,construction installation commissioning and maintenance. Specialized, turnkey heat tracing services meet the needs of many of our industrial customers who have downsized and outsourced their non-core competencies and are requiring their vendor base to have multi-service and multi-site capabilities.
•Recurring facility assessment or audit
•Maintenance services
Our turnkey business in the United States is based in Houston, Texas, Port Neches, Texas and Baton Rouge, Louisiana. During fiscal 2018, we workedcustomers rely on more than 310 turnkey projects, with the largest turnkey project accounting for approximately $5.4 million in revenue. Engineering and construction companies in the United States often subcontract their heat tracing projects to outside parties, including us, because of the field's highly specialized nature.
In July 2015, we acquired IPI, an insulation contractor located in Port Neches, Texas. Prior to the acquisition, IPI was formerly our customer and a subcontractor to the Company for 17 years. IPI enhances our turnkey product offerings and strengthens our presence in the Gulf Coast region, as IPI serves many of the same end-markets as those served by our core thermal solutions business.
Design and Engineering Services
We offer heat tracingThermon’s design and engineering expertise on projects around the world. These services during every stage of a project. Providing design services withinare combined with our heat tracing and process heating products under one contract to deliver an integrated solution that improves the quote process is a core element of our business strategy.overall value proposition for the customer. By delivering design drawings in conjunction with early project specifications, we can determine the customer's heat tracing requirements, which leads to subsequent sales of heat tracing productsaddress our customer needs for that project.
We are focused on providing comprehensive solutions to fulfill the heat tracing needs of our customers. As a manufacturer of a wide range of heat tracing products, we believe that we are well-positioned to evaluate and optimize a system
for a customer without bias towards a particular product, and rely on more than 60 years of experience to craft the most appropriate heat tracing solution for a customer's specifications and needs.
We provide design and engineering services to our customers through our full-time staff of engineers and technicians. Through the design and engineering process, our engineers and technicians located throughout the world provide our customers with design optimization studies, product selection assistance and computer-generated drawing packagespackages. Often these are new facilities or Greenfield projects but they may also include upgrades or expansions and detailed wiring diagrams.maintenance projects where our existing customers are upgrading their facilities. Project services are important to our business model and growth strategy to secure Greenfield contracts that both establish and enhance new and existing customer relationships.
Our services are automated by custom software technology. We have invested over years to develop software that assists our experts in the design, specification, and automatic creation of CAD drawings. Our project engineering staff empowered with this software technology can execute the largest projects, including the creation of thousands of drawings, accurately and with efficiency that cannot be matched by manpower alone.
Project services also include full turnkey solutions whereby we contract to install a complete heat tracing or process heating solution. We refer to this as our construction business which is primarily located in the southern United States near many of our customers in the downstream and mid-stream petroleum, chemical and power generation industries.
Thermon Heating Systems (THS) Products
In October 2017, we acquired 100% of the equity of CCI Thermal Technologies Inc. and immediately rebranded as Thermon Heating Systems, Inc. ("THS"). THS develops, designs and manufactures the following high quality and durable advanced industrial heating and filtration solutions:
Environmental heating (“Ruffneck”(branded as “Ruffneck” and “Catadyne”) - which provides electric or gas-powered space heating for both hazardous and non-hazardous areas;
Process heating (“Caloritech”(branded as “Caloritech”) - provides a myriad of highly-engineered heating products to multiple end-markets with the purpose of heating and maintaining a process fluid at specified temperatures. Some products also serve the transportation sector with both radiant and convection-style heating;
Filtration (“3L(branded as “3L Filters”) - which provides highly-specialized filtration solutions for the most stringent environments, including the nuclear industry; and
Transportation (“Fastrax”(branded as “Hellfire”, “ArcticSense” and “Hellfire”)other) - provides heating applications to both rolling stock (rail cars) and rail infrastructure (track and switch).
Sumac TemporaryThermon Power ProductsSolutions
In April 2015, we acquired a 75% controlling interest in the business previously operated by Sumac. Sumac's line ofThermon Power Solutions products and solutions are designed to provide a safe and efficient means of supplying temporary electrical power distribution and lighting at energy infrastructure facilities for new construction and during maintenance and turnaround projects at operating facilities. SumacThermon Power Solutions products include power distribution panels, master/slave sub-panels, power cords and lighting fixtures - and are sold to end-users operating in many of the same markets as our core thermal solutions, including heavy industrial settings, oil and gas refining and upgrading, power generation plants, petrochemical production facilities and mining operations. A number of these products are engineered-to-order based on proprietary designs.
Sumac'sThermon Power Solutions products are designed around the "plug and play" concept and differentiated from others in the industry through unique safety features that include arc flash protection i.e., protecting users while making and breaking connections under electrical load, and offering ground fault protection. Certain products are certified to safely operate in hazardous areas such as live plant environments that process combustible chemicals and materials. Sumac'sThe suite of Thermon Power Solutions products is designed to allow for quick reconfigurations of electrical power distribution panels to meet the changing needs of contractors as work moves from one phase to the next during construction and facility maintenance operations. These features help our customers save considerable time on the job site and realize significant cost savings while maintaining the highest level of safety. We believe we will be able to leverage our existing global sales force to further expand the reach of Sumac's product offerings.
Manufacturing and Operations
We have ten manufacturing facilities on three continents. We manufacture the products that generate a majority of our total sales at our principal facility in San Marcos, Texas including flexible heating cables, heat tracing compoundcontrol systems and tubing bundles. Our facilities are highly automated, which reduces labor costs. Our facilities incorporate numerous manufacturing processes that utilize computer-controlled equipment and laser technology. We maintain a ready supply of spare parts and have on-site personnel trained to repair and perform preventative maintenance on our specialized equipment, reducing the likelihood of long termlong-term interruptions at our manufacturing facilities. Our manufacturing facilities are equipped to provide us with maximum flexibility to manufacture our products efficiently and with short lead times. This in turn allows for lower inventory levels and faster responses to customer demands.
Our flexible heat cable products are manufactured in San Marcos, Texas. The manufacturing building has approximately 48,000 square feet of floor space, including offices. The facility has excess capacity and will support growth of our primary heat cable sales to an aggregate revenue capacity of $400 to $500 million, depending on pricing and product mix.
Our electronic cross-linking facility, which we refer to as our "ECLF," is also located at the San Marcos facility. Cross-linking enhances the thermal, chemical and electrical stability of our low-temperature self-regulating heater cables. By performing cross-linking in-house, we condense the overall manufacturing cycle by approximately six weeks. This enhances our ability to ensure a high level of product quality and to better control the production process.
Our pre-insulated tubing products are manufactured in our facilities in San Marcos and the Netherlands. The majority of our pre-insulated tubing product is custom ordered and made to customers' specifications in a two-part process. The thermal insulation is first applied over the heating cable and process tubing, and a protective plastic outer jacket is extruded onto the bundle to protect the insulation.
During fiscal 2016, we completed an expansion of our primary pre-insulated tubing product manufacturing plant located in San Marcos, Texas, which significantly increased our production capacity for our instrumentation tube-bundle product line. The total cost of the expanded facility, including the purchase of new capital equipment, was $3.5 million.
Our MI cable manufacturing facility in Calgary,Orillia, Canada gives us adequate capacity to service the demands of clients in the oil sands projects of Western Canada in a time efficient manner. The facility's strategic location has enabled us to expand our sale of MI cable which is well-suited for high temperature applications and harsh, arctic environments, into a global business.environments.
THS products are currently fabricated at fivefour THS facilities in North America: Edmonton, Oakville, and Orillia in Canada, and Denver and Houston in the United States. THS maintains state of the art facilities and maintains several recognized facility certifications.
Sumac'sThermon Power Solutions products are currentlyprimarily fabricated at a facility in Fort McMurray, Alberta, Canada. Sumac'sOur customer base for Thermon Power Solutions has primarilyhistorically been in the oil sands region of Alberta, Canada, which is a remote location. We are in the process of expanding Sumac's temporary power solutionbut has expanded its presence in the U.S. gulf-coast region with the addition of fabrication capacity at our San Marcos, Texas facility.
In 2017, we completed construction of our newest manufacturing facility in Russia, Thermon Eurasia LLC, a wholly owned indirect subsidiaryRussia. This facility has begun local production of key products in the greater Moscow region. The new production facility, approximately 20,300 square feet, focuses on manufacturing, fabrication, packaging and quality control of high-temperature self-regulating heating cables, low-temperature self-regulation heating cables, series constant watt cables, mineral insulated heating circuits, power and splice boxes, mechanical thermostats, electronic control modules, heat tracing kits and accessories, control panels and power distribution boards.THS Ruffneck heaters. The facility has helped us better serve our customers in the region through a comprehensive local suite of heat tracing products and services, including sales support, logistics, engineering, technical support, project management, and field services for electric and steam heat tracing, as well as other industrial process heating applications. We believe Russia and the adjacent Eurasian countries represent a very important and promising market opportunity for Thermon, and the new production facility is a key strategic investment. Our capital investment for the new facility was $1.0 million.
We maintain quality control testing standards in all of our manufacturing operations and perform various quality control checks on our products during the manufacturing process. We believe that our highly automated manufacturing process and multiple quality control checkpoints create high levels of operational efficiency.
Purchasing Strategy- Our critical raw materials include polymers, graphite, copper and stainless steel. For most of these materials, we purchase from multiple suppliers in order to avoid any potential disruption of our manufacturing process. For a small number of raw material items that require specific quality specifications, we have single source supply arrangements. We manage the inherent supply risk through purchase contracts and the maintenance ofincreased safety stock levels at all times. We evaluate pricing and performance of all suppliers annually. For our low-volume custom-built electronic controller components, we select a single supplier based on past performance reliability and monitor the process closely as volumes are too low to divide this product over multiple suppliers. Our purchase specifications are usually based on industry or manufacturer standards. Testing of the raw materials is performed and documented by our suppliers and is reviewed by us at the time of receipt.
Distribution- Our primary distribution centers are located in San Marcos, Texas, Calgary, Alberta, Edmonton, Alberta and the Netherlands. Inventory is typically shipped directly from these distribution centers to customers, the construction site or our regional sales agents or distributors. Our sales agents may maintain "safety stocks" of core products to service the immediate MRO/UE requirements of customers who are time-sensitive and cannot wait for delivery from one of the central distribution centers. In the United States, a network of agents maintains safety stocks of core products. In Canada, customers are serviced from the central distribution center in Calgary. THS maintains a sufficient supply of inventoried catalog stores at all five THS locations to quickly service customers' needs. Highly customizable engineered products are primarily manufactured out of the Oakville, Canada location. In Europe, customers are serviced from the central distribution center in the Netherlands. In Asia, safety stock of materials are kept in Yokohama, Japan; Seoul, Korea; Shanghai, China; Pune, India; and Melbourne, Australia. Safety stocks are also warehoused in Moscow, Russia, Mexico City Mexico and Rio de Janeiro, Brazil. We expect to utilize warehouses that have been added through the acquisition of Sumac, IPI and Unitemp in Fort McMurray, Alberta, Canada, Port Neches, Texas and Cape Town and Johannesburg, South Africa, respectively, to store inventory for sales to existing Sumac, IPI and Unitemp customers.Mexico.
In April 2015, we completed the expansion of our primary distribution center located in San Marcos, Texas at a total cost of $3.9 million including equipment. The expansion has significantly increased our storage capacity, reduced outside storage costs and consolidated warehouse operations for improved efficiencies.
Customers
We serve a broad base of large multinational customers, many of which we have served for more than 60 years. We have a diversified revenue mix with thousands of customers. None of our customers represented more than 10% of total revenue in fiscal 20182020.
Sales and Marketing
Our direct sales force is focused on positioning us with major end-users and EPC companies during the development phase of Greenfield projects with the goal of providing reliable, cost-effective process heating solutions. We utilize a network of more than 100 independent sales agents and distributors in over 30 countries to provide local support to customer facilities for MRO/UE. We actively participate in the growth and development of the domestic and international electrical standards established in the countries in which we sell products. We believe that we have established credibility as a reliable provider of high quality
high-quality process heating products. In addition, we believe that our registered trademarks in the United States and numerous additional brand names are recognized globally, giving us excellent brand recognition.
Standards and Certifications-WeCertifications- Thermon’s research and development practices ensure our product designs are validated to market requirements and verified to comply with applicable industry standards. We continually test our products through a quality control process to demonstrate that they can withstand harsh operating environments. Our products and associated design practicesThey are subjected to various tests, including heat output, thermal stability and long-term aging, with the goal of producing products capable of performing at or beyond the expectations of our customers. All products are further tested and certified for global use by various approval agencies, such as UL, CSA, FM, and ETL to verify compliance with applicable industry leading international standards.
We evaluate ourIn order to support the design and development of industrial products rated for electrical safetyoperation in potentially hazardous environments, Thermon holds quality system approvals which employ the appropriate oversight requirements. To support the international business, Thermon is audited annually by an Ex Certification Body such as DEKRA, and we hold a Quality Assurance Notification and Quality Assurance Report to IEC/ISO 80079-34. To support the North American business, Thermon is audited quarterly by many nationally recognized test labs including but not limited to UL, CSA, FM, and ETL to OSHA and Standards Council of Canada requirements. In addition, Thermon also pursues various regional and maritime certifications such as DNV, ABS, EAC, KOSHA and many more. All these oversight requirements environmental assessmentsare in addition to ISO 9001, and market based assessmentsallow Thermon to continue to produce safe, reliable products certified for operating in potentially hazardous environments.
