ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, Item 6, "Selected Financial Data" and our consolidated financial statements and related notes included elsewhere in this annual report. The discussions in this section contain forward-looking statements that involve risks and uncertainties, including, but not limited to, those described in Item 1A, "Risk Factors." Actual results could differ materially from those discussed below. Please refer to the section entitled "Forward-Looking Statements."
Overview
For a complete overview of our business, please refer to Item 1. "Business" disclosed within this document.
Recent Developments. The global economy has been negatively impacted by the war between Russia and Ukraine. Furthermore, governments in the United States, Canada, and European Union, among others, have imposed trade controls on certain products and economic sanctions on certain industry sectors and parties in Russia. Further escalation of geopolitical tensions related to the war, including increased trade barriers or restrictions on global trade, could result in, among other things, cyberattacks, supply disruptions, lower customer demand, and changes to foreign exchange rates and financial markets, any of which may adversely affect our business and supply chain. Refer to Item 1A, "Risk Factors" in this annual report on Form 10-K for further discussion regarding our risks. Also, we disclose the quantitative risk our exposure to the Ruble could have on our net income in Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" in this annual report on Form 10-K.
The Company has paused new investments in and new orders by our Russian affiliate. We will continue to fulfill our existing agreements while remaining in compliance with applicable laws, including applicable sanctions and export controls. We continue to assess the impact on our results of operations, financial position and overall performance as the situation develops and any broader implications it may have on the global economy.
Our Russian affiliate represented approximately 5% of Thermon’s worldwide revenue during fiscal 2022. The carrying value of Thermon’s net assets in Russia was approximately $8.8 million as of March 31, 2022. This consisted of $3.1 million of cash, $1.8 million of accounts receivables, net, $4.5 million of inventories, net, $1.9 million of other current assets, $0.3 million of property, plant, and equipment, net, $0.8 million of other non-current assets, and $3.6 million of current liabilities.
The COVID-19 pandemic and the measures being taken to address and limit the spread of the virus and its variants have adversely affected the economies and financial markets of many countries, resulting in an economic downturn that negatively impacted, and may impact in the future, global demand for our products and services. Although we believe the general economic environment in which we operate has improved significantly since the onset of the COVID-19 pandemic, we may experience a decline in the demand of our products and services or disruptions in raw materials or labor required for manufacturing that could materially and negatively impact our business, financial condition, results of operation and overall financial performance in future periods. The effect of loosening pandemic restrictions along with pent-up demand from periods of stagnant lockdown and uncertainty has combined to strengthen our customer demand from most regions we serve, especially in our US-LAM and Canada segments.
The Company continues to invest in our three long-term strategic initiatives: diversifying our revenues into adjacent markets as the global economy transitions to a more sustainable energy future, increased investment in developing markets as a response to a growing middle class, and offering technology enabled maintenance solutions that improve our customer’s efficiency and safety. Our efforts to diversify the business's end markets is starting to show early signs of success through increased customer engagement in diversified end markets such as rail and transit, food and beverage, commercial and power. Additionally, we are continuing to receive orders from key customers related to our recently launched Genesis Network technology, which helps our customers more efficiently and safely monitor and maintain their heating systems by utilizing our software, analytics, hardware and process heating maintenance expert services. We are benefiting from the increasing global demand for our solutions, particularly in North America. While we are seeing improvements in many key metrics by which we measure the business, including revenue, we also recognized higher costs in fiscal 2022, due to higher raw material and labor costs due to global supply chain challenges as discussed above.
Revenue. Our revenues are derived from providing customers with a full suite of innovative and reliable process heating solutions, including electric and steam heat tracing, tubing bundles, control systems, design optimization, engineering services, installation services, portable power solutions and software. Additionally, our process heating products offer a complementary suite of advanced heating and filtration solutions for industrial and hazardous area applications. Historically, our sales are primarily to industrial customers for petroleum and chemical plants, gas production facilities and power generation
facilities. While our petroleum customers represent an important portion of our business, we have been successfully broadening our customer base by earning business from numerous other industries, including chemical processing, power generation, transportation, food and beverage, 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, 2022 was $156.2 million as compared to $114.2 million at March 31, 2021. The timing of recognition of revenue out of backlog is not always certain, as it is subject to a variety of factors that may cause delays, many of which are beyond our control (such as, customers' delivery schedules and levels of capital and maintenance expenditures). When delays occur, the recognition of revenue associated with the delayed project is likewise deferred.
Cost of sales. Our cost of sales includes primarily the cost of raw material items used in the manufacture of our products, cost of ancillary products that are sourced from external suppliers and construction labor cost. Additional costs of sales include contract engineering cost directly associated to projects, direct labor cost, shipping and handling costs, and other costs associated with our manufacturing/fabrication operations. The other costs associated with our manufacturing/fabrication operations are primarily indirect production costs, including depreciation, indirect labor costs, warranty-related costs and the costs of manufacturing support functions such as logistics and quality assurance. Key raw material costs include polymers, copper, stainless steel, insulating material, electronic components and other miscellaneous parts related to products manufactured or assembled. Raw material costs have been stable in the past; however, we are experiencing temporary shortages related to the global supply chain issues driven by the COVID-19 pandemic in certain raw materials as well as an increase in costs of these materials due to: use of alternate suppliers, higher freight costs, increased lead times, expedited shipping and other inflationary factors. Also, we have seen labor inefficiencies and increased overtime in certain of our facilities due to temporary shortages in raw materials required for production, as well as time and attendance issues and labor shortages in certain of our facilities. We cannot provide any assurance that we will continue to be able to mitigate temporary raw material shortages or be able to pass along such cost increases, including the potential impacts of tariffs, to our customers in the future, and if we are unable to do so, our results of operations may be adversely affected.
Operating expenses. Our selling, general, and administrative expenses are primarily comprised of compensation and related costs for sales, marketing, pre-sales engineering and administrative personnel, as well as other sales related expenses and other costs related to research and development, insurance, professional fees, the global integrated business information system, and provisions for bad debts.
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 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 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, 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 especially large Greenfield projects (i.e., new facility construction projects generating in excess of $5 million in annual sales), historically have been a substantial source of revenue growth, and Greenfield revenues tend to be more cyclical than MRO/UE revenues. A sustained decrease in capital and maintenance spending or in new facility construction by our customers could have a material adverse effect on the demand for our products and services and our business, financial condition and results of operations.
Acquisition strategy. In recent years, we have begun executing on a strategy to grow the Company through the acquisition of businesses that are either in the process heating solutions industry or that provide complementary products and solutions for the markets and customers we serve. We actively pursue both organic and inorganic growth initiatives that serve to advance our corporate strategy.
Impact of product mix. Typically, both Greenfield and MRO/UE customers require our products as well as our engineering and construction services. The level of service and construction needs will affect the profit margin for each type of revenue. We tend to experience lower margins from our design optimization, engineering, installation and maintenance services than we do from sales of our heating units, heating cable, tubing bundle and control system products. We also tend to experience lower margins from our outsourced products, such as electrical switch gears and transformers, than we do from our manufactured products. Accordingly, our results of operations are impacted by our mix of products and services.
We estimate that Greenfield and MRO/UE have each made the following contribution as a percentage of revenue in the periods listed:
| | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31,* |
| | 2022 | | 2021 | | 2020 |
| Greenfield | | 38 | % | | 35 | % | | 40 | % |
| MRO/UE | | 62 | % | | 65 | % | | 60 | % |
*THS has been excluded from the table above. Most of THS's revenue would be classified as MRO/UE under the current definitions.
Greenfield revenue is an indicator of both our ability to successfully compete for new contracts as well as the economic health of the industries we serve. Furthermore, Greenfield revenue is an indicator of potential MRO/UE revenue in future years.
For MRO/UE orders, the sale of our manufactured products typically represents a higher proportion of the overall revenue associated with such order than the provision of our services. Greenfield projects, on the other hand, require a higher level of our services than MRO/UE orders, and often require us to purchase materials from third party vendors. Therefore, we typically realize higher margins from MRO/UE revenues than Greenfield revenues.
Large and growing installed base. Customers typically use the incumbent heat tracing provider for MRO/UE projects to avoid complications and compatibility problems associated with switching providers. Therefore, with the significant Greenfield activity we have experienced in recent years, our installed base has continued to grow, and we expect that such installed base will continue to generate ongoing high margin MRO/UE revenue. For fiscal 2022, MRO/UE sales comprised approximately 62% of our consolidated revenues (excluding THS).
Seasonality of MRO/UE revenues. MRO/UE revenues for the 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.
Results of Operations
The following table sets forth data from our statements of operations for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, | | Increase/(Decrease) |
| (dollars in thousands) | | | | |
| | 2022 | | 2021 | | $ | | % |
| Consolidated Statements of Operations Data: | | | | | | | |
| Sales | $ | 355,674 | | | $ | 276,181 | | | $ | 79,493 | | | 29 | % |
| Cost of sales | 215,556 | | | 159,309 | | | 56,247 | | | 35 | % |
| Gross profit | 140,118 | | | 116,872 | | | 23,246 | | | 20 | % |
| Operating expenses: | | | | | | | |
| Selling, general and administrative expenses | 93,054 | | | 89,834 | | | 3,220 | | | 4 | % |
| Deferred compensation plan expense/(income) | 283 | | | 1,564 | | | (1,281) | | | (82) | % |
| Amortization of intangible assets | 8,790 | | | 9,445 | | | (655) | | | (7) | % |
| Restructuring and other charges/(income) | (414) | | | 8,623 | | | (9,037) | | | (105) | % |
| Income/(loss) from operations | 38,405 | | | 7,406 | | | 30,999 | | | 419 | % |
| Other income/(expenses): | | | | | | | |
| Interest expense, net | (5,815) | | | (10,185) | | | 4,370 | | | (43) | % |
| Other income/(expense) | (4,165) | | | 2,135 | | | (6,300) | | | (295) | % |
| Income/(loss) before provision for income taxes | 28,425 | | | (644) | | | 29,069 | | | (4514) | % |
| Income tax expense/(benefit) | 8,333 | | | (1,521) | | | 9,854 | | | (648) | % |
| Net income/(loss) | $ | 20,092 | | | $ | 877 | | | $ | 19,215 | | | 2191 | % |
| | | | | | | |
| As a percent of sales: | | | | | | | |
| Gross profit | 39.4 | % | | 42.3 | % | | -290 bps | | |
| Selling, general and administrative expenses | 26.2 | % | | 32.5 | % | | -630 bps | | |
| Income/(loss) from operations | 10.8 | % | | 2.7 | % | | 810 bps | | |
| Net income/(loss) | 5.6 | % | | 0.3 | % | | 530 bps | | |
| | | | | | | |
| Effective tax rate | 29.3 | % | | (236.2) | % | | | | |
Year Ended March 31, 2022 ("fiscal 2022") Compared to the Year Ended March 31, 2021 ("fiscal 2021")
Revenue. Revenues for fiscal 2022 were $355.7 million compared to $276.2 million in fiscal 2021. The increase in revenue is due to strong demand in our US-LAM and Canada segments, which led the first stages of recovery from the COVID-19 pandemic. In fiscal 2022, we recognized revenue from several large, one-time projects that contributed significantly to our growth. Revenue increased $58.7 million, or 61.6%, in our US-LAM segment, $24.6 million, or 27.1%, in our Canada segment, and $0.5 million, or 1.0%, in our EMEA segment. We experienced a slower recovery from the effects of the COVID-19 pandemic, including lockdowns and other restrictions, in our APAC segment, which led to a $4.4 million, or 12.2%, decrease.
