UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended March 31, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35159
THERMON GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 27-2228185 | |||||||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||||||||
| 7171 Southwest Parkway, | Building 300, | Suite 200, | Austin, | Texas | 78735 | |||||||||||||||
(Address of principal executive offices) | (Zip Code) | |||||||||||||||||||
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, $0.001 par value per share | THR | New York Stock Exchange | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
x Yes ¨ No
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.
| Large accelerated filer | Accelerated filer | x | ||||||||||||
| Non-accelerated filer | o | Smaller reporting company | ☐ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No
The aggregate market value of the registrant's common equity held by non-affiliates as of September 30, 20192021 was $743,865,220$566,825,817 based on the closing price of $22.98$17.31 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 of May 29, 2020,25, 2022, the registrant had 32,960,505 33,373,950 shares of common stock, par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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 20202022 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, 20202022
TABLE OF CONTENTS
| Page | |||||
| PART I | |||||
| PART II | |||||
| PART III | |||||
| PART IV | |||||
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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 lookingforward-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 a global pandemic, including the novel strain of coronavirus (COVID-19)current pandemic (COVID-19 and its variants); (ii) general economic conditions and cyclicality in the markets we serve; (iii) future growth of energy, chemical processing and power generation capital investments; (iv) our ability to operate successfully in foreign countries; (v) our ability to deliver existing orders within our backlog; (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; (x) our ability to successfully develop and improve our products and successfully implement new technologies; (xi)(vi) competition from various other sources providing similar heat tracing and process heating products and services, or alternative technologies, to customers; (xii)(vii) our ability to deliver existing orders within our backlog; (viii) our ability to bid and win new contracts; (ix) the imposition of certain operating and financial restrictions contained in our debt agreements; (x) our revenue mix; (xiii)(xi) our ability to acquire smaller value added companies; (xiv)grow through strategic acquisitions; (xii) our ability to manage risk through insurance against potential liabilities (xiii) changes in relevant currency exchange rates; (xiv) tax liabilities and changes to tax policy; (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) the credit risk associated to our extension of credit to customers; (xxiv) our ability to achieve our operational initiatives; (xxiv)(xxv) unforeseen difficulties with expansions, relocations, or consolidations of existing facilities; (xxvi) potential liability related to our products as well as the delivery of products and services; (xxv)(xxvii) our ability to comply with foreign anti-corruption laws; (xxvi)(xxviii) export control regulations or sanctions; (xxvii)(xxix) changes in U.S. and foreign government administrative policy; (xxviii)(xxx) the current 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 lawsCanadian governments and regulations applicable to domestic and international operations, including U.S. government tariffs and the United Kingdom’s referendum vote; (xxx)European Union; (xxxi) environmental and health and safety laws and regulations as well as environmental liabilities; and (xxxi)(xxxii) climate change and related regulation of 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.
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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 2020,2022," "fiscal 2019"2021" and "fiscal 2018" mean2020" relate to the Company's fiscal years ended March 31, 2020,2022, March 31, 20192021, and March 31, 2018,2020, 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 65 years, we have served a diverse base of thousands of customers around the world in attractive and growing markets, including chemical and petrochemical, oil, & gas, chemical processing, power generation, transportation, miningcommercial, rail and transit, and other, industrialwhich we refer to as our "key end markets." We offer a full suite of products (heating units, heating cables, temporary power solutions and tubing bundles), services (engineering, installation and maintenance services) and software (design optimization and wireless and network control systems) required to deliver comprehensive solutions to some of the world's largest and most complex projects. With a legacy of innovation and sustainedcontinued investment in research and development, Thermon has established itself as a technology leader in hazardous or classified areas.areas, and we are committed to developing sustainable solutions for our customers. We serve our customers through a global network of sales and service professionals and distributors in more than 30 countries and through our tennine 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 growthhigh-growth markets worldwide.
On April 30, 2010, an investor group led by entities affiliated with CHS Capital LLC ("CHS") and two other private equity firms, acquired Audax's controlling interest in us.
In May 2011, we completed the initial public offering ("IPO") of our common stock, and our common stock became listed on The New York Stock Exchange under the ticker symbol "THR."
In October 2017, we, through a typical processing facility, they are critical to the safe and profitable operationwholly-owned subsidiary, acquired 100% 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 corporate offices are located at 7171 Southwest Parkway, Building 300, Suite 200, Austin, Texas 78735. Our telephone number is (512) 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.
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Heat Tracing
We offer turnkey 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.
Our tubing bundle solutions include bundle design services, heated and insulated sample lines for process control and instrumentation, and continuous emissions sampling lines for regulatory required environmental emissions monitoring and enforcement. We believe this capability allows us to offer products which help our customers with important sustainability practices, such as CCI Thermal Technologies Inc.) developsmeasuring emissions and produces advanced industrial heating and filtration solutions for industrialcomplying with related regulatory requirements.
Our temporary power systems provide portable, flexible, and hazardous area applicationsrated electrical connection systems and LED lighting that closely align with Thermon's core businessprovide the power infrastructure for workers in construction zones and serves similar end markets in North America. As such, we have elected to report THS's operations through our US-LAMprojects for industrial plants and Canada reportable segments. Both Unitemp and IPI offer thermal solutions and have been included in our EMEA and US-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. See Note 18, "Segment Information" for financial data relating to our four reportable geographic segments.
Our products and services include a wide range of electric heat tracing cables, steam tracing components, tubing bundles, instrumentheating solutions, controls, monitoring and control products, process heaters, environmental heaterssoftware, instrumentation, project services, industrial heating and filtration solutions, temporary electrical power distribution and lighting, and other complementary products and services, including:
Controls, Monitoring and Software
Our solution includessolutions include smart, connected devices and software systems for the control and management of a customer’s heat trace system. We offer a range of Genesis™ and TraceNet™ control products from a single point controller to a high capacityhigh-capacity multi-point control panel. All our controllers and panels can be networked together via wired or wireless communication into a large
control solution with capacity to manage over 30,000 heat trace circuits within the same customer facility. Our systems can be integrated with a plant’s central data management and control system.
Our controls and plant management software are built upon internet of things (IOT) technology that can be deployed locally within the 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 believe our control solutions are the most advanced, reliable and easy-to-use monitoring solutions in the marketplace.
•Filtration (branded as “3L Filters”) - provides highly specialized filtration solutions for the most stringent environments, including the nuclear industry; and
•Rail and Transit (branded as “Hellfire,” "Velocity," “ArcticSense” and others) - provides heating system. Our complete range of products includesapplications to both electric-rolling stock (rail cars) and steam-heated bundles containing various types of tubing (such as copper, stainless steelrail infrastructure (track 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.switch).
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Project Services
As a manufacturer and global expert in process heating solutions, our EPC and end userend-user customers often times rely on Thermon to deliver a range of project services, which may include:
•Engineering and designdesign;
•Procurement and project management servicesservices;
•Turnkey construction installationinstallation;
•Recurring facility assessment or auditaudit; and
•Maintenance servicesservices.
Our customers rely on Thermon’s design and engineering expertise on projects around the world. These services are combined with our heat tracing and process heating products under one contract to deliver an integrated solution that improves the overall value proposition for the customer. By delivering design drawings in conjunction with early project specifications, we can address our customer needs for design optimization studies, product selection assistance and computer-generated drawing packages. Often these are new facilities or Greenfield projects(which are discussed further below under the section "Customers"), but they may also include upgrades or expansions and 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.
Manufacturing and Operations
We have tennine manufacturing facilities on three continents. We manufacture the products that generate a majorityand two smaller assembly facilities, which complement our manufacturing operations. Most of our total sales atheat tracing products are manufactured in our principal facility in San Marcos, Texas, including flexible heating cables, control systems and tubing bundles. Our facilitiesProcess Heating products 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-term interruptionsprimarily manufactured at our Canadian facilities. We have smaller manufacturing facilities. Our manufacturing facilities are equipped to provide us with maximum flexibility to manufacture our products efficientlylocations in the Netherlands and with short lead times. ThisRussia, and we have small assembly operations in turn allows for lower inventory levelsPune, India and faster responses to customer demands.
Our San Marcos, Texas operation includes an Electron Cross-Linking Facility that is used to stabilize the resin material in our low-temperature self-regulating heating cables. Ownership of this operation allows us to have complete control of the manufacturing process, enhancing quality and reducing the lead time by about six weeks. Some of the base heating cable that is produced in San Marcos is shipped to better control the production process.our different sites to reduce lead time and to satisfy local content requirements.
Our process heating solutions are manufactured in various plants in Canada. The Edmonton facility largely manufactures environmental heating products. The Orillia facility manufactures tubular heaters, including our mineral insulated ("MI") heating cable that is supplied to OEM customers and other Thermon facilities. The Oakville location specializes in our engineered solutions and our Calgary facility fabricates electric heat trace circuits using the MI cable manufacturing facilityproduced in Orillia, Canada gives us adequate capacity to service the demands of clients in Canada in a time efficient manner. MI cable is well-suited for high temperature applications and harsh, arctic environments.
Orillia. Thermon Power Solutions is a product line that provides temporary power distribution and lighting products that are primarily fabricated at a facility in Fort McMurray, Alberta, Canada. Our customer base for
Thermon Power Solutions has historically been in the oil sands region of Alberta, Canada, but has expanded its presence in the U.S. gulf-coast region with the addition of fabrication capacitytransportation heating products are assembled at our San Marcos, Texas facility.facilities in Edmonton, Alberta and Denver, Colorado. This includes both solutions for rail car heating and rail track heating.
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customers are serviced from the central distribution centerfive manufacturing locations 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.Calgary, Edmonton, Fort McMurray, Orillia and Oakville. 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 and Mexico City, and Mexico.
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 2020.2022, 2021, or 2020.
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. Wemaintenance, repairs and upgrades. In addition to focused EPC sales, Thermon is actively participateengaged in commercial strategies to address a diversified mix of customers in our key end markets. Revenue diversification is a key long-term strategic initiative for the growth and development of the domestic and international electrical standards established in the countries in which we sell products.business. We believe that we have established our credibility as a reliable provider of
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- Certifications
Thermon’s research and development practices ensure our product designs are validated to market requirements and verified to comply with applicable industry standards. 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 continually test our products through a quality control process to demonstrate they can withstand harsh operating environments. They 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 meet industry leading international standards.
In order to support the design and development of industrial products rated for operation 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 requirementsIn addition, all of our manufacturing facilities are in addition to ISO 9001 and allow Thermoncertified, which allows us to continue to produce safe, reliable products certified for operating in potentially hazardous environments.
Over the last three decades, Thermon has made significant investments to actively participate in standardization at the national and international level. We are active in several committees such as the National Electrical Code (NEC), Canadian Electrical Code (CEC), American National Standards Institute (ANSI), National Electrical Equipment Manufacturers Association (NEMA), and the International Electro technical CommitteeElectrotechnical Commission (IEC). We leverage our extensive expertise and knowledge in industrial process heating technology to continually improve the applicable standards of our industry.
Markets
The major end markets that drive demand for process heating include chemical and petrochemical, up-, mid- and downstream oil, gas, power generation, commercial and rail and transit. We believe there are attractive long-term trends in each of these end markets.
•Chemical and Petrochemical. 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 chemical and petrochemical 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.
•Gas. Process heating is in the production and transmission of gas in upstream, midstream, and downstream applications. Despite recent market volatility, gas markets have remained resilient over the last twelve months,
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especially as a feedstock for petrochemical plants, and represent a significant and growing addressable market for our value added solutions. This includes the global and growing market for liquefied natural gas (LNG) compression and regasification facilities.
•Oil. Process heating is used to facilitate the exploration, production, processing, transportation and distribution of oil and oil-based energy products in upstream, midstream, and downstream oil applications. While the demand forecast for oil can be unpredictable, e.g., the COVID impact on transportation fuels, we have a sizable installed base that provides recurring revenue, especially in the downstream refining market.
•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, with an increasing prevalence of renewable power generation solutions.
•Rail and Transit. 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 1.1 million kilometers of operational railway in the world, rail is still one of the most economical and safe solutions for passengers and products globally.
•Commercial. Process heating is required for hospitals, hospitality/lodging, universities and secondary education, and light industrial facilities to provide freeze protection, temperature regulation, process control, and supporting laboratory environments. The electrification of heating products and removal of combustion-based heating solutions in urban areas drives demand for our products.
•General Industries and Other. We serve a growing number of other markets where we add value for customers, such as mining and mineral processing, maritime/shipbuilding, semiconductors, pharmaceutical and biotechnology, food and beverage, data centers, and renewables.
Our ability to provide technology design, such as wireless network controls and design software is an increasing factor in our customers' decision to purchase our products.
Segments
We operate in four reportable segments based on four geographic countries or regions in which we operate: (i) United States and Latin America ("US-LAM"), (ii) Canada, (iii) Europe, Middle East and Africa ("EMEA") and (iv) Asia-Pacific ("APAC"). Profitability within our segments is measured by operating income. See Note 19, "Segment Information" for financial data relating to our four reportable geographic segments.
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 servicelimited-service offering. We believe that we are the second largest participant in the industrial electric heat tracing market and one of only a few solutionssolution providers with a comprehensive suite of products and services, global capabilities, and local on-site presence.industry-leading controls technology, which includes our design software products. Our most significant competitor is the thermal management segment of nVent Electric plc (NYSE: NVT).
Following the THS transactionacquisition in October 2017, we entered the broader industrial process heating market. The industrial process heating market, which includes industrial heat tracing, tends to be fairly fragmented with several smaller companies serving discrete local markets with limited offerings. Our competitors vary by end-market, but generally we view nVent Electric, NIBE, Watlow and ChromaloxSpirax Sarco 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 maintaining 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,
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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.
Our research and development activities are focused on identifying new technologies to enhance our industrial process heating solutions through identifying opportunities to maximizeand meet the evolving needs of our customers. This maximizes safety and product reliability and reducereduces 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.
Government Contracts
We do not have any organized work stoppage or strike. Approximately 2%material portion of our employees are covered by collective bargaining agreements. We consider our employee relationsbusiness that may be subject to be good.renegotiation of profits or termination of contracts or subcontracts at the U.S. government's election.
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, anti-boycott rules, currency exchange controls and transfer pricing rules. These laws are administered by, 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. Since the escalation of the Russo-Ukrainian war in February 2022, many countries in which we operate have imposed significant economic sanctions upon Russia and certain individuals and entities with connections to the Russian government. These sanctions are evolving rapidly and have become significantly more stringent over time. Violations of these sanctions can result in significant penalties and civil and criminal liabilities. Our policies mandate compliance with these laws.all applicable laws and regulations, including the recent economic sanctions. 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.
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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 or the disclosure thereof, 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.
Other than our compliance requirements with environmental regulations, compliance with other government regulations has not had, and based on laws and regulations currently in effect, is not expected to have a material effect on the Company's capital expenditures, earnings or competitive position. See the section titled Item 1A, "Risk Factors" for additional information on government regulation that could impact our business.
Human Capital Management
We believe that our people are one of our most important investments and greatest assets. The success and growth of our business depend on our ability to attract, develop, incent and retain a diverse population of talented, qualified and highly skilled employees at all levels of our organization, including our executive officers, and across our global workforce. Our culture enables us to achieve our vision to be the world leader in industrial process heating. At the heart of our culture are our core values of Care, Commit and Collaborate.
Our Board of Directors (the "Board") provides important oversight on certain human capital matters through its Human Capital Management and Compensation Committee (the "HCMC Committee"). The HCMC Committee maintains oversight over our strategic direction for various people-related business strategies, including our compensation and benefit programs, leadership succession planning, culture, diversity, equity and inclusion, and talent development programs. The Company’s management proactively manages our human capital and cares for our employees in a manner that is consistent with our values.
Employee Health and Safety
We believe nothing is more important than the health, safety, and well-being of our people. We work hard to achieve best in class levels of safety through the application of policies and best practices. We maintain a robust safety culture to reduce workplace injuries, supported by effective communication, reporting, and external benchmarking. We hold regular talks and events on key safety topics, including reporting all injuries, hazards, near-misses, and case management to prevent reoccurrence. We also participate in industry groups, within and outside the manufacturing, construction, and energy sectors, to share safety best practices and collaborate to address safety concerns.
