UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A10-K
(Amendment No. 1)
x ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended March 31, 20182021
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) | | 27-2228185
| | | | (IRSI.R.S. Employer Identification No.)
|
100 Thermon Drive, San Marcos, 7171 Southwest Parkway,
| Building 300, | Suite 200, | Austin, | Texas | | 78735 |
| (Address of principal executive offices) | | 78666
| | | | (Zip Code) |
(512) 396-5801690-0600
(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 | o | | Accelerated filer | x
|
| Non-accelerated filer | o | | Smaller reporting company | ☐ |
| | |
Large accelerated filer x
| | Accelerated filer o
|
Non-accelerated filer o (do not check if smaller reporting company)
| | Smaller reporting company o
|
| | Emerging growth companyo | ☐ |
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, 20172020 was $576,947,503$367,767,182 based on the closing price of $17.99$11.23 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, 2018,26, 2021, the registrant had 32,497,99233,245,749 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 20182021 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.
EXPLANATORY NOTE
This Amendment No. 1 to Annual Report on Form 10-K/A (“Amendment No. 1”) is being filed by Thermon Group Holdings, Inc. (the “Company” or “Thermon”) solely for the purpose of correcting a typographical error in the report of KPMG LLP (“KPMG”) contained in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2018 filed with the Securities and Exchange Commission on May 30, 2018 (the “Original 10-K”). The changes do not in any way change the conclusions expressed by KPMG in its report included in the Original 10-K. In addition, Exhibits 23.1, 31.1, 31.2, 32.1 and 32.2 are being amended with this Amendment No. 1 to include currently-dated versions of the KPMG consent and certifications of the Chief Executive Officers and Chief Financial Officer of the Company.
For ease of reference, this Amendment No. 1 restates the Original 10-K in its entirety, making only the amendments described above. Except as described above, this Amendment No. 1 does not otherwise amend, update or change any other information or disclosure contained in the Original 10-K or change any previously reported financial results. This Amendment No. 1 speaks only as of the date of the Original 10-K and does not reflect any events that may have occurred subsequent to the date of the Original 10-K.
THERMON GROUP HOLDINGS, INC.
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED MARCH 31, 20182021
TABLE OF CONTENTS
| | | | | |
| Page |
| PART I | |
| |
| Page |
PART I | |
| |
| |
| |
| |
| |
| |
| |
| |
| PART II | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| PART III | |
| |
| |
| |
| |
| |
| |
| |
| PART IV | |
| |
| |
| |
| |
| |
| |
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K ("this annual report") includes forward-looking statements within the meaning of the U.S. federal securities laws in addition to historical information. These forward looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are included throughout this annual report, including in the sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and include, without limitation, statements regarding our industry, business strategy, plans, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. When used in this discussion, the words "anticipate," "assume," "believe," "budget," "continue," "contemplate," "could," "should," "estimate," "expect," "intend," "may," "plan," "possible," "potential," "predict," "project," "will," "would," "future" and similar terms and phrases are intended to identify forward-looking statements in this annual report.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows. The statements include but are not limited to statements regarding: (i) our plans to strategically pursue emerging growth opportunities in diverse regions and across industry sectors; (ii) our plans to secure more new facility, or Greenfield, project bids; (iii) our ability to generate more facility maintenance, repair and operations or upgrades or expansions, or MRO/UE, revenue from our existing and future installed base; (iv) our ability to timely deliver backlog; (v) our ability to respond to new market developments and technological advances; (vi) our expectations regarding energy consumption and demand in the future and its impact on our future results of operations; (vii) our plans to develop strategic alliances with major customers and suppliers; (viii) our expectations that our revenues will increase; (ix) our belief in the sufficiency of our cash flows to meet our needs for the next year; (x) our ability to integrate acquired companies; (xi) our ability to successfully achieve synergies from acquisitions; and (xii) our ability to make required debt repayments.
Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, (i) the outbreak of the novel strain of coronavirus (COVID-19); (ii) general economic conditions and cyclicality in the markets we serve; (ii)(iii) future growth of energy, chemical processing and power generation capital investments; (iii)(iv) our ability to operate successfully in foreign countries; (v) our ability to deliver existing orders within our backlog; (iv)(vi) our ability to bid and win new contracts; (v)(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 successfully develop and improve our products and successfully implement new technologies; (x) competition from various other sources providing similar heat tracing and process heating products and services, or alternative technologies, to customers; (vi)(xi) our revenue mix; (xii) our ability to grow through strategic acquisitions; (xiii) changes in relevant currency exchange rates; (vii)(xiv) impairment of goodwill and other intangible assets; (xv) our ability to attract and retain qualified management and employees, particularly in our overseas markets; (xvi) our ability to protect our trade secrets; (xvii) our ability to protect our intellectual property; (xiii) our ability to protect data and thwart potential cyber-attacks; (xix) a material disruption at any of our manufacturing facilities; (xx) our dependence on subcontractors and third-party suppliers; (xxi) our ability to profit on fixed-price contracts; (xxii) the credit risk associated to our extension of credit to customers; (xxiii) our ability to achieve our operational initiatives; (xxiv) unforeseen difficulties with expansions, relocations, or consolidations of existing facilities; (xxv) potential liability related to our products as well as the delivery of products and services; (viii)(xxvi) our ability to comply with foreign anti-corruption laws; (xxvii) export control regulations or sanctions; (xxviii) changes in government administrative policy; (xxix) geopolitical instability in Russia and Ukraine and related sanctions by the complexU.S. government; (xxx) environmental and dynamic system ofhealth and safety laws and regulations applicable to domesticas well as environmental liabilities; and international operations; (ix) our ability to protect data(xxxi) climate change and thwart potential cyber attacks; (x) our ability to continue to generate sufficient cash flow to satisfy our liquidity needs; (xi) a material disruption at anyrelated regulation of our manufacturing facilities; (xii) our dependence on subcontractors and suppliers; (xiii) our ability to obtain standby letters of credit, bank guarantees or performance bonds required to bid on or secure certain customer contracts; (xiv) our ability to attract and retain qualified management and employees, particularly in our overseas markets; and (xv) the extent to which federal, state, local, and foreign governmental regulations of energy, chemical processing and power generation products and services limits or prohibits the operation of our business.greenhouse gases. Any one of these factors or a combination of these factors could materially affect our future results of operations and could influence whether any forward-looking statements contained in this annual report ultimately prove to be accurate. See also Item 1A, "Risk Factors" for information regarding the additional factors that have impacted or may impact our business and operations.
Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required to do so under applicable securities laws.
PART I
References in this annual report to "we," "our," "us," the "Company," or "Thermon" mean Thermon Group Holdings, Inc. and its consolidated subsidiaries taken together as a combined entity. A particular fiscal year is the twelve months ended on March 31 of the given calendar year (e.g. "fiscal 2018,2021," "fiscal 2017"2020" and "fiscal 2016"2019" mean the Company's fiscal years ended March 31, 2018,2021, March 31, 20172020 and March 31, 2016,2019, 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 and Company History
We are one of the largest providers of highly engineered industrial process heating solutions for process industries. For over 6065 years, we have served a diverse base of thousands of customers around the world in attractive and growing markets, including chemical and petrochemical, oil &and gas, chemical processingpower generation, commercial, rail and power generation. We are a global leadertransit, and one of the few thermal solutions providers with a global footprint.other, which 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 and control systems) andbundles), services (design optimization, engineering,(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 continued investment in research and development, Thermon has established itself as a technology leader in hazardous or classified 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 teneight manufacturing facilities on three continents. These global capabilities and longstanding relationships with some of the largest multinational oil & gas, chemical processing, power and engineering, procurement and construction ("EPC") companies in the world have enabled us to diversify our revenue streams and opportunistically access high growth markets worldwide. For fiscal 2018, approximately 63% of our revenue was generated outside of the United States.
During fiscal years 2015 and 2016, we acquired three companies, Unitemp Corporation ("Unitemp"), Sumac Fabrication Company Limited ("Sumac") and Industrial Process Insulators, Inc. ("IPI"), adding complementary products and services to our core thermal solution offerings. Additionally, in October 2017, we completed the acquisition of CCI Thermal Technologies Inc. (now Thermon Heating Systems, or "THS"), allowing Thermon to greatly expand our product offerings and the end markets we serve. We continue to actively pursue both organic and inorganic growth initiatives that serve to advance our corporate strategy.
Our legacy thermal solutions product - also referred to as heat tracing - provides an external heat source to pipes, vessels and instruments for the purposes of freeze protection, temperature and flow maintenance, environmental monitoring, and surface snow and ice melting. We offer both electric and steam heat tracing, as both are utilized to a significant extent in our end markets. Customers typically purchase our products when constructing a new facility, which we refer to as "Greenfield projects", or when performing maintenance, repair and operations on a facility's existing heat-traced pipes or upgrading or expanding a current facility, which we refer to collectively as "MRO/UE." A large processing facility may require our heat tracing for a majority of its pipes, with the largest facilities containing hundreds of thousands of feet of heat-tracing cable and thousands of control points. While our products represent a fraction of the total cost of a typical processing facility, they are critical to the safe and profitable operation of the facility. These facilities are complex, with numerous classified areas that are inherently hazardous - and where product safety concerns are paramount. We believe that our strong brand and established reputation for safety, reliability and customer service are critical contributors to our customers' purchasing decisions.
Our customers' need for MRO/UE solutions provides us with attractive recurring revenue streams. Customers typically use the incumbent heat tracing provider for MRO/UE projects to avoid complications and compatibility problems associated with switching providers. We typically begin to realize meaningful MRO/UE revenue from new Greenfield installations one to three years after completion of the project as customers begin to remove and replace our products during routine and preventative maintenance on in-line mechanical equipment, such as pipes and valves. As a result, our growth has been driven by new facility construction, as well as by servicing our continually growing base of solutions installed around the world, which we refer to as our installed base. Approximately 63% of our revenue for fiscal 2018, excluding THS, was derived from such MRO/UE activities.
In April 2015, we expanded our product offerings beyond our legacy heat tracing products and now offer temporary electrical power distribution products through our Sumac product line. Sumac products are sold in many of the same markets as our thermal solution offerings, which we believe will provide an attractive complementary offering to our customers that engage in new facility construction as well as maintenance, turnaround and expansion activities.
Our newest offerings - made possible through the acquisition of THS - give us the ability to access a much broader footprint of a typical refining or heavy manufacturing facility where our legacy products have generally been required. With our full suite of heating products, we can now extend well beyond the external heating of pipes offered by heat tracing. Our family of environmental heating products (branded as “Ruffneck” and “Catadyne”) range from electric or gas-powered space heating for personnel operating in harsh and hazardous environments to specific components in the same environments that need special protection. THS also offers a broad spectrum of capabilities in the process heating line. Immersion, circulation, and other highly-engineered forms of process heating (branded as “Caloritech”) protects process fluids as they reside in tanks or vessels or in-transit through the plant. One can think of our legacy capabilities as heating “from the outside,” whereas our additional capabilities provide us the products to heat “from within.” THS holds an “N-stamp,” or Nuclear Component Certification, allowing us to serve the nuclear power sector with heating and filtration products. These highly specialized filters use advanced mediums and specialized metals to perform under extreme heat and pressure. These products are branded as “3L Filters.” Lastly, our “Fastrax” and “Hellfire” lines, as well as some “Caloritech” products, provide a full-spectrum offering to the rail and transit industry. In both rolling stock and rail infrastructure, THS is a market leader in providing heat to rail cars, tracks, and switches throughout the world.
Our corporate offices are located at 100 Thermon Drive, San Marcos, TX 78666. Our telephone number is (512) 396-5801. Our website address is www.thermon.com. Copies of the charters of the committees of our board of directors, our code of business conduct and ethics and our corporate governance guidelines are available free of charge on our Investor Relations website located at http://ir.thermon.com. All reports that we have filed with the Securities and Exchange Commission ("SEC"), including this Annual Report on Form 10-K and our Current Reports on Form 8-K, can be obtained free of charge from the SEC's website at www.sec.gov or through our Investor Relations website. In addition, all reports filed with the SEC may be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549-1090. Information regarding the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0330. None of the information on our website or any other website identified herein is incorporated by reference in this annual report and should not be considered a part of this annual report.
Company History
Thermon, Inc., our principal operating subsidiary in the United States, was founded as a partnership in October 1954 and later incorporated in Texas in 1960. At that time, our primary product was a thermally conductive heat transfer compound invented by our founder, Richard Burdick. Under Mr. Burdick's leadership, we experienced steady growth by diversifying our products and expanding our geographic reach. Mr. Burdick and his family maintained a controlling interest in us until August 2007, when the controlling interest was sold to an affiliate of the Audax Group private equity firm. During Audax's tenure as our majority owner, we positioned ourselves to take advantage of rising demand in the energy end market and secured significant capital projects.
On April 30, 2010, an investor group led by entities affiliated with CHS Capital LLC ("CHS") and two other private equity firms, which we refer to collectively as our "former private equity sponsors", acquired Audax's controlling interest in us. The acquisition and related transaction expenses were financed through the issuance of senior secured notes and an equity investment by our private equity sponsors and certain members of our current and former management team. As used in this annual report, the "CHS Transactions" refer collectively to such acquisition, the equity investment in us by CHS, our other former private equity sponsors and certain members of our management team and related financing transactions.
In May 2011, we completed the initial public offering ("IPO") of our common stock, (or "IPO"), and our common stock became listed on The New York Stock Exchange under the ticker symbol "THR." Our former private equity sponsors sold shares of our common stock in both the IPO and a secondary public offering in September 2012. As of March 31, 2013, our former private equity sponsors had sold or otherwise disposed of all of their shares of common stock in the Company.
On March 2, 2015, we acquired substantially all of the operating assets and assumed certain operating liabilities of Unitemp located in Cape Town, South Africa in a $3.9 million cash transaction. Unitemp, formerly a distributor of Thermon's thermal solutions in South Africa, offers heating, sensing, portable instruments, monitoring and control solutions to industrial customers throughout Sub-Saharan Africa. On April 1, 2015, we acquired a 75% controlling interest in the business previously operated by Sumac for approximately $11.0 million in cash and up to $5.9 million of potential additional contingent cash consideration, which was settled for $5.8 million in fiscal 2017. Sumac is based in Fort McMurray, Alberta, Canada and designs and manufactures temporary electrical power distribution equipment that is used in hazardous-location and general purpose areas within industrial facilities. On July 31, 2015, we acquired 100% of the capital stock of IPI, an insulation contractor located in Port Neches, Texas serving the U.S. refining, petrochemical, power and energy, marine and pulp and paper industries, in a $21.8 million cash transaction. IPI has a significant presence in the Texas and Louisiana Gulf Coast region.
In October 2017, we, through a wholly-owned subsidiary, acquired 100% of the equity interests of CCI Thermal Technologies Inc. and certain related real estate assets for $262.0$262.4 million CAD (approximately $204.2$204.6 million USD at the exchange rate as of October 30, 2017) in cash. Such subsidiary and CCI Thermal Technologies Inc. amalgamatedcombined immediately after the closing of the acquisition to form Thermon Heating Systems, Inc., ("THS"), an indirect, wholly-owned subsidiary of the Company. THS is engaged in industrial process heating, focused on the development and production of advanced heating and filtration solutions for industrial and hazardous area applications and is headquartered in Edmonton, Alberta,Oakville, Ontario, Canada. In fiscal 2021, we fully integrated the THS markets its productslegal entity into our legacy Canadian legal entity and consolidated our management and leadership accordingly.
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 several diverse brands known for high quality, safetyour Investor Relations website. In addition, all reports filed with the SEC may be read and reliability,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 serves clients in the energy, petrochemical, electrical distribution, power, transit and industrial end markets globally. We believe we willshould not be able to leverage our existing global sales force to further expand the reachconsidered a part of THS's product offerings.this annual report.
Sales
Heat Tracing
We estimate that the market for industrial process heating design and parts was approximately $3.2 billion in annual revenue in 2017. With our October 2017 acquisition of THS, our addressable market in fiscal 2018 grew by almost $1.0 billion in annual revenue, consisting of the process heating ($800 million) and transportation ($180 million) industries. This diversified the product and service mix to encompass the industrial process heating industry, which includes industrial heat tracing. We estimate that the industrial heat tracing market is composed of approximately 60% electric heat tracing and 40% steam heat tracing. While some environments welcome a conversion to electric heat tracing, a significant number of applications will remain protected by steam - due to both safety and the fact that many processes generate steam as a by-product, making it readily available. The industrial electric heat tracing industry is fragmented and consists of more than 30 companies that typically only serve discrete local markets with manufactured products and provide a limited service offering. The market for steamoffer turnkey heat tracing solutions is equally as fragmented, but served by fewer companies, as the applications can be extremely high-temperature - requiring specific domain knowledgefor maintaining pipe, vessel, and manufacturingfoundation temperatures in industrial and installation techniques that are unique. Much like electric and steam heat tracing, the process heating market is highly fragmented. Industrial process heating providers differentiate themselves through the quality and reputation of their products, the length and quality of their customer relationships and their ability to provide comprehensive solutions. Large multinational companies drive the majority of spending for the types of major industrial facilities that require process heating, and we believe that they prefer providers who have a global footprint and a comprehensive suite of products and services. We believe we are one of only a few companies that meet these criteria.
The major end markets that drive demand for process heating include oil & gas, chemical processing and power generation. We believe that there are attractive near-to medium-term trends in each of these end markets.
| |
· | Oil & Gas. Process heating is used to facilitate the processing, transportation and freeze protection of energy products in both upstream and downstream oil and gas applications. According to the International Energy Agency ("IEA"), natural gas supplies 22% of the energy used worldwide, and makes up nearly a quarter of electricity generation, and plays a crucial role as a feedstock for industry. Also, IEA estimates that global oil and gas upstream capital spending will increase over 5% in 2018. The oil and gas end market accounted for approximately 38% of the total market for industrial process heating in 2018, or approximately $1.2 billion in revenue. As global oil prices continue to recover from the recent depression, Thermon is well-positioned to take advantage of the near-to medium-term growth trends associated with this primary end market.
|
| |
· | Chemical Processing. Process heating is required for temperature maintenance and freeze protection in a variety of chemical processing applications. Factors that may impact process heating demand in chemicals end markets include the rapid industrialization of the developing world, a shift in base chemical processing operations to low-cost feedstock regions, a transition of Western chemical processing activities from commodity products to specialty products and environmental compliance. The IEA estimates that new global petrochemicals capacity will account for 25% of oil-demand growth by 2023. We estimate that the chemicals end market (including petrochemical) accounted for approximately 14% of the total market for industrial process heating in 2018, or approximately $460 million in revenue.
|
| |
· | Power Generation. Process heating is required for high-temperature product maintenance, freeze protection and environmental regulation compliance in coal and gas facilities and for safety systems in nuclear facilities. An important driver of demand for process heating solutions for power generation is increasing demand for electricity worldwide. We estimate that the power generation end market accounted for approximately 7% of the total market for industrial process heating in fiscal 2018, or approximately $230 million in revenue. According to the IEA's World Energy Outlook 2017, electricity is the rising force among worldwide end-uses of energy, accounting for 40% of the estimated increase in global energy consumption in 2040 - the same share of growth that oil accounted for during the last 25 years.
|
| |
· | Transportation. Process heating is required to safely clear and heat rail switches, melt snow and ice from platforms, and provide comfort heating and defrosting in rolling stock. With over 1 million kilometers of operational railway in the world, it is still one of the most economical and safe solutions for passengers and products globally. According to an estimate by IEA based on International Union of Railways ("UIC"), Urban, passenger and freight rail continues to grow on the same curve as global gross domestic product, or GDP. Of this growth, the commercial rail and transit sector represents the largest increase at approximately 8.9% through 2028. We estimate that our transportation industry end markets accounted for approximately 6% of the total market for industrial process heating in fiscal 2018, or approximately $180 million in revenue.
|
Segments
In connection with acquisitions made since fiscal 2015, the Company reviewed its determination of segments. Previously, we aggregated geographic markets into one reportable segment. Based on our review, we revised our segment reporting to four reportable segments based on four geographic countries or regions: United States, Canada, Europe and Asia. Within our four reportable segments, our primary products and services are focused on thermal solutions primarily related to the electrical heat tracing industry. Each of our reportable segments serves a similar class of customers including large EPC companies, international and regional oil and gas companies, commercial sub-contractors, electrical component distributors and direct sales to existing plant or industrial applications. Profitability within our segments is measured by operating income. Profitability can vary in each of our reportable segments based on the competitive environment within the region, the level of corporate overhead, such as the salaries of our senior executives, and the level of research and development and marketing activities in the region,hazardous locations as well as in commercial applications. Our solution includes software automated engineering design services, industry leading heat tracing products, smart connected control and monitoring systems, construction services, and maintenance services. Applications include process temperature maintenance, freeze protection, vessel temperature maintenance, tank temperature maintenance, and foundation heating for energy, commercial, transportation, semi-conductor, data centers, and food & beverage industries.
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 measuring emissions and complying with related regulatory requirements.
Our temporary power systems provide portable, flexible, and hazardous area rated electrical connection systems and LED lighting that provide the mix ofpower infrastructure for workers in construction zones and projects for industrial plants and facilities.
Our products and services. Since March 2015, we have acquired Unitemp, IPI, Sumac and THS. Both Unitemp and IPI offer thermal solutions and have been included in our Europe and United States reportable segments, respectively. Sumac provides temporary power products that differ from our core thermal solutions business. As operating results from Sumac comprise less than 10% of our total sales and operating income, Sumac has been aggregated in our Canada segment. THS, recently acquired in October 2017, has similar economic characteristics as the core Thermon process heating operations. Management intends to integrate THS into the existing Thermon operations as soon as practicable. Therefore, THS has been aggregated in our Canada and United States segments. See Note 17, "Segment Information" for financial data relating to our four reportable geographic segments.
Products and Services
Our productsservices include a wide range of electric heat tracing cables, steam tracing components, tubing bundles, and instrument and control products, as well as complementary product lines acquired in recent acquisitions, including:
self-regulating and power limiting heating cables, which automatically increase or decrease heat output as pipe temperature changes as well as constant wattage heating cables;
mineral insulated, or "MI," cable, which is a high performance heat tracing cable for generating high temperatures that is typically used in harsh environments;
skin effect trace heater, which can heat lines in excess of 15 miles long from a single power point;
heat traced tube bundles for environmental gas sampling systems;
heat transfer compounds and steam tracers for comprehensive steam tracing solutions;
control and monitoring systems for electric tracing of pipes, tanks, hoppers and instrument sampling systems;
turnkey solutions, that provide customers with complete solutions for heat tracing, including design, optimization, installation and ongoing maintenance;
products and services from the THS transaction, which include high efficiency explosion-proof gas catalytic heaters, convection heaters designed for rugged industrial applications, electric heaters engineered for industrial processes and environments, advanced gas and liquid filtration systems and highly efficient heat transfer systems for rail track and switch equipment;
products and services from the Unitemp acquisition, which include heating, sensing,controls, monitoring and controlling tools;software, instrumentation, project services, industrial heating and
products from the Sumac acquisition, which include equipment for filtration solutions, temporary electricelectrical power distribution and lighting, and other complementary products used in energy infrastructure construction projects and maintenance/turnaround projects.services.
Electric Heat Tracing ApplicationsControls, Monitoring and Software
We manufacture critical components of an electric heat tracing system, including heating cables,Our solutions include smart, connected devices and software systems for the control and monitoring systems and heating systems for tanks and hoppers. We customize these products to fit the specific design parameters for each client's installation.management of a customer’s heat trace system. We offer various electric heating cables, including conductive polymer self-regulating heating cables, power limiting cables, constant wattage heating cables and MI high temperature heating cables.
Self-regulating heating cables- Our self-regulating heating cables are flexible and engineered to automatically increase or decrease heat output as pipe or vessel temperature changes. BSX™ self-regulating cables are designed to provide freeze protection or process temperature maintenance to metallic and non-metallic piping, vessels and equipment. HTSX™ self-regulating heating cable is suitable for heat tracing applications involving crude oil and most chemicals.
Power-limiting and constant watt heating cables- Power limiting and constant watt heating cables are flexible parallel resistance cables used to heat trace piping in lengths longer than 500 feet. Such intermediate lengthsa range of pipe are commonly found in pipe racks that connect process units within a plant. These heaters allow longer lengths between power supply points than self-regulating cables. HPT cables offer a power limiting feature along with larger power bus wires to allow delivery of an increased heat output over that found with self-regulating cables.
TEK™ HTEK™ and MIQ™ cables- The TEK™ and HTEK™ series resistance, constant watt heating cables are used where circuit lengths exceed the limitations of parallel resistance heating cables. By using series constant watt heating cables, a single power supply point can energize circuit lengths up to 12,000 feet. MIQ™ high performance mineral insulated heating cables are used for high temperature maintenance, high temperature exposure and/or high watt density applications that exceed the limitations of thermoplastic insulated cables. MIQ™ cables are composed of a high nickel/chromium alloy sheath, which is well-suited for high temperature service and offers high resistance to stress corrosion in chloride, acid, salt and alkaline environments.
ThermTracTM cables - A ThermTrac skin effect system provides a cost-effective alternative to conventional resistance heat tracing on long pipelines by eliminating the need for an extensive power distribution system. A ThermTrac system is designed to heat a pipeline in excess of 15 miles longTraceNet™ control products from a single power point. The versatility of the system makes it well-suited for temperature maintenance, freeze protectionpoint controller to a high capacity multi-point control panel. All our controllers and heat-up applications. The system generates heat by the resistance of the electrical current flowing through both the conductor and the inner skin of a heat tube.
Steam Heating Solutions
In 1954, we began manufacturing heat transfer compounds that greatly improved the heat delivery of steam tracing systems. Today, in addition to the broad range of heat transfer compounds, we also offer steam tracers and tubing bundles that provide our customers with comprehensive steam tracing solutions. We manufacture our heat transfer compounds in various configurations so that theypanels can be appliednetworked together via wired or wireless communication into a large control solution with capacity to different surfaces, which increases the heat transfer rate of steam or fluid tracers.
Our heat transfer compounds create an efficient thermal connection between the heat tracing system and the process equipment. Through the elimination of air voids, heat is directed into the pipe wall primarily through conduction rather than convection and radiation. This requires fewer tracing pipes to maintain specified temperature requirements, substantially reducing operating and investment cost. Steam tracing offers the most cost effective solution for certain heavy oil and natural gas processing applications. We have also patented our SafeTrace® steam tracing products for use in applications with stringent temperature requirements.
Currently, we are adding capabilities to include full steam heating solutions. This includes the design, engineering, procurement, integration, installation, and insulation of steam systems that include the steam supply manifold, the condensate return manifold, and the tubing, valves, fittings,manage over 30,000 heat trace and other components that exist in-between.
Temperature Controls and Monitoring
We supply a wide range of control and monitoring products, from simple mechanical thermostats to sophisticated microprocessor-basedcircuits within the same customer facility. Our systems that control and monitor the status of electric heat tracing systems. We provide individual units for smaller projects, as well as multi-point controllers that can be integrated into and communicate with a plant'splant’s central data management and control system.
We offer a variety of temperature Advanced control monitoring systems as partenable lower cost and reduced emissions at many of our TraceNet™ familyend-user sites.
Our controls and plant management software are built upon internet of controllers. TraceNet™ controllers allow the operator to assess operating control parameters and operating conditions throughout the heat tracing system network utilizing our TraceNet™ control solutions. Our controllersthings (IOT) technology that can communicate with up to 4,096 controllers over 32 channels, allowing up to 15,000 heat trace circuits to be monitoreddeployed locally within the same network.secure plant environment. Our smart devices utilize the latest touch technology and industry leading intuitive user interfaces. Users familiar with modern mobile phones and tablets find our latest controllers intuitive to learn and use because of the similarities. These technologies also form a platform for offering easy automatic upgrades and additional value-added services. We actively seek to expandbelieve our TraceNet™ product offerings with the goal of offering the customerscontrol solutions are the most advanced, reliable and easy-to-use monitoring systemssolutions in the marketplace.
Instrumentation
We specialize in pre-insulated and heat-traced tubing bundles with accessories that offer a complete instrument heating system. Our complete range of products includes both electric- and steam-heated bundles containing various types of tubing (such as copper, stainless steel and polymer) 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.
HopperProcess Heating
The HT Hopper Heating Module is a self-contained heater designed for operation on surfaces prone to vibration. In cement plants and fossil fuel power facilities, hoppers facilitate the filtering of a facility's ash emissions. Hopper heaters maintain the walls of the hopper at a temperature above the dew point to prevent moisture from combining with ash, thus clogging the filtering equipment. We engineer each system based on the heating requirements of the specific application. The HT Hopper Heating Module has multiple flow paths for electrical current, which eliminates the burnout potential common with series wire-based designs. Protection of the heating element from vibration is accomplished with a cushion layer of insulation that also directs the flow of heat from the module to the surface being heated. The module provides mechanical protection during handling, installation and operation, and its low profile design helps facilitate installation.
Turnkey Services
We provide customers with complete turnkey solutions for their heat tracing needs. Turnkey services include project planning, product supply, engineering services, system integration, installation, commissioning and maintenance. Specialized, turnkey heat tracing services meet the needs of many of our industrial customers who have downsized and outsourced their non-core competencies and are requiring their vendor base to have multi-service and multi-site capabilities.
Our turnkey business in the United States is based in Houston, Texas, Port Neches, Texas and Baton Rouge, Louisiana. During fiscal 2018, we worked on more than 310 turnkey projects, with the largest turnkey project accounting for approximately $5.4 million in revenue. Engineering and construction companies in the United States often subcontract their heat tracing projects to outside parties, including us, because of the field's highly specialized nature.
In July 2015, we acquired IPI, an insulation contractor located in Port Neches, Texas. Prior to the acquisition, IPI was formerly our customer and a subcontractor to the Company for 17 years. IPI enhances our turnkey product offerings and strengthens our presence in the Gulf Coast region, as IPI serves many of the same end-markets as those served by our core thermal solutions business.
Design and Engineering Services
We offer heat tracing design and engineering services during every stage of a project. Providing design services within the quote process is a core element of our business strategy. By delivering design drawings in conjunction with early project specifications, we can determine the customer's heat tracing requirements, which leads to subsequent sales of heat tracing products for that project.
We are focused on providing comprehensive solutions to fulfill the heat tracing needs of our customers. As a manufacturer of a wide range of heat tracing products, we believe that we are well-positioned to evaluate and optimize a system
for a customer without bias towards a particular product, and rely on more than 60 years of experience to craft the most appropriate heat tracing solution for a customer's specifications and needs.
We provide design and engineering services to our customers through our full-time staff of engineers and technicians. Through the design and engineering process, our engineers and technicians located throughout the world provide our customers with design optimization studies, product selection assistance, computer-generated drawing packages and detailed wiring diagrams.
Thermon Heating Systems (THS) Products
In October 2017, we acquired 100% of the equity of CCI Thermal Technologies Inc. and immediately rebranded as Thermon Heating Systems, Inc. ("THS"). THS develops, designs and manufactures the following high quality and durable advanced industrial heating and filtration solutions:solutions, including the following categories:
•Environmental heating (“Ruffneck”(branded as “Ruffneck” and “Catadyne”) - which provides electric or gas-powered space heating for both hazardous and non-hazardous areas;
•Process heating (“Caloritech”(branded as “Caloritech”) - provides a myriad of highly-engineered heating products to multiple end-markets with the purpose of heating and maintaining a process fluid at specified temperatures. Some products also serve the transportation sector with both radiant and convection-style heating;
•Filtration (“3L(branded as “3L Filters”) - which provides highly-specialized filtration solutions for the most stringent environments, including the nuclear industry; and
Transportation (“Fastrax”•Rail and “Hellfire”)Transit (branded as “Hellfire,” “ArcticSense” and other) - provides heating applications to both rolling stock (rail cars) and rail infrastructure (track and switch).
Sumac Temporary Power Products
Project Services
In April 2015,
As a manufacturer and global expert in process heating solutions, our EPC and end-user customers often times rely on Thermon to deliver a range of project services, which may include:
•Engineering and design;
•Procurement and project management services;
•Turnkey construction installation;
•Recurring facility assessment or audit; and
•Maintenance services.
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 acquired a 75% controlling interestcan 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 previously operated by Sumac. Sumac's line of products and solutions are designed to provide a safe and efficient means of supplying temporary electrical power distribution and lighting at energy infrastructure facilities for new construction and during maintenance and turnaround projects at operating facilities. Sumac products include power distribution panels, master/slave sub-panels, power cords and lighting fixtures - and are sold to end-users operatingwhich is primarily located in the southern United States near many of our customers in the same markets as our core thermal solutions, including heavy industrial settings, oildownstream and gas refiningmid-stream petroleum, chemical and upgrading, power generation plants, petrochemical production facilities and mining operations. A number of these products are engineered-to-order based on proprietary designs.industries.
Sumac's products are designed around the "plug and play" concept and differentiated from others in the industry through unique safety features that include arc flash protection i.e., protecting users while making and breaking connections under electrical load, and offering ground fault protection. Certain products are certified to safely operate in hazardous areas such as live plant environments that process combustible chemicals and materials. Sumac's suite of products is designed to allow for quick reconfigurations of electrical power distribution panels to meet the changing needs of contractors as work moves from one phase to the next during construction and facility maintenance operations. These features help our customers save considerable time on the job site and realize significant cost savings while maintaining the highest level of safety. We believe we will be able to leverage our existing global sales force to further expand the reach of Sumac's product offerings.
Manufacturing and Operations
We have teneight manufacturing facilities on three continents. We manufacture the products that generate a majority of our total salesHeat Tracing products at our principal facility in San Marcos, Texas facility including flexible heating cables, heat tracing compoundcontrol systems and tubing bundles. Our facilitiesThe majority of our Process Heating products are manufactured at our four Canadian facilities. Smaller manufacturing locations are located in the Netherlands, Russia and India. We maintain quality control testing standards in all of our manufacturing operations and perform various quality control checks on our products during the manufacturing process. We believe that our highly automated which reduces labor costs. Our facilities incorporate numerous manufacturing processes that utilize computer-controlled equipmentprocess and laser technology. We maintain a ready supplymultiple quality control checkpoints create high levels 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 interruptions at our manufacturing facilities. Our manufacturing facilities are equipped to provide us with maximum flexibility to manufacture our products efficiently and with short lead times. This in turn allows for lower inventory levels and faster responses to customer demands.operational efficiency.
Our flexible heat cable products are manufactured in San Marcos, Texas. The manufacturing building has approximately 48,000 square feet of floor space, including offices. The facility has excess capacity and will support growth ofThis location includes our primary heat cable sales to an aggregate revenue capacity of $400 to $500 million, depending on pricing and product mix.
Our electronic cross-linking facility, which we refer to as our "ECLF,"ECLF." is also located at the San Marcos facility. Cross-linking enhances the thermal, chemical and electrical stability of our low-temperature self-regulating heater cables. By performing cross-linking in-house, we condense the overall manufacturing cycle by approximately six weeks. This enhances our ability to ensure a high level of product quality and to better control the production process. Core heating cable is distributed to other manufacturing sites, close to the customer base to reduce lead times and satisfy local content requirements.
Our pre-insulated tubing products are manufactured in our facilities in San Marcos and the Netherlands. The majority of our pre-insulated tubing product is custom ordered and made to customers' specifications in a two-part process. The thermal insulation is first applied over the heating cable and process tubing, and a protective plastic outer jacket is extruded onto the bundle to protect the insulation.
During fiscal 2016, we completed an expansion of our primary pre-insulated tubing product manufacturing plant located in San Marcos, Texas, which significantly increased our production capacity for our instrumentation tube-bundle product line. The total cost of the expanded facility, including the purchase of new capital equipment, was $3.5 million.
Our MI cable manufacturing facility in Calgary, Canada gives us adequate capacity to service the demands of clients in the oil sands projects of Western Canada in a time efficient manner. The facility's strategic location has enabled us to expand our sale of MI cable, which is well-suited for high temperature applications and harsh, arctic environments, into a global business.
THSProcess heating products are currently fabricated at five THSthree facilities in North America:Canada. Our Edmonton facility largely manufactures environmental heating products, and our Orillia facility manufactures tubular heaters, including MI heating cable that is supplied to OEM customers and other Thermon facilities. Our Oakville and Orillialocation specializes in Canada, and Denver and Houston in the United States. THS maintains state of the art facilities and maintains several recognized facility certifications.our engineered solutions.
Sumac'sThermon Power Solutions products are currentlyprimarily fabricated at a facility in Fort McMurray, Alberta, Canada. Sumac'sOur customer base for Thermon Power Solutions has primarilyhistorically been in the oil sands region of Alberta, Canada, which is a remote location. We are in the process of expanding Sumac's temporary power solutionbut has expanded its presence in the U.S. gulf-coastGulf Coast region with the addition of fabrication capacity at our San Marcos, Texas facility.
In 2017, we completed construction of
Thermon transportation heating products are fabricated at our newest manufacturing facility in Russia, Thermon Eurasia LLC, a wholly owned indirect subsidiary has begun local production of key products in the greater Moscow region. The new production facility, approximately 20,300 square feet, focuses on manufacturing, fabrication, packagingDenver, Colorado. This includes both solutions for rail car heating and quality control of high-temperature self-regulating heating cables, low-temperature self-regulation heating cables, series constant watt cables, mineral insulated heating circuits, power and splice boxes, mechanical thermostats, electronic control modules, heat tracing kits and accessories, control panels and power distribution boards. The facility has helped us better serve our customers in the region through a comprehensive local suite of heat tracing products and services, including sales support, logistics, engineering, technical support, project management, and field services for electric and steam heat tracing, as well as other industrial process heating applications. We believe Russia and the adjacent Eurasian countries represent a very important and promising market opportunity for Thermon, and the new production facility is a key strategic investment. Our capital investment for the new facility was $1.0 million.rail track heating.
We maintain quality control testing standards in all of our manufacturing operations and perform various quality control checks on our products during the manufacturing process. We believe that our highly automated manufacturing process and multiple quality control checkpoints create high levels of operational efficiency.
Purchasing Strategy- Our critical raw materials include polymers, graphite, copper and stainless steel. For most of these materials, we purchase from multiple suppliers in order to avoid any potential disruption of our manufacturing process. For a small number of raw material items that require specific quality specifications, we have single source supply arrangements. We manage the inherent supply risk through purchase contracts and the maintenance ofincreased safety stock levels at all times. We evaluate pricing and performance of all suppliers annually. For our low-volume custom-built electronic controller components, we select a single supplier based on past performance reliability and monitor the process closely as volumes are too low to divide this product over multiple suppliers. Our purchase specifications are usually based on industry or manufacturer standards. Testing of the raw materials is performed and documented by our suppliers and is reviewed by us at the time of receipt.
Distribution- Our primary distribution centers are located in San Marcos, Texas, Calgary,Edmonton, Alberta, the Netherlands and the Netherlands.Moscow, Russia. Inventory is typically shipped directly from these distribution centers to customers, the construction site or our regional sales agents or distributors. Our sales agents may maintain "safety stocks" of core products to service the immediate MRO/UEmaintenance and repair requirements of customers who are time-sensitive and cannot wait for delivery from one of the central distribution centers. In the United States, a network of agents maintains safety stocks of core products. In Canada, customers are serviced from the central distribution centerthree 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.Edmonton, 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, Mexico and Rio de Janeiro, Brazil. We expectCity. Thermon aims to utilize warehouses that have been added throughinventory available close to the acquisition of Sumac, IPI and Unitemp in Fort McMurray, Alberta, Canada, Port Neches, Texas and Cape Town and Johannesburg, South Africa, respectively,customer to store inventory for sales to existing Sumac, IPI and Unitemp customers.fulfill urgent needs.
In April 2015, we completed the expansion of our primary distribution center located in San Marcos, Texas at a total cost of $3.9 million including equipment. The expansion has significantly increased our storage capacity, reduced outside storage costs and consolidated warehouse operations for improved efficiencies.
Customers
We serve a broad base of large multinational customers, many of which we have served for more than 60 years. We have a diversified revenue mix with thousands of customers. None of our customers represented more than 10% of total revenue in fiscal 2018.2021.
SalesCustomers typically purchase our products when constructing a new facility, which we refer to as "Greenfield projects," or when performing maintenance, repair and operations on a facility's existing heat-traced pipes or upgrading or expanding a current facility, which we refer to collectively as "MRO/UE."
Marketing
Our direct sales force is focused on positioning us with major end-users and EPC companies during the development phase of Greenfield projects with the goal of providing reliable, cost-effective process heating solutions. We utilize a network of more than 100 independent sales agents and distributors in over 30 countries to provide local support to customer facilities for MRO/UE. WeIn 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 qualityhigh-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-We
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 that they can withstand harsh operating environments. Our products and associated design practicesThey are subjected to various tests, including heat output, thermal stability and long-term aging, with the goal of producing products capable of performing at or beyond the expectations of our customers. All products are further tested and certified for global use by various approval agencies, such as UL, CSA, FM, and ETL, to verify compliance with applicablemeet industry leading international standards.
We evaluate 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. In addition, all of our manufacturing facilities are in certified ISO 9001, which allows us to continue to produce safe, reliable products certified for electrical safety requirements, environmental assessments and market based assessments foroperating in potentially hazardous environments.
Over the particular applications and harsh climates thatlast three decades, Thermon services. Our products comply withhas made significant investments to actively participate in standardization at the national and international heat tracing industry standardslevel. We are active in several committees such as ANSI/IEEE-515, ANSI/IEEE, 515.1, ANSI/IEEE-844, UL 508A, UL 698, UL 1030the National Electrical Code (NEC), Canadian Electrical Code (CEC), American National Standards Institute (ANSI), National Electrical Equipment Manufacturers Association (NEMA), and UL 499the International Electro technical Committee (IEC). We leverage our extensive expertise and knowledge in industrial process heating technology to continually improve the 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 and 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. Gas markets have been resilient over the last twelve months, 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 MRO/UE 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.
•Other. We serve a growing number of other markets where we add value for customers, such as data centers, food and beverage, mineral processing, pharmaceutical, semiconductor facilities and other general industrial activities.
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 Canadian Standards Association 130.03, 72, 46, 88, 14 and 30 in Canada;Latin America ("US-LAM"), (ii) Canada, (iii) Europe, Middle East and International Electrical Commission IECx 60079-30-1, IECEx 60079-30-2, IECEx 60079-0, IECEx 60079-1Africa ("EMEA") and IECEx 60079-2 in international markets. We also hold many product certifications from local country approval agencies and registration bodies around the world. We actively monitor the introduction of new domestic or global standards and certifications, and pursue certifications(iv) Asia-Pacific ("APAC"). Profitability within our segments is measured by operating income. See Note 19, "Segment Information" for financial data relating to the electrical heat tracing industry.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 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), which was spun-off of Pentair plc (NYSE:PNR).
Following the THS acquisition in April 2018.
We haveOctober 2017, we entered the broader industrial process heating market following the THS transaction in October 2017.market. The industrial process heating market, which includes industrial heat tracing, also tends to be fairly fragmented with several smaller
companies serving discrete local markets with limited offerings. The primaryOur competitors of THS vary by end-market, but generally we view nVent Electric, Nibe,NIBE, Watlow and 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, business strategy and other proprietary information. We rely on registered and unregistered trademarks in the United States and abroad and have many recognized brand names.
Research and Development
Our research and development activities are focused on identifying new technologies to enhance our industrial process heating solutions through identifying opportunities to 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.
Resources
Employees
AsOur critical raw materials include polymers, graphite, copper and stainless steel. For most of March 31, 2018,these materials, we employed approximately 1,480 personspurchase from multiple suppliers in order to avoid any potential disruption of our manufacturing operations. For a small number of raw material items that require specific quality specifications, we have single source supply arrangements. We manage the inherent supply risk through purchase contracts and the maintenance ofincreased safety stock levels at all times. We evaluate pricing and performance of all suppliers annually. For our low-volume custom-built electronic controller components, we select a single supplier based on past performance reliability and monitor the process closely as volumes are too low to divide this product over multiple suppliers. Approximately 60% of the components we purchase by cost are off-the-shelf items and are readily available from multiple sources. Our purchase specifications are usually based on industry or manufacturer standards. Testing of the raw materials is performed and documented by our suppliers and is reviewed by us at the time of receipt. While our manufacturing locations are predominantly in North America, we operate an “in the region, for the region” strategy to diversify our supplier base, manage costs and hold inventory across our various sites. We employ a full-time basis worldwide, inclusivescreening mechanism for conflict materials as part of THS employees.our supplier approval and management processes. Use of tin, tungsten, tantalum and gold (3TG) in our purchased components is very minimal. We have never experiencedestablished a process to collect and report conflict minerals use in order to meet all regulatory and customer requirements. We use limited amounts of magnesium, graphite and platinum in our processes and these commodities are sourced from multiple suppliers to ensure availability. The quantities we consume of these materials are insignificant compared to the global production and usage.
Government Contracts
We do not have any organized work stoppage or strike; however, 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.
GovernmentalGovernment Regulation
Due to the international scope of our operations, we are subject to complex United States and foreign laws governing, among others, anti-corruption matters, export controls, economic sanctions, antiboycottanti-boycott rules, currency exchange controls and
transfer pricing rules. These laws are administered 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. Our policies mandate compliance with these laws. Despite our training and compliance programs, no assurances can be made that we will be found to be operating in full compliance with, or be able to detect every violation of, any such laws. We cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.
Environmental Compliance
OurIn addition, our operations and properties are subject to a variety of federal, state, local and foreign environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes, the cleanup of contaminated sites, the emission of greenhouse gases, and workplace health and safety. Certain environmental laws, including the Comprehensive Environmental Response, Compensation, and Liability Act, impose joint and several liability for cleanup costs, without regard to fault, on persons who have disposed of or released hazardous substances into the environment. In addition, we could become liable to third parties for damages resulting from the disposal or release of hazardous substances into the environment. Some of our sites are affected by soil and groundwater contamination relating to historical site operations, which could require us to incur expenses to investigate and remediate the
contamination in compliance with environmental laws. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities. A failure to obtain, maintain, and comply with these permit requirements could result in substantial penalties, including facility shutdowns. From time to time, we could be subject to requests for information, notices of violation, and/or investigations initiated by environmental regulatory agencies relating to our operations and properties. Violations of environmental and health and safety laws can result in substantial penalties, civil and criminal sanctions, permit revocations, and facility shutdowns. Environmental and health and safety laws may change rapidly and have tended to become more stringent over time. As a result, we could incur costs for past, present, or future failure to comply with all environmental and health and safety laws and regulations. In addition, we could become subject to potential regulations concerning the emission of greenhouse gasses, and while the effect of such future regulations cannot be determined at this time, they could require us to incur substantial costs in order to achieve and maintain compliance. In the ordinary course of business, we may be held responsible for any environmental damages we may cause to our customers' premises.
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 section titled 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 the 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. The Human Capital Management and Compensation Committee of the Board 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 2021. 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 decreased from 0.19 in fiscal 2020 to 0.07 in fiscal 2021 and our LTIR decreased from 0.05 in fiscal 2020 to 0.00 in fiscal 2021. We are proud of our superior safety rating in both the manufacturing and construction industries. TRIR & LTIR is 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 again supports our superior safety rating in the industry.
COVID-19 Response
Throughout fiscal 2021 and during the pandemic, 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 ("PPE"). 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. Our COVID-19 related policies and guidelines (which vary by country and region of operation) include, but are not limited to:
a.Time off and pay continuation for immune compromised essential workers in the early weeks of the pandemic
b.Work-from-home policy for office employees
c.Guidelines for appropriate use and application of personal protective equipment
d.Guidelines and recommendations for social distancing and increased hygiene methods; and
e.Contact tracing and quarantine protocols specific to each location.
Workforce Breakdown
On March 31, 2021, we employed approximately 1,083 regular employees, of which 37.2% were located in the U.S. and Latin America, 35.1% in Canada, 13.1% located in Europe, the Middle East, and Africa ("EMEA"), and 14.6% located in Asia-Pacific ("APAC"). Our 12-month rolling voluntary turnover rate as of March 31, 2021 was 12.6% compared to the 2020 manufacturing industry average of 12% according to Aon 2020 Salary Increase and Turnover Study – Second Edition. Approximately 1.1% 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 generally very good.
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, 2021 (based on self-reporting at the date of hire): 25.0% of our employees worldwide identify as females (excludes certain employees in Europe in accordance with the European Union’s General Data Protection Regulation); 21.8% of our employees in the United States identify as female; and 31.8% of our employees in the United States identify as a racial or ethnic minority.
In fiscal year 2021, we launched several initiatives to foster diversity in our organization. These initiatives include: (i) launching of a new global job posting platform that allows us to source a wider pool of candidates, (ii) updating master service agreements with external recruiting partners and temporary agencies in the United States to include specific service level agreements to source more diverse slates of talent for positions these partners and agencies are tasked to fill, and (iii) targeting diversity in our university recruiting for our U.S. new hire graduate program for sales engineers which resulted in over half of recent hires coming from diverse groups in fiscal 2021.