Sales related to our products ("point-in-time") grew $53.0 million and sales of projects ("over time") grew $26.5 million compared to fiscal 2021. Our sales mix (excluding THS) in fiscal 2022 was 38% Greenfield and 62% MRO/UE compared to 35% Greenfield and 65% MRO/UE in fiscal 2021.
Gross profit. Gross profit in fiscal 2022 totaled $140.1 million compared to $116.9 million in fiscal 2021. The increase in gross profit was driven by higher revenue for the year. Gross margins were 39.4% in fiscal 2022 compared to 42.3% in fiscal 2021. The lower gross margin in fiscal 2022 is primarily attributable to higher project costs, including the impacts of a large, one-time project, as well as additional warranty costs associated with the operational execution of a large project, both of which are reported in our US-LAM segment.
Selling, general and administrative expenses. Selling, general and administrative expenses ("SG&A") were $93.1 million in fiscal 2022 compared to $89.8 million in fiscal 2021. The primary drivers in the increase in SG&A is attributable to higher incentive compensation for our employees and higher sales commissions commensurate with the increase in revenue and profitability. SG&A as a percentage of sales has decreased significantly to 26.2% in fiscal 2022 from 32.5% in fiscal 2021. The
decrease is due to the fixed nature of SG&A in a year with higher sales, but also due to the Company’s efforts to reduce its cost structure in light of the global pandemic.
Amortization of intangible assets. Amortization of intangible assets was $8.8 million in fiscal 2022 compared to $9.4 million fiscal 2021. The decrease of amortization is due to certain intangible assets becoming fully amortized in fiscal 2021, partially offset by foreign exchange impacts.
Deferred compensation plan expense/(income). Deferred compensation plan expense/(income) was $0.3 million in fiscal 2022 compared to $1.6 million in fiscal 2021. The decrease is primarily attributable to market fluctuations in the underlying balances owed to employees. This compensation plan expense/(income) is materially offset in other income/(expense) where the Company records market gains/(losses) on related investment assets.
Restructuring and other charges/(income). Restructuring and other charges/(income) was $(0.4) million in fiscal 2022 compared to $8.6 million in fiscal 2021. The Company implemented certain restructuring activities in fiscal 2021 not present in fiscal 2022. Refer to Note 14, "Restructuring and other charges/(income)" for additional details.
Interest expense, net. The decrease in interest expense is due to a lower average interest rate during fiscal 2022 than fiscal 2021 as well as a lower average outstanding balance. Our average outstanding principal balance during fiscal 2022 was lower at $138.8 million versus $162.3 million during fiscal 2021. See Note11, "Long-Term Debt," for additional information on our long-term debt.
Other income/(expense). Other income/(expense) was $(4.2) million and $2.1 million in fiscal 2022 and fiscal 2021, respectively. The increase primarily relates to our debt extinguishment charges of $2.6 million in fiscal 2022, as we completed refinancing of our senior secured credit facility, as well as an increase in foreign exchange losses of $2.2 million. See Note 11, "Long-Term Debt," for additional information on our long-term debt and the refinancing of our senior secured credit facility. The remaining variance is attributable to relatively lower gains on the Company's non-qualified deferred compensation plan in fiscal 2022 than in the prior year due to market fluctuations. These gains are offset by deferred compensation plan expense as noted above.
Income taxes. Income tax expense/(benefit) was $8.3 million or 29.3% on pretax income of $28.4 million in fiscal 2022 as compared to an income tax benefit of $(1.5) million on a pretax loss of $(0.6) million in fiscal 2021. Our fiscal 2022 effective tax rate of 29.3% was within our expected range of combined tax expense for the United States and foreign subsidiaries in which we operate. The benefit in fiscal 2021 was primarily due to a pre-tax loss and the impact from the Global Intangible Low-Taxes Income (or “GILTI Tax”) in the U.S. During fiscal 2021, tax law changes provided a $1.9 million recovery of previously incurred GILTI Tax expense.
See Note 18, “Income Taxes,” to our audited consolidated financial statements included elsewhere in this annual report for further detail on income taxes.
Net income/(loss). Net income/(loss) was $20.1 million in fiscal 2022 compared to $0.9 million in fiscal 2021. The change in net income/(loss) is explained by the changes noted in the sections above.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, | | Increase/(Decrease) |
| (dollars in thousands) | | | | |
| | 2021 | | 2020 | | $ | | % |
| Consolidated Statements of Operations Data: | | | | | | | |
| Sales | $ | 276,181 | | | $ | 383,486 | | | $ | (107,305) | | | (28) | % |
| Cost of sales | 159,309 | | | 221,848 | | | (62,539) | | | (28) | % |
| Gross profit | 116,872 | | | 161,638 | | | (44,766) | | | (28) | % |
| Operating expenses: | | | | | | | |
| Selling, general and administrative expenses | 89,834 | | | 111,589 | | | (21,755) | | | (19) | % |
| Deferred compensation plan expense/(income) | 1,564 | | | (387) | | | 1,951 | | | (504) | % |
| Amortization of intangible assets | 9,445 | | | 17,773 | | | (8,328) | | | (47) | % |
| Restructuring and other charges/(income) | 8,623 | | | — | | | 8,623 | | | — | % |
| Income/(loss) from operations | 7,406 | | | 32,663 | | | (25,257) | | | (77) | % |
| Other income/(expenses): | | | | | | | |
| Interest expense, net | (10,185) | | | (14,027) | | | 3,842 | | | (27) | % |
| Other income/(expense) | 2,135 | | | (1,558) | | | 3,693 | | | (237) | % |
| Income/(loss) before provision for income taxes | (644) | | | 17,078 | | | (17,722) | | | (104) | % |
| Income tax expense/(benefit) | (1,521) | | | 5,142 | | | (6,663) | | | (130) | % |
| Net income/(loss) | $ | 877 | | | $ | 11,936 | | | $ | (11,059) | | | (93) | % |
| Income (loss) attributable to non-controlling interests | — | | | (2) | | | 2 | | | (100) | % |
| Net income/(loss) available to Thermon Group Holdings, Inc. | $ | 877 | | | $ | 11,938 | | | $ | (11,061) | | | (93) | % |
| | | | | | | |
| As a percent of sales: | | | | | | | |
| Gross profit | 42.3 | % | | 42.1 | % | | 20 bps | | |
| Selling, general and administrative expenses | 32.5 | % | | 29.1 | % | | 340 bps | | |
| Income/(loss) from operations | 2.7 | % | | 8.5 | % | | -580 bps | | |
| Net income/(loss) | 0.3 | % | | 3.1 | % | | -280 bps | | |
| | | | | | | |
| Effective tax rate | (236.2) | % | | 30.1 | % | | | | |
Year Ended March 31, 2021 ("fiscal 2021") Compared to the Year Ended March 31, 2020 ("fiscal 2020")
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2021 filed with the SEC on May 27, 2021 for a discussion of the results of operations in fiscal 2021 as compared to fiscal 2020.
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, 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 accounting period.
For information on legal proceedings, see Note 15, "Commitments and Contingencies" to our consolidated financial statements contained elsewhere in this annual report, which is hereby incorporated by reference into this Item 7.
To bid on or secure certain contracts, we are required at times to provide a performance guaranty to our customers in the form of a surety bond, standby letter of credit or foreign bank guaranty. On March 31, 2022, we had in place standby letters of credit, bank guarantees and performance bonds totaling $9.8 million to back our various customer contracts. In addition, our
Indian subsidiary also has $4.8 million in customs bonds outstanding. Refer to Note 15, "Commitments and Contingencies" for more information on our letters of credit and bank guarantees.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations and funds available under our revolving credit facility. Our primary liquidity needs are to finance our working capital, capital expenditures, debt service needs and potential future acquisitions.
Cash and cash equivalents. At March 31, 2022, we had $41.4 million in cash and cash equivalents. We manage our global cash requirements by maintaining cash and cash equivalents at various financial institutions throughout the world where we operate. Approximately $15.3 million, or 37%, of these amounts were held in domestic accounts with various institutions and approximately $26.1 million, or 63%, of these amounts were held in accounts outside of the United States with various financial institutions. Of the non-U.S. cash noted above, $3.1 million of cash was held by our Russian affiliate. While we have cash needs at our various foreign operations, excess cash is available for distribution to the United States through intercompany dividends or debt reduction in Canada.
Generally, we seek to maintain a cash and cash equivalents balance between $30.0 and $40.0 million. We will encounter periods where we may be above or below this range, due to, for example, inventory buildup for anticipated seasonal demand in fall and winter months, related cash receipts from credit sales in months that follow, debt maturities, restructuring activities, larger capital investments, severe and/or protracted economic downturns, acquisitions, or some combination of the above activities. The Company continues to manage its working capital requirements effectively through optimizing inventory levels, doing business with credit-worthy customers, and extending payments terms with its supplier base.
Senior secured credit facility
On September 29, 2021, Thermon Group Holdings, Inc. (the “Company”), as a credit party and a guarantor, Thermon Holding Corp. (“THC” or the “U.S. Borrower”) and Thermon Canada Inc. (the “Canadian Borrower” and together with THC, the “Borrowers”), as borrowers, entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with several banks and other financial institutions or entities from time to time (the “Lenders”) and JPMorgan Chase Bank, N.A., as Administrative Agent (the “Agent”).
The Credit Agreement is an amendment and restatement of that certain Credit Agreement dated October 30, 2017 by and among Borrowers, the lenders time to time party thereto and JPMorgan Chase Bank, N.A. as administrative agent (the “Prior Credit Agreement”), and provides for the credit facilities.