Our Safety Record
Any loss of life or serious injury in the workplace is unacceptable. We did not have any fatal incidents at any of our facilities or job sites in fiscal 2022. We primarily track two key safety indicators in monitoring our safety efforts, total recordable incident rate (“TRIR”) and lost-time incident rate (“LTIR”). Our TRIR increased from 0.07 in fiscal 2021 to 0.27 in fiscal 2022 and our LTIR stayed at 0.00, the same as fiscal 2021. We are proud of our superior safety rating in both the manufacturing and construction industries. TRIR and LTIR are defined as the Company’s number of recordable injuries/loss time, respectively, experienced by employees during the fiscal year multiplied by 200,000 divided by the number of man hours worked during the fiscal year.
In addition to TRIR and LTIR, we also measure total near miss and hazard ID reporting as well as case management metrics. These aid in accident prevention, which we believe is critical to incident avoidance and supports our superior safety rating in the industry.
COVID-19 Response
Throughout fiscal 2022, we remained operational in order to support our customers while still supporting and protecting our employees. At the beginning of the COVID-19 pandemic, we immediately mobilized our office employees to a work-from-home environment and ensured that our essential manufacturing and field construction employees were kept safe with proper personal protective equipment. In addition, we deployed new safety policies and guidelines based on recommendations from the World Health Organization, the Centers for Disease Control and Prevention, as well as local health organizations. Our ability to ensure business continuity and employee welfare and safety was the result of the Company’s early planning, and a well-designed enterprise business continuity plan. This plan was led by our Critical Response Team, which is comprised of senior leadership who collaborated with designated site leaders around the globe to implement COVID-19 specific polices and guidelines that addressed the regional requirements of the population.
In fiscal 2022, we offered a vaccine incentive to our employees in the U.S. and Canada to encourage them to get vaccinated against COVID-19 and report their vaccination status to help ensure business continuity.
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Workforce Breakdown
On March 31, 2022, we employed 1,227 employees, of which 39.4% were located in the U.S. and Latin America, 35.8% in Canada, 11.6% located in Europe, the Middle East, and Africa ("EMEA"), and 13.2% located in Asia-Pacific ("APAC"). We also contracted with 105 contingent workers as of March 31, 2022. Our 12-month rolling voluntary turnover rate as of March 31, 2022, was 16.0% compared to the 2021 manufacturing industry average of 10.4% according to Aon 2021 Salary Increase and Turnover Study – Second Edition. Our fiscal year differs from the period covered by the AON study, but we believe it is the best proxy to benchmark against. We are committed to reducing our voluntary turnover and management will continue to work to that end. Approximately 0.8% of our global employees are covered by a collective bargaining agreement. We have not experienced any union-related work stoppages in the past, and we believe that our working relationship with our employees is positive.
Diversity, Equity, and Inclusion
We believe in the benefits of an inclusive workforce, where diverse backgrounds are represented, engaged, and empowered to inspire innovative ideas and decisions. We have locations in 15 countries, and our employees operate across cultures, functions, unique languages, and time zones to solve the technical and logistical challenges presented by a worldwide customer base. Our diversity statistics include the following as of March 31, 2022, (based on self-reporting at the date of hire): 25.0% of our employees worldwide identify as females; 23.9% of our employees in the U.S. identify as female; and 47.1% of our employees in the U.S. identify as a racial or ethnic minority.
In fiscal 2022, we continued the diversity initiatives initiated in fiscal 2021 and added diversity metrics that directly affect the short-term incentive payments for our executive officers. These metrics are specific to our U.S. salaried workforce and include, increasing diversity in candidate interview slates; decreasing new hire turnover of diverse talents; and increasing overall diversity.
We know we have more to do when it comes to increasing the representation of historically underrepresented groups within our global workforce, and we are taking action to ensure Thermon is an employer of choice for diverse candidates.
Talent Development
In fiscal 2022, the Company expanded its talent review program to include not only the executives and their direct reports, but also the next level of employees. This program identifies emerging leaders and high-potential employees, succession planning, and development plans for select employees. Certain employees from this program were selected and enrolled in a targeted development program and assigned an executive mentor.
Additionally, the Company created and implemented the “Level Up” job structure for direct labor employees in the U.S. This program sets forth a transparent career path with clear roles, levels, minimum pay rates, and provides employees with information and tools to manage their career at Thermon.
Furthermore, the Company uses a robust performance management by objective process that identifies goals and reinforces the Company's values through an evaluation process twice per year.
Compensation and Benefits
We provide competitive compensation and benefits programs to help meet the needs of our employees and to attract and retain talent. In addition to salaries, these programs (which vary by country and region) include annual bonuses for all regular full and part time employees globally, a 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, flexible work schedules, employee assistance programs, tuition assistance, and scholarship programs for children and grandchildren of employees.
For the 2022 benefit year in the U.S., Thermon discounted the health insurance premiums for our lower wage workers without increasing premiums for other employees, increased the 401(k) match, implemented a wellness program, expanded paid maternity leave, and introduced paid parental leave and family creation benefits for employees.
In addition to our broad-based programs, we use targeted equity-based grants with vesting conditions to facilitate retention of key personnel, particularly those with critical domain expertise necessary to deliver on the long-term strategic initiatives of the Company.
Employee Retention
To address our employees’ desire for work-life balance, we implemented a remote work policy for employees who can do their work remotely or in a hybrid capacity.
Additionally, the Company undertook a series of market reviews by location and implemented compensation adjustments where necessary.
Seasonality
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Our quarterly operating results may fluctuate based on the cyclical pattern of industries to which we provide heat tracing solutions and the seasonality see Item 7, "Management's Discussionof demand for our heat tracing products. Most of our heat tracing customers perform preventative maintenance prior to the winter season, typically making our second and Analysisthird fiscal quarters the largest for related revenue. However, revenues from Greenfield projects are not seasonal and depend on the capital spending environment and project timing. Our operating expenses remain relatively consistent with some variability related to the overall headcount of Financial Conditionthe Company.
Our revenue derived from industrial process heating products typically experiences more pronounced seasonality than our legacy heat tracing business, with a noticeable increase in revenue and Resultsprofitability typically beginning in the third fiscal quarter and continuing during the winter months through the end of Operations-Seasonality," which is hereby incorporated by reference into this Item 1.
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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 operationoperations 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 a global pandemic, including the current pandemic caused by the novel strain of coronavirus (COVID-19) and its variants, and the measures taken in response thereto could have an adverse effect on our business, results of operations and financial condition.
Changes in our operations around the world 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, delays to our strategic plans, and additional costs related to business continuity initiatives, that cannot be fully mitigated through succession planning, employees working remotely or teleconferencing technologies. Additionally,In addition, changes in the operations of our suppliers in response to COVID-19 may also result in disruptions in our manufacturing and supply arrangements caused by the loss or disruption of essential manufacturing and supply elements such as raw materials or other finished product components, transportation, workforce or other manufacturing and distribution capability. Finally, 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.
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 usersend-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,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 downturnContinued significant volatility in the energy industry due to decreases in oil and gas prices or demand for oil and gas products, could further decrease demand for some of our products and services and adversely affect our business, financial condition and results of operations.
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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 arecan be 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 precautionarypublic safety measures instituted by governments and businesses to mitigate the spread of COVID-19.COVID-19 and the Russo-Ukrainian war. A sustained downturn in the capital expenditures of our customers, whether due to a decreasethe significant volatility in the market price of oil and gas or 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 an adverse effect on our business, financial condition and results of operations. Such downturns,volatility, including the perception that theyit 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 2020,2022, approximately 59%57% of our revenues were generated outside of the United States, and approximately 26%24% were generated outside of North America. In addition, oneOne of our key growth strategies is to continue to expand our global footprint in emerging and high growth markets around the world, althoughworld; however, we may not be successfulunsuccessful 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, Canada or Europe and those foreign countries in which our customers and suppliers have operations,operate, 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.
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Business Risks
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 domestic and international markets and compete with highly competitive domestic and international manufacturers and service providers. The fragmented nature of the process heating 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, and additional competitors may enter these 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 a reduction in our revenues and results of operations.
Our backlog may fluctuate and a failure to deliver our backlog on time could affect our future sales, 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, 20202022 was $105.4$156.2 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 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 future sales and results of operations.
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. If we are unablefail to effectively integratereplace completed or canceled large Greenfield projects with new order volume of the THS product lines intosame magnitude, our existing salesbacklog will decrease and marketing channels, our future salesrevenue and revenue growth couldfinancial results may be adversely affected.
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adequate financial arrangements or required governmental approvals, we may not be unableable to realize the anticipated synergies and financial benefits from the THS acquisition in the time frame that we expect, or at all, andpursue particular projects, which could adversely affect our future sales and results of operations 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 an event of default that could adversely affect our results of operations.
We have substantial indebtedness. At March 31, 2020,2022, we had $176.0$129.0 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 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, includingwhich may impact our ability to meet our debt service our indebtedness.
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 of our 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 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 year ended March 31, 2020,2022, Greenfield revenue has accounted for approximately 40%38% of our total 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.
Our business strategy includes acquiring smaller, value-added companiesgrowth and making investments that complement our existing business.product diversification through strategic acquisitions. These acquisitions and investments could be unsuccessful or consume significant resources, which could adversely affect our results of operations.
Acquisitions and investments may involve cash expenditures, debt incurrence, operating losses and expenses that could have an adverse effect on our financial condition and 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. It may also be difficult for us to identify suitable acquisition candidates, which may inhibit
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our growth rate. Any acquisitions or investments may ultimately harm our business or financial condition if they are unsuccessful and any acquisitions or investments ultimately result in impairment charges.
Although we maintain insurance policies with respect to our related exposures, including certain casualty, property and business interruption programs, these policies contain deductibles, self-insured retentions and limits of coverage. In addition, we may not be able to continue to obtain insurance at commercially reasonable rates or may be faced with liabilities not covered by insurance, such as, but not limited to, environmental contamination, conflicts, or terrorist attacks. We estimate our liabilities for known claims and unpaid claims and expenses based on information available as well as projections for claims incurred but not reported. However, insurance liabilities, some of which are self-insured, are difficult to estimate due to various factors. If any of our insurance policies or programs are not effective in mitigating our risks, we may incur losses that are not covered by our insurance policies, that are subject to deductibles or that exceed our estimated accruals or our insurance policy limits, which could adversely impact our business and results of operations.
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 do not eliminate 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. During fiscal 2020 and 2019,2022, the value of the U.S. Dollar overall weakened in relation to the principal non-U.S. currencies from which we derive revenue, which positively impacted revenue by $5.9 million. During fiscal 2021, the value of the U.S. Dollar overall strengthened in relation to the principal non-U.S. currencies from which we derive revenue, which negatively impacted revenue by $5.0 million and $4.6 million, respectively.$1.7 million. 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 strengthen 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.income/(loss).
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 laws 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. Some of these assessments may be substantial, and 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 adversely impact our results of operations, financial condition and cash flows.
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.
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We test goodwill and indefinite-life intangible assets for impairment on 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, 2020,2022, our goodwill and other intangible assets balance was $302.5$307.7 million, which represented 49%48% 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 timely find and secure 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 tracingprocess heating industry is highly competitive and subject to the introduction of innovative techniques and services using new technologies. We rely significantly on maintaining confidentialthe confidentiality of 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. These attacks are constantly evolving in nature, increasing the efforts and controls required to prevent, detect and defend against them. We require user names and passwords as well as multi-factor authentication ("MFA") 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,
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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, during fiscal 2021 and 2022, precautionary measures recently instituted by government authorities in Russiacertain markets and South Africasanitization procedures adopted to protect our employees in response to the COVID-19 pandemic have required us to temporarily suspend operations at certain of our manufacturing facilities in such jurisdictions.facilities.
Interruptions in production, in particular at our manufacturing facilities in San Marcos, Texas,the United States 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, suppliers and manufacturers to produce our products and complete our projects. To the extent we cannot engage subcontractors or acquire supplies or raw materials from third parties, our ability to produce our products or complete a projectour projects 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.price or, if unavailable, limit the availability of products critical to our operations. Such shortages or disruptions could be caused by factors beyond the control of our subcontractors, our suppliers or us, including inclement weather, natural disasters, conflicts, increased demand, problems in production or distribution, disruptions in third party logistics or transportation systems or the inability of our subcontractors or suppliers to obtain credit. These factors could be exacerbated by the impact of COVID-19 pandemic or geopolitical instability. This may reduce the profit we 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 and warranty claims 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
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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 and warranty provisions for which we are responsible in the event that we fail to perform our obligations thereunder in a timely manner or our products or services fail to perform, in accordance with the agreed terms, conditions and standards.
We typically agree to allow our customers to defer payment on projects until certain milestones have been met or until the projects are substantially completed, and customers typically withhold some portion of amounts due to us as retainage. Our payment arrangements subject us to potential credit risk related to changes in business and economic factors affecting our customers, including material changes in our customers' revenues or cash flows. These credit risks may be exacerbated by the effects of the global pandemic. If we are unable to collect amounts owed to us, or retain amounts paid to us, our cash flows would be reduced, and we could experience losses if those amounts exceed current allowances. Any of these factors could adversely impact our business and results of operations.
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. For example, during fiscal 2021, we enacted certain restructuring initiatives to align our current cost structure with the decline in demand for our products and services primarily due to COVID-19 and supply/demand fluctuations in commodity prices. Refer to Item 8, Financial Statements and Supplementary Data for more discussion. 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.
From time to time we may decide to enter new markets, build or lease additional facilities, expand our existing facilities, relocate or consolidate one or more of our operations or exit a facility we may own or lease. Increased costs and production delays arising from the staffing, relocation, sublease, expansion or consolidation of our facilities could adversely affect our business and results of operations.
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 and costs of litigation 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'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. Substantial indemnity claims may exceed the
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amount of insurance we maintain and could have a material adverse effect on our reputation, business, financial condition or results of operations.
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 (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 usersend-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. However, 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,U.S., 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 adverse effects 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. InFor example, 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.
Any alleged or actual violations of these conflict mineral requirementsregulations 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., Canada or the European Union, 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. companies as a result of such changes, could have an adverse effect on our business, financial condition, results of operations and cash flows.
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We derived approximately 4%5%, 3%8%, and 5%4% of our revenue from our subsidiary incorporated in Russia in the fiscal years ended March 31, 2020, 20192022, 2021 and 2018,2020, respectively. The escalation of geopolitical instability in Russia and Ukraine as well as currency fluctuations in the Russian Ruble couldRusso-Ukrainian war has negatively impactimpacted our operations, sales, and future growth prospects in that region. The U.S. government has, Canada, and European Union and other governments have imposed sanctions through several executive orders restricting U.S. companies from conducting business with specified Russian, Belarusian and Ukrainian individuals and companies. While we believe that the executive orderssanctions currently do not preclude us from conducting business with all of our current customers or vendors in Russia, the sanctions imposed by the U.S. government may be expanded in the future to restrictinternational community have greatly restricted us from engaging with them. In response to the war and in compliance with certain sanctions, we have paused new investments in and new orders by our Russian affiliate, as we continue to evaluate our operations in the region. Further escalation of geopolitical tensions related to the war, including increased trade barriers or restrictions on global trade, could result in, among other things, cyberattacks, supply disruptions, lower customer demand, and changes to foreign exchange rates and financial markets, any of which may adversely affect our business and supply chain. If we are unable to conduct business with new or existing customers or vendors or pursue business opportunities in Russia or Ukraine, or conduct our business in the ordinary course and timely fulfill customer orders outside of Russia and Ukraine due to these or related factors, 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.
At March 31, 2022, backlog associated with our Russian affiliate was $15.2 million. The United Kingdom's withdrawal fromRusso-Ukrainian war could also have the European Union may have a negative effect on economic conditions, financial markets and our business.
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 or disclosure regarding such emissions, 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.