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.
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.
Reward decisions are informed by the annual performance evaluation process which includes an assessment of both Thermon’s values demonstrated by the employee and the delivery of employee-specific goals. In addition to our broad-based programs, we have used 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.
Seasonality
For information on seasonality, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Seasonality," which is hereby incorporated by reference into this Item 1.
Backlog
For information on backlog, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations- Overview- Revenue," which is hereby incorporated by reference into this Item 1.
ITEM 1A. RISK FACTORSRisk 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 the measures taken in response thereto could have an adverse effect on our business, results of operations and financial condition.
Our business, financial condition, results of operations and cash flows may be adversely affected if a global pandemic, including the COVID-19 pandemic, interferes with the ability of our employees, vendors and customers to perform our and their respective responsibilities and obligations relative to the conduct of our business. The COVID-19 coronavirus pandemic has caused significant volatility in the global economy. Public health problems resulting from COVID-19 and safety measures instituted by governments and businesses to mitigate its spread, including travel restrictions and quarantines, could continue to contribute to a general slowdown in the global economy, adversely impact the businesses of our customers, suppliers and distribution partners, and disrupt our operations. For example, precautionary measures instituted by government authorities and sanitization 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.
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. 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.
A prolonged economic downturn due to the COVID-19 pandemic could result in reduced demand for our products and services. The severity and longevity of the COVID-19 pandemic may cause customers to suspend their decisions on using our products and/or services and give rise to significant changes in regional and global economic conditions that could delay or interfere with the capital spending of our customers. While the full extent and continued impact of the pandemic and the efficacy and availability of vaccines cannot be reasonably estimated at this time, it could have a material impact on our consolidated business, results of operations and financial condition in our fiscal year ending March 31, 2022 and beyond. The COVID-19 pandemic could also have the effect of heightening other risks described elsewhere in these Risk Factors.
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 downturn in the energy industry, due to decreases in oil and gas prices decreasing or otherwise,demand for oil and gas products, could further decrease demand for some of our products and services which would materially and adversely affect our business, financial condition and results of operations.
A significant portion of our revenue historically has been generated by end-users in the oil and gas markets where we serve all three major categories of customers in the petroleum industry - upstream exploration/production, midstream transportation and downstream refining. The businesses of most of our customers in the energy industry are, to varying degrees, cyclical and historically have experienced periodic downturns. Profitability in the energy industry is highly sensitive to supply and demand cycles and commodity prices, which historically have been volatile, and our customers in this industry have tended to delay large capital projects, including expensive maintenance and upgrades, during industry downturns. Customer project delays and cancellations may limit our ability to realize value from our backlog as expected and cause fluctuations in the timing or the amount of revenue earned and the profitability of our business in a particular period. In addition, such delays and cancellations may lead to significant fluctuations in results of operations from quarter to quarter, making it difficult to predict our financial performance on a quarterly basis.
Demand for a significant portion of our products and services depends upon the level of capital expenditure by companies in the energy industry, which depends, in part, on energy prices, which 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. The impact on oil and gas commodity markets has further been impacted by the reduction in demand caused by the public safety measures instituted by governments and businesses to mitigate the spread of COVID-19. A sustained downturn in the capital expenditures of our customers, whether due to a decrease in the market price of oil and gas or otherwise,demand for oil and gas products, may delay projects, decrease demand for our products and services and cause downward pressure on the prices we charge, which, in turn, could have a materialan adverse effect on our business, financial condition and results of operations. Such downturns, including the perception that they might continue, could also have a significant negative impact on the market price of our common stock.
As a global business, we are exposed to economic, political and other risks in a number of countries, which could materially reduce our revenues, profitability, 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 2021, approximately 65% of our revenues were generated outside of the United States, and approximately 33% were generated outside of North America. One of our key growth strategies is to continue to expand our global footprint in emerging and high growth markets around the world; however, we may be unsuccessful in expanding our international business.
Conducting business outside the U.S. subjects us to additional risks that may impact our revenues, profitability or cash flows or increase our liabilities, including the following:
•changes in a specific country's or region's political, social or economic conditions, particularly in emerging markets;
•changes in trade relations between the United States and those foreign countries in which our customers and suppliers 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.
Business Risks
Our backlog may fluctuate and a failure to deliver our backlog on time could affect our future sales, and profitability and our relationships with our customers, and if we were to experience a material amount of modifications or cancellations of orders, our sales could be negatively impacted.
Our backlog is comprised of the portion of firm signed purchase orders or other written contractual commitments received from customers that we have not recognized as revenue. Backlog may increase or decrease based on the addition of large multi-year projects and their subsequent completion. Backlog may also be favorably or unfavorably affected by foreign currency rate fluctuations. The dollar amount of backlog as of March 31, 20182021 was $159.6$114.2 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.control and difficult to forecast. Such delays may lead to significant fluctuations in
results of operations from quarter to quarter, making it difficult to predict our financial performance on a quarterly basis. Further, while we have historically experienced few order cancellations and the amount of order cancellations has not been material compared to our total contract volume, if we were to experience a significant amount of cancellations of or reductions in purchase orders, it would reduce our backlog and, consequently, our future sales and results of operations.
Our ability to meet customer delivery schedules for our backlog is dependent on a number of factors including, but not limited to, access to raw materials, an adequate and capable workforce, engineering expertise for certain projects, sufficient manufacturing capacity and, in some cases, our reliance on subcontractors. The availability of these factors may in some cases be subject to conditions outside of our control. A failure to deliver in accordance with our performance obligations may result in financial penalties and damage to existing customer relationships, our reputation and a loss of future bidding opportunities, which could cause the loss of future business and could negatively impact our financial performance.
As a global business, we are exposed to economic, politicalfuture sales 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 a material adverse effect on our business and financial condition.
For fiscal 2018, approximately 63% of our revenues were generated outside of the United States, and approximately 32% were generated outside North America. In addition, one of our key growth strategies is to continue to expand our global footprint in emerging and high growth markets around the world, although we may not be successful in expanding our international business.
Conducting business outside the United States is subject to additional risks, including the following:
changes in a specific country's or region's political, social or economic conditions, particularly in emerging markets;
trade relations between the United States and those foreign countries in which our customers and suppliers have operations, including protectionist measures such as tariffs, import or export licensing requirements and trade sanctions;
restrictions on our ability to own or operate subsidiaries in, expand in and, if necessary, repatriate cash from, foreign jurisdictions;
exchange controls and currency restrictions;
the burden of complying with numerous and potentially conflicting laws;
potentially negative consequences from changes in U.S. and foreign tax laws;
difficulty in staffing and managing (including ensuring compliance with internal policies and controls) geographically widespread operations;
different regulatory regimes controlling the protection of our intellectual property;
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 a material adverse effect on our revenues, profitability or cash flows or cause an increase in our liabilities. We may not succeed in developing and implementing policies and strategies to counter the foregoing factors effectively in each location where we do business. In addition, the imposition of trade restrictions, economic sanctions or embargoes by the United States or foreign governments could adversely affect our operations and financial results.
Additional liabilities related to taxes, potential tax adjustments or changes to tax policy in foreign jurisdictions could adversely impact our financial results, financial condition and cash flow.
We are subject to tax and related obligations in the jurisdictions in which we operate or do business, including state, local, federal and foreign taxes. The taxing rules of the various jurisdictions in which we operate or do business often are
complex and subject to varying interpretations. Tax authorities may challenge tax positions that we take or historically have taken, and may assess taxes where we have not made tax filings or may audit the tax filings we have made and assess additional taxes, as they have done from time to time in the past. Some of these assessments may be substantial, and also may involve the imposition of substantial penalties and interest. Significant judgment is required in evaluating our tax positions and in establishing appropriate reserves. The resolutions of our tax positions are unpredictable. The payment of substantial additional taxes, penalties or interest resulting from any assessments could materially and adversely impact our results of operations, financial condition and cash flow.operations.
On December 22, 2017, the United States enacted significant changes to U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”). The Tax Act included significant changes to existing U.S. tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income (“Transition Tax”), deductions, credits and business-related exclusions. We have estimated the Transition Tax as of March 31, 2018. The estimated tax is subject to further research with regard to foreign earnings and available tax credits and is therefore held as provisional per the Securities and Exchange Commission's Staff Accounting Bulletin 118. Adjustments to estimated Transition Tax could impact our results of operations, financial condition and cash flow.
Given the Tax Act’s significant changes and potential opportunities to repatriate cash tax free, we have reevaluated our former permanent reinvestment position. Accordingly, we will no longer assert a permanent reinvestment position in most of our foreign subsidiaries. We expect to repatriate certain earnings which will be subject to withholding taxes. These additional withholding taxes are being recorded as an additional deferred tax liability associated with the basis difference in such jurisdictions. Any changes made by foreign jurisdictions to their respective withholding rates could materially impact our results of operations, financial condition and cash flow.
There may be breaches of our information technology systems that materially damage business partner and customer relations that could subject us to significant reputational, financial, legal and operational consequences.
As a company we store company, customer, employee and business partner information, which may include, among other information, trade secrets, names, addresses, phone numbers, email addresses, tax identification numbers, payment account information and customer facility information. We could be subject to sophisticated and targeted attacks intending to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, including the introduction of computer viruses or malware, cyber-attacks and other means. We require user names and passwords in order to access our information technology systems. These security measures are subject to potential third-party security breaches, employee error, malfeasance and faulty password management, among other limitations. Third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be used to access our information technology systems. We may not be able to anticipate, detect or recognize threats to our system or to implement effective preventive measures against all security breaches. If we were to experience a breach of our systems and were unable to protect sensitive data, such a breach could, among other things:
risk our confidential manufacturing processes and other trade secreted information that may lead to new and increased entrants and competitors or cause other damage to the business;
expose our customers' facilities and projects to increased safety and security risk;
materially damage business partner and customer relationships;
adversely impact our financial results and expose us to potential risk of loss or litigation; and/or
require us to incur substantial costs or require us to change our business practices;
Our future revenue depends in part on our ability to bid and win new contracts. Our failure to effectively obtain future contracts could adversely affect our profitability.
Our future revenue and overall results of operations require us to successfully bid on new contracts and, in particular, contracts for large Greenfield projects, which are frequently subject to competitive bidding processes. Our revenue from major projects depends in part on the level of capital expenditures in our principal end markets, including the energy, chemical processing and power generation industries. With the recent reductionsdisruptions to many of our customers’ end markets caused by the COVID-19 pandemic and the recent volatility in capital spending budgets,oil and gas commodity markets, we anticipate we could experience decreased levels of profitability which could adversely impact our financial results. In addition, if we fail to replace completed or canceled large Greenfield projects with new order volume of the same magnitude, our backlog will decrease and our future revenue and financial results may be adversely affected. The number of such projects we win in any year fluctuates,
and is dependent upon the number of projects available and our ability to bid successfully for such projects. Contract proposals and negotiations are complex and frequently involve a lengthy bidding and selection process, which is affected by a number of factors, such as competitive position, market conditions, financing arrangements and required governmental approvals. For example, a client may require us to provide a bond or letter of credit to protect the client should we fail to perform under the terms of the contract. If negative market conditions arise,continue, or if we fail to secure adequate financial arrangements or required governmental approvals, we may not be able to pursue particular projects, which could adversely affect our profitability.
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, 2021, we had $148.5 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, which may impact our ability to meet our debt service obligations.
Additional liabilities related to taxes, potential tax adjustments or changes to tax policy in foreign jurisdictions could adversely impact our financial results, financial condition and cash flows.
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.
If we are unable to successfully develop and improve our products and successfully implement new technologies in the markets that we serve, our business and results of operations could be adversely affected.
Our future success will depend upon our continued investment in research and development of new products, improvement and enhancement of our existing product offerings and our ability to continue to achieve new technological advances in the process heating industry. Our inability to continue to successfully develop and market new products or our inability to implement technological advances on a pace consistent with that of our competitors could adversely affect our business and results of operations.
We may be unable to compete successfully in the highly competitive markets in which we operate.
We operate in competitive domestic and international markets and compete with highly competitive domestic and international manufacturers and service providers. The fragmented nature of the industrial electric heat tracing industry and the similarly fragmented nature of the industrial process heating industry makes the market for our products and services highly competitive. A number of our direct and indirect competitors are major multinational corporations, some of which have substantially greater technical, financial and marketing resources, than us, and additional competitors may enter these markets.markets at any time. In addition, we compete against many regional and lower-cost manufacturers. Our competitors may develop products that are superior to our products, develop methods of more efficiently and effectively providing products and services, adapt more quickly than we do to new technologies or evolving customer requirements, or attempt to compete based primarily on price, localized expertise and local relationships. If we are unable to continue to differentiate our products and services or if we experience an increase in competition, it may cause us to lose market share or compel us to reduce prices to remain competitive, which could result in reduceda reduction in our revenues and results of operations.
Our gross margins depend, in part, on our revenue mix. Although Greenfield project revenues, which provide for an ongoing stream of future high-margin MRO/UE revenues, are critical to our success and growth, increased Greenfield project revenues can adversely affect our gross margin.
Typically, both Greenfield and MRO/UE customers require our products as well as our engineering and construction services. We tend to experience lower margins from our design optimization, engineering, installation and maintenance services than we do from sales and earnings.
Currency fluctuations and the current geopolitical instability in Russia and Ukraine and related sanctions by the U.S. government against certain companies and individuals may hinder our ability to conduct business with potential or existing customers and vendors in these countries.
We derived approximately 5%, 8% and 7% of our revenueheating cable, tubing bundle and control system products. We also tend to experience lower margins from our subsidiary incorporated in Russia in theoutsourced products, such as electrical switch gears and transformers, than we do from our manufactured products. Accordingly, our gross margins are impacted by our mix of products and services. Although our product mix varies from period to period due to a variety of factors, during fiscal yearsyear ended March 31, 2018, 2017 and 2016, respectively. The escalation of geopolitical instability in Russia and Ukraine as well as currency fluctuations in the Russian Ruble could negatively impact our operations, sales, and future growth prospects in that region. The U.S. government has imposed sanctions through several executive orders restricting U.S. companies from conducting business with specified Russian and Ukrainian individuals and companies. While we believe that the executive orders currently do not preclude us from conducting business with our current customers or vendors in Russia, the sanctions imposed by the U.S. government may be expanded in the future to restrict us from engaging with them. If we are unable to conduct business with new or existing customers or vendors or pursue business opportunities in Russia or Ukraine, our business, including2021, Greenfield revenue profitability and cash flows, and operations could be materially adversely affected. We cannot provide assurance that current sanctions or potential future changes in sanctions will not have a material impact on our operations in Russia and the Ukraine or on our financial results.accounted for
A material disruption at anyapproximately 35% of our manufacturing facilitiestotal revenue. Although Greenfield project revenues, which provide for an ongoing stream of future high-margin MRO/UE revenues, are critical to our long-term success and growth, a revenue mix higher in lower-margin Greenfield project revenues relative to historical levels could adversely affect our gross margins and results of operations.
If operations at any of our manufacturing facilities were to be disrupted as a result of significant equipment failures, natural disasters, power outages, fires, explosions, terrorism, adverse weather conditions, labor disputes or other reasons, we may be unable to fill customer orders and otherwise meet customer demand for our products, which could adversely affect our financial performance. For example, our marketing and research & development buildings, located on the same campus as our corporate headquarters and primary manufacturing facility in San Marcos, Texas, were destroyed by a tornado in January 2007.
Our Sumac operations are located in Fort McMurray, Alberta, Canada. Beginning on May 3, 2016, a forest fire swept through the town of Fort McMurray and the surrounding area causing significant damage to homes and businesses. None of Thermon's personnel located in Fort McMurray were injured nor were our facilities damaged. However, the entire city of Fort McMurray, including all of our staff, was evacuated for a period of approximately four weeks. We incurred temporary relocation costs of $21,000 for our employees as well as business interruption costs. As a result of the crisis at Fort McMurray, many of the nearby oil sands region facilities ceased operations for approximately one month. This shut down adversely impacted Thermon's core thermal solutions business and Sumac's equipment rental and sales business during fiscal 2017.
Interruptions in production, in particular at our manufacturing facilities in San Marcos, Texas, or Calgary, Edmonton, Oakville or Orillia, Canada, at which we manufacture the majority of our products, could increase our costs and reduce our sales. Any interruption in production capability could require us to make substantial capital expenditures to fill customer orders, which could negatively affect our profitability and financial condition. We maintain property damage insurance that we believe to be adequate to provide for reconstruction of facilities and equipment, as well as business interruption insurance to mitigate losses resulting from any production interruption or shutdown caused by an insured loss. However, any recovery under our
insurance policies may not offset the lost sales or increased costs that may be experienced during the disruption of operations, which could adversely affect our financial performance.
Our business strategy includes acquiring smaller, value-added 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 operating results.results of operations.
Acquisitions and investments may involve cash expenditures, debt incurrence, operating losses and expenses that could have a materialan adverse effect on our financial condition and operating results.results of operations. Acquisitions involve numerous other risks, including:
•diversion of management time and attention from daily operations;
•difficulties integrating acquired businesses, technologies and personnel into our business;
•difficulties in realization of expected synergies and revenue creation or cross-selling opportunities;
•potential loss of key employees, key contractual relationships or key customers of acquired companies or of us; and
•assumption of the liabilities and exposure to unforeseen liabilities of acquired companies.
We have limited experience in acquiring or integrating other businesses or making investments or undertaking joint ventures with others. It may be difficult for us to complete transactions quickly and to integrate acquired operations efficiently into our current business operations. It may also be difficult for us to identify suitable acquisition candidates, which may inhibit our growth rate. Any acquisitions or investments may ultimately harm our business or financial condition as suchif they are unsuccessful and any acquisitions may not be successful and mayor investments ultimately result in impairment charges. During fiscal 2016,
We carry insurance against many potential liabilities, but our management of risk may leave us exposed to unidentified or unanticipated risks.
Although we impaired $1.7 millionmaintain 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 goodwillcoverage. 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 or terrorist attacks. We estimate our liabilities for known claims and other intangible assets relatedunpaid 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 the Unitemp acquisition asestimate due to various factors. If any of our expectationsinsurance 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 future revenue and profitability were below those estimated at the time of the acquisition.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 we have entered into do not eliminate this exchange rate risk, nor do they reduce risk associated with total foreign sales.
Our non-U.S. subsidiaries generally sell their products and services in the local currency, but obtain a significant amount of their products from our facilities located elsewhere, primarily the United States, Canada or Europe. In particular, significant fluctuations in the Canadian Dollar, the Russian Ruble, the Euro or the Pound Sterling against the U.S. Dollar could adversely affect our results of operations. AlthoughDuring fiscal 2021 and 2020, the value of the U.S. Dollar weakenedoverall strengthened in relation to the principal non-U.S. currencies from which we derive revenue, which positively impacted revenue by $7.9 million in fiscal 2018, the relative strengthening of the U.S. Dollar negatively impacted revenue by $1.3$1.7 million in fiscal 2017, and any$5.0 million, respectively. Any further appreciation in the U.S. Dollar relative to such non-U.S. currencies could continue to have a significant negative impact on our results of operations in future periods. We also bid for certain foreign projects in U.S. Dollars or Euros. If the U.S. Dollar or Euro strengthensstrengthen relative to the value of the local currency, we may be less competitive in bidding for those projects. In addition, currency variations can adversely affect margins on sales of our products in countries outside of the U.S. and margins on sales of products that include components obtained from suppliers located outside of the U.S. See Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" for additional information regarding our foreign currency exposure relating to operations.
Because our consolidated financial results are reported in U.S. Dollars and we generate a substantial amount of our sales and earnings in other currencies, the translation of those results into U.S. Dollars can result in a significant decrease in the amount of those sales and earnings. Fluctuations in currencies relative to the U.S. Dollar may make it more difficult to perform period-to-period comparisons of our reported results of operations. In addition, the net asset values of foreign operations are adjusted upward and downward based on currency exchange rate fluctuations and are reported in our foreign currency translation adjustment as part of other comprehensive income in our consolidated statements of operations and comprehensive income.income/(loss).
We have significant goodwill and other intangible assets and future impairment of our goodwill and other intangible assets could have a material negative impact on our financial results.
We test goodwill and indefinite-life intangible assets for impairment on at least an annual basis, and more frequently if circumstances warrant, by comparing the estimated fair value of each of our reporting units to their respective carrying values. As of March 31, 2018,2021, our goodwill and other intangible assets balance was $362$316.8 million, which represented 55%51% 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 tracing industry is highly competitive and subject to the introduction of innovative techniques and services using new technologies. We rely significantly on maintaining the 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, among other limitations. Third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be used to access our information technology systems. We may not be able to anticipate, detect or recognize threats to our system or to implement effective preventive measures against all security breaches. If we were to experience a breach of our systems and were unable to protect sensitive data, such a breach could, among other things:
•risk exposing our confidential manufacturing processes and other trade secreted information that may lead to new and increased entrants and competitors in our business or cause other damage to the business;
•expose our customers' facilities and projects to increased safety and security risk;
•materially damage business partner and customer relationships;
•impact our reputation in the markets in which we compete for business;
•adversely impact our financial results and expose us to potential risk of loss or litigation; and/or
•require us to incur substantial costs or require us to change our business practices.
A material disruption at any of our manufacturing facilities could adversely affect our financial performance and results of operations.
If operations at any of our manufacturing facilities were to be disrupted as a result of significant equipment failures, natural disasters, pandemics, power outages, fires, explosions, terrorism, adverse weather conditions, labor disputes or other reasons, we may be unable to fill customer orders and meet customer demand for our products, which could adversely affect our financial performance and results of operations. For example, our marketing and research & development buildings, located on the same campus as our former corporate headquarters and primary manufacturing facility in San Marcos, Texas, were destroyed by a tornado in January 2007. In addition, precautionary measures instituted by government authorities in certain markets and sanitization 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.
Interruptions in production, in particular at our manufacturing facilities in the United States or Canada, at which we manufacture the majority of our products, could increase our costs and reduce our sales. Any interruption in production capability could require us to make substantial capital expenditures to fill customer orders, which could negatively affect our profitability and financial condition. We maintain property damage insurance that we believe to be adequate to provide for reconstruction of facilities and equipment, as well as business interruption insurance to mitigate losses resulting from any production interruption or shutdown caused by an insured loss. However, any recovery under our insurance policies may not offset the lost sales or increased costs that may be experienced during the disruption of operations, which could adversely affect our financial performance and results of operations.
Our dependence on subcontractors and third-party suppliers could adversely affect our results of operations.
We often rely on third-party subcontractors, as well as third-party suppliers and manufacturers to 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, 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. This may reduce the profit to be realizedwe realize or result in a loss on a project for which the services or materials were needed.needed or, if the product is unavailable, prevent us from accepting orders.
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 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 extend credit to customers in conjunction with our performance under fixed-price contracts which subjects us to potential credit risks.
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 present 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.
Unforeseen difficulties with expansions, relocations or consolidations of existing facilities could adversely affect our operations.
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. Many, but not all, of our customer contracts include provisions designed to limit our potential liability by excluding consequential damages and lost profits from our
indemnity obligations. However, substantialSubstantial indemnity claims may exceed the amount of insurance we maintain and could have a material adverse effect on our reputation, business, financial condition or results of operations.
Our current or future indebtedness could impair our financial condition and reduce the funds available to us for other purposes. Our debt agreements impose certain operating and financial restrictions, with which failure to comply could result in an event of default that could adversely affect our results of operations.
We have substantial indebtedness. At March 31, 2018, we had $225.0 million of outstanding indebtedness. If our cash flows and capital resources are insufficient to fund the interest payments on our outstanding borrowings under our credit facility and other debt service obligations and keep us in compliance with the covenants under our debt agreements or to fund our other liquidity needs, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot ensure that we would be able to take any of these actions, that these actions would permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements, which may impose significant operating and financial restrictions on us and could adversely affect our ability to finance our future operations or capital needs; obtain standby letters of credit, bank guarantees or performance bonds required to bid on or secure certain customer contracts; make strategic acquisitions or investments or enter into alliances; withstand a future downturn in our business or the economy in general; engage in business activities, including future opportunities, that may be in our interest; and plan for or react to market conditions or otherwise execute our business strategies.
If we cannot make scheduled payments on our debt, or if we breach any of the covenants in our debt agreements, we will be in default and, as a result, our debt holders could declare all outstanding principal and interest to be due and payable, the lenders under our credit facility could terminate their commitments to lend us money and foreclose against the assets securing our borrowings, and we could be forced into bankruptcy or liquidation.
In addition, we and certain of our subsidiaries may incur significant additional indebtedness, including additional secured indebtedness. Although the terms of our debt agreements contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and additional indebtedness incurred in compliance with these restrictions could be significant. Incurring additional indebtedness could increase the risks associated with our substantial indebtedness, including our ability to service our indebtedness.
Our international operations and non-U.S. subsidiaries are subject to a variety of complex and continually changing laws and regulations and, in particular, export control regulations or sanctions.
Due to the international scope of our operations, we are subject to a complex system of laws and regulations, including regulations issued by the U.S. Department of Justice, or the "DOJ," the SEC, the IRS, the U.S. Department of Treasury, the U.S. Department of State, Customs and Border Protection, BIS, OAC and OFAC, as well as the counterparts of these agencies in foreign countries. While we believe we are in material compliance with these regulations and maintain programs intended to achieve compliance, we may currently or may in the future be in violation of these regulations. In 2009, we entered into settlement agreements with BIS and OFAC, and in 2010, we entered into a settlement agreement with OAC, in each case with respect to matters we voluntarily disclosed to such agencies.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. Under the Dodd-Frank Act, the SEC has adopted requirements for companies that use certain minerals and metals, known as “conflict minerals”, in their products, whether or not these products are manufactured by third parties. These regulations require companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We are required to perform sufficient due diligence to determine whether such minerals are used in the manufacture of our products. The implementation of these requirements could adversely affect the sourcing, availability and pricing of such minerals if they are found to be used in the manufacture of our products. In addition, we incur costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free.
Any alleged or actual violations may subject us to government scrutiny, investigation and civil and criminal penalties and may limit our ability to export our products or provide services outside the United States. Additionally, we cannot predict
the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.
In addition, our geographically widespread operations, coupled with our relatively smaller offices in many countries and our reliance on third party subcontractors, suppliers and manufacturers in the completion of our projects, make it more difficult to oversee and ensure that all our offices and employees comply with our internal policies and control procedures. We have in the past experienced employee theft, although the amounts involved have not been material, and we cannot assure you that we can ensure compliance with our internal control policies and procedures.
Significant developments arising from recent U.S. Government proposals concerning tariffs and other economic proposals could have a material adverse effect on us.
As a result of recent changes to U.S. administration policy and recent U.S. government proposals, there may be greater restrictions and economic disincentives on international trade that could include significant increases in tariffs on goods. Changes in U.S. or international social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently develop and sell our products, and any negative sentiment towards the United States as a result of such changes, could adversely affect our business.
We operate in many different jurisdictions and we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar foreign anti-corruption laws.
The U.S. Foreign Corrupt Practices Act which we refer to as the "FCPA,"(the “FCPA”) and similar foreign anti-corruption laws generally prohibit companies and their intermediaries from making improper payments or providing anything of value to influence foreign government officials for the purpose of obtaining or retaining business or obtaining an unfair advantage. Recent years have seen a substantial increase in the global enforcement of anti-corruption laws, with more frequent voluntary self-disclosures by companies, aggressive investigations and enforcement proceedings by both the DOJ and the SEC resulting in record fines and penalties, increased enforcement activity by non-U.S. regulators, and increases in criminal and civil proceedings brought against companies and individuals. Because many of our customers, sales channels and end 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. WeHowever, we operate in many parts of the world that are recognized as having governmental corruption problems to some degree and where strict compliance with anti-corruption laws may conflict with local customs and practices. Our continued operation and expansion outside the United States, including in developing countries, could increase the risk of such violations in the future. Despite our training and compliance programs, we cannot assure you that our internal control policies and procedures always will protect us from unauthorized reckless or criminal acts committed by our employees or agents. In the event that we believe or have reason to believe that our employees or agents have or may have violated applicable anti-corruption laws, including the FCPA, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Violations of these laws may result in severe criminal or civil sanctions, which could disrupt our business and result in a material adverse effecteffects on our reputation, business, results of operations or financial condition.
Our international operations and non-U.S. subsidiaries are subject to a variety of complex and continually changing laws and regulations and, in particular, export control regulations or sanctions.
Due to the international scope of our operations, we are subject to a complex system of laws and regulations, including regulations issued by the U.S. Department of Justice (the “DOJ”), the SEC, the IRS, the U.S. Department of Treasury, the U.S. Department of State, Customs and Border Protection, Bureau of Industry and Security (“BIS”), Office of Anti-Boycott Compliance (“OAC”) and Office of Foreign Asset Control (“OFAC”), as well as the counterparts of these agencies in foreign countries. While we believe we are in material compliance with these regulations and maintain programs intended to achieve compliance, we may currently or may in the future be in violation of these regulations. In 2009, we entered into settlement agreements with BIS and OFAC, and in 2010, we entered into a settlement agreement with OAC, in each case with respect to matters we voluntarily disclosed to such agencies.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. Under the Dodd-Frank Act, the SEC has adopted requirements for companies that use certain minerals and metals, known as “conflict minerals”, in their products, whether or not these products are manufactured by third parties. These regulations require companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We are required to perform sufficient due diligence to determine whether such minerals are used in the manufacture of our products. The implementation of these requirements could adversely affect the sourcing, availability and pricing of such minerals if they are found to be used in the manufacture of our products. In addition, we incur costs to comply with conflict mineral disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free.
Any alleged or actual violations of these conflict mineral requirements may subject us to government scrutiny, investigation and civil and criminal penalties and may limit our ability to export our products or provide services outside the U.S. Additionally, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.
In addition, our geographically widespread operations, coupled with our relatively smaller offices in many countries and our reliance on third party subcontractors, suppliers and manufacturers in the completion of our projects, make it more difficult to oversee and ensure that all our offices and employees comply with our internal policies and control procedures. We have experienced immaterial employee theft in the past, and we cannot assure you that we can ensure our employees compliance with our internal control policies and procedures.
Changes in government administrative policy, including changes to existing trade agreements and government sanctions, could have a material adverse effect on us.
As a result of changes to 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 and Mexico, among other possible changes. Changes in 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 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.
Currency fluctuations and the current geopolitical instability in Russia and Ukraine and related sanctions by the U.S. government against certain companies and individuals may hinder our ability to conduct business with potential or existing customers and vendors in these countries.
We derived approximately 8%, 4% and 3% of our revenue from our subsidiary incorporated in Russia in the fiscal years ended March 31, 2021, 2020 and 2019, respectively. The escalation of geopolitical instability in Russia and Ukraine as well as currency fluctuations in the Russian Ruble could negatively impact our operations, sales, and future growth prospects in that region. The U.S. government has imposed sanctions through several executive orders restricting U.S. companies from conducting business with specified Russian and Ukrainian individuals and companies. While we believe that the executive orders currently do not preclude us from conducting business with our current customers or vendors in Russia, the sanctions imposed by the U.S. government may be expanded in the future to restrict us from engaging with them. If we are unable to conduct business with new or existing customers or vendors or pursue business opportunities in Russia or Ukraine, our business, including revenue, profitability and cash flows, and operations could be adversely affected. We cannot provide assurance that current sanctions or potential future changes in sanctions will not have a material impact on our operations in Russia and the Ukraine or on our financial results.
We are subject to numerous environmental and health and safety laws and regulations, as well as potential environmental liabilities, which may require us to make substantial expenditures.
Our operations and properties are subject to a variety of federal, state, local and foreign environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes, the cleanup of contaminated sites and workplace health and safety. As an owner or operator of real property, or generator of waste, we could become subject to liability for environmental contamination, regardless of
whether we caused such contamination. Certain environmental laws, including the Comprehensive Environmental Response, Compensation, and Liability Act, impose joint and several liability for cleanup costs, without regard to fault, on persons who have disposed of or released hazardous substances into the environment. In addition, we could become liable to third parties for damages resulting from the disposal or release of hazardous substances into the environment. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities. From time to time, we could be subject to requests for information, notices of violation, and/or investigations initiated by environmental regulatory agencies relating to our operations and properties. Violations of environmental and health and safety laws can result in substantial penalties, civil and criminal sanctions, permit revocations, and facility shutdowns. Environmental and health and safety laws may change rapidly and have tended to become more stringent over time. As a result, we could incur costs for past, present, or future failure to comply with all environmental and health and safety laws and regulations. In addition, we could become subject to potential regulations concerning the emission of greenhouse gases, and while the effect of such future regulations cannot be determined at this time, they could
require us to incur substantial costs in order to achieve and maintain compliance. In the ordinary course of business, we may be held responsible for any environmental damages we may cause to our customers' premises.
IfThe effects of climate change and any related regulation of greenhouse gases could have a negative impact on our business.
Governments around the world are increasingly focused on enacting laws and regulations regarding climate change and regulation of greenhouse gases. Lawmakers and regulators in the jurisdictions where we lose our senior managementoperate have proposed or enacted regulations requiring reporting of greenhouse gas emissions and the restriction thereof, including increased fuel efficiency standards, carbon taxes or cap and trade systems, restrictive permitting, and incentives for renewable energy. In addition, efforts have been made and continue to be made in the international community toward the adoption of international treaties or protocols that would address global climate change issues and impose reductions of hydrocarbon-based fuels, including plans developed in connection with the Paris climate conference in December 2015 and the Katowice climate conference in December 2018. Laws or regulations incentivizing or mandating the use of alternative energy sources such as wind power and solar energy have also been enacted in certain jurisdictions. Additionally, numerous large cities globally and several countries have adopted programs to mandate or incentivize the conversion from internal combustion engine powered vehicles to electric-powered vehicles and placed restrictions on non-public transportation. Such policies or other key employeeslaws, regulations, treaties and international agreements related to greenhouse gases and climate change may negatively impact the price of oil relative to other energy sources, reduce demand for hydrocarbons, or cannot successfully execute succession plans,otherwise unfavorably impact our business may be adversely affected.
Our abilitycustomers in the oil and gas, power generation and petrochemical industries. To the extent our customers, particularly our energy and industrial customers, are subject to successfully operate and grow our global business and implement our strategies is largely dependent on the efforts, abilities and servicesany of our senior management and other key employees. If we lose the services of our senior managementthese or other key employeessimilar proposed or newly enacted laws and regulations or impacted by the change in energy prices due to such laws and regulations, we are exposed to risks that the additional costs incurred by customers to comply with such laws and regulations or that the deterioration of customers’ financial results as a result of changing energy prices could impact our customers’ ability or desire to continue to operate at similar levels in certain jurisdictions as historically seen or as currently anticipated, which could negatively impact their demand for our products and services. These laws and regulations could also increase costs associated with our operations, including costs for raw materials and transportation. The ultimate impact of greenhouse gas emissions-related agreements, legislation and measures on our financial performance is highly uncertain because we are unable to find qualified replacementspredict with comparable experiencecertainty, for a multitude of individual jurisdictions, the outcome of political decision-making processes and the variables and trade-offs that inevitably occur in the industry,connection with such processes.
In addition to potential impacts on our business resulting from climate-change legislation or regulations, our business also could be negatively affected. Competition for qualified management and key technical and sales personnelaffected by climate-change related physical changes or changes in our industry is intense.
At the end of fiscal 2016, twoweather patterns. An increase in severe weather patterns could result in damages to or loss of our senior executives, including our former chief executive officer, both of which had been with the Company for over 45 years, announced their retirements effective March 31, 2016. Both senior executives have agreed to continue assisting the Company on a consulting basis. While replacements were previously identified and were current members of our senior management team, we cannot provide any assurance that replacements will perform at or near the same levels of our prior senior executives. Our future success will depend on, among other factors,manufacturing facilities, impact our ability to successfully executeconduct our succession plan and continue to attract and retain qualified personnel, such as engineers and other skilled labor, andoperations and/or result in particular management and skilled employeesa disruption of our customers’ operations. In addition, volatility in weather patterns could exacerbate the cyclicality of demand for our foreign operations.heating products.
We rely heavily on trade secrets to gain a competitive advantage in the market and the unenforceability of our nondisclosure agreements may adversely affect our operations.
The heat tracing industry is highly competitive and subject to the introduction of innovative techniques and services using new technologies. While we have patented some of our products and processes, we historically have not relied upon patents to protect our design or manufacturing processes or products, and our patents are not material to our operations or business. Instead, we rely significantly on maintaining confidential our trade secrets and other information related to our operations. Accordingly, we require all employees to sign a nondisclosure agreement to protect our trade secrets, business strategy and other proprietary information. If the provisions of these agreements are found unenforceable in any jurisdiction in which we operate, the disclosure of our proprietary information may place us at a competitive disadvantage. Even where the provisions are enforceable, the confidentiality clauses may not provide adequate protection of our trade secrets and proprietary information in every such jurisdiction.
We may be unable to prevent third parties from using our intellectual property rights, including trade secrets and know-how, without our authorization or from independently developing intellectual property that is the same as or similar to ours, particularly in those countries where the laws do not protect our intellectual property rights as fully as in the United States. The unauthorized use of our trade secrets or know-how by third parties could reduce or eliminate any competitive advantage we have developed, cause us to lose sales or otherwise harm our business or increase our expenses as we attempt to enforce our rights.
Our intellectual property rights may not be successfully asserted in the future or may be invalidated, circumvented or challenged.
We have obtained and applied for some U.S. and, to a lesser extent, foreign trademark registrations and will continue to evaluate the registration of additional trademarks. We cannot guarantee that any of our pending applications will be approved. Moreover, even if the applications are approved, third parties may seek to oppose or otherwise challenge them. In addition, we rely on a number of significant unregistered trademarks, primarily abroad, but also in the United States, in the day-to-day operation of our business. Without the protections afforded by registration, our ability to protect and use our trademarks may be limited and could negatively affect our business.
In addition, while we have not faced intellectual property infringement claims from others in recent years, in the event successful infringement claims are brought against us, particularly claims (under patents or otherwise) against our product design or manufacturing processes, such claims could have a material adverse effect on our business, financial condition or results of operation.
Risks Related to Ownership of Our Common Stock
Our quarterly operating results may vary significantly, which could negatively impact the price of our common stock.
Our quarterly results of operations have fluctuated in the past and will continue to fluctuate in the future. You should not rely on the results of any past quarter or quarters as an indication of future performance in our business operations or the price of our common stock. Factors that might cause our operating results to vary from quarter to quarter include, but are not limited to:
•general economic conditions and cyclicality in the end markets we serve;
•the effects of the ongoing COVID-19 pandemic or other global pandemics or catastrophes;
•future growth of energy and chemical processing capital investments;
•a material disruption at any of our manufacturing facilities;
•delays in our customers' projects for which our products are a component;
•the timing of completion of large Greenfield projects;
•costs associated with regulatory compliance;
•competition from various other sources providing similar heat tracing products and services, or other alternative technologies, to customers; and
•the seasonality of demand for MRO/UE orders, which is typically highest during the second and third fiscal quarters.
If our results of operations from quarter to quarter fail to meet the expectations of securities analysts and investors, the price of our common stock could be negatively impacted.
The market price of our common stock may fluctuate significantly, and this may make it difficult for holders to resell our common stock when they want or at prices that they find attractive.
The price of our common stock on the NYSE constantly changes. We expect that the market price of our common stock will continue to fluctuate. The market price of our common stock may fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include: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.conditions, including the effects of the COVID-19 pandemic.
In addition, in recent years, global equity markets have experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons often unrelated to their operating performance. These broad market fluctuations may adversely affect the market price of our common stock, regardless of our operating results.results and cash flows.
Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws could impair a takeover attempt that our stockholders may find beneficial.
Our second amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could have the effect of rendering more difficult, or discouraging, an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:
•authorizing our board of directors, without further action by the stockholders, to issue blank check preferred stock;
•limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;
•requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;
•authorizing our board of directors, without stockholder approval, to amend our amended and restated bylaws;
•limiting the determination of the number of directors on our board of directors and the filling of vacancies or newly created seats on our board of directors to our board of directors then in office; and
•subject to certain exceptions, limiting our ability to engage in certain business combinations with an "interested stockholder" for a three-year period following the time that the stockholder became an interested stockholder.
These provisions, alone or together, could delay hostile takeovers and changes in control of our companythe Company or changes in our management.
Though we have opted out of the Delaware anti-takeover statute, our second amended and restated certificate of incorporation contains provisions that are similar to the Delaware anti-takeover statute, which may impair a takeover attempt that our stockholders may find beneficial. Any provision of our second amended and restated certificate of incorporation or amended and restated bylaws that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We do not expect to pay dividends on our common stock. Any future dividend payments are within the discretion of our board of directors or a duly authorized committee of the board of directors and will depend on, among other things, our results of operations, working capital requirements, capital expenditure requirements, financial condition, level of indebtedness, contractual restrictions with respect to payment of dividends, business opportunities, anticipated cash needs, provisions of applicable law and other factors that our board of directors may deem relevant. In particular, our credit facility limits our ability to pay dividends from cash generated from operations. We may not generate sufficient cash from operations in the future to pay dividends on our common stock. See Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Dividend Policy."
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters and principal executive offices are located at 100 Thermon Drive,7171 Southwest Parkway, Building 300, Austin, Texas.
Our principal manufacturing and warehousing operations are located at our San Marcos, Texas facilities. We own our principal manufacturing and warehousing facilities, and lease one ancillary manufacturing facility in San Marcos, Texas. . A summaryAll of our physical properties as of March 31, 2018 followsreportable segments utilize our San Marcos, Texas facilities. In addition, we have offices and/or manufacturing locations in Canada, the table below. We believe that our facilities are suitable for their purposeNetherlands, France, United Kingdom, Germany, Russia, Mexico, China, Korea, Japan, India, Australia, Malaysia, and adequate to meet our business operations requirements. We have manufacturing facilities in the United States, Canada, Europe and India. MostBahrain. All of 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.
|
| | | | | | |
Location | | Country | | Function | | Owned/Leased |
Corporate Headquarters
San Marcos ,TX
| | United States | | Manufacturing, fabrication, sales, engineering, marketing, research and development, warehouse and corporate headquarters | | Owned |
Houston, TX | | United States | | Fabrication, engineering and sales | | Leased |
Baton Rouge, LA | | United States | | Sales, engineering and warehouse | | Owned |
Port Neches, TX | | United States | | Sales and warehouse | | Leased |
|
| | | | | | |
Houston, TX | | United States | | Manufacturing, fabrication, sales and warehouse | | Leased |
Denver, CO | | United States | | Manufacturing, fabrication, sales and warehouse | | Owned |
Edmonton, AB | | Canada | | Manufacturing, fabrication, sales and warehouse | | Owned |
Oakville, ON | | Canada | | Manufacturing, fabrication, sales, engineering and warehouse | | Owned |
Orillia, ON | | Canada | | Manufacturing, fabrication, sales and warehouse | | Owned |
Office: Calgary, AB | | Canada | | Fabrication, sales, engineering and warehouse | | Leased |
MI Plant: Calgary, AB | | Canada | | Manufacturing, fabrication and warehouse | | Leased |
Edmonton, AB | | Canada | | Sales and warehouse | | Leased |
Fort McMurray, AB | | Canada | | Fabrication, sales and warehouse | | Leased |
Office: Calgary, AB | | Canada | | Fabrication, sales, engineering and warehouse | | Leased |
Mexico City | | Mexico | | Sales and engineering | | Leased |
Rio de Janeiro | | Brazil | | Sales, engineering and warehouse | | Leased |
Pijnacker | | Netherlands | | Manufacturing, fabrication, sales, engineering, warehouse, marketing and European headquarters | | Owned |
Pijnacker | | Netherlands | | Warehouse | | Leased |
Moscow | | Russia | | Sales and engineering | | Leased |
Moscow | | Russia | | Manufacturing, fabrication and warehouse | | Leased |
Paris | | France | | Sales and engineering | | Leased |
Gateshead, Tyne & Wear | | United Kingdom | | Sales, engineering and warehouse | | Leased |
Bergisch Gladbach | | Germany | | Sales and engineering | | Leased |
Cape Town | | South Africa | | Sales, engineering, fabrication and warehouse | | Leased |
Johannesburg | | South Africa | | Sales and warehouse | | Leased |
Manama | | Bahrain | | Sales and engineering | | Leased |
Shanghai | | China | | Sales and engineering | | Leased |
Shanghai | | China | | Warehouse | | Leased |
Shanghai | | China | | Warehouse | | Leased |
Beijing | | China | | Sales and engineering | | Leased |
Mumbai | | India | | Sales and engineering | | Leased |
Koregon Bhima, Pune | | India | | Manufacturing, fabrication and warehouse | | Owned |
Noida | | India | | Engineering | | Leased |
Caringbah, New South Wales | | Australia | | Sales | | Leased |
Bayswater, Victoria | | Australia | | Fabrication, sales, engineering and warehouse | | Owned |
Kuala Lumpur | | Malaysia | | Sales and engineering | | Leased |
Singapore
| | Singapore
| | Sales | | Leased |
Yokohama | | Japan | | Sales and engineering | | Leased |
Seoul | | South Korea | | Sales and engineering | | Leased |
Seoul | | South Korea | | Warehouse | | Leased |
ITEM 3. LEGAL PROCEEDINGS
For information on legal proceedings, see Note 13,15, "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." The following table sets forth for each period indicated the reported high and low sales prices for the common stock of the Company on the NYSE.
|
| | | | | | | | | | | | |
| | | | Thermon Common Stock |
| | | | High | | Low | | Dividends Paid |
| For the quarterly period ended: | | | | | | |
| | June 30, 2016 | | $ | 21.87 |
| | $ | 16.87 |
| | — |
|
| | September 30, 2016 | | $ | 21.11 |
| | $ | 16.66 |
| | — |
|
| | December 31, 2016 | | $ | 21.20 |
| | $ | 16.50 |
| | — |
|
| | March 31, 2017 | | $ | 21.48 |
| | $ | 18.33 |
| | — |
|
| For the quarterly period ended: | | | | | | |
| | June 30, 2017 | | $ | 21.39 |
| | $ | 17.60 |
| | — |
|
| | September 30, 2017 | | $ | 19.61 |
| | $ | 15.74 |
| | — |
|
| | December 31, 2017 | | $ | 26.50 |
| | $ | 17.89 |
| | — |
|
| | March 31, 2018 | | $ | 24.93 |
| | $ | 21.24 |
| | — |
|
| For the quarterly period ended: | | | | | | |
| | June 30, 2018 (Through May 29, 2018) | | $ | 24.83 |
| | $ | 21.74 |
| | — |
|
On May 29, 2018,26, 2021, the closing sale price of our common stock, as reported by the NYSE, was $23.12.$19.52. As of May 29, 2018,26, 2021, there were approximately 1514 holders of our common stock of record.
Stock Performance
The following line graph and table present a comparison of cumulative total returns for our common stock on an annual basis over the last five fiscal years as compared to (i) the Russell 2000 Index, (ii) the Russell 3000 Index (iii) the Russell 2000 Global Index, (iv) a peer group selected by the Company and (v)(ii) the S&P SmallCap 600 - Capped Energy Index, in each case over the same period. Our peer group was selected in good faith and is comprised of manufacturing companies who compete in similar industries and possess similar sales and market capitalizations. The returns of each company in the peer group have been weighted according to market capitalization. The plotted points in the line graph are based on the closing price on the last trading date of the fiscal year. The values assume an initial investment of $100 was made in our common stock and the respective indexes on March 31, 20132016 (the last day of fiscal 2013)2016), and assumes the reinvestment of dividends.dividends, as applicable. The stock price performance shown below is not necessarily indicative of future price performance.