See Note 11, “Long-Term Debt—Senior Secured Credit Facility” to our consolidated financial statements and accompanying notes thereto included in Item 8 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 7. At March 31, 2022, we had no outstanding borrowings under our revolving credit facility and $97.1 million of available capacity thereunder, after taking into account the borrowing base and letters of credit outstanding, which totaled $2.9 million. From time to time, we may choose to utilize our revolving credit facility to fund operations, acquisitions or other investments, despite having cash available within our consolidated group in light of the cost, timing and other business considerations.
As of March 31, 2022, we had $129.0 million of outstanding principal on our term loan A facility. 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 | % |
Future capital requirements
Our future capital requirements depend on many factors as noted throughout this report. We believe that, based on our current level of operations and related cash flows, plus cash on hand and available borrowings under our revolving credit facility, we will be able to meet our liquidity needs for the next 12 months and the foreseeable future.
For fiscal 2023, we expect our capital expenditures to approximate 3.0% to 3.5% of revenue. Additionally, we will be required to pay $7.9 million in principal payments and approximately $2.8 million in interest payments on our long-term debt in the next 12 months. Our estimate of interest expense above was derived from our variable interest rates at March 31, 2022, and
is subject to change. See further details Note 11, "Long-Term Debt." We also have payment commitments of $3.7 million, mostly related to long-term information technology contracts, of which $2.1 million are due within the next 12 months.
Strategic Investments
Our long-term plan includes investments in three key areas as we look to profitably grow the Company beyond its existing installed base.
First, we expect to diversify our revenues into adjacent markets like commercial, food & beverage, transportation and other non-oil and gas industries where we can continue to differentiate our offerings through quality, safety and customer service, while also aligning Thermon’s strategy around the energy transition toward a more sustainable global economy.
Second, we expect higher levels of investment in the emerging markets over the coming decades to meet the needs of a larger middle class and will be investing in resources to more quickly respond to the unique needs of those local markets.
Finally, we will continue expanding our technology enabled maintenance solutions, like our recently launched Genesis Network, which helps our customers more efficiently and safely monitor and maintain their heating systems by utilizing our software, analytics, hardware and process heating maintenance expert services.
These three initiatives will require incremental investments, both organic and inorganic, over a multi-year period, but we expect will result in a more diversified, sustainable and profitable company over time.
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| (dollars in thousands) |
| 2022 | | 2021 | | 2020 |
| Total cash provided by/(used in): | | | | | |
| Operating activities | $ | 28,754 | | | $ | 30,289 | | | $ | 70,726 | |
| Investing activities | (4,531) | | | (7,832) | | | (10,010) | |
| Financing activities | (22,658) | | | (28,205) | | | (46,540) | |
Year Ended March 31, 2022 ("fiscal 2022") Compared to the Year Ended March 31, 2021 ("fiscal 2021")
Net cash provided by/(used in) operating activities. Net cash provided by operating activities decreased by $1.5 million in fiscal 2022. The decrease is mostly attributable to the use of cash to fund net working capital accounts of $21.0 million, partially offset by a change in non-cash items and increase in net income totaling $19.5 million. Our net working capital position changed as a result of an overall increase in sales activity in fiscal 2022, which drove an increase in accounts receivable versus a large decline in accounts receivable in fiscal 2021, when sales were not trending positively.
Net cash provided by/(used in) investing activities. Net cash used in investing activities was $(4.5) million in fiscal 2022 and $(7.8) million in fiscal 2021 and relates to the purchase of capital assets, primarily to maintain the existing operations of the business and includes purchases and sales of equipment in our rental business.
Net cash provided by/(used in) financing activities. Net cash used in financing activities totaled $(22.7) million and $(28.2) million in fiscal 2022 and fiscal 2021, respectively, a comparative decrease in the use of cash in financing activities of $5.5 million, mostly attributable to higher principal and revolver payments in fiscal 2021.
Free Cash Flow (Non-GAAP)
In addition to evaluating our cash flow generation based upon operating, investing, and financing activities, the Company believes that the non-GAAP measure used in this section may provide investors and key stakeholders with another important perspective regarding our performance. The Company does not intend for this non-GAAP metric to be a substitute for the related GAAP measure, nor should it be viewed in isolation and without considering all relevant GAAP measurements. Moreover, our calculation may not be comparable to similarly titled measures reported by other companies. Refer to the reconciliation of cash provided by/(used in) operating activities to Free Cash Flow under "Non-GAAP Financial Measures" below.
We define “Free Cash Flow” as net cash provided by operating activities less cash used for the purchase of property, plant, and equipment, net of sales of rental equipment as well as proceeds from sales of land and buildings. This metric should not be interpreted to mean the remaining cash that is available for discretionary spending, dividends, share repurchases, acquisitions, or other purposes, as it excludes significant, mandatory obligations, such as principal payments on the Company’s long-term debt facility. Free cash flow is one measure that the Company uses internally to assess liquidity.
Free Cash Flow totaled $24.2 million for fiscal 2022 as compared to $22.5 million for fiscal 2021, an increase comparatively, primarily due to higher cash flows from operations as well as reduced purchases on property, plant and
equipment. Free Cash Flow for fiscal 2020 was $60.7 million driven primarily by strong cash flows from operating activities, which occurred prior to the impacts of the COVID-19 pandemic.
Year Ended March 31, 2021 ("fiscal 2021") Compared to the Year Ended March 31, 2020 ("fiscal 2020")
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2021 filed with the SEC on May 27, 2021 for a discussion of net cash provided by operating activities, net cash used in investing activities and net cash provided by (used in) financing activities in fiscal 2021 as compared to fiscal 2020.
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.
Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Our critical accounting policies are those that materially affect our financial statements and involve difficult, subjective or complex judgments by management. Our most significant financial statement estimates include revenue recognition, estimating allowances, specifically the allowance for doubtful accounts and the adjustment for excess and 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 company in the future, actual results may be materially different from the estimates.
Revenue recognition. Please refer to Note 4. "Revenue from Contracts with Customers" of our consolidated financial statements included below in Item 8 of this annual report for further discussion.
Estimating allowances, specifically the allowance for doubtful accounts and the adjustment for excess and obsolete 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 major end markets that drive demand for process heating include chemical and petrochemical, up-, mid- and downstream oil, gas, power generation, commercial, and rail and transit. From time to time, the Company has experienced significant credit losses with respect to individual customers; however, historically, these 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 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.
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 $2.2 million and $2.1 million as of March 31, 2022 and 2021, respectively. Although we have fully provided for these balances, we continue to pursue collection of these receivables.
We write down our inventory for estimated excess or obsolete inventory equal to the difference between the cost of inventory and estimated net realizable value based on assumptions of future demand and market conditions. Net realizable value is determined quarterly by comparing inventory levels of individual products and components to historical usage rates, current backlog and estimated future sales and by analyzing the age and potential applications of inventory, in order to identify specific products and components of inventory that are judged unlikely to be sold. Our finished goods inventory consists primarily of completed electrical cable that has been manufactured for various heat tracing solutions. Most of our manufactured product offerings are built to industry standard specifications that have general purpose applications and therefore are sold to a variety of customers in various industries. Some of our products, such as custom orders and ancillary components outsourced from third-party manufacturers, have more specific applications and therefore may be at a higher risk of inventory obsolescence. Inventory is written-off in the period in which the disposal occurs. Actual future write-offs of inventory for salability and obsolescence reasons may differ from estimates and calculations used to determine valuation allowances due to changes in customer demand, customer negotiations, product application, technology shifts and other factors. Our allowance for excess and obsolete inventories was $1.8 million and $1.8 million at March 31, 2022 and 2021, 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, additional provisions may be needed and our future results of operations could be adversely affected.
Valuation of long-lived, goodwill and other intangible assets. Refer to Note 1, "Organization and Summary of Significant Accounting Policies" of our consolidated financial statements included below in Item 8 of this annual report for further discussion. We determined that there was no impairment related to our goodwill, intangible assets, or long-lived assets during fiscal 2022, 2021, and 2020.
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. We accrue for probable losses from contingencies 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. 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 income/(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-based compensation expense and our results of operations could be impacted.
Non-GAAP Financial Measures
Disclosure in this annual report of "Adjusted EPS," "Adjusted EBITDA," "Adjusted Net Income," and "Free Cash Flow," which are "non-GAAP financial measures" as defined under the rules of the Securities and Exchange Commission (the "SEC"), are intended as supplemental measures of our financial performance that are not required by, or presented in accordance with, U.S. generally accepted accounting principles ("GAAP"). "Adjusted Net Income" and "Adjusted fully diluted earnings per share" ("Adjusted EPS") represents net income attributable to Thermon before costs related to acceleration of unamortized debt costs, the tax benefit from income tax rate reductions in certain foreign jurisdictions, amortization of intangible assets, the income tax effect on any non-tax adjustments, costs associated with our restructuring and other income/(charges), and income related to the Canadian Emergency Wage Subsidy, per fully-diluted common share in the case of Adjusted EPS. "Adjusted EBITDA" represents net income attributable to Thermon before interest expense (net of interest income), income tax expense, depreciation and amortization expense, stock-based compensation expense, income attributable to non-controlling interests, costs associated with our restructuring and other income/(charges), and income related to the Canadian Emergency Wage Subsidy. "Free cash flow" represents cash provided by operating activities less cash used for the purchase of property, plant and equipment, net of sales of rental equipment and proceeds from sales of land and buildings.
We believe these non-GAAP financial measures are meaningful to our investors to enhance their understanding of our financial performance and are frequently used by securities analysts, investors and other interested parties to compare our performance with the performance of other companies that report Adjusted EPS, Adjusted EBITDA, or Adjusted Net Income. Adjusted EPS, Adjusted EBITDA, and Adjusted Net Income should be considered in addition to, not as substitutes for, income from operations, net income, net income per share, and other measures of financial performance reported in accordance with GAAP. We provide Free Cash Flow as a measure of our liquidity. Note that our calculation of Adjusted EPS, Adjusted EBITDA, Adjusted Net Income, and Free Cash Flow may not be comparable to similarly titled measures reported by other companies.
