Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except share and per share data)
1. Basis of Presentation
Thermon Group Holdings, Inc. and its direct and indirect subsidiaries are referred to collectively as “we,” “our,” or the “Company” herein. We are one of the largest providers of highly engineered industrial process heating solutions for process industries. We offer a full suite of products (heating units, heating cables, temporary power solutions, tubing bundles, industrial heating blankets and chillers), services (engineering, installation and maintenance services) and software (design optimization and wireless and network control systems) required to deliver comprehensive solutions to some of the world's largest and most complex projects.
Our condensed consolidated financial statements are prepared in conformity with generally accepted accounting principles in the United States ("GAAP") and the requirements of the United States Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, the accompanying condensed consolidated financial statements do not include all disclosures required for full annual financial statements and should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2022 ("fiscal 2022"). In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments considered necessary to present fairly our financial position at September 30, 2022 and March 31, 2022, and the results of our operations for the three and six months ended September 30, 2022 and 2021. Certain prior year amounts have been reclassified to conform with the current year's presentation.
Impact of the COVID-19 Pandemic and General Economic Environment
The COVID-19 pandemic and the measures being taken to address and limit the spread of the virus have adversely affected the economies and financial markets of many countries, resulting in an economic downturn that negatively impacted, and may continue to negatively impact, global demand for our products and services. We are still experiencing effects of lockdowns in certain parts of Asia, which are impacting our results in our Asia-Pacific ("APAC") segment. The effect of loosening pandemic restrictions outside of APAC, along with pent-up demand from periods of stagnant lockdown and uncertainty have combined to strengthen customer demand from most regions we serve, especially in North America. During periods of the pandemic we have experienced, and may experience in the future, a decline in the demand of our products and services or disruptions in raw materials or labor required for manufacturing that has in the past, and may in the future, materially and negatively impact our business, financial condition, results of operation and overall financial performance. We have experienced increased costs across our global supply chain as we focus on meeting growing demand from our customers. In certain circumstances, we have had issues with a lack of availability of certain raw materials as well as increases in costs of our raw materials due to: use of alternate suppliers, higher freight costs, increased lead times, and expedited shipping. We have also had to increase our inventory of certain items to ensure availability in the face of supply chain disruptions. We continue to monitor the pandemic restrictions and other effects the pandemic may have on our business.
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 the COVID-19 pandemic and of reducing potential layoffs of employees.
We recorded no transactions related to CEWS for the three and six months ended September 30, 2022. We recorded $547 and $1,248 related to CEWS to "Cost of sales" in our condensed consolidated statement of operations for the three and six months ended September 30, 2021. We recorded $186 and $500 related to CEWS to "Selling, general and administrative expenses" in our condensed consolidated statement of operations for the three and six months ended September 30, 2021. We anticipate no benefit from the CEWS program in the fiscal year ending March 31, 2023 ("fiscal 2023") as the program ended in October 2021.
Use of Estimates
Generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. While management has based its assumptions and estimates on the facts and circumstances existing at September 30, 2022, actual results could differ from those estimates and affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities and the corresponding revenues and expenses as of the date of the financial statements. The operating results for the three and six months ended September 30, 2022 are not necessarily indicative of the results that may be achieved for fiscal 2023.
Restricted Cash and Cash Equivalents
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, and restricted cash included in prepaid expenses and other current assets and restricted cash included in other non-current assets reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the statements of cash flows.
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
| Cash and cash equivalents | $ | 31,866 | | | $ | 38,242 | |
| Restricted cash included in prepaid expenses and other current assets | 2,655 | | | 2,745 | |
| Restricted cash included in other non-current assets | 24 | | | 349 | |
| Total cash, cash equivalents, and restricted cash shown in the statements of cash flows | $ | 34,545 | | | $ | 41,336 | |
Amounts shown in restricted cash included in prepaid expenses and other current assets and other non-current 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 non-current assets represent such agreements that require a commitment term longer than one year.
Recent Accounting Pronouncements
Business Combinations - In October 2021, the FASB issued Accounting Standards Update, ("ASU") 2021-08 - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASC 805). ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. Under this "Topic 606 approach," the acquirer applies the revenue model as if it had originated the contracts. This is a departure from the current requirement to measure contract assets and contract liabilities at fair value. The ASU is effective for all public business entities in annual and interim periods starting after December 15, 2022, and early adoption is permitted. We are still evaluating this ASU and will consider early adoption with future acquisitions, if any.
2. Acquisition
Powerblanket
On May 31, 2022 (the "Acquisition Date"), Thermon Holding Corp., as buyer, acquired 100% of the issued and outstanding equity interests of Powerblanket (“Powerblanket”) from Glacier Capital LLC, as seller (the "Acquisition"). Powerblanket is a leading North American supplier of heated blankets built upon patented heat spreading technology and portable industrial chillers. The Acquisition increases our exposure to growing industrial and commercial end-markets through its freeze protection, temperature control and flow assurance solutions. We have integrated Powerblanket into our United States and Latin America ("US-LAM") reportable segment. From the period May 31, 2022 to September 30, 2022, Powerblanket contributed $3,967 in Sales and $(698) in Net income/(loss) to our consolidated operating results.