Over the particular applications and harsh climates thatlast three decades Thermon services. Our products comply withhas made significant investments to actively participate in standardization at the national and international heat tracing industry standardslevel. We are active in several committees such as ANSI/IEEE-515, ANSI/IEEE, 515.1, ANSI/IEEE-844, UL 508A, UL 698, UL 1030the National Electrical Code (NEC), Canadian Electrical Code (CEC), American National Standards Institute (ANSI), National Electrical Equipment Manufacturers Association (NEMA), and UL 499the International Electro technical Committee (IEC). We leverage our extensive expertise and knowledge in industrial process heating technology to continually improve the United States, Canadian Standards Association 130.03, 72, 46, 88, 14 and 30 in Canada; and International Electrical Commission IECx 60079-30-1, IECEx 60079-30-2, IECEx 60079-0, IECEx 60079-1 and IECEx 60079-2 in international markets. We also hold many product certifications from local country approval agencies and registration bodies around the world. We actively monitor the introductionapplicable standards of new domestic or global standards and certifications, and pursue certifications relating to the electrical heat tracingour industry.
Competition
The global industrial electric heat tracing industry is fragmented and consists of more than 30 companies, which typically only serve discrete local markets and provide a limited service offering. We believe that we are the second largest participant in the industrial electric heat tracing market and one of only a few solutions providers with a comprehensive suite of products and services, global capabilities and local on-site presence. Our most significant competitor is nVent Electric plc (NYSE: NVT), which was spun-off of Pentair plc (NYSE:PNR)
Following the THS transaction in April 2018.
We haveOctober 2017, we entered the broader industrial process heating market following the THS transaction in October 2017.market. The industrial process heating market, which includes industrial heat tracing, also tends to be fairly fragmented with several smaller
companies serving discrete local markets with limited offerings. The primaryOur competitors of THS vary by end-market, but generally we view nVent Electric, Nibe,NIBE, Watlow and Chromalox as competitors in various areas across the spectrum of end-markets we now serve.
Industrial process heating providers differentiate themselves through value-added services, long-term customer relationship management and the ability to provide a full range of solutions. We differentiate ourselves from local providers by a global footprint, a full suite of products and services and a track record with some of the largest multinational energy, chemical processing, power and EPC companies in the world. In addition, we are almost entirely dedicated to providing thermal solutions and complementary products and services whereas some of our competitors' thermal solutions operations constitute only one of numerous operating segments.
Intellectual Property and Technology
The industrial process heating industry, as well as the complementary markets where we intend to expand, are highly competitive and subject to the introduction of innovative techniques and services using new technologies. While we have patented some of our products and processes, we historically have not relied upon patents to protect our design, manufacturing processes or products, and our patents are not material to our operations or business. Instead, we rely significantly on maintaining the confidentiality of our trade secrets, manufacturing know-how, other proprietary rights and other information related to our operations. Accordingly, we require all employees to sign a nondisclosure agreement to protect our trade secrets, business strategy and other proprietary information. We rely on registered and unregistered trademarks in the United States and abroad and have many recognized brand names.
Research and Development
Our research and development activities are focused on identifying new technologies to enhance our industrial process heating solutions through identifying opportunities to maximize product reliability and reduce the customer's total cost of ownership, which consists of capital expenses, maintenance costs and energy costs. Current product development initiatives include polymer research and continued advancement of integrated control and monitoring systems. Software development activities include advanced heat tracing network monitoring communication software and engineering design software initiatives.
Employees
As of March 31, 2018,2020, we employed approximately 1,4801,335 persons on a full-time basis worldwide inclusive of THS employees.and retained approximately 201 independent contractors. We have never experienced any organized work stoppage or strike; however, approximatelystrike. Approximately 2% of our employees are covered by collective bargaining agreements. We consider our employee relations to be good.
Governmental Regulation
Due to the international scope of our operations, we are subject to complex United States and foreign laws governing, among others, anti-corruption matters, export controls, economic sanctions, antiboycottanti-boycott rules, currency exchange controls and transfer pricing rules. These laws are administered, among others, the U.S. Department of Justice, the SEC, the Internal Revenue Service, or the "IRS," Customs and Border Protection, the Bureau of Industry and Security, or "BIS," the Office of Antiboycott Compliance, or "OAC," and the Office of Foreign Assets Control, or "OFAC," as well as the counterparts of these agencies in foreign countries. Our policies mandate compliance with these laws. Despite our training and compliance programs, no assurances can be made that we will be found to be operating in full compliance with, or be able to detect every violation of, any such laws. We cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.
Environmental Compliance
Our operations and properties are subject to a variety of federal, state, local and foreign environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes, the cleanup of contaminated sites, the emission of greenhouse gases, and workplace health and safety. Certain environmental laws, including the Comprehensive Environmental Response, Compensation, and Liability Act, impose joint and several liability for cleanup costs, without regard to fault, on persons who have disposed of or released hazardous substances into the environment. In addition, we could become liable to third parties for damages resulting from the disposal or release of hazardous substances into the environment. Some of our sites are affected by soil and groundwater contamination relating to historical site operations, which could require us to incur expenses to investigate and remediate the
contamination in compliance with environmental laws. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities. A failure to obtain, maintain, and comply with these permit requirements could result in substantial penalties, including facility shutdowns. From time to time, we could be subject to requests for information, notices of violation, and/or investigations initiated by environmental regulatory agencies relating to our operations and properties. Violations of environmental and health and safety laws can result in substantial penalties, civil and criminal sanctions, permit revocations, and facility shutdowns. Environmental and health and safety laws may change rapidly and have tended to become more stringent over time. As a result, we could incur costs for past, present, or future failure to comply with all environmental and health and safety laws and regulations. In addition, we could become subject to potential regulations concerning the emission of greenhouse gasses, and while the effect of such future regulations cannot be determined at this time, they could require us to incur substantial costs in order to achieve and maintain compliance. In the ordinary course of business, we may be held responsible for any environmental damages we may cause to our customers' premises.
Seasonality
For information on seasonality, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Seasonality," which is hereby incorporated by reference into this Item 1.
Backlog
For information on backlog, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations- Overview- Revenue," which is hereby incorporated by reference into this Item 1.
ITEM 1A. RISK FACTORS
The following risk factors address the material risks concerning our business. If any of the risks discussed in this annual report were to occur, our business, prospects, financial condition, results of operation and our ability to service our debt could be materially and adversely affected and the trading price of our common stock could decline significantly. Some statements in this annual report, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled "Forward-Looking Statements."
Risks Related to Our Business and Industry
Macroeconomic and Industry Risks
The outbreak of the novel strain of coronavirus (COVID-19) and the measures taken in response thereto could have an adverse effect on our business, results of operations and financial condition.
In the first several months of 2020, the COVID-19 coronavirus pandemic has caused significant volatility in global economy and has raised the prospect of an extended global recession. Public health problems resulting from COVID-19 and precautionary measures instituted by governments and businesses to mitigate its spread, including travel restrictions and quarantines, could contribute to a general slowdown in the global economy, adversely impact the businesses of our customers, suppliers and distribution partners, and disrupt our operations. For example, precautionary measures instituted by government authorities in Russia and South Africa in response to the COVID-19 pandemic have required us to temporarily suspend operations at our manufacturing facilities in such jurisdictions.
Changes in our operations in response to COVID-19 or employee illnesses resulting from the pandemic may result in inefficiencies or delays, including delays in sales and product development efforts and additional costs related to business continuity initiatives, that cannot be fully mitigated through succession planning, employees working remotely or teleconferencing technologies. Additionally, COVID-19 could negatively affect our internal controls over financial reporting as a portion of our workforce is required to work from home, potentially requiring new processes, procedures, and controls.
A prolonged economic downturn due to the COVID-19 pandemic could result in reduced demand for our products and services. The severity and longevity of the COVID-19 pandemic may cause customers to suspend their decisions on using our products and/or services and give rise to significant changes in regional and global economic conditions that could delay or interfere with the capital spending of our customers. While the full extent and impact of the pandemic cannot be reasonably estimated at this time, it could have a material impact on our consolidated business, results of operations and financial condition in our fiscal year ending March 31, 2021 and beyond.
The markets we serve are subject to general economic conditions and cyclical demand, which could harm our business and lead to significant shifts in our results of operations from quarter to quarter that make it difficult to project long-term performance.
Our operating results have been and may in the future be adversely affected by general economic conditions and the cyclical pattern of certain industries in which our customers and end users operate. Demand for our products and services depends in large part upon the level of capital and maintenance expenditures by many of our customers and end users, in particular those in the energy, chemical processing and power generation industries, and firms that design and construct facilities for these industries. These customers' expenditures historically have been cyclical in nature and vulnerable to economic downturns. Prolonged periods of little or no economic growth could decrease demand for oil and gas which, in turn, could result in lower demand for our products and a negative impact on our results of operations and cash flows. In addition, this historically cyclical demand may lead to significant shifts in our results of operations from quarter to quarter, which limits our ability to make accurate long-term predictions about our future performance.
Suspensions and delays in large capital projects within the energy sector, especially in the United States and Canada, have adversely affected our results of operations in recent years. A sustained downturn in the energy industry, due to decreases in oil and gas prices decreasing or otherwise,demand for oil and gas products, could further decrease demand for some of our products and services which would materially and adversely affect our business, financial condition and results of operations.
A significant portion of our revenue historically has been generated by end-users in the oil and gas markets where we serve all three major categories of customers in the petroleum industry - upstream exploration/production, midstream transportation and downstream refining. The businesses of most of our customers in the energy industry are, to varying degrees,
cyclical and historically have experienced periodic downturns. Profitability in the energy industry is highly sensitive to supply and demand cycles and commodity prices, which historically have been volatile, and our customers in this industry have tended to delay large capital projects, including expensive maintenance and upgrades, during industry downturns. Customer project delays and cancellations may limit our ability to realize value from our backlog as expected and cause fluctuations in the timing or the amount of revenue earned and the profitability of our business in a particular period. In addition, such delays and cancellations may lead to significant fluctuations in results of operations from quarter to quarter, making it difficult to predict our financial performance on a quarterly basis.
Demand for a significant portion of our products and services depends upon the level of capital expenditure by companies in the energy industry, which depends, in part, on energy prices, which are volatile. In recent years, we have experienced suspensions or delays in large capital projects within the energy sector, especially in the upstream exploration and production sector, and most notably in the United States and Canada. Pricing actions by Russia and Saudi Arabia in March of 2020 have resulted in a significant downturn in oil and gas commodity prices. The impact on oil and gas commodity markets has further been impacted by the reduction in demand caused by the precautionary measures instituted by governments and businesses to mitigate the spread of COVID-19. A sustained downturn in the capital expenditures of our customers, whether due to a decrease in the market price of oil and gas or otherwise,demand for oil and gas products, may delay projects, decrease demand for our products and services and cause downward pressure on the prices we charge, which, in turn, could have a materialan adverse effect on our business, financial condition and results of operations. Such downturns, including the perception that they might continue, could also have a significant negative impact on the market price of our common stock.
As a global business, we are exposed to economic, political and other risks in a number of countries, which could materially reduce our revenues, profitability or cash flows or materially increase our liabilities. If we are unable to continue operating successfully in one or more foreign countries, it may have an adverse effect on our business and financial condition.
For fiscal 2020, approximately 59% of our revenues were generated outside of the United States, and approximately 26% were generated outside of North America. In addition, one of our key growth strategies is to continue to expand our global footprint in emerging and high growth markets around the world, although we may not be successful in expanding our international business.
Conducting business outside the U.S. subjects us to additional risks that may impact our revenues, profitability or cash flows or increase our liabilities, including the following:
changes in a specific country's or region's political, social or economic conditions, particularly in emerging markets;
changes in trade relations between the United States and those foreign countries in which our customers and suppliers have operations, including protectionist measures such as tariffs, import or export licensing requirements and trade sanctions;
restrictions on our ability to own or operate subsidiaries in, expand in and, if necessary, repatriate cash from, foreign jurisdictions;
exchange controls and currency restrictions;
the burden of complying with numerous and potentially conflicting legal requirements;
potentially negative consequences from changes in U.S. and foreign tax laws;
difficulty in staffing and managing (including ensuring compliance with internal policies and controls) geographically widespread operations;
different regulatory regimes controlling the protection of our intellectual property;
difficulty in the enforcement of contractual obligations in non-U.S. jurisdictions and the collection of accounts receivable from foreign accounts; and
transportation delays or interruptions.
One or more of these factors could prevent us from successfully expanding our presence in international markets, could have an adverse effect on our revenues, profitability or cash flows or cause an increase in our liabilities. We may not
succeed in developing and implementing policies and strategies to counter the foregoing factors effectively in each location where we do business. In addition, the imposition of trade restrictions, economic sanctions or embargoes by the United States or foreign governments could adversely affect our future sales and results of operations.
Business Risks
Our backlog may fluctuate and a failure to deliver our backlog on time could affect our future sales, and profitability and our relationships with our customers, and if we were to experience a material amount of modifications or cancellations of orders, our sales could be negatively impacted.
Our backlog is comprised of the portion of firm signed purchase orders or other written contractual commitments received from customers that we have not recognized as revenue. Backlog may increase or decrease based on the addition of large multi-year projects and their subsequent completion. Backlog may also be favorably or unfavorably affected by foreign currency rate fluctuations. The dollar amount of backlog as of March 31, 20182020 was $159.6$105.4 million. The timing of our recognition of revenue out of our backlog is subject to a variety of factors that may cause delays, many of which, including fluctuations in our customers' delivery schedules, are beyond our control.control and difficult to forecast. Such delays may lead to significant fluctuations in
results of operations from quarter to quarter, making it difficult to predict our financial performance on a quarterly basis. Further, while we have historically experienced few order cancellations and the amount of order cancellations has not been material compared to our total contract volume, if we were to experience a significant amount of cancellations of or reductions in purchase orders, it would reduce our backlog and, consequently, our future sales and results of operations.
Our ability to meet customer delivery schedules for our backlog is dependent on a number of factors including, but not limited to, access to raw materials, an adequate and capable workforce, engineering expertise for certain projects, sufficient manufacturing capacity and, in some cases, our reliance on subcontractors. The availability of these factors may in some cases be subject to conditions outside of our control. A failure to deliver in accordance with our performance obligations may result in financial penalties and damage to existing customer relationships, our reputation and a loss of future bidding opportunities, which could cause the loss of future business and could negatively impact our financial performance.future sales and results of operations.