Pursuant to SEC rules, our stock performance line graph and table must include both a broad market equity index and a published industry or line-of-business index (or a self-constructed peer index) in addition to our common stock. The rules also require that if a registrant selects a different index from an index used in the immediately preceding fiscal year, the registrant must (i) explain the reason for the change and (ii) compare the registrant’s total return to that of both the newly selected index and the index used in the immediately preceding fiscal year. With respect to the broad market equity index, we have used and will continue to the Russell 2000 Index; however, we will no longer include the Russell 3000 Index and Russell 2000 Global Index. The reason we are making the change is that we are one of the companies that comprises the Russell 2000 Index, and the Russell 2000 Index generally includes companies with more comparable market capitalization to us (compared to the Russell 3000 Index and the Russell 2000 Global Index). Additionally, going forward we will also use the S&P SmallCap 600 - Capped Energy Index as we believe it is more reflective of the cyclical nature of the markets we serve while also used to measure performance for executive compensation purposes. Pursuant to SEC rules, for this stock performance line graph and table we have included a comparison of our cumulative total return to both the selected indices ((i) the Russell 2000 Index, (ii) a peer group selected by the Company and (iii) the S&P SmallCap 600 - Capped Energy Index) and the discontinued indices ((i) the Russell 3000 Index and (ii) the Russell 200 Global Index).
| | | | | | | | | | | | | | | | | | | | |
| March 31, 2016 | March 31, 2017 | March 31, 2018 | March 31, 2019 | March 31, 2020 | March 31, 2021 |
| Thermon Group Holdings, Inc. | $ | 100.00 | | $ | 118.68 | | $ | 127.62 | | $ | 139.58 | | $ | 85.82 | | $ | 110.99 | |
| iShares Russell 2000 Index | $ | 100.00 | | $ | 126.42 | | $ | 141.36 | | $ | 144.33 | | $ | 109.88 | | $ | 214.06 | |
| | | | | | |
| | | | | | |
| S&P 600 SmallCap 600 Energy | $ | 100.00 | | $ | 123.54 | | $ | 94.80 | | $ | 73.68 | | $ | 14.93 | | $ | 43.55 | |
|
| | | | | | | | | | | | | | | | | | |
| | March 31, 2013 | March 31, 2014 | March 31, 2015 | March 31, 2016 | March 31, 2017 | March 31, 2018 |
| Thermon Group Holdings, Inc. | $ | 100.00 |
| $ | 104.37 |
| $ | 108.37 |
| $ | 79.06 |
| $ | 93.83 |
| $ | 100.90 |
|
| iShares Russell 3000 Index | $ | 100.00 |
| $ | 124.51 |
| $ | 139.28 |
| $ | 138.45 |
| $ | 162.64 |
| $ | 184.31 |
|
| iShares Russell 2000 Index | $ | 100.00 |
| $ | 124.92 |
| $ | 135.13 |
| $ | 121.88 |
| $ | 123.80 |
| $ | 171.80 |
|
| Russell Global Index | $ | 100.00 |
| $ | 115.69 |
| $ | 117.34 |
| $ | 95.98 |
| $ | 109.37 |
| $ | 123.32 |
|
| Peer Group (a) | $ | 100.00 |
| $ | 109.66 |
| $ | 96.19 |
| $ | 107.74 |
| $ | 152.78 |
| $ | 149.77 |
|
| S&P 600 Small Cap 600 Energy | $ | 100.00 |
| $ | 131.44 |
| $ | 72.18 |
| $ | 38.04 |
| $ | 46.99 |
| $ | 36.06 |
|
(a) Our peer group is comprised of the following publicly traded companies, which we selected in good faith on the basis of being manufacturing companies that compete in similar industries and have comparable sales and market capitalizations as Thermon: Ampco-Pittsburgh Corp. (AP), AAON Inc. (AAON), Flotek Industries Inc. (FTK), Gorman-Rupp Co. (GRC), Advanced Energy Industries Inc. (AEIS), Allied Motion Technologies, Inc. (AMOT), ESCO Technologies Inc. (ESE), Aspen Aerogels, Inc. (ASPN), Badger Meter, Inc. (BMI), DMC Global, Inc. (BOOM), Brooks Automation, Inc. (BRKS), Cohu, Inc. (COHU), Hurco Companies, Inc. (HURC), Lydall, Inc. (LDL), MFRI, Inc. (MFRI), and Powell Industries Inc. (POWL).
The information in this "Stock Performance" section shall not be deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act.
Dividend Policy
Since the completion of the CHS Transactions on April 30, 2010, we have not declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our common stock. We currently intend to retain earnings to finance the growth and development of our business and for working capital and general corporate purposes. 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 14,16, "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
The following table sets forth certain selectedDiscussion was omitted pursuant to SEC Release 33-10890. Please refer to past filings on our website or sec.gov for relevant historical consolidated financial and operating data as of and for the fiscal years ended March 31, 2018 ("fiscal 2018"), March 31, 2017 ("fiscal 2017"), March 31, 2016 ("fiscal 2016"), March 31, 2015 ("fiscal 2015") and March 31, 2014 ("fiscal 2014"). The data set forth below should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is contained elsewhere in this annual report, and our consolidated financial statements and the notes thereto as of March 31, 2018 and 2017 and for fiscal 2018, fiscal 2017 and fiscal 2016, which are contained in Item 8 elsewhere in this annual report.information.
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended March 31, |
| | | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | | (dollars in thousands, except per share data) |
| Consolidated Statements of Operations Data: | | | | | | | | | | |
| Sales | | $ | 308,609 |
| | $ | 264,130 |
| | $ | 281,928 |
| | $ | 308,578 |
| | $ | 277,323 |
|
| Cost of sales | | 164,798 |
| | 152,199 |
| | 150,613 |
| | 153,874 |
| | 142,153 |
|
| Gross profit | | $ | 143,811 |
| | $ | 111,931 |
| | $ | 131,315 |
| | $ | 154,704 |
| | $ | 135,170 |
|
| Operating expenses: | | | | | | | | | | |
| | Marketing, general and administrative and engineering | | 94,615 |
| | 77,715 |
| | 80,729 |
| | 76,868 |
| | 65,463 |
|
| | Amortization of intangible assets | | 16,458 |
| | 11,772 |
| | 12,112 |
| | 10,775 |
| | 11,090 |
|
| | Impairment of intangible assets and goodwill (1) | | — |
|
| — |
|
| 1,713 |
| | — |
| | — |
|
| Income from operations | | $ | 32,738 |
| | $ | 22,444 |
| | $ | 36,761 |
| | $ | 67,061 |
| | $ | 58,617 |
|
| Interest income | | 606 |
| | 566 |
| | 423 |
| | 460 |
| | 246 |
|
| Interest expense (2) | | (9,360 | ) | | (3,518 | ) | | (4,142 | ) | | (4,565 | ) | | (10,019 | ) |
| Loss on retirement of debt | | — |
| | — |
| | — |
| | — |
| | (15,485 | ) |
| Other expense (3) | | (5,595 | ) | | (410 | ) | | (676 | ) | | (394 | ) | | (596 | ) |
| Income from continuing operations before provision for income taxes | | $ | 18,389 |
| | $ | 19,082 |
| | $ | 32,366 |
| | $ | 62,562 |
| | $ | 32,763 |
|
| Income tax expense | | 5,170 |
| | 4,098 |
| | 8,716 |
| | 13,176 |
| | 6,964 |
|
| Net income | | $ | 13,219 |
| | $ | 14,984 |
| | $ | 23,650 |
| | $ | 49,386 |
| | $ | 25,799 |
|
| Income attributable to non-controlling interests | | 1,306 |
| | 343 |
| | 641 |
| | — |
| | — |
|
| Net income available to Thermon Group Holdings, Inc. | | $ | 11,913 |
| | $ | 14,641 |
| | $ | 23,009 |
| | $ | 49,386 |
| | $ | 25,799 |
|
| Net income per common share: | | | | | | | | | | |
| | Basic | | 0.37 |
| | $ | 0.45 |
| | $ | 0.72 |
| | $ | 1.54 |
| | $ | 0.82 |
|
| | Diluted | | 0.36 |
| | 0.45 |
| | 0.71 |
| | 1.52 |
| | 0.80 |
|
| Weighted-average shares used in | | | | | | | | | | |
| | computing net income per | | | | | | | | | | |
| | common share (thousands) | | | | | | | | | | |
| | Basic | | 32,424 |
| | 32,302 |
| | 32,177 |
| | 32,027 |
| | 31,595 |
|
| | Diluted | | 32,797 |
| | 32,633 |
| | 32,593 |
| | 32,407 |
| | 32,154 |
|
| | | | | | | | | | | | |
| Cash dividends per share | | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | |
| Other Financial and Operating Data: | | | | | | | | | | |
| | Capital expenditures | | 9,072 |
| | 8,370 |
| | 12,581 |
| | 6,075 |
| | 3,367 |
|
| | Backlog at end of period (4) | | 159,624 |
| | 106,880 |
| | 81,242 |
| | 75,745 |
| | 84,840 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | At March 31, |
| | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | (dollars in thousands) |
| Balance Sheet Data: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 33,879 |
| | $ | 42,842 |
| | $ | 84,570 |
| | $ | 93,774 |
| | $ | 72,640 |
|
| Accounts receivable, net | | 94,411 |
| | 63,719 |
| | 57,432 |
| | 60,441 |
| | 52,578 |
|
| Inventory, net | | 63,829 |
| | 34,020 |
| | 40,645 |
| | 41,008 |
| | 37,316 |
|
| Total assets | | 662,477 |
| | 454,080 |
| | 468,677 |
| | 449,757 |
| | 442,180 |
|
| Total debt, principal amount | | 225,000 |
| | 81,000 |
| | 94,500 |
| | 108,000 |
| | 121,500 |
|
| Deferred debt issuance costs | | 7,967 |
| | 524 |
| | 888 |
| | 1,217 |
| | 1,351 |
|
| Total debt, net of deferred debt issuance costs | | 217,033 |
| | 80,476 |
| | 93,612 |
| | 106,783 |
| | 120,149 |
|
| Total equity | | 340,853 |
| | 312,502 |
| | 298,701 |
| | 271,766 |
| | 250,466 |
|
| |
(1) | During fiscal 2016, the European segment's financial results were negatively impacted by a $1.7 million impairment charge to Unitemp's goodwill and other intangible assets. |
| |
(2) | Interest expense in fiscal 2018 includes a $0.4 million acceleration of amortization of unamortized deferred debt costs related to the retirement of the term loan A and a $0.9 million acceleration of amortization of deferred debt charges in connection with the unscheduled repayment of $25.0 million on the term loan B. Interest expense for fiscal 2016 included a $0.3 million acceleration of amortization of our deferred debt issuance costs in connection with the second amendment to our prior credit agreement and $0.4 million of additional amortized deferred debt issuance costs. Interest expense for fiscal 2014 included a $4.0 million acceleration of amortization on our deferred debt issuance costs related to the redemption of all $118.1 million of aggregate principal amount of our 9.5% senior secured notes and an additional $0.6 million of amortized deferred debt issuance costs. |
| |
(3) | Other expense in fiscal 2018 includes a foreign currency transaction loss of $3.3 million in connection with the option contract entered into to secure the CCI acquisition purchase price, and a $2.3 million loss related to a derivative contract to hedge a $112.8 million long-term intercompany loan between Canada and the United States for the CCI acquisition. |
| |
(4) | Represents the future revenue attributable to signed, but unperformed, purchase orders that set forth specific revenue amounts at the end of the applicable period. |
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".Statements."
Overview
We are one of the largest providers of highly engineered industrial process heating solutions for process industries. For over 60 years, we have served a diverse base of thousands of customers around the world in attractive and growing markets, including oil & gas, chemical processing and power generation. We are a global leader and one of the few thermal solutions providers with a global footprint. We offer a full suite of products (heating units, heating cables, tubing bundles and control systems) and services (design optimization, engineering, installation and maintenance services) required to deliver comprehensive solutions to complex projects. We serve our customers through a global network of sales and service professionals and distributors in more than 30 countries and through our ten manufacturing facilities on three continents. These global capabilities and longstanding relationships with some of the largest multinational oil & gas, chemical processing, power
and EPC companies in the world have enabled us to diversify our revenue streams and opportunistically access high growth markets worldwide. For fiscal 2018, approximately 63%complete overview 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 servicesbusiness, please refer to our core thermal solution offerings. We actively pursue both organic and inorganic growth initiatives that serve to advance our corporate strategy.Item 1. "Business" disclosed within this document.
Revenue. Our revenues are derived from providing customers with a full suite of innovative and reliable process heating solutions, including electric and steam heat tracing, tubing bundles, control systems, design optimization, engineering services, installation services, and portable power solutions.solutions and software. Additionally, THS offers a complementary suite of advanced heating and filtration solutions for industrial and hazardous area applications. Historically, our sales are primarily to industrial customers for petroleum and chemical plants, oil and gas production facilities and power generation facilities. 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 successful 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, 20182021 was $159.6$114.2 million inclusive of $31.7 million for THS, as compared to $106.9$105.4 million at March 31, 2017.2020. The timing of recognition of revenue out of backlog is not always certain, as it is subject to a variety of factors that may cause delays, many of which are beyond our control (such as, customers' delivery schedules and levels of capital and maintenance expenditures). When delays occur, the recognition of revenue associated with the delayed project is likewise deferred.
Cost of sales. Our cost of sales includes primarily the cost of raw material items used in the manufacture of our products, cost of ancillary products that are sourced from external suppliers and construction labor cost. Additional costs of revenue include contract engineering cost directly associated to projects, direct labor cost, shipping and handling costs, and other costs associated with our manufacturing/fabrication operations. The other costs associated with our manufacturing/fabrication operations are primarily indirect production costs, including depreciation, indirect labor costs, and the costs of
manufacturing support functions such as logistics and quality assurance. Key raw material costs include polymers, copper, stainless steel, insulating material, and other miscellaneous parts related to products manufactured or assembled as part of our heat tracing solutions. Historically, our primary raw materials have been readily available from multiple suppliers and raw material costs have been stable, and we have been generally successful with passing along raw material cost increases to our customers. Therefore, increases in the cost of key raw materials of our products have not generally affected our gross margins. We cannot provide any assurance that we may be able to pass along such cost increases, including the potential impacts of tariffs, to our customers in the future, and if we are unable to do so, our results of operations may be adversely affected.
Operating expenses. Our marketing, general, and administrative, and engineering expenses are primarily comprised of compensation and related costs for sales, marketing, pre-sales engineering and administrative personnel, as well as other sales related expenses and other costs related to research and development, insurance, professional fees, the global integrated business information system, provisions for bad debts and warranty expense.
Key drivers affecting our results of operations. Our results of operations and financial condition are affected by numerous factors, including those described above under Item 1A, "Risk Factors" and elsewhere in this annual report and those described below:
Timing of Greenfield projects. Our results of operations in recent years have been impacted by the various construction phases of large Greenfield projects. On very large projects, we are typically designated as the heat tracing provider of choice by the project owner. We then engage with multiple contractors to address incorporating various heat tracing solutions throughout the overall project. Our largest Greenfield projects may generate revenue for several quarters.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. 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.(i.e., new facility construction projects generating in excess of $5 million in annual sales), historically have been a substantial source of revenue growth, and Greenfield revenues tend to be more cyclical than MRO/UE revenues. In recent years we have experienced particular cyclicality in capital spending for new facilities in Canada, Eastern Europe and the Middle East. Revenues derived from Europe, including the Middle East and Africa, accounted for 22%, 27% and 23% of our total revenue during fiscal 2018, fiscal 2017 and fiscal 2016, respectively, and revenue derived from the Canada segment accounted for 31%, 16% and 20% of our total revenue during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. In fiscal 2018, our Canadian operations experienced a revenue increase of 126.3% as compared to fiscal 2017 due to an increase in MRO/UE demand and the THS transaction. A sustained decrease in capital and maintenance spending or in new facility construction by our customers could have a material adverse effect on the demand for our products and services and our business, financial condition and results of operations.
Acquisition strategy. In recent years, we have begun executing on a strategy to grow the Company through the acquisition of businesses that are either in the heat tracing solutions industry or that provide complementary products and solutions for the markets and customers we serve. Since March 2015, we have completed four acquisitions: THS, Unitemp, SumacWe actively pursue both organic and IPI. See Note 3. "Acquisitions"inorganic growth initiatives that serve to advance our consolidated financial statements and accompanying notes thereto included below in Item 8. Financial Statements and Supplementary Data of this annual report for information on these acquisitions.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,* | Fiscal Year Ended March 31,* | Fiscal Year Ended March 31,* |
| | | 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
| Greenfield | | 37 | % | | 39 | % | | 34 | % | Greenfield | | 35 | % | | 40 | % | | 49 | % |
| MRO/UE | | 63 | % | | 61 | % | | 66 | % | MRO/UE | | 65 | % | | 60 | % | | 51 | % |
*THS has been excluded from the table above. Most of THS's revenue would be classified as MRO/UE under the current definitions.
We believe that our analysis of Greenfield and MRO/UE is an important measure to explain the trends in our business to investors. 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 2018,2021, MRO/UE sales comprised approximately 63%65% of our consolidated revenues (excluding THS).
Seasonality of MRO/UE revenues. Revenues realized from MRO/UE orders tend to be less cyclical than Greenfield projects and more consistent quarter over quarter, although MRO/UE revenues are impacted by seasonal factors. 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 from Greenfield projects are not seasonal and depend on the capital spending environment and project timing.
Recent Events-Acquisition of CCI Thermal Technologies Inc. On October 30, 2017, we, through a wholly-owned subsidiary, acquired 100%Developments - COVID-19 Pandemic. The recent COVID-19 pandemic and the measures being taken to address and limit the spread of the equity interestsvirus have adversely affected the economies and financial markets of CCI Thermal Technologies, Inc.many countries, resulting in an economic downturn that has negatively impacted, and certain related real estate assetsmay continue to negatively impact, global demand for $262.0our products and services. See part Item 1A, "Risk Factors" above, for further discussion. The Company has taken the following precautionary measures in light of current macroeconomic uncertainty resulting from the COVID-19 pandemic:
•Reduced discretionary spending across the organization by approximately $6.3 million CAD (approximately $204.2 million USD at the exchange rate as of October 30, 2017) in cash. Such subsidiary and CCI Thermal Technologies, Inc. amalgamated immediately after the closing of the acquisition to form THS, an indirect, wholly-owned subsidiary of the Company. THS is engaged in industrial process heating, focused on the development and production of advanced heating and filtration solutions for industrial and hazardous area applications and is headquartered in Edmonton, Alberta, Canada. THS markets its products through several diverse brands known for high quality, safety and reliability, and serves clients in the energy, petrochemical, electrical distribution, power, transitfiscal year ending March 31, 2021 by curtailing consulting fees and industrial end markets globally. The THS transaction was fundedtravel expenses and consolidating our global operating footprint;
•Decreased payroll expense, including temporarily decreasing salaries for certain officers and implementing a reduction in partforce initiative that reduced ongoing personnel cost by a new $250.0approximately $15.9 million senior secured term loan B facility that was consummatedin the fiscal year ending March 31, 2021;
•Reduced capital expenditures in the fiscal year ending March 31, 2021 to approximately $8.1 million, which includes approximately $1.0 million year over year increase in strategic spending on October 30, 2017.
Recent Developments-Canadian and United States operations. Goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential impairment exist. We perform a qualitative analysis to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If required, we also perform a quantitative analysis using the income approach, based on discounted future cash flows, which are derived from internal forecasts and economic expectations, and the market approach basedour Thermon Power Solutions (“TPS”) product line (based on market multiplesdemand), a reduction of guideline public companies. The most significant inputsapproximately $2.8 million as compared to fiscal 2020; and
•Reduced manufacturing expense across the organization by approximately $1.8 million in the Company's quantitative goodwill impairment tests are projected financial information, the weighted average cost of capital and market multiples for similar transactions. Our annual impairment test is performed during the fourth quarter offiscal year ending March 31, 2021 by consolidating our fiscal year. manufacturing footprint.
In prior years, we experienced sizable declines in revenue and operating results within our Canadian operations, and considered such to be an indication of potential goodwill and intangible asset impairment. These declines in operating results principally resulted from lower crude oil prices, which had a significant adverse impact on capital spending in Canada. During fiscal 2018, we have experienced increased revenue and operating results in Canada, and project continued growth. Accordingly, during the fourth quarter of fiscal 2018, we did not conclude a triggering event existed within our Canadian reporting unit requiring further analysis. We will continue to evaluate our Canadian operations and assess on a quarterly basis whether it is more likely than not that the fair value of the Canadian reporting unit is less than its carrying amount.
Similarly, based upon our qualitative analysis, we have not determined that it is more likely than not that the fair value of our U.S. reporting unit is less than its carrying amount; however, we have experienced losses in the U.S. during fiscal 2018. If changes in estimates and assumptions used to determine whether impairment exists, or if we experience future declines in actual and forecasted operating results and/or market conditions in the United States, we may be required to reevaluate the fair value of our United States reporting unit, which could ultimately result in an impairment to goodwill and/or indefinite-lived intangible assets in future periods.
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, | | Fiscal Year Ended March 31, |
| | | 2018 | | | | 2017 | | | | 2016 | | | | 2021 | | 2020 | | 2019 | |
| | | (dollars in thousands) | | (dollars in thousands) |
| Consolidated Statements of Operations Data: | Consolidated Statements of Operations Data: | | | | | | | | | | | | | Consolidated Statements of Operations Data: | |
| Sales | Sales | | $ | 308,609 |
| | 100 | % | | $ | 264,130 |
| | 100 | % | | $ | 281,928 |
| | 100 | % | Sales | | $ | 276,181 | | | 100 | % | | $ | 383,486 | | | 100 | % | | $ | 412,642 | | | 100 | % |
| Cost of sales | Cost of sales | | 164,798 |
| | 53 |
| | 152,199 |
| | 58 |
| | 150,613 |
| | 53 |
| Cost of sales | | 158,938 | | | 58 | | | 221,848 | | | 58 | | | 236,702 | | | 57 | |
| Gross profit | Gross profit | | $ | 143,811 |
| | 47 | % | | $ | 111,931 |
| | 42 | % | | $ | 131,315 |
| | 47 | % | Gross profit | | $ | 117,243 | | | 42 | % | | $ | 161,638 | | | 42 | % | | $ | 175,940 | | | 43 | % |
| Operating Expenses: | Operating Expenses: | | | | | | | | | | | | | Operating Expenses: | |
| | Marketing, general, and administrative and engineering | | 91,096 |
| | 30 | % | | 74,313 |
| | 28 | % | | 71,274 |
| | 25 | % | | Marketing, general, administrative, and engineering | | 91,398 | | | 33 | | | 111,202 | | | 29 | | | 106,660 | | | 26 | |
| | Acquisition related contingent consideration accounted for as compensation (1) | | — |
| | — |
| | — |
| | — |
| | 5,706 |
| | 2 |
| |
| | Stock compensation expense | | 3,519 |
| | 1 |
| | 3,402 |
| | 1 |
| | 3,749 |
| | 1 |
| | Amortization of intangible assets | | 9,445 | | | 3 | | | 17,773 | | | 5 | | | 20,771 | | | 5 | |
| | Amortization of intangible assets | | 16,458 |
| | 5 |
| | 11,772 |
| | 4 |
| | 12,112 |
| | 4 |
| | Restructuring and other charges/(income) | | 8,623 | | | 3 | | | — | | | — | | | — | | | — | |
| Income from operations | | Income from operations | | $ | 7,777 | | | 3 | % | | $ | 32,663 | | | 9 | % | | $ | 48,509 | | | 12 | % |
| Interest income | | Interest income | | 76 | | | — | | | 252 | | | — | | | 238 | | | — | |
| Interest expense | | Interest expense | | (10,261) | | | (4) | | | (14,279) | | | (4) | | | (15,714) | | | (4) | |
| Other income/(expense) | | Other income/(expense) | | 2,135 | | | 1 | | | (1,558) | | | — | | | 109 | | | — | |
| | Impairment of intangible assets and goodwill (2) | | — |
| | — |
| | — |
| | — |
| | 1,713 |
| | 1 |
| | Income/(expense) before provision for income taxes | | $ | (273) | | | — | % | | $ | 17,078 | | | 4 | % | | $ | 33,142 | | | 8 | % |
| Income from operations | | $ | 32,738 |
| | 11 | % | | $ | 22,444 |
| | 8 | % | | $ | 36,761 |
| | 13 | % | |
| Interest expense, net (3) | | (8,754 | ) | | (3 | ) | | (2,952 | ) | | (1 | ) | | (3,719 | ) | | (1 | ) | |
| Other expense (4) | | (5,595 | ) | | (2 | ) | | (410 | ) | | — |
| | (676 | ) | | — |
| |
| | Income before provision for income taxes | | $ | 18,389 |
| | 6 | % | | $ | 19,082 |
| | 7 | % | | $ | 32,366 |
| | 11 | % | |
| Income tax expense | | 5,170 |
| | 2 |
| | 4,098 |
| | 2 |
| | 8,716 |
| | 3 |
| |
| Net income | | $ | 13,219 |
| | 4 | % | | $ | 14,984 |
| | 6 | % | | $ | 23,650 |
| | 8 | % | |
| Income attributable to non-controlling interest (5) | | 1,306 |
| | — | % | | 343 |
| | — | % | | 641 |
| | — | % | |
| Net income available to Thermon Group Holdings, Inc. | | $ | 11,913 |
| | 4 | % | | $ | 14,641 |
| | 6 | % | | $ | 23,009 |
| | 8 | % | |
| Income tax expense/(benefit) | | Income tax expense/(benefit) | | (1,438) | | | (1) | | | 5,142 | | | 1 | | | 9,973 | | | 2 | |
| Net income/(loss) | | Net income/(loss) | | $ | 1,165 | | | — | % | | $ | 11,936 | | | 3 | % | | $ | 23,169 | | | 6 | % |
Income/(loss) attributable to non-controlling interest(1) | | Income/(loss) attributable to non-controlling interest(1) | | — | | | — | | | (2) | | | — | | | 413 | | — | |
| Net income/(loss) available to Thermon Group Holdings, Inc. | | Net income/(loss) available to Thermon Group Holdings, Inc. | | $ | 1,165 | | | — | % | | $ | 11,938 | | | 3 | % | | $ | 22,756 | | | 6 | % |
| |
(1) | As part of the Sumac transaction, we issued the sellers a $5.9 million non-interest bearing note ("performance note") that matured on April 1, 2016, with the actual amount payable at maturity ranging from zero up to a maximum of $7.5 million CAD subject to the achievement of certain performance metrics during the twelve month period ended April 1, 2016. The terms of the performance-based note assume the continued employment of Sumac's principals and, as a result, the performance note payment is accounted for as compensation expense. The performance note was settled during the first quarter of fiscal 2017 for $5.8 million. |
| |
(2) | During fiscal 2016, the European segment's financial results were negatively impacted by a $1.7 million impairment charge to Unitemp's goodwill and other intangible assets. |
| |
(3) | Interest expense in fiscal 2018 includes a $0.4 million acceleration of amortization of unamortized deferred debt costs related to the retirement of the term loan A and a $0.9 million acceleration of amortization of deferred debt charges in connection with the unscheduled repayment of $25.0 million on the term loan B. Interest expense for fiscal 2016 included a $0.3 million acceleration of amortization of our deferred debt issuance costs in connection with the second amendment to our prior credit agreement and, during the same period, we incurred an additional $0.4 million in amortized debt issuance costs. Further reductions in our fiscal 2017 and fiscal 2016 interest expense were due to the difference in interest rates on our term loan that carried an interest rate that ranged from 2.87% to 3.62% after giving effect to our interest rate swaps and the interest rate reductions realized from the first and second amendments to our prior credit agreement. |
| |
(4) | Other expense in fiscal 2018 includes a foreign currency transaction loss of $3.3 million in connection with the option contract entered into to secure the CCI acquisition purchase price, and a $2.3 million loss related to a derivative contract to hedge a $112.8 million long-term intercompany loan between Canada and the United States related to the CCI acquisition. |
(1) Represents income attributable to the non-controlling equity interest in the Thermon Power Solutions ("TPS") business that was retained by sellers in the TPS transaction. Between July 20, 2018 and August 1, 2019, income attributable to non-controlling equity interest represented 12.5%. Subsequent to August 1, 2019, income attributable to non-controlling equity interest represents 0%. See Note 12. "Related Party Transactions" to our consolidated financial statements included in Item 8 of this annual report for further discussion.
| |
(5) | Represents a 25% equity interest in Sumac retained by former sellers. See Note 19. "Subsequent Events" to our consolidated financial statements included in Item 8 of this annual report for further discussion in connection with decrease in retained Sumac equity interest subsequent to March 31, 2018. |
Year Ended March 31, 20182021 ("Fiscal 2018"fiscal 2021") Compared to the Year Ended March 31, 20172020 ("Fiscal 2017"fiscal 2020")
Revenue. Revenue for fiscal 2018 were $308.62021 was $276.2 million, compared to $264.1$383.5 million for fiscal 2017, an increase2020, a decrease of $44.5$107.3 million, or 17%28%. The increase in revenue is mostly due to the THS transaction, which contributed $41.0 million of additional revenue for fiscal 2018. Our sales mix (excluding THS) in fiscal 20182021 was 37%35% Greenfield and 63%65% MRO/UE, as compared to 39%40% Greenfield and 61%60% MRO/UE in fiscal 2017.2020. Greenfield revenue is historically at or near 40% of our total revenue. Although our order rates were higher in
In fiscal 2018 and backlog grew, fiscal 2018 revenue (excluding THS) was relatively flat due to customer delays on Greenfield projects.
Fiscal 2018 revenue declined in all geographic regions with the exception of Canada which increased by $52.7 million or 126%2021 as compared to fiscal 2017. Within2020, US-LAM reportable segment revenue decreased $60.0 million or 38.6%, Canada revenue decreased $37.5 million or 29.2%, APAC revenue decreased $10.2 million or 22.2%, and EMEA revenue increased $0.5 million or 0.9%. The decreases in our US-LAM, Canada, segment, we saw increasedand APAC segments were primarily related to a decline in demand for our products and services in both Greenfield and MRO/UE and improvementbusiness activity as a result of the COVID-19 driven economic downturn. Decreases in EMEA's segment revenue related to the overall market conditionsCOVID-19 driven economic downturn were more than offset by an increase in over time, project-related revenue within the Canadian region. Fiscal 2018 revenue in the United States declined $5.2 million or 4%. United States revenue continues to be impacted by Greenfield project timing and delays. The United States decline was partially offset by our acquisition of THS, which contributed $4.7 million of the overall United States revenue. Fiscal 2018 revenue in Europe declined by $2.8 million or 4%. Our Asia segment revenue declined by $0.2 million or 1% in fiscal 2018 as compared to fiscal 2017. Revenue reductions in Asia and Europe were mostly attributable to project delays by our customers.
Gross profit and margin. Gross profit totaled $143.8$117.2 million in fiscal 2018,2021, compared to $111.9$161.6 million in fiscal 2017, an increase2020, a decrease of $31.9$44.4 million, or 28%27%. Gross margins were 42.5% and 42.1% in fiscal 2021 and fiscal 2020, respectively. The increase inlower gross profit in fiscal 2021 is primarily attributable to lower overall sales in connection with the depressed market conditions due to the increase in revenue and an increase in ourCOVID-19. Although lower sales produced a lower gross margin percentage. Gross margins increased from 42%profit in fiscal 2017 to 47% in fiscal 2018. Our fiscal 2018 gross margins were within2021, our expected gross margin historical range of 45%-50%, whereas our fiscal 2017 gross margins were below this range. Our fiscal 2017 gross margins were negatively impacted by an unfavorable product mix with a higher concentration of Greenfield revenue. Our gross margin percentage in fiscal 2018 has been positively impacted by better sales mix within our MRO/UE sales as well as better pricing and project execution within our Greenfield sales. Our MRO sales include the greatest concentration of sales of our higher margin heat tracing cable. Greenfield revenue generally has lower gross margins than our MRO revenueincreased due to a highergreater mix of third-party manufactured productsMRO/UE business relative to Greenfield plus overall cost reduction efforts described above and installation labor related costs. Based on our existing definition of Greenfield and MRO/UE, substantially all of THS salesoperational efficiencies in fiscal 2018 would be classified as MRO/UE. 2021. Additionally, the Canadian Emergency Wage Subsidy, through which we received subsidies with respect to our Canadian manufacturing operations, positively impacted our margins by $4.7 million in fiscal 2021. Please see Note 1, “Basis of Presentation and Accounting Policy Information” in our financial statements for more information on the Canadian Emergency Wage Subsidy.
Marketing, general, and administrative, and engineering. Marketing, general, and administrative and engineering costs were $91.1$91.4 million in fiscal 2018,2021, compared to $74.3$111.2 million in fiscal 2017, an increase2020, a decrease of $16.8$19.8 million, or 23%17.8%. As a percentage
of total revenue, marketing, general, and administrative, and engineering costs were 29.5%33.1% and 28.1%29.0% in fiscal 20182021 and fiscal 2017,2020, respectively. The increasedecrease in fiscal 20182021 marketing, general, and administrative, and engineering costs is primarily attributable to intentional decreases in response to the THS transaction.COVID-19 pandemic. Specifically, we undertook a reduction in force initiative to reduce costs throughout fiscal 2021. At this time, we believe we are substantially complete with the reduction in force cost measures. In fiscal 2018, the five months of operations of THS contributed $7.4 million of marketing,addition, our Marketing, general, and administrative and engineering expense, andcosts were positively impacted by the Canadian Emergency Wage Subsidy in the amount of $2.2 million, through which we incurred increases in legal, audit and professional fees of $4.1received government subsidies with respect to our Canadian manufacturing operations. These favorable costs reductions were partly offset by $0.7 million related to the THS transaction. Depreciation increased $1.5 milliona specific customer past due account and an increase in compensation costs associated with the addition of our upgraded enterprise resource planning (ERP) systems that was placed in service as well as additional capital investment for our Sumac business unit. Additionally, our accrual for annual incentive was $4.3 million higher in fiscal 2018 than fiscal 2017. These increases wereCompany’s non-qualified deferred compensation plan. To note, these specific compensation plan costs are fully offset in part by a $1.5other income/(expense) where the Company experienced market gains of $1.6 million decrease in salaries and benefits in fiscal 2018 as compared to fiscal 2017 due to reductions in staffing primarily inon the United States.related investment assets.
Stock compensation expense. Stock compensation expense increased $0.1 million in fiscal 2018 over fiscal 2017.
Amortization of intangible assets. Amortization of intangible assets was $16.5$9.4 million in fiscal 20182021 and $11.8$17.8 million in fiscal 2017.2020. The increasedecrease in amortization expense is attributable to the acquiredcertain intangible assets of THS, which accounted for $4.4that became fully amortized during fiscal 2020.
Restructuring and other charges/(income). Restructuring and other charges/(income) was $8.6 million in amortizationfiscal 2021. Refer to Note 14. "Restructuring and other charges/(income)" for further discussion. These charges were not present in the prior fiscal 2018.year.
Interest expense, net. Interest expense, net totaled $8.8$10.2 million in fiscal 2018,2021, compared to $3.0$14.0 million in fiscal 2017, an increase2020, a decrease of $5.8$3.8 million. InterestThe decrease in interest expense on outstanding principal of long-term debt increased $3.8 million in fiscal 2018 as compared to fiscal 2017is due to our new $250.0 million senior securedsubstantial principal prepayments during fiscal 2021 on both the revolving credit facility and the term loan B credit facility incurred to finance in part the THS acquisition (see Note 10,11, "Long-Term Debt",Debt," to our consolidated financial statements included below in Item 8 of this annual report for additional information on our long-term debt)further discussion). Our interest expense includes the amortizationWe paid a total of debt issuance costs in fiscal 2018. We expensed $0.4$25 million of unamortized debt issuance costs on the retirementprincipal above and in advance of our former credit facility indebtedness. In addition, we incurred an additional $0.9 million of accelerated amortization in fiscal 2018 related to an unscheduled $25.0 million principal prepayment on the senior secured term loan B credit facility. At March 31, 2018, we had $225.0 million principal outstanding with variable rate interest of approximately 6%.contractual obligation.
Other expense. income/(expense). Other expenseincome was $5.6$2.1 million in fiscal 2018,2021, compared to $0.4other expense of $1.6 million in fiscal 2017, an increase2020, a comparative decrease of $5.2expense of $3.7 million. During fiscal 2018, we recorded approximately $5.6 million ofThe decrease in other expense primarily relates to transactional foreign exchange lossesgains as well as market-related gains on underlying investments associated with our deferred compensation plan for certain high-level employees. The gains were partially offset by related to the THS acquisition, compared to $0.4 million of foreign currency transaction lossescompensation expense, included in fiscal 2017. The one-time foreign currency related losses include $3.3 million on a $200.0 million CAD option contract to hedge part of the THS acquisition purchase priceMarketing, general, administrative and $2.3 million related to a derivative contract to hedge a $112.8 million long term intercompany loan between Canada and the United States for the THS acquisition (see Note 2, "Fair Value Measurements", for additional information on the Acquisition Foreign Exchange Option and the Cross Currency Swap).engineering costs as discussed above.
In fiscal 2017, we recognized a gain of $0.2 million from sales of land and buildings which we were not utilizing.
Income taxes. Income tax expense(benefit) was $5.2$(1.4) million in fiscal 2018,2021, on pre-tax net incomeloss of $18.4$(0.3) million compared to income tax expense of $4.1$5.1 million in fiscal 20172020 on pre-tax net income of $19.1$17.1 million, an increasea decrease of $1.1$6.5 million. Our effectiveThe income tax rates were 28.1%(benefit) in fiscal 2018the current period was primarily due to a pre-tax loss and 21.5% in fiscal 2017. Our tax expense included discrete tax expense totaling $0.5 million in fiscal 2018 and a tax benefit of $0.6 fiscal 2017, respectively. Excluding these discrete events, our effective tax rate would have been 25.6% and 24.4% in fiscal 2018 and fiscal 2017, respectively.
On December 22, 2017, the United States enacted significant changes toimpact from the U.S. (global intangible low-taxed income) or "GILTI Tax". During fiscal 2021, tax law following the passage and signingchanges provided a $1.9 million recovery of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “Thepreviously incurred GILTI Tax Cuts and Jobs Act”). The Tax Act included significant changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income (“Transition Tax”), deductions, credits and business-related exclusions. We estimate that $5.7 million is payable to the United States Treasury in transition taxes over the next eight years. After accounting for the reduction of certain non-cash tax liabilities, the net impactexpense.
See Note 18, “Income Taxes,” to our tax provision for the effects of the Tax Act was $0.8 million expense for fiscal 2018. See Note 16, "Income Taxes," to ouraudited consolidated financial statements included elsewhere in this annual report, for further detail on income taxes.
We are in the process of evaluating the impact of the Tax Act to our expected tax rate in fiscal 2019. While the statutory U.S. corporate tax rate has decreased, we have also increased our interest expense in the United States in connection with the THS transaction, which reduces taxable income. As a result, we currently expect our fiscal 2019 effective tax rate to be similar to our fiscal 2018 rate after discrete events.
Net incomeincome/(loss) available to Thermon Group Holdings, Inc. Net income available to the Company, after non-controlling interest, was $1.2 million in fiscal 2021 as compared to income of $11.9 million in fiscal 2018 as compared to $14.6 million in fiscal 2017,2020, a decrease of $2.7$10.7 million or 19%89.9%. The decrease in fiscal 20182021 net income is primarily due to lower revenue, lower gross profit as a $16.8 million increase in marketing, generalresult, and administrative and engineering expense primarily due to the THS operations and THS acquisition-related expenses. In addition, in fiscal 2018, THS-acquired intangible assets contributed $4.4 million in increased amortization expense, and we experienced increases in interest expense, netrestructuring and other expense of $5.8 million and $5.2 million, respectively, primarily due to interest expense on our new credit facility indebtedness and losses on foreign currency related hedges we entered into in fiscal 2018, respectively. These decreases were offset in part by a $31.9 million increase in gross profit and $1.0 million increase in income attributable to non-controlling interests due to an increase in Sumac's net income.charges/(income), as described above.
Year Ended March 31, 20172020 ("Fiscal 2017"fiscal 2020") Compared to the Year Ended March 31, 20162019 ("Fiscal 2016"fiscal 2019")
Revenue. RevenueSee Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal 2017 were $264.1 million, compared to $281.9 millionyear ended March 31, 2020 filed with the SEC on June 1, 2020 for fiscal 2016, a decreasediscussion of $17.8 million, or 6%, mostly attributable to decreases in Canada, the United States and Asia, offset in part by increased sales in Europe. Our sales mixresults of operations in fiscal 2017 was 39% Greenfield and 61% MRO/UE compared to 34% Greenfield and 66% MRO/UE in fiscal 2016.
In fiscal 2017, revenue grew in our Europe segment and declined in our Canada, United States and Asia segments. We are experiencing continued pricing pressure within most industries we serve. While there have been some recent increases in the price of oil, we are experiencing a continued deferral of capital and maintenance spending from our customers, particularly in the United States and Canada. Europe has been the recent exception to this trend. Fiscal 2017 revenue increased by $5.8 million in our Europe segment or 9%2020 as compared to fiscal 2016. Within our Europe segment, we are beginning to see increased demand in the downstream energy market, particularly in Russia, Eastern Europe and the Middle East. Fiscal 2017 revenue in Canada declined $15.2 million or 27%. Canadian revenue continues to be impacted by low crude oil prices, which has resulted in the postponement or suspension of upstream exploration and production projects, particularly in the Canadian oil sands region, where the cost to extract oil is high. To a lesser degree, our fiscal 2017 Canada segment's revenues were also negatively impacted by the evacuation of Fort McMurray and the related suspension of oil sands facility projects. Fiscal 2017 revenue in the United States declined by $6.2 million or 5%. Our IPI business contributed revenue of $12.9 million and $8.92019.
million in revenue in fiscal 2017 and fiscal 2016, respectively, representing an increase of $4.0 million. We acquired IPI on July 31, 2015; therefore, fiscal 2016 only contains nine months of IPI revenue, whereas fiscal 2017 contains twelve months of IPI revenue. Within the United States segment, excluding IPI, our revenue declined $10.3 million or 9% in fiscal 2017 as compared to fiscal 2016. Greenfield and upgrade and expansion (“UE”) demand in the U.S. gulf coast region remains relatively strong. However, we have encountered weakening demand in MRO sales related to the cycle of deferred maintenance spending we see in North America. Our Asia segment revenue declined by $2.1 million or 6% in fiscal 2017 as compared to fiscal 2016, which is primarily attributable to a slow fourth quarter due to customer project timing.
Gross profit and margin. Gross profit totaled $111.9 million in fiscal 2017, compared to $131.3 million in fiscal 2016, a decrease of $19.4 million, or 15%. The decline in gross profit is due to the decline in revenue, and a decline in our gross margin percentage. Gross margins decreased from 47% in fiscal 2016 to 42% in fiscal 2017. Our fiscal 2016 gross margins were within our expected gross margin historical range of 45%-50%, whereas our fiscal 2017 gross margins were below this range. Our fiscal 2017 gross margins were negatively impacted by an unfavorable product mix. In fiscal 2017, we experienced a higher concentration of Greenfield revenue, as well as a higher concentration of construction services, as compared to fiscal 2016. Our MRO sales include the greatest concentration of sales of our higher margin heat tracing cable. Greenfield revenue has lower gross margins than our MRO revenue due to a higher mix of third-party manufactured products, engineering costs and installation labor related costs.
Marketing, general and administrative and engineering.Marketing, general and administrative and engineering costs were $74.3 million in fiscal 2017, compared to $71.3 million in fiscal 2016, an increase of $3.0 million, or 4%. As a percentage of total revenue, marketing, general and administrative and engineering costs were 28.1% and 25.3% in fiscal 2017 and fiscal 2016, respectively. In fiscal 2017, depreciation expense increased by $1.4 million over fiscal 2016 attributable to increased capital expenditures of $12.6 million in fiscal 2016. Fiscal 2017 contains four additional months of on-going expenses from our IPI business that we acquired on July 31, 2015. As a result, fiscal 2017 reflects approximately $1.0 million of additional marketing, general and administrative and engineering expense attributable to IPI. Additionally we noted an increase in our incentive bonus of $0.3 million in fiscal 2017 due to reporting units achieving their business goals, with the remaining increase attributable mostly to higher salary and benefit costs.
Included in fiscal 2016 marketing, general and administrative and engineering expense is a $0.5 million reduction of expense to correct a prior period accounting error related to the withholding of vested equity awards to satisfy employees' withholding tax obligations. See Note 1. "Organization and Summary of Significant Accounting Policies" to our consolidated financial statements included in Item 8 of this annual report. This correction of an error was offset by a $0.6 million restructuring charge in Canada related to accrued employee severance payments and future lease payments on facilities we will no longer use.
Acquisition related contingent consideration accounted for as compensation. During fiscal 2016, we recorded $5.7 million of acquisition related contingent consideration costs related to Sumac's $5.9 million performance-based note. Since the performance-based note assumes the continued employment of Sumac's principals, the amount was recorded as compensation expense. No costs related to the Sumac contingent consideration were recorded in fiscal 2017. See Note 6. "Acquisitions, Goodwill and Other Intangible Assets" to our consolidated financial statements included in Item 8 of this annual report for further discussion.
Stock compensation expense. Stock compensation expense decreased $0.3 million in fiscal 2017, primarily due to an award granted in fiscal 2016 to a newly hired member of our senior management team that had a one year vesting period and was fully expensed in fiscal 2016.
Impairment of intangible assets and goodwill. During fiscal 2016 Unitemp received notice that a distribution partner intended to end its relationship with the Company. Due to the forecasted revenue loss, as well as the fact Unitemp's financial performance was below our forecast used at the acquisition date, we performed an impairment analysis. Based on the results of our impairment analysis it was determined the implied fair value of goodwill and the fair value of certain acquired intangible assets were below the assets carrying value. As a result of our assessment we impaired $1.2 million of goodwill and $0.5 million of intangibles assets related to the Unitemp acquisition. The Company determined that there were no impairments to goodwill or intangible assets in fiscal 2017.
Amortization of intangible assets. Amortization of intangible assets was $11.8 million in fiscal 2017, compared to $12.1 million in fiscal 2016, a decrease of $0.3 million. The decrease in our amortization of intangible assets was primarily due to the finalization of our provisional purchase accounting for the IPI transaction in which we reduced the fair value and useful lives of customer relationships. As a result of these IPI purchase accounting adjustments, we recorded a cumulative reduction of amortization of intangible asset expense of $0.3 million during fiscal 2017.
Interest expense, net. Interest expense, net totaled $3.0 million in fiscal 2017, compared to $3.7 million in fiscal 2016, a decrease of $0.7 million. Interest expense on outstanding principal decreased by $0.3 million in fiscal 2017 as compared to fiscal 2016. The decrease is attributed to a $13.5 million scheduled reduction of outstanding principal on our senior secured credit facility as well as interest rate reductions realized from the first and second amendments to our credit agreement. In fiscal 2016, in connection with the second amendment, we incurred a $0.3 million acceleration of deferred debt issuance costs which is included in interest expense. In fiscal 2017, interest income increased $0.1 million, primarily due to a strategic decision to increase short term investments to generate interest income.
Other expense. Other expense was $0.4 million in fiscal 2017, compared to $0.7 million in fiscal 2016, a decrease of $0.3 million. We experienced foreign currency exchange transaction losses of $0.6 million and $0.6 million in fiscal 2017 and fiscal 2016, respectively. See Note 2, "Fair Value Measurements" to our consolidated financial statements included in Item 8 of this annual report for further discussion of our foreign currency exchange transactions. In fiscal 2017, the Company recorded gains on the sale of fixed assets in the amount of $0.2 million compared to a loss on the sale of fixed assets of $0.1 million in fiscal 2016.
Income taxes. Income tax expense was $4.1 million in fiscal 2017, on pre-tax net income of $19.1 million compared to income tax expense of $8.7 million in fiscal 2016 on pre-tax net income of $32.4 million, a decrease of $4.6 million. Our effective tax rates were 21.5% in fiscal 2017 and 26.9% in fiscal 2016. Our tax expense included discrete tax benefits totaling $0.6 million and $0.8 million in fiscal 2017 and fiscal 2016, respectively. Excluding these discrete events, our effective tax rate would have been 24.4% and 26.9% in fiscal 2017 and fiscal 2016, respectively. The effective tax rate before discrete events was lower in fiscal 2017 primarily due to relatively low taxable income in the United States where the corporate tax rate is 35% and a higher proportion of pre-tax earnings in other jurisdictions with a collective average tax rate of approximately 24.4%. See Note 15, "Income Taxes," to our consolidated financial statements, included elsewhere in this annual report, for further detail on income taxes.
Net income available to Thermon Group Holdings, Inc. Net income available to the Company was $14.6 million in fiscal 2017 as compared to $23.0 million in fiscal 2016, a decrease of $8.4 million. In fiscal 2017 our gross profit decreased by $19.4 million as a result of decreased revenue and a lower gross margin percentage. Fiscal 2017 results included favorable reductions in contingent consideration of $5.7 million related to the Sumac performance-based note which was recorded as compensation expense in fiscal 2016, a $1.7 million reduction in goodwill and intangible impairment charges, and a $1.0 million reduction in stock compensation, amortization of intangible assets, and other expense. These unfavorable results were partially offset by increases in marketing, general and administrative and engineering expenses of $3.0 million primarily due to increases in depreciation expense and the incremental increase of four additional months of IPI related administrative and operating costs. Interest expense, net decreased $0.8 million as a result of scheduled principal reductions and favorable reduction in debt amortization costs. Income tax expense decreased by $4.6 million primarily as a result of our decreased pre-tax net income. Income attributable to non-controlling interest was $0.3 million in fiscal 2017, a decrease of $0.3 million as compared to fiscal 2016, due to a decline in Sumac net income.