The 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 operate have proposed or enacted regulations requiring reporting of greenhouse gas emissions and the restriction thereof, including the SEC’s recent rule proposal for climate change disclosure, 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 laws, 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 otherwise unfavorably impact our 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
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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.transportation and compliance with enhanced climate change-related disclosure requirements. The ultimate impact of greenhouse gas emissions-related agreements, legislation, disclosure requirements and related measures on our financial performance is highly
uncertain because we are unable to predict with certainty, for a multitude of individual jurisdictions, the outcome of political decision-making processes and the variables and tradeoffstrade-offs that inevitably occur in 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 by climate-change related physical changes or changes in weather patterns. An increase in severe weather patterns could result in damages to or loss of our manufacturing facilities, impact our ability to conduct our operations and/or result in a disruption of our customers’ operations. In addition, volatility in weather patterns could exacerbate the cyclicality of demand for our heating products.
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, conflicts, 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 theour 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:include, but are not limited to:
•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, 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
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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 amendedcharter 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 the 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 7171 Southwest Parkway, Building 300, Austin, Texas.
Our principal manufacturing and warehousing operations are located at our facilities in San Marcos, Texas facilities.Texas. We own our principal manufacturing and warehousing facilities, and lease one ancillary manufacturing facility in San Marcos, Texas. All our reportable segments utilize our San Marcos, Texas facilities. In addition, we have offices and/or manufacturing and manufacturingassembly locations in Houston, Texas, Denver, Colorado, Canada, the Netherlands, France, United Kingdom, Germany, Russia, Mexico, China, Korea, Japan, India, Australia, Malaysia, Bahrain and South Africa. Most ofBahrain. All our operationsmanufacturing facilities 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.
ITEM 3. LEGAL PROCEEDINGS
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For information on legal proceedings, see Note 14,15, "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." On May 29, 2020,25, 2022, the closing sale price of our common stock, as reported by the NYSE, was $16.03.$15.51. As of May 29, 2020,25, 2022, 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, and (ii) the S&P SmallCap 600 - Capped Energy Index, in each case over the same period. 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, 20152017 (the last day of fiscal 2015)2017), and assumes the reinvestment of dividends.dividends, as applicable. The stock price performance shown below is not necessarily indicative of future price performance.
| March 31, 2015 | March 31, 2016 | March 31, 2017 | March 31, 2018 | March 31, 2019 | March 31, 2020 | |||||||||||||
| Thermon Group Holdings, Inc. | $ | 100.00 | $ | 72.95 | $ | 86.58 | $ | 93.10 | $ | 101.83 | $ | 62.61 | ||||||
| iShares Russell 2000 Index | $ | 100.00 | $ | 90.30 | $ | 113.78 | $ | 127.23 | $ | 129.90 | $ | 98.90 | ||||||
| S&P 600 Small Cap 600 Energy | $ | 100.00 | $ | 52.70 | $ | 65.11 | $ | 49.96 | $ | 38.83 | $ | 7.87 | ||||||
| March 31, 2017 | March 31, 2018 | March 31, 2019 | March 31, 2020 | March 31, 2021 | March 31, 2022 | |||||||||||||||
| Thermon Group Holdings, Inc. | $ | 100.00 | $ | 107.53 | $ | 117.61 | $ | 72.31 | $ | 93.52 | $ | 77.74 | ||||||||
| iShares Russell 2000 Index | $ | 100.00 | $ | 111.96 | $ | 114.31 | $ | 87.03 | $ | 169.54 | $ | 159.12 | ||||||||
| S&P 600 SmallCap 600 Energy | $ | 100.00 | $ | 76.74 | $ | 59.64 | $ | 12.09 | $ | 35.25 | $ | 56.17 | ||||||||
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.
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Dividend Policy
Since the completion of the CHS Transactions on April 30, 2010,our initial public offering in May 2011, 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. We also use our cash to make unscheduled principal repayments on our debt over and above the required amounts.
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 15,16, "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
| Year Ended March 31, | |||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||
| (dollars in thousands, except per share data) | |||||||||||||||||||||
| Consolidated Statements of Operations Data: | |||||||||||||||||||||
| Sales | $ | 383,486 | $ | 412,642 | $ | 308,609 | $ | 264,130 | $ | 281,928 | |||||||||||
| Cost of sales | 221,848 | 236,702 | 164,798 | 152,199 | 150,613 | ||||||||||||||||
| Gross profit | $ | 161,638 | $ | 175,940 | $ | 143,811 | $ | 111,931 | $ | 131,315 | |||||||||||
| Operating expenses: | |||||||||||||||||||||
| Marketing, general and administrative and engineering | 111,202 | 106,660 | 94,615 | 77,715 | 80,729 | ||||||||||||||||
| Amortization of intangible assets | 17,773 | 20,771 | 16,458 | 11,772 | 12,112 | ||||||||||||||||
| Impairment of intangible assets and goodwill (1) | — | — | — | — | 1,713 | ||||||||||||||||
| Income from operations | $ | 32,663 | $ | 48,509 | $ | 32,738 | $ | 22,444 | $ | 36,761 | |||||||||||
| Interest income | 252 | 238 | 606 | 566 | 423 | ||||||||||||||||
| Interest expense (2) | (14,279 | ) | (15,714 | ) | (8,984 | ) | (3,518 | ) | (4,142 | ) | |||||||||||
| Loss on extinguishment of debt | — | — | (376 | ) | — | — | |||||||||||||||
| Other income/(expense) (3) | (1,558 | ) | 109 | (5,595 | ) | (410 | ) | (676 | ) | ||||||||||||
| Income from continuing operations before provision for income taxes | $ | 17,078 | $ | 33,142 | $ | 18,389 | $ | 19,082 | $ | 32,366 | |||||||||||
| Income tax expense | 5,142 | 9,973 | 5,170 | 4,098 | 8,716 | ||||||||||||||||
| Net income | $ | 11,936 | $ | 23,169 | $ | 13,219 | $ | 14,984 | $ | 23,650 | |||||||||||
| Income (loss) attributable to non-controlling interests | (2 | ) | 413 | 1,306 | 343 | 641 | |||||||||||||||
| Net income available to Thermon Group Holdings, Inc. | $ | 11,938 | $ | 22,756 | $ | 11,913 | $ | 14,641 | $ | 23,009 | |||||||||||
| Net income per common share: | |||||||||||||||||||||
| Basic | $ | 0.36 | $ | 0.70 | $ | 0.37 | $ | 0.45 | $ | 0.72 | |||||||||||
| Diluted | 0.36 | 0.69 | 0.36 | 0.45 | 0.71 | ||||||||||||||||
| Weighted-average shares used in | |||||||||||||||||||||
| computing net income per | |||||||||||||||||||||
| common share (thousands) | |||||||||||||||||||||
| Basic | 32,760 | 32,569 | 32,424 | 32,302 | 32,177 | ||||||||||||||||
| Diluted | 33,149 | 33,054 | 32,797 | 32,633 | 32,593 | ||||||||||||||||
| Cash dividends per share | — | — | — | — | — | ||||||||||||||||
| Other Financial and Operating Data: | |||||||||||||||||||||
| Capital expenditures (4) | 10,252 | 11,055 | 9,072 | 8,370 | 12,581 | ||||||||||||||||
| Backlog at end of period (5) | 105,445 | 119,956 | 159,624 | 106,880 | 81,242 | ||||||||||||||||
| At March 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Balance Sheet Data: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 43,237 | $ | 31,402 | $ | 33,879 | $ | 42,842 | $ | 84,570 | ||||||||||
| Accounts receivable, net | 92,478 | 105,323 | 94,411 | 63,719 | 57,432 | |||||||||||||||
| Inventory, net | 60,273 | 64,890 | 63,829 | 34,020 | 40,645 | |||||||||||||||
| Total assets | 620,905 | 655,762 | 662,477 | 454,080 | 468,677 | |||||||||||||||
| Total debt, principal amount | 176,000 | 206,500 | 225,000 | 81,000 | 94,500 | |||||||||||||||
| Deferred debt issuance costs | 4,447 | 6,271 | 7,967 | 524 | 888 | |||||||||||||||
| Total debt, net of deferred debt issuance costs | 171,553 | 200,229 | 217,033 | 80,476 | 93,612 | |||||||||||||||
| Total equity | 346,439 | 348,949 | 340,853 | 312,502 | 298,701 | |||||||||||||||
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
Recent Developments. The global economy has been negatively impacted by the war between Russia and Ukraine. Furthermore, governments in the United States, Canada, and European Union, among others, have imposed trade controls on certain products and economic sanctions on certain industry sectors and parties in Russia. Further escalation of geopolitical tensions related to the war, including increased trade barriers or restrictions on global trade, could result in, among other things, cyberattacks, supply disruptions, lower customer demand, and changes to foreign exchange rates and financial markets, any of which may adversely affect our business and supply chain. Refer to Item 1A, "Risk Factors" in this annual report on Form 10-K for further discussion regarding our risks. Also, we disclose the quantitative risk our exposure to the Ruble could have on our net income in Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" in this annual report on Form 10-K.
The Company has paused new investments in and new orders by our Russian affiliate. We are onewill continue to fulfill our existing agreements while remaining in compliance with applicable laws, including applicable sanctions and export controls. We continue to assess the impact on our results of operations, financial position and overall performance as the situation develops and any broader implications it may have on the global economy.
Our Russian affiliate represented approximately 5% of Thermon’s worldwide revenue during fiscal 2022. The carrying value of Thermon’s net assets in Russia was approximately $8.8 million as of March 31, 2022. This consisted of $3.1 million of cash, $1.8 million of accounts receivables, net, $4.5 million of inventories, net, $1.9 million of other current assets, $0.3 million of property, plant, and equipment, net, $0.8 million of other non-current assets, and $3.6 million of current liabilities.
The COVID-19 pandemic and the measures being taken to address and limit the spread of the largest providersvirus and its variants have adversely affected the economies and financial markets of highly engineered industrial process heating solutionsmany countries, resulting in an economic downturn that negatively impacted, and may impact in the future, global demand for process industries. For over 65 years,our products and services. Although we have served a diverse base of thousands of customers aroundbelieve the worldgeneral economic environment in attractive and growing markets, including oil & gas, chemical processing, power generation, mining and other industrial markets. We are a global leader and onewhich we operate has improved significantly since the onset of the few thermal solutions providers withCOVID-19 pandemic, we may experience a global footprint. We offer a full suite of products (heating units, heating cables, temporary power solutions and tubing bundles) and services (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 companiesdecline in the world have enabled us to diversify our revenue streams and opportunistically access high growth markets worldwide. For fiscal 2020, approximately 59%demand 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 or disruptions in raw materials or labor required for manufacturing that could materially and negatively impact our business, financial condition, results of operation and overall financial performance in future periods. The effect of loosening pandemic restrictions along with pent-up demand from periods of stagnant lockdown and uncertainty has combined to strengthen our customer demand from most regions we serve, especially in our US-LAM and Canada segments.
The Company continues to invest in our three long-term strategic initiatives: diversifying our revenues into adjacent markets as the global economy transitions to a more sustainable energy future, increased investment in developing markets as a response to a growing middle class, and offering technology enabled maintenance solutions that improve our customer’s efficiency and safety. Our efforts to diversify the business's end markets is starting to show early signs of success through increased customer engagement in diversified end markets such as rail and transit, food and beverage, commercial and power. Additionally, we are continuing to receive orders from key customers related to our core thermal
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, portable power solutions and software. Additionally, THS offersour process heating products offer 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
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facilities. OurWhile our petroleum customers represent a significantan important portion of our business. We serve all three major categories of customers in the petroleum industry - upstream exploration/production, midstreambusiness, we have been successfully broadening our customer base by earning business from numerous other industries, including chemical processing, power generation, transportation, food and downstream refining. Overall, demandbeverage, commercial, pharmaceutical, and mineral processing.
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 interpreting 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, 20202022 was $105.4$156.2 million as compared to $120.0$114.2 million at March 31, 2019.2021. 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 revenuesales 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, warranty-related costs and the costs of manufacturing support functions such as logistics and quality assurance. Key raw material costs include polymers, copper, stainless steel, insulating material, electronic components and other miscellaneous parts related to products manufactured or assembled as part of our heat tracing solutions. Historically, our primary raw materials have been readily available from multiple suppliers and rawassembled. Raw material costs have been stable in the past; however, we are experiencing temporary shortages related to the global supply chain issues driven by the COVID-19 pandemic in certain raw materials as well as an increase in costs of these materials due to: use of alternate suppliers, higher freight costs, increased lead times, expedited shipping and other inflationary factors. Also, we have been generally successful with passing along raw material cost increasesseen labor inefficiencies and increased overtime in certain of our facilities due to our customers. Therefore, increasestemporary shortages in the cost of key raw materials required for production, as well as time and attendance issues and labor shortages in certain of our products have not generally affected our gross margins.facilities. We cannot provide any assurance that we maywill continue to be able to mitigate temporary raw material shortages or 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,selling, 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, and provisions for bad debts and warranty expense.debts.
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.more than one year. 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.
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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,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 particularespecially large Greenfield projects (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. 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 tracingprocess heating 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, SumacWe actively pursue both organic and IPI.inorganic growth initiatives that serve to advance our corporate strategy.
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,* | |||||||||
| 2020 | 2019 | 2018 | |||||||
| Greenfield | 40 | % | 49 | % | 37 | % | |||
| MRO/UE | 60 | % | 51 | % | 63 | % | |||
| Fiscal Year Ended March 31,* | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Greenfield | 38 | % | 35 | % | 40 | % | ||||||||||||||
| MRO/UE | 62 | % | 65 | % | 60 | % | ||||||||||||||
*THS has been excluded from the table above. Most of THS's revenue would be classified as MRO/UE under the current definitions.
Greenfield revenue is an indicator of both our ability to successfully compete for new contracts as well as the economic health of the industries we serve. Furthermore, Greenfield revenue is an indicator of potential MRO/UE revenue in future years.
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.
Large and growing installed base. Customers typically use the incumbent heat tracing provider for MRO/UE projects to avoid complications and compatibility problems associated with switching providers. Therefore, with
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 2020,2022, MRO/UE sales comprised approximately 60%62% of our consolidated revenues (excluding THS).
Seasonality of MRO/UE revenues. MRO/UE revenues for the legacy heat tracing business are typically highest during the second and third fiscal quarters, as most of our customers perform preventative maintenance prior to the winter season. However, revenues realized from MRO/UE orders tend to be less cyclical than Greenfield projects.projects are not seasonal and depend on the capital spending environment and project timing.