The following table reconciles net income to Adjusted EBITDA for the periods presented:
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
| Net income available to Thermon Group Holdings, Inc. | $ | 20,092 | | | $ | 877 | | | $ | 11,938 | |
| Interest expense, net | 5,815 | | | 10,185 | | | 14,027 | |
| Income tax expense/(benefit) | 8,333 | | | (1,521) | | | 5,142 | |
| Depreciation and amortization | 20,205 | | | 20,722 | | | 28,275 | |
| EBITDA (non-GAAP) | $ | 54,445 | | | $ | 30,263 | | | $ | 59,382 | |
| Stock-based compensation | 3,803 | | | 3,728 | | | 4,960 | |
| Income/(loss) attributable to non-controlling interest | — | | | — | | | (2) | |
| Restructuring and other charges/(income) | (414) | | | 8,623 | | | — | |
| Loss on debt extinguishment | 2,569 | | | — | | | — | |
| Canadian Emergency Wage Subsidy | (1,952) | | | (6,412) | | | — | |
| Adjusted EBITDA (non-GAAP) | $ | 58,451 | | | $ | 36,202 | | | $ | 64,340 | |
The following table reconciles net income to Adjusted Net Income and Adjusted EPS for the periods presented:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended March 31, |
| | 2022 | | 2021 | | 2020 |
| Net income available to Thermon Group Holdings, Inc. | $ | 20,092 | | | $ | 877 | | | $ | 11,938 | |
| Acceleration of unamortized debt costs | — | | | 510 | | | 756 | |
| Tax expense/(benefit) for impact of rate reduction in foreign jurisdictions | 505 | | | 332 | | | (1,231) | |
| Withholding tax on dividend related to debt amendment | 301 | | | — | | | — | |
| Amortization of intangible assets | 8,790 | | | 9,445 | | | 17,773 | |
| Restructuring and other charges/(income) | (414) | | | 8,623 | | | — | |
| Loss on debt extinguishment | 2,569 | | | — | | | — | |
| Canadian Emergency Wage Subsidy | (1,952) | | | (6,412) | | | — | |
| Tax effect of financial adjustments | (1,999) | | | (2,450) | | | (4,447) | |
| Adjusted net income (non-GAAP) | $ | 27,892 | | | $ | 10,925 | | | $ | 24,789 | |
| | | | | | |
| Adjusted-fully diluted earnings per common share (non-GAAP) | $ | 0.83 | | | $ | 0.33 | | | $ | 0.75 | |
| | | | | | |
| Fully-diluted common shares - non-GAAP basis (thousands) | 33,515 | | | 33,341 | | | 33,149 | |
The following table reconciles cash provided by/(used in) operating activities to Free Cash Flow:
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| (dollars in thousands) |
| 2022 | | 2021 | | 2020 |
| Cash provided by/(used in) operating activities | $ | 28,754 | | | $ | 30,289 | | | $ | 70,726 | |
| Less: Cash provided by/(used for) purchases of property, plant, and equipment | (5,220) | | | (8,132) | | | (10,855) | |
| Plus: Sales of rental equipment | 689 | | | 300 | | | 603 | |
| Plus: Proceeds from the sale of property, plant and equipment | — | | | — | | | 242 | |
| Free Cash Flow (non-GAAP) | $ | 24,223 | | | $ | 22,457 | | | $ | 60,716 | |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
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| Page |
| Audited Financial Statements of Thermon Group Holdings, Inc. and its Consolidated Subsidiaries | |
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Thermon Group Holdings, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Thermon Group Holdings, Inc. and subsidiaries (the Company) as of March 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income/(loss), equity, and cash flows for each of the years in the three-year period ended March 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated May 26, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
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 opinion 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 $140,865 thousand of revenues over time using cost-to-cost percentage of completion or time and materials methodologies, for the year ended March 31, 2022.
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.
Austin, Texas
May 26, 2022
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Thermon Group Holdings, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Thermon Group Holdings, Inc. and subsidiaries' (the Company) internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income/(loss), equity, and cash flows for each of the years in the three-year period ended March 31, 2022, and the related notes (collectively, the consolidated financial statements), and our report dated May 26, 2022 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Austin, Texas
May 26, 2022
Thermon Group Holdings, Inc.
Consolidated Statements of Operations and Comprehensive Income/(Loss)
(Dollars in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2022 | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 |
| Sales | | $ | 355,674 | | | $ | 276,181 | | | $ | 383,486 | |
| Cost of sales | | 215,556 | | | 159,309 | | | 221,848 | |
| Gross profit | | 140,118 | | | 116,872 | | | 161,638 | |
| Operating expenses: | | | | | | |
| Selling, general and administrative expenses | | 93,054 | | | 89,834 | | | 111,589 | |
| Deferred compensation plan expense/(income) | | 283 | | | 1,564 | | | (387) | |
| Amortization of intangible assets | | 8,790 | | | 9,445 | | | 17,773 | |
| Restructuring and other charges/(income) | | (414) | | | 8,623 | | | — | |
| Income/(loss) from operations | | 38,405 | | | 7,406 | | | 32,663 | |
| Other income/(expenses): | | | | | | |
| Interest expense, net | | (5,815) | | | (10,185) | | | (14,027) | |
| Other income/(expense) | | (4,165) | | | 2,135 | | | (1,558) | |
| Income/(loss) before provision for income taxes | | 28,425 | | | (644) | | | 17,078 | |
| Income tax expense/(benefit) | | 8,333 | | | (1,521) | | | 5,142 | |
| Net income/(loss) | | 20,092 | | | 877 | | | 11,936 | |
| Income/(loss) attributable to non-controlling interests | | — | | | — | | | (2) | |
| Net income/(loss) available to Thermon Group Holdings, Inc. | | $ | 20,092 | | | $ | 877 | | | $ | 11,938 | |
| Other comprehensive income/(loss): | | | | | | |
| Net income/(loss) available to Thermon Group Holdings, Inc. | | $ | 20,092 | | | $ | 877 | | | $ | 11,938 | |
| Foreign currency translation adjustment | | (2,922) | | 28,615 | | | (15,485) | |
| Other | | (65) | | | (640) | | | 540 | |
| Total comprehensive income/(loss) | | $ | 17,105 | | | $ | 28,852 | | | $ | (3,007) | |
| Net income/(loss) per common share: | | | | | | |
| Basic | | $ | 0.60 | | | $ | 0.03 | | | $ | 0.36 | |
| Diluted | | 0.60 | | | 0.03 | | | 0.36 | |
| Weighted-average shares used in computing net income/(loss) per common share: | | | | | | |
| Basic | | 33,308,045 | | | 33,134,592 | | | 32,760,327 | |
| Diluted | | 33,514,561 | | | 33,340,954 | | | 33,148,670 | |
The accompanying notes are an integral part of these consolidated financial statements
Thermon Group Holdings, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share and per share data)
| | | | | | | | | | | |
| | March 31,
2022 | | March 31,
2021 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 41,445 | | | $ | 40,124 | |
| | | |
| Accounts receivable, net of allowances of $2,177 and $2,074 as of March 31, 2022 and 2021, respectively | 95,305 | | | 74,501 | |
| Inventories, net | 71,650 | | | 63,790 | |
| Contract assets | 19,626 | | | 11,379 | |
| Prepaid expenses and other current assets | 11,786 | | | 8,784 | |
| Income tax receivable | 4,626 | | | 8,231 | |
| Total current assets | $ | 244,438 | | | $ | 206,809 | |
| Property, plant and equipment, net of depreciation and amortization of $63,954 and $55,555 as of March 31, 2022 and 2021, respectively | 66,039 | | | 72,630 | |
| Goodwill | 212,754 | | | 213,038 | |
| Intangible assets, net | 94,908 | | | 103,784 | |
| Operating lease right-of-use assets | 10,534 | | | 12,619 | |
| Deferred income taxes | 1,211 | | | 2,586 | |
| Other long-term assets | 6,785 | | | 6,412 | |
| Total assets | $ | 636,669 | | | $ | 617,878 | |
| Liabilities and equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 33,567 | | | $ | 19,722 | |
| Accrued liabilities | 26,971 | | | 23,888 | |
| Current portion of long-term debt | 7,929 | | | 2,500 | |
| | | |
| Contract liabilities | 8,010 | | | 2,959 | |
| Lease liabilities | 3,624 | | | 3,511 | |
| Income taxes payable | 897 | | | 218 | |
| Total current liabilities | $ | 80,998 | | | $ | 52,798 | |
| Long-term debt, net of current maturities and deferred debt issuance costs and debt discounts of $640 and $2,983 as of March 31, 2022 and 2021, respectively | 120,431 | | | 143,017 | |
| Deferred income taxes | 17,943 | | | 21,006 | |
| Non-current lease liabilities | 9,659 | | | 12,373 | |
| Other non-current liabilities | 8,434 | | | 9,812 | |
| Total liabilities | $ | 237,465 | | | $ | 239,006 | |
| Equity | | | |
| Common stock: $.001 par value; 150,000,000 authorized; 33,364,722 and 33,225,808 shares issued and outstanding at March 31, 2022 and 2021, respectively | 33 | | | 33 | |
| Preferred stock: $.001 par value; 10,000,000 authorized; no shares issued and outstanding | — | | | — | |
| Additional paid in capital | 234,549 | | | 231,322 | |
| Accumulated other comprehensive loss | (38,906) | | | (35,919) | |
| Retained earnings | 203,528 | | | 183,436 | |
| | | |
| | | |
| Total equity | $ | 399,204 | | | $ | 378,872 | |
| Total liabilities and equity | $ | 636,669 | | | $ | 617,878 | |
The accompanying notes are an integral part of these consolidated financial statements
Thermon Group Holdings, Inc.