Contractual Obligations and Contingencies
Contractual Obligations. The following table summarizes our significant contractual payment obligations as of March 31, 2018 and the effect such obligations are expected to have on our liquidity position assuming all obligations reach maturity.
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | 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) | $ | 225,000 |
| | $ | 2,500 |
| | $ | 5,000 |
| | $ | 5,000 |
| | $ | 212,500 |
|
| Interest payments on variable rate term loan (2) | 69,939 |
| | 10,965 |
| | 21,593 |
| | 21,072 |
| | 16,309 |
|
| Operating lease obligations (3) | 11,946 |
| | 3,152 |
| | 4,222 |
| | 2,718 |
|
| 1,854 |
|
| Information technology services agreements (4) | 1,010 |
| | 902 |
| | 87 |
| | 21 |
| | — |
|
| Total | | $ | 307,895 |
| | $ | 17,519 |
| | $ | 30,902 |
| | $ | 28,811 |
| | $ | 230,663 |
|
| |
(1) | Consists of quarterly scheduled principal payments commencing April 1, 2018 under our new term loan B credit facility of $0.6 million through July 31, 2024, with the remaining principal balance being settled with a lump-sum payment of $208.8 million due at maturity in October 2024. Please see Note 10, “Long-Term Debt” in our financial statements, for more information on our new term loan B credit facility. |
| |
(2) | Consists of estimated future term loan interest payments under our credit facility based on our current interest rate as of March 31, 2018. |
| |
(3) | We enter into operating leases in the normal course of business. Our operating leases include the leases on certain of our manufacturing and warehouse facilities, in addition to certain offices of our affiliates. |
| |
(4) | Represents the future annual service fees associated with certain information technology service agreements with several vendors. |
Contingencies. We are involved in various legal and administrative proceedings that arise from time to time in the ordinary course of doing business. Some of these proceedings may result in fines, penalties or judgments being assessed against us, which may adversely affect our financial results. In addition, from time to time, we are involved in various disputes, which may or may not be settled prior to legal proceedings being instituted and which may result in losses in excess of accrued liabilities, if any, relating to such unresolved disputes. As of March 31, 2018,2021, management believes that adequate reserves have been established for any probable and reasonably estimable losses. Expenses related to litigation reduce operating income. We do not believe
that the outcome of any of these proceedings or disputes would have a significant adverse effect on our financial position, long-term results of operations, or cash flows. It is possible, however, that charges related to these matters could be significant to our results of operations or cash flows in any one accounting period.
The Company has no outstanding For information on legal matters outside of matters arisingproceedings, see Note 15, "Commitments and Contingencies" to our consolidated financial
statements contained elsewhere in the ordinary course of business. We can give no assurances we will prevail in any of these matters.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, 2018,2021, we had in place standby letters of credit, bank guarantees and performance bonds totaling $20.4$10.0 million to back our various customer contracts. Our Indian subsidiary also has $5.6$4.9 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. 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, 2018,2021, outstanding principal under the term loan B facility was $225.0 million.$148.5 million and we had no outstanding borrowings under our revolving credit facility.
Cash and cash equivalents. At March 31, 2018,2021, we had $33.9$40.1 million in cash and cash equivalents. We maintain cash and cash equivalents at various financial institutions located in many countries throughout the world. Approximately $7.4$10.0 million, or 22%25%, of these amounts were held in domestic accounts with various institutions and approximately $26.5$30.1 million, or 78%75%, of these amounts were held in accounts outside of the United States with various financial institutions.
Investments. AtMarch 31, 2018, we had $1.0 million in investments. The investments have maturities that range from 90 days to one year. The investments are primarily in held in foreign accounts with various financial institutions.
Senior secured credit facility. See Note 10,11, “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, 2018,2021, we had no outstanding borrowings under our revolving credit facility and $55.4$56.7 million of available capacity thereunder, after taking into account the borrowing base and letters of credit outstanding, which totaled $4.6$3.3 million. From time to time, we may choose to utilize our revolving credit facility to fund operations, acquisitions or other investments, despite having cash available within our consolidated group in light of the cost, timing and other business considerations.
As of March 31, 2018,2021, we had $225.0$148.5 million of outstanding principal on our term loan B facility. Commencing April 1, 2018, we will beWe 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 $208.8$139.8 million due at maturity of the
term loan in October 2024. InDuring the fourth quarter of fiscal 2018,year ended March 31, 2021, we made an optionalvoluntary debt prepaymentprepayments of principal on the term loan B facility of $25.0 million. From time to time, we may choose to make unscheduled and additional repaymentsprepayments of principal on the term loan B based on available cash flows.
Guarantees; security. The term loan is guaranteed by the Company and all of the Company's current and future wholly owned domestic material subsidiaries (the “US“U.S. Subsidiary Guarantors”), subject to certain exceptions. Obligations of the Company under the revolving credit facility are guaranteed by the Company and the USU.S. Subsidiary Guarantors. The obligations of Thermon Canada Inc. (the "Canadian Borrower"“Canadian Borrower”) under the revolving credit facility are guaranteed by the Company, Thermon Holding Corp. (the "US Borrower"“U.S. Borrower”), the USU.S. Subsidiary Guarantors and each of the wholly owned Canadian material subsidiaries of the Canadian Borrower, subject to certain exceptions. The term loan and the obligations of the USU.S. Borrower under the revolving credit facility are secured by a first lien on all of the Company’s assets and the assets of the USU.S. Subsidiary Guarantors, including 100% of the capital stock of the USU.S. Subsidiary Guarantors and 65% of the capital stock of the first tier material foreign subsidiaries of the Company, the USU.S. Borrower and the USU.S. Subsidiary Guarantors, subject to certain exceptions. The obligations of the Canadian Borrower under the revolving credit facility are secured by a first lien on all of the Company's assets, the USU.S. Subsidiary Guarantors' assets, the Canadian Borrower’s assets and the assets of the material Canadian subsidiaries of the Canadian Borrower, including 100% of the capital stock of the Canadian Borrower’s material Canadian subsidiaries.
Financial covenants.The term loan is not subject to any financial covenants. The revolving credit facility requires the Company, on a consolidated basis, to maintain certain financial covenant ratios. The Company must maintain a consolidated leverage ratio of 3.75:1.0 as measured on the last day of the following periods: 5.5:1.0 for December 31, 2017 through September 30, 2018; 5.0:1.0 for December 31, 2018 through September 30, 2019; 4.5:1.0 for December 31, 2019 through September 30, 2020; and 3.8:1.0 for December 31, 2020 and eachany fiscal quarter thereafter.quarter. In addition, on the last day of any period of four fiscal quarters, the Company must maintain a consolidated fixed charge coverage ratio of not less than 1.3:1.25:1.0. As of March 31, 2018,2021, we were in compliance with all financial covenants of the credit facility.
Restrictive covenants. The credit agreement governing our credit facility contains various restrictive covenants that, among other things, restrict or limit our ability to (subject to certain negotiated exceptions): incur additional indebtedness; grant liens; make fundamental changes; sell assets; make restricted payments;payments including cash dividends to shareholders; enter into sales and leasebacks;leaseback transactions; make investments; prepay certain indebtedness; enter into certain transactions with affiliates; and enter into restrictive agreements.
Repatriation considerations. Given the Tax Act’s significant changes and potential opportunities under the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) to repatriate cash tax free, we have reevaluated our current indefinite assertions. Accordingly,Beginning with fiscal 2018, we will no longer assert a permanent reinvestment position in most of our foreign subsidiaries. We expect to repatriate certain earnings which will be subject to withholding taxes. These additional withholding taxes are being recorded as an additional deferred tax liability associated with the basis difference in such jurisdictions. Any changes made by foreign jurisdictions to their respective withholding rates could impact future tax expense and cash flow.
Future capital requirements. Our future capital requirements will depend on a number of factors. We believe that, based on our current level of operations, cash flow from operations and available cash, together with available borrowings under our revolving credit facility, will be adequate to meet our liquidity needs for the next 12 months. We cannot assure you that our business 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.
In fiscal 2018,2021, we invested $10.0$8.1 million in capital expenditures. SumacTPS purchased $4.6 million in property, plant and equipment, primarily related to leased equipment, of which $0.9 million was sold to customers.equipment. We invested $1.4$3.1 million in the implementation of our enterprise resource planning (ERP) software and an additional $0.8 millionUS-LAM segment primarily related to upgrading our external websitebuilding improvements, leased equipment, and other internally developed software. The remaining $3.2 million represents our annualfurther investments in technology, furniture and fixture replacements, and capital maintenance. Going forward, we expect to invest approximately $9.0 million in fiscal 2019, including $3.4 million of investments in equipment used in our manufacturing facilities, and $0.9 million in land and building improvements. We estimate we will incur approximately $0.8 million related to our multi-year ERP upgrade, which we estimate will be complete in fiscal 2020, and $0.5 million related to the ongoing website upgrade in fiscal 2019. 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 Sumac business based on market demand.
Year Ended March 31, 20182021 ("Fiscal 2018"fiscal 2021") Compared to the Year Ended March 31, 20172020 ("Fiscal 2017"fiscal 2020")
Net cash provided by operating activities totaled $21.9$30.3 million for fiscal 20182021 compared to $26.4$70.7 million for fiscal 2017,2020, a decrease of $4.5$40.4 million. OurThe decrease was primarily attributable to a $19.7 million decrease in cash provided by working capital accounts, a decrease of $10.8 million in net income, decreasedand $9.9 million decrease in cash provided from $15.0non-cash reconciling items.
Our working capital assets in accounts receivable, inventory, contract assets, and other current assets represented a source of cash of $17.6 million and $20.2 million in fiscal 2017 to $13.22021 and fiscal 2020 respectively, a decrease in the source of cash of $2.6 million in fiscal 2018,2021. During fiscal 2021, as compared to fiscal 2020 accounts receivable decreased on lower sales volume, representing a decreasesource of $1.8 million. Non-cash reconciling items such as depreciation and amortization, stock compensation expense, changes in deferred taxes and other non-cash charges were $20.3cash of $22.9 million and $18.4a source of cash of $9.4 million, in fiscal 2018 and fiscal 2017, respectively. Additionally, in fiscal 2018 working capital accounts wereContract assets represented a use of cash of $4.6 million.
$2.7 million and a source of cash of $12.2 million in fiscal 2021 and fiscal 2020, respectively, which is primarily attributed to timing of billings on our projects. In fiscal 20182021, our working capital assetsinventory balance increased slightly as compared to fiscal 2020 due to lower inventory turnover, representing a use of cash of $31.6$0.5 million and infor fiscal 2017 our working capital assets decreased representing2021 and a source of cash of $3.4 million. The comparative increase in the fiscal 2018 use of cash of $35.0$1.4 million is primarily the result of an increase, or use of cash, in accounts receivable, inventory and costs in excess of billings of $8.6 million, $15.6 million and $8.7 million, respectively. The increase in accounts receivable is primarily attributable to the increase in revenue in fiscal 2018. The increase in inventory is due to higher revenue and for the build-up of inventory for future periods and the increase in costs in excess of billing is related to the timing for billings on our turnkey projects. 2020.
Our combined balancesbalance of accounts payable, accrued liabilities and other non-current liabilities were a source of cash of $16.0 million in fiscal 2018, andrepresented a use of cash of $7.8$6.3 million and source of cash of $3.1 million in fiscal 2017.2021 and fiscal 2020, respectively, a total decrease of $9.4 million. The increase in accounts payable, accrued liabilities and other non-current liabilitiesthe use of cash in fiscal 2021 is primarily attributabledue to decreased overall activity as well as the timing of vendor payment timing and an increase in accrued short-term incentives.payments. Changes in our income taxes payable and receivable balances represented a use of cash of $6.8 million in fiscal 2021 and a source of cash of $4.0$0.9 million in fiscal 2018 and a $2.5 million use of cash in fiscal 2017.2020.
Net cash used in investing activities totaled $166.5$7.8 million for fiscal 20182021 compared to $52.0$10.0 million for fiscal 2017, an increase2020, a decrease of $114.5 million. In fiscal 2018, we acquired THS which resulted$2.2 million in athe use of cash of $202.7 million. Partially offsettingcash. Net cash used in investing activities relates to fund the THS acquisition was a comparative $36.7 million sourcepurchase of cash fromcapital assets primarily to maintain the decreaseexisting operations of the business; it also includes purchases and sales of equipment in purchases of investments and a comparative $53.4 million source of cash from the increase in the sale of investmentsour rental business. Capital expenditures in fiscal 2018.2021 were curtailed due to our response to the economic downturn associated with the COVID-19 pandemic.
Net cash provided by (used in)used in financing activities totaled $133.9$28.2 million in fiscal 2018,2021, compared to $(14.7)$46.5 million for fiscal 2017, an increase2020, a comparative decrease of $148.6$18.3 million cash provided byused in financing activities. The increase in the source of cashactivities which is primarily attributable to the funding of the new term loan Bincreased principal prepayments on our credit facility which was a source of cash of $250.0 million, offset in part by the repayment of the extinguished credit facility of $91.0 million, and an unscheduled repayment of $25.0 million on the term loan B in fiscal 2018. Additionally, the Company had borrowings of $10.0 million from the revolving credit facilityfacilities during fiscal 2018 which were repaid2020 as compared to fiscal 2021. Cash proceeds in full at the end of the reporting periodfinancing activities are
primarily short-term borrowings, and paid $9.7 million of debt issuancecash used in financing activities are from contractual and debt discounts related to the new term loan B credit facility. See Note 10, “Long-Term Debt” for additional informationvoluntary principal payments on our term loan B credit facility.outstanding long-term debt.
Year Ended March 31, 20172020 ("Fiscal 2017"fiscal 2020") Compared to the Year Ended March 31, 20162019 ("Fiscal 2016"fiscal 2019")
NetSee Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020 filed with the SEC on June 1, 2020 for a discussion of net cash provided by operating activities, totaled $26.4 million for fiscal 2017 compared to $47.9 million for fiscal 2016, a decrease of $21.5 million. Our net income decreased from $23.7 millioncash used in investing activities and net cash provided by (used in) financing activities in fiscal 2016 to $15.0 million in fiscal 2017. The lower net income in fiscal 2017 is primarily attributable to our $17.8 million decline in revenue and decline in gross margin percentage. Non-cash reconciling items such as depreciation and amortization, stock compensation expense, changes in deferred taxes and other non-cash charges were $18.4 million and $18.7 million in fiscal 2017 and fiscal 2016, respectively. Depreciation and amortization expense increased $0.4 million mostly attributable to our recent acquisitions and an increase in capital expenditures in fiscal 2016. In fiscal 2017 we released a reserve for uncertain tax positions of $0.2 million, as the tax periods are no longer subject to examination. Also in fiscal 2016, we recorded a $1.7 million impairment of Unitemp's goodwill and other intangible assets.
In fiscal 2017 our assets decreased representing a source of cash of $3.4 million, and in fiscal 2016 our assets also decreased representing a source of cash of $4.4 million. The comparative decline of $1.0 million is primarily a result of an increase in accounts receivable, or use of cash, of $10.4 million partially offset by decreases, or source of cash, of $4.9 million, $2.9 million, and $1.6 million in inventories, cost in excess of billings, and other non-current and current assets, respectively. Our combined balances of accounts payable, accrued liabilities and other non-current liabilities were a use of cash of $7.8 million in fiscal 2017, and a $0.4 million source of cash in fiscal 2016. The increase in the use of cash from fiscal 2017 to fiscal 2016 is primarily related to the payment of the $5.8 million contingent consideration for Sumac, and a $2.6 million decrease, or use of cash, in accrued liabilities and non-current liabilities. Changes in our income taxes payable balances represented a use of cash of $2.5 million in fiscal 2017 and a $0.8 million source of cash in fiscal 2016. The comparative increase in the use of cash of $3.3 million is primarily a result of reduced pre-tax net income in fiscal 20172020 as compared to fiscal 2016.2019.
Net cash used in investing activities totaled $52.0 million for fiscal 2017 compared to $41.6 million for fiscal 2016, an increase of $10.4 million. In fiscal 2017 and fiscal 2016, we spent $8.4 million and $12.6 million, respectively, to purchase property, plant and equipment. In fiscal 2017, we used $44.8 million to purchase short term investments. In fiscal 2016 we paid $31.2 million to acquire Sumac and IPI.
Net cash used in financing activities totaled $14.7 million in fiscal 2017, compared to $15.0 million for fiscal 2016, a decrease of $0.4 million. In both periods we made $13.5 million of scheduled payments on our credit facility. The primary drivers of the $0.4 million comparative decrease in cash used in financing activities relates to the benefit from excess tax deductions from option exercises, which was a use of cash of $0.4 million in fiscal 2017 and $0.1 million source of cash in fiscal 2016, and a $0.6 million decrease in cash used to repurchase employee stock awards upon vesting to satisfy their tax obligation in fiscal 2017 and fiscal 2016, partially offset by a decrease in cash used for debt issuance cost of $0.3 million.
Off-Balance Sheet Arrangements
We do not have any off 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.
Effect of Inflation
While inflationary increases in certain input costs, such as wages, have an impact on our operating results, inflation has had minimal net impact on our operating results during the last three years, as overall inflation has been offset by lower commodity prices for our core production materials. We cannot assure you, however, that we will not be affected by general inflation in the future.
Seasonality
Demand for our products 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 customers in the oil and gas, refining, chemical processing and transportation markets. These customers' expenditures historically have been cyclical in nature and vulnerable to economic downturns. In addition, quarterly revenues for the heat tracing business are impacted by the level and timing of large Greenfield projects that may be occurring at any given time. Our operating expenses remain relatively consistent with some variability related to overall headcount of the Company.
Our quarterly operating results may fluctuate based on the cyclical pattern of industries to which we provide heat tracing solutions and the seasonality of MRO/UE 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 third fiscal quarters the largest for MRO/UE revenue. However, revenues from Greenfield projects are not seasonal and depend on the capital spending environment and project timing.
THS typically experiences more pronounced seasonality than our legacy heat tracing business, with a noticeable increase in revenue and profitability typically beginning in the third fiscal quarter and continuing during the winter months through the end of the fourth fiscal quarter.
Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance with 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, inventory reservesdoubtful accounts and potential litigation claimsthe adjustment for excess and settlements.obsolete inventories, valuation of long-lived assets, goodwill, and other intangible assets, accounting for income taxes, loss contingencies, and stock-based compensation expense.
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.
Revenue recognition. Revenues Please refer to Note 4 "Revenue from salesContracts with Customers" of products are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectability is probable.
On average, less than 20% of our annual revenues are derived from the installation of heat tracing solutions for which we apply construction-type accounting. These construction-related contracts are awarded on a competitive bid and negotiated basis. We offer our customers a range of contracting options, including cost-reimbursable, fixed-price and hybrid, which has both cost-reimbursable and fixed-price characteristics. Most of our construction contract revenue is recognized using either the percentage-of-completion method, based on the percentage that actual costs-to-date bear to total estimated costs to complete each contract or as it relates to cost-reimbursable projects, revenue is recognized as work is performed. We follow the guidance of FASB ASC Revenue Recognition Topic 605-35 for accounting policies relating to our use of the percentage-of-completion method, estimating costs and revenue recognition, including the recognition of profit incentives, unapproved change orders and claims and combining and segmenting contracts. We utilize the cost-to-cost approach to measure the extent of progress toward completion, as we believe this method is less subjective than relying on assessments of physical progress. Under the cost-to-cost approach, the use of total estimated cost to complete each contract is a significant variable in the process of determining recognized revenue and is a significant factor in the accounting for contracts. Significant estimates that impact the cost to complete each contract are costs of engineering, materials, components, equipment, labor and subcontractors; labor productivity; schedule durations, including subcontractors and supplier progress; liquidated damages; contract disputes, including claims; achievement of contractual performance requirements; and contingency, among others. The cumulative impact of revisions in total cost estimates as contracts progress is reflected in the period in which these changes become known, including the recognition of any losses expected to be incurred on contracts in progress. Due to the various estimates inherent in our construction contract accounting, actual results could differ from those estimates. Our historical construction contract cost estimates have generally been accurate, and management does not believe that there is a reasonable likelihood that there will be a material change in future estimates or the methodology used to calculate these estimates.
Sales which are not accounted for under ASC 605-35 may have multiple elements, including heat tracing product, engineering and "field" services such as inspection, repair and/or training. We assess such revenue arrangements to determine the appropriate units of accounting. Each deliverable provided under multiple-element arrangements is considered a separate unit of accounting. Revenue associated with the sale of a product is recognized upon delivery, while the revenue for engineering and field services is recognized as services are rendered, limited to the amount of consideration which is not contingent upon the successful provision of future products or services under the arrangement. Amounts assigned to each unit of accounting are based on an allocation of total arrangement consideration using a hierarchy of estimated selling price for the deliverables. The selling price used for each deliverable will be based on Vendor Specific Objective Evidence ("VSOE"), if available, Third Party Evidence ("TPE"), if VSOE is not available, or estimated selling price, if neither VSOE nor TPE is available. We have completed the evaluation of the impact of Accounting Standard Update 2014-9 will have on our performance obligations and the method which we determine and allocate the price of our contracts. See Note 1 ("Organization and Summary of Accounting Polices") to our consolidated financial statements included below in Item 8 of this annual report for additional information onfurther discussion, including the impact of the implementation of Accounting Standard Update 2014-9.adoption had on our consolidated financial statements.
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 and gas, 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 $1.2$2.1 million and $0.5$0.8 million as of March 31, 20182021 and 2017,2020, 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 fair marketnet realizable value based on assumptions of future demand and market conditions. Fair marketNet 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 $2.1$1.8 million and $1.3$2.0 million at March 31, 20182021 and 2017,2020, respectively. Historically, 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 evaluateconduct a required annual review of goodwill for potential impairment annually duringin the fourth quarter, or sooner if events or changes in circumstances indicate that the fair value 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 sevena reporting unit is below its carrying value. Our reporting units each of which is assessed for potential impairments.are our operating segments: US-LAM, Canada, EMEA, and APAC. We have the option to perform a qualitative analysisassessment to determine whethersatisfy the annual test requirement if we believe that it is more likely than not that we do not have an impairment in any one of our reporting units. If the carrying value of a reporting unit that includes goodwill exceeds its fair value, which is determined using both the income approach and market approach, goodwill is considered impaired. The income approach determines fair value based on discounted cash flow model derived from a reporting unit’s long-term forecasted cash flows. The market approach determines fair value based on the application of earnings multiples of comparable companies to projected earnings of the reporting unit. The amount of impairment loss is measured as the difference between the carrying value and the fair value of a reporting unit but is limited to the total amount of goodwill is less than its carrying amount. Some ofallocated to the impairment indicators we consider include significant differences betweenreporting unit. In performing the carrying amount and the estimated fair value analysis, management makes various judgments, estimates and assumptions, the most significant of which is the assumption related to revenue growth rates.
The factors we considered in developing our assetsestimates and liabilities;projections for cash flows include, but are not limited to, the following: (i) macroeconomic conditions such as a deterioration in general economic condition or limitations on accessing capital;conditions; (ii) industry and market considerations such as a deterioration in the environment in which we operate and an increased competitive environment; cost factorsconsiderations; (iii) costs, such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows;costs; (iv) our overall financial performanceperformance; and, (v) other relevant entity-specific events that impact our reporting units. The determination of whether goodwill is impaired involves a significant level of judgment in the
assumptions underlying the approach used to determine the estimated fair values of our reporting units. We believe that the estimates and assumptions used in our impairment assessment are reasonable; however, these assumptions are judgmental and variations in any assumptions could result in materially different calculations of fair value. We will continue to evaluate goodwill on an annual basis in our fourth quarter, and whenever events or changes in circumstances, 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,significant adverse changes in management, key personnel,operating results, market conditions, or changes in management’s business strategy or customers; the testing for recoverabilityindicate that there may be a probable indicator 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 itimpairment. It is more likely than notpossible that the fair value of goodwill is less than its carrying amount, then a second step is performedassumptions used by management related to quantify the amount of goodwill impairment. If impairment is indicated, a goodwill impairment charge is recorded to write the goodwill down to its implied fair value. evaluation may change or that actual results may vary significantly from management’s estimates. In fiscal 2016, we recorded a $1.2 million goodwill impairment charge related to Unitemp, as our expectations of future revenue2021, 2020 and profitability was below those estimated at the time of the acquisition, and impaired an additional $0.5 million of other intangibles as their fair value was less than their carrying value. In fiscal 2018 and 2017,2019, the Company determined that no impairment of goodwill existed.
Other intangible assets include indefinite lived intangible assets for which we must also perform an annual test of impairment. The Company's indefinite lived intangible assets consist primarily of trademarks. The fair value of the Company's trademarks is calculated using a "relief from royalty payments" methodology. This approach involves first estimating reasonable royalty rates for each trademark then applying these royalty rates to a net sales stream and discounting the resulting cash flows to determine the fair value. The royalty rate is estimated using both a market and income approach. The market approach relies on the existence of identifiable transactions in the marketplace involving the licensing of trademarks similar to those owned by the Company. The income approach uses a projected pretax profitability rate relevant to the licensed income stream. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of each trademark. This fair value is then compared with the carrying value of each trademark. The results of this test during the fourth quarter of our fiscal year indicated that there was no impairment of our indefinite life intangible assets during fiscal 2018 or fiscal 2017.2021, 2020 and 2019.
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 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.forfeitures.
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.
Recent Accounting Pronouncements
Revenue Recognition - In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 "Revenue from Contracts with Customers" (Topic 606), which amends the existing revenue recognition requirements and guidance. The core principle of the new standard is to recognize revenue that reflects the consideration the Company expects to receive for goods or services when or as the promised goods or services are transferred to customers. Topic 606 requires more judgment than current guidance, as management will now be required to: (i) identify each performance obligation in contracts with customers, (ii) estimate any variable consideration included in the transaction price and (iii) allocate the transaction price to each performance obligation. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company adopted the amended guidance using the modified retrospective method as of April 1, 2018.
To assess the impact of the standard, we utilize internal resources to lead the implementation effort and supplemented our internal resources with external consultants. As of March 31, 2018, the Company has completed the evaluation of its revenue streams and has reviewed a sample of customer contracts that we believe fairly represent contract traits that could be accounted for differently under amended guidance. The Company has begun evaluating the potential impact of the new revenue standard on each of the selected contracts including: (i) estimating the contract consideration under the new standard, (ii) identifying the performance obligations within the customer contracts, (iii) calculating the anticipated allocation of contract consideration to each performance obligation, (iv) determining the timing of revenue recognition for each performance obligation, and (v) determining the classification of the contract revenue for disclosure purposes. As a result of the evaluation, the Company has identified certain engineering services revenue related to projects on existing facilities that will now be deferred, until delivery of product, as a fulfillment obligation under the amended guidance, as well as other minor changes in accounting. The transition adjustment related to the adoption is estimated to be immaterial (less than 1% of total revenue for the fiscal year ended March 31, 2018 and total shareholders’ equity as of March 31, 2018), and we do not expect the adoption of this standard to materially impact the amount or timing of our revenue going forward. An adjustment will be recorded to our fiscal 2019 beginning retained earnings for the cumulative effect of the change. We intend to provide additional disclosures as required by the new standard, which we are currently assessing, in our quarterly report on Form 10-Q for the first quarter of fiscal 2019.
Stock Compensation- In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-09 "Compensation-Stock Compensation" (Topic 718), which changes the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. Additionally, cash flows related to excess tax benefits will no longer be separately classified as a financing activity and will be included as an operating activity on the consolidated statements of cash flows. The guidance allows for an accounting policy election to account for forfeitures as they occur. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted this standard effective April 1, 2017 and it did not have a material impact on our consolidated financial statements.
Inventory- In July 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-11 "Simplifying the Measurement of Inventory" (Topic 330). Under the new guidance, inventory is measured at the lower of cost and net realizable value, and the new guidance eliminates the use of replacement cost and net realizable value less a normal profit margin as techniques to value inventory. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new guidance will be applied prospectively for annual periods and interim periods within fiscal years beginning after December 15, 2016. We adopted this standard effective April 1, 2017 and it did not have a material impact on our consolidated financial statements.
Financial Instruments- In January 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-01 "Financial Instruments-Overall" (Subtopic 825-10), which amends the guidance on the classification and measurement of financial instruments. The amendment requires all equity investments to be measured at fair value with changes in the fair value recognized through earnings. The amendment also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the credit risk when an entity has elected the fair value option. The guidance eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. Early adoption is permitted for certain provisions of the accounting standards update. Upon the adoption of the standard, an entity will be required to make a cumulative-effect adjustment to retained earnings as of
the beginning of such reporting period. We are currently evaluating when to adopt this standard. Upon adoption, we do not anticipate this standard will have a material impact on our consolidated financial statements.
Leases- In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-02 "Leases." which provides guidance on the recognition, measurement, presentation and disclosure on leases. Under the standard substantially all leases will be reported on the balance sheet as right-of-use assets and lease liabilities. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the requirements of the standard and have not yet determined its impact on our consolidated financial statements.
Financial Instruments- In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-13 “Financial Instruments-Credit Losses” (Topic 326), which amends the guidance on the impairment of financial instruments. The standard adds an impairment model, referred to as current expected credit loss, which is based on expected losses rather than incurred losses. The standard applies to most debt instruments, trade receivables, lease receivables, reinsurance receivables, financial guarantees and loan commitments. Under the guidance, companies are required to disclose credit quality indicators disaggregated by year of origination for a five-year period. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. We do not anticipate this will have a material impact to our consolidated financial statements.
Statement of Cash Flows- In August 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-15 “Statement of Cash Flows” (Topic 230), which amends Topic 230 of the accounting standards codification (ASC) to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The standard addresses eight types of cash flows, some of which we believe could or will impact our financial statements upon adoption, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and proceeds from the settlement of insurance claims. Under the guidance, cash payments for debt prepayment or extinguishment costs must be classified as cash outflows from financing activities. Contingent consideration payments that were not made soon after a business combination must be separated and classified in operating and financing activities. Cash payments up to the amount of the contingent consideration liability recognized as of the acquisition dates, including any measurement-period adjustments, should be classified in financing activities, while any excess cash payments should be classified in operating activities. Cash proceeds from the settlement of insurance claims should be classified on the basis of the nature of the loss. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted for all entities. Entities must apply the guidance retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. We do not anticipate this will have a material impact to our consolidated financial statements.
Non-GAAP Financial Measures
Disclosure in this annual report of "Adjusted EPS," "Adjusted EBITDA," "Adjusted Net Income," and "Free cash flow" and "Return on equity,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 shareshare" (or EPS)""Adjusted EPS") represents net income attributable to Thermon before acquisition-related expenses, a one-time loss oncosts 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 currency hedges entered into in connection with the THS acquisition, a one-time repatriation tax on deferred foreign income as a result of the tax reform legislation, adjustments to our deferred tax liability for a tax rate change,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. Note that the Company now presents Non-GAAP Adjusted EPS to include the impact of intangible amortization. "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, acquisition-related expensescosts related to the consolidation of our operating footprint in Canada, costs associated with our restructuring and a one-time loss on certain foreign currency hedges entered into in connection withother income/(charges), and income related to the THS acquisition. "Return on equity" for the three month periods ended March 31, 2018 and 2017, represents Adjusted EBITDA for each respective period that is multiplied by four to represent a full year's results, divided by the average of total equity at March 31 and December 31 for each respective period. "Return on equity" for the year ended March 31, 2018 and 2017, represents Adjusted EBITDA for each respective year, divided by the average of total equity for each respective fiscal year. We believe that the average total equity properly accounts for net income that occurred during the three months and years ended March 31, 2018 and 2017.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, or Return on equity.Income. Adjusted EPS, Adjusted EBITDA, and Adjusted Net Income and Return on equity should be considered in addition to, not as substitutes for, income from operations, net income, net income per share, and other measures of financial performance reported in accordance with GAAP. We provide Free cash flow as a measure of our liquidity. OurNote that our calculation of Adjusted EPS, Adjusted EBITDA, Adjusted Net Income, and Free cash flow and Return on equity may not be comparable to similarly titled measures reported by other companies.
The following table reconciles net income to Adjusted EBITDA and Return on equity for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | | 2021 | | 2020 | | 2019 |
| Net income available to Thermon Group Holdings, Inc. | | $ | 1,165 | | | $ | 11,938 | | | $ | 22,756 | |
| Interest expense, net | | 10,185 | | | 14,027 | | | 15,476 | |
| Income tax expense/(benefit) | | (1,438) | | | 5,142 | | | 9,973 | |
| | | | | | | |
| Depreciation and amortization | | 20,722 | | | 28,275 | | | 29,965 | |
| EBITDA (non-GAAP) | | $ | 30,634 | | | $ | 59,382 | | | $ | 78,170 | |
| Stock-based compensation | | 3,728 | | | 4,960 | | | 4,148 | |
| | | | | | | |
| | | | | | | |
| Income/(loss) attributable to non-controlling interest | | — | | | (2) | | | 413 | |
| Consolidation of operating footprint in Canada | | — | | | — | | | 757 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Restructuring and other charges/(income) | | 8,623 | | | — | | | — | |
| Canadian Emergency Wage Subsidy | | (6,412) | | | — | | | — | |
| Adjusted EBITDA (non-GAAP) | | $ | 36,573 | | | $ | 64,340 | | | $ | 83,488 | |
| | | | | | | | |
| | | | | | |
| | | | | | | | |
| | | | | | |
|
| | | | | | | | | | | | | | |
| | | | Year Ended March 31, |
| | | | | 2018 | | 2017 | | 2016 |
| Net income available to Thermon Group Holdings, Inc. | | $ | 11,913 |
| | $ | 14,641 |
| | $ | 23,009 |
|
| | Interest expense, net | | 8,754 |
| | 2,952 |
| | 3,719 |
|
| | Income tax expense | | 5,170 |
| | 4,098 |
| | 8,716 |
|
| | Depreciation and amortization | | 24,420 |
| | 17,832 |
| | 17,409 |
|
| | Stock-based compensation | | 3,519 |
| | 3,402 |
| | 3,749 |
|
| | Sumac acquisition related contingent consideration | | — |
| | — |
| | 5,706 |
|
| | Income attributable to noncontrolling interest in Sumac | | 1,306 |
| | 343 |
| | 641 |
|
| | THS acquisition related foreign exchange losses | | 5,594 |
| | — |
| | — |
|
| | THS acquisition related expenses | | 4,093 |
| | — |
| | — |
|
| | Cost of restructuring Canadian operations | | — |
| | — |
| | 578 |
|
| | Impairment of intangible assets and goodwill related to Unitemp acquisition | | — |
| | — |
| | 1,713 |
|
| Adjusted EBITDA | | $ | 64,769 |
| | $ | 43,268 |
| | $ | 65,240 |
|
| | | | | | | | | |
| Average total shareholders' equity for the twelve month period ended March 31 | | 326,678 |
| | 305,602 |
| | 285,234 |
|
| | | | | | | | | |
| Return on Equity - non-GAAP basis | | 20 | % | | 14 | % | | 23 | % |
The following table reconciles net income to Adjusted net income and Adjusted EPS for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | Year ended March 31, |
| | | | 2021 | | 2020 | | 2019 |
| Net income available to Thermon Group Holdings, Inc. | | | $ | 1,165 | | | $ | 11,938 | | | $ | 22,756 | |
| Consolidation of operating footprint in Canada | | | — | | | — | | | 757 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Acceleration of unamortized debt costs | | | 510 | | | 756 | | | 394 | |
| Tax expense/(benefit) for impact of rate reduction in foreign jurisdictions | | | 332 | | | (1,231) | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Amortization of intangible assets | | | 9,445 | | | 17,773 | | | 20,771 | |
| Restructuring and other charges/(income) | | | 8,623 | | | — | | | — | |
| Canadian Emergency Wage Subsidy | | | (6,412) | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| Tax effect of financial adjustments | | | (2,450) | | | (4,447) | | | (5,499) | |
| Adjusted net income (non-GAAP) | | | $ | 11,213 | | | $ | 24,789 | | | $ | 39,179 | |
| | | | | | | | |
| Adjusted-fully diluted earnings per common share (non-GAAP) | | | $ | 0.34 | | | $ | 0.75 | | | $ | 1.19 | |
| | | | | | | | |
| Fully-diluted common shares - non-GAAP basis (thousands) | | | 33,341 | | | 33,149 | | | 33,054 | |
|
| | | | | | | | | | | | | | |
| | | | |
| | | | Year ended March 31, |
| | | | | 2018 | | 2017 | | 2016 |
| Net income available to Thermon Group Holdings, Inc. | | | $ | 11,913 |
| | $ | 14,641 |
| | $ | 23,009 |
|
| 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 | | | 880 |
| | — |
| | 302 |
|
| Tax effect of Canadian tax rate change on deferred tax liability | | | — |
| | — |
| | 455 |
|
| Sumac acquisition related contingent consideration accounted for as compensation | | | — |
| | — |
| | 5,706 |
|
| Cost of restructuring Canadian operations | | | — |
| | — |
| | 578 |
|
| Release of deferred tax liability for undistributed foreign earnings and uncertain tax positions | | | (554 | ) | | (555 | ) | | (1,281 | ) |
| Impairment of intangible assets and goodwill related to Unitemp acquisition | | | — |
| | — |
| | 1,713 |
|
| Tax effect of financial adjustments | | | (2,260 | ) | | — |
| | (1,552 | ) |
| | | | |
| |
| |
|
| Adjusted Net Income - non-GAAP basis (former presentation) | | | $ | 20,680 |
| | $ | 14,086 |
| | $ | 28,930 |
|
| Adjusted fully-diluted earnings per common share - non-GAAP basis (former presentation) | | | $ | 0.63 |
| | $ | 0.43 |
| | $ | 0.89 |
|
| | | | | | | | | |
| Amortization of intangible assets | | | $ | 16,458 |
| | $ | 11,772 |
| | $ | 12,112 |
|
| Tax effect of intangible amortization | | | (4,687 | ) | | (3,626 | ) | | (3,258 | ) |
| Adjusted net income (non-GAAP) | | | $ | 32,451 |
| | $ | 22,232 |
| | $ | 37,784 |
|
| | | | | | | | | |
| Impact of intangible amortization to fully-diluted earnings per share (non-GAAP) | | | $ | 0.36 |
| | $ | 0.25 |
| | $ | 0.27 |
|
| | | | | | | | | |
| Adjusted-fully diluted earnings per common share (non-GAAP) (new presentation) (1) | | | $ | 0.99 |
| | $ | 0.68 |
| | $ | 1.16 |
|
| | | | |
| |
| |
|
| Fully-diluted common shares - non-GAAP basis (thousands) | | | 32,797 |
| | 32,633 |
| | 32,593 |
|
(1) The Company now presents non-GAAP Adjusted EPS to include the impact of intangible amortization.
The following table reconciles cash provided by operating activities to Free cash flow for the periods presented:
| | | | | Year Ended March 31, | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
| Cash provided by operating activities | | $ | 21,915 |
| | $ | 26,440 |
| | $ | 47,920 |
| Cash provided by operating activities | | $ | 30,289 | | | $ | 70,726 | | | $ | 23,227 | |
| Less: Purchases of property, plant and equipment, net of rental equipment sales | | (9,072 | ) | | (8,020 | ) | | (10,388 | ) | Less: Purchases of property, plant and equipment, net of rental equipment sales | | (8,132) | | | (10,855) | | | (12,036) | |
| Plus: Sales of rental equipment | | Plus: Sales of rental equipment | | 300 | | | 603 | | | 981 | |
| Plus: Proceeds from sales of land and buildings | | Plus: Proceeds from sales of land and buildings | | — | | | 242 | | | 33 | |
| Free cash flow provided | | $ | 12,843 |
| | $ | 18,420 |
| | $ | 37,532 |
| Free cash flow provided | | $ | 22,457 | | | $ | 60,716 | | | $ | 12,205 | |
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 63%65% of our fiscal 20182021 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, Brazilian Real, South African Rand, South Korean Won, Chinese Renminbi, Indian Rupee, Mexican Peso, Bahraini Dinars, 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, 20182021 and 2017,2020, the notional amounts of forward contracts we held to buy U.S. dollars in exchange for other major international currencies were $18.7$16.4 million and $2.4$9.8 million, respectively.
During fiscal 2018,2021, 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 $1.5$0.8 million for fiscal 2018.2021. Conversely, a 10% depreciation of the U.S. dollar relative to the Canadian Dollar would result in a net increase in net income of $1.8$1.0 million for fiscal 2018.2021. A 10% appreciation of the U.S. dollar relative to the Euro would result in a net decrease in net income of $0.4$0.3 million for fiscal 2018.2021. Conversely, a 10% depreciation of the U.S. dollar relative to the Euro would result in a net increase in net income of $0.5$0.3 million for fiscal 2018.2021.
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 transaction lossestransactions on our consolidated statements of operations were lossesgains of $5.7$0.3 million and gains of $0.6 million in fiscal 20182021 and fiscal 2017,2020, 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 2018,2021, we estimate that our sales were positivelynegatively impacted by $7.9$1.7 million when compared to foreign exchange translation rates that were in effect in fiscal 2017.2020. 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 2018,2021, we were mostly impacted by appreciation of the U.S. dollar relative to the Euro and the depreciation of the U.S. dollar relative to the Canadian Dollar and the Euro.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 gains of $12.0$28.6 million in fiscal 20182021 and losses of $4.5$15.5 million in fiscal 2017.2020. 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 into a cross currency swap for the purposes of mitigating potential exposures to currency rate fluctuations related to an intercompany note of $112.8$54.6 million with
our wholly-owned Canadian subsidiary, Thermon Canada .Inc. See Note 2, “Fair Value Measurements” to our consolidated financial statements included below in Item 8 of this annual report for further information regarding our cross currency swap.
Interest rate risk and foreign currency risk relating to debt. The interest rate forBorrowings under both our new variable rate term loan B credit facility was 5.41% as of March 31, 2018. Borrowings on ourand revolving credit facility will incur interest expense that is variable in relation to the LIBOR rate. The interest rate for borrowings under our term loan B credit facility was 4.75% as of March 31, 2021. 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, 2018,2021, we had $225.0$148.5 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 $2.2$1.4 million increase or decrease in our annual interest expense. As of March 31, 2021, 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 |
| Page |
| Audited Financial Statements of Thermon Group Holdings, Inc. and its Consolidated Subsidiaries | |
| |
| |
| |
| |
| |
| |
Report of Independent Registered Public Accounting Firm
To the ShareholdersStockholders 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, 20182021 and 2017,2020, 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, 2018,2021, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the years in the three yearthree-year period ended March 31, 2018,2021, 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, 2018,2021, 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 May 30, 201827, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company has elected to change its method of accounting for leases as of April 1, 2019 due to the adoption of Accounting Standards Update (ASU) 2016-02, “Leases” (Topic 842).
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 Matters
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 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 opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Sufficiency of audit evidence surrounding revenues recognized over time using cost-to-cost percentage of completion
As discussed in Note 4 to the consolidated financial statements, the Company recognized $114,379 thousand of revenues over time using cost-to-cost percentage of completion or time and materials methodologies, for the year ended March 31, 2021.
We identified the evaluation of the sufficiency of audit evidence related to revenues recognized over time using cost-to-cost percentage of completion as a critical audit matter. A high degree of subjective auditor judgment was required because of the geographical dispersion of the Company’s 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. We applied auditor judgment to determine the 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 revenue recognition process, including controls associated with contract setup, project cost accumulation, monitoring of project status, and estimated costs to complete. We assessed the recorded revenues by selecting a sample of projects and comparing the amounts recognized for consistency with underlying documentation, including contracts with customers, cost 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 evaluated the sufficiency of audit evidence obtained over revenues recognized over time using cost-to-cost percentage of completion by assessing the results of procedures performed.
/s/ KPMG LLP
We have served as the Company’s auditor since 2013.
San Antonio,
Austin, Texas
May 30, 201827, 2021
Report of Independent Registered Public Accounting Firm
To the ShareholdersStockholders and Board of Directors
Thermon Group Holdings, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Thermon Group Holdings, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of March 31, 2018,2021, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2018,2021, 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, 20182021 and 2017,2020, 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, 2018,2021, and the related notes (collectively, the consolidated financial statements), and our report dated May 30, 2018,27, 2021 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired CCI Thermal Technologies Inc. during fiscal 2018, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2018, CCI Thermal Technologies Inc.’s internal control over financial reporting whose financial statements reflect 35 percent of total assets (of which approximately 24 percent represents goodwill and intangible assets included within the scope of the assessment) and 13 percent of total revenues of the related consolidated financial statement amounts of Thermon Group Holdings, Inc. as of and for the year ended March 31, 2018. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of CCI Thermal Technologies Inc.