As a global business, we are exposed to economic, political and other risks in a number of countries, which could materially reduce our revenues, profitability or cash flows or materially increase our liabilities. If we are unable to continue operatingeffectively integrate the THS product lines into our existing sales and marketing channels, our future sales and revenue growth could be adversely affected.
With the completion of the THS acquisition in October 2017, we entered into a new product line. THS is engaged in industrial process heating, focused on the development and production of advanced heating and filtration solutions for industrial and hazardous area applications, and serves clients in the energy, petrochemical, electrical distribution, power, transit and industrial end markets globally. While THS has similar economic characteristics as the core Thermon process heating operations, it represents a new product line that exposes us to new end markets relative to our legacy heat tracing products and services. We are in the process of integrating THS into our existing Thermon sales and marketing operations. If we are unable to successfully in one or more foreign countries, itcombine and integrate the THS product lines with our existing Thermon operations, we may have a material adverse effect on our businessbe unable to realize the anticipated synergies and financial condition.
For fiscal 2018, approximately 63% of our revenues were generated outside ofbenefits from the United States, and approximately 32% were generated outside North America. In addition, one of our key growth strategies is to continue to expand our global footprint in emerging and high growth markets around the world, although we may not be successful in expanding our international business.
Conducting business outside the United States is subject to additional risks, including the following:
changes in a specific country's or region's political, social or economic conditions, particularly in emerging markets;
trade relations between the United States and those foreign countries in which our customers and suppliers have operations, including protectionist measures such as tariffs, import or export licensing requirements and trade sanctions;
restrictions on our ability to own or operate subsidiaries in, expand in and, if necessary, repatriate cash from, foreign jurisdictions;
exchange controls and currency restrictions;
the burden of complying with numerous and potentially conflicting laws;
potentially negative consequences from changes in U.S. and foreign tax laws;
difficulty in staffing and managing (including ensuring compliance with internal policies and controls) geographically widespread operations;
different regulatory regimes controlling the protection of our intellectual property;
difficultyTHS acquisition in the enforcementtime frame that we expect, or at all, and our future sales and results of contractual obligationsoperations could be adversely affected.
Our current or future indebtedness could impair our financial condition and reduce the funds available to us for other purposes. Our debt agreements impose certain operating and financial restrictions, with which failure to comply could result in non-U.S. jurisdictions and the collectionan event of accounts receivable from foreign accounts; and
transportation delays or interruptions.
One or more of these factors could prevent us from successfully expanding our presence in international markets, could have a material adverse effect on our revenues, profitability or cash flows or cause an increase in our liabilities. We may not succeed in developing and implementing policies and strategies to counter the foregoing factors effectively in each location where we do business. In addition, the imposition of trade restrictions, economic sanctions or embargoes by the United States or foreign governmentsdefault that could adversely affect our results of operations.
We have substantial indebtedness. At March 31, 2020, we had $176.0 million of outstanding indebtedness. If our cash flows and capital resources are insufficient to fund the interest payments on our outstanding borrowings under our credit facility and other debt service obligations and keep us in compliance with the covenants under our debt agreements or to fund our other liquidity needs, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot guarantee that we would be able to (i) take any of these actions or that these actions would permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements, which may impose significant operating and financial results.restrictions on us and could adversely affect our ability to finance our future operations or capital needs; (ii) obtain standby letters of credit, bank guarantees or performance bonds required to bid on or secure certain customer contracts; (iii) make strategic acquisitions or investments or enter into alliances; (iv) withstand a future downturn in our business or the economy in general; (v) engage in business activities, including future opportunities, that may be in our interest; and (vi) plan for or react to market conditions or otherwise execute our business strategies.
If we cannot make scheduled payments on our debt, or if we breach any of the covenants in our debt agreements, we will be in default under such agreements and, as a result, our debt holders could declare all outstanding principal and interest to be due and payable, the lenders under our credit facility could terminate their commitments to lend us money and foreclose against the assets securing our borrowings, and we could be forced into bankruptcy or liquidation.
In addition, we and certain of our subsidiaries may incur significant additional indebtedness, including additional secured indebtedness. Although the terms of our debt agreements contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and additional indebtedness incurred in compliance with these restrictions could be significant. Incurring additional indebtedness could increase the risks associated with our substantial indebtedness, including our ability to service our indebtedness.
Additional liabilities related to taxes, potential tax adjustments or changes to tax policy in foreign jurisdictions could adversely impact our financial results, financial condition and cash flow.
We are subject to tax and related obligations in the jurisdictions in which we operate or do business, including state, local, federal and foreign taxes. The taxing ruleslaws of the various jurisdictions in which we operate or do business often are
complex and subject to varying interpretations. Tax authorities may challenge tax positions that we take or historically have taken, and may assess taxes where we have not made tax filings or may audit the tax filings we have made and assess additional taxes, as they have done from time to time in the past. Some of these assessments may be substantial, and also may involve the imposition of substantial penalties and interest. Significant judgment is required in evaluating our tax positions and in establishing appropriate reserves. The resolutions of our tax positions are unpredictable. The payment of substantial additional taxes, penalties or interest resulting from any assessments could materially and adversely impact our results of operations, financial condition and cash flow.
On December 22, 2017, the United States enacted significant changes to U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”). The Tax Act included significant changes to existing U.S. tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income (“Transition Tax”), deductions, credits and business-related exclusions. We have estimated the Transition Tax as of March 31, 2018. The estimated tax is subject to further research with regard to foreign earnings and available tax credits and is therefore held as provisional per the Securities and Exchange Commission's Staff Accounting Bulletin 118. Adjustments to estimated Transition Tax could impact our results of operations, financial condition and cash flow.
Given the Tax Act’s significant changes and potential opportunities to repatriate cash tax free, we have reevaluated our former permanent reinvestment position. Accordingly, we will no longer assert a permanent reinvestment position in most of our foreign subsidiaries. We expect to repatriate certain earnings which will be subject to withholding taxes. These additional withholding taxes are being recorded as an additional deferred tax liability associated with the basis difference in such jurisdictions. Any changes made by foreign jurisdictions to their respective withholding rates could materially impact our results of operations, financial condition and cash flow.
There may be breaches of our information technology systems that materially damage business partner and customer relations that could subject us to significant reputational, financial, legal and operational consequences.
As a company we store company, customer, employee and business partner information, which may include, among other information, trade secrets, names, addresses, phone numbers, email addresses, tax identification numbers, payment account information and customer facility information. We could be subject to sophisticated and targeted attacks intending to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, including the introduction of computer viruses or malware, cyber-attacks and other means. We require user names and passwords in order to access our information technology systems. These security measures are subject to potential third-party security breaches, employee error, malfeasance and faulty password management, among other limitations. Third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be used to access our information technology systems. We may not be able to anticipate, detect or recognize threats to our system or to implement effective preventive measures against all security breaches. If we were to experience a breach of our systems and were unable to protect sensitive data, such a breach could, among other things:
risk our confidential manufacturing processes and other trade secreted information that may lead to new and increased entrants and competitors or cause other damage to the business;
expose our customers' facilities and projects to increased safety and security risk;
materially damage business partner and customer relationships;
adversely impact our financial results and expose us to potential risk of loss or litigation; and/or
require us to incur substantial costs or require us to change our business practices;
Our future revenue depends in part on our ability to bid and win new contracts. Our failure to effectively obtain future contracts could adversely affect our profitability.
Our future revenue and overall results of operations require us to successfully bid on new contracts and, in particular, contracts for large Greenfield projects, which are frequently subject to competitive bidding processes. Our revenue from major projects depends in part on the level of capital expenditures in our principal end markets, including the energy, chemical processing and power generation industries. With the recent reductionsdisruptions to many of our customers’ end markets caused by the COVID-19 pandemic and the recent volatility in capital spending budgets,oil and gas commodity markets, we anticipate we could experience decreased levels of profitability which could adversely impact our financial results. In addition, if we fail to replace completed or canceled large Greenfield projects with new order volume of the same magnitude, our backlog will decrease and our future revenue and financial results may be adversely affected. The number of such projects we win in any year fluctuates,
and is dependent upon the number of projects available and our ability to bid successfully for such projects. Contract proposals and negotiations are complex and frequently involve a lengthy bidding and selection process, which is affected by a number of factors, such as competitive position, market conditions, financing arrangements and required governmental approvals. For example, a client may require us to provide a bond or letter of credit to protect the client should we fail to perform under the terms of the contract. If negative market conditions arise,continue, or if we fail to secure adequate financial arrangements or required governmental approvals, we may not be able to pursue particular projects, which could adversely affect our profitability.
If we are unable to successfully develop and improve our products and successfully implement new technologies in the markets that we serve, our business and results of operations could be adversely affected.
Our future success will depend upon our continued investment in research and development of new products, improvement and enhancement of our existing product offerings and our ability to continue to achieve new technological advances in the process heating industry. Our inability to continue to successfully develop and market new products or our inability to implement technological advances on a pace consistent with that of our competitors could adversely affect our business and results of operations.
We may be unable to compete successfully in the highly competitive markets in which we operate.
We operate in competitive domestic and international markets and compete with highly competitive domestic and international manufacturers and service providers. The fragmented nature of the industrial electric heat tracing industry and the similarly fragmented nature of the industrial process heating industry makes the market for our products and services highly competitive. A number of our direct and indirect competitors are major multinational corporations, some of which have substantially greater technical, financial and marketing resources, than us, and additional competitors may enter these markets.markets at any time. In addition, we compete against many regional and lower-cost manufacturers. Our competitors may develop products that are superior to our
products, develop methods of more efficiently and effectively providing products and services, adapt more quickly than we do to new technologies or evolving customer requirements, or attempt to compete based primarily on price, localized expertise and local relationships. If we are unable to continue to differentiate our products and services or if we experience an increase in competition, it may cause us to lose market share or compel us to reduce prices to remain competitive, which could result in reduceda reduction in our revenues and results of operations.
Our gross margins depend, in part, on our revenue mix. Although Greenfield project revenues, which provide for an ongoing stream of future high-margin MRO/UE revenues, are critical to our success and growth, increased Greenfield project revenues can adversely affect our gross margin.
Typically, both Greenfield and MRO/UE customers require our products as well as our engineering and construction services. We tend to experience lower margins from our design optimization, engineering, installation and maintenance services than we do from sales and earnings.
Currency fluctuations and the current geopolitical instability in Russia and Ukraine and related sanctions by the U.S. government against certain companies and individuals may hinder our ability to conduct business with potential or existing customers and vendors in these countries.
We derived approximately 5%, 8% and 7% of our revenueheating cable, tubing bundle and control system products. We also tend to experience lower margins from our subsidiary incorporated in Russia in theoutsourced products, such as electrical switch gears and transformers, than we do from our manufactured products. Accordingly, our gross margins are impacted by our mix of products and services. Although our product mix varies from period to period due to a variety of factors, during fiscal yearsyear ended March 31, 2018, 2017 and 2016, respectively. The escalation of geopolitical instability in Russia and Ukraine as well as currency fluctuations in the Russian Ruble could negatively impact our operations, sales, and future growth prospects in that region. The U.S. government2020, Greenfield revenue has imposed sanctions through several executive orders restricting U.S. companies from conducting business with specified Russian and Ukrainian individuals and companies. While we believe that the executive orders currently do not preclude us from conducting business with our current customers or vendors in Russia, the sanctions imposed by the U.S. government may be expanded in the future to restrict us from engaging with them. If we are unable to conduct business with new or existing customers or vendors or pursue business opportunities in Russia or Ukraine, our business, including revenue, profitability and cash flows, and operations could be materially adversely affected. We cannot provide assurance that current sanctions or potential future changes in sanctions will not have a material impact on our operations in Russia and the Ukraine or on our financial results.
A material disruption at anyaccounted for approximately 40% of our manufacturing facilitiestotal revenue. Although Greenfield project revenues, which provide for an ongoing stream of future high-margin MRO/UE revenues, are critical to our long-term success and growth, a revenue mix higher in lower-margin Greenfield project revenues relative to historical levels could adversely affect our gross margins and results of operations.
If operations at any of our manufacturing facilities were to be disrupted as a result of significant equipment failures, natural disasters, power outages, fires, explosions, terrorism, adverse weather conditions, labor disputes or other reasons, we may be unable to fill customer orders and otherwise meet customer demand for our products, which could adversely affect our financial performance. For example, our marketing and research & development buildings, located on the same campus as our corporate headquarters and primary manufacturing facility in San Marcos, Texas, were destroyed by a tornado in January 2007.
Our Sumac operations are located in Fort McMurray, Alberta, Canada. Beginning on May 3, 2016, a forest fire swept through the town of Fort McMurray and the surrounding area causing significant damage to homes and businesses. None of Thermon's personnel located in Fort McMurray were injured nor were our facilities damaged. However, the entire city of Fort McMurray, including all of our staff, was evacuated for a period of approximately four weeks. We incurred temporary relocation costs of $21,000 for our employees as well as business interruption costs. As a result of the crisis at Fort McMurray, many of the nearby oil sands region facilities ceased operations for approximately one month. This shut down adversely impacted Thermon's core thermal solutions business and Sumac's equipment rental and sales business during fiscal 2017.
Interruptions in production, in particular at our manufacturing facilities in San Marcos, Texas, or Calgary, Edmonton, Oakville or Orillia, Canada, at which we manufacture the majority of our products, could increase our costs and reduce our sales. Any interruption in production capability could require us to make substantial capital expenditures to fill customer orders, which could negatively affect our profitability and financial condition. We maintain property damage insurance that we believe to be adequate to provide for reconstruction of facilities and equipment, as well as business interruption insurance to mitigate losses resulting from any production interruption or shutdown caused by an insured loss. However, any recovery under our
insurance policies may not offset the lost sales or increased costs that may be experienced during the disruption of operations, which could adversely affect our financial performance.
Our business strategy includes acquiring smaller, value-added companies and making investments that complement our existing business. These acquisitions and investments could be unsuccessful or consume significant resources, which could adversely affect our operating results.results of operations.