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Results of Operations
The following table sets forth data from our statements of operations as a percentage of sales for the periods indicated.
| Fiscal Year Ended March 31, | |||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Consolidated Statements of Operations Data: | |||||||||||||||||||||||
| Sales | $ | 383,486 | 100 | % | $ | 412,642 | 100 | % | $ | 308,609 | 100 | % | |||||||||||
| Cost of sales | 221,848 | 58 | 236,702 | 57 | 164,798 | 53 | |||||||||||||||||
| Gross profit | $ | 161,638 | 42 | % | $ | 175,940 | 43 | % | $ | 143,811 | 47 | % | |||||||||||
| Operating Expenses: | |||||||||||||||||||||||
| Marketing, general, and administrative and engineering | 106,242 | 28 | % | 102,512 | 25 | % | 91,096 | 30 | % | ||||||||||||||
| Stock compensation expense | 4,960 | 1 | 4,148 | 1 | 3,519 | 1 | |||||||||||||||||
| Amortization of intangible assets | 17,773 | 5 | 20,771 | 5 | 16,458 | 5 | |||||||||||||||||
| Income from operations | $ | 32,663 | 9 | % | $ | 48,509 | 12 | % | $ | 32,738 | 11 | % | |||||||||||
| Interest expense, net | (14,027 | ) | (4 | ) | (15,476 | ) | (4 | ) | (8,754 | ) | (3 | ) | |||||||||||
| Other income/(expense) (1) | (1,558 | ) | — | 109 | — | (5,595 | ) | (2 | ) | ||||||||||||||
| Income before provision for income taxes | $ | 17,078 | 4 | % | $ | 33,142 | 8 | % | $ | 18,389 | 6 | % | |||||||||||
| Income tax expense | 5,142 | 1 | 9,973 | 2 | 5,170 | 2 | |||||||||||||||||
| Net income | $ | 11,936 | 3 | % | $ | 23,169 | 6 | % | $ | 13,219 | 4 | % | |||||||||||
| Income (loss) attributable to non-controlling interest (2) | (2 | ) | — | % | 413 | — | % | 1,306 | — | % | |||||||||||||
| Net income available to Thermon Group Holdings, Inc. | $ | 11,938 | 3 | % | $ | 22,756 | 6 | % | $ | 11,913 | 4 | % | |||||||||||
| Fiscal Year Ended March 31, | Increase/(Decrease) | ||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Consolidated Statements of Operations Data: | |||||||||||||||||||||||
| Sales | $ | 355,674 | $ | 276,181 | $ | 79,493 | 29 | % | |||||||||||||||
| Cost of sales | 215,556 | 159,309 | 56,247 | 35 | % | ||||||||||||||||||
| Gross profit | 140,118 | 116,872 | 23,246 | 20 | % | ||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative expenses | 93,054 | 89,834 | 3,220 | 4 | % | ||||||||||||||||||
| Deferred compensation plan expense/(income) | 283 | 1,564 | (1,281) | (82) | % | ||||||||||||||||||
| Amortization of intangible assets | 8,790 | 9,445 | (655) | (7) | % | ||||||||||||||||||
| Restructuring and other charges/(income) | (414) | 8,623 | (9,037) | (105) | % | ||||||||||||||||||
| Income/(loss) from operations | 38,405 | 7,406 | 30,999 | 419 | % | ||||||||||||||||||
| Other income/(expenses): | |||||||||||||||||||||||
| Interest expense, net | (5,815) | (10,185) | 4,370 | (43) | % | ||||||||||||||||||
| Other income/(expense) | (4,165) | 2,135 | (6,300) | (295) | % | ||||||||||||||||||
| Income/(loss) before provision for income taxes | 28,425 | (644) | 29,069 | (4514) | % | ||||||||||||||||||
| Income tax expense/(benefit) | 8,333 | (1,521) | 9,854 | (648) | % | ||||||||||||||||||
| Net income/(loss) | $ | 20,092 | $ | 877 | $ | 19,215 | 2191 | % | |||||||||||||||
| As a percent of sales: | |||||||||||||||||||||||
| Gross profit | 39.4 | % | 42.3 | % | -290 bps | ||||||||||||||||||
| Selling, general and administrative expenses | 26.2 | % | 32.5 | % | -630 bps | ||||||||||||||||||
| Income/(loss) from operations | 10.8 | % | 2.7 | % | 810 bps | ||||||||||||||||||
| Net income/(loss) | 5.6 | % | 0.3 | % | 530 bps | ||||||||||||||||||
| Effective tax rate | 29.3 | % | (236.2) | % | |||||||||||||||||||
Year Ended March 31, 20202022 ("fiscal 2020"2022") Compared to the Year Ended March 31, 20192021 ("fiscal 2019"2021")
Revenue. RevenueRevenues for fiscal 2020 was $383.52022were $355.7 million compared to $412.6$276.2 million forin fiscal 2019, a decrease2021. The increase in revenue is due to strong demand in our US-LAM and Canada segments, which led the first stages of $29.1recovery from the COVID-19 pandemic. In fiscal 2022, we recognized revenue from several large, one-time projects that contributed significantly to our growth. Revenue increased $58.7 million, or 7%.61.6%, in our US-LAM segment, $24.6 million, or 27.1%, in our Canada segment, and $0.5 million, or 1.0%, in our EMEA segment. We experienced a slower recovery from the effects of the COVID-19 pandemic, including lockdowns and other restrictions, in our APAC segment, which led to a $4.4 million, or 12.2%, decrease.
Sales related to our products ("point-in-time") grew $53.0 million and sales of projects ("over time") grew $26.5 million compared to fiscal 2021. Our sales mix (excluding THS) in fiscal 20202022 was 40%38% Greenfield and 60%62% MRO/UE as compared to 49%35% Greenfield and 51%65% MRO/UE in fiscal 2019. Greenfield revenue is historically at or near 40% of our total revenue.
2021.
Gross profit and margin.profit. Gross profit in fiscal 2022 totaled $161.6$140.1 million compared to $116.9 million in fiscal 2020, compared to $175.9 million2021. The increase in fiscal 2019, a decrease of $14.3 million, or 8%.gross profit was driven by higher revenue for the year. Gross margins were 42.1% and 42.6%39.4% in fiscal 2020 and2022 compared to 42.3% in fiscal 2019, respectively.2021. The lower gross profitmargin in fiscal 20202022 is primarily attributable to higher project costs, including the impacts of a $4.7 million charge, or increase inlarge, one-time project, as well as additional warranty costs associated with the cost of sales, recorded during the third and fourth quarters of fiscal 2020 for a one-time adjustment related to operational execution expenses (as described furtherof a large project, both of which are reported in Note 14 to the consolidated financial statements included in Item 8).our US-LAM segment.
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decrease is attributable to general planned increases to address the growth of our business as experienced in fiscal 2019, offset in part by a decrease in the annual incentive plan expense.
Amortization of intangible assets. Amortization of intangible assets was $17.8$8.8 million in fiscal 2020 and $20.82022 compared to $9.4 million in fiscal 2019.2021. The decrease inof amortization expense is attributabledue to certain intangible assets that becamebecoming fully amortized duringin fiscal 2019.2021, partially offset by foreign exchange impacts.
Restructuring and other charges/(income). Restructuring and other charges/(income) was $(0.4) million in fiscal 2022 compared to $8.6 million in fiscal 2021. The Company implemented certain restructuring activities in fiscal 2021 not present in fiscal 2022. Refer to Note 14, "Restructuring and other charges/(income)" for additional details.
Interest expense, net. Interest expense, net totaled $14.0 million in fiscal 2020, compared to $15.5 million in fiscal 2019, a decrease of $1.5 million. The decrease in interest expense is due to substantial principal prepaymentsa lower average interest rate during fiscal 20202022 than fiscal 2021 as well as a lower average outstanding balance. Our average outstanding principal balance during fiscal 2022 was lower at $138.8 million versus $162.3 million during fiscal 2021. See Note11, "Long-Term Debt," for additional information on both the revolving credit facility and the term loan B credit facility. (see Note 11, "Long-Term Debt", to our consolidated financial statements included below in Item 8 of this annual report for further discussion)long-term debt.
Other income/(expense). Other expenseincome/(expense) was $1.6$(4.2) million and $2.1 million in fiscal 2020, compared2022 and fiscal 2021, respectively. The increase primarily relates to other incomeour debt extinguishment charges of $0.1$2.6 million in fiscal 2019, a comparative2022, as we completed refinancing of our senior secured credit facility, as well as an increase of expense of $1.7 million. The increase in other expense primarily relates to transactional foreign exchange losses of $2.2 million. See Note 11, "Long-Term Debt," for additional information on our long-term debt and losses associated withthe refinancing of our senior secured credit facility. The remaining variance is attributable to relatively lower gains on the Company's non-qualified deferred compensation plan for certain high-level employees.in fiscal 2022 than in the prior year due to market fluctuations. These gains are offset by deferred compensation plan expense as noted above.
Income taxes. Income tax expenseexpense/(benefit) was $5.1$8.3 million or 29.3% on pretax income of $28.4 million in fiscal 2020, on pre-tax net income of $17.1 million2022 as compared to an income tax expensebenefit of $10.0$(1.5) million on a pretax loss of $(0.6) million in fiscal 2019 on pre-tax net income of $33.1 million, a decrease of $4.9 million.2021. Our fiscal 2022 effective tax rate of 29.3% was 30.1%within our expected range of combined tax expense for the United States and 30.0%foreign subsidiaries in which we operate. The benefit in fiscal 20202021 was primarily due to a pre-tax loss and the impact from the Global Intangible Low-Taxes Income (or “GILTI Tax”) in the U.S. During fiscal 2019, respectively.2021, tax law changes provided a $1.9 million recovery of previously incurred GILTI Tax expense.
See Note 17,18, “Income Taxes,” to our audited consolidated financial statements included elsewhere in this annual report for further detail on income taxes.
Net income available to Thermon Group Holdings, Inc.income/(loss). Net income available to the Company, after non-controlling interest,income/(loss) was $11.9$20.1 million in fiscal 2020 as2022 compared to $22.8$0.9 million in fiscal 2019, a decrease of $10.9 million or 47.5%.2021. The decreasechange in fiscal 2020 net incomeincome/(loss) is primarily due to (i) a $14.3 million decreaseexplained by the changes noted in gross profit and (ii) a $4.5 million increase in marketing, general and administrative and engineering expense (inclusive of stock compensation expense) attributable to the growth of the business, offset in part by (iii) a $3.0 million decrease in amortization of intangibles, and (iv) a $4.8 million decrease in income tax expense.sections above.
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| Fiscal Year Ended March 31, | Increase/(Decrease) | ||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Consolidated Statements of Operations Data: | |||||||||||||||||||||||
| Sales | $ | 276,181 | $ | 383,486 | $ | (107,305) | (28) | % | |||||||||||||||
| Cost of sales | 159,309 | 221,848 | (62,539) | (28) | % | ||||||||||||||||||
| Gross profit | 116,872 | 161,638 | (44,766) | (28) | % | ||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative expenses | 89,834 | 111,589 | (21,755) | (19) | % | ||||||||||||||||||
| Deferred compensation plan expense/(income) | 1,564 | (387) | 1,951 | (504) | % | ||||||||||||||||||
| Amortization of intangible assets | 9,445 | 17,773 | (8,328) | (47) | % | ||||||||||||||||||
| Restructuring and other charges/(income) | 8,623 | — | 8,623 | — | % | ||||||||||||||||||
| Income/(loss) from operations | 7,406 | 32,663 | (25,257) | (77) | % | ||||||||||||||||||
| Other income/(expenses): | |||||||||||||||||||||||
| Interest expense, net | (10,185) | (14,027) | 3,842 | (27) | % | ||||||||||||||||||
| Other income/(expense) | 2,135 | (1,558) | 3,693 | (237) | % | ||||||||||||||||||
| Income/(loss) before provision for income taxes | (644) | 17,078 | (17,722) | (104) | % | ||||||||||||||||||
| Income tax expense/(benefit) | (1,521) | 5,142 | (6,663) | (130) | % | ||||||||||||||||||
| Net income/(loss) | $ | 877 | $ | 11,936 | $ | (11,059) | (93) | % | |||||||||||||||
| Income (loss) attributable to non-controlling interests | — | (2) | 2 | (100) | % | ||||||||||||||||||
| Net income/(loss) available to Thermon Group Holdings, Inc. | $ | 877 | $ | 11,938 | $ | (11,061) | (93) | % | |||||||||||||||
| As a percent of sales: | |||||||||||||||||||||||
| Gross profit | 42.3 | % | 42.1 | % | 20 bps | ||||||||||||||||||
| Selling, general and administrative expenses | 32.5 | % | 29.1 | % | 340 bps | ||||||||||||||||||
| Income/(loss) from operations | 2.7 | % | 8.5 | % | -580 bps | ||||||||||||||||||
| Net income/(loss) | 0.3 | % | 3.1 | % | -280 bps | ||||||||||||||||||
| Effective tax rate | (236.2) | % | 30.1 | % | |||||||||||||||||||
Year Ended March 31, 20192021 ("fiscal 2019"2021") Compared to the Year Ended March 31, 20182020 ("fiscal 2018"2020")
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K10-K/A for the fiscal year ended March 31, 20192021 filed with the SEC on June 12, 2019May 27, 2021 for a discussion of the results of operations in fiscal 20192021 as compared to fiscal 2018.2020.
| Payment Due By Period | |||||||||||||||||||||
| Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||
| Variable rate term loan (1) | $ | 176,000 | $ | 2,500 | $ | 5,000 | $ | 168,500 | $ | — | |||||||||||
| Interest payments on variable rate term loan (2) | 38,220 | 8,563 | 16,758 | 12,899 | — | ||||||||||||||||
| Operating lease obligations (3) | 18,396 | 3,992 | 6,216 | 3,143 | 5,045 | ||||||||||||||||
| Information technology services agreements (4) | 1,100 | 1,007 | 93 | — | — | ||||||||||||||||
| Total | $ | 233,716 | $ | 16,062 | $ | 28,067 | $ | 184,542 | $ | 5,045 | |||||||||||
position, long-term results of operations, or cash flows. It is possible, however, that charges related to these matters could be significant to our results of operations or cash flows in any one accounting period.
For information on legal proceedings, see Note 14,15, "Commitments and Contingencies" to our consolidated financial
statements contained elsewhere in this annual report, which is hereby incorporated by reference into this Item 7.
To bid on or secure certain contracts, we are required at times to provide a performance guaranty to our customers in the form of a surety bond, standby letter of credit or foreign bank guaranty. On March 31, 2020,2022, we had in place standby letters of credit, bank guarantees and performance bonds totaling $15.2$9.8 million to back our various customer contracts. Our In addition, our
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Indian subsidiary also has $4.8 million in customs bonds outstanding.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations and funds available under our revolving credit facility and other revolving lines of credit.facility. Our primary liquidity needs are to finance our working capital, capital expenditures, debt service needs and potential future acquisitions. In October 2017, we entered into a new credit agreement that provides for (i) a seven-year $250.0 million variable rate senior secured term loan B facility and (ii) a five-year $60.0 million senior secured revolving credit facility. At March 31, 2020, outstanding principal under the term loan B facility was $176.0 million and we had no outstanding borrowings under our revolving credit facility.
Cash and cash equivalents. At March 31, 2020,2022, we had $43.2$41.4 million in cash and cash equivalents. We maintainmanage our global cash requirements by maintaining cash and cash equivalents at various financial institutions located in many countries throughout the world.world where we operate. Approximately $20.8$15.3 million, or 48%37%, of these amounts were held in domestic accounts with various institutions and approximately $22.4$26.1 million, or 52%63%, of these amounts were held in accounts outside of the United States with various financial institutions. Of the non-U.S. cash noted above, $3.1 million of cash was held by our Russian affiliate. While we have cash needs at our various foreign operations, excess cash is available for distribution to the United States through intercompany dividends or debt reduction in Canada.
Generally, we seek to maintain a cash and cash equivalents balance between $30.0 and $40.0 million. We will encounter periods where we may be above or below this range, due to, for example, inventory buildup for anticipated seasonal demand in fall and winter months, related cash receipts from credit sales in months that follow, debt maturities, restructuring activities, larger capital investments, severe and/or protracted economic downturns, acquisitions, or some combination of the above activities. The Company continues to manage its working capital requirements effectively through optimizing inventory levels, doing business with credit-worthy customers, and extending payments terms with its supplier base.
Senior secured credit facility. facility
On September 29, 2021, Thermon Group Holdings, Inc. (the “Company”), as a credit party and a guarantor, Thermon Holding Corp. (“THC” or the “U.S. Borrower”) and Thermon Canada Inc. (the “Canadian Borrower” and together with THC, the “Borrowers”), as borrowers, entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with several banks and other financial institutions or entities from time to time (the “Lenders”) and JPMorgan Chase Bank, N.A., as Administrative Agent (the “Agent”).
The Credit Agreement is an amendment and restatement of that certain Credit Agreement dated October 30, 2017 by and among Borrowers, the lenders time to time party thereto and JPMorgan Chase Bank, N.A. as administrative agent (the “Prior Credit Agreement”), and provides for the credit facilities.
See Note 11, “Long-Term Debt—Senior Secured Credit Facility” to our consolidated financial statements and accompanying notes thereto included in Item 8 below of this annual report for additional information on our senior secured term loan and revolving credit facilities, which is hereby incorporated by reference into this Item 2.7. At March 31, 2020,2022, we had no outstanding borrowings under our revolving credit facility and $56.0$97.1 million of available capacity thereunder, after taking into account the borrowing base and letters of credit outstanding, which totaled $4.0$2.9 million. From time to time, we may choose to utilize our revolving credit facility to fund operations, acquisitions or other investments, despite having cash available within our consolidated group in light of the cost, timing and other business considerations. As noted above, subsequent to March 31, 2020, we made several draws on our revolving credit facility resulting in a total of $41.4 million (including $4.0 million in letters of credit) in outstanding borrowings as of April 30, 2020 as a precautionary measure in light of the COVID-19 pandemic and recent volatility in commodity markets.