Consolidated Statements of Equity
(Dollars in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock Outstanding | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Non-controlling Interests | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Balances at March 31, 2019 | 32,624,200 | | | $ | 33 | | | $ | 223,040 | | | $ | 170,621 | | | $ | 4,204 | | | $ | (48,949) | | | $ | 348,949 | |
| Issuance of common stock in exercise of stock options | 159,062 | | | — | | | 1,016 | | | — | | | — | | | — | | | 1,016 | |
| Issuance of restricted stock as deferred compensation to employees and directors | 26,608 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock as deferred compensation to employees | 59,570 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock as deferred compensation to named executive officers | 47,378 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock compensation expense | — | | | — | | | 4,960 | | | — | | | — | | | — | | | 4,960 | |
| | | | | | | | | | | | | |
| Repurchase of employee stock units on vesting | — | | | — | | | (969) | | | — | | | — | | | — | | | (969) | |
| Net income/(loss) available to Thermon Group Holdings, Inc. | — | | | — | | | — | | | 11,938 | | | — | | | — | | | 11,938 | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | (15,485) | | | (15,485) | |
| | | | | | | | | | | | | |
| Other | — | | | — | | | — | | | — | | | — | | | 540 | | | 540 | |
| Remeasurement of non-controlling interest | — | | | — | | | (306) | | | — | | | 306 | | | — | | | — | |
| Purchase of non-controlling interest | — | | | — | | | — | | | — | | | (4,508) | | | — | | | (4,508) | |
| | | | | | | | | | | | | |
| Income attributable to non-controlling interest | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
| Balances at March 31, 2020 | 32,916,818 | | | $ | 33 | | | $ | 227,741 | | | $ | 182,559 | | | $ | — | | | $ | (63,894) | | | $ | 346,439 | |
| Issuance of common stock in exercise of stock options | 97,156 | | | — | | | 629 | | | — | | | — | | | — | | | 629 | |
| Issuance of common stock as deferred compensation to directors | 52,098 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock as deferred compensation to employees | 88,254 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock as deferred compensation to executive officers | 71,482 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock compensation expense | — | | | — | | | 3,728 | | | — | | | — | | | — | | | 3,728 | |
| | | | | | | | | | | | | |
| Repurchase of employee stock units on vesting | — | | | — | | | (784) | | | — | | | — | | | — | | | (784) | |
| Net income/(loss) available to Thermon Group Holdings, Inc. | — | | | — | | | — | | | 877 | | | — | | | — | | | 877 | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 28,615 | | | 28,615 | |
| Other | — | | | — | | | 8 | | | — | | | — | | | (640) | | | (632) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Balances at March 31, 2021 | 33,225,808 | | | $ | 33 | | | $ | 231,322 | | | $ | 183,436 | | | $ | — | | | $ | (35,919) | | | $ | 378,872 | |
| Issuance of common stock in exercise of stock options | 8,100 | | | | | 97 | | | — | | | — | | | — | | | 97 | |
| Issuance of common stock as deferred compensation to directors | 32,136 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock as deferred compensation to employees | 36,126 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock as deferred compensation to executive officers | 62,552 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock compensation expense | | | — | | | 3,803 | | | — | | | — | | | — | | 3,803 | |
| Repurchase of employee stock units on vesting | — | | | — | | | (673) | | | — | | | — | | | — | | | (673) | |
| Net income/(loss) available to Thermon Group Holdings, Inc. | — | | | — | | | — | | | 20,092 | | | — | | | — | | | 20,092 | |
| | | | | | | | | | | | | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | (2,922) | | | (2,922) | |
| | | | | | | | | | | | | |
| Other | — | | | — | | | — | | | — | | | — | | | (65) | | | (65) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Balances at March 31, 2022 | 33,364,722 | | | $ | 33 | | | $ | 234,549 | | | $ | 203,528 | | | $ | — | | | $ | (38,906) | | | $ | 399,204 | |
The accompanying notes are an integral part of these consolidated financial statements
Thermon Group Holdings, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands) | | | | | | | | | | | | | | | | | |
| Year Ended March 31, 2022 | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 |
| Operating activities | | | | | |
| Net income/(loss) | $ | 20,092 | | | $ | 877 | | | $ | 11,936 | |
| Adjustment to reconcile net income/(loss) to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 20,205 | | | 20,722 | | | 28,275 | |
| Amortization of debt costs | 596 | | | 1,525 | | | 1,885 | |
| | | | | |
| Loss on extinguishment of debt | 2,569 | | | — | | | — | |
| Stock compensation expense | 3,803 | | | 3,728 | | | 4,960 | |
| | | | | |
| Loss on sale of business, net of cash surrendered | 306 | | | 2,065 | | | — | |
| Deferred income taxes | (1,648) | | | (3,153) | | | (3,737) | |
| Long-term cross currency swap loss/(gain) | (774) | | | 5,842 | | | (2,580) | |
| Reserve (release) for uncertain tax positions | 77 | | | 79 | | | (408) | |
| | | | | |
| Remeasurement loss/(gain) on intercompany balances | (247) | | | (6,227) | | | 6,169 | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | (21,739) | | | 22,930 | | | 9,449 | |
| Inventories | (8,598) | | | (549) | | | 1,407 | |
| Contract assets | (3,292) | | | (2,693) | | | 12,220 | |
| Other current and non-current assets | (2,891) | | | (2,127) | | | (2,915) | |
| Accounts payable | 13,752 | | | (5,651) | | | 3,407 | |
| Accrued liabilities and non-current liabilities | 2,227 | | | (239) | | | (284) | |
| Income taxes payable and receivable | 4,316 | | | (6,840) | | | 942 | |
| Net cash provided by operating activities | $ | 28,754 | | | $ | 30,289 | | | $ | 70,726 | |
| Investing activities | | | | | |
| Purchases of property, plant and equipment | $ | (5,220) | | | $ | (8,132) | | | $ | (10,855) | |
| Sales of rental equipment | 689 | | | 300 | | | 603 | |
| Proceeds from the sale of property, plant and equipment | — | | | — | | | 242 | |
| | | | | |
| | | | | |
| | | | | |
| Net cash used in investing activities | $ | (4,531) | | | $ | (7,832) | | | $ | (10,010) | |
| Financing activities | | | | | |
| Proceeds from Term Loan A | $ | 139,793 | | | $ | — | | | $ | — | |
| | | | | |
| Payments on long-term debt and revolving credit facility | (178,914) | | | (64,963) | | | (51,883) | |
| Proceeds from revolving credit facility | 18,459 | | | 37,189 | | | 10,000 | |
| Issuance costs associated with debt financing | (1,265) | | | — | | | — | |
| Purchase of shares from non-controlling interests | — | | | — | | | (4,508) | |
| | | | | |
| Lease financing | (155) | | | (276) | | | (196) | |
| Issuance of common stock including exercise of stock options | 97 | | | 629 | | | 1,016 | |
| Repurchase of employee stock units on vesting | (673) | | | (784) | | | (969) | |
| | | | | |
| Net cash used in financing activities | $ | (22,658) | | | $ | (28,205) | | | $ | (46,540) | |
| Effect of exchange rate changes on cash and cash equivalents | (84) | | | 2,192 | | | (2,011) | |
| Change in cash and cash equivalents | $ | 1,481 | | | $ | (3,556) | | | $ | 12,165 | |
| Cash, cash equivalents and restricted cash at beginning of period | 42,450 | | | 46,006 | | | 33,841 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 43,931 | | | $ | 42,450 | | | $ | 46,006 | |
| Cash paid for interest and income taxes | | | | | |
| Interest paid | $ | 5,700 | | | $ | 8,736 | | | $ | 12,397 | |
| Income taxes paid | 9,788 | | | 9,667 | | | 12,614 | |
| Income tax refunds received | 4,059 | | | 2,070 | | | 4,842 | |
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 share and per share data) |
| March 31, 2022 |
1. Organization and Summary of Significant Accounting Policies
Organization
For a history of the organization of the Company, please refer to Part I, Item 1. Business Overview in this annual report on Form 10-K. Thermon Group Holdings, Inc. and its direct and indirect subsidiaries are referred to collectively as "we," "our" or the "Company" herein.
COVID-19
The COVID-19 pandemic and the measures being taken to address and limit the spread of the virus and its variants have adversely affected the economies and financial markets of many countries, resulting in an economic downturn that negatively impacted, and may impact in the future, global demand for our products and services. Although we believe the general economic environment in which we operate has improved significantly since the onset of the COVID-19 pandemic, we may experience a decline in the demand of our products and services or disruptions in raw materials or labor required for manufacturing that could materially and negatively impact our business, financial condition, results of operation and overall financial performance in future periods. The effect of loosening pandemic restrictions along with pent-up demand from periods of stagnant lockdown and uncertainty has combined to strengthen our customer demand from most regions we serve, especially in our US-LAM and Canada segments, defined below. We continue to monitor the pandemic restrictions and other effects the pandemic may have on our business.
Basis of Consolidation and Presentation
Our consolidated financial statements are prepared in conformity with generally accepted accounting principles in the United States ("GAAP"). 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 non-controlling investors is recorded as non-controlling interests. All significant inter-company balances and transactions have been eliminated in consolidation. Consolidated subsidiaries domiciled in foreign countries comprised approximately 57%, 65% and 59%, of the Company's consolidated sales for fiscal 2022, 2021 and 2020, respectively, and 62% and 65%, of the Company's consolidated total assets at March 31, 2022 and 2021, respectively. In our opinion, the accompanying consolidated financial statements present fairly our financial position at March 31, 2022 and 2021, and the results of operations for the years ended March 31, 2022, 2021, and 2020. Certain prior year amounts in "Deferred compensation plan expense/(income)" on our consolidated statements of operations and comprehensive income/(loss) have been reclassified to conform with the current year's presentation. Also refer to the section below titled, "Correction of an Error" for further discussion of changes from prior periods.
Segment Reporting
We maintain four reportable segments based on the four geographic countries or regions in which we operate: (i) United States and Latin America ("US-LAM"), (ii) Canada, (iii) Europe, Middle East and Africa ("EMEA") and (iv) Asia-Pacific ("APAC"). Profitability within our segments is measured by operating income. See Note 19, "Segment Information" for financial data relating to our four reportable geographic segments.
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 the 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 Canadian 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 2022 and 2021, we recorded $1,449 and $4,236 to "Cost of sales" in CEWS subsidies in our consolidated statement of operations. Also during fiscal 2022, we recorded $504 and $2,176 to "Selling, general and administrative expenses" in CEWS subsidies in our consolidated statements of operations and comprehensive income/(loss). At March 31, 2022 and 2021, we capitalized zero and $430 in "Inventories, net" in our consolidated balance sheets. As of the end of fiscal 2022, we are no longer receiving CEWS benefits.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows.
| | | | | | | | | | | | | | | | | |
| March 31,
2022 | | March 31,
2021 | | March 31,
2020 |
| Cash and cash equivalents | $ | 41,445 | | | $ | 40,124 | | | $ | 43,237 | |
| Restricted cash included in prepaid expenses and other current assets | 2,486 | | | 1,962 | | | 2,421 | |
| Restricted cash included in other long-term assets | — | | | 364 | | | 348 | |
| Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | $ | 43,931 | | | $ | 42,450 | | | $ | 46,006 | |
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 its 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, gas, power generation, 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.
At March 31, 2022 and 2021, we had $5,352 and $6,214, respectively, of balances billed but not paid by customers under retention provisions of our contracts. Retention balances typically represent hold backs against project completion.
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 $2,177 and $2,074 as of March 31, 2022 and 2021, 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, 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 | |
| Additions to reserve | 683 | |
| Write-off of uncollectible accounts | (580) | |
| Balance at March 31, 2022 | $ | 2,177 | |
Inventories
Inventories, principally raw materials and finished goods, are valued at the lower of cost (weighted average cost) or 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 our process heating business. 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
The core principle of the revenue recognition 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. Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC 606") requires more judgment than previous guidance, as management will need to consider the terms of the contract and all relevant facts and circumstances when applying the revenue 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 contracts 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 satisfied.