The initial purchase price for the Acquisition was $35,000, subject to an adjustment for net working capital acquired at closing. Subsequent to the Acquisition Date, and commensurate with the purchase agreement, we increased the purchase price by $299 for net working capital acquired. We financed the Acquisition through the use of our revolving credit facility as well as cash on hand. Powerblanket's revenue structure does not result in material contract assets or liabilities.
Acquisition Costs
In accordance with GAAP, costs incurred to complete the Acquisition are expensed as incurred. Total acquisition costs, which represent transaction costs, legal fees, and third-party professional fees were $403, of which $251 were incurred in the six months ended September 30, 2022. No acquisition costs were incurred in the three months ended September 30, 2022. Acquisition costs are reflected in "Selling, general and administrative expenses" in our condensed consolidated statement of operations and comprehensive income/(loss).
Purchase Price Allocation
We have accounted for the Acquisition according to the business combinations guidance found in ASC 805 - Business Combinations, henceforth referred to as acquisition accounting. Acquisition accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. We used primarily Level 2 inputs to allocate the purchase price to the major categories of assets and liabilities shown below, with the exception of the contract-based intangible asset, which was valued using Level 3 inputs. The carrying values of inventories, property, plant and equipment as well as leased assets approximated their respective fair values. During the measurement period, if new information is obtained about facts and circumstances that existed as of the Acquisition Date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date, we will revise the preliminary purchase price
allocation. The effect of measurement period adjustments to the estimated fair values will be reflected as if the adjustments had been completed on the Acquisition Date. The impact of all changes that do not qualify as measurement period adjustments will be included in current period earnings.
| | | | | | | | |
| Purchase Price Allocation |
| Amortization Period (years) | Fair Value |
| Accounts receivable | | $ | 1,267 | |
| Inventories | | 3,545 | |
| Property, plant and equipment | | 391 | |
| Other current assets | | 290 | |
| Other non-current assets | | 954 | |
| Intangibles: | | |
| Customer relationships | 9.8 | 3,301 | |
| Trademarks | 9.8 | 3,397 | |
| Contract-based | 5.0 | 1,280 | |
| Developed technology | 15.8 | 5,189 | |
| Goodwill | | 18,620 | |
| Total fair value of assets acquired | | $ | 38,234 | |
| Accounts payable | | (1,098) | |
| Accrued liabilities | | (637) | |
| Other liabilities | | (1,200) | |
| Total fair value of liabilities acquired | | $ | (2,935) | |
| Purchase Price | | $ | 35,299 | |
Unaudited Pro Forma Financial Information
The following unaudited pro forma results of operations assume that the Acquisition occurred at the beginning of the periods presented. These unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations would have been if the Acquisition had occurred at the beginning of the periods presented, nor are they indicative of future results of operations. The pro forma results presented below are adjusted for the removal of acquisition and other related costs of $286 which were incurred in our first fiscal quarter ended June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| in thousands, unaudited | Three Months Ended September 30, 2022 | | Three Months Ended September, 30, 2021 | | Six Months Ended September 30, 2022 | | Six Months Ended September, 30, 2021 |
| Sales | $ | 100,557 | | | $ | 84,401 | | | $ | 197,863 | | | $ | 157,990 | |
| Net Income/(loss) | 10,984 | | | 1,221 | | | 17,257 | | | 814 | |
3. 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 use 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 and cash equivalents, 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 September 30, 2022 and March 31, 2022, no
assets or liabilities were valued using Level 3 criteria, except for those acquired in our recent acquisition of Powerblanket, discussed in Note 2, "Acquisition."
Information about our long-term debt that is not measured at fair value is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | March 31, 2022 | | |
| | Carrying
Value | | Fair Value | | Carrying
Value | | Fair Value | | Valuation Technique |
| Financial Assets | | | | | | | | | |
| Deferred compensation plan assets | $ | 5,521 | | | $ | 5,521 | | | $ | 5,391 | | $ | 5,391 | | Level 1 - Active Markets |
| Foreign currency contract forwards assets | — | | | — | | | 105 | | 105 | | Level 2 - Market Approach |
| Financial Liabilities | | | | | | | | | |
| Outstanding borrowings from revolving line of credit | $ | 29,000 | | | $ | 29,000 | | | $ | — | | | $ | — | | | Level 1 - Active Markets |
| Outstanding principal amount of senior secured credit facility | 114,539 | | | 113,966 | | | 129,000 | | | 128,355 | | | Level 2 - Market Approach |
| Deferred compensation plan liabilities | 4,938 | | | 4,938 | | | 4,837 | | | 4,837 | | | Level 1 - Active Markets |
| Foreign currency contract forwards liabilities | 46 | | | 46 | | | — | | | — | | | Level 2 - Market Approach |
At September 30, 2022 and March 31, 2022, the fair value of our long-term debt is based on market 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.