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’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
San Antonio,
Austin, Texas
May 30, 2018
27, 2021
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, 2018 | | Year Ended March 31, 2017 | | Year Ended March 31, 2016 | | | | | | | | | | | | | | | | | |
| | | | | | | | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 | | Year Ended March 31, 2019 |
| Sales | | $ | 308,609 |
| | $ | 264,130 |
| | $ | 281,928 |
| Sales | | $ | 276,181 | | | $ | 383,486 | | | $ | 412,642 | |
| Cost of sales | | 164,798 |
| | 152,199 |
| | 150,613 |
| Cost of sales | | 158,938 | | | 221,848 | | | 236,702 | |
| Gross profit | | 143,811 |
| | 111,931 |
| | 131,315 |
| Gross profit | | 117,243 | | | 161,638 | | | 175,940 | |
| Operating expenses: | | | | | | | Operating expenses: | |
| Marketing, general and administrative and engineering | | 94,615 |
|
| 77,715 |
|
| 80,729 |
| |
| Marketing, general, administrative, and engineering | | Marketing, general, administrative, and engineering | | 91,398 | | | 111,202 | | | 106,660 | |
| Amortization of intangible assets | | 16,458 |
| | 11,772 |
| | 12,112 |
| Amortization of intangible assets | | 9,445 | | | 17,773 | | | 20,771 | |
| Impairment of intangible assets and goodwill | | — |
| | — |
| | 1,713 |
| |
| Restructuring and other charges/(income) | | Restructuring and other charges/(income) | | 8,623 | | | 0 | | | 0 | |
| Income from operations | | 32,738 |
|
| 22,444 |
|
| 36,761 |
| Income from operations | | 7,777 | | | 32,663 | | | 48,509 | |
| Other income/(expenses): | | | | | | | Other income/(expenses): | |
| Interest income | | 606 |
| | 566 |
| | 423 |
| Interest income | | 76 | | | 252 | | | 238 | |
| Interest expense | | (8,984 | ) | | (3,518 | ) | | (4,142 | ) | Interest expense | | (10,261) | | | (14,279) | | | (15,714) | |
| Loss on extinguishment of debt | | (376 | ) | | — |
| | — |
| |
| Other expense | | (5,595 | ) | | (410 | ) | | (676 | ) | |
| Income before provision for income taxes | | 18,389 |
| | 19,082 |
| | 32,366 |
| |
| Income tax expense | | 5,170 |
| | 4,098 |
| | 8,716 |
| |
| Net income | | 13,219 |
| | 14,984 |
| | 23,650 |
| |
| Income attributable to non-controlling interests | | 1,306 |
|
| 343 |
|
| 641 |
| |
| Net income available to Thermon Group Holdings, Inc. | | $ | 11,913 |
| | $ | 14,641 |
| | $ | 23,009 |
| |
| Other comprehensive income: | | | | | | | |
| Net income available to Thermon Group Holdings, Inc. | | $ | 11,913 |
| | $ | 14,641 |
| | $ | 23,009 |
| |
| | Other income/(expense) | | Other income/(expense) | | 2,135 | | | (1,558) | | | 109 | |
| Income/(loss) before provision for income taxes | | Income/(loss) before provision for income taxes | | (273) | | | 17,078 | | | 33,142 | |
| Income tax expense/(benefit) | | Income tax expense/(benefit) | | (1,438) | | | 5,142 | | | 9,973 | |
| Net income/(loss) | | Net income/(loss) | | 1,165 | | | 11,936 | | | 23,169 | |
| Income (loss) attributable to non-controlling interests | | Income (loss) attributable to non-controlling interests | | 0 | | | (2) | | | 413 | |
| Net income/(loss) available to Thermon Group Holdings, Inc. | | Net income/(loss) available to Thermon Group Holdings, Inc. | | $ | 1,165 | | | $ | 11,938 | | | $ | 22,756 | |
| Other comprehensive income (loss): | | Other comprehensive income (loss): | | | | | | |
| Net income/(loss) available to Thermon Group Holdings, Inc. | | Net income/(loss) available to Thermon Group Holdings, Inc. | | $ | 1,165 | | | $ | 11,938 | | | $ | 22,756 | |
| Foreign currency translation adjustment | | 12,030 |
| | (4,536 | ) | | (3,242 | ) | Foreign currency translation adjustment | | 28,615 | | (15,485) | | | (13,233) | |
| Derivative valuation, net of tax | | 34 |
| | 791 |
| | (340 | ) | |
| | Other | | (270 | ) | | (21 | ) | | 413 |
| Other | | (640) | | | 540 | | | 825 | |
| Total comprehensive income | | $ | 23,707 |
| | $ | 10,875 |
| | $ | 19,840 |
| |
| Net income per common share: | | | | | | | |
| Total comprehensive income (loss) | | Total comprehensive income (loss) | | $ | 29,140 | | | $ | (3,007) | | | $ | 10,348 | |
| Net income/(loss) per common share: | | Net income/(loss) per common share: | | | | | | |
| Basic | | $ | 0.37 |
| | $ | 0.45 |
| | $ | 0.72 |
| Basic | | $ | 0.04 | | | $ | 0.36 | | | $ | 0.70 | |
| Diluted | | 0.36 |
| | 0.45 |
| | 0.71 |
| Diluted | | 0.03 | | | 0.36 | | | 0.69 | |
| Weighted-average shares used in computing net income per common share: | | | | | | | |
| Weighted-average shares used in computing net income/(loss) per common share: | | Weighted-average shares used in computing net income/(loss) per common share: | |
| Basic | | 32,423,581 |
| | 32,301,661 |
| | 32,176,925 |
| Basic | | 33,134,592 | | | 32,760,327 | | | 32,568,541 | |
| Diluted | | 32,797,351 |
| | 32,633,281 |
| | 32,592,646 |
| Diluted | | 33,340,954 | | | 33,148,670 | | | 33,054,304 | |
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,
2018 | | March 31,
2017 | | March 31,
2021 | | March 31,
2020 |
| Assets | |
| | |
| Assets | | | |
| Current assets: | |
| | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 33,879 |
| | $ | 42,842 |
| Cash and cash equivalents | $ | 40,124 | | | $ | 43,237 | |
| Investments | 1,022 |
| | 44,786 |
| |
| Accounts receivable, net of allowance for doubtful accounts of $1,231 and $518 as of March 31, 2018 and 2017, respectively | 94,411 |
| | 63,719 |
| |
| | Accounts receivable, net of allowance for doubtful accounts of $2,074 and $834 as of March 31, 2021 and 2020, respectively | | Accounts receivable, net of allowance for doubtful accounts of $2,074 and $834 as of March 31, 2021 and 2020, respectively | 74,501 | | | 92,478 | |
| Inventories, net | 63,829 |
| | 34,020 |
| Inventories, net | 63,790 | | | 60,273 | |
| Costs and estimated earnings in excess of billings on uncompleted contracts | 16,114 |
| | 4,973 |
| |
| Contract assets | | Contract assets | 11,379 | | | 10,194 | |
| Prepaid expenses and other current assets | 9,054 |
| | 5,806 |
| Prepaid expenses and other current assets | 8,784 | | | 9,219 | |
| Income tax receivable | 1,885 |
| | 2,028 |
| Income tax receivable | 8,231 | | | 2,535 | |
| Total current assets | 220,194 |
| | 198,174 |
| Total current assets | $ | 206,809 | | | $ | 217,936 | |
| Property, plant and equipment, net | 74,485 |
| | 43,266 |
| |
| Property, plant and equipment, net of depreciation and amortization of $55,555 and $43,550 as of March 31, 2021 and 2020, respectively | | Property, plant and equipment, net of depreciation and amortization of $55,555 and $43,550 as of March 31, 2021 and 2020, respectively | 72,630 | | | 72,542 | |
| Goodwill | 210,566 |
| | 122,521 |
| Goodwill | 213,038 | | | 197,978 | |
| Intangible assets, net | 151,434 |
| | 86,178 |
| Intangible assets, net | 103,784 | | | 104,546 | |
| Operating lease right-of-use assets | | Operating lease right-of-use assets | 12,619 | | | 16,637 | |
| Deferred income taxes | 3,425 |
| | 2,823 |
| Deferred income taxes | 2,586 | | | 2,904 | |
| Other long term assets | 2,373 |
| | 1,118 |
| |
| Other long-term assets | | Other long-term assets | 6,412 | | | 8,362 | |
| Total assets | $ | 662,477 |
| | $ | 454,080 |
| Total assets | $ | 617,878 | | | $ | 620,905 | |
| Liabilities and equity | |
| | |
| Liabilities and equity | | | |
| Current liabilities: | |
| | |
| Current liabilities: | | | |
| Accounts payable | $ | 22,995 |
| | $ | 15,683 |
| Accounts payable | $ | 19,722 | | | $ | 25,070 | |
| Accrued liabilities | 22,810 |
| | 13,142 |
| Accrued liabilities | 23,517 | | | 23,757 | |
| Current portion of long term debt | 2,500 |
| | 20,250 |
| |
| Billings in excess of costs and estimated earnings on uncompleted contracts | 8,143 |
| | 2,767 |
| |
| Current portion of long-term debt | | Current portion of long-term debt | 2,500 | | | 2,500 | |
| | Contract liabilities | | Contract liabilities | 2,959 | | | 4,538 | |
| Lease liabilities | | Lease liabilities | 3,511 | | | 3,553 | |
| Income taxes payable | 5,952 |
| | 481 |
| Income taxes payable | 219 | | | 1,217 | |
| Total current liabilities | 62,400 |
| | 52,323 |
| Total current liabilities | $ | 52,428 | | | $ | 60,635 | |
| Long-term debt, net of current maturities and deferred debt issuance costs and debt discounts of $7,967 and $524 as of March 31, 2018 and 2017, respectively | 214,533 |
| | 60,226 |
| |
| Long-term debt, net of current maturities and deferred debt issuance costs and debt discounts of $2,983 and $4,447 as of March 31, 2021 and 2020, respectively | | Long-term debt, net of current maturities and deferred debt issuance costs and debt discounts of $2,983 and $4,447 as of March 31, 2021 and 2020, respectively | 143,017 | | | 169,053 | |
| Deferred income taxes | 34,252 |
| | 25,661 |
| Deferred income taxes | 21,088 | | | 22,245 | |
| Other noncurrent liabilities | 10,439 |
| | 3,368 |
| |
| Non-current lease liabilities | | Non-current lease liabilities | 12,373 | | | 15,571 | |
| Other non-current liabilities | | Other non-current liabilities | 9,811 | | | 6,962 | |
| Total liabilities | 321,624 |
|
| 141,578 |
| Total liabilities | $ | 238,717 | | | $ | 274,466 | |
| Equity | | | | Equity | |
| Common stock: $.001 par value; 150,000,000 authorized; 32,492,339 and 32,365,553 shares issued and outstanding at March 31, 2018 and 2017, respectively | 32 |
| | 32 |
| |
| Common stock: $.001 par value; 150,000,000 authorized; 33,225,808 and 32,916,818 shares issued and outstanding at March 31, 2021 and 2020, respectively | | Common stock: $.001 par value; 150,000,000 authorized; 33,225,808 and 32,916,818 shares issued and outstanding at March 31, 2021 and 2020, 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 | 0 | | | 0 | |
| Additional paid in capital | 222,622 |
| | 219,284 |
| Additional paid in capital | 231,322 | | | 227,741 | |
| Accumulated other comprehensive loss | (36,541 | ) | | (48,335 | ) | Accumulated other comprehensive loss | (35,919) | | | (63,894) | |
| Retained earnings | 148,812 |
| | 136,899 |
| Retained earnings | 183,725 | | | 182,559 | |
| Total Thermon Group Holdings, Inc. shareholders' equity | 334,925 |
|
| 307,880 |
| |
| Non-controlling interests | 5,928 |
|
| 4,622 |
| |
| | Total equity | 340,853 |
| | 312,502 |
| Total equity | $ | 379,161 | | | $ | 346,439 | |
| Total liabilities and equity | $ | 662,477 |
| | $ | 454,080 |
| Total liabilities and equity | $ | 617,878 | | | $ | 620,905 | |
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 |
| | | Common Stock Outstanding | | Common Stock | | Additional Paid-in Capital | | Retained Earnings/ (Deficit) | | Non-controlling Interests | | Accumulated Other Comprehensive Income (Loss) | | Total | |
| Balances at March 31, 2015 | 32,082,393 |
| | $ | 32 |
| | $ | 213,885 |
| | $ | 99,249 |
| | $ | — |
| | $ | (41,400 | ) | | $ | 271,766 |
| |
| Balances at March 31, 2018 | | 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 | Issuance of common stock in exercise of stock options | 29,056 |
| | — |
| | 240 |
| | — |
| | — |
| | — |
| | 240 |
| Issuance of common stock in exercise of stock options | 37,906 | | | — | | | 396 | | | — | | | — | | | — | | | 396 | |
| Issuance of restricted stock as deferred compensation to employees and directors | Issuance of restricted stock as deferred compensation to employees and directors | 18,578 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Issuance of restricted stock as deferred compensation to employees and directors | 20,064 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock as deferred compensation to employees | Issuance of common stock as deferred compensation to employees | 69,704 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Issuance of common stock as deferred compensation to employees | 51,775 | | | 1 | | | — | | | — | | | — | | | — | | | 1 | |
| Issuance of common stock as deferred compensation to named executive officers | Issuance of common stock as deferred compensation to named executive officers | 22,989 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Issuance of common stock as deferred compensation to named executive officers | 22,116 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock compensation expense | Stock compensation expense | — |
| | — |
| | 3,749 |
| | — |
| | — |
| | — |
| | 3,749 |
| Stock compensation expense | — | | | — | | | 4,148 | | | — | | | — | | | — | | | 4,148 | |
| Excess tax deduction from stock options | — |
| | — |
| | 92 |
| | — |
| | — |
| | — |
| | 92 |
| |
| | Repurchase of employee stock units on vesting | Repurchase of employee stock units on vesting | — |
| | — |
| | (1,265 | ) | | — |
| | — |
| | — |
| | (1,265 | ) | Repurchase of employee stock units on vesting | — | | | — | | | (598) | | | — | | | — | | | — | | | (598) | |
| Net income available to Thermon Group Holdings, Inc. | Net income available to Thermon Group Holdings, Inc. | — |
| | — |
| | — |
| | 23,009 |
| | — |
| | — |
| | 23,009 |
| Net income available to Thermon Group Holdings, Inc. | — | | | — | | | — | | | 22,756 | | | — | | | — | | | 22,756 | |
| Foreign currency translation adjustment | Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | (3,242 | ) | | (3,242 | ) | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | (13,233) | | | (13,233) | |
| Interest rate swap | — |
| | — |
| | — |
| | — |
| | — |
| | (340 | ) | | (340 | ) | |
| | Other | Other | — |
| | — |
| | — |
| | — |
| | — |
| | 413 |
| | 413 |
| Other | — | | | — | | | — | | | — | | | — | | | 825 | | | 825 | |
| Non-controlling interest in acquisition | — |
| | — |
| | — |
| | — |
| | 3,638 |
| | — |
| | 3,638 |
| |
| Income attributable to non-controlling interests | — |
| | — |
| | — |
| | — |
| | 641 |
| | — |
| | 641 |
| |
| Balances at March 31, 2016 | 32,222,720 |
| | $ | 32 |
| | $ | 216,701 |
| | $ | 122,258 |
| | $ | 4,279 |
| | $ | (44,569 | ) | | $ | 298,701 |
| |
| Remeasurement of non-controlling interest | | Remeasurement of non-controlling interest | — | | | — | | | (3,528) | | | — | | | 3,528 | | | — | | | — | |
| Purchase of non-controlling interest | | Purchase of non-controlling interest | — | | | — | | | — | | | — | | | (5,665) | | | — | | | (5,665) | |
| Distribution to non-controlling interest | | Distribution to non-controlling interest | — | | | — | | | — | | | (947) | | | — | | | (947) | |
| Income attributable to non-controlling interest | | Income attributable to non-controlling interest | — | | | — | | | — | | | — | | | 413 | | | 413 | |
| Balances at March 31, 2019 | | 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 | Issuance of common stock in exercise of stock options | 43,121 |
| | — |
| | 250 |
| | — |
| | — |
| | — |
| | 250 |
| Issuance of common stock in exercise of stock options | 159,062 | | | — | | | 1,016 | | | — | | | — | | | — | | | 1,016 | |
| Issuance of common stock as deferred compensation to directors | Issuance of common stock as deferred compensation to directors | 19,824 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Issuance of common stock as deferred compensation to directors | 26,608 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock as deferred compensation to employees | Issuance of common stock as deferred compensation to employees | 47,179 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Issuance of common stock as deferred compensation to employees | 59,570 | | | 0 | | | — | | | — | | | — | | | — | | | 0 | |
| Issuance of common stock as deferred compensation to executive officers | Issuance of common stock as deferred compensation to executive officers | 32,709 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Issuance of common stock as deferred compensation to executive officers | 47,378 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock compensation expense | Stock compensation expense | — |
| | — |
| | 3,402 |
| | — |
| | — |
| | — |
| | 3,402 |
| Stock compensation expense | — | | | — | | | 4,960 | | | — | | | — | | | — | | | 4,960 | |
| Excess tax deduction from stock options | — |
| | — |
| | (1,069 | ) | | — |
| | — |
| | — |
| | (1,069 | ) | |
| | Repurchase of employee stock units on vesting | | Repurchase of employee stock units on vesting | — | | | — | | | (969) | | | — | | | — | | | — | | | (969) | |
| Net income available to Thermon Group Holdings, Inc. | Net income available to Thermon Group Holdings, Inc. | — |
| | — |
| | — |
| | 14,641 |
| | — |
| | — |
| | 14,641 |
| Net income available to Thermon Group Holdings, Inc. | — | | | — | | | — | | | 11,938 | | | — | | | — | | | 11,938 | |
| Foreign currency translation adjustment | Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | (4,536 | ) | | (4,536 | ) | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | (15,485) | | | (15,485) | |
| Interest rate swap | — |
| | — |
| | — |
| | — |
| | — |
| | 791 |
| | 791 |
| |
| Other | Other | — |
| | — |
| | — |
| | — |
| | — |
| | (21 | ) | | (21 | ) | Other | — | | | — | | | — | | | — | | | — | | | 540 | | | 540 | |
| Remeasurement of non-controlling interest | | Remeasurement of non-controlling interest | — | | | — | | | (306) | | | — | | | 306 | | | — | | | — | |
| Purchase of non-controlling interest | | Purchase of non-controlling interest | — | | — | | — | | | — | | | — | | | (4,508) | | | — | | | (4,508) | |
| | Income attributable to non-controlling interests | Income attributable to non-controlling interests | — |
| | — |
| | — |
| | — |
| | 343 |
| | — |
| | 343 |
| Income attributable to non-controlling interests | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
| Balances at March 31, 2017 | 32,365,553 |
| | $ | 32 |
| | $ | 219,284 |
| | $ | 136,899 |
| | $ | 4,622 |
| | $ | (48,335 | ) | | $ | 312,502 |
| |
| Balances at March 31, 2020 | | Balances at March 31, 2020 | 32,916,818 | | | $ | 33 | | | $ | 227,741 | | | $ | 182,559 | | | $ | 0 | | | $ | (63,894) | | | $ | 346,439 | |
| Issuance of common stock in exercise of stock options | Issuance of common stock in exercise of stock options | 42,636 |
| | — |
| | 300 |
| | — |
| | — |
| | — |
| | 300 |
| Issuance of common stock in exercise of stock options | 97,156 | | | — | | | 629 | | | — | | | — | | | — | | | 629 | |
| Issuance of common stock as deferred compensation to directors | Issuance of common stock as deferred compensation to directors | 20,216 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Issuance of common stock as deferred compensation to directors | 52,098 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock as deferred compensation to employees | Issuance of common stock as deferred compensation to employees | 43,445 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Issuance of common stock as deferred compensation to employees | 88,254 | | | 0 | | | — | | | — | | | — | | | — | | | 0 | |
| Issuance of common stock as deferred compensation to executive officers | Issuance of common stock as deferred compensation to executive officers | 20,489 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Issuance of common stock as deferred compensation to executive officers | 71,482 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock compensation expense | Stock compensation expense | — |
| | — |
| | 3,519 |
| | — |
| | — |
| | — |
| | 3,519 |
| Stock compensation expense | — | | | — | | | 3,728 | | | — | | | — | | | — | | 3,728 | |
| Repurchase of employee stock units on vesting | Repurchase of employee stock units on vesting | — |
| | — |
| | (481 | ) | | — |
| | — |
| | — |
| | (481 | ) | Repurchase of employee stock units on vesting | — | | | — | | | (784) | | | — | | | — | | | — | | | (784) | |
| Net income available to Thermon Group Holdings, Inc. | Net income available to Thermon Group Holdings, Inc. | — |
| | — |
| | — |
| | 11,913 |
| | — |
| | — |
| | 11,913 |
| Net income available to Thermon Group Holdings, Inc. | — | | | — | | | — | | | 1,165 | | | — | | | — | | | 1,165 | |
| | Foreign currency translation adjustment | Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | 12,030 |
| | 12,030 |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | 28,615 | | | 28,615 | |
| Interest rate swap | — |
| | — |
| | — |
| | — |
| | — |
| | 34 |
| | 34 |
| |
| | Other | Other | — |
| | — |
| | — |
| | — |
| | — |
| | (270 | ) | | (270 | ) | Other | — | | | — | | | 8 | | | 1 | | | — | | | (640) | | | (631) | |
| 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 |
| |
| | Balances at March 31, 2021 | | Balances at March 31, 2021 | 33,225,808 | | | $ | 33 | | | $ | 231,322 | | | $ | 183,725 | | | $ | 0 | | | $ | (35,919) | | | $ | 379,161 | |
The accompanying notes are an integral part of these consolidated financial statements
Thermon Group Holdings, Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)thousands) | | | | Year Ended March 31, 2018 | | Year Ended March 31, 2017 | | Year Ended March 31, 2016 | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 | | Year Ended March 31, 2019 |
| Operating activities | |
| | |
| | | Operating activities | | | | | |
| Net income | $ | 13,219 |
| | $ | 14,984 |
| | $ | 23,650 |
| Net income | $ | 1,165 | | | $ | 11,936 | | | $ | 23,169 | |
| Adjustment to reconcile net income to net cash provided by operating activities: | |
| | |
| | | Adjustment to reconcile net income to net cash provided by operating activities: | | | | |
| Depreciation and amortization | 24,420 |
| | 17,832 |
| | 17,409 |
| Depreciation and amortization | 20,722 | | | 28,275 | | | 29,965 | |
| Amortization of debt costs | 1,657 |
| | 390 |
| | 732 |
| Amortization of debt costs | 1,525 | | | 1,885 | | | 1,756 | |
| Amortization of inventory step-up | 869 |
| | — |
| | — |
| Amortization of inventory step-up | 0 | | | 0 | | | 170 | |
| Loss on extinguishment of debt | 376 |
| | — |
| | — |
| |
| | Stock compensation expense | 3,519 |
| | 3,402 |
| | 3,749 |
| Stock compensation expense | 3,728 | | | 4,960 | | | 4,148 | |
| Impairment of acquisition related to goodwill and intangibles | — |
| | — |
| | 1,713 |
| |
| | Loss on sale of business, net of cash surrendered | | Loss on sale of business, net of cash surrendered | 2,065 | | | 0 | | | 0 | |
| Deferred income taxes | (11,337 | ) | | (3,262 | ) | | (4,090 | ) | Deferred income taxes | (3,072) | | | (3,737) | | | (5,552) | |
| Long term foreign exchange derivative | 1,540 |
| | — |
| | — |
| |
| Release of reserve for uncertain tax positions | — |
| | (128 | ) | | (1,312 | ) | |
| Other | (773 | ) | | 152 |
| | 510 |
| |
| Long-term cross currency swap loss/(gain) | | Long-term cross currency swap loss/(gain) | 5,842 | | | (2,580) | | | (3,313) | |
| Reserve (release) for uncertain tax positions | | Reserve (release) for uncertain tax positions | 79 | | | (408) | | | 1,136 | |
| | Remeasurement loss/(gain) on intercompany balances | | Remeasurement loss/(gain) on intercompany balances | (6,227) | | | 6,169 | | | 4,147 | |
| Changes in operating assets and liabilities: | |
| | |
| | | Changes in operating assets and liabilities: | | | | |
| Accounts receivable | (13,818 | ) | | (5,212 | ) | | 5,211 |
| Accounts receivable | 22,930 | | | 9,449 | | | (14,541) | |
| Inventories | (9,059 | ) | | 6,579 |
| | 1,637 |
| Inventories | (549) | | | 1,407 | | | (3,432) | |
| Costs and estimated earnings in excess of billings on uncompleted contracts | (6,067 | ) | | 2,599 |
| | (350 | ) | |
| Contract assets | | Contract assets | (2,693) | | | 12,220 | | | (11,990) | |
| Other current and non-current assets | (2,625 | ) | | (570 | ) | | (2,125 | ) | Other current and non-current assets | (2,127) | | | (2,915) | | | (370) | |
| Accounts payable | 2,003 |
| | (4,608 | ) | | 1,006 |
| Accounts payable | (5,651) | | | 3,407 | | | (21) | |
| Accrued liabilities and non-current liabilities | 13,950 |
| | (3,173 | ) | | (594 | ) | Accrued liabilities and non-current liabilities | (608) | | | (284) | | | 4,076 | |
| Income taxes payable and receivable | 4,041 |
| | (2,545 | ) | | 774 |
| Income taxes payable and receivable | (6,840) | | | 942 | | | (6,121) | |
| Net cash provided by operating activities | $ | 21,915 |
| | $ | 26,440 |
| | $ | 47,920 |
| Net cash provided by operating activities | $ | 30,289 | | | $ | 70,726 | | | $ | 23,227 | |
| Investing activities | |
| | |
| | | Investing activities | | | | |
| Purchases of property, plant and equipment | $ | (10,008 | ) | | $ | (8,370 | ) | | $ | (12,581 | ) | Purchases of property, plant and equipment | $ | (8,132) | | | $ | (10,855) | | | $ | (12,036) | |
| Sales of rental equipment at net book value | 936 |
| | 350 |
| | 2,193 |
| |
| Sales of rental equipment | | Sales of rental equipment | 300 | | | 603 | | | 981 | |
| Proceeds from the sale of property, plant and equipment | 13 |
| | 811 |
| | — |
| Proceeds from the sale of property, plant and equipment | 0 | | | 242 | | | 33 | |
| Cash paid for acquisitions, net of cash acquired | (202,693 | ) | | — |
| | (31,180 | ) | |
| Purchase of investments | (8,123 | ) | | (44,786 | ) | | — |
| |
| | Proceeds from the sale of investments | 53,406 |
| | — |
| | — |
| Proceeds from the sale of investments | 0 | | | 0 | | | 952 | |
| Net cash used in investing activities | $ | (166,469 | ) | | $ | (51,995 | ) | | $ | (41,568 | ) | Net cash used in investing activities | $ | (7,832) | | | $ | (10,010) | | | $ | (10,070) | |
| Financing activities | |
| | |
| | | Financing activities | | | | |
| Proceeds from senior secured notes | $ | 250,000 |
| | $ | — |
| | $ | — |
| |
| Payments on long term debt and revolving credit facility | (116,000 | ) | | $ | (13,500 | ) | | $ | (13,500 | ) | |
| | Payments on long-term debt and revolving credit facility | | Payments on long-term debt and revolving credit facility | $ | (64,963) | | | $ | (51,883) | | | $ | (40,323) | |
| Proceeds from revolving credit facility | 10,000 |
| | — |
| | — |
| Proceeds from revolving credit facility | 37,189 | | | 10,000 | | | 33,241 | |
| Lease financing, net | (264 | ) | | (257 | ) | | (235 | ) | |
| Issuance costs associated with debt financing | (9,698 | ) | | — |
| | (341 | ) | |
| | Purchase of shares from non-controlling interests | | Purchase of shares from non-controlling interests | 0 | | | (4,508) | | | (5,665) | |
| Distribution to non-controlling interest | | Distribution to non-controlling interest | 0 | | | 0 | | | (947) | |
| Lease financing | | Lease financing | (276) | | | (196) | | | (205) | |
| Issuance of common stock including exercise of stock options | 383 |
| | 168 |
| | 240 |
| Issuance of common stock including exercise of stock options | 629 | | | 1,016 | | | 396 | |
| Benefit (loss) from excess tax deduction from option exercises | — |
| | (448 | ) | | 92 |
| |
| Repurchase of employee stock units on vesting | (481 | ) | | (621 | ) | | (1,265 | ) | Repurchase of employee stock units on vesting | (784) | | | (969) | | | (598) | |
| | Net cash provided by (used in) financing activities | $ | 133,940 |
| | $ | (14,658 | ) | | $ | (15,009 | ) | Net cash provided by (used in) financing activities | $ | (28,205) | | | $ | (46,540) | | | $ | (14,101) | |
| Effect of exchange rate changes on cash and cash equivalents | $ | 1,651 |
| | $ | (1,516 | ) | | $ | (547 | ) | Effect of exchange rate changes on cash and cash equivalents | 2,192 | | | (2,011) | | | (1,542) | |
| Change in cash and cash equivalents | (8,963 | ) | | (41,729 | ) | | (9,204 | ) | Change in cash and cash equivalents | $ | (3,556) | | | $ | 12,165 | | | $ | (2,486) | |
| Cash and cash equivalents at beginning of period | 42,842 |
| | 84,570 |
| | 93,774 |
| |
| Cash and cash equivalents at end of period | $ | 33,879 |
| | $ | 42,842 |
| | $ | 84,570 |
| |
| Cash, cash equivalents and restricted cash at beginning of period | | Cash, cash equivalents and restricted cash at beginning of period | 46,006 | | | 33,841 | | | 36,327 | |
| Cash, cash equivalents and restricted cash at end of period | | Cash, cash equivalents and restricted cash at end of period | $ | 42,450 | | | $ | 46,006 | | | $ | 33,841 | |
| Cash paid for interest and income taxes | | | | | | Cash paid for interest and income taxes | | | | | |
| Interest | $ | 7,348 |
| | $ | 3,085 |
| | $ | 3,366 |
| |
| Interest paid | | Interest paid | $ | 8,736 | | | $ | 12,397 | | | $ | 13,959 | |
| Income taxes paid | 7,728 |
| | 9,280 |
| | 15,652 |
| Income taxes paid | 9,667 | | | 12,614 | | | 22,260 | |
| Income tax refunds received | 818 |
| | — |
| | 121 |
| Income tax refunds received | 2,070 | | | 4,842 | | | 900 | |
The accompanying notes are an integral part of these consolidated financial statements.
|
| | | | | | | | | | | | | |
| Thermon Group Holdings, Inc. |
| Notes to Consolidated Financial Statements |
(Dollars in Thousands, Except Sharethousands, except share and Per Share Data)per share data) |
March 31, 20182021 |
| | | | |
1. Organization and Summary of Significant Accounting Policies
Organization
On April 30, 2010, a group of investors led by entities affiliated with CHS Capital LLC ("CHS") and two2 other private equity firms acquired a controlling interest in Thermon Holding Corp. and its subsidiaries from Thermon Holdings, LLC ("Predecessor") for approximately $321,500$321,500 in a transaction that was financed by approximately $129,252$129,252 of equity investments by CHS, two other private equity firms and certain members of our current and former management team (collectively, the "management investors") and $210,000$210,000 of debt raised in an exempt Rule 144A senior secured note offering to qualified institutional investors (collectively, the "CHS Transactions"). The proceeds from the equity investments and debt financing were used both to finance the acquisition and pay related transaction costs. As a result of the CHS Transactions, Thermon Group Holdings, Inc. became the ultimate parent of Thermon Holding Corp. Thermon Group Holdings, Inc. and its direct and indirect subsidiaries are referred to collectively as "we," "our," or the "Company" herein. We refer
Canadian Emergency Wage Subsidy
On April 11, 2020, the Canadian government officially enacted the Canadian Emergency Wage Subsidy (the “CEWS”) for the purposes of assisting employers in financial hardship due to CHSthe COVID-19 pandemic and of reducing potential lay-offs of employees. The CEWS, which was made retroactive to March 15, 2020, generally provides “eligible entities” with a wage subsidy of up to 75% of “eligible remuneration” paid to an eligible employee per week, limited to a certain weekly maximum. On September 23, 2020, the two other private equity fund investors collectivelyCanadian government announced that the CEWS program would be extended through the summer of 2021 and announced certain modifications to the subsidy calculation. Our Canadian operations have benefited from such wage subsidies and have received distributions from the Canadian government. During fiscal 2021, we recorded subsidies in the amount of $6,842, as "our former private equity sponsors."an offset to the related underlying expenses and assets, accordingly.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company, its subsidiaries and entities in which the Company has a controlling financial interest. The ownership of noncontrollingnon-controlling investors is recorded as noncontrollingnon-controlling interests. All significant inter-company balances and transactions have been eliminated in consolidation. Consolidated subsidiaries domiciled in foreign countries comprised approximately 63%65%, 55%59% and 55%63%, of the Company's consolidated sales and $33,501, $21,698 and $19,304 of the Company's consolidated pretax income for fiscal 2018,2021, fiscal 20172020 and fiscal 2016,2019, respectively, and 68%65% and 59%61%, of the Company's consolidated total assets at March 31, 20182021 and 2017,2020, respectively.
Segment Reporting
In connection with acquisitions made since fiscal 2015, the Company reviewed its determination of segments. Previously, we aggregated geographic markets into one reportable segment. Based on our review, we revised our segment reporting to fourWe maintain 4 reportable segments based on fourthe 4 geographic countries or regions:regions in which we operate: (i) United States and Latin America ("US-LAM"), (ii) Canada, (iii) Europe, Middle East and Asia. Within our four reportable segments, our primary productsAfrica ("EMEA") and services are focused on thermal solutions primarily related to the electrical heat tracing industry. Each of our reportable segments serves a similar class of customers including large EPC companies, international and regional oil and gas companies, commercial sub-contractors, electrical component distributors and direct sales to existing plant or industrial applications.(iv) Asia-Pacific ("APAC"). Profitability within our segments is measured by operating income. Profitability can vary in each of our reportable segments based on the competitive environment within the region, the level of corporate overhead, such as the salaries of our senior executives, and the level of research and development and marketing activities in the region, as well as the mix of products and services. Since March 2015, we have acquired Unitemp, IPI, Sumac and Thermon Heating Systems ("THS"). Both Unitemp and IPI offer thermal solutions and have been included in our Europe and United States reportable segments, respectively. Sumac provides temporary power products that differ from our core thermal solutions business. As operating results from Sumac comprise less than 10% of our total sales and operating income, Sumac has been aggregated in our Canada segment. THS, recently acquired in October 2017, has similar economic characteristics as the core Thermon process heating operations. Management intends to integrate THS into the existing Thermon operations as soon as practicable. Therefore, THS has been aggregated in our Canada and United States segments. See Note 17,19, "Segment Information" for financial data relating to our four reportable geographic segments.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
Cash Equivalents
Cash and cash equivalents consist of cash in bank and money market funds. All highly liquid investments purchased with original maturities of three months or less are considered to be cash equivalents.
Restricted Cash
The Company maintains restricted cash related to certain letter of credit guarantees and performance bonds securing performance obligations. The following table provides a reconciliation of cash, cash equivalents, restricted cash included in prepaid expenses and other current assets and restricted cash included in other long-term assets reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows.
| | | | | | | | | | | | | | | | | |
| March 31,
2021 | | March 31,
2020 | | March 31,
2019 |
| Cash and cash equivalents | $ | 40,124 | | | $ | 43,237 | | | $ | 31,402 | |
| Restricted cash included in prepaid expenses and other current assets | 1,962 | | | 2,421 | | | 1,624 | |
| Restricted cash included in other long-term assets | 364 | | | 348 | | | 815 | |
| Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | $ | 42,450 | | | $ | 46,006 | | | $ | 33,841 | |
Amounts shown in restricted cash included in prepaid expenses and other current assets and other long-term assets represent those required to be set aside by a contractual agreement, which contain cash deposits pledged as collateral on performance bonds and letters of credit. Amounts shown in restricted cash in other long-term assets represent such agreements that require a commitment term longer than one year.
Receivables
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 theirits 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 the chemical and petrochemical, oil chemical processing and gas, power generation, industries.rail and transit, and other industries; we are diversifying our customer base through numerous other end markets. Although the Company has a concentration of credit risk within these industries, the Company has not experienced significant collection losses on sales to these customers. The Company's foreign receivables are not concentrated within any one geographic 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.
The Company performs credit evaluations of new customers and sometimes requires deposits, prepayments or use of trade letters of credit to mitigate our credit risk. Allowance for doubtful account balances were $1,231$2,074 and $518$834 as of March 31, 20182021 and 2017,2020, respectively. Although we have fully provided for these balances, we continue to pursue collection of these receivables.
The following table summarizes the annual changes in our allowance for doubtful accounts:
| | | | | | | | | | | | | | |
| Balance at March 31, 2018 | | | $ | 1,231 | |
| Additions to reserve | | | 354 | |
| Write-off of uncollectible accounts | | | (598) | |
| Balance at March 31, 2019 | | | 987 | |
| Additions to reserve | | | 674 | |
| Write-off of uncollectible accounts | | | (827) | |
| Balance at March 31, 2020 | | | 834 | |
| Additions to reserve | | | 1,466 | |
| Write-off of uncollectible accounts | | | (226) | |
| Balance at March 31, 2021 | | | $ | 2,074 | |
|
| | | | | | |
| Balance at March 31, 2015 | | | $ | 785 |
|
| | Reduction in reserve | | | 214 |
|
| | Write-off of uncollectible accounts | | | (343 | ) |
| Balance at March 31, 2016 | | | 656 |
|
| | Additions to reserve | | | 307 |
|
| | Write-off of uncollectible accounts | | | (445 | ) |
| Balance at March 31, 2017 | | | 518 |
|
| | Additions to reserve | | | 787 |
|
| | Write-off of uncollectible accounts | | | (74 | ) |
| Balance at March 31, 2018 | | | $ | 1,231 |
|
Inventories
Inventories, principally raw materials and finished goods, are valued at the lower of cost (weighted average cost) or market.net realizable value. We write down our inventory for estimated excess or obsolete inventory equal to the difference between the cost of inventory and estimated fair market value based on assumptions of future demand and market conditions. Fair market 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, as well as various types of immersion, circulation and space heaters for THS. 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 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. Historically, 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.
Revenue Recognition
RevenuesEffective April 1, 2018, we adopted Accounting Standards Codification Topic 606, Revenue from sales of products are recognized when persuasive evidence of an agreement exists, deliveryContracts with Customers ("ASC 606") using the modified retrospective method and applying ASC 606 to all revenue contracts with customers which were not completed as of the product has occurred, the fee is fixed or determinable, and collectability is probable.
On average, less than 20%date of our annual revenues are derived from the installation of heat tracing solutions for which we apply construction-type accounting. These construction-related contracts are awarded on a competitive bid and negotiated basis. We offer our customers a range of contracting options, including cost-reimbursable, fixed-price and hybrid, which has both cost-reimbursable and fixed-price characteristics. Most of our construction contract revenue is recognized using either the percentage-of-completion method, based on the percentage that actual costs-to-date bear to total estimated costs to complete each contract or as it relates to cost-reimbursable projects, revenue is recognized as work is performed. We follow the guidance of FASB ASC Revenue Recognition Topic 605-35 for accounting policies relating to our use of the percentage-of-completion method, estimating costs and revenue recognition, including the recognition of profit incentives, unapproved change orders and claims and combining and segmenting contracts. We utilize the cost-to-cost approach to measure the extent of progress toward completion, as we believe this method is less subjective than relying on assessments of physical progress. Under the cost-to-cost approach, the use of total estimated cost to complete each contract is a significant variable in the process of determining recognized revenue and is a significant factor in the accounting for contracts. Significant estimates that impact the cost to complete each contract are costs of engineering, materials, components, equipment, labor and subcontracts; labor productivity; schedule durations, including subcontract and supplier progress; liquidated damages; contract disputes, including claims; achievement of contractual performance requirements; and contingency, among others. The cumulative impact of revisions in total cost estimates as contracts progress is reflected in the period in which these changes become known, including the recognition of any losses expected to be incurred on contracts in progress. Due to the various estimates inherent in our construction contract accounting, actual results could differ from those estimates. Our historical construction contract cost estimates have generally been accurate, and management does not believe that there is a reasonable likelihood that there will be a material change in future estimates or the methodology used to calculate these estimates.
Sales which are not accounted for under ASC 605-35 may have multiple elements, including heat tracing product, engineering and "field" services such as inspection, repair and/or training. We assess such revenue arrangements to determine the appropriate units of accounting. Each deliverable provided under multiple-element arrangements is considered a separate unit of accounting. Revenues associatedadoption. In accordance with the sale of a product are recognized upon delivery, while the revenue for engineering and field services are recognized as services are rendered, limited to the amount of consideration which ismodified retrospective approach, prior period amounts were not contingent upon the successful provision of future products or services under the arrangement. Amounts assigned to each unit of accounting are based on an allocation of total arrangement consideration using a hierarchy of estimated selling price for the deliverables. The selling price used for each deliverable will be based on Vendor Specific Objective Evidence ("VSOE"), if available, Third Party Evidence ("TPE"), if VSOE is not available, or estimated selling price, if neither VSOE nor TPE is available. See "Recent Accounting Pronouncements" within Note 1 for additional information onadjusted. We expect the impact of Accounting Standard Update 2014-9the adoption of the new standard to continue to be immaterial to revenues and net income on our performance obligations and the method which we determine and allocate the price of our contracts beginning in fiscal 2019.
an ongoing basis. Please refer to Note 4 "Revenue from Contracts with Customers" for additional information.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for renewals and improvements that significantly extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs of assets are charged to operations as incurred whenincurred. When assets are sold or retired, the cost and accumulated depreciation are removed from the accounts and any gain or loss is credited or charged to operations.
Depreciation is computed using the straight-line method over the following lives:
| | | | | | | | | | | | | | | | | |
| | | Useful Lives in Years |
| Land improvements | | | 15 | - | 20 |
| Buildings and improvements | | | 10 | - | 40 |
| Machinery and equipment | | | 3 | - | 25 |
| Office furniture and equipment | | | 3 | - | 10 |
| Internally developed software | | | 5 | - | 7 |
Goodwill and Other Intangible Assets
We evaluateconduct a required annual review of goodwill for potential impairment annually duringin the fourth quarter, or sooner if events or changes in circumstances indicate that the fair value 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 sevena reporting unit is below its carrying value. Our reporting units each of which is assessed for potential impairments.are our operating segments: US-LAM, Canada, EMEA, and APAC. We have the option to perform a qualitative analysisassessment to determine whethersatisfy the annual test requirement if we believe that it is more likely than not that we do not have an impairment in any one of our reporting units. If the carrying value of a reporting unit that includes goodwill exceeds its fair value, which is determined using both the income approach and market approach, goodwill is considered impaired. The income approach determines fair value based on discounted cash flow model derived from a reporting unit’s long-term forecasted cash flows. The market approach determines fair value based on the application of earnings multiples of comparable companies to projected earnings of the reporting unit. The amount of impairment loss is measured as the difference between the carrying value and the fair value of a reporting unit but is limited to the total amount of goodwill is less than its carrying amount. Some ofallocated to the impairment indicators we consider include significant differences betweenreporting unit. In performing the carrying amount and the estimated fair value analysis,
management makes various judgments, estimates and assumptions, the most significant of which is the assumption related to revenue growth rates.
The factors we considered in developing our assetsestimates and liabilities;projections for cash flows include, but are not limited to, the following: (i) macroeconomic conditions such as a deterioration in general economic condition or limitations on accessing capital;conditions; (ii) industry and market considerations such as a deterioration in the environment in which we operate and an increased competitive environment; cost factorsconsiderations; (iii) costs, such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows;costs; (iv) our overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actualperformance; and, projected results of relevant prior periods;(v) other relevant entity-specific events such as litigation, changes in management, key personnel, strategy or customers; the testing for recoverabilitythat impact our reporting units. The determination 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 ofwhether goodwill is less than its carrying amount, then we performimpaired involves a significant level of judgment in the first step ofassumptions underlying the two-step goodwill impairment test. In the first step of the goodwill impairment test, the reporting unit's carrying amount (including goodwill) and its fair value are compared. Ifapproach used to determine the estimated fair valuevalues of our reporting units. We believe that the estimates and assumptions used in our impairment assessment are reasonable; however, these assumptions are judgmental and variations in any assumptions could result in materially different calculations of fair value. We will continue to evaluate goodwill on an annual basis in our fourth quarter, and whenever events or changes in circumstances, such as significant adverse changes in operating results, market conditions, or changes in management’s business strategy indicate that there may be a reporting unitprobable indicator of impairment. It is less thanpossible that the carrying value, a second step is performed to compute the amount of the impairmentassumptions used by determining an "implied fair value" of goodwill. The determination of the "implied fair value" requires us to allocate the estimated value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the "implied fair value" of goodwill, which is compared to the corresponding carrying value. If the "implied fair value" is less than the carrying value, an impairment charge will be recorded. In fiscal 2016, we recorded a $1,240 goodwill impairment chargemanagement related to the Unitemp acquisition as our expectations of future revenues and profitability were below those estimated at the time of the acquisition and, during the same period, we impaired an additional $473 of other intangibles as their fair value was less than their carrying value.evaluation may change or that actual results may vary significantly from management’s estimates. In fiscal 20182021, 2020 and 2017,2019, the Company determined that no0 impairment of goodwill existed.
Other intangible assets include indefinite lived intangible assets for which we must also perform an annual test of impairment. The Company's indefinite lived intangible assets consist primarily of trademarks. The fair value of the Company's trademarks is calculated using a "relief from royalty payments" methodology. This approach involves first estimating reasonable royalty rates for each trademark then applying these royalty rates to a net sales stream and discounting the resulting cash flows to determine the fair value. The royalty rate is estimated using both a market and income approach. The market approach relies on the existence of identifiable transactions in the marketplace involving the licensing of trademarks similar to those owned by the Company. The income approach uses a projected pretax profitability rate relevant to the licensed income stream. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of each trademark. This fair value is then compared with the carrying value of each trademark. The results of this test during the fourth
quarter of our fiscal year indicated that there was no impairment of our indefinite life intangible assets during fiscal 2018, 20172021, 2020 and 2016.2019.
Debt Issuance Costs
The Company capitalizes and defers the costs associated with establishing our debt and financing arrangements. These costs are amortized as interest expense over the life of the loan or financing as interest expense.related financing. Additionally, for any unscheduled principleprincipal payments the Company will record additionalincremental deferred debt charges on a pro rata basis of the unamortized deferred debt balance at the time of the repayment. When debt or the contract is retired prematurely, the proportionate unamortized deferred issuance costs are expensed as loss on retirement. Deferred debt issuance costs expensed as part of interest expense for fiscal 2018, fiscal 20172021, 2020 and fiscal 20162019 were $1,657, $391$1,525, $1,885 and $732,$1,756, respectively. Included in these amounts are the acceleration of amortization associated with the termination of the term loan A in fiscal 2018 of $376, $880 related to the unscheduled principal repayment of $25,000 of term loan B in fiscal 2018, and the second amendment to our senior secured credit agreement, redemptions of our senior secured notes and our prior revolving credit facility in fiscal 2016.
Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amounts to the future undiscounted cash flows that the assets are expected to generate. If the long-lived assets are considered impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds the estimated fair value and is recorded in the period the determination was made. In fiscal 2021, 2020, and 2019, the Company determined that no impairment of long-lived assets existed.
Stock-based Compensation
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 account for forfeitures as they occur, rather than estimate expected forfeitures.
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. 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.
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.
During fiscal 2018, we revised our permanent reinvestment position whereby we expect to repatriate future earnings. Given the Tax Act’s significant changes and potential opportunities to repatriate cash tax free due to H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for fiscal Year 2018” (the “Tax Act”), we have reevaluated our current permanent reinvestment position. Accordingly, we will no longer assert a permanent reinvestment position in most of our foreign subsidiaries. We expect to repatriate certain earnings which will be subject to withholding taxes. These additional withholding taxes are being recorded as an additional deferred tax liability associated with the basis difference in such jurisdictions. The uncertainty related to the taxation of such withholding taxes on distributions under the Tax Act and finalization of the cash repatriation plan makes the deferred tax liability a provisional amount. Please see Note 16,18, "Income Taxes" for more information on the impacts of the Tax Act.
Foreign Currency Transactions and Translation
Exchange adjustments resultingrate gains and losses that result from foreign currency transactions are recognized in income as they are realized. For the Company's non-U.S. dollar functional currency subsidiaries, assets and liabilities of foreign subsidiaries are translated into U.S. dollars using year-end exchange rates. Income and expense items are translated at a weighted average
exchange raterates prevailing during the year. Adjustments resulting from translation of financial statements are reflected as a separate component of shareholders' equity.
Loss Contingencies
We accrue for probable losses from contingencies on an undiscounted basis, when such costs are considered probable of being incurred and are reasonably estimable. Legal expense related to such matters are expensed as incurred. 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 material loss has been incurred. In determining whether a loss should be accrued we 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.
Warranties
The Company offers a standard warranty on product sales in whichsales. Specifically, we will replace aany defective product for a periodwithin one year from the date of one year.purchase. Warranties on construction projects are negotiated individually, are typically one year in duration, and may include the cost of labor to replace products. Factors that affect the Company's warranty liability include the amount of sales, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Research and Development
Research and development expenditures are expensed when incurred and are included in marketing, general, and administrative, and engineering expenses. Research and development expenses include salaries, direct material costs incurred, andplus building and other overhead expenses. The amounts expensed for fiscal 2018,2021, fiscal 20172020 and fiscal 20162019 were $5,240, $3,501$7,466, $8,378 and $3,338,$6,289, respectively.
Shipping and Handling Cost
The Company includes shipping and handling as part of cost of sales and freight collectionsdue from customers is included as part of sales.
Economic Dependence
As of March 31, 2018 and 2017, one major customer represented approximately 4% and 14%, respectively of the Company's accounts receivable balance. As of March 31, 20182021 and March 31, 2016,2020, no one customer represented more than 10% of the Company's accounts receivable balance. In fiscal 2018, fiscal 2017 or fiscal 20162021 and 2020, no one customer represented more than 10% of sales.
Reclassifications
Certain reclassifications have been made within these consolidated financial statements to conform prior periods to current period classifications. On the Consolidated Balance Sheet at March 31, 2017, we reduced the previously reported balance of prepaid expenses and other current assets by $2,000 and increased income tax receivable by the same amount. The income tax receivable amounts relate to tax payments or accruals made currently, which have not been included in tax returns filed within their respective jurisdictions. The Company believes that presenting these amounts as current income tax receivables provides a better understanding of our position related to taxation obligations.
Correction of an Error
During the year ended March 31, 2016, the Company recorded a correction of an error that reduced marketing, general and administrative and engineering expense by $498 and decreased additional paid in capital by an equivalent amount. In previous years, the Company had expensed the withholding tax value of equity awards that were withheld by the Company at vesting. The Company determined that the value of withheld shares should have been recorded as a reduction to additional paid in capital.
Recent Accounting Pronouncements
Revenue Recognition- In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 "Revenue from Contracts with Customers" (Topic 606), which amends the existing revenue recognition requirements and guidance. The core principle of the new standard is to recognize revenue that reflects the consideration the Company expects to receive for goods or services when or as the promised goods or services are transferred to customers. Topic 606 requires more judgment than current guidance, as management will now be required to: (i) identify each performance obligation in contracts with customers, (ii) estimate any variable consideration included in the transaction price and (iii) allocate the transaction price to each performance obligation. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company adopted the amended guidance using the modified retrospective method as of April 1, 2018.
To assess the impact of the standard, we utilize internal resources to lead the implementation effort and supplemented our internal resources with external consultants. As of March 31, 2018, the Company has completed the evaluation of its revenue streams and has reviewed a sample of customer contracts that we believe fairly represent contract traits that could be accounted for differently under amended guidance. The Company has begun evaluating the potential impact of the new revenue standard on each of the selected contracts including: (i) estimating the contract consideration under the new standard, (ii) identifying the performance obligations within the customer contracts, (iii) calculating the anticipated allocation of contract consideration to each performance obligation, (iv) determining the timing of revenue recognition for each performance obligation, and (v) determining the classification of the contract revenue for disclosure purposes. As a result of the evaluation, the Company has identified certain engineering services revenue related to projects on existing facilities that will now be deferred, until delivery of product, as a fulfillment obligation under the amended guidance, as well as other minor changes in accounting. The transition adjustment related to the adoption is estimated to be immaterial (less than 1% of total revenues for the fiscal year ended March 31, 2018 and total shareholders’ equity as of March 31, 2018), and we do not expect the adoption of this standard to materially impact the amount or timing of our revenue going forward. An adjustment will be recorded to our
fiscal 2019 beginning retained earnings for the cumulative effect of the change. We intend to provide additional disclosures as required by the new standard, which we are currently assessing, in our quarterly report on Form 10-Q for the first quarter of fiscal 2019.