As of March 31, 2020,2022, we had $176.0$129.0 million of outstanding principal on our term loan BA facility. We are required to make quarterly principal payments of the term loan of $0.6 million through July 31, 2024. Thereafter, the remaining principal balance will be settled with a lump-sum payment of $164.8 million due at maturity of the term loan in October 2024. During the fiscal year ended March 31, 2020, we made voluntary debt prepayments of principal on the term loan B facility of $28.0 million. From time to time, we may choose to make unscheduled and additional prepayments of principal on the term loan B based on available cash flows.
| Installment Dates | Original Principal Amount | |||||||
| January 1, 2022 through October 1, 2022 | 1.25 | % | ||||||
| January 1, 2023 through October 1, 2024 | 1.88 | % | ||||||
| January 1, 2025 through July 1, 2026 | 2.50 | % | ||||||
Future capital requirements. requirements
Our future capital requirements will depend on a number of factors.many factors as noted throughout this report. We believe that, based on our current level of operations and related cash flow from operationsflows, plus cash on hand and available cash, together with available borrowings under our revolving credit facility, we will be adequateable to meet our liquidity needs for the next 12 months. We cannot assure you thatmonths and the foreseeable future.
For fiscal 2023, we expect our businesscapital expenditures to approximate 3.0% to 3.5% of revenue. Additionally, we will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to service our indebtedness, including our credit facility borrowings, or to fund our other liquidity needs. In addition, upon the occurrence of certain events, such as a change of control, we could be required to repay or refinance our indebtedness. We cannot assure you that we will be able to refinance any of our indebtedness, including our credit facility, on commercially reasonable terms or at all.
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is subject to change. See further details Note 11, "Long-Term Debt." We also have payment commitments of $3.7 million, mostly related to leased equipment,long-term information technology contracts, of which $0.6$2.1 million was sold to customers. We invested $1.6 million inare due within the implementation of our enterprise resource planning (“ERP”) software and other internally developed software. We invested $5.5 million in upgrading various buildings and manufacturing equipment and annualnext 12 months.
Strategic Investments
Our long-term plan includes investments in technology, furniture and fixture replacements, and capital maintenance. Going forward,three key areas as we look to profitably grow the Company beyond its existing installed base.
First, we expect to decreasediversify our revenues into adjacent markets like commercial, food & beverage, transportation and other non-oil and gas industries where we can continue to differentiate our offerings through quality, safety and customer service, while also aligning Thermon’s strategy around the energy transition toward a more sustainable global economy.
Second, we expect higher levels of investment in capital expendituresthe emerging markets over the coming decades to approximately $4.0 million formeet the fiscal year ending March 31, 2021needs of a larger middle class and will be investing in responseresources to more quickly respond to the COVID-19 coronavirus pandemic. During the fiscal year ending March 31, 2021,unique needs of those local markets.
Finally, we will continue expanding our technology enabled maintenance solutions, like our recently launched Genesis Network, which helps our customers more efficiently and safely monitor and maintain their heating systems by utilizing our software, analytics, hardware and process heating maintenance expert services.
These three initiatives will require incremental investments, both organic and inorganic, over a multi-year period, but we expect to invest approximately $2.2 millionwill result in equipment used in our manufacturing facilities,a more diversified, sustainable and in land and building improvements. The remaining amount primarily relates to investments in computers and technology equipment to support our business. We will continue to invest in building portable power solutions used as rentals by our TPS business based on market demand.profitable company over time.
| Year Ended March 31, | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Total cash provided by/(used in): | |||||||||||||||||
| Operating activities | $ | 28,754 | $ | 30,289 | $ | 70,726 | |||||||||||
| Investing activities | (4,531) | (7,832) | (10,010) | ||||||||||||||
| Financing activities | (22,658) | (28,205) | (46,540) | ||||||||||||||
Year Ended March 31, 20202022 ("fiscal 2020"2022") Compared to the Year Ended March 31, 20192021 ("fiscal 2019"2021")
Net cash provided by/(used in) operating activities. Net cash provided by operating activities totaled $70.7 decreased by $1.5 million forin fiscal 2020 compared to $23.2 million for fiscal 2019, an increase of $47.5 million.2022. The increase was primarilydecrease is mostly attributable to a $56.6 million increase inthe use of cash provided byto fund net working capital accounts of $21.0 million, partially offset by a decrease of $11.2 millionchange in non-cash items and increase in net income.
income totaling $19.5 million. Our net working capital assetsposition changed as a result of an overall increase in sales activity in fiscal 2022, which drove an increase in accounts receivable inventory, contract assets and other current assets representedversus a source of cash of $20.2 million and a use of cash of $30.3 millionlarge decline in accounts receivable in fiscal 2020 and fiscal 2019 respectively, an increase in the source of2021, when sales were not trending positively.
Net cash of $50.5 million in fiscal 2020. During fiscal 2020, as compared to fiscal 2019 accounts receivable decreased due to the seasonality of the business and the timing of the conversion of contract assets to accounts receivable, representing a source of cash of $9.4 million and a use of cash of $14.5 million, respectively. Contract assets represented a source of cash of $12.2 million and a use of cash of $12.0 million in fiscal 2020 and fiscal 2019, respectively, which is primarily attributed to timing of billings on our projects. In fiscal 2020, our inventory balance decreased as compared to fiscal 2019 due to planned
provided by/(used in) investing activities. Net cash used in investing activities totaled $10.0 million for fiscal 2020 compared to $10.1 million for fiscal 2019, a decrease of $0.1 was $(4.5) million in the use of cash. Net cash usedfiscal 2022 and $(7.8) million in investing activitiesfiscal 2021 and relates to the purchase of capital assets, primarily to maintain the existing operations of the business and includes purchases and sales of equipment in our rental business.
Net cash provided by/(used in) financing activities. Net cash used in financing activities totaled $46.5$(22.7) million and $(28.2) million in fiscal 2020, compared2022 and fiscal 2021, respectively, a comparative decrease in the use of cash in financing activities of $5.5 million, mostly attributable to $14.1higher principal and revolver payments in fiscal 2021.
Free Cash Flow (Non-GAAP)
In addition to evaluating our cash flow generation based upon operating, investing, and financing activities, the Company believes that the non-GAAP measure used in this section may provide investors and key stakeholders with another important perspective regarding our performance. The Company does not intend for this non-GAAP metric to be a substitute for the related GAAP measure, nor should it be viewed in isolation and without considering all relevant GAAP measurements. Moreover, our calculation may not be comparable to similarly titled measures reported by other companies. Refer to the reconciliation of cash provided by/(used in) operating activities to Free Cash Flow under "Non-GAAP Financial Measures" below.
We define “Free Cash Flow” as net cash provided by operating activities less cash used for the purchase of property, plant, and equipment, net of sales of rental equipment as well as proceeds from sales of land and buildings. This metric should not be interpreted to mean the remaining cash that is available for discretionary spending, dividends, share repurchases, acquisitions, or other purposes, as it excludes significant, mandatory obligations, such as principal payments on the Company’s long-term debt facility. Free cash flow is one measure that the Company uses internally to assess liquidity.
Free Cash Flow totaled $24.2 million for fiscal 2019, a comparative2022 as compared to $22.5 million for fiscal 2021, an increase of $32.4comparatively, primarily due to higher cash flows from operations as well as reduced purchases on property, plant and
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equipment. Free Cash Flow for fiscal 2020 was $60.7 million driven primarily by strong cash used in financingflows from operating activities, which is primarily attributableoccurred prior to principal prepayments on our credit facilities during fiscal 2020. Cash proceeds in financing activities are primarily short-term borrowings netthe impacts of contractual and principal payments on our outstanding long-term debt.
Year Ended March 31, 20192021 ("fiscal 2019"2021") Compared to the Year Ended March 31, 20182020 ("fiscal 2018"2020")
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K10-K/A for the fiscal year ended March 31, 20192021 filed with the SEC on June 12, 2019May 27, 2021 for a discussion of net cash provided by operating activities, net cash used in investing activities and net cash provided by (used in) financing activities in fiscal 20192021 as compared to fiscal 2018.
Off-Balance Sheet Arrangements
We do not have any off balanceoff-balance sheet arrangements. In addition, we do not have any interest in entities referred to as variable interest entities, which include special purpose entities and other structured finance entities.
Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Our critical accounting policies are those that materially affect our financial statements and involve difficult, subjective or complex judgments by management. Our most significant financial statement estimates include revenue recognition, estimating allowances, specifically the allowance for bad debts, warranty reserves, project revenues, inventory reservesdoubtful accounts and potential litigation claimsthe adjustment for excess and settlements.
Although these estimates are based on management's best knowledge of current events and actions that may impact the Companycompany in the future, actual results may be materially different from the estimates.
Estimating allowances, specifically the allowance for doubtful accounts and the adjustment for excess and obsolete inventories. inventories. The Company's receivables are recorded at cost when earned and represent claims against third parties that will be settled in cash. The carrying value of the Company's receivables, net of allowance for doubtful accounts, represents their estimated net realizable value. If events or changes in circumstances indicate specific receivable balances may be impaired, further consideration is given to the Company's ability to collect those balances and the allowance is adjusted accordingly. The Company has established an allowance for doubtful accounts based upon an analysis of aged receivables. Past-due receivable balances are written-off when the Company's internal collection efforts have been unsuccessful in collecting the amounts due.
The Company's primary base of customers operates in themajor end markets that drive demand for process heating include chemical and petrochemical, up-, mid- and downstream oil, chemical processing andgas, power generation, industries. Althoughcommercial, and rail and transit. From time to time, the Company has a concentration of credit risk within these industries, the Company has not experienced significant collectioncredit losses on saleswith respect to individual customers; however, historically, these customers.credit losses have been isolated to specific customers rather than across an industry and have been infrequent. The Company's foreign receivables are not concentrated within any one geographicgeographic segment nor are they subject to any current economic conditions that would subject the Company to unusual risk. The Company does not generally require collateral or other security from customers.
We perform credit evaluations of new customers and sometimes require deposits, prepayments or use of trade letters of credit to mitigate our credit risk. Allowance for doubtful account balances were $0.8$2.2 million and $1.0$2.1 million as of March 31, 20202022 and 2019,2021, respectively. Although we have fully provided for these balances, we continue to pursue collection of these receivables.
We write down our inventory for estimated excess or obsolete inventory equal to the difference between the cost of inventory and estimated net realizable value based on assumptions of future demand and market conditions. Net realizable value is determined quarterly by comparing inventory levels of individual products and components to historical usage rates, current backlog and estimated future sales and by analyzing the age and potential applications of inventory, in order to identify specific products and components of inventory that are judged unlikely to be sold. Our finished goods inventory consists primarily of completed electrical cable that has been manufactured for various heat tracing solutions. Most of our manufactured product offerings are built to industry standard specifications that have general purpose applications and therefore are sold to a variety of customers in various industries. Some of our products, such as custom orders and ancillary components outsourced from third-party manufacturers, have more specific applications and therefore may be at a higher risk of inventory obsolescence. Inventory is written-off in the period in which the disposal occurs. Actual future write-offs of inventory for salability and obsolescence reasons may differ from estimates and calculations used to determine valuation allowances due to changes in customer demand, customer negotiations, product application, technology shifts and other factors. Our allowance for excess and obsolete inventories was $2.0$1.8 million and $2.1$1.8 million at March 31, 20202022 and 2019,2021, respectively. Historically,
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inventory obsolescence and potential excess cost adjustments have been within our expectations, and management does not believe that there is a reasonable likelihood that there will be a material change in future estimates or assumptions used to calculate the inventory valuation reserves.
Significant judgments and estimates must be made and used in connection with establishing these allowances. If our assumptions used to calculate these allowances do not agree with our future ability to collect outstanding receivables, or the actual demand for our inventory, or the number of products and installations returned under warranty, additional provisions may be needed and our future results of operations could be adversely affected.
Valuation of long-lived, goodwill and other intangible assets. We evaluate goodwill for impairment annually during the fourth quarter Refer to Note 1, "Organization and Summary of Significant Accounting Policies" of our fiscal year, or more frequently when indicators of impairment are present. We operate as four reportable segments based on four geographic countries or regions. Within these four reportable segments, we have six reporting units, each of which is assessed for potential impairments. We perform a qualitative analysis to determine whether it is more likely than not that the fair value of goodwill is less than its carrying amount. Some of the impairment indicators we consider include significant differences between the carrying amount and the estimated fair value of our assets and liabilities; macroeconomic conditions such as a deteriorationconsolidated financial statements included below in general economic condition or limitations on accessing capital; industry and market considerations such as a deterioration in the environment in which we operate and an increased competitive environment; cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows; overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods; other relevant events such as litigation, changes in management, key personnel, strategy or customers; the testing for recoverability of our long-lived assets; and a potential decrease in share price. We evaluate the significance of identified events and circumstances on the basis of the weight of evidence along with how they could affect the relationship between the reporting unit's fair value and carrying amount, including positive mitigating events and circumstances. If we determine it is more likely than not that the fair value of goodwill is less than its carrying amount, then a second step is performed to quantify the amount of goodwill impairment. Our goodwill impairment assessment of our reporting units utilizes the income approach, based on discounted future cash flows, which are derived from internal forecasts and economic expectations, and the market approach, based on market multiples of guideline public companies. The most significant inputs in the Company's goodwill impairment test are the projected financial information, the weighted average cost of capital and market multiples for similar transactions. If impairment is indicated, a goodwill impairment charge is recorded to write the goodwill down to its implied fair value. In fiscal 2020, 2019 and 2018, the Company determined that no impairment of goodwill existed.
Accounting for income taxes. We account for income taxes under the asset and liability method that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations or effective tax rate.
Significant judgment is required in determining our worldwide income tax provision. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities, the process of identifying items of revenue and expense that qualify for preferential tax treatment, and segregation of foreign and domestic earnings and expenses to avoid double taxation. Although we believe that our estimates are reasonable, the final tax
outcome of these matters could be different from that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such determination is made.
In estimating future tax consequences, all expected future events are considered other than enactments of changes in tax laws or rates. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized. We consider future growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, taxable income in prior years, if carryback is permitted under the law, and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in the period in which we make such a determination, or goodwill would be adjusted at our final determination of the valuation allowance related to an acquisition within the measurement period. If we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance as an adjustment to earnings at such time. The amount of income tax we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We account for these uncertain tax issues pursuant to ASC 740, Income Taxes,, which contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given with respect to the final outcome of these matters. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, judicial rulings, refinement of estimates or realization of earnings or deductions that differ from our estimates. To the extent that the final outcome of these matters is different than the amounts recorded, such differences generally will impact our provision for income taxes in the period in which such a determination is made. Our provisions for income taxes include the impact of reserve provisions and changes to reserves that are considered appropriate and also include the related interest and penalties.
We expect to repatriate certain foreign earnings from jurisdictions that are 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.
Loss contingencies. contingencies.We accrue for probable losses from contingencies including legal defense costs, on an undiscounted basis, when such costs are considered probable of being incurred and are reasonably estimable. We periodically evaluate available information, both internal and external, relative to such contingencies and adjust this accrual as necessary. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. In determining whether a loss should be accrued we
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evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss.
Stock-based compensation expense.expense. We account for share-based payments to employees in accordance with ASC 718, Compensation-Stock Compensation, which requires that share-based payments (to the extent they are compensatory) be recognized in our consolidated statements of operations and comprehensive incomeincome/(loss) based on their fair values.
As required by ASC 718, we recognize stock-based compensation expense for share-based payments that are expected to vest. In determining whether an award is expected to vest, we use an estimated, forward-looking forfeiture rate based upon our historical forfeiture rates. Stock-based compensation expense recorded using an estimated forfeiture rate is updatedaccount for actual forfeitures quarterly. To the extent our actual forfeitures are differentas they occur, rather than our estimates, we record a true-up for the differences in the period that the awards vest, and such true-ups could materially affect our operating results. We also consider on a quarterly basis whether there have been any significant changes in facts and circumstances that would affect ourestimate expected forfeiture rate.
We are also required to determine the fair value of stock-based awards at the grant date. For option awards that are subject to service conditions and/or performance conditions, we estimate the fair values of employee stock options using a Black-Scholes-Merton valuation model. For restricted stock awards and restricted stock units, fair value is determined by the market price of our common stock as of the grant date. Some of our option grants and awards included a market condition for which we used a Monte Carlo pricing model to establish grant date fair value. These determinations require judgment, including estimating expected volatility. If actual results differ significantly from these estimates, stock- basedstock-based compensation expense and our results of operations could be impacted.