Additionally, we acquired certain assets and liabilities as disclosed in Note 2, "Acquisition" at fair value according to purchase price accounting
Deferred Compensation Plan
The Company 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. Included in “Other non-current assets” in the condensed consolidated balance sheets at September 30, 2022 and March 31, 2022 were $5,521 and $5,391, 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 participants of $4,938 and $4,837 included in “Other non-current liabilities” in the condensed consolidated balance sheets at September 30, 2022 and March 31, 2022, respectively. Deferred compensation plan expense/(income) is included as such in the condensed consolidated statement of operations, and therefore is excluded from "Selling, general and administrative expenses." Deferred compensation plan expense/(income) was $(303) and $(14) for the three months ended September 30, 2022 and 2021, respectively, and $(963) and $318 for the six months ended September 30, 2022 and 2021, respectively. Expenses and income from our deferred compensation plan were offset by unrealized gains and losses for the deferred compensation plan included in "Other income/expense" on our condensed consolidated statements of operations and comprehensive income/(loss). Our unrealized losses and (gains) on investments were $296 and $20, respectively, for the three months ended September 30, 2022 and 2021, respectively, and $934 and $(306) for the six months ended September 30, 2022 and 2021, respectively.
Trade Related Foreign Currency Forward Contracts
We transact business in various foreign currencies and have established a program that primarily utilizes foreign currency forward contracts to address 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 foreign currency transaction gains or losses. These foreign currency exposures arise from intercompany transactions as well as third party accounts receivable or payable that are denominated in foreign currencies. 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 "Other income/expense" on our condensed consolidated statements of operations and comprehensive income/(loss). These gains and losses are designed to offset gains and losses resulting from settlement of receivables or payables by our foreign operations which are settled in currency other than the local transactional currency. The fair value is determined by quoted prices from active foreign currency markets (Level 2). Fair value amounts for such forward contracts on our condensed consolidated balance sheets are either classified as accounts receivable, net or accrued
liabilities depending on whether the forward contract is in a gain (accounts receivable, net) or loss (accrued liabilities) position. 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 September 30, 2022 and March 31, 2022, the notional amounts of forward contracts were as follows:
| | | | | | | | | | | |
| Notional amount of foreign currency forward contracts by currency |
| September 30, 2022 | | March 31, 2022 |
| | | |
| Euro | $ | 1,000 | | | $ | — | |
| Canadian Dollar | — | | | 4,000 | |
| South Korean Won | 2,000 | | | 2,250 | |
| | | |
| | | |
| Australian Dollar | — | | | 1,000 | |
| Japanese Yen | 300 | | | — | |
| | | |
| | | |
| | | |
| | | |
| Total notional amounts | $ | 3,300 | | | $ | 7,250 | |
Foreign currency gains or losses related to our forward contracts in the accompanying condensed consolidated statements of operations and comprehensive income/(loss) were losses of $(252) and gains of $41 in the three months ended September 30, 2022 and 2021, respectively, and losses of $(612) and $(225) for the six months ended September 30, 2022 and 2021, respectively. Gains and losses from our forward contracts were offset by transaction gains or losses incurred with the settlement of transactions denominated in foreign currencies. For the three months ended September 30, 2022 and 2021, our net foreign currency transactions resulted in losses of $(37) and $(350), respectively, and losses of $(333) and $(686) in the six months ended September 30, 2022 and 2021.
4. Restructuring and Other Charges/(Income)
Fiscal 2023 charges/(income)
We have not recorded any restructuring charges/(income) in fiscal 2023.
Fiscal 2022 charges/(income)
We recorded $(103) for severance-related activity in our Canadian segment, which was recorded to "Restructuring and other charges/(income)" in our condensed consolidated statements of operations and comprehensive income/(loss). Additionally, we recorded $(311) in cash receipts related to receivables existing prior to the sale of our South Africa business, which was completed in fiscal 2021.