Stock Compensation- In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-09 "Compensation-Stock Compensation" (Topic 718), which changes the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. Additionally, cash flows related to excess tax benefits will no longer be separately classified as a financing activity and will be included as an operating activity on the consolidated statements of cash flows. We have elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted this standard effective April 1, 2017 and it did not have a material impact on our consolidated financial statements.
InventoryLeases- In July 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-11 "Simplifying the Measurement of Inventory" (Topic 330). Under the new guidance, inventory is measured at the lower of cost and net realizable value, and the new guidance eliminates the use of replacement cost and net realizable value less a normal profit margin as techniques to value inventory. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new guidance will be applied prospectively for annual periods and interim periods within fiscal years beginning after December 15, 2016. We adopted this standard effective April 1, 2017 and it did not have a material impact on our consolidated financial statements.
Financial Instruments- In January 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-01 "Financial Instruments-Overall" (Subtopic 825-10), which amends the guidance on the classification and measurement of financial instruments. The amendment requires all equity investments to be measured at fair value with changes in the fair value recognized through earnings. The amendment also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the credit risk when an entity has elected the fair value option. The guidance eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. Early adoption is permitted for certain provisions of the accounting standards update. Upon the adoption of the standard, an entity will be required to make a cumulative-effect adjustment to retained earnings as of the beginning of such reporting period. We are currently evaluating when to adopt this standard. Upon adoption, we do not anticipate this standard will have a material impact on our consolidated financial statements.
Leases- In February 2016, the Financial Accounting Standards BoardFASB issued Accounting StandardsStandard Update 2016-02 "Leases,"Leases (“ASC 842”), which provides guidance on the recognition, measurement, presentation and disclosure on leases. Under the standard, substantially all leases will be reported on the balance sheet as right-of-use assets and lease liabilities. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. EarlyThe Company adopted the amended guidance using the modified retrospective method as of April 1, 2019. Please refer to Note 3 "Leases" for further discussion, including the impact the adoption is permitted. We are currently evaluating the requirements of the standard and have not yet determined its impacthad on our consolidated financial statements.
Financial Instruments- Instruments- In June 2016, the Financial Accounting Standards BoardFASB issued Accounting Standards Update 2016-13 “Financial Instruments-Credit Losses” (Topic 326)Financial Instruments- Credit Losses (“ASC 326”), which amends the guidance on the impairment of financial instruments. The standard adds an impairment model, referred to as current expected credit loss, which is based on expected losses rather than incurred losses. The standard applies to most debt instruments, trade receivables, lease receivables, reinsurance receivables, financial guarantees and loan commitments. Under the guidance, companies are required to disclose credit quality indicators disaggregated by year of origination for a five-year period. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. We doadopted this standard effective April 1, 2020, and such adoption did not anticipate this will have a material impact toon our consolidated financial statements.
Statement of Cash Flows- Intangibles-In August 2016,January 2017, the Financial Accounting Standards BoardFASB issued Accounting Standards Update 2016-15 “Statement of Cash Flows” (Topic 230)2017-04 Intangibles- Goodwill and Other (“ASC 350”), which amends Topic 230and simplifies the accounting for goodwill impairment by eliminating step 2 of the goodwill impairment test. Under the amended guidance, goodwill impairment will be measured as the excess of the reporting unit’s carrying value over its fair value, not to exceed the carrying amount of goodwill for that reporting unit. The changes are
effective for annual and interim periods beginning after December 15, 2019, and amendments should be applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. We adopted this standard effective April 1, 2020, and such adoption did not have a material impact on our consolidated financial statements.
Reference Rate Reform- In March 2020, the FASB issued Accounting Standards Update 2020-04- Reference Rate Reform ("ASC 848"). The update is intended to provide temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting standards codification (ASC)to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. As of March 31, 2021, we have not yet elected any optional expedients provided in the standard. We will apply the accounting relief, if necessary, as relevant contract and hedge accounting relationship modifications are made during the reference rate reform transition period. We have adopted this standard effective April 1, 2020, and such adoption did not have a material impact on our consolidated financial statements.
Income Taxes- In December 2019, the FASB issued Accounting Standards Update 2019-12- Income Taxes ("ASC 740"). This ASU amends ASC 740 to add, orremove, and clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows.disclosure requirements related to income taxes. The new standard addresses eight types of cash flows, some of which we believe could or will impact our financial statements upon adoption, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and proceeds from the settlement of insurance claims. Under the guidance, cash payments for debt prepayment or extinguishment costs must be classified as cash outflows from financing activities. Contingent consideration payments that were not made soon after a business combination must be separated and classified in operating and financing activities. Cash
payments up to the amount of the contingent consideration liability recognized as of the acquisition dates, including any measurement-period adjustments, should be classified in financing activities, while any excess cash payments should be classified in operating activities. Cash proceeds from the settlement of insurance claims should be classified on the basis of the nature of the loss. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted for all entities. Entities must apply2020. We are still evaluating the guidance retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. We do not anticipateimpact of this will have a material impact to our consolidated financial statements.new standard.
2. Fair Value Measurements
Fair Value. We measure fair value based on authoritative accounting guidance, which defines fair value, establishes a framework for measuring fair value and expands on required disclosures regarding fair value measurements.
Inputs are referred to as assumptions that market participants would use in pricing the asset or liability. The uses of inputs in the valuation process are categorized into a three-level fair value hierarchy.
•Level 1 — uses quoted prices in active markets for identical assets or liabilities we have the ability to access.
•Level 2 — uses observable inputs other than quoted prices in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•Level 3 — uses one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment.
Financial assets and liabilities with carrying amounts approximating fair value include cash, trade accounts receivable, accounts payable, accrued expenses and other current liabilities. The carrying amount of these financial assets and liabilities approximates fair value because of their short maturities. At March 31, 20182021 and 2017,2020, no assets or liabilities were valued using Level 3 criteria.
Information about our investmentsshort-term debt and long-term debt that is not measured at fair value follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 | | March 31, 2020 | | |
| | Carrying
Value | | Fair Value | | Carrying
Value | | Fair Value | | Valuation Technique |
| Financial Liabilities | | | | | | | | | |
| Outstanding principal amount of senior secured credit facility | $ | 148,500 | | | $ | 148,871 | | | $ | 176,000 | | | $ | 150,480 | | | Level 2 - Market Approach |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | March 31, 2017 | | |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Valuation Technique |
| Financial Assets | | | | | | | | | |
| Certificates of deposits with maturities greater than 90 days | $ | 1,022 |
| | $ | 1,022 |
| | $ | 44,786 |
| | $ | 44,786 |
| | Level 2 - Market Approach |
| Financial Liabilities | |
| | |
| | |
| | |
| | |
| Outstanding principal amount of senior secured credit facility | $ | 225,000 |
| | $ | 225,000 |
| | $ | 81,000 |
| | $ | 81,000 |
| | Level 2 - Market Approach |
At March 31, 20182021 and 2017,2020, the fair value of our variable rate term loan approximates its carrying value as we pay interestlong-term debt is based on the current market rate.quotes available for issuance of debt with similar terms. As the quoted price is only available for similar financial assets, the Company concluded the pricing is indirectly observable through dealers and has been classified as Level 2.
Investments
During fiscal 2018 and 2017, the Company maintained term deposit accounts at several foreign financial institutions with whom we have established relationships. Maturities on these deposits are greater than 90 days and less than one year and accordingly are classified as investments. The Company concluded that sincebelieves the interest rates for these term deposits are based ondecline in fair value as of March 31, 2020 was attributable to the quoted rates from the various financial institutions that the pricing is indirectly observable and has been classified as a Level 2 market approach.
Acquisition Related Foreign Exchange Option
In connection with the executioneconomic effects of the purchase agreement for the THS acquisition on October 3, 2017, we entered into a combination of option contracts to secure the exchange rate of $200,000 CAD that would be contributed by the Company at closing on October 30, 2017. The options were structured such that the $200,000 CAD would be exchanged for no more than $162,100 and no less than $159,200 USD. At settlement date, Thermon took delivery of $200,000 CAD for $159,200. At closing of the THS acquisition, the Canadian dollar weakened such that the actual spot foreign exchange rate was $155,900. The resulting difference of $3,326 was recognized as realized loss on foreign exchange.
COVID-19 pandemic.
Cross Currency Swap
The Company has entered into a long termlong-term cross currency swap to hedge the currency rate fluctuations related to a $112,750$54,603 intercompany receivable at March 31, 2021 from our wholly-owned Canadian subsidiary, Thermon Canada Inc., maturing on October 30, 2022. Periodic principal payments are to be settled twice annually with interest payments settled
quarterly through the cross currency derivative contract. We do not designate the cross currency swap as a cash flow hedge under ASC 815. As of815, Derivatives and Hedging ("ASC 815"). At March 31, 20182021, we recorded $1,540$5,842 of unrealized mark to marketmark-to-market losses on the Cross Currency Swap,cross-currency swap which is reported as "Other non-current liabilities",income and expense," in the consolidated statements of operations and comprehensive income. Cross currency swap contracts are measured on a recurring basis at fair value and are classified as Level 2 measurements. Hedge assets in the amount of $1,265 and $4,011 were included in "Other long-term assets" in the consolidated balance sheet. sheet at March 31, 2021 and 2020, respectively. For the twelve months ended March 31, 2021, the loss on the long-term cross currency swap derivative contract was more than offset by unrealized gains on the intercompany note of $6,400, resulting in a net gain of $558.
Deferred Compensation Plan Assets
The markCompany provides a non-qualified deferred compensation plan for certain highly compensated employees where payroll contributions are made by the employees on a pre-tax basis. Please refer to market valuation has been determined by actual quoted prices (Level 2).Note 13 "Employee Benefits" for further discussion.
Foreign Currency Forward Contracts
We transact business in various foreign currencies and have established a program that primarily utilizes foreign currency forward contracts to offset the risk associated with fluctuations of certain foreign currencies. Under this program, increases or decreases in our foreign currency exposures are offset by gains or losses on the forward contracts to mitigate foreign currency transaction gains or losses. These foreign currency exposures typically arise from intercompany transactions. Our forward contracts generally have terms of 30 days. We do not use forward contracts for trading purposes or 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 are intended to 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 from active foreign currency markets (Level 2). The consolidated balance sheets reflect unrealized gains within accounts receivable, net 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, 20182021 and 2017,2020, the notional amounts of forward contracts as well as the related fair values were as follows:
| | | | | | | | | | | |
| March 31, 2021 | | March 31, 2020 |
| Russian Ruble | $ | 3,000 | | | $ | 1,103 | |
| Euro | 0 | | | 500 | |
| Canadian Dollar | 5,500 | | | 1,500 | |
| South Korean Won | 5,000 | | | 3,500 | |
| | | |
| Mexican Peso | 1,500 | | | 2,000 | |
| Australian Dollar | 900 | | | 700 | |
| | | |
| Great Britain Pound | 500 | | | 500 | |
| | | |
| | | |
| | | |
| Total notional amounts | $ | 16,400 | | | $ | 9,803 | |
|
| | | | | | | |
| Notional amount of foreign exchange forward contracts by currency |
| | March 31, 2018 | | March 31, 2017 |
| Russian Ruble | $ | 2,416 |
| | $ | 250 |
|
| Euro | 750 |
| | — |
|
| Canadian Dollar | 4,000 |
| | — |
|
| South Korean Won | 10,500 |
| | 1,300 |
|
| Mexican Peso | 200 |
| | 450 |
|
| Australian Dollar | 850 |
| | 375 |
|
| Total notional amounts | $ | 18,716 |
| | $ | 2,375 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | March 31, 2020 |
| Fair Value | | Fair Value |
| Assets | | Liabilities | | Assets | | Liabilities |
| Foreign exchange contract forwards | $ | 61 | | | $ | 32 | | | $ | 140 | | | $ | 49 | |
|
| | | | | | | | | | | | | | | |
| | March 31, 2018 | | March 31, 2017 |
| | Fair Value | | Fair Value |
| | Assets | | Liabilities | | Assets | | Liabilities |
| Foreign exchange contract forwards | $ | 229 |
| | $ | 25 |
| | $ | 62 |
| | $ | 10 |
|
Recognized foreign currency gains or losses related to our forward contracts in the accompanying consolidated statements of operations and comprehensive income were losses of $96, $453$811, $437 and $411$125 for fiscal 2018,2021, fiscal 20172020 and fiscal
2016, 2019, respectively. Gains and losses from our forward contracts are intended to be offset by transaction gains and losses from the settlement of transactions denominated in foreign currencies. OurThe Company realized net foreign currency losses were $5,725, $628, gains and$550 for fiscal 2018, fiscal 2017 (losses) of $283, $(580), and $(228) for fiscal 2016,2021, 2020, and 2019, respectively. Foreign currency gains and losses are recorded within other expense in our consolidated statements of operations and comprehensive income.
3. AcquisitionsLeases
THS acquisition
On October 30, 2017,April 1, 2019, we throughadopted ASC 842 utilizing the modified retrospective approach. The modified retrospective approach we selected provides a wholly-owned subsidiary, acquired 100%method of transition allowing for the recognition of existing leases as of the equity interestsbeginning of CCI Thermal Technologiesthe period of adoption, and which does not require the adjustment of comparative periods. Specifically, our results for reporting periods beginning after April 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 840.
Description of Leases
The significant majority of our lease obligations are for real property. We lease numerous facilities relating to our operations, primarily for office, manufacturing and warehouse facilities, as well as, from time to time, both long-term and short-term employee housing. Leases for real property have terms ranging from month-to-month to ten years. We also lease various types of equipment, including vehicles, office equipment (such as copiers and postage machines), heavy warehouse equipment (such as fork lifts), heavy construction equipment (such as cranes), medium and light construction equipment used for customer project needs (such as pipe threading machines) and mobile offices and other general equipment that is normally associated with an office environment. Equipment leases generally have terms ranging from six months to five years.
Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We do not have any significant leases that have not yet commenced but that create significant rights and obligations for us.
We lease temporary power products produced by our Thermon Power Solutions Inc. (“TPS”) division to our customers on a short-term basis. Lease contracts associated with such rental of the temporary power products have historically been month-to-month contracts without purchase options. No lease contracts in which the Company was the lessor have had an initial term in excess of one year. As such, lease revenues for temporary power products recognized under ASC 842 in fiscal 2021 did not materially differ from leases that would have been recorded under ASC 840. See Note 12 "Related-Party Transactions" for more information about TPS.
Variable Lease Payments
A majority of our lease agreements include fixed rental payments. A small number of our lease agreements include fixed rental payments that are adjusted periodically for changes in the Consumer Price Index (“CPI”). Payments based on an index or rate such as CPI are included in the lease payments based on the commencement date index or rate. Estimated changes to the index or rate during the lease term are not considered in the determination of the lease payments.
Options to Extend or Terminate Leases
Most of our real property leases include early termination options and/or one or more options to renew, with renewal terms that can extend the lease term for an additional one to five years or longer. The exercise of lease termination and renewal options is at our sole discretion. If it is reasonably certain related real estatethat we will exercise such renewal options, the periods covered by such renewal options are included in the lease term and are recognized as part of our Right of Use ("ROU") assets for $261,950 CAD (approximately $204,235 USD atand lease liabilities. Certain leases also include options to purchase the exchangeleased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Discount Rate
The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of October 30, 2017) in cash. Suchthe interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. A large concentration of the Company's operating lease liabilities are attributed to our United States and Latin America operations. Our EMEA operations and APAC operations have limited borrowing needs and rely on cash from operations. However, the U.S. operating subsidiary can make intercompany loans if necessary from its available credit capacity given the more preferential rates available to our U.S. operating subsidiary and CCI Thermal Technologies Inc. amalgamated immediately after the closing ofease with which funds can be drawn from the acquisition to form Thermon Heating Systems, Inc. ("THS"), an indirect, wholly-owned subsidiary ofdebt facilities already established within the Company. THS is engagedUnited States. With this in industrial process heating, focused on the development and production of advanced heating and filtration solutions for industrial and hazardous area applications and is headquartered in Edmonton, Alberta, Canada. THS markets its products through several diverse brands known for high quality, safety and reliability, and serves clients in the energy, petrochemical, electrical distribution, power, transit and industrial end markets globally. We believe we will be able to leverage our existing global sales force to further expand the reach of THS's product offerings. We recognized $85,156 of goodwill in connection with the THS transaction. THS has contributed $41,011 and $7,266 of revenue and operating income, respectively, to our Condensed Consolidated Statements of Operations and Comprehensive Income for the twelve months ended March 31, 2018.
Pro forma financial information- The following table presents selected unaudited pro forma information formind, the Company assuminghas utilized its U.S. credit facility rate as the acquisition of THS had occurredworldwide incremental borrowing rate. The Company used incremental borrowing rates as of April 1, 2016. This pro forma financial information is presented2019 for informational and illustrative purposes and does not purportoperating leases that commenced prior to represent whatApril 1, 2019 to establish the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods. In addition, the unaudited pro forma results do not include any anticipated synergies or other expected benefits of the acquisition or costs necessary to obtain the anticipated synergies and benefits. The pro forma financial information includes the amortization associated with the acquired intangible assets, interest expense associated with debt used to fund the acquisition, amortization of the inventory step-up, removal of aircraft and rent expense for assets not assumed in the transaction, acquisition related expenses, and the income tax affected for the pro forma results.
|
| | | | | | | |
| | Pro Forma Financial Information (Unaudited) |
| | Twelve months ended March 31, |
| | 2018 | | 2017 |
| Revenues | $ | 348,557 |
| | $ | 331,007 |
|
| Net income available to Thermon Group Holdings, Inc. | 5,303 |
| | 3,318 |
|
| Earnings per share: | | | |
| Basic | $ | 0.16 |
| | $ | 0.10 |
|
| Diluted | $ | 0.16 |
| | $ | 0.10 |
|
The following table details the purchase price of the THS transaction:
|
| | | |
| Consideration to or on behalf of sellers at close | $ | 204,235 |
|
| Fair value of total consideration transferred | $ | 204,235 |
|
The Company is in the process of obtaining all necessary information required to complete the THS acquisition accounting. Principal pending matters include receipt of final valuation estimates on acquired intangible and tangible assets, and final review of tax related matters. The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed:
|
| | | |
| Assets acquired: | |
| Cash | $ | 1,534 |
|
| Accounts receivable | 14,351 |
|
| Costs and estimated earning in excess of billing on uncompleted contracts | 450 |
|
| Inventories | 20,085 |
|
| Other current assets | 731 |
|
| Property, plant and equipment | 29,464 |
|
| Identifiable intangible assets | 79,002 |
|
| Goodwill | 85,156 |
|
| Total assets | 230,773 |
|
| Liabilities assumed: | |
| Current liabilities | 6,712 |
|
| Other non-current liabilities | 500 |
|
| Non-current deferred tax liability | 19,326 |
|
| Total liabilities | 26,538 |
|
| Total consideration | $ | 204,235 |
|
In total, $4,093 of transaction costs were incurred related to the THS transaction, all of which were incurredlease liabilities. For operating leases that commenced during the twelve monthsyear ended March 31, 2018. As2021, rates applicable at or close to the time of the inception of the lease were used to establish the new lease's ROU liabilities.
| | | | | | | | | | | | | | |
| Lease Term and Discount Rate | | March 31, 2021 | | March 31, 2020 |
| Weighted average remaining lease term | | | | |
| Operating | | 6.0 | | 6.2 |
| Finance | | 3.1 | | 3.4 |
| | | | |
| Weighted average discount rate | | | | |
| Operating | | 4.81 | % | | 4.82 | % |
| Finance | | 6.56 | % | | 6.98 | % |
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| Assets | | Classification | | March 31, 2021 | | March 31, 2020 | | |
| Operating | | Operating lease right-of-use assets | | $ | 12,619 | | | $ | 16,637 | | | |
| Finance | | Property, plant and equipment | | 426 | | | 695 | | | |
| Total right-of-use assets | | | | $ | 13,045 | | | $ | 17,332 | | | |
| | | | | | | | |
| Liabilities | | | | | | | | |
| Current | | | | | | | | |
| Operating | | Lease liabilities | | $ | 3,383 | | | $ | 3,352 | | | |
| Finance | | Lease liabilities | | 128 | | | 201 | | | |
| Non-current | | | | | | | | |
| Operating | | Non-current lease liabilities | | 12,027 | | | 15,060 | | | |
| Finance | | Non-current lease liabilities | | 346 | | | 511 | | | |
| Total lease liabilities | | | | $ | 15,884 | | | $ | 19,124 | | | |
Supplemental statement of operations information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| Lease expense | | Classification | | | | Twelve Months Ended March 31, 2021 | | Twelve Months Ended March 31, 2020 |
| Operating lease expense | | Marketing, general, administrative, and engineering | | | | $ | 4,697 | | | $ | 3,835 | |
| | | | | | | | |
| Finance lease expense: | | | | | | | | |
| Amortization of ROU assets | | Marketing, general, administrative, and engineering | | | | 266 | | | 266 |
| Interest expense on finance lease liabilities | | Interest expense | | | | 21 | | | 41 |
| | | | | | | | |
| Short-term lease expense | | Marketing, general, administrative, and engineering | | | | 240 | | | 1,117 | |
| Net lease expense | | | | | | $ | 5,224 | | | $ | 5,259 | |
Supplemental statement of cash flows information related to leases was as follows:
| | | | | | | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | Twelve Months Ended March 31, 2021 | | Twelve Months Ended March 31, 2020 |
| Operating cash used for operating leases | | $ | 4,566 | | | $ | 3,523 | |
| Operating cash flows used for finance leases | | 39 | | | 41 | |
| Financing cash flows used for finance leases | | 276 | | | 259 | |
| | | | |
Future lease payments under non-cancellable leases as of March 31, 2018 the final working capital adjustment for the THS transaction has not been finalized, however, the such working capital adjustment is not expected to be material.2021 were as follows:
Our provisional estimate of identifiable intangible assets at March 31, 2018 that were related to the THS transaction, inclusive of currency translation adjustments for the period, consisted | | | | | | | | | | | | | | |
| Future Lease Payments | | Operating Leases | | Finance Leases |
| Twelve months ending March 31, | | | | |
| 2022 | | $ | 4,031 | | | $ | 288 | |
| 2023 | | 3,390 | | 133 |
| 2024 | | 2,238 | | 99 |
| 2025 | | 1,887 | | 37 |
| 2026 | | 1,707 | | 2 |
| Thereafter | | 4,538 | | 0 |
| Total lease payments | | $ | 17,791 | | | $ | 559 | |
| Less imputed interest | | (2,381) | | (85) |
| Total lease liability | | $ | 15,410 | | | $ | 474 | |
4. Revenue from Contracts with Customers
The core principle of the
following: |
| | | | | | | | | | | | | |
| | Amortization period | | Gross Carrying Amount at March 31, 2018 | | Accumulated Amortization | | Net Carrying Amount at March 31, 2018 |
| | | | | | | | |
| Products | 10 years | | $ | 64,611 |
| | $ | 2,692 |
| | $ | 61,919 |
|
| Customer relationships | 17 years | | 11,155 |
| | 273 |
| | 10,882 |
|
| Backlog | 1 year | | 3,230 |
| | 1,346 |
| | 1,884 |
|
| Total | | | $ | 78,996 |
| | $ | 4,311 |
| | $ | 74,685 |
|
The weighted average useful life of acquired finite lived intangible assets relatedrevenue recognition standard is to THS transaction is 10.6 years.
Industrial Process Insulatorsrecognize revenue that reflects the consideration the Company expects to receive for goods or services when or as the promised goods or services are transferred to customers. Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("IPI"ASC 606") Transaction
On July 31, 2015, a wholly owned indirect subsidiaryrequires more judgment than previous guidance, as management will need to consider the terms of the Company acquired 100% ofcontract and all relevant facts and circumstances when applying the capital stock of Industrial Process Insulators ("IPI") for $21,750, subject to a customary working capital adjustment. The results of IPI's operations have been includedrevenue recognition standard. Management performs the following five steps when applying the revenue recognition standard: (i) identify each contract with customers, (ii) identify each performance obligation in the consolidated financial statements since that date. IPIcontracts with customers, (iii) estimate the transaction price (including any variable consideration), (iv) allocate the transaction price to each performance obligation and (v) recognize revenue as each performance obligation is an insulation contractor serving the refining, petrochemical, powersatisfied.
Description of Product and energy, marineService Offerings and pulpRevenue Recognition Policies
We principally provide a (i) suite of products, including heating units, heating cables, tubing bundles, control systems including industry-leading customized software solutions, environmental heating solutions, process heating solutions, temporary heating and paper industries in the United States, with a significant presence in the Texaslighting, filtration, and Louisiana Gulf Coast region. Priortransportation products and (ii) services, including design optimization, engineering, installation and maintenance services required to the acquisition, IPI was formerly a customer and subcontractordeliver comprehensive solutions to the Company for the past 17 years.complex projects. The acquisition is expected to enhance our turn-key product offerings and strengthen our presence and relationships in the Gulf Coast region as IPI serves many of the same end-markets as those served by our core thermal solutions business. We recognized $13,249 in goodwillperformance obligations associated with the IPI acquisition.
Our identifiable intangible assetsour product sales are generally recognized at March 31, 2018,a point in time. Where products and March 31, 2017 that were related to the IPI transaction consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortization period | | Gross Carrying Amount at March 31, 2018 | | Accumulated Amortization | | Net Carrying Amount at March 31, 2018 | | Gross Carrying Amount at March 31, 2017 | | Accumulated Amortization | | Net Carrying Amount at March 31, 2017 |
| Customer relationships | 8 years | | $ | 5,962 |
| | $ | 1,987 |
| | $ | 3,975 |
| | $ | 5,962 |
|
| $ | 1,242 |
|
| $ | 4,720 |
|
| Trademark | 8 years | | 1,820 |
| | 607 |
| | 1,213 |
| | 1,820 |
|
| 379 |
|
| 1,441 |
|
| Non-compete agreement | 3 years | | 807 |
| | 717 |
| | 90 |
| | 807 |
|
| 448 |
|
| 359 |
|
| Total |
|
| $ | 8,589 |
| | $ | 3,311 |
| | $ | 5,278 |
| | $ | 8,589 |
|
| $ | 2,069 |
|
| $ | 6,520 |
|
The weighted average useful life of acquired finite lived intangible assets related to the IPI transaction is 7.2 years.
During fiscal 2017, we finalized our provisional purchase accounting for the IPI transaction. The table below summarizes our provisional estimates of the fair value of assetsservices are provided together under a time and liabilities assumed as well as the final fair value of assets and liabilities assumed:
|
| | | | | | | |
| | Provisional Fair Value | | Final Fair Value |
| Customer relationships | $ | 10,720 |
| | $ | 5,962 |
|
| Goodwill | 10,204 |
| | 13,249 |
|
| Noncurrent deferred tax liability | 4,962 |
| | 3,249 |
|
We determined the useful lives of our customer relationships were 8 years, where we originally estimated the useful life to be 10 years. As a result of the change in the estimated fair value and useful life of our customer relationships, we recorded a cumulative reduction of amortization of intangible asset expense of $299 during fiscal 2017.
At March 31, 2018, approximately $3,026 of the purchase price was held in escrow to secure the sellers' indemnification obligations in the event of any breaches of representations and warranties contained in the definitive agreements.
Sumac Transaction
On April 1, 2015, Thermon Canada Inc., a wholly owned indirect subsidiary of the Company, acquired a 75% controlling interest in the business previously operated by Sumac Fabrication Company Limited ("Sumac") for $10,956, (based on the Canadian Dollar to U.S. Dollar exchange rate on April 1, 2015) in cash, plus a non-interest bearing note ("performance based note") with a principal amount of $5,905 (based on the Canadian Dollar to U.S. Dollar exchange rate on April 1, 2015) that matured on April 1, 2016, with the actual amount payable at maturity ranging from zero up to a maximum of $7,500 Canadian Dollars, subject to the achievement of certain performance metrics during the 12 month period ended April 1, 2016. During fiscal 2017, we paid Sumac's principals $5,805 to satisfy all of the Company's obligations undermaterials contract, the performance based note.
Sumac is located in Fort McMurray, Alberta, Canada. Sumac's lineobligations are satisfied over time. We also provide fixed-fee turnkey solutions consisting of products and solutionsservices under which the related performance obligations are satisfied over time.
In addition, we offer temporary power products that are designed to provide a safe and efficient means of supplying temporary electrical power distribution and lighting at energy infrastructure facilities for new construction and during maintenance and turnaround projects at operating facilities. Sumac products include power distribution panels, master/slave sub-panels, power cords and lighting fixtures. Sumac products are sold to end-users operating in manyRevenues associated with the rental of the temporary power products have historically been less than 5% of our total revenues and are recognized under ASC 842.
Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for transferring such goods or providing such services. We account for a contract when a customer provides us with a firm purchase order or other contract that identifies the goods or services to be provided, the payment terms for those services, and when collectability of the consideration due is probable. Generally, our payment terms do not exceed 30 days for product sales, while terms for our projects can vary based on milestones or other key deliverable-based increments.
Performance Obligations
A performance obligation is a promise to provide the customer with a good or service. At contract inception, the Company will assess the goods or services promised in the contract with a customer and shall identify, as a performance obligation, each promise to transfer to the customer either: (i) a good or service (or a bundle of goods or services) or (ii) a series of distinct goods or services that are substantially the same markets as our core thermal solutions, including heavy industrial settings, oil and gas refining and upgrading, power generation plants, petrochemical production facilities and mining operations. Wethat have the same pattern of transfer to the customer. For contracts with multiple performance obligations, standalone selling price is generally readily observable.
Revenue from products transferred to customers at a point in time is recognized $7,992when obligations under the terms of goodwill in connectionthe contract with the Sumac acquisition that we expect will be partially deductiblecustomer are satisfied; generally this occurs with the transfer of control upon shipment. Revenue from
products transferred to customers at a point in time accounted for Canadian taxation purposes.
|
| | | |
| Consideration to or on behalf of sellers at close | $ | 10,956 |
|
| Fair value of total consideration transferred | $ | 10,956 |
|
The following table summarizesapproximately 58.6% and 59.6% of revenue for the fair value of the assets and liabilities assumed: |
| | | |
| Assets acquired: | |
| Accounts receivable | $ | 1,693 |
|
| Inventories | 1,299 |
| Other current assets | 33 |
| Property, plant and equipment | 1,316 |
| Identifiable intangible assets | 3,085 |
| Goodwill | 7,992 |
| Deferred tax asset | 111 |
|
| Total assets | 15,529 |
|
| Liabilities assumed: | |
| Current liabilities | 935 |
| Total liabilities | 935 |
|
| Non-controlling interests | 3,638 |
|
| Total consideration | $ | 10,956 |
|
In total, $134 of transaction costs were incurred related to the Sumac transaction, all of which were incurred in thefiscal year ended March 31, 2015.2021 and 2020, respectively.
Our identifiable intangiblerevenues that are recognized over time include (i) products and services which are billed on a time and materials basis, and (ii) fixed fee contracts for complex turnkey solutions. Revenue from products and services transferred to customers over time accounted for approximately 41.4% and 40.4% of revenue for the fiscal year ended March 31, 2021 and 2020, respectively.
For our time and materials service contracts, we recognize revenues as the products and services are provided over the term of the contract and have determined that the stated rate for installation services and products is representative of the stand-alone selling price for those services and products.
Our turnkey projects, or fixed fee projects, offer our customers a comprehensive solution for heat tracing from the initial planning stage through engineering/design, manufacture, installation and final proof-of-performance and acceptance testing. Turnkey services also include project planning, product supply, system integration, commissioning and on-going maintenance. Turnkey solutions, containing multiple deliverables, are customer specific and do not have an alternative use and present an unconditional right to payment, and thus are treated as a single performance obligation with revenues recognized over time as work progresses.
For revenue recognized under fixed fee turnkey contracts, we measure the costs incurred that contribute towards the satisfaction of our performance obligation as a percentage of the total cost of production (the “cost-to-cost method”), and we recognize a proportionate amount of contract revenue, as the cost-to-cost method appropriately depicts performance towards satisfaction of the performance obligation. Changes to the original cost amount may be required during the life of the contract and such estimates are reviewed on a regular basis. Sales and gross profits are adjusted using the cumulative catch-up method for revisions in estimated contract costs. Reviews of estimates have not generally resulted in significant adjustments to our results of operations.
At March 31, 2021, revenues associated with our open performance obligations totaled $114,200, representing our combined backlog and deferred revenue. Within this amount, approximately $20,774 will be earned as revenue in excess of one year. We expect to recognize the remaining revenues associated with unsatisfied or partially satisfied performance obligations within twelve months.
Pricing and Sales Incentives
Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price. Generally, we do not enter into sales contracts with customers that offer sales discounts or incentives.
Optional Exemptions, Practical Expedients and Policy Elections
We expense the incremental costs of obtaining a contract when incurred because the amortization period would be less than one year.
The Company has elected to treat shipping and handling activities as a cost of fulfillment rather than a separate performance obligation.
The Company has elected to exclude all sales and other similar taxes from the transaction price. Accordingly, the Company presents all collections from customers for sales and other similar taxes on a net basis, rather than having to assess whether the Company is acting as an agent or a principal in each taxing jurisdiction.
The Company adopted ASC 606 as of April 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, the Company utilized the practical expedient to consider the aggregate effect of all modifications when identifying performance obligations and allocating transaction price.
Contract Assets and Liabilities
Contract assets and liabilities are presented on our consolidated balance sheet. Contract assets consist of unbilled amounts resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. In addition, contract assets contain labor and material costs
incurred under our time and material service contracts that have not been billed to the customer. Contract liabilities represent deferred revenue from advanced customer payments or billings in excess of costs incurred or revenue earned. The Company invoices customers pursuant to the terms of their related contract. Invoiced amounts are applied to individual contracts and an associated amount is either classified as a contract asset or contract liability depending on whether the revenue associated with the amounts billed had been earned (contract asset) or not (contract liability).
As of March 31, 2021 and 2020, contract assets were $11,379 and $10,194, respectively. There were no impairment losses recognized on our contract assets for the twelve months ended March 31, 2021 and 2020. As of March 31, 2021 and 2020, contract liabilities were $2,959 and $4,538, respectively. The majority of contract liabilities at March 31, 2018 and 2017 that2020 were related to the Sumac transaction consistedrecognized in revenue as of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortization period | | Gross Carrying Amount at March 31, 2018 | | Accumulated Amortization | | Net Carrying Amount at March 31, 2018 | | Gross Carrying Amount at March 31, 2017 | | Accumulated Amortization | | Net Carrying Amount at March 31, 2017 |
| Customer relationships | 4 years | | $ | 2,631 |
| | $ | 1,973 |
| | $ | 658 |
| | $ | 2,551 |
| | $ | 1,275 |
| | $ | 1,276 |
|
| Total | | | $ | 2,631 |
| | $ | 1,973 |
| | $ | 658 |
| | $ | 2,551 |
| | $ | 1,275 |
| | $ | 1,276 |
|
The weighted average useful life of acquired finite lived intangible assets related to Sumac transaction is 3.6 years.March 31, 2021.
Disaggregation of Revenue 4.We disaggregate our revenue from contracts with customers by geographic location, revenues recognized at point in time and revenues recognized over time, as we believe these best depict the nature of our sales and the regions in which those sales are earned and managed.
Disaggregation of revenues from contracts with customers for fiscal 2021, 2020 and 2019 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, 2021 | | |
| | Revenues recognized at point in time | | Revenues recognized over time | | Total | | | | | | |
| United States and Latin America | | $ | 47,599 | | | $ | 47,842 | | | $ | 95,441 | | | | | | | |
| Canada | | 67,451 | | | 23,402 | | | 90,853 | | | | | | | |
| Europe, Middle East and Africa | | 29,304 | | | 24,915 | | | 54,219 | | | | | | | |
| Asia-Pacific | | 17,448 | | | 18,220 | | | 35,668 | | | | | | | |
| Total revenues | | $ | 161,802 | | | $ | 114,379 | | | $ | 276,181 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, 2020 |
| | Revenues recognized at point in time | | Revenues recognized over time | | Total |
| United States and Latin America | | $ | 72,334 | | | $ | 83,131 | | | $ | 155,465 | |
| Canada | | 106,577 | | | 21,787 | | | 128,364 | |
| Europe, Middle East and Africa | | 31,028 | | | 22,734 | | | 53,762 | |
| Asia-Pacific | | 18,558 | | | 27,337 | | | 45,895 | |
| Total revenues | | $ | 228,497 | | | $ | 154,989 | | | $ | 383,486 | |
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, 2019 |
| | Revenues recognized at point in time | | Revenues recognized over time | | Total |
| United States and Latin America | | $ | 71,865 | | | $ | 93,783 | | | $ | 165,648 | |
| Canada | | 102,997 | | | 24,395 | | | 127,392 | |
| Europe, Middle East and Africa | | 46,210 | | | 31,298 | | | 77,508 | |
| Asia-Pacific | | 26,534 | | | 15,560 | | | 42,094 | |
| Total revenues | | $ | 247,606 | | | $ | 165,036 | | | $ | 412,642 | |
5. Net Income per Common Share
Basic net income per common share is computed by dividing net income available to Thermon Group Holdings, Inc. by the weighted average number of common shares outstanding during each period. Diluted net income per common share is computed by dividing net income available to Thermon Group Holdings, Inc. by the weighted average number of common shares and common share equivalents outstanding (if dilutive) during each period. The number of common share equivalents, which includes options and both restricted and performance stock units, is computed using the treasury stock method. With regard to the performance stock units, we assumedassume that the associated performance targets will be met at the target level of performance for purposes of calculating diluted net income per common share.share until such time that it is probable that the performance target will not be met.
The reconciliations of the denominators used to calculate basic net income per common share and diluted net income per common share for fiscal 2018, fiscal 2017,2021, 2020, and fiscal 2016,2019, respectively, is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2021 | | Year Ended March 31, 2020 | | Year Ended March 31, 2019 |
| Basic net income per common share | | | | | | |
| Net income available to Thermon Group Holdings, Inc. | | $ | 1,165 | | | $ | 11,938 | | | $ | 22,756 | |
| Weighted-average common shares outstanding | | 33,134,592 | | | 32,760,327 | | | 32,568,541 | |
| Basic net income per common share | | $ | 0.04 | | | $ | 0.36 | | | $ | 0.70 | |
| | | | | | | | | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 | | Year Ended March 31, 2019 |
| | | Year Ended March 31, 2018 | | Year Ended March 31, 2017 | | Year Ended March 31, 2016 | |
| Basic net income per common share | | | | | | | |
| Diluted net income per common share | | Diluted net income per common share | | | | | | |
| Net income available to Thermon Group Holdings, Inc. | | $ | 11,913 |
| | $ | 14,641 |
| | $ | 23,009 |
| Net income available to Thermon Group Holdings, Inc. | | $ | 1,165 | | | $ | 11,938 | | | $ | 22,756 | |
| Weighted-average common shares outstanding | | 32,423,581 |
| | 32,301,661 |
| | 32,176,925 |
| Weighted-average common shares outstanding | | 33,134,592 | | | 32,760,327 | | | 32,568,541 | |
| Basic net income per common share | | $ | 0.37 |
| | $ | 0.45 |
| | $ | 0.72 |
| |
| Common share equivalents: | | Common share equivalents: | |
| Stock options issued | | Stock options issued | | 27,306 | | | 134,777 | | | 235,802 | |
| Restricted and performance stock units issued | | Restricted and performance stock units issued | | 179,056 | | | 253,566 | | | 249,961 | |
| Weighted average shares outstanding – dilutive | | Weighted average shares outstanding – dilutive | | 33,340,954 | | | 33,148,670 | | | 33,054,304 | |
| Diluted net income per common share | | Diluted net income per common share | | $ | 0.03 | | | $ | 0.36 | | | $ | 0.69 | |
|
| | | | | | | | | | | | |
| | | Year Ended March 31, 2018 | | Year Ended March 31, 2017 | | Year Ended March 31, 2016 |
| Diluted net income per common share | | |
| | |
| | |
| Net income available to Thermon Group Holdings, Inc. | | $ | 11,913 |
| | $ | 14,641 |
| | $ | 23,009 |
|
| Weighted-average common shares outstanding | | 32,423,581 |
| | 32,301,661 |
| | 32,176,925 |
|
| Common share equivalents: | | | | | | |
| Stock options issued | | 218,693 |
| | 216,041 |
| | 241,529 |
|
| Restricted and performance stock units issued | | 155,077 |
| | 115,579 |
| | 174,192 |
|
| Weighted average shares outstanding – dilutive | | 32,797,351 |
| | 32,633,281 |
| | 32,592,646 |
|
| Diluted net income per common share | | $ | 0.36 |
| | $ | 0.45 |
| | $ | 0.71 |
|
For the yearsyear ended March 31, 2018, 20172021, 2020, and 2016, 76,205, 59,9502019, 85,322, 0 and 49,0970 equity awards, respectively, were not included in the calculation of diluted net income per common share since they would have had an anti-dilutive effect.
5.6. Inventories
Inventories consisted of the following at March 31:
| | | | 2018 | | 2017 | | 2021 | | 2020 |
| Raw materials | $ | 31,516 |
| | $ | 12,270 |
| Raw materials | $ | 33,485 | | | $ | 31,300 | |
| Work in process | 7,186 |
| | 1,769 |
| Work in process | 4,071 | | | 5,317 | |
| Finished goods | 27,204 |
| | 21,310 |
| Finished goods | 28,008 | | | 25,701 | |
| | 65,906 |
| | 35,349 |
| | 65,564 | | | 62,318 | |
| Valuation reserves | (2,077 | ) | | (1,329 | ) | Valuation reserves | (1,774) | | | (2,045) | |
| Inventories, net | $ | 63,829 |
| | $ | 34,020 |
| Inventories, net | $ | 63,790 | | | $ | 60,273 | |
The following table summarizes the annual changes in our valuation reserve accounts:
| | | | | | | | | | | |
| Balance as of March 31, 2018 | | $ | 2,077 | |
| Additions in reserve | | 166 | |
| Charged to reserve | | (44) | |
| Balance as of March 31, 2019 | | 2,199 | |
| Additions in reserve | | 172 | |
| Charged to reserve | | (326) | |
| Balance as of March 31, 2020 | | 2,045 | |
| Additions in reserve | | 133 | |
| Charged to reserve | | (404) | |
| Balance as of March 31, 2021 | | $ | 1,774 | |
|
| | | | | |
| Balance at March 31, 2015 | | $ | 1,116 |
|
| | Additions in reserve | | 383 |
|
| | Charged to reserve | | (212 | ) |
| Balance at March 31, 2016 | | 1,287 |
|
| | Additions in reserve | | 348 |
|
| | Charged to reserve | | (306 | ) |
| Balance at March 31, 2017 | | 1,329 |
|
| | Additions in reserve | | 721 |
|
| | Charged to reserve | | 27 |
|
| Balance at March 31, 2018 | | $ | 2,077 |
|
6.7. Property, Plant and Equipment
Property, plant and equipment consisted of the following at March 31:
| | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| Land, buildings and improvements | | $ | 57,317 | | | $ | 53,060 | |
| Machinery and equipment | | 47,138 | | | 38,880 | |
| Office furniture and equipment | | 15,375 | | | 15,587 | |
| Internally developed software | | 7,336 | | | 5,793 | |
| Construction in progress | | 1,019 | | | 2,772 | |
| Property, plant and equipment at cost | | 128,185 | | | 116,092 | |
| Accumulated depreciation | | (55,555) | | | (43,550) | |
| Property, plant and equipment, net | | $ | 72,630 | | | $ | 72,542 | |
| | | | |
|
| | | | | | | | |
| | | 2018 | | 2017 |
| Land, buildings and improvements | | $ | 50,808 |
| | $ | 23,812 |
|
| Machinery and equipment | | 24,182 |
| | 20,727 |
|
| Office furniture and equipment | | 20,818 |
| | 13,296 |
|
| Internally developed software | | 4,069 |
| | 3,188 |
|
| Construction in progress | | 2,183 |
| | 2,478 |
|
| Property, plant and equipment at cost | | 102,060 |
| | 63,501 |
|
| Accumulated depreciation | | (27,575 | ) | | (20,235 | ) |
| Property, plant and equipment, net | | $ | 74,485 |
| | $ | 43,266 |
|
| | | | | |
Depreciation expense was $7,962, $6,060$11,277, $10,502 and $4,655,$9,194, in fiscal 2018,2021, fiscal 2017,2020, and fiscal 2016,2019, respectively.
Included within depreciation expense was amortization of internally developed software of $495, $496,$766, $790, and $453,$479, in fiscal 2018, fiscal 20172021, 2020 and fiscal 2016,2019, respectively.
7.8. Goodwill and Other Intangible Assets
The carrying amount of goodwill for all reporting segments as of March 31, 2018, 20172021, 2020 and 20162019 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | US-LAM | | Canada | | EMEA | | APAC | | Total |
| Balance as of March 31, 2019 | | $ | 62,725 | | | $ | 114,382 | | | $ | 19,264 | | | $ | 8,624 | | | $ | 204,995 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Foreign currency translation impact | | 0 | | | (6,643) | | | (374) | | | 0 | | | (7,017) | |
| Balance as of March 31, 2020 | | $ | 62,725 | | | $ | 107,739 | | | $ | 18,890 | | | $ | 8,624 | | | $ | 197,978 | |
| | | | | | | | | | |
| Foreign currency translation impact | | 0 | | | 13,811 | | | 1,249 | | | 0 | | | 15,060 | |
| Balance as of March 31, 2021 | | $ | 62,725 | | | $ | 121,550 | | | $ | 20,139 | | | $ | 8,624 | | | $ | 213,038 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | United States | | Canada | | Europe | | Asia | | Total |
| Balance as of March 31, 2016 | | $ | 48,971 |
| | $ | 44,488 |
| | $ | 19,427 |
| | $ | 8,624 |
| | $ | 121,510 |
|
| Purchase price adjustment | | 3,045 |
| | — |
| | — |
| | — |
| | 3,045 |
|
| Foreign currency translation impact | | — |
| | (1,044 | ) | | (990 | ) | | — |
| | (2,034 | ) |
| Balance as of March 31, 2017 | | $ | 52,016 |
| | $ | 43,444 |
| | $ | 18,437 |
| | $ | 8,624 |
| | $ | 122,521 |
|
| Goodwill acquired | | — |
| | 85,156 |
| | — |
| | — |
| | 85,156 |
|
| Foreign currency translation impact | | — |
| | 167 |
| | 2,722 |
| | — |
| | 2,889 |
|
| Balance as of March 31, 2018 | | $ | 52,016 |
| | $ | 128,767 |
| | $ | 21,159 |
| | $ | 8,624 |
| | $ | 210,566 |
|
Goodwill is tested for impairment on We identified the prolonged economic effects of the COVID-19 pandemic to be an annual basis, and between annual tests if indicatorsindicator of potential asset impairments in our reporting units. In the fourth quarter of fiscal 2021, we performed our annual goodwill and tangible impairment exist.assessments including our indefinite life trademarks. We perform a qualitative analysis to determine whether it is more likely than not that the fair value of aanalyzed our reporting unit is less than its carrying amount, including goodwill. If required, we also perform a quantitative analysis usingunits utilizing 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 impairment test for indefinite life trademarks utilized a relief from royalty analysis based on the cash flow streams attributable to the Thermon trademark. Based on the goodwill and assets impairment assessment, the estimated fair value of our reporting units exceeded the carrying value. As such, there was no impairment of goodwill, assets or our indefinite life trademarks as of the respective reporting periods. The
most significant inputs in the Company's quantitative goodwill impairment teststest are the projected financial information, the weighted average cost of capital and market multiples for similar transactions. Our annualIf the overall economic conditions, energy market or factors specific to the Company deteriorate further, it could negatively impact the Company's future impairment test is performed during the fourth quarter of our fiscal year.
In prior years, we experienced sizable declines in revenue and operating results within our Canadian operations, and considered such to be an indication of potential goodwill and intangible asset impairment. These declines in operating results principally resulted from lower crude oil prices, which had a significant adverse impact on capital spending in Canada. During fiscal 2018, we have experienced increased revenues and operating results in Canada, and project continued growth. Accordingly, during the fourth quarter of fiscal 2018, we did not conclude a triggering event existed within our Canadian reporting unit requiring further analysis.tests. We will continue to evaluatemonitor our Canadian operationsreporting unit's goodwill and assess on a quarterly basis whether it is more likely than not thatasset valuations and test for potential impairments until the fair value of the Canadian reporting unit is less than its carrying amount.