Acquisitions and investments may involve cash expenditures, debt incurrence, operating losses and expenses that could have a materialan adverse effect on our financial condition and operating results.results of operations. Acquisitions involve numerous other risks, including:
diversion of management time and attention from daily operations;
difficulties integrating acquired businesses, technologies and personnel into our business;
difficulties in realization of expected synergies and revenue creation or cross-selling opportunities;
potential loss of key employees, key contractual relationships or key customers of acquired companies or of us; and
assumption of the liabilities and exposure to unforeseen liabilities of acquired companies.
We have limited experience in acquiring or integrating other businesses or making investments or undertaking joint ventures with others. It may be difficult for us to complete transactions quickly and to integrate acquired operations efficiently into our current business operations. Any acquisitions or investments may ultimately harm our business or financial condition as suchif they are unsuccessful and any acquisitions may not be successful and mayor investments ultimately result in impairment charges. During fiscal 2016, we impaired $1.7 million of goodwill and other intangible assets related to the Unitemp acquisition as our expectations of future revenue and profitability were below those estimated at the time of the acquisition.
Volatility in currency exchange rates may adversely affect our financial condition, results of operations or cash flows.
We may not be able to effectively manage our exchange rate and/or currency transaction risks. Volatility in currency exchange rates may decrease our revenue and profitability, adversely affect our liquidity and impair our financial condition. While we have entered into hedging instruments to manage our exchange rate risk as it relates to certain intercompany balances with certain of our foreign subsidiaries, these hedging activities we have entered into do not eliminate this exchange rate risk, nor do they reduce risk associated with total foreign sales.
Our non-U.S. subsidiaries generally sell their products and services in the local currency, but obtain a significant amount of their products from our facilities located elsewhere, primarily the United States, Canada or Europe. In particular, significant fluctuations in the Canadian Dollar, the Russian Ruble, the Euro or the Pound Sterling against the U.S. Dollar could adversely affect our results of operations. AlthoughDuring fiscal 2020 and 2019, the value of the U.S. Dollar weakenedstrengthened in relation to the principal non-U.S. currencies from which we derive revenue, which positively impacted revenue by $7.9 million in fiscal 2018, the relative strengthening of the U.S. Dollar negatively impacted revenue by $1.3$5.0 million in fiscal 2017, and any$4.6 million, respectively. Any further appreciation in the U.S. Dollar relative to such non-U.S. currencies could continue to have a significant negative impact on our results of operations in future periods. We also bid for certain foreign projects in U.S. Dollars or Euros. If the U.S. Dollar or Euro strengthensstrengthen relative to the value of the local currency, we may be less competitive in
bidding for those projects. In addition, currency variations can adversely affect margins on sales of our products in countries outside of the U.S. and margins on sales of products that include components obtained from suppliers located outside of the U.S. See Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" for additional information regarding our foreign currency exposure relating to operations.
Because our consolidated financial results are reported in U.S. Dollars and we generate a substantial amount of our sales and earnings in other currencies, the translation of those results into U.S. Dollars can result in a significant decrease in the amount of those sales and earnings. Fluctuations in currencies relative to the U.S. Dollar may make it more difficult to perform period-to-period comparisons of our reported results of operations. In addition, the net asset values of foreign operations are adjusted upward and downward based on currency exchange rate fluctuations and are reported in our foreign currency translation adjustment as part of other comprehensive income in our consolidated statements of operations and comprehensive income.
We have significant goodwill and other intangible assets and future impairment of our goodwill and other intangible assets could have a material negative impact on our financial results.
We test goodwill and indefinite-life intangible assets for impairment on at least an annual basis, and more frequently if circumstances warrant, by comparing the estimated fair value of each of our reporting units to their respective carrying values. As of March 31, 2018,2020, our goodwill and other intangible assets balance was $362$302.5 million, which represented 55%49% of our total assets. Long-term declines in projected future cash flows could result in future goodwill and other intangible asset impairments. For example, we recognized a pre-tax, non-cash impairment charge of $1.7 million for the year ended March 31, 2016 related to the goodwill and other intangible assets of Unitemp. Because of the significance of our goodwill and other intangible assets, any future impairment of these assets could have a material adverse effect on our financial results.
If we lose our senior management or other key employees or cannot successfully execute succession plans, our business may be adversely affected.
Competition for qualified management and key technical and sales personnel in our industry is intense. Our ability to successfully operate and grow our global business and implement our strategies is largely dependent on the efforts, abilities and services of our senior management and other key employees. If we lose the services of our senior management or other key employees for any reason and are unable to find qualified replacements with comparable experience in the industry, our business could be negatively affected.
We rely heavily on trade secrets to gain a competitive advantage in the market and the unenforceability of our nondisclosure agreements may adversely affect our operations.
The heat tracing industry is highly competitive and subject to the introduction of innovative techniques and services using new technologies. We rely significantly on maintaining confidential our trade secrets and other information related to our operations. Accordingly, we require all employees to sign a nondisclosure agreement to protect our trade secrets, business strategy and other proprietary information. If the provisions of these agreements are found unenforceable in any jurisdiction in which we operate, the disclosure of our proprietary information may place us at a competitive disadvantage. Even where the provisions are enforceable, the confidentiality clauses may not provide adequate protection of our trade secrets and proprietary information in every such jurisdiction and our trade secrets and proprietary information could be compromised as a result.
Intellectual property challenges may hinder our ability to develop, engineer and market our products, and we may incur significant costs in our efforts to successfully avoid, manage, defend and litigate intellectual property matters.
Patents, non-compete agreements, proprietary technologies, trade secrets, customer relationships, trademarks, trade names and brand names are important to our business. Intellectual property protection, however, may not preclude competitors from developing products similar to ours or from challenging our trade names or products. Our pending patent applications and our pending copyright and trademark registration applications may not be allowed or competitors may challenge the validity or scope of our patents, copyrights or trademarks. In addition, our patents, copyrights, trademarks and other intellectual property rights may not provide us a significant competitive advantage, particularly in those countries where the laws do not protect our intellectual property rights as fully as in the United States. Participants in our markets may use challenges to intellectual property as a means to compete. Patent and trademark challenges increase our costs to develop, engineer and market our products. We may need to spend significant resources monitoring our intellectual property rights and we may or may not be able to detect infringement by third parties. If we fail to successfully enforce our intellectual property rights or register new patents, our competitive position could suffer, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition, while we have not faced intellectual property infringement claims from others in recent years, any dispute or litigation involving intellectual property could be costly and time-consuming due to the complexity and the uncertainty of intellectual property litigation. Our intellectual property portfolio may not be useful in asserting a counterclaim, or negotiating a license, in response to a claim of infringement or misappropriation. In addition, as a result of such claims, we may lose our rights to utilize critical technology, may be required to pay substantial damages or license fees with respect to the infringed rights or may be required to redesign our products at a substantial cost, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Operational Risks
Breaches of our information technology systems could occur that materially damage business partner and customer relations and subject us to significant reputational, financial, legal and operational consequences.
As a company we store company, customer, employee and business partner information, which may include, among other information, trade secrets, names, addresses, phone numbers, email addresses, tax identification numbers, payment account information and customer facility information. We could be subject to sophisticated and targeted attacks attempting to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, including via the introduction of computer viruses or malware and cyber-attacks. We require user names and passwords in order to access our information technology systems. These security measures are subject to potential third-party security breaches, employee error, malfeasance and faulty password management, among other limitations. Third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be used to access our information technology systems. We may not be able to anticipate, detect or recognize threats to our system or to implement effective preventive measures against all security breaches. If we were to experience a breach of our systems and were unable to protect sensitive data, such a breach could, among other things:
risk exposing our confidential manufacturing processes and other trade secreted information that may lead to new and increased entrants and competitors in our business or cause other damage to the business;
expose our customers' facilities and projects to increased safety and security risk;
materially damage business partner and customer relationships;
impact our reputation in the markets in which we compete for business;
adversely impact our financial results and expose us to potential risk of loss or litigation; and/or
require us to incur substantial costs or require us to change our business practices.
A material disruption at any of our manufacturing facilities could adversely affect our financial performance and results of operations.
If operations at any of our manufacturing facilities were to be disrupted as a result of significant equipment failures, natural disasters, pandemics, power outages, fires, explosions, terrorism, adverse weather conditions, labor disputes or other reasons, we may be unable to fill customer orders and meet customer demand for our products, which could adversely affect our financial performance and results of operations. For example, our marketing and research & development buildings, located on the same campus as our former corporate headquarters and primary manufacturing facility in San Marcos, Texas, were destroyed by a tornado in January 2007. In addition, precautionary measures recently instituted by government authorities in Russia and South Africa in response to the COVID-19 pandemic have required us to temporarily suspend operations at our manufacturing facilities in such jurisdictions.
Interruptions in production, in particular at our manufacturing facilities in San Marcos, Texas, or Calgary, Edmonton, Oakville or Orillia, Canada, at which we manufacture the majority of our products, could increase our costs and reduce our sales. Any interruption in production capability could require us to make substantial capital expenditures to fill customer orders, which could negatively affect our profitability and financial condition. We maintain property damage insurance that we believe to be adequate to provide for reconstruction of facilities and equipment, as well as business interruption insurance to mitigate losses resulting from any production interruption or shutdown caused by an insured loss. However, any recovery under our insurance policies may not offset the lost sales or increased costs that may be experienced during the disruption of operations, which could adversely affect our financial performance and results of operations.
Our dependence on subcontractors and third-party suppliers could adversely affect our results of operations.
We often rely on third-party subcontractors, as well as third-party suppliers and manufacturers to complete our projects. To the extent we cannot engage subcontractors or acquire supplies or materials, our ability to complete a project in a timely fashion or at a profit may be impaired. If the amount we are required to pay for these goods and services exceeds the amount we have estimated in bidding for fixed-price contracts, we could experience losses on these contracts. In addition, if a subcontractor or supplier is unable to deliver its services or materials according to the negotiated contract terms for any reason, including the deterioration of its financial condition or over-commitment of its resources, we may be required to purchase the services or materials from another source at a higher price. This may reduce the profit to be realizedwe realize or result in a loss on a project for which the services or materials were needed.
We may lose money on fixed-price contracts, and we are exposed to liquidated damages charges in many of our customer contracts.
We often agree to provide products and services under fixed-price contracts, including our turnkey solutions. Under these contracts, we are typically responsible for all cost overruns, other than the amount of any cost overruns resulting from requested changes in order specifications. Our actual costs and any gross profit realized on these fixed-price contracts could vary from the estimated costs on which these contracts were originally based. This may occur for various reasons, including errors in estimates or bidding, changes in availability and cost of labor and raw materials and unforeseen technical and logistical challenges, including with managing our geographically widespread operations and use of third party subcontractors, suppliers and manufacturers in many countries. These variations and the risks inherent in our projects may result in reduced profitability or losses on projects. Depending on the size of a project, variations from estimated contract performance could have a material adverse impact on our project revenue and operating results. In addition, many of our customer contracts, including fixed-price contracts, contain liquidated damages provisions for which we are responsible in the event that we fail to perform our obligations thereunder in a timely manner or in accordance with the agreed terms, conditions and standards.
We may not achieve some or all of the expected benefits of our operational initiatives.
In order to align our operational resources with our business strategies, operate more efficiently and control costs, we may periodically announce plans to restructure certain of our operations, such as consolidation of manufacturing facilities, transitions to cost-competitive regions and product line rationalizations. We may also undertake restructuring actions and workforce reductions. Risks associated with these actions include delays in execution, additional unexpected costs, realization of fewer than estimated productivity improvements and adverse effects on employee morale. If these risks materialize, we may not realize all or any of the anticipated benefits of such restructuring plans, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Legal and Regulatory Risks
Due to the nature of our business, we may be liable for damages based on product liability claims. We are also exposed to potential indemnity claims from customers for losses due to our work or if our employees are injured performing services.
We face a risk of exposure to legal claims in the event that the failure, use or misuse of our products results in, or is alleged to result in, death, bodily injury, property damage or economic loss. Although we maintain quality controls and procedures, we cannot be sure that our products will be free from defects. If any of our products prove to be defective, we may be required to replace the product. In addition, we may be required to recall or redesign such products, which could result in significant unexpected costs. Some of our products contain components manufactured by third parties, which may also have defects. In addition, if we are installing our products, we may be subject to claims that our installation has caused damage or loss. Our products are often installed in our customers' or end users' complex and capital intensive facilities involved in inherently hazardous or dangerous industries, including energy, chemical processing and power generation, where the potential liability from risk of loss could be substantial. Although we currently maintain product liability coverage, which we believe is adequate for the continued operation of our business, we cannot be certain that this insurance coverage will continue to be available to us at a reasonable cost or, if available, will be adequate to cover any potential liabilities. With respect to components manufactured by third-party suppliers, the contractual indemnification that we seek from our third-party suppliers may be insufficient to cover claims made against us. In the event that we do not have adequate insurance or contractual indemnification, product liabilities and other claims could have a material adverse effect on our business, financial condition or results of operations.
Under our customer contracts, we often indemnify our customers from damages and losses they incur due to our work or services performed by us, as well as for losses our customers incur due to any injury or loss of life suffered by any of our
employees or our subcontractors' personnel occurring on our customer's property. Many, but not all, of our customer contracts include provisions designed to limit our potential liability by excluding consequential damages and lost profits from our
indemnity obligations. However, substantialSubstantial indemnity claims may exceed the amount of insurance we maintain and could have a material adverse effect on our reputation, business, financial condition or results of operations.
Our current or future indebtedness could impair our financial condition and reduce the funds available to us for other purposes. Our debt agreements impose certain operating and financial restrictions, with which failure to comply could result in an event of default that could adversely affect our results of operations.