Restructuring and other charges/(income) by reportable segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 | | Six Months Ended September 30, 2022 | | Six Months Ended September 30, 2021 |
| United States and Latin America | | $ | — | | | $ | — | | | $ | — | | | $ | (46) | |
| Canada | | — | | | — | | | — | | | (186) | |
| Europe, Middle East and Africa | | — | | | — | | | — | | | (182) | |
| Asia-Pacific | | — | | | — | | | — | | | — | |
| | | $ | — | | | $ | — | | | $ | — | | | $ | (414) | |
5. Net Income/(Loss) per Common Share
The reconciliations of the denominators used to calculate basic and diluted net income/(loss) per common share for the three and six months ended September 30, 2022 and 2021, respectively, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 | | Six Months Ended September 30, 2022 | | Six Months Ended September 30, 2021 |
| Basic net income/(loss) per common share | | | | | | | |
| Net income/(loss) | $ | 10,984 | | | $ | 477 | | | $ | 17,540 | | | $ | 137 | |
| Weighted-average common shares outstanding | 33,476,695 | | | 33,328,568 | | | 33,438,657 | | | 33,268,825 | |
| Basic net income/(loss) per common share | $ | 0.33 | | | $ | 0.01 | | | $ | 0.52 | | | $ | 0.00 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 | | Six Months Ended September 30, 2022 | | Six Months Ended September 30, 2021 |
| Diluted net income/(loss) per common share | | | | | | | | |
| Net income/(loss) | | $ | 10,984 | | | $ | 477 | | | $ | 17,540 | | | $ | 137 | |
| Weighted-average common shares outstanding | | 33,476,695 | | | 33,328,568 | | | 33,438,657 | | | 33,268,825 | |
| Common share equivalents: | | | | | | | | |
| Stock options | | 1,536 | | | — | | | — | | | 1,667 | |
| Restricted and performance stock units | | 295,244 | | | 264,256 | | | 172,634 | | | 186,085 | |
Weighted average shares outstanding – dilutive (1) | | 33,773,475 | | | 33,592,824 | | | 33,611,291 | | | 33,456,577 | |
| Diluted net income/(loss) per common share | | $ | 0.33 | | | $ | 0.01 | | | $ | 0.52 | | | $ | 0.00 | |
(1) For the three months ended September 30, 2022 and 2021, 36,310 and 132,605 equity awards, respectively and for the six months ended September 30, 2022 and 2021, 113,559 and 144,664 equity awards, respectively, were not included in the calculation of diluted net income/(loss) per common share, as they would have had an anti-dilutive effect.
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 assume that the associated performance targets will be met at the target level of performance for purposes of calculating diluted net income/(loss) per common share until such time that it is probable that the performance target will not be met.
6. Inventories
Inventories consisted of the following: | | | | | | | | | | | |
| September 30, 2022 | | March 31, 2022 |
| Raw materials | $ | 56,347 | | | $ | 41,389 | |
| Work in process | 5,304 | | | 6,294 | |
| Finished goods | 36,339 | | | 25,802 | |
| 97,990 | | | 73,485 | |
| Valuation reserves | (2,976) | | | (1,835) | |
| Inventories, net | $ | 95,014 | | | $ | 71,650 | |
7. Goodwill and Other Intangible Assets
The carrying amount of goodwill by operating segment as of September 30, 2022, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | United States and Latin America | | Canada | | Europe, Middle East and Africa | | Asia-Pacific | | Total |
| Balance as of March 31, 2022 | $ | 62,725 | | | $ | 122,318 | | | $ | 19,087 | | | $ | 8,624 | | | $ | 212,754 | |
Goodwill acquired(1) | 18,620 | | | — | | | — | | | — | | | 18,620 | |
| Foreign currency translation impact | — | | | (10,807) | | | (2,261) | | | — | | | (13,068) | |
| Balance as of September 30, 2022 | $ | 81,345 | | | $ | 111,511 | | | $ | 16,826 | | | $ | 8,624 | | | $ | 218,306 | |
(1) - Refer to Note 2, "Acquisition," for more information on the goodwill acquired through our recent acquisition of Powerblanket.
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, which is based on market multiples of guideline public companies. The most significant inputs 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 of our fiscal year.
In the fourth quarter of fiscal 2022, we identified the disruptions to our business from the ongoing Russo-Ukrainian war as an indicator of potential impairments in our EMEA reporting unit. We performed our annual goodwill, intangible and tangible impairment assessments including our indefinite life trademarks. Based on the goodwill impairment assessment, there was no impairment of goodwill, intangible or tangible assets or our indefinite life trademarks as of the respective reporting
periods. If overall economic conditions, our key end markets, or factors specific to the Company deteriorate significantly, it could negatively impact the Company's future impairment tests. We will continue to monitor our reporting units' goodwill and asset valuations and test for potential impairments, as appropriate.
Separately, we added $18,620 of goodwill as part of our recent acquisition of Powerblanket, which is discussed further in Note 2, "Acquisition." The newly acquired goodwill is allocated to our US-LAM segment. We believe the goodwill acquired in this recent acquisition represents synergies from combining operations in addition to the already identifiable assets. We anticipate being able to deduct goodwill for tax purposes.
No triggering events were identified during the three and six month periods ended September 30, 2022 which would indicate that the fair value of any of our reporting units was less than its carrying amount.