Similarly, based upon our qualitative analyses, we have not determined that it is more likely than not that the fair value of our U.S. reporting segment is less than its carrying amount; however, we have experienced losses in the U.S. during fiscal 2018. If changes in estimates and assumptions used to determine whether impairment exists, or if we experience future declines in actual and forecasted operating results and/oroverall market conditions in the United States, we may be required to reevaluate the fair value of our United States reporting unit, which could ultimately result in an impairment to goodwill and/or indefinite-lived intangible assets in future periods.improve.
Our total intangible assets at March 31, 2018,2021, and 20172020 consisted of the following (including THS, IPI, Sumac, and Unitemp):following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Carrying Amount at March 31, 2021 | | Accumulated Amortization | | Net Carrying Amount at March 31, 2021 | | Gross Carrying Amount at March 31, 2020 | | Accumulated Amortization | | Net Carrying Amount at March 31, 2020 |
| Products | | $ | 66,250 | | | $ | 22,635 | | | $ | 43,615 | | | $ | 58,722 | | | $ | 14,193 | | | $ | 44,529 | |
| Trademarks | | 45,581 | | | 1,289 | | | 44,292 | | | 43,865 | | | 1,273 | | | 42,592 | |
| Developed technology | | 10,028 | | | 5,486 | | | 4,542 | | | 9,564 | | | 4,758 | | | 4,806 | |
| Customer relationships | | 113,789 | | | 102,911 | | | 10,878 | | | 105,912 | | | 93,729 | | | 12,183 | |
| Certifications | | 457 | | | — | | | 457 | | | 436 | | | — | | | 436 | |
| | | | | | | | | | | | |
| Total | | $ | 236,105 | | | $ | 132,321 | | | $ | 103,784 | | | $ | 218,499 | | | $ | 113,953 | | | $ | 104,546 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Gross Carrying Amount at March 31, 2018 | | Accumulated Amortization | | Net Carrying Amount at March 31, 2018 | | Gross Carrying Amount at March 31, 2017 | | Accumulated Amortization | | Net Carrying Amount at March 31, 2017 |
| Products | | $ | 64,611 |
| | $ | 2,719 |
| | $ | 61,892 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Trademarks | | 46,156 |
| | 832 |
| | 45,324 |
| | 44,563 |
| | 521 |
| | 44,042 |
|
| Developed technology | | 10,160 |
| | 4,106 |
| | 6,054 |
| | 9,796 |
| | 3,454 |
| | 6,342 |
|
| Customer relationships | | 113,378 |
| | 77,646 |
| | 35,732 |
| | 99,676 |
| | 64,682 |
| | 34,994 |
|
| Certifications | | 458 |
| | — |
| | 458 |
| | 442 |
| | — |
| | 442 |
|
| Other | | 5,863 |
| | 3,889 |
| | 1,974 |
| | 2,626 |
| | 2,268 |
| | 358 |
|
| Total | | $ | 240,626 |
| | $ | 89,192 |
| | $ | 151,434 |
| | $ | 157,103 |
| | $ | 70,925 |
| | $ | 86,178 |
|
Trademarks and certifications have indefinite lives with the exception of IPI and Unitemp trademarks, which have gross carrying amounts of $1,820 and $474, respectively, that are subject to amortization. The useful life of the trademarks amortized is estimated at 8 years.lives. Developed technology, products, customer relationships and other intangible assets have estimated lives of 20 years,, 10 years, 10 years and 6 years,, respectively. The weighted average useful life for the group is 10 years. Portions12 years. Customer relationships intangibles associated with THS, with a gross carrying amount of intangible$11,438, have a useful life of 17 years. Intangible assets held in non-U.S. entities are valued in foreign currencies; accordingly changes in indefinite life intangible assets, such as certifications, at March 31, 20182021 and 20172020 were the result of foreign currency translation adjustments. Foreign currency translation adjustments also impacted finite life intangible assets held in non-U.S. entities.
The Company recorded amortization expense of $16,458, $11,772,$9,445, $17,773, and $12,112$20,771 in fiscal 2018, fiscal 20172021, 2020 and fiscal 2016,2019, respectively for intangible assets. Annual amortization of intangible assets for the next five years and thereafter will approximate the following:
| | | | | |
| 2022 | $ | 8,766 | |
| 2023 | 8,766 | |
| 2024 | 8,118 | |
| 2025 | 7,793 | |
| 2026 | 7,794 | |
| Thereafter | 18,329 | |
| Total | $ | 59,566 | |
|
| | | | |
| 2019 | | $ | 20,857 |
|
| 2020 | | 18,217 |
|
| 2021 | | 9,703 |
|
| 2022 | | 8,640 |
|
| 2023 | | 8,635 |
|
| Thereafter | | 41,100 |
|
| Total | | $ | 107,152 |
|
8.9. Accrued Liabilities
Accrued current liabilities consisted of the following:
| | | | March 31,
2018 | | March 31,
2017 | | March 31,
2021 | | March 31,
2020 |
| Accrued employee compensation and related expenses | $ | 16,449 |
| | $ | 8,364 |
| Accrued employee compensation and related expenses | $ | 11,765 | | | $ | 12,542 | |
| Accrued interest | 1,154 |
| | — |
| Accrued interest | 648 | | | 782 | |
| Customer prepayment | 519 |
| | 168 |
| Customer prepayment | 283 | | | 357 | |
| Warranty reserve | 300 |
| | 300 |
| Warranty reserve | 250 | | | 477 | |
| Professional fees | 1,854 |
| | 1,631 |
| Professional fees | 2,361 | | | 2,086 | |
| Sales tax payable | 1,546 |
| | 1,573 |
| Sales tax payable | 2,404 | | | 2,423 | |
| Other | 988 |
| | 1,106 |
| Other | 5,806 | | | 5,090 | |
| Total accrued current liabilities | $ | 22,810 |
| | $ | 13,142 |
| Total accrued current liabilities | $ | 23,517 | | | $ | 23,757 | |
9.10. Short-Term Revolving Credit Facilities
The Company’s subsidiary in the Netherlands has a revolving credit facility in the amount of Euro 4,000 (equivalent to $4,928 at March 31, 2018). The facility is collateralized by such subsidiary's receivables, inventory, equipment, furniture and real estate. No amounts were outstanding under this facility at March 31, 2018 and 2017.
The Company’s subsidiary in India has a revolving credit facility in the amount of 80,000 Rupees (equivalent to $1,230 at March 31, 2018). The facility is collateralized by such subsidiary's receivables, inventory, real estate, a letter of credit and cash. No amounts were outstanding under this facility at March 31, 2018 and 2017.
The Company’s subsidiary in Australia has a revolving credit facility in the amount of 230 Australian Dollars (equivalent to $177 at March 31, 2018). The facility is collateralized by such subsidiary's real estate. No amounts were outstanding under this facility at March 31, 2018 and 2017.
Under the Company’s senior secured revolving credit facility described below in Note 10, "Long-Term11, “Long-Term Debt," there were no” the Company had 0 outstanding borrowings at March 31, 20182021 and 2017.March 31, 2020.
10.11. Long-Term Debt
Long-term debt consisted of the following:
| | | | | | | | | | | |
| | March 31,
2021 | | March 31,
2020 |
| Variable Rate Term Loan, due October 2024, net of deferred debt issuance costs and debt discounts of $2,983 and $4,447 as of March 31, 2021 and 2020, respectively | $ | 145,517 | | | $ | 171,553 | |
| Less current portion | (2,500) | | | (2,500) | |
| Total | $ | 143,017 | | | $ | 169,053 | |
|
| | | | | | | |
| | March 31,
2018 | | March 31,
2017 |
| Variable Rate Term Loan, due October 2024, net of deferred debt issuance costs and debt discounts of $7,967 as of March 31, 2018 | $ | 217,033 |
| | $ | — |
|
| Variable Rate Term Loan, due April 2019, net of deferred debt issuance costs of $524 as of March 31, 2017 | — |
| | 80,476 |
|
| Less current portion | (2,500 | ) | | (20,250 | ) |
| | $ | 214,533 |
| | $ | 60,226 |
|
Senior secured credit facilitySecured Credit Facility
On October 30, 2017, the Company, as a credit party and a guarantor, Thermon Holding Corp. (the “US“U.S. Borrower”) and Thermon Canada Inc. (the “Canadian Borrower” and together with the US Borrower, the “Borrowers”), as borrowers, entered into a credit agreement with several banks and other financial institutions or entities from time to time party thereto (the “Lenders”) and JPMorgan Chase Bank, N.A. as administrative agent (the "Agent"“Agent”), thatwhich provides for a $250,000 seven-year term loan B facility made available to the USU.S. Borrower and a $60,000 five-year senior secured revolving credit facility made available to the USU.S. Borrower and the Canadian Borrower, which we refer to collectively as our “credit facility”. The proceeds of the term loan B were used to (1) pay in full $70,875 principal and interest on a previously issued term loan due April 2019; (2) repay $6,000 in unpaid principal and interest on the USU.S. Borrower's revolving line of credit; (3) to fund approximately $201,900 CAD of the purchase price of the acquisition of THS and certain related real estate assets for approximately $164,900; and (4) pay certain transaction fees and expenses in connection with the THS transactionacquisition and the credit facility.
Interest rates and fees. The USU.S. Borrower will have the option to pay interest on the term loan B facility at a base rate, plus an applicable margin, or at a rate based on LIBOR, (subject to a floor of 1.00%), plus an applicable margin. The applicable margin for base rate loans is 275 basis points and the applicable margin for LIBOR loans is 375 basis points. The USend-user Borrower may borrow revolving loans in USU.S. dollars and the Canadian Borrower may also borrow revolving loans in Canadian dollars. Borrowings under the revolving credit facility (a) made in USU.S. dollars will bear interest at a rate equal to a base rate, plus an applicable margin of 225 basis points or at a rate based on LIBOR, plus an applicable margin of 325 basis points and (b) made in Canadian dollars will bear interest at a rate equal to a Canadian base rate, plus an applicable margin of 225 basis points or at a rate based on CDOR,Canadian Dollar Offered Rate, plus an applicable margin of 325 basis points,points; provided, that followingsince the completion of the fiscal quarter endingended March 31, 2018, the applicable margins in each case will be determined based on a leverage-based performance grid, as set forth in the credit agreement. In addition to paying interest on outstanding principal under the revolving credit facility, the USU.S. Borrower is required to pay a commitment fee in respect of any unutilized revolving commitments of 0.50% per annum. Following the completion of the fiscal quarter ending March 31, 2018, the commitment fee will be determinedannum based on a leverage-based performance grid.
Maturity and repayment. The revolving credit facility terminates on October 28, 2022. The scheduled maturity date of the term loan facility is October 30, 2024. Commencing April 1, 2018, the term loan will amortize in equal quarterly installments of 0.25% of the $250,000 term loan, with the payment of the balance at maturity. The USU.S. Borrower will be able to voluntarily prepay the principal of the term loan without penalty or premium (subject to breakage fees) at any time in whole or in part; provided that for the first six months after the October 30, 2017 closing date, the USU.S. Borrower is required to pay a 1%
premium for prepayments of the term loan with the proceeds of certain re‑pricingrepricing transactions. The USU.S. Borrower is required to repay the term loan with certain asset sale and insurance proceeds, certain debt proceeds and, commencing for the fiscal year endingended March 31, 2019, 50% of excess cash flow (reducing to 25% if the Company’s leverage ratio is less than 4.0 to 1.0 but greater than or equal to 3.5 to 1.0 and 0% if the Company’s leverage ratio is less than 3.5 to 1.0). The remaining balance will be due at maturity of the term loan B facility on October 30, 2024.
Accordion. The credit facility allows for incremental term loans and incremental revolving commitments in an amount not to exceed $30,000 and an unlimited additional amount that would not cause the consolidated secured leverage ratio to exceed 4.0 to 1.0 (or, if less, the maximum consolidated leverage ratio permitted by the revolving credit facility on such date).
At March 31, 2018,2021, we had no outstanding borrowings under our revolving credit facility. The interest rate hadfacility for the Company had outstanding borrowings on March 31, 2018 would be 5.41%.Canadian Borrower line of credit or for the U.S. Borrower line of credit. As of March 31, 2018,2021, we had $55,384$56,686 of available borrowing capacity under our revolving credit facility after taking into account the borrowing base, outstanding borrowings and letters of credit outstanding. The variable rate term loan bears interest at the LIBOR rate plus an applicable margin dictated by our leverage ratio (as described above). Commencing April 1, 2018,The interest rate on the Company will be required to make quarterly principal payments of thevariable rate term loan of $625 through Julyon March 31, 2024. The remaining balance will be due at maturity of the term loan facility on October 30, 2024. In the fourth quarter of fiscal 2018, the Company made an unscheduled repayment of principal on the term loan facility in the amount of $25,000. From time to time, we may choose to make unscheduled principal repayments on the term loan credit facility based on available cash.2021 was 4.75%.
Guarantees; security. The term loan is guaranteed by the Company and all of the Company's current and future wholly-owned domestic material subsidiaries (the “US“U.S. Subsidiary Guarantors”), subject to certain exceptions. Obligations of the USU.S. Borrower under the revolving credit facility are guaranteed by the Company and the USU.S. Subsidiary Guarantors. The obligations of the Canadian Borrower under the revolving credit facility are guaranteed by the Company, the USU.S. Borrower, the USU.S. Subsidiary Guarantors and each of the wholly owned Canadian material subsidiaries of the Canadian Borrower, subject to certain exceptions. The term loan and the obligations of the USU.S. Borrower under the revolving credit facility are secured by a first lien on all of the Company’s assets and the assets of the USU.S. Subsidiary Guarantors, including 100% of the capital stock of the USU.S. Subsidiary Guarantors and 65% of the capital stock of the first tier material foreign subsidiaries of the Company, the USU.S. Borrower and the USU.S. Subsidiary Guarantors, subject to certain exceptions. The obligations of the Canadian Borrower under the revolving credit facility are secured by a first lien on all of the Company's assets, the USU.S. Subsidiary Guarantors' assets, the Canadian Borrower’s assets and the assets of the material Canadian subsidiaries of the Canadian Borrower, including 100% of the capital stock of the Canadian Borrower’s material Canadian subsidiaries.
Financial covenants. The term loan is not subject to any financial covenants. The revolving credit facility requires the Company, on a consolidated basis, to maintain certain financial covenant ratios. The Company must maintain a consolidated leverage ratio of 3.75:1.0 as measured on the last day of the following periods: 5.5:1.0 for December 31, 2017 through September 30, 2018; 5.0:1.0 for December 31, 2018 through September 30, 2019; 4.5:1.0 for December 31, 2019 through September 30, 2020; and 3.75:1.0 for December 31, 2020 and eachany fiscal quarter thereafter.quarter. In addition, on the last day of any period of four fiscal quarters, the Company must maintain a consolidated fixed charge coverage ratio of not less than 1.25:1.0. As of March 31, 2018,2021, we were in compliance with all financial covenants of the credit facility.
Restrictive covenants. The credit agreement governing our facility contains various restrictive covenants that, among other things, restrict or limit our ability to (subject to certain negotiated exceptions): incur additional indebtedness; grant liens; make fundamental changes; sell assets; make restricted payments;payments including cash dividends to shareholders; enter into sales and leasebacks;leaseback transactions; make investments; prepay certain indebtedness; enter into transactions with affiliates; and enter into restrictive agreements.
Maturities of long-term debt principal payments are as follows for the fiscal years ended March 31:
| | | | | | | | |
| 2022 | | $ | 2,500 | |
| 2023 | | 2,500 | |
| 2024 | | 2,500 | |
| 2025 | | 141,000 | |
| 2026 | | 0 | |
| Total | | $ | 148,500 | |
|
| | | | |
| 2019 | | $ | 2,500 |
|
| 2020 | | 2,500 |
|
| 2021 | | 2,500 |
|
| 2022 | | 2,500 |
|
| 2023 | | 2,500 |
|
| 2024 | | 2,500 |
|
| 2025 | | 210,000 |
|
| Total | | $ | 225,000 |
|
11.12. Related-Party Transactions
In connection with the SumacTPS transaction, one of the former TPS principals (the "TPS Minority Shareholder") retained 25% of the ownership of the Sumac business unit. This individual is employed byentities holding the Company and serves as general manager of the SumacTPS business unit. During the fiscal year ended March 31, 2017, this
individual, together with the two other former principals of Sumac, who are not employed by the CompanyTPS, were paid $5,805 in the aggregate in full satisfaction of the Company's obligations under the $5,905 non-interest bearing performance-based note issued in connection with the SumacTPS transaction.
Since
On April 2, 2018, the acquisition by our former privateTPS Minority Shareholder provided the Company notice that he was exercising his option to sell one-half (12.5%) of his remaining equity sponsors thatinterest in the entities holding the TPS business unit to the Company, and such sale was completed and effective as of July 20, 2018. The terms of the April 2015 TPS purchase agreement prescribed a valuation formula for such a sale based on TPS's financial results for the 12 months ended March 31, 2018. During the first quarter of the fiscal year ended March 31, 2019, the Company paid $5,665 to purchase the 12.5% non-controlling interest.
Similarly, on April 30, 2010, we have paid certain amounts2, 2019, the TPS Minority Shareholder provided the Company notice in order to exercise his option to sell the entirety of his remaining equity interest (12.5% of the entities holding the TPS business unit) to the Predecessor owners in settlement of CHS Transactions and have also received certain amounts that were identified as potential indemnity items at the timeCompany. The terms of the transaction. Certain members of our current management continueApril 2015 TPS purchase agreement prescribed a valuation formula for such a sale based on TPS’s financial results for the fiscal year ended March 31, 2019. The Company paid $4,508 to be investors inpurchase the Predecessor ownership fund. Therefore, these payments made and received are considered to be related party transactions.remaining 12.5% non-controlling interest on August 1, 2019.
12.13. Employee Benefits
The Company has defined contribution plans covering substantially all domestic employees and certain foreign subsidiary employees who meet certain service and eligibility requirements. Participant benefits are 100% vested upon participation. The Company matches employee contributions, limited to 50% of the first 6% of each employee's salary contributed. The Company's matching contributions to defined contribution plans on a consolidated basis were approximately $2,119, $1,634,$2,561, $2,607, and $1,684$2,315 in fiscal 2018, fiscal 2017, and fiscal 2016,2021, 2020, 2019, respectively.
The Company has an incentive compensation program to provide employees with incentive pay based on the Company's ability to achieve certain sales, profitability, and safety objectives. From time to time, the compensation committee of the Board of Directors, at its sole discretion, can add additional amounts to the overall incentive pay achieved. The Company recorded approximately $6,656, $2,324,$2,767, $3,104, and $2,133$9,885 for incentive compensation earned and other discretionary amounts in fiscal 2018, fiscal 2017, and fiscal 2016,2021, 2020, 2019, respectively.
Thermon Europe B.V., our European subsidiary, maintains defined benefit pension plans for qualifying employees located in The Netherlands. The Company is currently under contract with an insurance companyprovides a non-qualified deferred compensation plan for certain highly compensated employees where payroll contributions are made by the employees on a pre-tax basis. Included in “Other long-term assets” in the consolidated balance sheets at March 31, 2021 and 2020 were $5,047 and $2,849, respectively, of deferred compensation plan assets held by the Company. Deferred compensation plan assets (mutual funds) are measured at fair value on a recurring basis based on quoted market prices in active markets (Level 1). The Company has a corresponding liability to fund a defined benefit (average pay) pension plan to provideparticipants of $4,608 and $2,886 included in “Other long-term liabilities” in the consolidated balance sheet at March 31, 2021 and 2020, respectively. Deferred compensation expense (income) included in marketing, general, administrative, and engineering were $1,564 and $(387) for estimated post-retirement pension income. During the twelve months ended March 31, 2018, 20172021 and 2016,2020, respectively. Expenses and income from our deferred compensation plan were offset by unrealized gains and losses for the deferred compensation plan included in other expense on our consolidated statements of comprehensive income. Our unrealized (gains)/losses on investments were $(1,635) and $498 for the twelve months ended March 31, 2021 and 2020, respectively.
14. Restructuring and Other Charges/(income)
During fiscal 2021, we enacted certain restructuring initiatives to align our cost structure with the decline in demand for our products and services primarily due to COVID-19 and supply/demand fluctuations in commodity prices. Moreover, during fiscal 2021, the Company made cash paymentsterminated approximately 252 people (both hourly and salaried positions) and incurred $5,748 in one-time severance costs. These charges were recorded to restructuring and other charges/(income) in our consolidated statements of $417, $289operations and $295, respectively. Paymentscomprehensive income/(loss).
In addition, we incurred $429 in lease impairment costs primarily related to one of our Canadian facilities that was substantially vacated by December 31, 2020, as the Company executed efforts to optimize its global manufacturing footprint. We also exercised the early termination option for one of our existing leases in Canada, which resulted in the remeasurement of the related right-of-use asset and lease liability and accelerated the lease amortization and expense to align with the cease use date of the facility. We substantially vacated the facility by December 31, 2020. Finally, we early terminated one of our leases in our US-LAM segment. As a result of these abandonments, we recorded a total of $381 in lease abandonment charges during fiscal 2021. We recorded these charges to restructuring and other charges/(income) in our consolidated statements of operations and comprehensive income.
Disposal of South Africa Business
On December 15, 2020, a Sale of Shares Agreement was entered into between one of our consolidated subsidiaries and an investor consortium (the "TSAPL Purchasers"). As a result of this agreement, 100% of the outstanding common shares of our consolidated subsidiary, Thermon South Africa Proprietary Limited (the "South Africa Business"), were madesold to the insurance companyTSAPL Purchasers, with aggregate proceeds of 2,500 South African Rand (ZAR), or $167, as partial satisfaction of an existing note receivable. In addition, Purchasers committed to fundsettle operational receivables attributable to other Company subsidiaries existing at the pension contract. Astime of March 31, 2018sale.
After evaluating our presence in the region served by the South Africa Business, the Company decided to centralize and 2017, the plan had an estimated net benefit obligation of $2,185consolidate our business structure and $1,611, respectively which is included in non-current liabilities. The obligation is based on an actuarial calculationstreamline our organization. A member of the pension obligationTSAPL Purchasers was the current general manager of the operations of the South Africa business at the time of sale. This sale is accompanied by a distribution agreement whereby the new owners of the business have agreed to distribute our products, continuing the Company's presence in the region. We believe this is an opportunity to optimize the business while pivoting to a new relationship that will better enable us to serve our customers.
As a result of the sale and in accordance with Impairment and Disposal of Long-Lived Assets ("ASC 360"), we recognized a loss on the sale of a business of $2,065, which included the impact of a currency translation adjustment of $828. This loss was recognized within restructuring and other charges/(income) on the consolidated statements of operations and comprehensive income/(loss). The reported loss on sale of stock is not deductible for tax. Prior to the participants.disposal, the South Africa Business's results were reported within the "Europe, Middle East and Africa" segment.
Restructuring and other charges/(income) by reportable segment were as follows:
| | | | | | | | |
| | Year Ended March 31, 2021 |
| United States and Latin America | | $ | 3,563 | |
| Canada | | 2,591 | |
| Europe, Middle East and Africa | | 2,459 | |
| Asia-Pacific | | 10 | |
| | $ | 8,623 | |
13.Restructuring activity related to severance activity described above recorded in "Accrued liabilities" on the condensed consolidated balance sheets is summarized as follows for fiscal 2021:
| | | | | | | | |
| Beginning balance, April 1, 2020 | | $ | 0 | |
| Costs incurred | | 5,748 | |
| Less cash payments | | (5,091) | |
| Ending balance, March 31, 2021 | | $ | 657 | |
We believe we are substantially complete with accruing costs related to restructuring activities as of the end of fiscal 2021.
15. Commitments and Contingencies
At March 31, 2018,2021, the Company had in place letter of credit guarantees and performance bonds securing performance obligations of the Company. These arrangements totaled approximately $20,392.$6,905. Of this amount, $2,448$1,066 is secured by cash deposits at the Company's financial institutions and an additional $4,616$3,314 represents a reduction of the available amount of the Company's short term and long termlong-term revolving lines of credit. Included in prepaid expenses and other current assets at March 31, 20182021 and 2017,2020, was approximately $2,448$1,667 and $1,450,$2,769, respectively, of cash deposits pledged as collateral on performance bonds and letters of credit. Our Indian subsidiary also has $4,938 in customs bonds outstanding to secure the Company's customs and duties obligations in India.
The Company leases various property and equipment under operating leases. Lease expense was approximately $3,738, $3,441, and $3,200 in fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Future minimum annual lease payments under these leases are as follows for the fiscal years ended March 31:
|
| | | | |
| 2019 | | $ | 3,152 |
|
| 2020 | | 2,434 |
|
| 2021 | | 1,788 |
|
| 2022 | | 1,531 |
|
| 2023 | | 1,187 |
|
| Thereafter | | 1,854 |
|
| | | $ | 11,946 |
|
The Company has entered into information technology service agreements with several vendors. The service fees expense amounted to $3,439, $3,095,$1,768, $2,679, and $1,865$3,809 in fiscal 2018, fiscal 2017 and fiscal 2016,2021, 2020, 2019, respectively. The future annual service fees under the service agreements are as follows for the fiscal years ended March 31:
| | | | | |
| 2022 | $ | 1,087 | |
| 2023 | 896 | |
| |
| |
| |
| |
| Total | $ | 1,983 | |
|
| | | | |
| 2019 | | $ | 902 |
|
| 2020 | | 59 |
|
| 2021 | | 28 |
|
| 2022 | | 21 |
|
| | | $ | 1,010 |
|
We are involved in various legal and administrative proceedings that arise from time to time in the ordinary course of doing business. Some of these proceedings may result in fines, penalties or judgments being assessed against us, which may adversely affect our financial results. In addition, from time to time, we are involved in various disputes, which may or may not be settled prior to legal proceedings being instituted and which may result in losses in excess of accrued liabilities, if any, relating to such unresolved disputes. As of March 31, 2018,2021, management believes that adequate reserves have been established for any probable and reasonably estimable losses. Expenses related to litigation reduce operating income. We do not believe that the outcome of any of these proceedings or disputes would have a significant adverse effect on our financial position, long-term results of operations, or cash flows. It is possible, however, that charges related to these matters could be significant to our results of operations or cash flows in any one accountingreporting period.
In addition to the legal proceedings described above, in January 2020, the Company received service of process in a class action application in the Superior Court of Quebec, Montreal, Canada related to certain heating elements previously manufactured by THS and incorporated into certain portable construction heaters sold by certain manufacturers. The Company has no outstanding legal matters outsidebelieves this claim is without merit and intends to vigorously defend itself against the claim. While the Company continues to dispute the allegations, in March 2021, it reached an agreement in principle with the plaintiff and other defendants to resolve this matter without admitting to any liability; such agreement remains subject to the agreement of matters arising in the ordinary courseparties on the terms of businessa definitive settlement agreement. Settlement of this matter on the agreed terms will require the Company to contribute an amount that would materiallynot have a material impact ouron the Company’s consolidated financial position, results of operations or cash flows. The settlement is subject to, among other things, approval by the Superior Court.
As of March 31, 2021, the Company has accrued $4,380 as estimated additional cost related to the operational execution of a project in our financial position. We can give no assurances we will prevail in any of these matters.US-LAM segment.
Changes in the Company's warranty reserve are as followsfollows:
| | | | | | | | |
| Balance at March 31, 2018 | | $ | 300 | |
| Reserve for warranties issued during the period | | 300 | |
| Settlements made during the period | | (235) | |
| Balance at March 31, 2019 | | $ | 365 | |
| Reserve for warranties issued during the period | | 160 | |
| Settlements made during the period | | (48) | |
| Balance at March 31, 2020 | | $ | 477 | |
| Reserve for warranties issued during the period | | 217 | |
| Settlements made during the period | | (444) | |
| Balance at March 31, 2021 | | $ | 250 | |
|
| | | | | |
| Balance at March 31, 2015 | | $ | 429 |
|
| | Reserve for warranties issued during the period | | 490 |
|
| | Settlements made during the period | | (459 | ) |
| Balance at March 31, 2016 | | $ | 460 |
|
| | Reserve for warranties issued during the period | | 143 |
|
| | Settlements made during the period | | (303 | ) |
| Balance at March 31, 2017 | | $ | 300 |
|
| | Reserve for warranties issued during the period | | 281 |
|
| | Settlements made during the period | | (281 | ) |
| Balance at March 31, 2018 | | $ | 300 |
|
14.16. Stock-Based Compensation Expense
Since the completion of the CHS Transactions on April 30, 2010, theThe Board of Directors has adopted and the shareholders have approved twothree stock option award plans. The 2010 Thermon Group Holdings, Inc. Restricted Stock and Stock Option Plans ("2010 Plan") was approved on July 28, 2010. The plan authorized the issuance of 2,767,171 stock options or restricted shares (on a post stock split basis). On April 8, 2011, the Board of Directors approved the Thermon Group Holdings, Inc. 2011 Long-Term Incentive Plan ("2011 LTIP"). The 2011 LTIP made available 2,893,341 shares of the Company's common stock that may be awarded to employees, directors or non-employee contractor's compensation in the form of stock options or restricted stock awards. On May 21, 2020, the Board of Directors approved the Thermon Group Holdings, Inc. 2020 Long-Term Incentive Plan ("2020 LTIP"). The 2020 LTIP made available 1,400,000 shares of the Company's common stock that may be awarded to employees, directors, or non-employee contractor's compensation in the form of stock options or restricted stock awards. Collectively, the 2010 Plan, the 2011 LTIP, and the 20112020 LTIP are referred to as the "Stock Plans." The Company does not hold any shares of its own stock as treasury shares. Accordingly, the vesting of restricted stock units and performance stock units and the exercise of stock options result in the issuance of additional new shares of the Company's stock.
Unvested options outstanding are scheduled to cliff vest over fivethree years with 20%100% vesting on the third anniversary date of the grant each year.grant. Stock options must be exercised within 10 years from date of grant. Stock options were issued with an exercise price which was equal to the market price of our common stock at the grant date. We account for forfeitures as they incur,occur, rather than estimate expected forfeitures.
Stock Options
A summary of stock option activity under our Stock Plans for fiscal 2018, fiscal 20172021, 2020, and fiscal 20162019 are as follows:
|
| | | | | | | | |
| | | | Options Outstanding |
| | | | Number of Shares | | Weighted Average Exercise Price |
| Balance at March 31, 2015 | | 465,042 |
| | $ | 8.12 |
|
| | Exercised | | (29,056 | ) | | 8.25 |
|
| | Forfeited | | (2,260 | ) | | 17.10 |
|
| Balance at March 31, 2016 | | 433,726 |
| | $ | 8.07 |
|
| | Granted | | 28,499 |
| | 19.64 |
|
| | Exercised | | (47,484 | ) | | 6.77 |
|
| | Forfeited | | (2,802 | ) | | 19.58 |
|
| Balance at March 31, 2017 | | 411,939 |
| | $ | 8.94 |
|
| | Exercised | | (42,956 | ) | | 7.00 |
|
| | Forfeited | | (1,412 | ) | | 19.83 |
|
| Balance at March 31, 2018 | | 367,571 |
| | $ | 9.12 |
|
| | | | | | | | | | | | | | | | | |
| | | Options Outstanding |
| | | Number of Shares | | Weighted Average Exercise Price |
| Balance at March 31, 2018 | | 365,624 | | $ | 9.09 | |
| | | | | |
| Exercised | | (37,906) | | 10.44 | |
| Forfeited | | (279) | | 21.52 | |
| Balance at March 31, 2019 | | 327,439 | | $ | 8.92 | |
| | | | | |
| Exercised | | (185,792) | | 6.24 | |
| Forfeited | | (4,295) | | 18.69 | |
| Balance at March 31, 2020 | | 137,352 | | $ | 12.25 | |
| Granted | | 71,780 | | 14.28 | |
| Exercised | | (71,492) | | 6.81 | |
| Forfeited | | (16,171) | | 14.28 | |
| Expired | | (10,068) | | 14.73 | |
| Balance at March 31, 2021 | | 111,401 | | $ | 16.53 | |
For fiscal 2018, fiscal 20172021, 2020, and fiscal 20162019 the intrinsic value of stock option exercises was $648, $627,$646, $3,240, and $384,$555, respectively. During fiscal 2021, no options exercised will be transacted in the first quarter of fiscal year ending March 31, 2022.
| | | | | | | | | | | | | | | | | |
| | | Unvested Options |
| | | Number of Shares | | Weighted Average Grant Date Fair Value |
| Balance at March 31, 2018 | | 19,000 | | | $ | 5.89 | |
| | | | | |
| Vested | | (9,500) | | | 5.89 | |
| | | | | |
| Balance at March 31, 2019 | | 9,500 | | | $ | 5.89 | |
| | | | | |
| Vested | | (9,500) | | | 5.89 | |
| | | | | |
| Balance at March 31, 2020 | | 0 | | | $ | 0 | |
| Granted | | 0 | | | 0 | |
| Vested | | 0 | | | 0 | |
| Forfeited | | 0 | | | 0 | |
| Balance at March 31, 2021 | | 0 | | | $ | 0 | |
|
| | | | | | | | | |
| | | | Unvested Options |
| | | | Number of Shares | | Weighted Average Grant Date Fair Value |
| Balance at March 31, 2015 | | $ | 73,449 |
| | $ | 7.19 |
|
| | Vested | | (30,379 | ) | | 6.93 |
|
| | Forfeited | | (2,260 | ) | | 7.53 |
|
| Balance at March 31, 2016 | | $ | 40,810 |
| | $ | 7.39 |
|
| | Granted | | 28,499 |
| | 19.64 |
|
| | Vested | | (28,678 | ) | | 6.93 |
|
| | Forfeited | | (2,802 | ) | | 7.53 |
|
| Balance at March 31, 2017 | | $ | 37,829 |
| | $ | 8.86 |
|
| | Vested | | (17,417 | ) | | 6.93 |
|
| | Forfeited | | (1,412 | ) | | 19.83 |
|
| Balance at March 31, 2018 | | $ | 19,000 |
| | $ | 5.89 |
|
For fiscal 2018, fiscal 20172021, 2020, and fiscal 2016,2019, we recorded stock basedstock-based compensation of $3,519, $3,402,$3,728, $4,960, and $3,749,$4,148, respectively. TotalAs of March 31, 2021, there was no unrecognized expense related to non-vestedunvested stock option awards was approximately $117 as of March 31, 2018. We anticipate this expense will be recognized over a weighted average period of approximately 1.76 years.awards.
The following table summarizes information about stock options outstanding as of March 31, 2018:
2021:
| | | | | Options Outstanding | | Options Vested and Exercisable | | Options Outstanding | | Options Vested and Exercisable |
| Exercise Price | | Number Outstanding | | Weighted Average Contractual Life (Years) | | Weighted Average Exercise Price | | Aggregate Intrinsic Value at March 31, 2018 | | Number Vested and Exercisable | | Weighted Average Contractual Life (Years) | | Weighted Average Exercise Price | | Aggregate Intrinsic Value at March 31, 2017 | Exercise Price | | Number Outstanding | | Weighted Average Contractual Life (Years) | | Weighted Average Exercise Price | | Aggregate Intrinsic Value at March 31, 2021 | | Number Vested and Exercisable | | Weighted Average Contractual Life (Years) | | Weighted Average Exercise Price | | Aggregate Intrinsic Value at March 31, 2021 |
| $5.20 | | 238,863 |
| | 2.55 | | $ | 5.20 |
| | $ | 4,110,832 |
| | 238,863 |
| | 2.55 | | $ | 5.20 |
| | $ | 4,110,832 |
| |
| $9.82 | | 13,339 |
| | 2.91 | | 9.82 |
| | 167,938 |
| | 13,339 |
| | 2.91 | | 9.82 |
| | 167,938 |
| |
| $12.00 | | 47,250 |
| | 3.09 | | 12.00 |
| | 491,248 |
| | 47,250 |
| | 3.09 | | 12.00 |
| | 491,248 |
| $12.00 | | 10,470 | | 0.1 | | $ | 12.00 | | | $ | 78,420 | | | 10,470 | | | 0.1 | | $ | 12.00 | | | $ | 78,420 | |
| $14.28 | | $14.28 | | 55,609 | | 9.2 | | 14.28 | | | 289,723 | | | 0 | | | 0 | | 14.28 | | | 0 | |
| $19.64 | | 28,499 |
| | 8.76 | | 19.64 |
| | 78,942 |
| | 9,499 |
| | 8.76 | | 19.64 |
| | 26,312 |
| $19.64 | | 28,499 | | 5.8 | | 19.64 | | | (4,275) | | | 28,499 | | | 5.8 | | 19.64 | | | (4,275) | |
| $21.52 | | 39,620 |
| | 4.34 | | 21.52 |
| | 35,532 |
| | 39,620 |
| | 4.34 | | 21.52 |
| | 35,532 |
| $21.52 | | 16,823 | | 1.3 | | 21.52 | | | (34,150) | | | 16,823 | | | 1.3 | | 21.52 | | | (34,150) | |
| $5.20-$21.52 | | 367,571 |
| | 3.31 | | $ | 9.12 |
| | $ | 4,884,492 |
| | 348,571 |
| | 3.31 | | $ | 8.55 |
| | $ | 4,831,862 |
| |
| | $12.00 - $21.52 | | $12.00 - $21.52 | | 111,401 | | | 6.3 | | | $ | 16.53 | | | $ | 329,718 | | | 55,792 | | | 3.3 | | | $ | 18.77 | | | $ | 39,995 | |
The aggregate intrinsic value in the preceding table represents the total intrinsic value based on our closing stock price of $22.41 as of $19.49 as of March 31, 2018,2021, which would have been received by the option holders had all option holders exercised as of that date.
Stock options are valued by using a Black-Scholes-Merton option pricing model. We calculate the value of our stock option awards when they are granted. Accordingly, we update our valuation assumptions for volatility and the risk free interest rate each quarter that option grants are awarded. Annually, we prepare an analysis of the historical activity within our option plans as well as the demographic characteristics of the grantees of options within our stock option plan to determine the estimated life of the grants and possible ranges of estimated forfeiture. The expected life was determined using the simplified method for estimating expected option life, which qualify as "plain-vanilla" options. Due to the fact that the common stock underlying the options was not publicly traded for an equivalent period of the expected term of the options, the expected volatility was based on a comparable group of companies in conjunction with the historical volatility from traded shares of our stock. The risk-free interest rate is based on the rate of a zero-coupon U.S. Treasury instrument with a remaining term approximately equal to the expected term. We do not expect to pay dividends in the near term and therefore do not incorporate the dividend yield as part of our assumptions.
Restricted Stock Awards and Units
Restricted stock awards have been issued to members of our board of directors and restricted stock units have been issued to certain employees. For restricted stock awards, the actual common shares have been issued with voting rights and are included as part of our total common shares outstanding. The common shares may not be sold or exchanged until the vesting period is completed. For restricted stock units, no common shares are issued until the vesting period is completed. For restricted stock units, the Company allows its employees to withhold a portion of their units upon the vesting dates in order to satisfy their tax obligation. For both restricted stock awards and units, fair value is determined by the market value of our common stock on the date of the grant.
During fiscal 2015, we established a plan to issue our directors awards of fully vested common stock in lieu of restricted stock awards. During fiscal 20182021 and fiscal 2017,2020, we issued 20,21652,098 and 19,82426,608 fully vested common shares which had a total fair value of $411$712 and $385$660 based on the closing price of our common stock on the date of issuance, respectively. As of March 31, 2018,2021, there were no outstanding restricted stock awards.
The following table summarizes the activity with regard to unvested restricted stock units issued to employees during fiscal 2018, 2021, fiscal 2017,2020, and fiscal 2016.2019.
| | | | | | | | | | | | | | | | | |
| Restricted Stock Units | | Number of Shares | | Weighted Average Grant Fair Value |
| Balance of unvested units at March 31, 2018 | | 229,112 | | $ | 19.55 | |
| Granted | | 115,378 | | 23.44 | |
| Released | | (101,874) | | | 19.93 | |
| Forfeited | | (5,591) | | | 19.98 | |
| Balance of unvested units at March 31, 2019 | | 237,025 | | | $ | 21.26 | |
| Granted | | 122,747 | | | 22.17 | |
| Released | | (117,216) | | | 20.39 | |
| Forfeited | | (5,850) | | | 21.81 | |
| Balance of unvested units at March 31, 2020 | | 236,706 | | $ | 22.14 | |
| Granted | | 222,679 | | 13.75 | |
| Released | | (115,504) | | 21.33 | |
| Forfeited | | (39,357) | | 16.95 | |
| Balance of unvested units at March 31, 2021 | | 304,524 | | $ | 12.96 | |
|
| | | | | | | | |
| | Restricted Stock Units | | Number of Shares | | Weighted Average Grant Fair Value |
| Balance of unvested units at March 31, 2015 | | 198,822 |
| | $ | 22.38 |
|
| | Granted | | 98,009 |
| | 24.08 |
|
| | Released | | (69,704 | ) | | 21.97 |
|
| | Forfeited | | (34,906 | ) | | 22.53 |
|
| Balance of unvested units at March 31, 2016 | | 192,221 |
| | $ | 23.36 |
|
| | Granted | | 135,855 |
| | 18.65 |
|
| | Released | | (111,611 | ) | | 22.74 |
|
| | Forfeited | | (8,319 | ) | | 21.25 |
|
| Balance of unvested units at March 31, 2017 | | 208,146 |
| | $ | 20.64 |
|
| | Granted | | 119,302 |
| | 19.16 |
|
| | Released | | (88,084 | ) | | 21.51 |
|
| | Forfeited | | (10,252 | ) | | 20.05 |
|
| Balance of unvested units at March 31, 2018 | | 229,112 |
| | $ | 19.55 |
|
Based on our closing stock price of $22.41,$19.49, the aggregate intrinsic value of the unvested restricted stock units at March 31, 20182021 was $5,134.$5,935. Total unrecognized expense related to unvested restricted stock awards was approximately $2,841$2,994 as of March 31, 2018.2021. We anticipate this expense to be recognized over a weighted average period of approximately 1.651.8 years.
Performance Stock Units. During fiscal 2018, fiscal 20172021, 2020, and fiscal 2016,2019, performance stock unit awards were issued to our executive officers and other members of management and had total estimated grant date fair values of $1,420, $881$1,947, $2,285 and $1,113,$1,654, respectively. For the fiscal 20182021 awards, the performance indicator for these awards is a combination of stock price and the Company's Adjusted EBIDTA over a three year period.EBITDA. The target number of shares is 15,43849,716 and 58,24686,634 for the stock price awards and Adjusted EBITDA awards, respectively. TheFor those awards utilizing a stock price indicator, the stock price indicator measures our stock price comparedrelative to a pre-determinedpredetermined peer group of companies with similar business characteristics as ours. Since the stock price indicator is market based,market-based, we prepared a Monte Carlo valuation model to calculate the probable outcome of the market for our stock to arrive at the fair value. The fair value of the market based units will be expensed over three years, whether or not the market condition is met. TheFor those awards utilizing an Adjusted EBITDA indicator, the Adjusted EBITDA indicator establishes target for the combined total oftarget Adjusted EBITDA for each of the three years ending March 31, 2020.2023. Since this is athese are performance based stock award,awards, the Company will make estimates of periodic expense until the Adjusted EBITDA target is known and the expense for actual number of shares earned is determinable.
During fiscal 2018, there were no performance stock unit forfeitures. During fiscal 2017,2021 and 2020, certain Adjusted EBITDA-based performance stock awards that were scheduled to vest did not meet the minimum market basedAdjusted EBITDA indicator. Accordingly, 50,799130,835 and 5,153 of previously outstanding performance stock units were forfeited.forfeited during fiscal 2021 and 2020, respectively. For performance stock units, issued in fiscal 2018 and fiscal 2017, the performance period will end on the third fiscal year end subsequent to the award being granted. It will then be determined how many shares of stock will be issued. In each year of the performance period, the possible number of shares will range from zero0 percent to two hundred200 percent of the target shares.
The following table summarized the target number of performance stock units outstanding and the minimum and maximum number of shares that can be earned as of March 31, 2018.2021.
| | | | | | | | | | | | | | | | | |
| Fiscal Year Granted | Target | | Minimum | | Maximum |
| Fiscal 2019 | 68,178 | | 0 | | 136,356 |
| Fiscal 2020 | 92,394 | | 0 | | 184,788 |
| Fiscal 2021 | 136,350 | | 0 | | 272,700 |
|
| | | | | | | | |
| Fiscal Year Granted | Target | | Minimum | | Maximum |
| Fiscal 2017 | 47,486 | | — |
| | 94,972 |
| Fiscal 2018 | 73,684 |
| | — |
| | 147,368 |
|
The following table summarizes the number of awards earned and released during each fiscal year based on the results achieved for respective performance period:
|
| | | | | | | | |
| Fiscal Year Earned | Number of Shares Earned | | Number of Shares Withheld for Tax Obligation | | Number of Shares Released |
| Fiscal 2016 | 31,658 | | 8,669 | | 22,989 |
| Fiscal 2017 | — |
| | — |
| | — |
|
| Fiscal 2018 | — |
| | — |
| | — |
|
At March 31, 2018,2021, there was $1,231$1,461 in stock compensation that remained to be expensed, which will be recognized over a period of 2.221.5 years.
15.17. Other ExpenseIncome/(Expense)
Other expense consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2021 | | Year Ended March 31, 2020 | | Year Ended March 31, 2019 |
| Foreign currency transaction gain/(loss) | | $ | 1,095 | | | $ | (143) | | | $ | 353 | |
| Loss on foreign exchange forwards | | (811) | | | (437) | | | (125) | |
| Gain/(loss) on investments from deferred compensation plan | | 1,635 | | | (498) | | | (50) | |
| Other income/(expense) | | 216 | | | (480) | | | (69) | |
| Total | | $ | 2,135 | | | $ | (1,558) | | | $ | 109 | |
|
| | | | | | | | | | | | |
| | | Year Ended March 31, 2018 | | Year Ended March 31, 2017 | | Year Ended March 31, 2016 |
| Foreign currency transaction loss | | $ | (5,629 | ) | | $ | (176 | ) | | $ | (139 | ) |
| Loss on foreign exchange forwards | | (96 | ) | | (453 | ) | | (411 | ) |
| Other | | 130 |
| | 219 |
| | (126 | ) |
| | | $ | (5,595 | ) | | $ | (410 | ) | | $ | (676 | ) |
16.18. Income Taxes
Income taxes included in the consolidated income statement consisted of the following:
| | | | | Year Ended March 31, 2018 | | Year Ended March 31, 2017 | | Year Ended March 31, 2016 | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 | | Year Ended March 31, 2019 |
| Current provision: | Current provision: | | | | | | | Current provision: | | | | | | |
| | Federal provision | | $ | 3,937 |
| | $ | 1,588 |
| | $ | 4,185 |
| | Federal provision | | $ | (4,662) | | | $ | (759) | | | $ | 3,507 | |
| | Foreign provision | | 12,768 |
| | 6,341 |
| | 8,503 |
| | Foreign provision | | 6,098 | | | 9,359 | | | 11,951 | |
| | State provision | | 301 |
| | 155 |
| | 311 |
| | State provision | | 197 | | | 279 | | | 681 | |
| Deferred provision: | Deferred provision: | | | | | | | Deferred provision: | |
| | Federal deferred benefit | | (8,506 | ) | | (1,907 | ) | | (1,964 | ) | | Federal deferred benefit | | (1,880) | | | (796) | | | (2,083) | |
| | Foreign deferred benefit | | (3,178 | ) | | (2,025 | ) | | (2,263 | ) | | Foreign deferred benefit | | (1,084) | | | (2,895) | | | (3,964) | |
| | State deferred benefit | | (152 | ) | | (54 | ) | | (56 | ) | | State deferred benefit | | (107) | | | (46) | | | (119) | |
| Total provision for income taxes | Total provision for income taxes | | $ | 5,170 |
| | $ | 4,098 |
| | $ | 8,716 |
| Total provision for income taxes | | $ | (1,438) | | | $ | 5,142 | | | $ | 9,973 | |
Deferred income tax assets and liabilities were as follows:
| | | | | March 31, | | March 31, |
| | | 2018 | | 2017 | | 2021 | | 2020 |
| Deferred tax assets: | Deferred tax assets: | | | | | Deferred tax assets: | | | | |
| | | | | | | | Accrued liabilities and reserves | | $ | 3,537 | | | $ | 2,915 | |
| | Accrued liabilities and reserves | | $ | 1,987 |
| | $ | 1,617 |
| | Stock option compensation | | 593 | | | 896 | |
| | Stock option compensation | | 821 |
| | 932 |
| | Foreign deferred benefits | | 1,954 | | | 2,119 | |
| | Foreign deferred benefits | | 3,575 |
| | 2,340 |
| | Net operating loss carry-forward | | 1,224 | | | 1,545 | |
| | Net operating loss carry-forward | | 1,688 |
| | 1,250 |
| | Inventories | | 383 | | | 377 | |
| | Inventories | | 371 |
| | 440 |
| | Interest limitation | | 204 | | | 0 | |
| | Capitalized transaction costs | | 207 |
| | 390 |
| | Capitalized transaction costs | | 119 | | | 149 | |
| | Interest rate swap included in Other Comprehensive Loss | | — |
| | 18 |
| |
| | Foreign tax credit carry forward | | 104 |
| | 65 |
| | Foreign tax credit carry forward | | 721 | | | 458 | |
| | Valuation allowance | | (878 | ) | | (659 | ) | |
| | | Valuation allowance | | (282) | | | (757) | |
| | Total deferred tax assets | Total deferred tax assets | | $ | 7,875 |
| | $ | 6,393 |
| Total deferred tax assets | | $ | 8,453 | | | $ | 7,702 | |
| Deferred tax liabilities: | Deferred tax liabilities: | | | | | Deferred tax liabilities: | | | | |
| Intangible assets | Intangible assets | | $ | (9,498 | ) | | $ | (17,952 | ) | Intangible assets | | $ | (5,959) | | | $ | (6,334) | |
| Intangible assets - foreign | | (25,674 | ) | | (7,452 | ) | |
| Intangible and other - foreign | | Intangible and other - foreign | | (16,789) | | | (16,189) | |
| Property, plant and equipment | Property, plant and equipment | | (2,522 | ) | | (3,637 | ) | Property, plant and equipment | | (3,162) | | | (4,004) | |
| Prepaid expenses | Prepaid expenses | | (104 | ) | | (161 | ) | Prepaid expenses | | (227) | | | (154) | |
| Unrealized loss on hedge | Unrealized loss on hedge | | (45 | ) | | (19 | ) | Unrealized loss on hedge | | 0 | | | (42) | |
| Undistributed foreign earnings | Undistributed foreign earnings | | (859 | ) | | (10 | ) | Undistributed foreign earnings | | (820) | | | (320) | |
| Total deferred tax liabilities | Total deferred tax liabilities | | (38,702 | ) | | (29,231 | ) | Total deferred tax liabilities | | $ | (26,957) | | | $ | (27,043) | |
| | | | | | |
| Net deferred tax asset (liability) | Net deferred tax asset (liability) | | $ | (30,827 | ) | | $ | (22,838 | ) | Net deferred tax asset (liability) | | $ | (18,504) | | | $ | (19,341) | |
The Company expects that it is more likely than not that the results of future operations will generate sufficient taxable income to realize its domestic and foreign deferred tax assets, net of valuation allowance reserves.