Non-GAAP Financial Measures
Disclosure in this annual report of "Adjusted EPS," "Adjusted EBITDA," "Adjusted Net Income," and "Free cash flow,Cash Flow," which are "non-GAAP financial measures" as defined under the rules of the Securities and Exchange Commission (the "SEC"), are intended as supplemental measures of our financial performance that are not required by, or presented in accordance with, U.S. generally accepted accounting principles ("GAAP"). "Adjusted Net Income" and "Adjusted fully diluted earnings per share (or "EPS"share" ("Adjusted EPS") represents net income attributable to Thermon before costs related to the consolidation of our operating footprint in Canada, acceleration of unamortized debt costs, the tax benefit from income tax rate reductions in certain foreign jurisdictions, amortization of intangible assets, and the income tax effect on any non-tax adjustments, costs associated with our restructuring and other income/(charges), and income related to the Canadian Emergency Wage Subsidy, per fully-diluted common share in the case of Adjusted EPS. "Adjusted EBITDA" represents net income attributable to Thermon before interest expense (net of interest income), income tax expense, depreciation and amortization expense, stock-based compensation expense, income attributable to non-controlling interests, costs associated with our restructuring and costsother income/(charges), and income related to the consolidation of our operating footprint in Canada.Canadian Emergency Wage Subsidy. "Free cash flow" represents cash provided by operating activities less cash used for the purchase of property, plant and equipment, net of sales of rental equipment and proceeds from sales of land and buildings.
We believe these non-GAAP financial measures are meaningful to our investors to enhance their understanding of our financial performance and are frequently used by securities analysts, investors and other interested parties to compare our performance with the performance of other companies that report Adjusted EPS, Adjusted EBITDA, or Adjusted Net Income. Adjusted EPS, Adjusted EBITDA, and Adjusted Net Income should be considered in addition to, not as substitutes for, income from operations, net income, net income per share, and other measures of financial performance reported in accordance with GAAP. We provide Free cash flowCash Flow as a measure of our liquidity. OurNote that our calculation of Adjusted EPS, Adjusted EBITDA, Adjusted Net Income, and Free cash flowCash Flow may not be comparable to similarly titled measures reported by other companies.
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The following table reconciles net income to Adjusted EBITDA for the periods presented:
| Year Ended March 31, | ||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||
| Net income available to Thermon Group Holdings, Inc. | $ | 11,938 | $ | 22,756 | $ | 11,913 | ||||||||
| Interest expense, net | 14,027 | 15,476 | 8,754 | |||||||||||
| Income tax expense | 5,142 | 9,973 | 5,170 | |||||||||||
| Depreciation and amortization | 28,275 | 29,965 | 24,420 | |||||||||||
| EBITDA | $ | 59,382 | $ | 78,170 | $ | 50,257 | ||||||||
| Stock-based compensation | 4,960 | 4,148 | 3,519 | |||||||||||
| Income attributable to non-controlling interest in Sumac | (2 | ) | 413 | 1,306 | ||||||||||
| Consolidation of operating footprint in Canada | — | 757 | — | |||||||||||
| THS acquisition related foreign exchange losses | — | — | 5,594 | |||||||||||
| THS acquisition related expenses | — | — | 4,093 | |||||||||||
| Adjusted EBITDA | $ | 64,340 | $ | 83,488 | $ | 64,769 | ||||||||
| Year Ended March 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Net income available to Thermon Group Holdings, Inc. | $ | 20,092 | $ | 877 | $ | 11,938 | |||||||||||
| Interest expense, net | 5,815 | 10,185 | 14,027 | ||||||||||||||
| Income tax expense/(benefit) | 8,333 | (1,521) | 5,142 | ||||||||||||||
| Depreciation and amortization | 20,205 | 20,722 | 28,275 | ||||||||||||||
| EBITDA (non-GAAP) | $ | 54,445 | $ | 30,263 | $ | 59,382 | |||||||||||
| Stock-based compensation | 3,803 | 3,728 | 4,960 | ||||||||||||||
| Income/(loss) attributable to non-controlling interest | — | — | (2) | ||||||||||||||
| Restructuring and other charges/(income) | (414) | 8,623 | — | ||||||||||||||
| Loss on debt extinguishment | 2,569 | — | — | ||||||||||||||
| Canadian Emergency Wage Subsidy | (1,952) | (6,412) | — | ||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 58,451 | $ | 36,202 | $ | 64,340 | |||||||||||
The following table reconciles net income to Adjusted net incomeNet Income and Adjusted EPS for the periods presented:
| Year ended March 31, | ||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||
| Net income available to Thermon Group Holdings, Inc. | $ | 11,938 | $ | 22,756 | $ | 11,913 | ||||||||
| Consolidation of operating footprint in Canada | — | 757 | — | |||||||||||
| THS acquisition related expense | — | — | 4,093 | |||||||||||
| THS acquisition related foreign exchange losses | — | — | 5,594 | |||||||||||
| Tax reform related expense | — | — | 1,014 | |||||||||||
| Acceleration of unamortized debt costs | 756 | 394 | 880 | |||||||||||
| Tax benefit for impact of rate reduction in foreign jurisdictions | (1,231 | ) | — | — | ||||||||||
| Release of deferred tax liability for undistributed foreign earnings and uncertain tax positions | — | — | (554 | ) | ||||||||||
| Amortization of intangible assets | 17,773 | 20,771 | 16,458 | |||||||||||
| Tax effect of financial adjustments | (4,447 | ) | (5,499 | ) | (6,947 | ) | ||||||||
| Adjusted net income (non-GAAP) (1) | $ | 24,789 | $ | 39,179 | $ | 32,451 | ||||||||
| Adjusted-fully diluted earnings per common share (non-GAAP) (1) | $ | 0.75 | $ | 1.19 | $ | 0.99 | ||||||||
| Fully-diluted common shares - non-GAAP basis (thousands) | 33,149 | 33,054 | 32,797 | |||||||||||
| Year ended March 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Net income available to Thermon Group Holdings, Inc. | $ | 20,092 | $ | 877 | $ | 11,938 | ||||||||||||||
| Acceleration of unamortized debt costs | — | 510 | 756 | |||||||||||||||||
| Tax expense/(benefit) for impact of rate reduction in foreign jurisdictions | 505 | 332 | (1,231) | |||||||||||||||||
| Withholding tax on dividend related to debt amendment | 301 | — | — | |||||||||||||||||
| Amortization of intangible assets | 8,790 | 9,445 | 17,773 | |||||||||||||||||
| Restructuring and other charges/(income) | (414) | 8,623 | — | |||||||||||||||||
| Loss on debt extinguishment | 2,569 | — | — | |||||||||||||||||
| Canadian Emergency Wage Subsidy | (1,952) | (6,412) | — | |||||||||||||||||
| Tax effect of financial adjustments | (1,999) | (2,450) | (4,447) | |||||||||||||||||
| Adjusted net income (non-GAAP) | $ | 27,892 | $ | 10,925 | $ | 24,789 | ||||||||||||||
| Adjusted-fully diluted earnings per common share (non-GAAP) | $ | 0.83 | $ | 0.33 | $ | 0.75 | ||||||||||||||
| Fully-diluted common shares - non-GAAP basis (thousands) | 33,515 | 33,341 | 33,149 | |||||||||||||||||
The following table reconciles cash provided byby/(used in) operating activities to Free cash flow for the periods presented:Cash Flow:
| Year Ended March 31, | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash provided by/(used in) operating activities | $ | 28,754 | $ | 30,289 | $ | 70,726 | |||||||||||
| Less: Cash provided by/(used for) purchases of property, plant, and equipment | (5,220) | (8,132) | (10,855) | ||||||||||||||
| Plus: Sales of rental equipment | 689 | 300 | 603 | ||||||||||||||
| Plus: Proceeds from the sale of property, plant and equipment | — | — | 242 | ||||||||||||||
| Free Cash Flow (non-GAAP) | $ | 24,223 | $ | 22,457 | $ | 60,716 | |||||||||||
36
| Year Ended March 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Cash provided by operating activities | $ | 70,726 | $ | 23,227 | $ | 22,913 | ||||||
| Less: Purchases of property, plant and equipment, net of rental equipment sales | (10,855 | ) | (12,036 | ) | (10,008 | ) | ||||||
| Plus: Sale of rental equipment | 603 | 981 | 936 | |||||||||
| Plus: Proceeds from sales of land and buildings | 242 | 33 | 13 | |||||||||
| Free cash flow provided | $ | 60,716 | $ | 12,205 | $ | 13,854 | ||||||
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures include the effect of fluctuations in foreign exchange rates, interest rates and commodity prices.
Foreign currency risk relating to operations. We transact business globally and are subject to risks associated with fluctuating foreign exchange rates. Approximately 59%57% of our fiscal 20202022 consolidated revenues were generated by sales from our non-U.S. subsidiaries. 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 manufacturing facilities located elsewhere, primarily the United States, Canada and Europe. Significant changes in the relevant exchange rates could adversely affect our margins on foreign sales of products. Our non-U.S. subsidiaries incur most of their expenses (other than intercompany expenses) in their local functional currency. These currencies include the Canadian Dollar, Euro, British Pound, Russian Ruble, Australian Dollar, South African Rand, South Korean Won, Chinese Renminbi, Indian Rupee, Mexican Peso, and Japanese Yen.
We have established a program that primarily utilizes foreign currency forward contracts to offset the risk associated with the effects of certain foreign currency exposures. Under this program, increases or decreases in our foreign currency exposures are offset by gains or losses on the forward contracts, to mitigate the possibility of foreign currency transaction gains or losses. These foreign currency exposures typically arise from intercompany transactions. Our forward contracts generally have terms of 30 days or less. We do not use forward contracts for trading purposes nor do we designate these forward contracts as hedging instruments pursuant to ASC 815. We adjust the carrying amount of all contracts to their fair value at the end of each reporting period and unrealized gains and losses are included in our results of operations for that period. These gains and losses largely offset gains and losses resulting from settlement of payments received from our foreign operations which are settled in U.S. dollars. All outstanding foreign currency forward contracts are marked to market at the end of the period with unrealized gains and losses included in other expense. The fair value is determined by quoted prices on identical forward contracts (Level 2 fair value). The balance sheet reflects unrealized gains within accounts receivable and unrealized losses within accrued liabilities. Our ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the contracts mature. As of March 31, 20202022 and 2019,2021, the notional amounts of forward contracts we held to buy U.S. dollars in exchange for other major international currencies were $9.8$7.3 million and $7.4$16.4 million, respectively.
During fiscal 2020,2022, our largest exposures to foreign exchange rates consisted primarily of the Canadian Dollar and the Euro against the U.S. dollar. The market risk related to the foreign currency exchange rates is measured by estimating the potential impact of a 10% change in the value of the U.S. dollar relative to the local currency exchange rates. The rates used to perform this analysis were based on a weighted average of the market rates in effect during the relevant period. A 10% appreciation of the U.S. dollar relative to the Canadian Dollar would result in a net decrease in net income of $1.2 million for fiscal 2020.2022. Conversely, a 10% depreciation of the U.S. dollar relative to the Canadian Dollar would result in a net increase in net income of $1.5$1.4 million for fiscal 2020.2022. A 10% appreciation of the U.S. dollar relative to the Euro would result in a net decrease in net income of $0.1 million for fiscal 2022. Conversely, a 10% depreciation of the U.S. dollar relative to the Euro would result in a net increase in net income of $0.1 million for fiscal 2020.2022.
We also have exposure to the Russian Ruble. A 10% appreciation of the U.S. dollar relative to the Russian Ruble would result in a net decrease in net income of $0.2 million. Conversely, a 10% depreciation of the U.S. dollar relative to the EuroRussian Ruble would result in a net decreaseincrease in net income of $0.2 million for fiscal 2020.million.
The geographic areas outside the United States in which we operate are generally not considered to be highly inflationary. Nonetheless, these foreign operations are sensitive to fluctuations in currency exchange rates arising from, among other things, certain intercompany transactions that are generally denominated in U.S. dollars rather than their respective functional currencies. The impact of foreign currency transactions on our consolidated statements of operations were losses of $0.6$1.9 million and gains of $0.2$0.3 million in fiscal 20202022 and fiscal 2019,2021, respectively.
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 increase or decrease in the amount of those sales and earnings. In addition, 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 fiscal 2020,2022, we estimate that our sales were negativelypositively impacted by $5.0$5.9 million when compared to foreign exchange translation rates that were in effect in fiscal 2019.2021. Foreign currency impact on revenue is calculated by comparing actual current period revenue in U.S. dollars to the theoretical U.S. Dollar revenue we would have achieved based on the weighted-average foreign exchange rates in effect in the comparative prior periods for all applicable foreign currencies. In fiscal 2020,2022, we were mostlyprimarily impacted by the appreciation of the U.S. dollarCanadian Dollar relative to the Canadian Dollar and the Euro.U.S. dollar. At each balance sheet date, we translate our assets and liabilities denominated in foreign currency to U.S. dollars. The balances of our foreign equity accounts are translated at their historical value. The difference between the current rates and the historical rates are posted to our currency translation account and reflected in the shareholders' equity section of our balance sheet. The effect of foreign currency translation were losses of $15.5$2.9 million in fiscal
37
2022 and gains of $28.6 million in fiscal 2020 and losses of $13.2 million in fiscal 2019.2021. Currency translation gains or losses are reported as part of comprehensive income or loss in our accompanying consolidated financial statements.
Foreign currency risks related to intercompany notes. The Company has entered intoexited a cross currency swap for the purposes of mitigating potential exposuresduring fiscal 2022. Refer to currency rate fluctuations related to an intercompany note of $54.6 million with our wholly-owned Canadian subsidiary, Thermon Canada. See Note 2, “Fair"Fair Value Measurements”Measurements" for more information. Also, refer to our consolidated financial statements included below in Item 8 of this annual report1A, "Risk Factors" for further informationdiscussion regarding our cross currency swap.risk as it relates to foreign currency.
Interest rate risk and foreign currency risk relating to debt. Borrowings under both our variable rate term loan BA credit facility and revolving credit facility incur interest expense that is variable in relation to the LIBOR rate. The interest rate for borrowings under our term loan BA credit facility was 5.33%1.96% for the U.S. Term Loan and 2.62% for the Canadian Term loan as of March 31, 2020.2022. Based on historical balances on our revolving credit facility, we do not anticipate that a one percent increase or decrease in our interest rate would have a significant impact on our operations. We cannot provide any assurances that historical revolver borrowings (if any) will be reflective of our future use of the revolving credit facility.
As of March 31, 2020,2022, we had $176.0no outstanding principal under our revolving credit facility.
As of March 31, 2022, we had $129.0 million of outstanding principal under our variable rate LIBOR-based term loan B credit facility. Based on the outstanding borrowings, a one percent change in the interest rate would result in a $1.7$1.3 million increase or decrease in our annual interest expense. As of March 31, 2020, we had no outstanding principal under our revolving credit facility.
Commodity price risk. We use various commodity-based raw materials in our manufacturing processes. Generally, we acquire such components at market prices and do not typically enter into long-term purchase commitments with suppliers or hedging instruments to mitigate commodity price risk. As a result, we are subject to market risks related to changes in commodity prices and supplies of key components of our products. Historically, the costs of our primary raw materials have been stable and readily available from multiple suppliers. Typically, we have been able to pass on raw material cost increases to our customers. We cannot provide any assurance, however, that we may be able to pass along such cost increases to our customers or source sufficient amounts of key components on commercially reasonable terms or at all in the future, and if we are unable to do so, our results of operations may be adversely affected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
| Page | |||||
| Audited Financial Statements of Thermon Group Holdings, Inc. and its Consolidated Subsidiaries | |||||
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 185) | |||||
Consolidated Balance Sheets as of March 31, 20 | |||||
39
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Thermon Group Holdings, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Thermon Group Holdings, Inc. and subsidiaries (the Company) as of March 31, 20202022 and 2019,2021, the related consolidated statements of operations and comprehensive income,income/(loss), equity, and cash flows for each of the years in the three‑yearthree-year period ended March 31, 2020,2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the years in the three‑yearthree-year period ended March 31, 2020,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2020,2022, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated June 1, 2020May 26, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit MattersMatter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment.judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
As discussed in Note 34 to the consolidated financial statements, the Company adopted Topic 842, on April 1, 2019,recognized $140,865 thousand of revenues over time using cost-to-cost percentage of completion or time and materials methodologies, for the modified retrospective method. On adopting Topic 842, the Company recorded right-of-use assets and lease liabilities for substantially all of its existing operating leases. The Company did not elect either the package of practical expedients or the use of hindsight in transition.