Our total intangible assets consisted of the following:
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| | Gross Carrying Amount at September 30, 2022 | | Accumulated Amortization | | Net Carrying Amount at September 30, 2022 | | Gross Carrying Amount at March 31, 2022 | | Accumulated Amortization | | Net Carrying Amount at March 31, 2022 |
| Products | | $ | 60,778 | | | $ | (29,882) | | | $ | 30,896 | | | $ | 66,669 | | | $ | (29,445) | | | $ | 37,224 | |
| Trademarks | | 46,492 | | | (1,744) | | | 44,748 | | | 45,222 | | | (1,517) | | | 43,705 | |
| Developed technology | | 14,648 | | | (5,985) | | | 8,663 | | | 9,946 | | | (5,933) | | | 4,013 | |
| Customer relationships | | 111,642 | | | (100,370) | | | 11,272 | | | 113,413 | | | (103,900) | | | 9,513 | |
| Certifications | | 431 | | | — | | | 431 | | | 453 | | | — | | | 453 | |
| Contract-based | | 1,280 | | | (93) | | | 1,187 | | | — | | | — | | | — | |
| Total | | $ | 235,271 | | | $ | (138,074) | | | $ | 97,197 | | | $ | 235,703 | | | $ | (140,795) | | | $ | 94,908 | |
8. Accrued Liabilities
Accrued current liabilities consisted of the following:
| | | | | | | | | | | |
| | September 30, 2022 | | March 31, 2022 |
| Accrued employee compensation and related expenses | $ | 13,529 | | | $ | 16,235 | |
| Accrued interest | 381 | | | 277 | |
| Customer prepayments | 30 | | | 405 | |
| Warranty reserves | 964 | | | 557 | |
| Professional fees | 2,443 | | | 2,540 | |
| Sales taxes payable | 2,624 | | | 2,758 | |
| | | |
Other(1) | 4,140 | | | 4,199 | |
| Total accrued current liabilities | $ | 24,111 | | | $ | 26,971 | |
(1) - Included in Other are accrued warranty-related costs of $2,000 and $2,523, respectively, associated with the operational execution of a US-LAM project that was completed previously.
9. Debt
Long-term debt consisted of the following:
| | | | | | | | | | | |
| | September 30, 2022 | | March 31, 2022 |
| Variable Rate Term Loan A due September 2026, net of deferred debt issuance costs of $534 and $640 as of September 30, 2022, and March 31, 2022, respectively | $ | 114,005 | | | $ | 128,360 | |
| Less current portion | (9,321) | | | (7,929) | |
| Total long-term debt | $ | 104,684 | | | $ | 120,431 | |
Senior Secured Credit Facilities
On September 29, 2021, Thermon Group Holdings, Inc., as a credit party and a guarantor, Thermon Holding Corp. (“THC” or the “U.S. Borrower”) and Thermon Canada Inc. (the “Canadian Borrower” and together with THC, the “Borrowers”), as borrowers, entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with several
banks and other financial institutions or entities from time to time (the “Lenders”) and JPMorgan Chase Bank, N.A., as Administrative Agent (the “Agent”), which was further amended on November 19, 2021.
The Credit Agreement is an amendment and restatement of that certain Credit Agreement dated October 30, 2017 by and among Borrowers, the lenders party thereto and JPMorgan Chase Bank, N.A. as administrative agent (the “Prior Credit Agreement”), and provides for the following credit facilities described below (collectively, the “Facilities”).
•Revolving Credit Facility: A USD $100,000 five-year secured revolving credit facility made available to the U.S. Borrower. The Revolving Credit Facility includes sub-limits for letters of credit and swing-line loans (the “Revolving Credit Facility”).
•U.S. Term Loan Facility: A USD $80,000 five-year secured term loan A (the “U.S. Term Loan”) made available to the U.S. Borrower (the “U.S. Term Loan Facility”); and
•Canadian Term Loan Facility: A CAD $76,182 five-year term loan A (the “Canadian Term Loan” and, together with the U.S. Term Loan, the “Term Loans”) made available to the Canadian Borrower (the “Canadian Term Loan Facility,” and together with the U.S. Term Loan Facility, the “Term Loan Facilities”).
Proceeds of the Facilities were used at closing to repay and refinance the Borrowers’ existing indebtedness under the Prior Credit Agreement and pay all interest, fees and expenses related thereto, and thereafter are expected to be used for working capital and general corporate purposes.
The Credit Agreement allows for incremental term loans and incremental revolving commitments in an amount not to exceed USD $100,000.
Maturity and Repayment
Each of the Facilities terminates on September 29, 2026. Commencing January 1, 2022, each of the Term Loans will amortize as set forth in the table below, with payments on the first day of each January, April, July and October, with the balance of each Term Loan Facility due at maturity.
| | | | | | | | |
| Installment Dates | | Original Principal Amount |
| January 1, 2022, through October 1, 2022 | | 1.25 | % |
| January 1, 2023, through October 1, 2024 | | 1.88 | % |
| January 1, 2025, through July 1, 2026 | | 2.50 | % |
Guarantees
The U.S. Term Loan and the obligations of the U.S. Borrower under the Revolving Credit Facility are guaranteed by the Company and all of the U.S. Borrower’s current and future wholly owned domestic material subsidiaries (the “U.S. Subsidiary Guarantors”), subject to certain exceptions. The Canadian Term Loan is guaranteed by the Company, the U.S. Borrower, the U.S. Subsidiary Guarantors and each of the wholly owned Canadian material subsidiaries of the Canadian Borrower, subject to certain exceptions.
Security
The U.S. Term Loan and the obligations of the U.S. Borrower under the Revolving Credit Facility are secured by a first lien on all of the assets of the Company, the U.S. Borrower and the U.S. Subsidiary Guarantors, including 100% of the capital stock of the U.S. Subsidiary Guarantors and 65% of the capital stock of the first tier material foreign subsidiaries of the Company, the U.S. Borrower and the U.S. Subsidiary Guarantors, subject to certain exceptions. The Canadian Term Loan is secured by a first lien on all of the assets of the Company, the U.S. Borrower, the U.S. Subsidiary Guarantors, the Canadian Borrower and the material Canadian subsidiaries of the Canadian Borrower, including 100% of the capital stock of the Canadian Borrower’s material Canadian subsidiaries.