We have substantial indebtedness. At March 31, 2018, we had $225.0 million of outstanding indebtedness. If our cash flows and capital resources are insufficient to fund the interest payments on our outstanding borrowings under our credit facility and other debt service obligations and keep us in compliance with the covenants under our debt agreements or to fund our other liquidity needs, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot ensure that we would be able to take any of these actions, that these actions would permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements, which may impose significant operating and financial restrictions on us and could adversely affect our ability to finance our future operations or capital needs; obtain standby letters of credit, bank guarantees or performance bonds required to bid on or secure certain customer contracts; make strategic acquisitions or investments or enter into alliances; withstand a future downturn in our business or the economy in general; engage in business activities, including future opportunities, that may be in our interest; and plan for or react to market conditions or otherwise execute our business strategies.
If we cannot make scheduled payments on our debt, or if we breach any of the covenants in our debt agreements, we will be in default and, as a result, our debt holders could declare all outstanding principal and interest to be due and payable, the lenders under our credit facility could terminate their commitments to lend us money and foreclose against the assets securing our borrowings, and we could be forced into bankruptcy or liquidation.
In addition, we and certain of our subsidiaries may incur significant additional indebtedness, including additional secured indebtedness. Although the terms of our debt agreements contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and additional indebtedness incurred in compliance with these restrictions could be significant. Incurring additional indebtedness could increase the risks associated with our substantial indebtedness, including our ability to service our indebtedness.
Our international operations and non-U.S. subsidiaries are subject to a variety of complex and continually changing laws and regulations and, in particular, export control regulations or sanctions.
Due to the international scope of our operations, we are subject to a complex system of laws and regulations, including regulations issued by the U.S. Department of Justice, or the "DOJ," the SEC, the IRS, the U.S. Department of Treasury, the U.S. Department of State, Customs and Border Protection, BIS, OAC and OFAC, as well as the counterparts of these agencies in foreign countries. While we believe we are in material compliance with these regulations and maintain programs intended to achieve compliance, we may currently or may in the future be in violation of these regulations. In 2009, we entered into settlement agreements with BIS and OFAC, and in 2010, we entered into a settlement agreement with OAC, in each case with respect to matters we voluntarily disclosed to such agencies.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. Under the Dodd-Frank Act, the SEC has adopted requirements for companies that use certain minerals and metals, known as “conflict minerals”, in their products, whether or not these products are manufactured by third parties. These regulations require companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We are required to perform sufficient due diligence to determine whether such minerals are used in the manufacture of our products. The implementation of these requirements could adversely affect the sourcing, availability and pricing of such minerals if they are found to be used in the manufacture of our products. In addition, we incur costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free.
Any alleged or actual violations may subject us to government scrutiny, investigation and civil and criminal penalties and may limit our ability to export our products or provide services outside the United States. Additionally, we cannot predict
the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.
In addition, our geographically widespread operations, coupled with our relatively smaller offices in many countries and our reliance on third party subcontractors, suppliers and manufacturers in the completion of our projects, make it more difficult to oversee and ensure that all our offices and employees comply with our internal policies and control procedures. We have in the past experienced employee theft, although the amounts involved have not been material, and we cannot assure you that we can ensure compliance with our internal control policies and procedures.
Significant developments arising from recent U.S. Government proposals concerning tariffs and other economic proposals could have a material adverse effect on us.
As a result of recent changes to U.S. administration policy and recent U.S. government proposals, there may be greater restrictions and economic disincentives on international trade that could include significant increases in tariffs on goods. Changes in U.S. or international social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently develop and sell our products, and any negative sentiment towards the United States as a result of such changes, could adversely affect our business.
We operate in many different jurisdictions and we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar foreign anti-corruption laws.
The U.S. Foreign Corrupt Practices Act which we refer to as the "FCPA,"(the “FCPA”) and similar foreign anti-corruption laws generally prohibit companies and their intermediaries from making improper payments or providing anything of value to influence foreign government officials for the purpose of obtaining or retaining business or obtaining an unfair advantage. Recent years have seen a substantial increase in the global enforcement of anti-corruption laws, with more frequent voluntary self-disclosures by companies, aggressive investigations and enforcement proceedings by both the DOJ and the SEC resulting in record fines and penalties, increased enforcement activity by non-U.S. regulators, and increases in criminal and civil proceedings brought against companies and individuals. Because many of our customers, sales channels and end users are involved in infrastructure construction and energy production, they are often subject to increased scrutiny by regulators. Our internal policies mandate compliance with these anti-corruption laws. WeHowever, we operate in many parts of the world that are recognized as having governmental corruption problems to some degree and where strict compliance with anti-corruption laws may conflict with local customs and practices. Our continued operation and expansion outside the United States, including in developing countries, could increase the risk of such violations in the future. Despite our training and compliance programs, we cannot assure you that our internal control policies and procedures always will protect us from unauthorized reckless or criminal acts committed by our employees or agents. In the event that we believe or have reason to believe that our employees or agents have or may have violated applicable anti-corruption laws, including the FCPA, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Violations of these laws may result in severe criminal or civil sanctions, which could disrupt our business and result in a material adverse effecteffects on our reputation, business, results of operations or financial condition.
Our international operations and non-U.S. subsidiaries are subject to a variety of complex and continually changing laws and regulations and, in particular, export control regulations or sanctions.
Due to the international scope of our operations, we are subject to a complex system of laws and regulations, including regulations issued by the U.S. Department of Justice (the “DOJ”), the SEC, the IRS, the U.S. Department of Treasury, the U.S. Department of State, Customs and Border Protection, Bureau of Industry and Security (“BIS”), Office of Anti-Boycott Compliance (“OAC”) and Office of Foreign Asset Control (“OFAC”), as well as the counterparts of these agencies in foreign countries. While we believe we are in material compliance with these regulations and maintain programs intended to achieve compliance, we may currently or may in the future be in violation of these regulations. In 2009, we entered into settlement agreements with BIS and OFAC, and in 2010, we entered into a settlement agreement with OAC, in each case with respect to matters we voluntarily disclosed to such agencies.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. Under the Dodd-Frank Act, the SEC has adopted requirements for companies that use certain minerals and metals, known as “conflict minerals”, in their products, whether or not these products are manufactured by third parties. These regulations require companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We are required to perform sufficient due diligence to determine whether such minerals are used in the manufacture of our products. The implementation of these requirements could adversely affect the sourcing, availability and pricing of such minerals if they are found to be used in the manufacture of our products. In addition, we incur costs to comply with conflict mineral disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free.
Any alleged or actual violations of these conflict mineral requirements may subject us to government scrutiny, investigation and civil and criminal penalties and may limit our ability to export our products or provide services outside the U.S. Additionally, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.
In addition, our geographically widespread operations, coupled with our relatively smaller offices in many countries and our reliance on third party subcontractors, suppliers and manufacturers in the completion of our projects, make it more
difficult to oversee and ensure that all our offices and employees comply with our internal policies and control procedures. We have experienced immaterial employee theft in the past, and we cannot assure you that we can ensure our employees compliance with our internal control policies and procedures.
Changes in U.S. and foreign government administrative policy, including changes to existing trade agreements and U.S. government sanctions, could have a material adverse effect on us.
As a result of changes to U.S. and foreign government administrative policy, there may be changes to existing trade agreements, greater restrictions on free trade generally, significant increases in tariffs on goods imported into the U.S. particularly tariffs on products manufactured in China, Canada and Mexico, among other possible changes. Changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently manufacture and sell products, and any resulting negative sentiments towards the U.S. as a result of such changes, could have an adverse effect on our business, financial condition, results of operations and cash flows.
Currency fluctuations and the current geopolitical instability in Russia and Ukraine and related sanctions by the U.S. government against certain companies and individuals may hinder our ability to conduct business with potential or existing customers and vendors in these countries.
We derived approximately 4%, 3% and 5% of our revenue from our subsidiary incorporated in Russia in the fiscal years ended March 31, 2020, 2019 and 2018, respectively. The escalation of geopolitical instability in Russia and Ukraine as well as currency fluctuations in the Russian Ruble could negatively impact our operations, sales, and future growth prospects in that region. The U.S. government has imposed sanctions through several executive orders restricting U.S. companies from conducting business with specified Russian and Ukrainian individuals and companies. While we believe that the executive orders currently do not preclude us from conducting business with our current customers or vendors in Russia, the sanctions imposed by the U.S. government may be expanded in the future to restrict us from engaging with them. If we are unable to conduct business with new or existing customers or vendors or pursue business opportunities in Russia or Ukraine, our business, including revenue, profitability and cash flows, and operations could be adversely affected. We cannot provide assurance that current sanctions or potential future changes in sanctions will not have a material impact on our operations in Russia and the Ukraine or on our financial results.
The United Kingdom's withdrawal from the European Union may have a negative effect on economic conditions, financial markets and our business.
Pursuant to legislation approved by the United Kingdom Parliament and the European Union Parliament in January 2020, the United Kingdom withdrew from the European Union effective as of January 31, 2020 on the terms of a withdrawal agreement agreed between the United Kingdom and the European Union in October 2019 (the “Withdrawal Agreement”). The Withdrawal Agreement provides that the United Kingdom’s withdrawal is followed by a “transition period”, during which, in summary, the United Kingdom is not a member of the European Union but most European Union rules and regulations continue to apply to the United Kingdom. During the transition period, the United Kingdom and the European Union will seek to negotiate the terms of a long-term trading relationship between the United Kingdom and the European Union based on a “Political Declaration” agreed between the United Kingdom and the European Union in October 2019. The transition period provided for in the Withdrawal Agreement will expire on December 31, 2020 (unless both the United Kingdom and the European Union agree to extend the period of transition by one or two years).
The political negotiation surrounding the terms of the United Kingdom’s withdrawal from the European Union has created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply. Once the “transition period” expires, subject to the terms of any long-term trading relationship agreed between the United Kingdom and the European Union, the United Kingdom will determine which European Union-derived laws to replace or replicate. The United Kingdom’s withdrawal from the European Union has also given rise to calls for the governments of other European Union member states to consider withdrawal, while the United Kingdom’s withdrawal negotiation process has increased the risk of the possibility of a further referendum concerning Scotland’s independence from the rest of the United Kingdom.
If no long-term trading relationship is agreed between the United Kingdom and the European Union by the end of the transition period provided for in the Withdrawal Agreement, the United Kingdom’s membership of the European Union could ultimately terminate under a so-called “hard Brexit.” Under this scenario, there could be increased costs from the imposition of tariffs on trade or non-tariff barriers between the United Kingdom and European Union, shipping delays because of the need for customs inspections and temporary shortages of certain goods. Any of the foregoing might increase our cost of doing business
in the United Kingdom. In addition, trade and investment between the United Kingdom, the European Union and other countries would be impacted by the fact that the United Kingdom currently operates under tax and trade treaties concluded between the European Union and other countries. Following a “hard Brexit”, the United Kingdom would need to negotiate its own tax and trade treaties with other countries, as well as with the European Union.
These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global, regional and/or national economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity, result in changes to currency exchange rates, tariffs, treaties, taxes, import/export regulations, laws and other regulatory matters and the free movement of our employees, which could have an adverse effect on our financial position, operating results or cash flows. In addition, if the U.S. dollar strengthens, our revenue denominated in foreign currencies such as the British Pound may be adversely affected when translated into U.S. dollars. Approximately 4% of our total revenues were generated in the United Kingdom for fiscal 2020.
We are subject to numerous environmental and health and safety laws and regulations, as well as potential environmental liabilities, which may require us to make substantial expenditures.
Our operations and properties are subject to a variety of federal, state, local and foreign environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes, the cleanup of contaminated sites and workplace health and safety. As an owner or operator of real property, or generator of waste, we could become subject to liability for environmental contamination, regardless of whether we caused such contamination. Certain environmental laws, including the Comprehensive Environmental Response, Compensation, and Liability Act, impose joint and several liability for cleanup costs, without regard to fault, on persons who have disposed of or released hazardous substances into the environment. In addition, we could become liable to third parties for damages resulting from the disposal or release of hazardous substances into the environment. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities. From time to time, we could be subject to requests for information, notices of violation, and/or investigations initiated by environmental regulatory agencies relating to our operations and properties. Violations of environmental and health and safety laws can result in substantial penalties, civil and criminal sanctions, permit revocations, and facility shutdowns. Environmental and health and safety laws may change rapidly and have tended to become more stringent over time. As a result, we could incur costs for past, present, or future failure to comply with all environmental and health and safety laws and regulations. In addition, we could become subject to potential regulations concerning the emission of greenhouse gases, and while the effect of such future regulations cannot be determined at this time, they could
require us to incur substantial costs in order to achieve and maintain compliance. In the ordinary course of business, we may be held responsible for any environmental damages we may cause to our customers' premises.
IfThe effects of climate change and any related regulation of greenhouse gases could have a negative impact on our business.
Governments around the world are increasingly focused on enacting laws and regulations regarding climate change and regulation of greenhouse gases. Lawmakers and regulators in the jurisdictions where we lose our senior managementoperate have proposed or enacted regulations requiring reporting of greenhouse gas emissions and the restriction thereof, including increased fuel efficiency standards, carbon taxes or cap and trade systems, restrictive permitting, and incentives for renewable energy. In addition, efforts have been made and continue to be made in the international community toward the adoption of international treaties or protocols that would address global climate change issues and impose reductions of hydrocarbon-based fuels, including plans developed in connection with the Paris climate conference in December 2015 and the Katowice climate conference in December 2018. Laws or regulations incentivizing or mandating the use of alternative energy sources such as wind power and solar energy have also been enacted in certain jurisdictions. Additionally, numerous large cities globally and several countries have adopted programs to mandate or incentivize the conversion from internal combustion engine powered vehicles to electric-powered vehicles and placed restrictions on non-public transportation. Such policies or other key employeeslaws, regulations, treaties and international agreements related to greenhouse gases and climate change may negatively impact the price of oil relative to other energy sources, reduce demand for hydrocarbons, or cannot successfully execute succession plans,otherwise unfavorably impact our business may be adversely affected.customers in the oil and gas, power generation and petrochemical industries. To the extent our customers, particularly our energy and industrial customers, are subject to any of these or other similar proposed or newly enacted laws and regulations or impacted by the change in energy prices due to such laws and regulations, we are exposed to risks that the additional costs incurred by customers to comply with such laws and regulations or that the deterioration of customers’ financial results as a result of changing energy prices could impact our customers’ ability or desire to continue to operate at similar levels in certain jurisdictions as historically seen or as currently anticipated, which could negatively impact their demand for our products and services. These laws and regulations could also increase costs associated with our operations, including costs for raw materials and transportation. The ultimate impact of greenhouse gas emissions-related agreements, legislation and measures on our financial performance is highly
Our ability to successfully operate and grow our global business and implement our strategies is largely dependent on the efforts, abilities and services of our senior management and other key employees. If
uncertain because we lose the services of our senior management or other key employees and are unable to find qualified replacementspredict with comparable experiencecertainty, for a multitude of individual jurisdictions, the outcome of political decision-making processes and the variables and tradeoffs that inevitably occur in the industry,connection with such processes.