Description of Product and Service Offerings and Revenue Recognition Policies
We 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 lighting, filtration, and transportation products and (ii) services, including design optimization, engineering, installation and maintenance services required to deliver comprehensive solutions to complex projects. The performance obligations associated with our product sales are generally recognized at a point in time. Where products and services are provided together under a time and materials contract, the performance obligations are satisfied over time. We also provide fixed-fee turnkey solutions consisting of products and services 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. Revenues associated with the rental of the temporary power products have historically been less than 5% of our total revenues and are recognized in accordance with 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. 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. 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 |
| Buildings and improvements | | | 10 | - | 30 |
| Machinery and equipment | | | 3 | - | 25 |
| Office furniture and equipment | | | 3 | - | 10 |
| Internally developed software | | | 5 | - | 7 |
Goodwill and Other Intangible Assets
We conduct a required annual review of goodwill for potential impairment in the fourth quarter, or sooner if events or changes in circumstances indicate that the fair value of a reporting unit is below its carrying value. Our reporting units are our operating segments: US-LAM, Canada, EMEA, and APAC. We have the option to perform a qualitative assessment to satisfy 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. We identified the Russo-Ukrainian war as a trigger for impairment testing. We elected to test our goodwill and other intangible assets using the qualitative method in fiscal 2022. For a full quantitative assessment, 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 allocated to the reporting unit. In performing the 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 qualitative test include, but are not limited to, the following: (i) macroeconomic conditions; (ii) industry and market considerations; (iii) costs, such as increases in raw materials, labor, or other costs; (iv) our overall financial performance; 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 significant adverse changes in operating results, market conditions, or changes in management’s business strategy indicate that there may be a probable indicator of impairment. It is possible that the assumptions used by management related to the evaluation may change or that actual results may vary significantly from management’s estimates. In fiscal 2022, 2021 and 2020, 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. If a full quantitative assessment is warranted, 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. In fiscal 2022, we performed a qualitative assessment. 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 2022. Additionally, there was no impairment of our indefinite life intangible assets during fiscal 2021 and 2020.
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 related financing. Additionally, for any unscheduled principal payments the Company will record incremental 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 2022, 2021 and 2020 were $596, $1,525 and $1,885, respectively.
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 2022, 2021, and 2020, 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 Topic 718 Compensation-Stock Compensation ("ASC 718"), which requires that share-based payments (to the extent they are compensatory) be recognized in our consolidated statements of operations and comprehensive income/(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 generally 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-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.
Foreign Currency Transactions and Translation
Exchange rate 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 weighted average exchange rates 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. Specifically, we will replace any defective product within one year from the date of 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 selling, general and administrative expenses in our consolidated statements of operations and comprehensive income/(loss). Research and development expenses include salaries, direct material costs incurred, plus building and other overhead expenses. The amounts expensed for fiscal 2022, 2021 and 2020 were $6,436, $7,466 and $8,378, respectively.
Shipping and Handling Cost
The Company includes shipping and handling as part of cost of sales and freight due from customers is included as part of sales.
Economic Dependence
As of March 31, 2022 and 2021, no one customer represented more than 10% of the Company's accounts receivable balance. In fiscal 2022, 2021 and 2020, no one customer represented more than 10% of sales.
Correction of an Error
During the second quarter of fiscal 2022, we identified an error in our previously issued unaudited condensed consolidated financial statements as of and for the three months ended June 30, 2021, as well as our consolidated financial statements as of and for the three months and year ended March 31, 2021. The error was due to underreported warranty costs associated with the operational execution of a large project in our US-LAM segment that completed in a prior year for which we are supplying engineering services, installation services, and equipment. Management evaluated the materiality of the error from a qualitative and quantitative perspective and concluded that the error was not material to any one quarterly or annual period. Accordingly, we corrected the error in the consolidated balance sheets at March 31, 2021 and consolidated statements of operations and comprehensive income/(loss) for the three and twelve months ended March 31, 2021. We also corrected the
error in the unaudited condensed consolidated balance sheets at June 30, 2021, and unaudited condensed consolidated statements of operations and comprehensive income/(loss) for the three months ended June 30, 2021. The corrected financial statements for the periods in this annual report are as follows:
| | | | | | | | | | | | | | | | | |
| Consolidated Balance Sheets | March 31, 2021 | | | | March 31, 2021 |
| as reported | | Adjustments | | as corrected |
| Accrued liabilities | $ | 23,517 | | | $ | 371 | | | $ | 23,888 | |
| Deferred income taxes | 21,088 | | | (82) | | | 21,006 | |
| Retained earnings | 183,725 | | | (289) | | | 183,436 | |
| | | | | | | | | | | | | | | | | |
| Consolidated Statements of Operations and Comprehensive Income/(loss) | Three Months Ended March 31, 2021 | | | | Three Months Ended March 31, 2021 |
| as reported | | Adjustments | | as corrected |
| Sales | $ | 73,323 | | | $ | — | | | $ | 73,323 | |
| Cost of sales | 46,090 | | | 371 | | | 46,461 | |
| Gross profit | 27,233 | | | (371) | | | 26,862 | |
| Net income/(loss) | $ | (763) | | | $ | (288) | | | $ | (1,051) | |
| Net income/(loss) per common share: | | | | | |
| Basic | $ | (0.02) | | | $ | (0.01) | | | $ | (0.03) | |
| Diluted | $ | (0.02) | | | $ | (0.01) | | | $ | (0.03) | |
| | | | | | | | | | | | | | | | | |
| Consolidated Statements of Operations and Comprehensive Income/(loss) | Twelve Months Ended March 31, 2021 | | | | Twelve Months Ended March 31, 2021 |
| as reported | | Adjustments | | as corrected |
| Sales | $ | 276,181 | | | $ | — | | | $ | 276,181 | |
| Cost of sales | 158,938 | | | 371 | | | 159,309 | |
| Gross profit | 117,243 | | | (371) | | | 116,872 | |
| Net income/(loss) | $ | 1,165 | | | $ | (288) | | | $ | 877 | |
| Net income/(loss) per common share: | | | | | |
| Basic | $ | 0.04 | | | $ | (0.01) | | | $ | 0.03 | |
| Diluted | $ | 0.03 | | | $ | 0.00 | | | $ | 0.03 | |
Recent Accounting Pronouncements
Financial Instruments - In June 2016, the FASB issued Accounting Standards Update 2016-13, 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 adopted this standard effective April 1, 2020, and such adoption did not have a material impact on our consolidated financial statements.
Intangibles - In January 2017, the FASB issued Accounting Standards Update 2017-04, Intangibles- Goodwill and Other (“ASC 350”), which amends and 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 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, 2022, 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"): Simplifying the Accounting for Income Taxes. This update amends ASC 740 to simplify certain requirements related to income taxes, specifically as it relates to interim period accounting for changes in tax law and year-to-date loss limitation in interim period accounting. The new standard is effective for fiscal years beginning after December 15, 2020. We adopted this standard effective April 1, 2021, and such adoption did not have a material impact on our consolidated financial statements.
Business Combinations - In October 2021, the FASB issued Accounting Standards Update 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASC 805"). This update 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 intend to evaluate the option to early adopt should we execute a business combination before mandatory adoption. Adopting this standard could have a material impact on revenue associated with an acquired business.
Government Assistance - In November 2021, the FASB issued Accounting Standards Update 2021-10, Government Assistance, which creates new Codification Topic 832 (government assistance). This new topic addresses the requirement for disclosures when an entity receives government assistance. The requirements state the entity should disclose the nature of the transactions and the related accounting policies used, the line items on the balance sheet and income statement that are affected and the amounts applicable to each financial statement line item, and significant terms and conditions of the transactions. Topic 832 is effective for all public business entities in annual periods in fiscal years beginning after December 15, 2021. Early application is permitted. We have early adopted this standard effective October 1, 2021, and it did not have a material impact on our financial statements.
2. Fair Value Measurements
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, 2022 and 2021, no assets or liabilities were valued using Level 3 criteria.
Information about our financial assets and liabilities measured at fair value are as follows (our outstanding principal amount of the senior secured facility is reported at carrying value):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | March 31, 2021 | | |
| | Carrying
Value | | Fair Value | | Carrying
Value | | Fair Value | | Valuation Technique |
| Financial Assets | | | | | | | | | |
| Deferred compensation plan assets | $ | 5,391 | | | $ | 5,391 | | | $ | 5,047 | | | $ | 5,047 | | | Level 1 - Market Approach |
| Foreign currency contract forwards assets | 105 | | | 105 | | | 61 | | | 61 | | | Level 2 - Market Approach |
| Financial Liabilities | | | | | | | | | |
| Outstanding principal amount of senior secured credit facility | $ | 129,000 | | | $ | 128,355 | | | $ | 148,500 | | | $ | 148,871 | | | Level 2 - Market Approach |
| Deferred compensation plan liabilities | 4,837 | | | 4,837 | | | 4,608 | | | 4,608 | | | Level 1 - Market Approach |
| Foreign currency contract forwards liabilities | — | | | — | | | 32 | | | 32 | | | Level 2 - Market Approach |
| | | | | | | | | |
At March 31, 2022 and 2021, 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.
Cross-Currency Swap
On September 29, 2021, we terminated a long-term cross-currency swap we previously entered into through transactions related to the amendment to our term loan and revolving credit facility. The previous intercompany receivable, for which we had the swap, was settled with us by our wholly-owned Canadian subsidiary, Thermon Canada Inc. Refer to Note 11, "Long-Term Debt" for more information regarding our debt transactions.
Before the termination mentioned above, the Company entered into the long-term cross-currency swap to hedge the currency rate fluctuations related to an intercompany receivable. We did not designate the cross currency swap as a cash flow hedge under ASC 815, Derivatives and Hedging ("ASC 815"). Through March 31, 2022, we recorded $441 of unrealized mark-to-market gains on the cross-currency swap which is reported as "Other income and expense," in the consolidated statements of operations and comprehensive income/(loss). Cross currency swap contracts are measured on a recurring basis at fair value and are classified as Level 2 measurements. For the year ended March 31, 2022, the gain on the long-term cross currency swap derivative contract was more than offset by unrealized losses on the intercompany note of $(418), resulting in a net gain of $23.
Deferred Compensation Plan Assets
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. Please refer to 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 address 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, 2022 and 2021, the notional amounts of forward contracts as well as the related fair values were as follows:
| | | | | | | | | | | |
| March 31, 2022 | | March 31, 2021 |
| Russian Ruble | $ | — | | | $ | 3,000 | |
| | | |
| Canadian Dollar | 4,000 | | | 5,500 | |
| South Korean Won | 2,250 | | | 5,000 | |
| | | |
| Mexican Peso | — | | | 1,500 | |
| Australian Dollar | 1,000 | | | 900 | |
| | | |
| Great Britain Pound | — | | | 500 | |
| | | |
| | | |
| | | |
| Total notional amounts | $ | 7,250 | | | $ | 16,400 | |
Recognized foreign currency gains or losses related to our forward contracts in the accompanying consolidated statements of operations and comprehensive income/(loss) were losses of $(1,586), $(811) and $(437) for fiscal 2022, 2021 and 2020, 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. The Company realized net foreign currency gains and (losses) of $(1,937), $283, and $(580) for fiscal 2022, 2021, and 2020, respectively. Foreign currency gains and losses are recorded within other expense/(income) in our consolidated statements of operations and comprehensive income/(loss).