We identified the evaluation of the Company’s adoption of Topic 842 as a critical audit matter. Evaluating the Company’s application of the Topic 842 transition guidance and assessing the amounts at which the lease assets and liabilities were recognized and disclosed required subjective auditor judgment. Specifically, a high degree of auditor judgment was required to evaluate the sufficiency of audit evidence related to 1) determining that the lease population at adoptionrevenues recognized over time using cost-to-cost percentage of completion as a critical audit matter. A high degree of subjective auditor judgment was complete and accurate, 2) the Company’s applicationrequired because of the non-separation of lease and non-lease components and short-term lease practical expedients, and 3) transition-related disclosures. In addition, evaluating whether the Company properly aggregated all of its leases recorded in the local accounting recordsgeographical dispersion of the Company’s subsidiaries in its adoption accounting was complex.revenue generating activities and the extensive data compilation required to sufficiently support the revenue recognition.
The following are the primary procedures we performed to address this critical audit matter includedmatter. We applied auditor judgment to determine the following.nature and extent of procedures to be performed over the revenue stream. We evaluated the design and tested the effectiveness of certain internal controls over the Company’s adoption of Topic 842revenue recognition process, including controls overassociated with contract setup, project cost accumulation, monitoring of project status, and estimated costs to complete. We assessed the completeness and accuracy of the lease population at adoption, application of non-separation of lease and non-lease components and short-term lease practical expedients, and transition-related disclosures.
40
accumulation data, estimated costs to complete, and project status assessments by the project managers. We compared the estimated costs to complete to actual results to assess the Company’s ability to accurately forecast. In addition, we tested thatevaluated the key inputs into lease classification and measurement were appropriate and that those leases were classified and measured appropriately under Topic 842, as well as thatsufficiency of audit evidence obtained over revenues recognized over time using cost-to-cost percentage of completion by assessing the non-separationresults of lease and non-lease components and short-term lease practical expedients were applied properly. We also tested the completeness of the adoption date lease population by examining possible sources of existing leases such as service and supply contracts. Lastly, we tested the manual compilation of the underlying data used in the determination of the account balances and assessed the propriety of the transition-related disclosures included in the consolidated financial statements.
/s/ KPMG LLP
We have served as the Company’s auditor since 2013.
Austin, Texas
41
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Thermon Group Holdings, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Thermon Group Holdings, Inc. and subsidiaries’subsidiaries' (the Company) internal control over financial reporting as of March 31, 2020,2022, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2020,2022, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 20202022 and 2019,2021, the related consolidated statements of operations and comprehensive income,income/(loss), equity, and cash flows for each of the years in the three-year period ended March 31, 2020,2022, and the related notes (collectively, the consolidated financial statements), and our report dated June 1, 2020May 26, 2022 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Annual Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Austin, Texas
42
Thermon Group Holdings, Inc.
Consolidated Statements of Operations and Comprehensive IncomeIncome/(Loss)
(Dollars in Thousands,thousands, except share and per share data)
| Year Ended March 31, 2020 | Year Ended March 31, 2019 | Year Ended March 31, 2018 | ||||||||||
| Sales | $ | 383,486 | $ | 412,642 | $ | 308,609 | ||||||
| Cost of sales | 221,848 | 236,702 | 164,798 | |||||||||
| Gross profit | 161,638 | 175,940 | 143,811 | |||||||||
| Operating expenses: | ||||||||||||
| Marketing, general and administrative and engineering | 111,202 | 106,660 | 94,615 | |||||||||
| Amortization of intangible assets | 17,773 | 20,771 | 16,458 | |||||||||
| Income from operations | 32,663 | 48,509 | 32,738 | |||||||||
| Other income/(expenses): | ||||||||||||
| Interest income | 252 | 238 | 606 | |||||||||
| Interest expense | (14,279 | ) | (15,714 | ) | (8,984 | ) | ||||||
| Loss on extinguishment of debt | — | — | (376 | ) | ||||||||
| Other income/(expense) | (1,558 | ) | 109 | (5,595 | ) | |||||||
| Income before provision for income taxes | 17,078 | 33,142 | 18,389 | |||||||||
| Income tax expense | 5,142 | 9,973 | 5,170 | |||||||||
| Net income | 11,936 | 23,169 | 13,219 | |||||||||
| Income (loss) attributable to non-controlling interests | (2 | ) | 413 | 1,306 | ||||||||
| Net income available to Thermon Group Holdings, Inc. | $ | 11,938 | $ | 22,756 | $ | 11,913 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Net income available to Thermon Group Holdings, Inc. | $ | 11,938 | $ | 22,756 | $ | 11,913 | ||||||
| Foreign currency translation adjustment | (15,485 | ) | (13,233 | ) | 12,030 | |||||||
| Derivative valuation, net of tax | — | — | 34 | |||||||||
| Other | 540 | 825 | (270 | ) | ||||||||
| Total comprehensive income (loss) | $ | (3,007 | ) | $ | 10,348 | $ | 23,707 | |||||
| Net income per common share: | ||||||||||||
| Basic | $ | 0.36 | $ | 0.70 | $ | 0.37 | ||||||
| Diluted | 0.36 | 0.69 | 0.36 | |||||||||
| Weighted-average shares used in computing net income per common share: | ||||||||||||
| Basic | 32,760,327 | 32,568,541 | 32,423,581 | |||||||||
| Diluted | 33,148,670 | 33,054,304 | 32,797,351 | |||||||||
| Year Ended March 31, 2022 | Year Ended March 31, 2021 | Year Ended March 31, 2020 | ||||||||||||||||||
| Sales | $ | 355,674 | $ | 276,181 | $ | 383,486 | ||||||||||||||
| Cost of sales | 215,556 | 159,309 | 221,848 | |||||||||||||||||
| Gross profit | 140,118 | 116,872 | 161,638 | |||||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Selling, general and administrative expenses | 93,054 | 89,834 | 111,589 | |||||||||||||||||
| Deferred compensation plan expense/(income) | 283 | 1,564 | (387) | |||||||||||||||||
| Amortization of intangible assets | 8,790 | 9,445 | 17,773 | |||||||||||||||||
| Restructuring and other charges/(income) | (414) | 8,623 | — | |||||||||||||||||
| Income/(loss) from operations | 38,405 | 7,406 | 32,663 | |||||||||||||||||
| Other income/(expenses): | ||||||||||||||||||||
| Interest expense, net | (5,815) | (10,185) | (14,027) | |||||||||||||||||
| Other income/(expense) | (4,165) | 2,135 | (1,558) | |||||||||||||||||
| Income/(loss) before provision for income taxes | 28,425 | (644) | 17,078 | |||||||||||||||||
| Income tax expense/(benefit) | 8,333 | (1,521) | 5,142 | |||||||||||||||||
| Net income/(loss) | 20,092 | 877 | 11,936 | |||||||||||||||||
| Income/(loss) attributable to non-controlling interests | — | — | (2) | |||||||||||||||||
| Net income/(loss) available to Thermon Group Holdings, Inc. | $ | 20,092 | $ | 877 | $ | 11,938 | ||||||||||||||
| Other comprehensive income/(loss): | ||||||||||||||||||||
| Net income/(loss) available to Thermon Group Holdings, Inc. | $ | 20,092 | $ | 877 | $ | 11,938 | ||||||||||||||
| Foreign currency translation adjustment | (2,922) | 28,615 | (15,485) | |||||||||||||||||
| Other | (65) | (640) | 540 | |||||||||||||||||
| Total comprehensive income/(loss) | $ | 17,105 | $ | 28,852 | $ | (3,007) | ||||||||||||||
| Net income/(loss) per common share: | ||||||||||||||||||||
| Basic | $ | 0.60 | $ | 0.03 | $ | 0.36 | ||||||||||||||
| Diluted | 0.60 | 0.03 | 0.36 | |||||||||||||||||
| Weighted-average shares used in computing net income/(loss) per common share: | ||||||||||||||||||||
| Basic | 33,308,045 | 33,134,592 | 32,760,327 | |||||||||||||||||
| Diluted | 33,514,561 | 33,340,954 | 33,148,670 | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
Thermon Group Holdings, Inc.
Consolidated Balance Sheets
(Dollars in Thousands,thousands, except share and per share data)
| March 31, 2020 | March 31, 2019 | March 31, 2022 | March 31, 2021 | |||||||||||||||
| Assets | Assets | |||||||||||||||||
| Current assets: | Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 43,237 | $ | 31,402 | Cash and cash equivalents | $ | 41,445 | $ | 40,124 | |||||||||
| Accounts receivable, net of allowance for doubtful accounts of $834 and $987 as of March 31, 2020 and 2019, respectively | 92,478 | 105,323 | ||||||||||||||||
| Accounts receivable, net of allowances of $2,177 and $2,074 as of March 31, 2022 and 2021, respectively | Accounts receivable, net of allowances of $2,177 and $2,074 as of March 31, 2022 and 2021, respectively | 95,305 | 74,501 | |||||||||||||||
| Inventories, net | 60,273 | 64,890 | Inventories, net | 71,650 | 63,790 | |||||||||||||
| Contract assets | 10,194 | 26,454 | Contract assets | 19,626 | 11,379 | |||||||||||||
| Prepaid expenses and other current assets | 9,219 | 7,320 | Prepaid expenses and other current assets | 11,786 | 8,784 | |||||||||||||
| Income tax receivable | 2,535 | 4,389 | Income tax receivable | 4,626 | 8,231 | |||||||||||||
| Total current assets | 217,936 | 239,778 | Total current assets | $ | 244,438 | $ | 206,809 | |||||||||||
| Property, plant and equipment, net of depreciation and amortization of $43,550 and $38,414 as of March 31, 2020 and 2019, respectively | 72,542 | 74,955 | ||||||||||||||||
| Property, plant and equipment, net of depreciation and amortization of $63,954 and $55,555 as of March 31, 2022 and 2021, respectively | Property, plant and equipment, net of depreciation and amortization of $63,954 and $55,555 as of March 31, 2022 and 2021, respectively | 66,039 | 72,630 | |||||||||||||||
| Goodwill | 197,978 | 204,995 | Goodwill | 212,754 | 213,038 | |||||||||||||
| Intangible assets, net | 104,546 | 126,596 | Intangible assets, net | 94,908 | 103,784 | |||||||||||||
| Operating lease right-of-use assets | 16,637 | — | Operating lease right-of-use assets | 10,534 | 12,619 | |||||||||||||
| Deferred income taxes | 2,904 | 3,829 | Deferred income taxes | 1,211 | 2,586 | |||||||||||||
| Other long term assets | 8,362 | 5,609 | ||||||||||||||||
| Other long-term assets | Other long-term assets | 6,785 | 6,412 | |||||||||||||||
| Total assets | $ | 620,905 | $ | 655,762 | Total assets | $ | 636,669 | $ | 617,878 | |||||||||
| Liabilities and equity | Liabilities and equity | |||||||||||||||||
| Current liabilities: | Current liabilities: | |||||||||||||||||
| Accounts payable | $ | 25,070 | $ | 22,705 | Accounts payable | $ | 33,567 | $ | 19,722 | |||||||||
| Accrued liabilities | 23,757 | 27,848 | Accrued liabilities | 26,971 | 23,888 | |||||||||||||
| Current portion of long term debt | 2,500 | 2,500 | ||||||||||||||||
| Borrowings under revolving credit facility | — | 11,225 | ||||||||||||||||
| Current portion of long-term debt | Current portion of long-term debt | 7,929 | 2,500 | |||||||||||||||
| Contract liabilities | 4,538 | 6,814 | Contract liabilities | 8,010 | 2,959 | |||||||||||||
| Lease liabilities | 3,553 | 235 | Lease liabilities | 3,624 | 3,511 | |||||||||||||
| Income taxes payable | 1,217 | 1,961 | Income taxes payable | 897 | 218 | |||||||||||||
| Total current liabilities | 60,635 | 73,288 | Total current liabilities | $ | 80,998 | $ | 52,798 | |||||||||||
| Long-term debt, net of current maturities and deferred debt issuance costs and debt discounts of $4,447 and $6,271 as of March 31, 2020 and 2019, respectively | 169,053 | 197,729 | ||||||||||||||||
| Long-term debt, net of current maturities and deferred debt issuance costs and debt discounts of $640 and $2,983 as of March 31, 2022 and 2021, respectively | Long-term debt, net of current maturities and deferred debt issuance costs and debt discounts of $640 and $2,983 as of March 31, 2022 and 2021, respectively | 120,431 | 143,017 | |||||||||||||||
| Deferred income taxes | 22,245 | 28,139 | Deferred income taxes | 17,943 | 21,006 | |||||||||||||
| Non-current lease liabilities | 15,571 | 386 | Non-current lease liabilities | 9,659 | 12,373 | |||||||||||||
| Other non-current liabilities | 6,962 | 7,271 | Other non-current liabilities | 8,434 | 9,812 | |||||||||||||
| Total liabilities | 274,466 | 306,813 | Total liabilities | $ | 237,465 | $ | 239,006 | |||||||||||
| Equity | Equity | |||||||||||||||||
| Common stock: $.001 par value; 150,000,000 authorized; 32,916,818 and 32,624,200 shares issued and outstanding at March 31, 2020 and 2019, respectively | 33 | 33 | ||||||||||||||||
| Common stock: $.001 par value; 150,000,000 authorized; 33,364,722 and 33,225,808 shares issued and outstanding at March 31, 2022 and 2021, respectively | Common stock: $.001 par value; 150,000,000 authorized; 33,364,722 and 33,225,808 shares issued and outstanding at March 31, 2022 and 2021, respectively | 33 | 33 | |||||||||||||||
| Preferred stock: $.001 par value; 10,000,000 authorized; no shares issued and outstanding | — | — | Preferred stock: $.001 par value; 10,000,000 authorized; no shares issued and outstanding | — | — | |||||||||||||
| Additional paid in capital | 227,741 | 223,040 | Additional paid in capital | 234,549 | 231,322 | |||||||||||||
| Accumulated other comprehensive loss | (63,894 | ) | (48,949 | ) | Accumulated other comprehensive loss | (38,906) | (35,919) | |||||||||||
| Retained earnings | 182,559 | 170,621 | Retained earnings | 203,528 | 183,436 | |||||||||||||
| Total Thermon Group Holdings, Inc. shareholders' equity | 346,439 | 344,745 | ||||||||||||||||
| Non-controlling interests | — | 4,204 | ||||||||||||||||
| Total equity | 346,439 | 348,949 | Total equity | $ | 399,204 | $ | 378,872 | |||||||||||
| Total liabilities and equity | $ | 620,905 | $ | 655,762 | Total liabilities and equity | $ | 636,669 | $ | 617,878 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements
Thermon Group Holdings, Inc.