In addition to potential impacts on our business resulting from climate-change legislation or regulations, our business also could be negatively affected. Competition for qualified management and key technical and sales personnelaffected by climate-change related physical changes or changes in our industry is intense.
At the end of fiscal 2016, twoweather patterns. An increase in severe weather patterns could result in damages to or loss of our senior executives, including our former chief executive officer, both of which had been with the Company for over 45 years, announced their retirements effective March 31, 2016. Both senior executives have agreed to continue assisting the Company on a consulting basis. While replacements were previously identified and were current members of our senior management team, we cannot provide any assurance that replacements will perform at or near the same levels of our prior senior executives. Our future success will depend on, among other factors,manufacturing facilities, impact our ability to successfully executeconduct our succession plan and continue to attract and retain qualified personnel, such as engineers and other skilled labor, andoperations and/or result in particular management and skilled employeesa disruption of our customers’ operations. In addition, volatility in weather patterns could exacerbate the cyclicality of demand for our foreign operations.heating products.
We rely heavily on trade secrets to gain a competitive advantage in the market and the unenforceability of our nondisclosure agreements may adversely affect our operations.
The heat tracing industry is highly competitive and subject to the introduction of innovative techniques and services using new technologies. While we have patented some of our products and processes, we historically have not relied upon patents to protect our design or manufacturing processes or products, and our patents are not material to our operations or business. Instead, we rely significantly on maintaining confidential our trade secrets and other information related to our operations. Accordingly, we require all employees to sign a nondisclosure agreement to protect our trade secrets, business strategy and other proprietary information. If the provisions of these agreements are found unenforceable in any jurisdiction in which we operate, the disclosure of our proprietary information may place us at a competitive disadvantage. Even where the provisions are enforceable, the confidentiality clauses may not provide adequate protection of our trade secrets and proprietary information in every such jurisdiction.
We may be unable to prevent third parties from using our intellectual property rights, including trade secrets and know-how, without our authorization or from independently developing intellectual property that is the same as or similar to ours, particularly in those countries where the laws do not protect our intellectual property rights as fully as in the United States. The unauthorized use of our trade secrets or know-how by third parties could reduce or eliminate any competitive advantage we have developed, cause us to lose sales or otherwise harm our business or increase our expenses as we attempt to enforce our rights.
Our intellectual property rights may not be successfully asserted in the future or may be invalidated, circumvented or challenged.
We have obtained and applied for some U.S. and, to a lesser extent, foreign trademark registrations and will continue to evaluate the registration of additional trademarks. We cannot guarantee that any of our pending applications will be approved. Moreover, even if the applications are approved, third parties may seek to oppose or otherwise challenge them. In addition, we rely on a number of significant unregistered trademarks, primarily abroad, but also in the United States, in the day-to-day operation of our business. Without the protections afforded by registration, our ability to protect and use our trademarks may be limited and could negatively affect our business.
In addition, while we have not faced intellectual property infringement claims from others in recent years, in the event successful infringement claims are brought against us, particularly claims (under patents or otherwise) against our product design or manufacturing processes, such claims could have a material adverse effect on our business, financial condition or results of operation.
Risks Related to Ownership of Our Common Stock
Our quarterly operating results may vary significantly, which could negatively impact the price of our common stock.
Our quarterly results of operations have fluctuated in the past and will continue to fluctuate in the future. You should not rely on the results of any past quarter or quarters as an indication of future performance in our business operations or the price of our common stock. Factors that might cause our operating results to vary from quarter to quarter include, but are not limited to:
general economic conditions and cyclicality in the end markets we serve;
the effects of the ongoing COVID-19 pandemic or other global pandemics or catastrophes;
future growth of energy and chemical processing capital investments;
a material disruption at any of our manufacturing facilities;
delays in our customers' projects for which our products are a component;
the timing of completion of large Greenfield projects;
competition from various other sources providing similar heat tracing products and services, or other alternative technologies, to customers; and
the seasonality of demand for MRO/UE orders, which is typically highest during the second and third fiscal quarters.
If our results of operations from quarter to quarter fail to meet the expectations of securities analysts and investors, the price of our common stock could be negatively impacted.
The market price of our common stock may fluctuate significantly, and this may make it difficult for holders to resell our common stock when they want or at prices that they find attractive.
The price of our common stock on the NYSE constantly changes. We expect that the market price of our common stock will continue to fluctuate. The market price of our common stock may fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include:
quarterly fluctuations in our operating results;
changes in investors' and analysts' perception of the business risks and conditions of our business or our competitors;
our ability to meet the earnings estimates and other performance expectations of financial analysts or investors;
unfavorable commentary or downgrades of our stock by equity research analysts;
the emergence of new sales channels in which we are unable to compete effectively;
disruption to our operations;
fluctuations in the stock prices of our peer companies or in stock markets in general; and
general economic or political conditions.conditions, including the effects of the COVID-19 pandemic.
In addition, in recent years, global equity markets have experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons often unrelated to their operating performance. These broad market fluctuations may adversely affect the market price of our common stock, regardless of our operating results.
Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws could impair a takeover attempt that our stockholders may find beneficial.
Our second amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could have the effect of rendering more difficult, or discouraging, an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:
authorizing our board of directors, without further action by the stockholders, to issue blank check preferred stock;
limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;
requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;
authorizing our board of directors, without stockholder approval, to amend our amended and restated bylaws;
limiting the determination of the number of directors on our board of directors and the filling of vacancies or newly created seats on our board of directors to our board of directors then in office; and
subject to certain exceptions, limiting our ability to engage in certain business combinations with an "interested stockholder" for a three-year period following the time that the stockholder became an interested stockholder.
These provisions, alone or together, could delay hostile takeovers and changes in control of our companythe Company or changes in our management.
Though we have opted out of the Delaware anti-takeover statute, our second amended and restated certificate of incorporation contains provisions that are similar to the Delaware anti-takeover statute, which may impair a takeover attempt that our stockholders may find beneficial. Any provision of our second amended and restated certificate of incorporation or amended and restated bylaws that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We do not expect to pay dividends on our common stock. Any future dividend payments are within the discretion of our board of directors or a duly authorized committee of the board of directors and will depend on, among other things, our results of operations, working capital requirements, capital expenditure requirements, financial condition, level of indebtedness, contractual restrictions with respect to payment of dividends, business opportunities, anticipated cash needs, provisions of applicable law and other factors that our board of directors may deem relevant. In particular, our credit facility limits our ability to pay dividends from cash generated from operations. We may not generate sufficient cash from operations in the future to pay dividends on our common stock. See Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Dividend Policy."
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters and principal executive offices are located at 100 Thermon Drive,7171 Southwest Parkway, Building 300, Austin, Texas.
Our principal manufacturing and warehousing operations are located at our San Marcos, Texas facilities. We own our principal manufacturing and warehousing facilities, and lease one ancillary manufacturing facility in San Marcos, Texas. . A summary of our physical properties as of March 31, 2018 followsIn addition, we have offices and manufacturing locations in Canada, the table below. We believe that our facilities are suitable for their purposeNetherlands, France, United Kingdom, Germany, Russia, Mexico, China, Korea, Japan, India, Australia, Malaysia, Bahrain and adequate to meet our business operations requirements. We have manufacturing facilities in the United States, Canada, Europe and India.South Africa. Most of our operations are registered to International Organization for Standardization (ISO) 9001 quality standards. We believe that our production facilities are suitable for their purpose and are adequate to support our businesses.
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| | | | | | |
Location | | Country | | Function | | Owned/Leased |
Corporate Headquarters
San Marcos ,TX
| | United States | | Manufacturing, fabrication, sales, engineering, marketing, research and development, warehouse and corporate headquarters | | Owned |
Houston, TX | | United States | | Fabrication, engineering and sales | | Leased |
Baton Rouge, LA | | United States | | Sales, engineering and warehouse | | Owned |
Port Neches, TX | | United States | | Sales and warehouse | | Leased |
|
| | | | | | |
Houston, TX | | United States | | Manufacturing, fabrication, sales and warehouse | | Leased |
Denver, CO | | United States | | Manufacturing, fabrication, sales and warehouse | | Owned |
Edmonton, AB | | Canada | | Manufacturing, fabrication, sales and warehouse | | Owned |
Oakville, ON | | Canada | | Manufacturing, fabrication, sales, engineering and warehouse | | Owned |
Orillia, ON | | Canada | | Manufacturing, fabrication, sales and warehouse | | Owned |
Office: Calgary, AB | | Canada | | Fabrication, sales, engineering and warehouse | | Leased |
MI Plant: Calgary, AB | | Canada | | Manufacturing, fabrication and warehouse | | Leased |
Edmonton, AB | | Canada | | Sales and warehouse | | Leased |
Fort McMurray, AB | | Canada | | Fabrication, sales and warehouse | | Leased |
Office: Calgary, AB | | Canada | | Fabrication, sales, engineering and warehouse | | Leased |
Mexico City | | Mexico | | Sales and engineering | | Leased |
Rio de Janeiro | | Brazil | | Sales, engineering and warehouse | | Leased |
Pijnacker | | Netherlands | | Manufacturing, fabrication, sales, engineering, warehouse, marketing and European headquarters | | Owned |
Pijnacker | | Netherlands | | Warehouse | | Leased |
Moscow | | Russia | | Sales and engineering | | Leased |
Moscow | | Russia | | Manufacturing, fabrication and warehouse | | Leased |
Paris | | France | | Sales and engineering | | Leased |
Gateshead, Tyne & Wear | | United Kingdom | | Sales, engineering and warehouse | | Leased |
Bergisch Gladbach | | Germany | | Sales and engineering | | Leased |
Cape Town | | South Africa | | Sales, engineering, fabrication and warehouse | | Leased |
Johannesburg | | South Africa | | Sales and warehouse | | Leased |
Manama | | Bahrain | | Sales and engineering | | Leased |
Shanghai | | China | | Sales and engineering | | Leased |
Shanghai | | China | | Warehouse | | Leased |
Shanghai | | China | | Warehouse | | Leased |
Beijing | | China | | Sales and engineering | | Leased |
Mumbai | | India | | Sales and engineering | | Leased |
Koregon Bhima, Pune | | India | | Manufacturing, fabrication and warehouse | | Owned |
Noida | | India | | Engineering | | Leased |
Caringbah, New South Wales | | Australia | | Sales | | Leased |
Bayswater, Victoria | | Australia | | Fabrication, sales, engineering and warehouse | | Owned |
Kuala Lumpur | | Malaysia | | Sales and engineering | | Leased |
Singapore
| | Singapore
| | Sales | | Leased |
Yokohama | | Japan | | Sales and engineering | | Leased |
Seoul | | South Korea | | Sales and engineering | | Leased |
Seoul | | South Korea | | Warehouse | | Leased |
ITEM 3. LEGAL PROCEEDINGS
For information on legal proceedings, see Note 13,14, "Commitments and Contingencies" to our consolidated financial statements contained elsewhere in this annual report, which is hereby incorporated by reference into this Item 3.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of the Company trades on the NYSE under the symbol "THR." The following table sets forth for each period indicated the reported high and low sales prices for the common stock of the Company on the NYSE.
|
| | | | | | | | | | | | |
| | | Thermon Common Stock |
| | | High | | Low | | Dividends Paid |
For the quarterly period ended: | | | | | | |
| June 30, 2016 | | $ | 21.87 |
| | $ | 16.87 |
| | — |
|
| September 30, 2016 | | $ | 21.11 |
| | $ | 16.66 |
| | — |
|
| December 31, 2016 | | $ | 21.20 |
| | $ | 16.50 |
| | — |
|
| March 31, 2017 | | $ | 21.48 |
| | $ | 18.33 |
| | — |
|
For the quarterly period ended: | | | | | | |
| June 30, 2017 | | $ | 21.39 |
| | $ | 17.60 |
| | — |
|
| September 30, 2017 | | $ | 19.61 |
| | $ | 15.74 |
| | — |
|
| December 31, 2017 | | $ | 26.50 |
| | $ | 17.89 |
| | — |
|
| March 31, 2018 | | $ | 24.93 |
| | $ | 21.24 |
| | — |
|
For the quarterly period ended: | | | | | | |
| June 30, 2018 (Through May 29, 2018) | | $ | 24.83 |
| | $ | 21.74 |
| | — |
|
On May 29, 2018,2020, the closing sale price of our common stock, as reported by the NYSE, was $23.12.$16.03. As of May 29, 2018,2020, there were approximately 15 holders of our common stock of record.
Stock Performance
The following line graph and table present a comparison of cumulative total returns for our common stock on an annual basis over the last five fiscal years as compared to (i) the Russell 2000 Index, (ii) the Russell 3000 Index (iii) the Russell 2000 Global Index, (iv) a peer group selected by the Company and (v)(ii) the S&P SmallCap 600 - Capped Energy Index, in each case over the same period. Our peer group was selected in good faith and is comprised of manufacturing companies who compete in similar industries and possess similar sales and market capitalizations. The returns of each company in the peer group have been weighted according to market capitalization. The plotted points in the line graph are based on the closing price on the last trading date of the fiscal year. The values assume an initial investment of $100 was made in our common stock and the respective indexes on March 31, 20132015 (the last day of fiscal 2013)2015), and assumes the reinvestment of dividends. The stock price performance shown below is not necessarily indicative of future price performance.