3. Leases
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. 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 that 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 and lease liabilities. Certain leases also include options to purchase the leased 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 the 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 the ease with which funds can be drawn from the debt facilities already established within the United States. With this in mind, the Company has utilized its U.S. credit facility rate as the worldwide incremental borrowing rate. The Company used incremental borrowing rates as of April 1, 2019 for operating leases that commenced prior to April 1, 2019 to establish the lease liabilities. For operating leases that commenced during the year ended March 31, 2022, 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, 2022 | | March 31, 2021 |
| Weighted average remaining lease term | | | |
| Operating | 5.4 | | 6.0 |
| Finance | 2.5 | | 3.1 |
| | | |
| Weighted average discount rate | | | |
| Operating | 4.72 | % | | 4.81 | % |
| Finance | 6.18 | % | | 6.56 | % |
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| Assets | | Classification | | March 31, 2022 | | March 31, 2021 | | |
| Operating | | Operating lease right-of-use assets | | $ | 10,534 | | | $ | 12,619 | | | |
| Finance | | Property, plant and equipment | | 351 | | | 426 | | | |
| Total right-of-use assets | | | | $ | 10,885 | | | $ | 13,045 | | | |
| | | | | | | | |
| Liabilities | | | | | | | | |
| Current | | | | | | | | |
| Operating | | Lease liabilities | | $ | 3,472 | | | $ | 3,383 | | | |
| Finance | | Lease liabilities | | 152 | | | 128 | | | |
| Non-current | | | | | | | | |
| Operating | | Non-current lease liabilities | | 9,476 | | | 12,027 | | | |
| Finance | | Non-current lease liabilities | | 183 | | | 346 | | | |
| Total lease liabilities | | | | $ | 13,283 | | | $ | 15,884 | | | |
Supplemental statement of operations information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Lease expense | | Classification | | | | Year Ended March 31, 2022 | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 |
| Operating lease expense | | Selling, general, and administrative expenses | | | | $ | 4,164 | | | $ | 4,697 | | | $ | 3,835 | |
| | | | | | | | | | |
| Finance lease expense: | | | | | | | | | | |
| Amortization of ROU assets | | Selling, general, and administrative expenses | | | | 166 | | | 266 | | 266 |
| Interest expense on finance lease liabilities | | Interest expense | | | | 27 | | | 21 | | 41 |
| | | | | | | | | | |
| Short-term lease expense | | Selling, general, and administrative expenses | | | | 248 | | | 240 | | | 1,117 | |
| Net lease expense | | | | | | $ | 4,605 | | | $ | 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 | | Year Ended March 31, 2022 | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 |
| Operating cash used for operating leases | | $ | 4,538 | | | $ | 4,566 | | | $ | 3,523 | |
| Operating cash flows used for finance leases | | 27 | | | 39 | | | 41 | |
| Financing cash flows used for finance leases | | 154 | | | 276 | | | 259 | |
| | | | | | |
Future lease payments under non-cancellable leases as of March 31, 2022 were as follows:
| | | | | | | | | | | | | | |
| Future Lease Payments | | Operating Leases | | Finance Leases |
| Twelve months ending March 31, | | | | |
| 2023 | | $ | 4,064 | | | $ | 170 | |
| 2024 | | 2,516 | | 136 |
| 2025 | | 2,049 | | 66 |
| 2026 | | 1,750 | | 10 |
| 2027 | | 1,713 | | 1 |
| Thereafter | | 2,847 | | — |
| Total lease payments | | $ | 14,939 | | | $ | 383 | |
| Less imputed interest | | (1,991) | | (48) |
| Total lease liability | | $ | 12,948 | | | $ | 335 | |
4. Revenue from Contracts with Customers
Please refer to Note 1, "Organization and Summary of Significant Accounting Policies" for more information regarding our revenue recognition policy.
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 and that 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 when obligations under the terms of the contract with the customer 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 approximately 60.4%, 58.6% and 59.6% of revenue for the fiscal year ended March 31, 2022, 2021, and 2020, respectively
Our revenues 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 39.6%, 41.4% and 40.4% of revenue for the fiscal years ended March 31, 2022, 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, 2022, revenues associated with our open performance obligations totaled $156,229, representing our combined backlog and deferred revenue. Within this amount, approximately $11,655 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.
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, 2022 and 2021, contract assets were $19,626 and $11,379, respectively. There were no impairment losses recognized on our contract assets for the year ended March 31, 2022 and 2021. As of March 31, 2022 and 2021, contract liabilities were $8,010 and $2,959, respectively. The majority of contract liabilities at March 31, 2021 were recognized in revenue as of March 31, 2022.
Disaggregation of Revenue
We disaggregate our revenue from contracts with customers by geographic location as well as revenue 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.
Revenue recognized at a point-in-time based on when control transitions to the customer and is generally related to our product sales. Moreover, 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 service to the customer.
Disaggregation of revenues from contracts with customers for fiscal 2022, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, 2022 | | |
| | Revenues recognized at point in time | | Revenues recognized over time | | Total | | | | | | |
| United States and Latin America | | $ | 75,115 | | | $ | 79,072 | | | $ | 154,187 | | | | | | | |
| Canada | | 92,071 | | | 23,371 | | | 115,442 | | | | | | | |
| Europe, Middle East and Africa | | 27,306 | | | 27,431 | | | 54,737 | | | | | | | |
| Asia-Pacific | | 20,317 | | | 10,991 | | | 31,308 | | | | | | | |
| Total revenues | | $ | 214,809 | | | $ | 140,865 | | | $ | 355,674 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | 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 | |
5. Net Income/(Loss) per Common Share
Basic net income/(loss) per common share is computed by dividing net income/(loss) available to Thermon Group Holdings, Inc. by the weighted average number of common shares outstanding during each period. Diluted net income/(loss) per common share is computed by dividing net income/(loss) 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 assume that the associated performance targets will be met at the target level of performance for purposes of calculating diluted net income per common 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/(loss) per common share and diluted net income/(loss) per common share for fiscal 2022, 2021, and 2020, respectively, is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2022 | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 |
| Basic net income/(loss) per common share | | | | | | |
| Net income/(loss) available to Thermon Group Holdings, Inc. | | $ | 20,092 | | | $ | 877 | | | $ | 11,938 | |
| Weighted-average common shares outstanding | | 33,308,045 | | | 33,134,592 | | | 32,760,327 | |
| Basic net income/(loss) per common share | | $ | 0.60 | | | $ | 0.03 | | | $ | 0.36 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2022 | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 |
| Diluted net income/(loss) per common share | | | | | | |
| Net income/(loss) available to Thermon Group Holdings, Inc. | | $ | 20,092 | | | $ | 877 | | | $ | 11,938 | |
| Weighted-average common shares outstanding | | 33,308,045 | | | 33,134,592 | | | 32,760,327 | |
| Common share equivalents: | | | | | | |
| Stock options issued | | 2,231 | | | 27,306 | | | 134,777 | |
| Restricted and performance stock units issued | | 204,285 | | | 179,056 | | | 253,566 | |
| Weighted average shares outstanding – dilutive | | 33,514,561 | | | 33,340,954 | | | 33,148,670 | |
| Diluted net income/(loss) per common share | | $ | 0.60 | | | $ | 0.03 | | | $ | 0.36 | |
For the year ended March 31, 2022, 2021, and 2020, 110,923, 85,322 and zero equity awards, respectively, were not included in the calculation of diluted net income/(loss) per common share since they would have had an anti-dilutive effect.
6. Inventories
Inventories consisted of the following at March 31:
| | | | | | | | | | | |
| March 31, |
| 2022 | | 2021 |
| Raw materials | $ | 41,389 | | | $ | 33,485 | |
| Work in process | 6,294 | | | 4,071 | |
| Finished goods | 25,802 | | | 28,008 | |
| | 73,485 | | | 65,564 | |
| Valuation reserves | (1,835) | | | (1,774) | |
| Inventories, net | $ | 71,650 | | | $ | 63,790 | |
The following table summarizes the annual changes in our valuation reserve accounts:
| | | | | | | | |
| |
| | |
| | |
| Balance as of March 31, 2020 | $ | 2,045 | |
| Additions in reserve | 133 | |
| Charged to reserve | (404) | |
| Balance as of March 31, 2021 | 1,774 | |
| Additions in reserve | 389 | |
| Charged to reserve | (328) | |
| Balance as of March 31, 2022 | $ | 1,835 | |
7. Property, Plant and Equipment
Property, plant and equipment consisted of the following at March 31:
| | | | | | | | | | | |
| March 31, |
| 2022 | | 2021 |
| Land, buildings and improvements | $ | 57,306 | | | $ | 57,317 | |
| Machinery and equipment | 48,365 | | | 47,138 | |
| Office furniture and equipment | 17,014 | | | 15,375 | |
| Internally developed software | 5,851 | | | 7,336 | |
| Construction in progress | 1,457 | | | 1,019 | |
| Property, plant and equipment at cost | 129,993 | | | 128,185 | |
| Accumulated depreciation | (63,954) | | | (55,555) | |
| Property, plant and equipment, net | $ | 66,039 | | | $ | 72,630 | |
| | | |
Depreciation expense was $11,415, $11,277 and $10,502, in fiscal 2022, 2021, and 2020, respectively.
Included within depreciation expense was amortization of internally developed software of $346, $766, and $790, in fiscal 2022, 2021 and 2020, respectively.
8. Goodwill and Other Intangible Assets
The carrying amount of goodwill for all reporting segments as of March 31, 2022, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | US-LAM | | Canada | | EMEA | | APAC | | Total |
| Balance as of March 31, 2020 | | $ | 62,725 | | | $ | 107,739 | | | $ | 18,890 | | | $ | 8,624 | | | $ | 197,978 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Foreign currency translation impact | | — | | | 13,811 | | | 1,249 | | | — | | | 15,060 | |
| Balance as of March 31, 2021 | | $ | 62,725 | | | $ | 121,550 | | | $ | 20,139 | | | $ | 8,624 | | | $ | 213,038 | |
| | | | | | | | | | |
| Foreign currency translation impact | | — | | | 768 | | | (1,052) | | | — | | | (284) | |
| Balance as of March 31, 2022 | | $ | 62,725 | | | $ | 122,318 | | | $ | 19,087 | | | $ | 8,624 | | | $ | 212,754 | |
In the fourth quarter of fiscal 2022, we performed our annual goodwill and intangible assessments including our indefinite life trademarks using the qualitative assessment approach. Based on the goodwill impairment assessment, it was not more likely than not that the carrying value exceeded the estimated fair value of our reporting units. There was no impairment of goodwill, intangible assets as of the respective reporting periods. If the overall economic conditions in our key end markets, or other factors specific to the Company change, it could negatively impact the Company's future impairment tests. We will continue to monitor our reporting unit's goodwill and asset valuations and test for potential impairments until the overall market conditions improve.