The U.S. and non-U.S. components of income (loss) from continuing operations before income taxes were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2021 | | Year Ended March 31, 2020 | | Year Ended March 31, 2019 |
| U.S. | | $ | (15,447) | | | $ | (8,603) | | | $ | 44 | |
| Non-U.S. | | 15,174 | | | 25,681 | | | 33,098 | |
| Income from continuing operations | | $ | (273) | | | $ | 17,078 | | | $ | 33,142 | |
|
| | | | | | | | | | | | | |
| | | | Year Ended March 31, 2018 | | Year Ended March 31, 2017 | | Year Ended March 31, 2016 |
| U.S. | | | $ | (13,568 | ) | | $ | (83 | ) | | $ | 13,043 |
|
| Non-U.S. | | | 31,957 |
| | 19,165 |
| | 19,323 |
|
| Income from continuing operations | | $ | 18,389 |
| | $ | 19,082 |
| | $ | 32,366 |
|
The difference between the provision for income taxes and the amount that would result from applying the U.S. statutory tax rate to income before provision for income taxes is as follows:
| | | | | Year Ended March 31, 2018 | | Year Ended March 31, 2017 | | Year Ended March 31, 2016 | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 | | Year Ended March 31, 2019 |
| Notional U.S. federal income tax expense at statutory rate | Notional U.S. federal income tax expense at statutory rate | | $ | 5,792 |
| | $ | 6,679 |
| | $ | 11,328 |
| Notional U.S. federal income tax expense at statutory rate | | $ | (57) | | | $ | 3,586 | | | $ | 6,960 | |
| Adjustments to reconcile to the income tax provision: | Adjustments to reconcile to the income tax provision: | | | | | | | Adjustments to reconcile to the income tax provision: | |
| Transition tax for United States tax reform | | 5,125 |
| | — |
| | — |
| |
| | Impact on deferred tax liability for statutory rate change | | (5,849 | ) | | — |
| | 455 |
| | Impact of U.S. global intangible tax | | (1,859) | | | 926 | | | 946 | |
| U.S. state income tax provision, net | | 111 |
| | 45 |
| | 150 |
| |
| | | U.S. net operating loss carry-back rate difference | | (1,470) | | | 0 | | | 0 | |
| | | South Africa divestiture | | 526 | | | 0 | | | 0 | |
| | | Rate difference-international subsidiaries | | 513 | | | 1,181 | | | 1,366 | |
| | | Transition tax for United States tax reform | | 0 | | | 0 | | | (1,118) | |
| | Undistributed foreign earnings | | 1,786 |
| | — |
| | — |
| | Impact on deferred tax liability for statutory rate change | | 332 | | | (1,231) | | | 0 | |
| | Rate difference-international subsidiaries | | (1,769 | ) | | (2,622 | ) | | (1,727 | ) | | Undistributed foreign earnings | | 359 | | | 259 | | | 313 | |
| | Charges/(benefits) related to uncertain tax positions | | (533 | ) | | (128 | ) | | (1,227 | ) | | U.S. state income tax provision, net | | 48 | | | 143 | | | 408 | |
| | Non-deductible charges | | 758 |
| | 296 |
| | 51 |
| | Charges/(benefits related to uncertain tax positions | | 79 | | | (408) | | | 1,137 | |
| | Foreign purchase price adjustment | | — |
| | (379 | ) | | — |
| | Non-deductible charges | | 239 | | | 349 | | | 517 | |
| | Change in valuation allowance | | 219 |
| | 490 |
| | — |
| | Change in valuation allowance | | (475) | | | 152 | | | (280) | |
| | Other, net | | (470 | ) | | (283 | ) | | (314 | ) | | Other, net | | 327 | | | 185 | | | (276) | |
| Provision for income taxes | Provision for income taxes | | $ | 5,170 |
| | $ | 4,098 |
| | $ | 8,716 |
| Provision for income taxes | | $ | (1,438) | | | $ | 5,142 | | | $ | 9,973 | |
On December 22, 2017, the United States enacted significant changes to U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscalfiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”). The Tax Act included significant changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income (“Transition Tax”), deductions, credits and business-related exclusions.
On December 22, 2017, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 118 (“SAB 118”). SAB 118 expresses views of the SEC regarding ASC Topic 740, Income Taxes (“ASC 740”) in the reporting period that includes the enactment date of the Tax Act. The SEC staff issuing SAB 118 (the “Staff”) recognized that a registrant’s review of certain income tax effects of the Tax Act may be incomplete at the time financial statements are issued for the reporting period that includes the enactment date, including interim periods therein. The Staff’s view of the enactment of the Tax Act has been developed considering the principles of ASC Topic 805, Business Combinations, which addresses the accounting for certain items in a business combination for which the accounting is incomplete upon issuance of the financial statements that include the reporting period in which the business combination occurs. Specifically, the Staff provides that the accounting guidance in ASC Topic 805 may be analogized to the accounting for impacts of the Tax Act. If a company does not have the necessary information available, prepared or analyzed for certain income tax effects of the Tax Act, SAB 118 allows a company to report provisional numbers and adjust those amounts during the measurement period not to extend beyond one year. The Company has recorded all known and estimable impacts of the Tax Act that are effective for fiscal year 2018. Future
adjustments to the provisional numbers will be recorded as discrete adjustments to income tax expense in the period in which those adjustments become estimable and/or are finalized.
Accordingly, our income tax provision as of March 31, 2018 reflects (i) the current fiscal year impacts of the Tax Act on the estimated annual effective tax rate and (ii) the following discrete items resulting directly from the enactment of the Tax Act based on the information available, prepared, or analyzed (including computations) in reasonable detail.
|
| | | |
| | Year Ended |
| | March 31,
2018 |
| Transition Tax (provisional) | $ | 5,126 |
|
| Net impact on U.S. deferred tax assets and liabilities (provisional) | (6,030 | ) |
| Net changes in deferred tax liability associated with anticipated repatriation taxes (provisional) | 1,704 |
|
| Net discrete impacts of the enactment of the Tax Act | $ | 800 |
|
Consistent with provisions allowed under the Tax Act, the $5,126 estimatednet $4,007 calculated Transition Tax liability will be paid over an eight year period beginning in fiscal year 2019. The non-current portionAt March 31, 2020, $2,478 of the estimated Transition Tax liability has beenis included in “Other liabilities- long term”long-term” in the Condensed Consolidated Balance Sheets.consolidated balance sheets.
The net benefit of $6,030$3,097 related to deferred tax assets and liabilities is primarily associated with a reduction in deferred liabilities for unamortized intangible assets. Since these intangible assets are not tax deductible, the reduction of the liability is non-cash and will not reduce future tax payments.
Given the Tax Act’s significant changes and potentialthe opportunities to repatriate cash tax free, we have reevaluated our current permanent reinvestment position. Accordingly, we will no longer assert a permanent reinvestment position in most of our foreign subsidiaries. We expect to repatriate certain earnings which will be subject to withholding taxes. These additional withholding taxes are being recordedAt March 31, 2021 we have accrued $1,073 as an additional deferred tax liability associated with the basis difference in such jurisdictions. The uncertainty related to the taxationfuture repatriation of such withholdingearnings from jurisdictions that withhold taxes on distributions underforeign paid dividends.
While the Tax Act provides for a modified territorial tax system, beginning in January 1, 2018, global intangible low-taxed income, or ("GILTI"), provisions will be applied by the United States providing an incremental tax on certain foreign income. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. Under GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on the future U.S. inclusions in taxable income related to GILTI provisions as a current-period expense when incurred, or the period cost method, or (2) factoring such amounts into the Company's measurement of its deferred taxes, or the deferred method. The Company has selected the period cost method as its accounting policy with respect to the new GILTI tax rules.
To provide relief for taxpayers impacted by the COVID-19 outbreak, the United States enacted the Coronavirus Aid, Relief, and finalizationEconomic Security (CARES) Act on March 27, 2020. Among other provisions, the law provides relief to U.S. federal corporate taxpayers through temporary adjustments to net operating loss rules, changes to interest expense deductibility, and enhanced qualified improvement property depreciation. Under ASC 740, the Company recognized the effect of the cash repatriation plan makeschange in tax law on existing deferred tax assets and liabilities in income from continuing operations in the interim period that includes March 27, 2020. The primary impact to the Company for CARES was our ability to fully deduct interest expense for the twelve months ended March 31, 2020.
During the year ended March 31, 2021, the Company recorded discrete tax benefits of $1,859 related to updated Internal Revenue Service rules regarding the United States Global intangible low-taxed income or ("GILTI tax") and related tax planning elections associated with the GILTI tax rule changes. Under the new rules, Thermon was able to reduce previously incurred GILTI tax under the high tax exception rules. Included with this benefit are certain tax elections that resulted in the reduction of previous tax expense.
During the year ended March 31, 2021, the Company incurred a taxable loss within its operations in the United States. As a result, the net operating loss was available to be carried back to the Company's 2016 tax year when the federal tax rate was 35%. The rate differential resulted in a discrete tax benefit of $1,470.
The loss on the capital stock sale of the South Africa Business, referred to in Note 14, "Restructuring and other charges/(income)," was not deductible for income tax. This resulted in approximately $526 of discrete tax expense during the fiscal 2021.
During the twelve months ended March 31, 2020, the Company recorded the impact of a prospective income tax rate reduction in the tax jurisdictions of Alberta, Canada and the Netherlands. The scheduled rate reductions of 4% and 3%, respectively, resulted in a net reduction of deferred tax liabilities of $1,231 reported as a benefit to tax expense. In fiscal 2021, the Netherlands reversed their prospective tax reduction. Accordingly, the Company adjusted its deferred tax liability a provisional amount. resulting in additional tax expense $332.
We continue to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”), which are not effective until fiscal year 2019. We have not recorded any impact associated with either GILTI or BEAT in the tax rate for fiscal year 2018.
Within the calculation of our annual effective tax rate we have used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, and the Financial Accounting Standards Board and/or various other taxing jurisdictions. For example, we anticipate that the state jurisdictions will continue to determine and announce their conformity to the Tax Act which could have an impact on the annual effective tax rate.
As of March 31, 2018,2021, the Company had foreign tax net operating loss carry-forwards ("NOLs") of $5,731.$4,421. Of this amount, $4,024$1,320 may be carried forward indefinitely. As of March 31, 2018,2021, the tax years 20142017 through 20172020 remain open to examination by the major taxing jurisdictions to which we are subject.
During the fiscal year ended At March 31, 2018, the Company released its remaining reserve2020, reserves for uncertain tax position consisted of uncertain tax positions asrelated to the final Transition Tax that we determined could be overturned if the calculations were examined by tax periodsauthorities. The reserves for the Transition Tax will remain subject to which they relate had closed.examination until January 2025. No reserves are expected to be released within twelve months. Activity within our reserve for uncertain tax positions as well as the penalties and interest are recorded as a component of the Company's income tax expense. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 |
| Beginning balance | | $ | 729 | | | $ | 1,137 | |
| Release of reserve | | 0 | | | (463) | |
| | | | |
| | | | |
| Interest and penalties on prior reserves | | 79 | | | 55 | |
| Reserve for uncertain income taxes | | $ | 808 | | | $ | 729 | |
|
| | | | | | | | | |
| | | | Year Ended March 31, 2018 | | Year Ended March 31, 2017 |
| Beginning balance | | $ | 533 |
| | $ | 661 |
|
| Reductions for tax positions of prior years | | (533 | ) | | (176 | ) |
| Interest and penalties on prior reserves | | — |
| | 48 |
|
| Reserve for uncertain income taxes | | $ | — |
| | $ | 533 |
|
17.19. Segment Information
In connection with acquisitions made since fiscal 2015, the Company reviewed its determination of segments. Previously, we aggregated geographic markets into one reportable segment. Based on our review, we revised our segment reporting to four
We operate in 4 reportable segments based on four4 geographic countries or regions:regions in which we operate: (i) United States and Latin America ("US-LAM"), (ii) Canada, (iii) Europe, Middle East and Asia.Africa ("EMEA") and (iv) Asia-Pacific ("APAC"). Within our four4 reportable segments, our primarycore products and services are focused on thermal solutions primarily related to the electrical heat tracing industry. Each of our reportable segments serves a similar class of customers, including large EPCengineering, procurement and construction companies, international and regional oil and gas companies, commercial sub-contractors, electrical component distributors and direct sales to existing plant or industrial applications. Profitability within our segments is measured by operating income. Profitability can vary in each of our reportable segments based on the competitive environment within the region, the level of corporate overhead, such as the salaries of our senior executives, and the level of research and development and marketing activities in the region, as well as the mix of products and services. Since March 2015, we have acquired Unitemp, IPI, Sumac and THS. Both Unitemp and IPI offer thermal solutions and have been included in our Europe and United States reportable segments, respectively. Sumac provides temporary power products that differ from our core thermal solutions business. As our operating results from Sumac comprise less than 10% of our total sales and operating income, Sumac has been aggregated in our Canada segment. THS, recently acquired in October 2017, has similar economic characteristics as the core Thermon process heating operations. Management intends to integrate THS into the existing Thermon operations as soon as practicable. Therefore, THS has been aggregated in our Canada and United States segments. For purposes of this note, revenue is attributed to individual countries or regions on the basis of the physical location and jurisdiction of organization of the subsidiary that invoices the material and services.
Total sales to external customers, inter-segment sales, depreciation expense, amortization expense, income from operations and total assets classified by major geographic area in which the Company operates are as follows:
|
| | | | | | | | | | | | |
| | | Year Ended March 31, 2018 | | Year Ended March 31, 2017 | | Year Ended March 31, 2016 |
| Sales to External Customers: | | | | | | |
| United States | | $ | 114,548 |
| | $ | 119,791 |
| | $ | 126,033 |
|
| Canada | | 94,427 |
| | 41,721 |
| | 56,925 |
|
| Europe | | 68,352 |
| | 71,133 |
| | 65,370 |
|
| Asia | | 31,282 |
| | 31,485 |
| | 33,600 |
|
| | | $ | 308,609 |
| | $ | 264,130 |
| | $ | 281,928 |
|
| Inter-segment Sales: | | | | | | |
| United States | | $ | 50,155 |
| | $ | 45,966 |
| | $ | 50,807 |
|
| Canada | | 7,294 |
| | 3,610 |
| | 3,886 |
|
| Europe | | 1,614 |
| | 1,580 |
| | 2,367 |
|
| Asia | | 1,668 |
| | 1,407 |
| | 435 |
|
| | | $ | 60,731 |
| | $ | 52,563 |
| | $ | 57,495 |
|
| Depreciation Expense: | | | | | | |
| United States | | $ | 4,326 |
| | $ | 3,632 |
| | $ | 3,117 |
|
| Canada | | 3,019 |
| | 1,933 |
| | 1,071 |
|
| Europe | | 476 |
| | 301 |
| | 296 |
|
| Asia | | 141 |
| | 194 |
| | 171 |
|
| | | $ | 7,962 |
| | $ | 6,060 |
| | $ | 4,655 |
|
| Amortization of Intangibles: | | | | | | |
| United States | | $ | 6,018 |
| | $ | 5,860 |
| | $ | 6,080 |
|
| Canada | | 7,979 |
| | 3,538 |
| | 3,543 |
|
| Europe | | 1,398 |
| | 1,310 |
| | 1,426 |
|
| Asia | | 1,063 |
| | 1,064 |
| | 1,063 |
|
| | | $ | 16,458 |
| | $ | 11,772 |
| | $ | 12,112 |
|
| Income from Operations: | | | | | | |
| United States | | $ | 484 |
| | $ | 5,359 |
| | $ | 20,607 |
|
| Canada (a) | | 26,198 |
| | 8,040 |
| | 7,302 |
|
| Europe (b) | | 6,842 |
| | 9,095 |
| | 8,586 |
|
| Asia | | 4,111 |
| | 4,512 |
| | 5,541 |
|
| Unallocated: | |
|
| |
|
| |
|
|
| Public company costs | | (1,378 | ) | | (1,160 | ) | | (1,526 | ) |
| Stock compensation | | (3,519 | ) | | (3,402 | ) | | (3,749 | ) |
| | | $ | 32,738 |
| | $ | 22,444 |
| | $ | 36,761 |
|
| | | | | | | |
| | | March 31, 2018 | | March 31, 2017 | | |
| Fixed Assets: | | | | | | |
| United States | | $ | 37,112 |
| | $ | 34,563 |
| | |
| Canada | | 33,076 |
| | 4,674 |
| | |
| Europe | | 3,567 |
| | 3,532 |
| | |
| Asia | | 730 |
| | 497 |
| | |
| | | $ | 74,485 |
| | $ | 43,266 |
| | |
| Total Assets: | |
|
| |
|
| | |
| United States | | $ | 213,099 |
| | $ | 186,300 |
| | |
| Canada | | 317,635 |
| | 136,688 |
| | |
| Europe | | 89,379 |
| | 80,589 |
| | |
| Asia | | 42,364 |
| | 50,503 |
| | |
| | | $ | 662,477 |
| | $ | 454,080 |
| | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2021 | | Year Ended March 31, 2020 | | Year Ended March 31, 2019 |
| Sales to External Customers: | | | | | | |
| United States and Latin America | | $ | 95,441 | | | $ | 155,465 | | | $ | 165,648 | |
| Canada | | 90,853 | | | 128,364 | | | 127,392 | |
| Europe, Middle East and Africa | | 54,219 | | | 53,762 | | | 77,508 | |
| Asia-Pacific | | 35,668 | | | 45,895 | | | 42,094 | |
| | | $ | 276,181 | | | $ | 383,486 | | | $ | 412,642 | |
| Inter-segment Sales: | | | | | | |
| United States and Latin America | | $ | 40,793 | | | $ | 48,891 | | | $ | 52,662 | |
| Canada | | 7,272 | | | 4,764 | | | 6,231 | |
| Europe, Middle East and Africa | | 2,003 | | | 2,890 | | | 3,406 | |
| Asia-Pacific | | 1,221 | | | 991 | | | 859 | |
| | $ | 51,289 | | | $ | 57,536 | | | $ | 63,158 | |
| Depreciation Expense: | | | | | | |
| United States and Latin America | | $ | 6,290 | | | $ | 6,304 | | | $ | 4,935 | |
| Canada | | 4,454 | | | 3,462 | | | 3,616 | |
| Europe, Middle East and Africa | | 341 | | | 551 | | | 466 | |
| Asia-Pacific | | 192 | | | 185 | | | 177 | |
| | $ | 11,277 | | | $ | 10,502 | | | $ | 9,194 | |
| Amortization of Intangibles: | | | | | | |
| United States and Latin America | | $ | 1,464 | | | $ | 5,752 | | | $ | 5,841 | |
| Canada | | 7,301 | | | 9,665 | | | 12,515 | |
| Europe, Middle East and Africa | | 453 | | | 1,292 | | | 1,351 | |
| Asia-Pacific | | 227 | | | 1,064 | | | 1,064 | |
| | $ | 9,445 | | | $ | 17,773 | | | $ | 20,771 | |
| Income/(Loss) from Operations: | | | | | | |
| United States and Latin America | | $ | (9,119) | | | $ | 6,346 | | | $ | 16,421 | |
| Canada | | 15,242 | | | 24,946 | | | 20,601 | |
| Europe, Middle East and Africa | | 3,181 | | | 1,196 | | | 11,295 | |
| Asia-Pacific | | 3,917 | | | 6,628 | | | 5,847 | |
| Unallocated: | | | | | | |
| Public company costs | | (1,716) | | | (1,493) | | | (1,507) | |
| Stock compensation | | (3,728) | | | (4,960) | | | (4,148) | |
| | | $ | 7,777 | | | $ | 32,663 | | | $ | 48,509 | |
| | | | | | |
| | March 31, 2021 | | March 31, 2020 | | |
| Fixed Assets: | | | | | | |
| United States and Latin America | | $ | 36,155 | | | $ | 39,815 | | | |
| Canada | | 32,583 | | | 28,703 | | | |
| Europe, Middle East and Africa | | 3,141 | | | 3,246 | | | |
| Asia-Pacific | | 751 | | | 778 | | | |
| | $ | 72,630 | | | $ | 72,542 | | | |
| Total Assets: | | | | | | |
| United States and Latin America | | $ | 218,699 | | | $ | 239,751 | | | |
| Canada | | 287,907 | | | 270,055 | | | |
| Europe, Middle East and Africa | | 77,798 | | | 73,334 | | | |
| Asia-Pacific | | 33,474 | | | 37,765 | | | |
| | $ | 617,878 | | | $ | 620,905 | | | |
(a) During the year ended March 31, 2016, the Canadian segment's operating income was negatively impacted by $5,706 due to acquisition related contingent consideration accounted for as compensation. As part of the Sumac transaction, we issued the sellers a $5,905 non-interest bearing note that matured on April 1, 2016. The terms of the performance-based note assume the continued employment of Sumac's principals, and as a result, the performance note payment is accounted for as compensation expense. The performance note was settled during the first quarter of fiscal 2017.
(b) During the year ended March 31, 2016, the European segment's operating income was negatively impacted by a $1,713 impairment charge to Unitemp's goodwill and other intangible assets.
At March 31, 20182021 and 2017,2020, non-current deferred tax assets of $3,490$5,557 and $4,053$4,483 respectively, were applicable to the United States.
Capital expenditures by geographic area were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2021 | | Year Ended March 31, 2020 | | Year Ended March 31, 2019 |
| Capital Expenditures: | | | | | | |
| United States and Latin America | | $ | 3,075 | | | $ | 5,607 | | | $ | 8,432 | |
| Canada | | 4,866 | | | 4,221 | | | 2,753 | |
| Europe, Middle East and Africa | | 68 | | | 654 | | | 612 | |
| Asia-Pacific | | 123 | | | 373 | | | 239 | |
| | | $ | 8,132 | | | $ | 10,855 | | | $ | 12,036 | |
18. Quarterly Results (Unaudited)
The following quarterly results
20. Subsequent Events
No subsequent events have been derived from unaudited consolidated financial statements that, inidentified for the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such quarterly information. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period. The unaudited quarterly financial data for each of the eight quarters in the two yearsfiscal year ended March 31, 2018 are as follows:
2021.
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, 2018 | | December 31, 2017 | | September 30, 2017 | | June 30, 2017 |
| Sales | | $ | 102,582 |
| | $ | 92,660 |
| | $ | 61,631 |
| | $ | 51,736 |
|
| Gross Profit | | 46,823 |
| | 42,214 |
| | 30,960 |
| | 23,814 |
|
| Income from operations | | 13,553 |
| | 10,210 |
| | 7,417 |
| | 1,558 |
|
| Net income available to Thermon Group Holdings, Inc. | | $ | 6,057 |
| | $ | 599 |
| | $ | 4,778 |
| | $ | 479 |
|
| | | | | | | | | |
| Net income per common share | | | | | | | | |
| Basic | | $ | 0.19 |
| | $ | 0.02 |
| | $ | 0.15 |
| | $ | 0.01 |
|
| Diluted | | 0.18 |
| | 0.02 |
| | 0.15 |
| | 0.01 |
|
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, 2017 | | December 31, 2016 | | September 30, 2016 | | June 30, 2016 |
| Sales | | $ | 67,582 |
| | $ | 64,340 |
| | $ | 68,812 |
| | $ | 63,396 |
|
| Gross Profit | | 28,274 |
| | 28,619 |
| | 28,924 |
| | 26,114 |
|
| Income from operations | | 5,280 |
| | 7,299 |
| | 5,675 |
| | 4,190 |
|
| Net income available to Thermon Group Holdings, Inc. | | $ | 3,251 |
| | $ | 5,358 |
| | $ | 3,506 |
| | $ | 2,526 |
|
| | | | | | | | | |
| Net income per common share | | | | | | | | |
| Basic | | $ | 0.15 |
| | $ | 0.17 |
| | $ | 0.11 |
| | $ | 0.08 |
|
| Diluted | | 0.15 |
| | 0.16 |
| | 0.11 |
| | 0.08 |
|
The basic and diluted income per common share for each respective three month period is calculated independently. Therefore, the sum of the periods does not necessarily total the full year net income or loss per common share.
19. Subsequent Events
On April 2, 2018, the minority shareholder of our Sumac business unit provided the Company notice that he was exercising his option to sell one-half (12.5%) of his remaining equity interest to the Company. The terms of the April 2015 Sumac purchase agreement prescribed a valuation formula for such a sale based on Sumac's financial results for the twelve months ending March 31, 2018. We estimate that Thermon will pay $6,000 to purchase the 12.5% Sumac equity interest which is expected to be completed in June 2018.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act as of the end of the period covered by this annual report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this annual report, these disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting
The Company’s We, as management, isare responsible for establishing and maintaining adequate internal control over the Company's financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Our internal control system was 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 and 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. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2018,2021, based on the criteria set forth in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, management has concluded that, as of March 31, 2018,2021, our internal control over financial reporting is effective.
The Company acquired CCI during fiscal 2018, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2018, CCI’s internal control over financial reporting whose financial statements reflect 35 percent of total assets (of which approximately 24 percent represents goodwill and intangible assets included within the scope of the assessment) and 13 percent of total revenues of the related consolidated financial statement amounts of Thermon as of and for the year ended March 31, 2018.
KPMG LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements as of and for the year ended March 31, 20182021 included in this annual report, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of March 31, 2018.2021. The report is included in Item 8 inof this annual report.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company'sour internal control over financial reporting that occurred during the most recently completed fiscal quarter ended March 31, 20182021 that have materially affected, or are reasonably likely to materially affect, the Company'sour internal control over financial reporting.reporting
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regardingAbout Our Executive Officers
The following table and biographies set forth certain information about our current executive officers (collectively, the "Executive Officers"). The names, positions and ages of the Executive Officers as of May 27, 2021, are listed below. Our Executive Officers are appointed by the Board and serve at the discretion of the Board. There are no family relationships among these officers, nor any arrangements or understandings between any officer and any other person pursuant to which the officer was selected.
| | | | | | | | | | | | | | |
| Executive Officer | | Title | | Age |
| Bruce Thames | | President & Chief Executive Officer | | 58 |
| Kevin Fox | | Senior Vice President, Chief Financial Officer | | 37 |
| David Buntin | | Senior Vice President, Thermon Heat Tracing | | 51 |
| Thomas Cerovski | | Senior Vice President, Global Sales | | 49 |
| Candace Harris-Peterson | | Vice President, Human Resources | | 42 |
| Mark Roberts | | Senior Vice President, Global Engineering and Project Services | | 60 |
| Johannes (René) van der Salm | | Senior Vice President, Global Operations | | 57 |
| Ryan Tarkington | | General Counsel & Corporate Secretary | | 40 |
Bruce A. Thames joined the Company in April 2015 as Executive Vice President and Chief Operating Officer. He was promoted to President and Chief Executive Officer and appointed as a member of the Board on April 1, 2016. Prior to joining Thermon, Mr. Thames was Senior Vice President and Chief Operating Officer of TD Williamson in Tulsa, Oklahoma, a position he held since 2012. TD Williamson manufactures and delivers a portfolio of solutions to the owners and operators of pressurized piping systems for onshore and offshore applications. He joined TD Williamson in 2005 as Vice President, North America and also served as Vice President and General Manager, Eastern Hemisphere from 2010 to 2012. Mr. Thames began his career with Cooper Industries (formerly Intool), where he spent twelve years in various roles within the product engineering, marketing and operations groups. Mr. Thames then joined GE Energy (formerly Dresser Flow Solutions) ("Dresser") and served primarily as the Director of North American Operations and Product Director for Ball Valves globally for Dresser's Valve Group during his tenure from 2002 to 2005. Mr. Thames holds a B.S. in Mechanical Engineering from The University of Texas at Austin.
Kevin Fox joined the Company in March 2019 as Vice President, Corporate Development, in which he managed the Corporate Development, Investor Relations and the global Marketing activities of the Company. He was promoted to Senior Vice President, Chief Financial Officer in February 2021. Prior to joining Thermon, Mr. Fox served in various roles of increasing responsibility in strategy, corporate development and finance with General Electric from 2006 to 2019. Mr. Fox holds a B.A. from Boston College and a M.B.A. from Northwestern University’s Kellogg School of Management.
David Buntin joined the Company in January 2017 as Senior Vice President, Research and Development. In May 2019, Mr. Buntin was promoted to Senior Vice President, Thermon Heat Tracing. Prior to joining the Company, from 2007 to 2016, Mr. Buntin served first as Vice President, Engineering and R&D, and then as Chief Operating Officer for Enovation Controls, Inc., a company that provides instrumentation, displays, controls, and fuel systems for natural gas engines and compressors as well as industrial and marine equipment. Before joining Enovation Controls, Inc., from 1998 to 2007, Mr. Buntin served as the Vice President of Engineering for SecureLogix Corporation, a successful high-tech startup providing telephony and voice-over-IP security solutions. Prior to SecureLogix Corporation, from 1994 to 1998, Mr. Buntin served in various engineering roles of increasing responsibility with Southwest Research Institute. Mr. Buntin holds a B.S. in electrical engineering from Baylor University and a M.S. in electrical engineering from Texas A&M University.
Thomas Cerovski joined the Company in January 2019 as Senior Vice President, Global Sales, where Mr. Cerovski manages the Company's profit and loss business units and commercial organization. Prior to joining the Company, from 2018 until 2019, Mr. Cerovski was the Senior Vice President, Global Sales and Business Development for Trojan Battery Company, a leading manufacturer of deep-cycle batteries. From 2013 through 2018, Mr. Cerovski held various positions at Dover Corporation, a conglomerate manufacturer of industrial products, including Vice President and General Manager, Dispenser
Business Unit, and Vice President, Product and Technology Services, Wayne Fueling Systems. Prior to joining Dover Corporation, Mr. Cerovski served for fourteen (14) years in various positions with General Electric Company. Mr. Cerovski began his career at the Nuclear Regulatory Commission. Mr. Cerovski brings more than twenty-five (25) years of energy industry leadership experience in positions ranging from engineering, product management, sales, business development, and business unit management. Mr. Cerovski holds a B.S. from Montana State University, a M.S. from Purdue University, and a M.B.A. from George Washington University.
Candace Harris-Peterson joined the Company in January 2017 as Vice President of Human Resources. Prior to joining the Company, from 2006 to 2016, Ms. Harris-Peterson was the Senior Business Partner, Global Sales and Services for TD Williamson, Inc., a global solutions provider to the owners and operators of pressurized piping systems for onshore and offshore applications. Ms. Harris-Peterson holds a B.A. in organizational leadership from Chapman University in Orange, California.
Mark Roberts joined the Company in October 2016 as Vice President of Global Engineering and Project Services. Prior to joining the Company, from September 2011 to September 2015, Mr. Roberts served as Vice President, Executive Vice President and President of Audubon Engineering Company, LLC, a professional Engineering Firm. During his thirty-five (35) year career in the energy industry, Mr. Roberts has held executive and management positions within technical sales, business development, engineering and business unit management. Mr. Roberts holds a B.S. in chemical engineering from The University of Texas at Austin.
Johannes (René) van der Salm joined the Company in October 2001 as European Logistics Manager based at the Company's European headquarters in Pijnacker, the Netherlands. In 2006, Mr. van der Salm was promoted to Vice President, Manufacturing and Logistics. During that period, he divided his time between the Company's offices in the United States and Europe. In 2007, Mr. van der Salm was promoted to Senior Vice President, Operations and permanently relocated to Texas. He was instrumental in the global implementation of the Company’s enterprise resource planning software. In 2011, Mr. van der Salm was promoted to Senior Vice President, Global Operations. After completing his undergraduate studies and a period of military service, Mr. van der Salm worked in a number of positions within the petrochemical industry prior to joining Thermon, including as a sales engineer, a project manager and a production manager. Mr. van der Salm holds a B.S. in mechanical engineering from Amsterdam Technical University.
Ryan Tarkington joined the Company in February 2019 as General Counsel and Corporate Secretary. Prior to joining the Company, from 2011 to 2019, Mr. Tarkington served in various capacities with several international companies in the offshore drilling industry, including as Senior Counsel for Rowan Companies plc from 2017 through 2019, as Associate General Counsel for Paragon Offshore plc from 2014 through 2017 and as Senior Counsel for Transocean Ltd. from 2011 through 2014. Mr. Tarkington began his career at the law firm of Vinson & Elkins L.L.P. Mr. Tarkington holds a B.A. from Rice University and a J.D. from The University of Texas School of Law.
Information concerning our directors and executive officerswill appear in our proxy statement for the 2021 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A of the Exchange Act (Regulation 14A) on or before July 29, 2021 (the “2021 Proxy Statement”) under the caption “Directors.” Such information is incorporated herein by reference to the "Directorsreference.
Information concerning our Audit, Human Capital Management and Executive Officers" section of our DefinitiveCompensation, Finance, and Nominating and Corporate Governance Committees will appear in 2021 Proxy Statement forunder the 2018 Annual Meeting of Stockholders.
Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934caption “Corporate Governance.” Such information is incorporated herein by reference to the "Section 16(a) Beneficial Ownership Reporting Compliance" section ofreference. Our committee charters and corporate governance guidelines are available on our Definitive Proxy Statement for the 2018 Annual Meeting of Stockholders.Investor Relations website located at http://ir.thermon.com.
Information regarding the audit committee financial expert and the audit committee is incorporated herein by reference to the sections entitled "Corporate Governance-Committees of the Board" and "Audit Committee Report" in our Definitive Proxy Statement for the 2018 Annual Meeting of Stockholders.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics, which we refer to as our "code“code of conduct,"” that applies to all of our employees, officers and directors. Our code of conduct is available on our Investor Relations website located at http://ir.thermon.com.ir.thermon.com. Stockholders can also obtain a free copy of our code of conduct by writing to the Director of Investor Relations,General Counsel, Thermon Group Holdings, Inc., 100 Thermon Drive, San Marcos,7171 Southwest Parkway, Building 300, Suite 200, Texas 78666.78735. We will post any amendments to our code of conduct, and any waivers that are required to be disclosed pursuant to SEC or NYSE rules, on our Investor Relations website.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive and director compensation is incorporated by reference to the "Compensation Discussion and Analysis" section of our Definitive Proxy Statement for the 20182021 Annual Meeting of Stockholders.
The material incorporated herein by reference to the information set forth under the "Compensation Committee Report" in our Definitive Proxy Statement for the 20182021 Annual Meeting of Stockholders shall be deemed furnished, and not filed, in this Annual Report on Form 10-K and shall not be deemed incorporated by reference into any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 as a result of this furnishing, except to the extent that we have specifically incorporated such materials by reference.
Information regarding compensation committee interlocks and insider participation is incorporated herein by reference to the information under the heading "Corporate Governance-Compensation Committee Interlocks and Insider Participation" section of our Definitive Proxy Statement for the 20182021 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference to the "Security Ownership of Certain Beneficial Owners and Management" section of our Definitive Proxy Statement for the 20182021 Annual Meeting of Stockholders.
Information related to compensation plans under which our equity securities are authorized for issuance as of March 31, 20182021 is set forth in the table below.
Equity Compensation Plan Information
The following table sets forth information regarding our equity compensation plans as of March 31, 2018.2021. Specifically, the table provides information regarding our 2010 Plan and the LTIP,stock plans, described elsewhere in this annual report.
| | | | | | | | | | | | | | | | | | | | | | | |
| Plan Category | | Number of securities to be issued upon exercise of outstanding equity awards | | Weighted-average exercise price of outstanding options | | Number of securities remaining available for future issuances under equity compensation plans (1) |
| | | | | | |
Equity compensation plans approved by security holders (2) | | 632,240 | | | $ | 16.53 | | | 1,330,421 | |
| Equity plans not approved by security holders | | — | | | $ | — | | | — | |
Total(4) | | 632,240 | | | | | 1,330,421 | |
(1) Excludes securities reflected in the column entitled "Number of securities to be issued upon exercise of outstanding equity awards."
(2) On April 8, 2011, our board of directors and pre-IPO stockholders approved the Thermon Group Holdings, Inc. 2011 Long-Term Incentive Plan ("2011 LTIP"). The 2011 LTIP authorized the issuance of 2,893,341 equity awards. On May 21, 2020, the Board of Directors approved the Thermon Group Holdings, Inc. 2020 Long-Term Incentive Plan ("2020 LTIP"). The 2020 LTIP made available 1,400,000 shares of the Company's common stock that may be awarded to employees, directors, or non-employee contractor's compensation in the form of stock options or restricted stock awards.
(3) At March 31, 2021, the Company had outstanding under the LTIP: (i) 111,401 stock options, with a weighted average exercise price of $18.77, (ii) 304,524 unvested restricted stock units, with a weighted average grant date fair value of $22.14, and (iii) 296,922 performance units (assuming satisfaction of the performance metric at target and 593,844 at maximum), with a weighted average grant date fair value of $20.80.
|
| | | | | | | | | | | |
| Plan Category | | Number of securities to be issued upon exercise of outstanding equity awards | | Weighted-average exercise price of outstanding options | | Number of securities remaining available for future issuances under equity compensation plans (1) |
| | | | | | | |
Equity compensation plans approved by security holders (2) | | 367,571 |
| | (3) |
| | 1,637,491 |
|
| Equity plans not approved by security holders (4) | | 252,202 |
| | $ | 5.44 |
| | — |
|
| |
(1) | Excludes securities reflected in the column entitled "Number of securities to be issued upon exercise of outstanding equity awards." |
| |
(2) | On April 8, 2011, our board of directors and pre-IPO stockholders approved the Thermon Group Holdings, Inc. 2011 Long-Term Incentive Plan ("2011 LTIP"). The 2011 LTIP authorized the issuance of 2,893,341 equity awards. |
| |
(3) | At March 31, 2018, the Company had outstanding under the LTIP: (i) 115,369 stock options, with a weighted average exercise price of $17.16, (ii) 229,112 unvested restricted stock units, with a weighted average grant date fair value of $19.55, and (iii) 159,256 performance units (assuming satisfaction of the performance metric at target and 318,512 at maximum), with a weighted average grant date fair value of $20.30. |
| |
(4) | The 2010 Thermon Group Holdings, Inc. Restricted Stock and Stock Option Plans (the "2010 Plan") was approved by our board of directors on July 28, 2010. The 2010 Plan authorized the issuance of 2,767,171 equity awards and provides for the grant of non-qualified stock options and restricted stock. In connection with our May 2011 IPO, all 2,757,524 of the unvested stock options that were then outstanding under the 2010 Plan became fully vested and exercisable. The 2010 Plan will terminate as of the earlier of (i) the date on which all equity awards under the 2010 Plan have been issued, (ii) the termination of the 2010 Plan by our board of directors, or (iii) the tenth anniversary of the effective date of the 2010 Plan; however, no further grants or equity awards will be made under the 2010 Plan. Under the 2010 Plan, the compensation committee of our board of directors has the authority to designate participants in the plan, determine the form of awards, the number of shares subject to individual awards, and the terms and conditions, including the vesting schedule, of each award granted under the 2010 Plan. The term of any option shall be fixed by the compensation committee and shall not exceed ten years from the date of grant. At March 31, 2018, the Company had outstanding under the 2010 Plan 252,202 non-qualified stock options, with a weighted average exercise price of $5.44. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions and director independence is incorporated herein by reference to the "Certain Relationships and Related Party Transactions" and "Corporate Governance-Director Independence" sections, respectively, of our Definitive Proxy Statement for the 20182021 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding our principal accountant fees and services is incorporated herein by reference to the "Audit and Non-Audit Fees" section of our Definitive Proxy Statement for the 20182021 Annual Meeting of Stockholders.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this annual report:
| |
1. | Financial Statements: Included herein at pages 54 through 89
|
1. Financial Statements: Included herein at pages 39 through 77
| |
2. | Financial Statement Schedules: None. Financial statement schedules have been omitted because the required information is included in our consolidated financial statements contained elsewhere in this annual report.
|
| |
3. | Exhibits: See the Exhibit Index following the signature page of this annual report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this annual report is identified in the Exhibit Index by a single asterisk following its exhibit number.
|
2. Financial Statement Schedules: None. Financial statement schedules have been omitted because the required information is included in our consolidated financial statements contained elsewhere in this annual report.
3. Exhibits: See the Exhibit Index below. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this annual report is identified in the Exhibit Index by a single asterisk following its exhibit number.
Certain of the agreements included as exhibits to this annual report contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
•should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
•have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in such agreement;
•may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
•were made only as of the date of the applicable agreement or such other date or dates as may be specified in such agreement and are subject to more recent developments.
The registrant acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this annual report not misleading.
EXHIBIT INDEX
| | | | | | | | |
Exhibit
Number | | Description |
| | |
| 2.1+ | | |
| | |
| 2.2+ | | |
| | |
| 2.3 | | |
| | |
| 3.1 | | |
| | |
| 3.2 | | |
| | |
| 4.1 | | |
| | |
| 4.2 | | |
| | |
| 10.1 | | Credit Agreement, dated October 30, 2017, by and among Thermon Group Holdings, Inc., Thermon Holding Corp, Thermon Canada Inc., and the several lenders from time to time parties hereto, Bank of Montreal and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed November 3, 2017) |
| 10.2 | | |
| | |
| 10.3 | | |
| | |
| 10.4 | | Amendment No. 2, dated as of May 4, 2012, to Amended and Restated Securityholder Agreement, dated as of April 30, 2010, as previously Amended by Amendment No. 1, dated as of April 1, 2011 and effective as of May 10, 2011, among Thermon Group Holdings, Inc. and the other parties identified therein (incorporated by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K of Thermon Group Holdings, Inc. filed on May 10, 2012) |
| | |
| 10.5† | | |
| | |
| 10.6† | | |
| | |
| 10.7† | | |
| 10.8† | | |
| 10.9† | | |
| | |
| 10.10† | | |
| | |
| 10.11† | | |
| | |
| 10.12† | | |
| | |
| | | | | | | | |
| | |
| | |
| 10.13† | | |
| | |
| 10.14† | | |
| | |
| 10.15† | | |
| | |
| 10.16† | | |
| | |
| 10.17† | | |
| | |
| 10.18† | | |
| | |
| 10.19† | | |
| | |
| 10.20† | | |
| | |
| 10.21† | | |
| | |
| 10.22†* | | |
| | |
| 21.1* | | |
| | |
| 23.1* | | |
| | |
| 31.1* | | |
| | |
| 31.2* | | |
| | |
| 32.1* | | |
| | |
| 32.2* | | |
| | |
| 101* | | Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Consolidated Statements of Shareholders'/Members' Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements |
| | |
| 104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
|
__________________________________
+ The schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). A copy of any
omitted schedule will be furnished to the Securities and Exchange Commission upon request.
† Management contract and compensatory plan or arrangement
* Filed herewith
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| THERMON GROUP HOLDINGS, INC. (registrant) |
| Date: May 27, 2021 | By: | /s/ Kevin Fox |
| | Kevin Fox |
| | Senior Vice President, Chief Financial Officer
(Principal Financial and Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the following persons on behalf of the registrants and in the capacities and on the date indicated.
| | | | | | | | | | | | | | | | | |
| Date | | Title | | | Signatures |
| May 27, 2021 | | President and Chief Executive Officer | | By: | |
| | (Principal Executive Officer); Director | | | Bruce Thames |
| THERMON GROUP HOLDINGS, INC. (registrant) | | | | |
Date: June 8, 2018May 27, 2021 | By: | /s/ Jay Peterson |
| | Jay Peterson |
| | Chief Financial Officer, Senior Vice President Finance and Assistant Secretary | | By: | |
| | (Principal Financial and Principal Accounting Officer) |
EXHIBIT INDEX
| | Kevin Fox |
| | |
Exhibit
Number
| | Description |
| May 27, 2021 | | |
2.1+ | | |
| | |
2.2+ | | |
| | |
2.3 | | |
| | |
3.1 | | |
| | |
3.2 | | |
| | |
4.1 | | |
| Board | | |
10.1By: | | Credit Agreement, dated October 30, 2017, by and among Thermon Group Holdings, Inc., Thermon Holding Corp, Thermon Canada Inc., and the several lenders from time to time parties hereto, Bank of Montreal and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed November 3, 2017) |
10.2 | | |
| | |
10.3 | | |
| | |
10.4 | | Amendment No. 2, dated as of May 4, 2012, to Amended and Restated Securityholder Agreement, dated as of April 30, 2010, as previously Amended by Amendment No. 1, dated as of April 1, 2011 and effective as of May 10, 2011, among Thermon Group Holdings, Inc. and the other parties identified therein (incorporated by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K of Thermon Group Holdings, Inc. filed on May 10, 2012) |
| | |
10.5 | | |
| | |
10.6 | | |
| | |
10.7 | | |
| | |
10.8 | | |
| | |
10.9 | | |
| | |
10.10 | | |
| | |
10.11 | | |
| | |
10.12 | | |
| | |
|
| | |
Exhibit
Number
| | Description |
| | |
10.13 | | |
| | |
10.14 | | |
| | |
10.15 | | |
| | |
10.16 | | |
| | |
10.17 | | |
| | |
10.18 | | |
| | |
10.19 | | |
| | |
10.20 | | |
| | |
10.21 | | |
| | |
10.22 | | |
| | |
10.23 | | |
| | |
10.24 | | |
| | |
10.25 | | |
| | |
10.26 | | |
| | |
10.27 | | |
| | |
10.28 | | |
| | |
10.29 | | |
| | |
21.1** | | |
| | |
23.1** | | |
| | |
31.1** | | |
| | |
31.2** | | |
| | |
John T. Nesser III |
| | |
Exhibit
Number
| | Description |
| May 27, 2021 | | Director | | By: | |
32.1** | | | | | John U. Clarke |
| | | | | |
32.2**May 27, 2021 | | Director | | By: | |
| | | | | Linda Dalgetty |
101** | | Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Consolidated Statements of Shareholders'/Members' Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements | | | |
| May 27, 2021 | | Director | | By: | |
| | | | | Roger L. Fix |
| | | | | |
| May 27, 2021 | | Director | | By: | |
| | | | | Marcus J. George |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| May 27, 2021 | | Director | | By: | |
| | | | | Kevin J. McGinty |
| | | | | |
| | | | | |
| | | | | |
__________________________________
+ The schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). A copy of any
omitted schedule will be furnished to the Securities and Exchange Commission upon request.
*Management contract and compensatory plan or arrangement
** Filed herewith