Pursuant to SEC rules, our stock performance line graph and table must include both a broad market equity index and a published industry or line-of-business index (or a self-constructed peer index) in addition to our common stock. The rules also require that if a registrant selects a different index from an index used in the immediately preceding fiscal year, the registrant must (i) explain the reason for the change and (ii) compare the registrant’s total return to that of both the newly selected index and the index used in the immediately preceding fiscal year. With respect to the broad market equity index, we have used and will continue to the Russell 2000 Index; however, we will no longer include the Russell 3000 Index and Russell 2000 Global Index. The reason we are making the change is that we are one of the companies that comprises the Russell 2000 Index, and the Russell 2000 Index generally includes companies with more comparable market capitalization to us (compared to the Russell 3000 Index and the Russell 2000 Global Index). Additionally, going forward we will also use the S&P SmallCap 600 - Capped Energy Index as we believe it is more reflective of the cyclical nature of the markets we serve while also used to measure performance for executive compensation purposes. Pursuant to SEC rules, for this stock performance line graph and table we have included a comparison of our cumulative total return to both the selected indices ((i) the Russell 2000 Index, (ii) a peer group selected by the Company and (iii) the S&P SmallCap 600 - Capped Energy Index) and the discontinued indices ((i) the Russell 3000 Index and (ii) the Russell 200 Global Index).
| | | March 31, 2013 | March 31, 2014 | March 31, 2015 | March 31, 2016 | March 31, 2017 | March 31, 2018 | March 31, 2015 | March 31, 2016 | March 31, 2017 | March 31, 2018 | March 31, 2019 | March 31, 2020 |
Thermon Group Holdings, Inc. | $ | 100.00 |
| $ | 104.37 |
| $ | 108.37 |
| $ | 79.06 |
| $ | 93.83 |
| $ | 100.90 |
| $ | 100.00 |
| $ | 72.95 |
| $ | 86.58 |
| $ | 93.10 |
| $ | 101.83 |
| $ | 62.61 |
|
iShares Russell 3000 Index | $ | 100.00 |
| $ | 124.51 |
| $ | 139.28 |
| $ | 138.45 |
| $ | 162.64 |
| $ | 184.31 |
| |
iShares Russell 2000 Index | $ | 100.00 |
| $ | 124.92 |
| $ | 135.13 |
| $ | 121.88 |
| $ | 123.80 |
| $ | 171.80 |
| $ | 100.00 |
| $ | 90.30 |
| $ | 113.78 |
| $ | 127.23 |
| $ | 129.90 |
| $ | 98.90 |
|
Russell Global Index | $ | 100.00 |
| $ | 115.69 |
| $ | 117.34 |
| $ | 95.98 |
| $ | 109.37 |
| $ | 123.32 |
| |
Peer Group (a) | $ | 100.00 |
| $ | 109.66 |
| $ | 96.19 |
| $ | 107.74 |
| $ | 152.78 |
| $ | 149.77 |
| |
S&P 600 Small Cap 600 Energy | $ | 100.00 |
| $ | 131.44 |
| $ | 72.18 |
| $ | 38.04 |
| $ | 46.99 |
| $ | 36.06 |
| $ | 100.00 |
| $ | 52.70 |
| $ | 65.11 |
| $ | 49.96 |
| $ | 38.83 |
| $ | 7.87 |
|
(a) Our peer group is comprised of the following publicly traded companies, which we selected in good faith on the basis of being manufacturing companies that compete in similar industries and have comparable sales and market capitalizations as Thermon: Ampco-Pittsburgh Corp. (AP), AAON Inc. (AAON), Flotek Industries Inc. (FTK), Gorman-Rupp Co. (GRC), Advanced Energy Industries Inc. (AEIS), Allied Motion Technologies, Inc. (AMOT), ESCO Technologies Inc. (ESE), Aspen Aerogels, Inc. (ASPN), Badger Meter, Inc. (BMI), DMC Global, Inc. (BOOM), Brooks Automation, Inc. (BRKS), Cohu, Inc. (COHU), Hurco Companies, Inc. (HURC), Lydall, Inc. (LDL), MFRI, Inc. (MFRI), and Powell Industries Inc. (POWL).
The information in this "Stock Performance" section shall not be deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act.
Dividend Policy
Since the completion of the CHS Transactions on April 30, 2010, we have not declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our common stock. We currently intend to retain earnings to finance the growth and development of our business and for working capital and general corporate purposes. Any payment of dividends will be at the discretion of our board of directors and will depend upon our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed
by applicable law and other factors. In particular, our credit facility limits our ability to pay dividends from cash generated from operations. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources."
Equity Compensation Plan Information
For information on our equity compensation plans, see Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters-Equity Compensation Plan Information." See also Note 14,15, "Stock-Based Compensation Expense" to our consolidated financial statements included elsewhere in this annual report.
Issuer Purchases of Equity Securities
None.
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected historical consolidated financial and operating data as of and for the fiscal years ended March 31, 2020 ("fiscal 2020"), March 31, 2019 ("fiscal 2019"), March 31, 2018 ("fiscal 2018"), March 31, 2017 ("fiscal 2017"), and March 31, 2016 ("fiscal 2016"), March 31, 2015 ("fiscal 2015") and March 31, 2014 ("fiscal 2014"). The data set forth below should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is contained elsewhere in this annual report, and our consolidated financial statements and the notes thereto as of March 31, 20182020 and 20172019 and for fiscal 2018,2020, fiscal 20172019 and fiscal 2016,2018, which are contained in Item 8 elsewhere in this annual report.
| | | | Year Ended March 31, | | Year Ended March 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | (dollars in thousands, except per share data) | | (dollars in thousands, except per share data) |
Consolidated Statements of Operations Data: | Consolidated Statements of Operations Data: | | | | | | | | | | | Consolidated Statements of Operations Data: | | | | | | | | | | |
Sales | Sales | | $ | 308,609 |
| | $ | 264,130 |
| | $ | 281,928 |
| | $ | 308,578 |
| | $ | 277,323 |
| Sales | | $ | 383,486 |
| | $ | 412,642 |
| | $ | 308,609 |
| | $ | 264,130 |
| | $ | 281,928 |
|
Cost of sales | Cost of sales | | 164,798 |
| | 152,199 |
| | 150,613 |
| | 153,874 |
| | 142,153 |
| Cost of sales | | 221,848 |
| | 236,702 |
| | 164,798 |
| | 152,199 |
| | 150,613 |
|
Gross profit | Gross profit | | $ | 143,811 |
| | $ | 111,931 |
| | $ | 131,315 |
| | $ | 154,704 |
| | $ | 135,170 |
| Gross profit | | $ | 161,638 |
| | $ | 175,940 |
| | $ | 143,811 |
| | $ | 111,931 |
| | $ | 131,315 |
|
Operating expenses: | Operating expenses: | | | | | | | | | | | Operating expenses: | | | | | | | | | | |
| Marketing, general and administrative and engineering | | 94,615 |
| | 77,715 |
| | 80,729 |
| | 76,868 |
| | 65,463 |
| Marketing, general and administrative and engineering | | 111,202 |
| | 106,660 |
| | 94,615 |
| | 77,715 |
| | 80,729 |
|
| Amortization of intangible assets | | 16,458 |
| | 11,772 |
| | 12,112 |
| | 10,775 |
| | 11,090 |
| Amortization of intangible assets | | 17,773 |
| | 20,771 |
| | 16,458 |
| | 11,772 |
| | 12,112 |
|
| Impairment of intangible assets and goodwill (1) | | — |
|
| — |
|
| 1,713 |
| | — |
| | — |
| Impairment of intangible assets and goodwill (1) | | — |
|
| — |
|
| — |
| | — |
| | 1,713 |
|
Income from operations | Income from operations | | $ | 32,738 |
| | $ | 22,444 |
| | $ | 36,761 |
| | $ | 67,061 |
| | $ | 58,617 |
| Income from operations | | $ | 32,663 |
| | $ | 48,509 |
| | $ | 32,738 |
| | $ | 22,444 |
| | $ | 36,761 |
|
Interest income | Interest income | | 606 |
| | 566 |
| | 423 |
| | 460 |
| | 246 |
| Interest income | | 252 |
| | 238 |
| | 606 |
| | 566 |
| | 423 |
|
Interest expense (2) | Interest expense (2) | | (9,360 | ) | | (3,518 | ) | | (4,142 | ) | | (4,565 | ) | | (10,019 | ) | Interest expense (2) | | (14,279 | ) | | (15,714 | ) | | (8,984 | ) | | (3,518 | ) | | (4,142 | ) |
Loss on retirement of debt | | — |
| | — |
| | — |
| | — |
| | (15,485 | ) | |
Other expense (3) | | (5,595 | ) | | (410 | ) | | (676 | ) | | (394 | ) | | (596 | ) | |
Loss on extinguishment of debt | | Loss on extinguishment of debt | | — |
| | — |
| | (376 | ) | | — |
| | — |
|
Other income/(expense) (3) | | Other income/(expense) (3) | | (1,558 | ) | | 109 |
| | (5,595 | ) | | (410 | ) | | (676 | ) |
Income from continuing operations before provision for income taxes | Income from continuing operations before provision for income taxes | | $ | 18,389 |
| | $ | 19,082 |
| | $ | 32,366 |
| | $ | 62,562 |
| | $ | 32,763 |
| Income from continuing operations before provision for income taxes | | $ | 17,078 |
| | $ | 33,142 |
| | $ | 18,389 |
| | $ | 19,082 |
| | $ | 32,366 |
|
Income tax expense | Income tax expense | | 5,170 |
| | 4,098 |
| | 8,716 |
| | 13,176 |
| | 6,964 |
| Income tax expense | | 5,142 |
| | 9,973 |
| | 5,170 |
| | 4,098 |
| | 8,716 |
|
Net income | Net income | | $ | 13,219 |
| | $ | 14,984 |
| | $ | 23,650 |
| | $ | 49,386 |
| | $ | 25,799 |
| Net income | | $ | 11,936 |
| | $ | 23,169 |
| | $ | 13,219 |
| | $ | 14,984 |
| | $ | 23,650 |
|
Income attributable to non-controlling interests | | 1,306 |
| | 343 |
| | 641 |
| | — |
| | — |
| |
Income (loss) attributable to non-controlling interests | | Income (loss) attributable to non-controlling interests | | (2 | ) | | 413 |
| | 1,306 |
| | 343 |
| | 641 |
|
Net income available to Thermon Group Holdings, Inc. | Net income available to Thermon Group Holdings, Inc. | | $ | 11,913 |
| | $ | 14,641 |
| | $ | 23,009 |
| | $ | 49,386 |
| | $ | 25,799 |
| Net income available to Thermon Group Holdings, Inc. | | $ | 11,938 |
| | $ | 22,756 |
| | $ | 11,913 |
| | $ | 14,641 |
| | $ | 23,009 |
|
Net income per common share: | Net income per common share: | | | | | | | | | | | Net income per common share: | | | | | | | | | | |
| Basic | | 0.37 |
| | $ | 0.45 |
| | $ | 0.72 |
| | $ | 1.54 |
| | $ | 0.82 |
| Basic | | $ | 0.36 |
| | $ | 0.70 |
| | $ | 0.37 |
| | $ | 0.45 |
| | $ | 0.72 |
|
| Diluted | | 0.36 |
| | 0.45 |
| | 0.71 |
| | 1.52 |
| | 0.80 |
| Diluted | | 0.36 |
| | 0.69 |
| | 0.36 |
| | 0.45 |
| | 0.71 |
|
Weighted-average shares used in | Weighted-average shares used in | | | | | | | | | | | Weighted-average shares used in | | | | | | | | | | |
| computing net income per | | | | | | | | | | | computing net income per | | | | | | | | | | |
| common share (thousands) | | | | | | | | | | | common share (thousands) | | | | | | | | | | |
| Basic | | 32,424 |
| | 32,302 |
| | 32,177 |
| | 32,027 |
| | 31,595 |
| Basic | | 32,760 |
| | 32,569 |
| | 32,424 |
| | 32,302 |
| | 32,177 |
|
| Diluted | | 32,797 |
| | 32,633 |
| | 32,593 |
| | 32,407 |
| | 32,154 |
| Diluted | | 33,149 |
| | 33,054 |
| | 32,797 |
| | 32,633 |
| | 32,593 |
|
| | | | | | | | | | | | | | | | | | | | |
Cash dividends per share | Cash dividends per share | | — |
| | — |
| | — |
| | — |
| | — |
| Cash dividends per share | | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | | | | | |
Other Financial and Operating Data: | Other Financial and Operating Data: | | | | | | | | | | | Other Financial and Operating Data: | | | | | | | | | | |
| Capital expenditures | | 9,072 |
| | 8,370 |
| | 12,581 |
| | 6,075 |
| | 3,367 |
| Capital expenditures (4) | | 10,252 |
| | 11,055 |
| | 9,072 |
| | 8,370 |
| | 12,581 |
|
| Backlog at end of period (4) | | 159,624 |
| | 106,880 |
| | 81,242 |
| | 75,745 |
| | 84,840 |
| Backlog at end of period (5) | | 105,445 |
| | 119,956 |
| | 159,624 |
| | 106,880 |
| | 81,242 |
|
| | | | At March 31, | | At March 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | (dollars in thousands) | | (dollars in thousands) |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 33,879 |
| | $ | 42,842 |
| | $ | 84,570 |
| | $ | 93,774 |
| | $ | 72,640 |
| | $ | 43,237 |
| | $ | 31,402 |
| | $ | 33,879 |
| | $ | 42,842 |
| | $ | 84,570 |
|
Accounts receivable, net | | 94,411 |
| | 63,719 |
| | 57,432 |
| | 60,441 |
| | 52,578 |
| | 92,478 |
| | 105,323 |
| | 94,411 |
| | 63,719 |
| | 57,432 |
|
Inventory, net | | 63,829 |
| | 34,020 |
| | 40,645 |
| | 41,008 |
| | 37,316 |
| | 60,273 |
| | 64,890 |
| | 63,829 |
| | 34,020 |
| | 40,645 |
|
Total assets | | 662,477 |
| | 454,080 |
| | 468,677 |
| | 449,757 |
| | 442,180 |
| | 620,905 |
| | 655,762 |
| | 662,477 |
| | 454,080 |
| | 468,677 |
|
Total debt, principal amount | | 225,000 |
| | 81,000 |
| | 94,500 |
| | 108,000 |
| | 121,500 |
| | 176,000 |
| | 206,500 |
| | 225,000 |
| | 81,000 |
| | 94,500 |
|
Deferred debt issuance costs | | 7,967 |
| | 524 |
| | 888 |
| | 1,217 |
| | 1,351 |
| | 4,447 |
| | 6,271 |
| | 7,967 |
| | 524 |
| | 888 |
|
Total debt, net of deferred debt issuance costs | | 217,033 |
| | 80,476 |
| | 93,612 |
| | 106,783 |
| | 120,149 |
| | 171,553 |
| | 200,229 |
| | 217,033 |
| | 80,476 |
| | 93,612 |
|
Total equity | | 340,853 |
| | 312,502 |
| | 298,701 |
| | 271,766 |
| | 250,466 |
| | 346,439 |
| | 348,949 |
| | 340,853 |
| | 312,502 |
| | 298,701 |
|
| |
(1) | During fiscal 2016, the European segment's financial results were negatively impacted by a $1.7 million impairment charge to Unitemp's goodwill and other intangible assets. |
| |
(2) | Interest expense in fiscal 2018 includes a $0.4 million acceleration of amortization of unamortized deferred debt costs related to the retirement of the term loan A and a $0.9 million acceleration of amortization of deferred debt charges in connection with the unscheduled repayment of $25.0 million on the term loan B. Interest expense for fiscal 2016 included a $0.3 million acceleration of amortization of our deferred debt issuance costs in connection with the second amendment to our prior credit agreement and $0.4 million of additional amortized deferred debt issuance costs. Interest expense for fiscal 2014 included a $4.0 million acceleration of amortization on our deferred debt issuance costs related to the redemption of all $118.1 million of aggregate principal amount of our 9.5% senior secured notes and an additional $0.6 million of amortized deferred debt issuance costs. |
| |
(3) | Other expense in fiscal 2018 includes a foreign currency transaction loss of $3.3 million in connection with the option contract entered into to secure the CCI acquisition purchase price, and a $2.3 million loss related to a derivative contract to hedge a $112.8 million long-term intercompany loan between Canada and the United States for the CCI acquisition. |
| |
(4) | Represents the future revenue attributable to signed, but unperformed, purchase orders that set forth specific revenue amounts at the end of the applicable period. |
(1) During fiscal 2016, the EMEA segment's financial results were negatively impacted by a $1.7 million impairment charge to Unitemp's goodwill and other intangible assets.