Interest Rates and Fees
The U.S. Borrower will have the option to pay interest on the U.S. Term Loan and borrowings under the Revolving Credit Facility at a base rate, plus an applicable margin, or at a rate based on LIBOR plus an applicable margin. The Canadian Borrower will have the option to pay interest on the Canadian Term Loan at a prime rate, plus an applicable margin, or at a rate based on the Canadian Dollar Offered Rate, or "CDOR," plus an applicable margin.
Under the applicable Facilities, the margin for base rate loans and Canadian prime rate loans is 62.5 basis points and the applicable margin for LIBOR loans and CDOR loans is 162.5 basis points; provided that, following the completion of one full fiscal quarter after the closing date, the applicable margins will be determined based on a leverage-based performance grid.
In addition to paying interest on outstanding principal under the Revolving Credit Facility, the U.S. Borrower is required to pay a commitment fee in respect of unutilized revolving commitments of 0.25% per annum, provided that, following the completion of one full fiscal quarter after the closing date, the commitment fee will be determined based on a leverage-based performance grid.
Voluntary Prepayment
The Borrowers will be able to voluntarily prepay the principal of the loans outstanding under each of the Facilities without penalty or premium (subject to breakage fees) at any time in whole or in part.
Mandatory Prepayment
Each Borrower is required to repay its respective Term Loan with certain asset sale and insurance proceeds and certain debt proceeds.
Debt Issuance Costs
We incurred fees to third parties in connection with our entry into the Credit Agreement described above. The debt issuance costs of $1,265 were capitalized and will be amortized over the life of the Credit Agreement. Additionally, we recognized a loss on debt extinguishment of $2,569, which was recorded to Other income/(expense) on our condensed consolidated statements of operations and comprehensive income/(loss).
Financial Covenants
In connection with the Credit Agreement, the Company is required, on a consolidated basis, to maintain certain financial covenant ratios. On the last day of any period of four fiscal quarters ending during a period set forth below, the Company must maintain a consolidated leverage ratio that does not exceed the ratios for such period set forth below (each of which ratios may be increased by 0.50:1.00 for each of the four fiscal quarters following certain acquisitions at the election of the U.S. Borrower):
| | | | | | | | |
| Fiscal Quarter Ending | | Consolidated Leverage Ratio |
| September 30, 2021, through September 30, 2022 | | 3.75:1.00 |
| December 31, 2022, and each fiscal quarter thereafter | | 3.50:1.00 |
In addition, on the last day of any period of four fiscal quarters ending on or after September 30, 2021, the Company must maintain a consolidated fixed charge coverage ratio of not less than 1.25:1.00. As of September 30, 2022, we were in compliance with all financial covenants of the Credit Agreement and there is no material uncertainty about our ongoing ability to comply with our covenants.
Other Covenants
The Credit Agreement contains restrictive covenants (in each case, subject to certain exclusions) that limit, among other things, the ability of the Company and its subsidiaries (including the Borrowers) to:
•incur additional indebtedness;
•grant liens;
•make fundamental changes;
•sell assets;
•make restricted payments;
•enter into sales and leasebacks;
•make investments;
•prepay certain indebtedness;
•enter into transactions with affiliates; and
•enter into restrictive agreements.
The covenants are subject to various baskets and materiality thresholds, with certain of the baskets to the restrictions on the repayment of subordinated or unsecured indebtedness, restricted payments and investments being available only when the Company’s pro forma leverage ratios are less than a certain level.
The Credit Agreement contains certain customary representations and warranties, affirmative covenants and events of default, including, among other things, payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under ERISA, judgment defaults, actual or asserted failure of any guaranty or security documents to be in full force and effect and change of control. If such an event of default occurs, the Agent will be entitled to take various actions, including the termination of the commitment for the Revolving Credit Facility, the acceleration of amounts due under the Credit Agreement and certain other actions that a secured creditor is customarily permitted to take following a default.
At September 30, 2022, we had $29,000 in outstanding borrowings under the Revolving Credit Facility. We had $69,220 of available borrowing capacity thereunder after taking into account the borrowing base and $1,780 of outstanding letters of credit and the outstanding borrowings under the Revolving Credit Facility as of September 30, 2022. The Term Loans bear interest at the LIBOR rate or CDOR rate, as applicable, in each case plus an applicable margin dictated by our leverage ratio (as described above). The interest rates on the Term Loan Facilities on September 30, 2022 were 4.93% for the Canadian Term Loan Facility, 3.81% for the U.S. Term Loan Facility, and 3.77% for the U.S. Revolving Credit Facility. Interest expense has been presented net of interest income on our condensed consolidated statements of operations and comprehensive income/(loss).
10. Commitments and Contingencies
Legal Proceedings and Other 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 September 30, 2022, 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 reporting period.