Consolidated Statements of Equity
(Dollars in Thousands,thousands, except share and per share data)
| Common Stock Outstanding | Common Stock | Additional Paid-in Capital | Retained Earnings | Non-controlling Interests | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2019 | 32,624,200 | $ | 33 | $ | 223,040 | $ | 170,621 | $ | 4,204 | $ | (48,949) | $ | 348,949 | ||||||||||||||||||||||||||||||||||
| Issuance of common stock in exercise of stock options | 159,062 | — | 1,016 | — | — | — | 1,016 | ||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock as deferred compensation to employees and directors | 26,608 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as deferred compensation to employees | 59,570 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as deferred compensation to named executive officers | 47,378 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock compensation expense | — | — | 4,960 | — | — | — | 4,960 | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of employee stock units on vesting | — | — | (969) | — | — | — | (969) | ||||||||||||||||||||||||||||||||||||||||
| Net income/(loss) available to Thermon Group Holdings, Inc. | — | — | — | 11,938 | — | — | 11,938 | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | (15,485) | (15,485) | ||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | 540 | 540 | ||||||||||||||||||||||||||||||||||||||||
| Remeasurement of non-controlling interest | — | — | (306) | — | 306 | — | — | ||||||||||||||||||||||||||||||||||||||||
| Purchase of non-controlling interest | — | — | — | — | (4,508) | — | (4,508) | ||||||||||||||||||||||||||||||||||||||||
| Income attributable to non-controlling interest | — | — | — | — | (2) | — | (2) | ||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2020 | 32,916,818 | $ | 33 | $ | 227,741 | $ | 182,559 | $ | — | $ | (63,894) | $ | 346,439 | ||||||||||||||||||||||||||||||||||
| Issuance of common stock in exercise of stock options | 97,156 | — | 629 | — | — | — | 629 | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as deferred compensation to directors | 52,098 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as deferred compensation to employees | 88,254 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as deferred compensation to executive officers | 71,482 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock compensation expense | — | — | 3,728 | — | — | — | 3,728 | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of employee stock units on vesting | — | — | (784) | — | — | — | (784) | ||||||||||||||||||||||||||||||||||||||||
| Net income/(loss) available to Thermon Group Holdings, Inc. | — | — | — | 877 | — | — | 877 | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | 28,615 | 28,615 | ||||||||||||||||||||||||||||||||||||||||
| Other | — | — | 8 | — | — | (640) | (632) | ||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2021 | 33,225,808 | $ | 33 | $ | 231,322 | $ | 183,436 | $ | — | $ | (35,919) | $ | 378,872 | ||||||||||||||||||||||||||||||||||
| Issuance of common stock in exercise of stock options | 8,100 | 97 | — | — | — | 97 | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as deferred compensation to directors | 32,136 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as deferred compensation to employees | 36,126 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as deferred compensation to executive officers | 62,552 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock compensation expense | — | 3,803 | — | — | — | 3,803 | |||||||||||||||||||||||||||||||||||||||||
| Repurchase of employee stock units on vesting | — | — | (673) | — | — | — | (673) | ||||||||||||||||||||||||||||||||||||||||
| Net income/(loss) available to Thermon Group Holdings, Inc. | — | — | — | 20,092 | — | — | 20,092 | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | (2,922) | (2,922) | ||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | (65) | (65) | ||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2022 | 33,364,722 | $ | 33 | $ | 234,549 | $ | 203,528 | $ | — | $ | (38,906) | $ | 399,204 | ||||||||||||||||||||||||||||||||||
| Common Stock Outstanding | Common Stock | Additional Paid-in Capital | Retained Earnings | Non-controlling Interests | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||||||
| Balances at March 31, 2017 | 32,365,553 | $ | 32 | $ | 219,284 | $ | 136,899 | $ | 4,622 | $ | (48,335 | ) | $ | 312,502 | |||||||||||||||
| Issuance of common stock in exercise of stock options | 42,636 | — | 300 | — | — | — | 300 | ||||||||||||||||||||||
| Issuance of restricted stock as deferred compensation to employees and directors | 20,216 | — | — | — | — | — | — | ||||||||||||||||||||||
| Issuance of common stock as deferred compensation to employees | 43,445 | — | — | — | — | — | — | ||||||||||||||||||||||
| Issuance of common stock as deferred compensation to named executive officers | 20,489 | — | — | — | — | — | — | ||||||||||||||||||||||
| Stock compensation expense | — | — | 3,519 | — | — | — | 3,519 | ||||||||||||||||||||||
| Excess tax deduction from stock options | — | — | (481 | ) | — | — | — | (481 | ) | ||||||||||||||||||||
| Net income available to Thermon Group Holdings, Inc. | — | — | — | 11,913 | — | — | 11,913 | ||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | 12,030 | 12,030 | ||||||||||||||||||||||
| Interest rate swap | — | — | — | — | — | 34 | 34 | ||||||||||||||||||||||
| Other | — | — | — | — | — | (270 | ) | (270 | ) | ||||||||||||||||||||
| Income attributable to non-controlling interests | — | — | — | — | 1,306 | — | 1,306 | ||||||||||||||||||||||
| Balances at March 31, 2018 | 32,492,339 | $ | 32 | $ | 222,622 | $ | 148,812 | $ | 5,928 | $ | (36,541 | ) | $ | 340,853 | |||||||||||||||
| Issuance of common stock in exercise of stock options | 37,906 | — | 396 | — | — | — | 396 | ||||||||||||||||||||||
| Issuance of common stock as deferred compensation to directors | 20,064 | — | — | — | — | — | — | ||||||||||||||||||||||
| Issuance of common stock as deferred compensation to employees | 51,775 | 1 | — | — | — | — | 1 | ||||||||||||||||||||||
| Issuance of common stock as deferred compensation to executive officers | 22,116 | — | — | — | — | — | — | ||||||||||||||||||||||
| Stock compensation expense | — | — | 4,148 | — | — | — | 4,148 | ||||||||||||||||||||||
| Repurchase of employee stock units on vesting | — | — | (598 | ) | — | — | — | (598 | ) | ||||||||||||||||||||
| Net income available to Thermon Group Holdings, Inc. | — | — | — | 22,756 | — | — | 22,756 | ||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | (13,233 | ) | (13,233 | ) | ||||||||||||||||||||
| Other | — | — | — | — | — | 825 | 825 | ||||||||||||||||||||||
| Remeasurement of non-controlling interest | — | — | (3,528 | ) | — | 3,528 | — | — | |||||||||||||||||||||
| Purchase of non-controlling interest | — | — | — | — | — | (5,665 | ) | — | (5,665 | ) | |||||||||||||||||||
| Distribution to non-controlling interest | — | — | — | (947 | ) | — | — | (947 | ) | ||||||||||||||||||||
| Income attributable to non-controlling interests | — | — | — | — | 413 | — | 413 | ||||||||||||||||||||||
| Balances at March 31, 2019 | 32,624,200 | $ | 33 | $ | 223,040 | $ | 170,621 | $ | 4,204 | $ | (48,949 | ) | $ | 348,949 | |||||||||||||||
| Issuance of common stock in exercise of stock options | 159,062 | — | 1,016 | — | — | — | 1,016 | ||||||||||||||||||||||
| Issuance of common stock as deferred compensation to directors | 26,608 | — | — | — | — | — | — | ||||||||||||||||||||||
| Issuance of common stock as deferred compensation to employees | 59,570 | — | — | — | — | — | — | ||||||||||||||||||||||
| Issuance of common stock as deferred compensation to executive officers | 47,378 | — | — | — | — | — | — | ||||||||||||||||||||||
| Stock compensation expense | — | — | 4,960 | — | — | — | 4,960 | ||||||||||||||||||||||
| Repurchase of employee stock units on vesting | — | — | (969 | ) | — | — | — | (969 | ) | ||||||||||||||||||||
| Net income available to Thermon Group Holdings, Inc. | — | — | — | 11,938 | — | — | 11,938 | ||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | (15,485 | ) | (15,485 | ) | ||||||||||||||||||||
| Other | — | — | — | — | — | 540 | 540 | ||||||||||||||||||||||
| Remeasurement of non-controlling interest | — | — | (306 | ) | — | 306 | — | — | |||||||||||||||||||||
| Purchase of non-controlling interest | — | — | — | — | (4,508 | ) | — | (4,508 | ) | ||||||||||||||||||||
| Income attributable to non-controlling interests | — | — | — | — | (2 | ) | — | (2 | ) | ||||||||||||||||||||
| Balances at March 31, 2020 | 32,916,818 | $ | 33 | $ | 227,741 | $ | 182,559 | $ | — | $ | (63,894 | ) | $ | 346,439 | |||||||||||||||
45
Thermon Group Holdings, Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)thousands)
| Year Ended March 31, 2020 | Year Ended March 31, 2019 | Year Ended March 31, 2018 | Year Ended March 31, 2022 | Year Ended March 31, 2021 | Year Ended March 31, 2020 | |||||||||||||||||||||||
| Operating activities | Operating activities | |||||||||||||||||||||||||||
| Net income | $ | 11,936 | $ | 23,169 | $ | 13,219 | ||||||||||||||||||||||
| Adjustment to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||||||||
| Net income/(loss) | Net income/(loss) | $ | 20,092 | $ | 877 | $ | 11,936 | |||||||||||||||||||||
| Adjustment to reconcile net income/(loss) to net cash provided by operating activities: | Adjustment to reconcile net income/(loss) to net cash provided by operating activities: | |||||||||||||||||||||||||||
| Depreciation and amortization | 28,275 | 29,965 | 24,420 | Depreciation and amortization | 20,205 | 20,722 | 28,275 | |||||||||||||||||||||
| Amortization of debt costs | 1,885 | 1,756 | 1,657 | Amortization of debt costs | 596 | 1,525 | 1,885 | |||||||||||||||||||||
| Amortization of inventory step-up | — | 170 | 869 | |||||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | 376 | Loss on extinguishment of debt | 2,569 | — | — | |||||||||||||||||||||
| Stock compensation expense | 4,960 | 4,148 | 3,519 | Stock compensation expense | 3,803 | 3,728 | 4,960 | |||||||||||||||||||||
| Loss on sale of business, net of cash surrendered | Loss on sale of business, net of cash surrendered | 306 | 2,065 | — | ||||||||||||||||||||||||
| Deferred income taxes | (3,737 | ) | (5,552 | ) | (11,337 | ) | Deferred income taxes | (1,648) | (3,153) | (3,737) | ||||||||||||||||||
| Long term cross currency swap loss/(gain) | (2,580 | ) | (3,313 | ) | 1,540 | |||||||||||||||||||||||
| Long-term cross currency swap loss/(gain) | Long-term cross currency swap loss/(gain) | (774) | 5,842 | (2,580) | ||||||||||||||||||||||||
| Reserve (release) for uncertain tax positions | (408 | ) | 1,136 | — | Reserve (release) for uncertain tax positions | 77 | 79 | (408) | ||||||||||||||||||||
| Remeasurement loss/(gain) on intercompany balances | 6,169 | 4,147 | (773 | ) | Remeasurement loss/(gain) on intercompany balances | (247) | (6,227) | 6,169 | ||||||||||||||||||||
| Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | |||||||||||||||||||||||||||
| Accounts receivable | 9,449 | (14,541 | ) | (13,818 | ) | Accounts receivable | (21,739) | 22,930 | 9,449 | |||||||||||||||||||
| Inventories | 1,407 | (3,432 | ) | (9,059 | ) | Inventories | (8,598) | (549) | 1,407 | |||||||||||||||||||
| Contract assets | 12,220 | (11,990 | ) | (6,067 | ) | Contract assets | (3,292) | (2,693) | 12,220 | |||||||||||||||||||
| Other current and non-current assets | (2,915 | ) | (370 | ) | (1,627 | ) | Other current and non-current assets | (2,891) | (2,127) | (2,915) | ||||||||||||||||||
| Accounts payable | 3,407 | (21 | ) | 2,003 | Accounts payable | 13,752 | (5,651) | 3,407 | ||||||||||||||||||||
| Accrued liabilities and non-current liabilities | (284 | ) | 4,076 | 13,950 | Accrued liabilities and non-current liabilities | 2,227 | (239) | (284) | ||||||||||||||||||||
| Income taxes payable and receivable | 942 | (6,121 | ) | 4,041 | Income taxes payable and receivable | 4,316 | (6,840) | 942 | ||||||||||||||||||||
| Net cash provided by operating activities | $ | 70,726 | $ | 23,227 | $ | 22,913 | Net cash provided by operating activities | $ | 28,754 | $ | 30,289 | $ | 70,726 | |||||||||||||||
| Investing activities | Investing activities | |||||||||||||||||||||||||||
| Purchases of property, plant and equipment | $ | (10,855 | ) | $ | (12,036 | ) | $ | (10,008 | ) | Purchases of property, plant and equipment | $ | (5,220) | $ | (8,132) | $ | (10,855) | ||||||||||||
| Sales of rental equipment | 603 | 981 | 936 | Sales of rental equipment | 689 | 300 | 603 | |||||||||||||||||||||
| Proceeds from the sale of property, plant and equipment | 242 | 33 | 13 | Proceeds from the sale of property, plant and equipment | — | — | 242 | |||||||||||||||||||||
| Cash paid for acquisitions, net of cash acquired | — | — | (202,693 | ) | ||||||||||||||||||||||||
| Purchase of investments | — | — | (8,123 | ) | ||||||||||||||||||||||||
| Proceeds from the sale of investments | — | 952 | 53,406 | |||||||||||||||||||||||||
| Net cash used in investing activities | $ | (10,010 | ) | $ | (10,070 | ) | $ | (166,469 | ) | Net cash used in investing activities | $ | (4,531) | $ | (7,832) | $ | (10,010) | ||||||||||||
| Financing activities | Financing activities | |||||||||||||||||||||||||||
| Proceeds from senior secured notes | $ | — | $ | — | $ | 250,000 | ||||||||||||||||||||||
| Payments on long term debt and revolving credit facility | (51,883 | ) | (40,323 | ) | (116,000 | ) | ||||||||||||||||||||||
| Proceeds from Term Loan A | Proceeds from Term Loan A | $ | 139,793 | $ | — | $ | — | |||||||||||||||||||||
| Payments on long-term debt and revolving credit facility | Payments on long-term debt and revolving credit facility | (178,914) | (64,963) | (51,883) | ||||||||||||||||||||||||
| Proceeds from revolving credit facility | 10,000 | 33,241 | 10,000 | Proceeds from revolving credit facility | 18,459 | 37,189 | 10,000 | |||||||||||||||||||||
| Issuance costs associated with debt financing | — | — | (9,698 | ) | Issuance costs associated with debt financing | (1,265) | — | — | ||||||||||||||||||||
| Purchase of shares from non-controlling interests | (4,508 | ) | (5,665 | ) | — | Purchase of shares from non-controlling interests | — | — | (4,508) | |||||||||||||||||||
| Distribution to non-controlling interest | — | (947 | ) | — | ||||||||||||||||||||||||
| Lease financing | (196 | ) | (205 | ) | (264 | ) | Lease financing | (155) | (276) | (196) | ||||||||||||||||||
| Issuance of common stock including exercise of stock options | 1,016 | 396 | 383 | Issuance of common stock including exercise of stock options | 97 | 629 | 1,016 | |||||||||||||||||||||
| Repurchase of employee stock units on vesting | (969 | ) | (598 | ) | (481 | ) | Repurchase of employee stock units on vesting | (673) | (784) | (969) | ||||||||||||||||||
| Net cash provided by (used in) financing activities | $ | (46,540 | ) | $ | (14,101 | ) | $ | 133,940 | ||||||||||||||||||||
| Net cash used in financing activities | Net cash used in financing activities | $ | (22,658) | $ | (28,205) | $ | (46,540) | |||||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (2,011 | ) | (1,542 | ) | 1,651 | Effect of exchange rate changes on cash and cash equivalents | (84) | 2,192 | (2,011) | |||||||||||||||||||
| Change in cash and cash equivalents | $ | 12,165 | $ | (2,486 | ) | $ | (7,965 | ) | Change in cash and cash equivalents | $ | 1,481 | $ | (3,556) | $ | 12,165 | |||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 33,841 | 36,327 | 44,292 | Cash, cash equivalents and restricted cash at beginning of period | 42,450 | 46,006 | 33,841 | |||||||||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 46,006 | $ | 33,841 | $ | 36,327 | Cash, cash equivalents and restricted cash at end of period | $ | 43,931 | $ | 42,450 | $ | 46,006 | |||||||||||||||
| Cash paid for interest and income taxes | Cash paid for interest and income taxes | |||||||||||||||||||||||||||
| Interest | $ | 12,397 | $ | 13,959 | $ | 7,348 | ||||||||||||||||||||||
| Interest paid | Interest paid | $ | 5,700 | $ | 8,736 | $ | 12,397 | |||||||||||||||||||||
| Income taxes paid | 12,614 | 22,260 | 7,728 | Income taxes paid | 9,788 | 9,667 | 12,614 | |||||||||||||||||||||
| Income tax refunds received | 4,842 | 900 | 818 | Income tax refunds received | 4,059 | 2,070 | 4,842 | |||||||||||||||||||||