(2) Interest expense in fiscal 2020 and 2019 primarily represents interest expense on the term loan B on outstanding principal balances as of March 31, 2020, 2019 and 2018 of $176.0 million, $206.5 million and $225.0 million, respectively, compared to $81.0 million as of March 31, 2017. Further increases in fiscal 2017 and thereafter of interest expense were due to the difference in interest rates on our term loan A that carried an interest rate that ranged from 2.87% to 3.62% after giving effect to our interest rate swaps and the interest rate reductions realized from the first and second amendments to our prior credit agreement.
(3) Other expense in fiscal 2018 includes a foreign currency transaction loss of $3.3 million in connection with the option contract entered into to secure the THS acquisition purchase price, and a $2.3 million loss related to a derivative contract to hedge a $112.8 million long-term intercompany loan between Canada and the United States for the THS acquisition.
(4) Represents capital expenditures less the sales of rental equipment at net book value.
(5) Represents the future revenue attributable to signed, but unperformed, purchase orders that set forth specific revenue amounts at the end of the applicable period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, Item 6, "Selected Financial Data" and our consolidated financial statements and related notes included elsewhere in this annual report. The discussions in this section contain forward-looking statements that involve risks and uncertainties, including, but not limited to, those described in Item 1A, "Risk Factors." Actual results could differ materially from those discussed below. Please refer to the section entitled "Forward-Looking Statements".
Overview
We are one of the largest providers of highly engineered industrial process heating solutions for process industries. For over 6065 years, we have served a diverse base of thousands of customers around the world in attractive and growing markets, including oil & gas, chemical processing, power generation, mining and power generation.other industrial markets. We are a global leader and one of the few thermal solutions providers with a global footprint. We offer a full suite of products (heating units, heating cables, temporary power solutions and tubing bundles and control systems)bundles) and services (design optimization, engineering,(engineering, installation and maintenance services) and software (design optimization and control systems) required to deliver comprehensive solutions to some of the world's largest and most complex projects. We serve our customers through a global network of sales and service professionals and distributors in more than 30 countries and through our ten manufacturing facilities on three continents. These global capabilities and longstanding relationships with some of the largest multinational oil & gas, chemical processing, power
and EPC companies in the world have enabled us to diversify our revenue streams and opportunistically access high growth markets worldwide. For fiscal 20182020, approximately 63%59% of our revenues were generated outside of the United States. Since March 2015, we have acquired four companies (THS, Unitemp, Sumac and IPI), that offer complementary products and services to our core thermal
solution offerings. We actively pursue both organic and inorganic growth initiatives that serve to advance our corporate strategy.
Revenue. Our revenues are derived from providing customers with a full suite of innovative and reliable process heating solutions, including electric and steam heat tracing, tubing bundles, control systems, design optimization, engineering services, installation services, and portable power solutions.solutions and software. Additionally, THS offers a complementary suite of advanced heating and filtration solutions for industrial and hazardous area applications. Historically, our sales are primarily to industrial customers for petroleum and chemical plants, oil and gas production facilities and power generation facilities. Our petroleum customers represent a significant portion of our business. We serve all three major categories of customers in the petroleum industry - upstream exploration/production, midstream transportation and downstream refining. Overall, demand for industrial heat tracing solutions falls into two categories: (i) new facility construction, which we refer to as Greenfield projects, and (ii) recurring maintenance, repair and operations and facility upgrades or expansions, which we refer to as MRO/UE. Greenfield construction projects often require comprehensive heat tracing solutions. We believe that Greenfield revenue consists of sales revenue by customer in excess of $1 million annually (excluding sales to resellers), and typically includes most orders for projects related to facilities that are new or that are built independent of existing facilities. We refer to sales revenue by customer of less than $1 million annually, which we believe are typically derived from MRO/UE, as MRO/UE revenue. Based on our experience, we believe that $1 million in annual sales is an appropriate threshold for distinguishing between Greenfield revenue and MRO/UE revenue. However, we often sell our products to intermediaries or subcontract our services; accordingly, we have limited visibility into how our products or services may ultimately be used and can provide no assurance that our categorization may accurately reflect the sources of such revenue. Furthermore, our customers do not typically enter into long-term forward maintenance contracts with us. In any given year, certain of our smaller Greenfield projects may generate less than $1 million in annual sales, and certain of our larger plant expansions or upgrades may generate in excess of $1 million in annual sales, though we believe that such exceptions are few in number and insignificant to our overall results of operations. THS has been excluded from the Greenfield and MRO/UE calculations. Most of THS's revenue would be classified as MRO/UE under these definitions.
We believe that our pipeline of planned projects, in addition to our backlog of signed purchase orders, provides us with visibility into our future revenue. Historically we have experienced few order cancellations, and the cancellations that have occurred in the past have not been material compared to our total contract volume or total backlog. The small number of order cancellations is attributable in part to the fact that a large portion of our solutions are ordered and installed toward the end of Greenfield project construction. Our backlog at March 31, 20182020 was $159.6$105.4 million inclusive of $31.7 million for THS, as compared to $106.9$120.0 million at March 31, 2017.2019. The timing of recognition of revenue out of backlog is not always certain, as it is subject to a variety of factors that may cause delays, many of which are beyond our control (such as customers' delivery schedules and levels of capital and maintenance expenditures). When delays occur, the recognition of revenue associated with the delayed project is likewise deferred.
Cost of sales. Our cost of sales includes primarily the cost of raw material items used in the manufacture of our products, cost of ancillary products that are sourced from external suppliers and construction labor cost. Additional costs of revenue include contract engineering cost directly associated to projects, direct labor cost, shipping and handling costs, and other costs associated with our manufacturing/fabrication operations. The other costs associated with our manufacturing/fabrication operations are primarily indirect production costs, including depreciation, indirect labor costs, and the costs of manufacturing support functions such as logistics and quality assurance. Key raw material costs include polymers, copper, stainless steel, insulating material, and other miscellaneous parts related to products manufactured or assembled as part of our heat tracing solutions. Historically, our primary raw materials have been readily available from multiple suppliers and raw material costs have been stable, and we have been generally successful with passing along raw material cost increases to our customers. Therefore, increases in the cost of key raw materials of our products have not generally affected our gross margins. We cannot provide any assurance that we may be able to pass along such cost increases, including the potential impacts of tariffs, to our customers in the future, and if we are unable to do so, our results of operations may be adversely affected.
Operating expenses. Our marketing, general and administrative and engineering expenses are primarily comprised of compensation and related costs for sales, marketing, pre-sales engineering and administrative personnel, as well as other sales related expenses and other costs related to research and development, insurance, professional fees, the global integrated business information system, provisions for bad debts and warranty expense.
Key drivers affecting our results of operations. Our results of operations and financial condition are affected by numerous factors, including those described above under Item 1A, "Risk Factors" and elsewhere in this annual report and those described below:
Timing of Greenfield projects. Our results of operations in recent years have been impacted by the various construction phases of large Greenfield projects. On very large projects, we are typically designated as the heat tracing provider of choice by the project owner. We then engage with multiple contractors to address incorporating various heat tracing solutions throughout the overall project. Our largest Greenfield projects may generate revenue for several quarters. In the early stages of a Greenfield project, our revenues are typically realized from the provision of engineering services. In the middle stages, or the material requirements phase, we typically experience the greatest demand for our heat tracing cable, at which point our revenues tend to accelerate. Revenues tend to decrease gradually in the final stages of a project and are generally derived from installation services and demand for electrical panels and other miscellaneous electronic components used in the final installation of heat tracing cable, which we frequently outsource from third-party manufacturers. Therefore, we typically provide a mix of products and services during each phase of a Greenfield project, and our margins fluctuate accordingly.
Cyclicality of end-users' markets. Demand for our products and services depends in large part upon the level of capital and maintenance expenditures of our customers and end users, in particular those in the energy, chemical processing and power generation industries, and firms that design and construct facilities for these industries. These customers' expenditures historically have been cyclical in nature and vulnerable to economic downturns. Greenfield projects, and in particular large Greenfield projects (i.e.(i.e., new facility construction projects generating in excess of $5 million in annual sales), historically have been a substantial source of revenue growth, and Greenfield revenues tend to be more cyclical than MRO/UE revenues. In recent years we have experienced particular cyclicality in capital spending for new facilities in Canada, Eastern Europe and the Middle East. Revenues derived from Europe, including the Middle East and Africa, accounted for 22%, 27% and 23% of our total revenue during fiscal 2018, fiscal 2017 and fiscal 2016, respectively, and revenue derived from the Canada segment accounted for 31%, 16% and 20% of our total revenue during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. In fiscal 2018, our Canadian operations experienced a revenue increase of 126.3% as compared to fiscal 2017 due to an increase in MRO/UE demand and the THS transaction. A sustained decrease in capital and maintenance spending or in new facility construction by our customers could have a material adverse effect on the demand for our products and services and our business, financial condition and results of operations.
Acquisition strategy. In recent years, we have begun executing on a strategy to grow the Company through the acquisition of businesses that are either in the heat tracing solutions industry or that provide complementary products and solutions for the markets and customers we serve. Since March 2015, we have completed four acquisitions: THS, Unitemp, Sumac and IPI. See Note 3. "Acquisitions" to our consolidated financial statements and accompanying notes thereto included below in Item 8. Financial Statements and Supplementary Data of this annual report for information on these acquisitions.
Impact of product mix. Typically, both Greenfield and MRO/UE customers require our products as well as our engineering and construction services. The level of service and construction needs will affect the profit margin for each type of revenue. We tend to experience lower margins from our design optimization, engineering, installation and maintenance services than we do from sales of our heating units, heating cable, tubing bundle and control system products. We also tend to experience lower margins from our outsourced products, such as electrical switch gears and transformers, than we do from our manufactured products. Accordingly, our results of operations are impacted by our mix of products and services.
We estimate that Greenfield and MRO/UE have each made the following contribution as a percentage of revenue in the periods listed:
| | Fiscal Year Ended March 31,* | | | 2018 | | 2017 | | 2016 | | 2020 | | 2019 | | 2018 |
Greenfield | | 37 | % | | 39 | % | | 34 | % | | 40 | % | | 49 | % | | 37 | % |
MRO/UE | | 63 | % | | 61 | % | | 66 | % | | 60 | % | | 51 | % | | 63 | % |
*THS has been excluded from the table above. Most of THS's revenue would be classified as MRO/UE under the current definitions.
For MRO/UE orders, the sale of our manufactured products typically represents a higher proportion of the overall revenue associated with such order than the provision of our services. Greenfield projects, on the other hand, require a higher level of our services than MRO/UE orders, and often require us to purchase materials from third party vendors. Therefore, we typically realize higher margins from MRO/UE revenues than Greenfield revenues.
the significant Greenfield activity we have experienced in recent years, our installed base has continued to grow, and we expect that such installed base will continue to generate ongoing high margin MRO/UE revenue. For fiscal 2018,2020, MRO/UE sales comprised approximately 63%60% of our consolidated revenues (excluding THS).
The following table sets forth data from our statements of operations as a percentage of sales for the periods indicated.