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 believes 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 the parties on the terms of a definitive settlement agreement. Settlement of this matter on the agreed terms will require the Company to contribute an amount that would not have a material impact on 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.
Letters of Credit and Bank Guarantees
At September 30, 2022, the Company had in place letter of credit guarantees and performance bonds securing certain performance obligations of the Company. These arrangements totaled $15,372. Of this amount, $1,214 is secured by cash deposits at the Company’s financial institutions and an additional $1,780 represents a reduction of the available amount of the Company's short-term and long-term revolving lines of credit. In addition to the arrangements totaling $15,372, our Indian subsidiary also has $4,454 in non-collateralized customs bonds outstanding to secure the Company's customs and duties obligations in India.
11. Revenue
Disaggregation of Revenue
We disaggregate our revenue from contracts with customers by geographic location, as well as revenues recognized at point in time and revenues recognized over time, as we believe these best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
Revenue recognized at a point-in-time based on when control transitions to the customer is generally related to our product sales. Point-in-time revenue does not typically require engineering or installation services. Revenue recognized over time occurs on our projects where engineering or installation services, or a combination of the two, are required. We recognize revenue related to such projects in a systematic way that reflects the transfer of goods or services, or a combination of goods and services, to the customer.
Disaggregation of revenues from contracts with customers for the three and six months ended September 30, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 |
| | Revenues recognized at point in time | | Revenues recognized over time | | Total | | Revenues recognized at point in time | | Revenues recognized over time | | Total |
| United States and Latin America | | $ | 24,749 | | | $ | 22,685 | | | $ | 47,434 | | | $ | 17,115 | | | $ | 13,327 | | | $ | 30,442 | |
| Canada | | 25,656 | | | 9,127 | | | 34,783 | | | 20,036 | | | 4,907 | | | 24,943 | |
| Europe, Middle East and Africa | | 5,261 | | | 4,282 | | | 9,543 | | | 6,876 | | | 9,619 | | | 16,495 | |
| Asia-Pacific | | 6,665 | | | 2,132 | | | 8,797 | | | 6,448 | | | 2,994 | | | 9,442 | |
| Total revenues | | $ | 62,331 | | | $ | 38,226 | | | $ | 100,557 | | | $ | 50,475 | | | $ | 30,847 | | | $ | 81,322 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended September 30, 2022 | | Six Months Ended September 30, 2021 |
| | Revenues recognized at point in time | | Revenues recognized over time | | Total | | Revenues recognized at point in time | | Revenues recognized over time | | Total |
| United States and Latin America | | $ | 47,865 | | | $ | 45,162 | | | $ | 93,027 | | | $ | 30,870 | | | $ | 22,228 | | | $ | 53,098 | |
| Canada | | 50,787 | | | 16,191 | | | 66,978 | | | 39,132 | | | 11,242 | | | 50,374 | |
| Europe, Middle East and Africa | | 11,168 | | | 8,411 | | | 19,579 | | | 13,322 | | | 18,107 | | | 31,429 | |
| Asia-Pacific | | 11,297 | | | 5,118 | | | 16,415 | | | 11,156 | | | 6,420 | | | 17,576 | |
| Total revenues | | $ | 121,117 | | | $ | 74,882 | | | $ | 195,999 | | | $ | 94,480 | | | $ | 57,997 | | | $ | 152,477 | |
Performance Obligations
At September 30, 2022, revenues associated with our open performance obligations totaled $160,764. Within this amount, approximately $19,469 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 12 months.
Contract Assets and Liabilities
As of September 30, 2022 and March 31, 2022, contract assets were $12,985 and $19,626, respectively. There were no losses recognized on our contract assets for the six months ended September 30, 2022 and 2021. As of September 30, 2022 and March 31, 2022, contract liabilities were $12,225 and $8,010, respectively. The majority of contract liabilities at March 31, 2022 will be recognized as revenue in fiscal 2023. We typically recognize revenue associated with our contract liabilities within 12 months.
12. Income Taxes
Our effective income tax rate was 26.2% and 93.6% for the six months ended September 30, 2022 and 2021, respectively. During the six months ended September 30, 2021, the Company recorded discrete tax expenses of $301 related to withholding taxes in Canada and $945 related to an increase in withholding tax rate in our Russian subsidiary.
As of September 30, 2022, we have established a long-term liability for uncertain tax positions in the amount of $921. As of September 30, 2022, the tax years for the fiscal years ended March 31, 2017 through March 31, 2022, remain open to examination by the major taxing jurisdictions.
13. Segment Information
We maintain four reportable segments based on four geographic countries or regions in which we operate: (i) United States and Latin America ("US-LAM"), (ii) Canada, (iii) Europe, Middle East and Africa ("EMEA") and (iv) Asia-Pacific ("APAC"). Within our four reportable segments, our core products and services are focused on the following markets: chemical and petrochemical, oil, gas, power generation, commercial, food and beverage, rail and transit, and other, which we refer to as our "key end markets." We offer a full suite of products (heating units, heating cables, industrial heating blankets and related products, temporary power solutions and tubing bundles), services (engineering, installation and maintenance services) and software (design optimization and wireless and network control systems) required to deliver comprehensive solutions to
some of the world's largest and most complex projects. 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. 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, property, plant and equipment, net and total assets for each of our four reportable segments are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 | | Six Months Ended September 30, 2022 | | Six Months Ended September 30, 2021 |
| Sales to External Customers: | | | | | | | |
| United States and Latin America | $ | 47,434 | | | $ | 30,442 | | | $ | 93,027 | | | $ | 53,098 | |
| Canada | 34,783 | | | 24,943 | | | 66,978 | | | 50,374 | |
| Europe, Middle East and Africa | 9,543 | | | 16,495 | | | 19,579 | | | 31,429 | |
| Asia-Pacific | 8,797 | | | 9,442 | | | 16,415 | | | 17,576 | |
| | $ | 100,557 | | | $ | 81,322 | | | $ | 195,999 | | | $ | 152,477 | |
| Inter-Segment Sales: | | | | | | | |
| United States and Latin America | $ | 11,841 | | | $ | 10,139 | | | $ | 22,742 | | | $ | 20,836 | |
| Canada | 3,304 | | | 2,170 | | | 6,656 | | | 4,939 | |
| Europe, Middle East and Africa | 234 | | | 430 | | | 656 | | | 842 | |
| Asia-Pacific | 433 | | | 313 | | | 812 | | | 617 | |
| $ | 15,812 | | | $ | 13,052 | | | $ | 30,866 | | | $ | 27,234 | |
| Depreciation Expense: | | | | | | | |
| United States and Latin America | $ | 1,240 | | | $ | 1,451 | | | $ | 2,587 | | | $ | 2,935 | |
| Canada | 1,148 | | | 1,303 | | | 2,300 | | | 2,723 | |
| Europe, Middle East and Africa | 96 | | | 98 | | | 189 | | | 203 | |
| Asia-Pacific | 35 | | | 44 | | | 71 | | | 90 | |
| $ | 2,519 | | | $ | 2,896 | | | $ | 5,147 | | | $ | 5,951 | |
| Amortization Expense: | | | | | | | |
| United States and Latin America | $ | 599 | | | $ | 295 | | | $ | 999 | | | $ | 590 | |
| Canada | 1,795 | | | 1,860 | | | 3,630 | | | 3,766 | |
| Europe, Middle East and Africa | 20 | | | 24 | | | 42 | | | 48 | |
| Asia-Pacific | 23 | | | 11 | | | 34 | | | 22 | |
| $ | 2,437 | | | $ | 2,190 | | | $ | 4,705 | | | $ | 4,426 | |
| Income/(Loss) from Operations: | | | | | | | |
| United States and Latin America | $ | 6,163 | | | $ | 750 | | | $ | 17,716 | | | $ | (1,895) | |
| Canada | 8,700 | | | 3,793 | | | 12,776 | | | 7,824 | |
| Europe, Middle East and Africa | 1,079 | | | 2,268 | | | (1,562) | | | 4,438 | |
| Asia-Pacific | 1,809 | | | 1,317 | | | 1,746 | | | 2,425 | |
| Unallocated: | | | | | | | |
| Stock compensation | (1,251) | | | (1,246) | | | (2,444) | | | (2,424) | |
| Public company costs | (462) | | | (657) | | | (980) | | | (1,160) | |
| | $ | 16,038 | | | $ | 6,225 | | | $ | 27,252 | | | $ | 9,208 | |
| | | | | | | | | | | |
| September 30, 2022 | | March 31, 2022 |
| Property, Plant and Equipment, Net: | | | |
| United States and Latin America | $ | 31,069 | | | $ | 31,919 | |
| Canada | 27,597 | | | 30,686 | |
| Europe, Middle East and Africa | 2,600 | | | 2,796 | |
| Asia-Pacific | 529 | | | 638 | |
| $ | 61,795 | | | $ | 66,039 | |
| Total Assets: | | | |
| United States and Latin America | $ | 277,037 | | | $ | 241,421 | |
| Canada | 281,822 | | | 296,459 | |
| Europe, Middle East and Africa | 64,655 | | | 67,608 | |
| Asia-Pacific | 30,765 | | | 31,181 | |
| $ | 654,279 | | | $ | 636,669 | |
Capital expenditures for our reportable segments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 | | Six Months Ended
September 30, 2022 | | Six Months Ended
September 30, 2021 |
| Capital Expenditures: | | | | | | | | |
| United States and Latin America | | $ | 1,180 | | | $ | 322 | | | $ | 1,423 | | | $ | 640 | |
| Canada | | 715 | | | 739 | | | 2,000 | | | 1,267 | |
| Europe, Middle East and Africa | | 51 | | | 106 | | | 132 | | | 131 | |
| Asia-Pacific | | 51 | | | 15 | | | 59 | | | 17 | |
| | | $ | 1,997 | | | $ | 1,182 | | | $ | 3,614 | | | $ | 2,055 | |