Our total intangible assets at March 31, 2022, and 2021 consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Carrying Amount at March 31, 2022 | | Accumulated Amortization | | Net Carrying Amount at March 31, 2022 | | Gross Carrying Amount at March 31, 2021 | | Accumulated Amortization | | Net Carrying Amount at March 31, 2021 |
| Products | | $ | 66,669 | | | $ | (29,445) | | | $ | 37,224 | | | $ | 66,250 | | | $ | (22,635) | | | $ | 43,615 | |
| Trademarks | | 45,222 | | | (1,517) | | | 43,705 | | | 45,581 | | | (1,289) | | | 44,292 | |
| Developed technology | | 9,946 | | | (5,933) | | | 4,013 | | | 10,028 | | | (5,486) | | | 4,542 | |
| Customer relationships | | 113,413 | | | (103,900) | | | 9,513 | | | 113,789 | | | (102,911) | | | 10,878 | |
| Certifications | | 453 | | | — | | | 453 | | | 457 | | | — | | | 457 | |
| | | | | | | | | | | | |
| Total | | $ | 235,703 | | | $ | (140,795) | | | $ | 94,908 | | | $ | 236,105 | | | $ | (132,321) | | | $ | 103,784 | |
Generally, trademarks and certifications have indefinite lives, except for one trademark in the U.S. With a gross carrying amount of $1,820, it has a useful life of 8 years. Developed technology and products have estimated lives of 20 years and 10 years, respectively. Customer relationships intangibles associated with THS, with a gross carrying amount of $11,510, have a useful life of 17 years. Customer relationships intangibles in the U.S., with a gross carrying amount of $5,962, have a useful life of 8 years. The weighted average useful life for the definite-lived intangibles is 12 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, 2022 and 2021 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 $8,790, $9,445, and $17,773 in fiscal 2022, 2021 and 2020, respectively for intangible assets. Annual amortization of intangible assets for the next five fiscal years and thereafter will approximate the following:
| | | | | |
| 2023 | $ | 8,808 | |
| 2024 | 8,160 | |
| 2025 | 7,836 | |
| 2026 | 7,836 | |
| 2027 | 7,835 | |
| Thereafter | 10,578 | |
| Total | $ | 51,053 | |
9. Accrued Liabilities
Accrued current liabilities consisted of the following:
| | | | | | | | | | | |
| | March 31,
2022 | | March 31,
2021 |
| Accrued employee compensation and related expenses | $ | 16,235 | | | $ | 11,765 | |
| Accrued interest | 277 | | | 648 | |
| Customer prepayment | 405 | | | 283 | |
| Warranty reserve | 557 | | | 621 | |
| Professional fees | 2,540 | | | 2,361 | |
| Sales tax payable | 2,758 | | | 2,404 | |
Other(1) | 4,199 | | | 5,806 | |
| Total accrued current liabilities | $ | 26,971 | | | $ | 23,888 | |
(1) - included in Other is accrued warranty-related costs of $2,523 and $4,380, respectively, associated with the operational execution of a US-LAM project that was completed previously.
10. Short-Term Revolving Credit Facilities
Under the Company’s senior secured revolving credit facility described below in Note 11, “Long-Term Debt,” the Company had no outstanding borrowings at March 31, 2022 and March 31, 2021.
11. Long-Term Debt
Long-term debt consisted of the following:
| | | | | | | | | | | |
| | March 31,
2022 | | March 31,
2021 |
| Variable Rate Term Loan B due October 2024, net of deferred debt issuance costs and debt discounts of $2,983 as of March 31, 2021 | $ | — | | | $ | 145,517 | |
| Variable Rate Term Loan A due September 2026 net of deferred debt issuance costs of $640 as of March 31, 2022 | 128,360 | | | — | |
| Less current portion | (7,929) | | | (2,500) | |
| Total | $ | 120,431 | | | $ | 143,017 | |
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 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 March 31, 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 certain 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 certain 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 March 31, 2022, we had no outstanding borrowings under the Revolving Credit Facility. We had $97,052 of available borrowing capacity thereunder after taking into account the borrowing base and $2,948 of outstanding letters of credit. 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 March 31, 2022 were 2.62% for the Canadian Term Loan Facility, and 1.96% for the U.S. Term Loan Facility. Interest expense has been presented net of interest income on our condensed consolidated statements of operations and comprehensive income/(loss).
Maturities of long-term debt principal payments are as follows for the fiscal years ended March 31:
| | | | | | | | |
| 2023 | | $ | 7,929 | |
| 2024 | | 10,572 | |
| 2025 | | 11,453 | |
| 2026 | | 14,097 | |
| 2027 | | 84,949 | |
| Total | | $ | 129,000 | |
12. Related-Party Transactions
In connection with the TPS transaction, one of the former TPS principals (the "TPS Minority Shareholder") retained 25% of the ownership of the entities holding the TPS business unit. During the fiscal year ended March 31, 2017, this individual, together with the two other former principals of TPS, 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 TPS transaction.
On April 2, 2018, the TPS Minority Shareholder provided the Company notice that he was exercising his option to sell one-half (12.5%) of his remaining equity interest 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 2, 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 Company. 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 fiscal year ended March 31, 2019. The Company paid $4,508 to purchase the remaining 12.5% non-controlling interest on August 1, 2019.
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 10% of each eligible employee's salary contributed. The Company's matching contributions to defined contribution plans on a consolidated basis were approximately $2,708, $2,561, and $2,607 in fiscal 2022, 2021, 2020, 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 $7,258, $2,767, and $3,104 for incentive compensation earned and other discretionary amounts in fiscal 2022, 2021, 2020, respectively.
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 long-term assets” in the consolidated balance sheets at March 31, 2022 and 2021 were $5,391 and $5,047, 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 $4,837 and $4,608 included in “Other long-term liabilities” in the consolidated balance sheet at March 31, 2022 and 2021, respectively. Deferred compensation plan expense/(income) was $283, $1,564, and $(387) for the years ended March 31, 2022, 2021, and 2020 respectively, and is presented as such in our consolidated statements of operations and comprehensive income/(loss). 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 consolidated statements of operations and comprehensive income/(loss). Our unrealized (gains)/losses on investments were $(285), $(1,635), and $498 for the year ended March 31, 2022, 2021, and 2020, respectively.
14. Restructuring and Other Charges/(Income)
During fiscal 2022, we recorded $(103) for severance-related activity in our Canadian segment which was recorded to "Restructuring and other charges/(income)" in our 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.
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 terminated 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 operations and comprehensive 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/(loss).
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 sold to the TSAPL 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 settle operational receivables attributable to other Company subsidiaries existing at the time of sale.
After evaluating our presence in the region served by the South Africa Business, the Company decided to centralize and consolidate our business structure and streamline our organization. A member of the TSAPL 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 ASC Topic 360, 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 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, 2022 | | Year Ended March 31, 2021 |
| United States and Latin America | $ | (46) | | | $ | 3,563 | |
| Canada | (186) | | | 2,591 | |
| Europe, Middle East and Africa | (182) | | | 2,459 | |
| Asia-Pacific | — | | | 10 | |
| | $ | (414) | | | $ | 8,623 | |
Restructuring activity related to severance activity described above recorded in "Accrued liabilities" on the condensed consolidated balance sheets is summarized as follows for fiscal 2022:
| | | | | | | | |
| Beginning balance, April 1, 2020 | | $ | — | |
| Costs incurred | | 5,748 | |
| Less cash payments | | (5,091) | |
| Beginning balance, April 1, 2021 | | $ | 657 | |
| Costs incurred | | (103) | |
| Less cash payments | | (554) | |
| Ending balance, March 31, 2022 | | $ | — | |
We are substantially complete with accruing costs related to restructuring activities as of the end of fiscal 2022.
15. 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 March 31, 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.
As of March 31, 2022, the Company has accrued $2,523 as estimated additional cost related to the operational execution of a project in our US-LAM segment.
Changes in the Company's warranty reserve are as follows:
| | | | | | |
| 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 | |
| Reserve for warranties issued during the period | | 605 | |
| Settlements made during the period | | (298) | |
| Balance at March 31, 2022 | | $ | 557 | |
Letters of Credit, Bank Guarantees, and Other Commitments
At March 31, 2022, and 2021, the Company had in place letter of credit guarantees and performance bonds securing performance obligations of the Company. These arrangements totaled approximately $9,760 and $6,905 as of March 31, 2022, and 2021, respectively. Of this amount, $953 and $1,066 is secured by cash deposits at the Company's financial institutions at March 31, 2022, and 2021, respectively, and an additional $2,948 and $3,314, respectively, represents a reduction of the available amount of the Company's short term and long-term revolving lines of credit. Included in prepaid expenses and other
current assets at March 31, 2022 and 2021, was approximately $2,486 and $1,667, respectively, of cash deposits pledged as collateral on performance bonds and letters of credit. In addition to the $9,760 and $6,905 above, our Indian subsidiary also has $4,807 and $4,938 in non-collateralized customs bonds outstanding at March 31, 2022 and 2021, respectively, to secure the Company's customs and duties obligations in India.
The Company has entered into information technology service agreements with several vendors. The service fees expense amounted to $2,498, $1,768, and $2,679 in fiscal 2022, 2021, 2020, respectively. The future annual service fees under the service agreements are as follows for the fiscal years ended March 31:
| | | | | |
| 2023 | $ | 2,060 | |
| 2024 | 1,594 | |
| 2025 | 43 | |
| |
| |
| |
| Total | $ | 3,697 | |
16. Stock-Based Compensation Expense
The Board of Directors has adopted and the shareholders have approved three 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 2020 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. For fiscal 2022, 2021, and 2020, we recorded stock-based compensation of $3,803, $3,728, and $4,960, respectively.
Unvested options outstanding are scheduled to cliff vest over three years with 100% vesting on the third anniversary date of the 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 occur, rather than estimate expected forfeitures.
Stock Options
A summary of stock option activity under our Stock Plans for fiscal 2022, 2021, and 2020 are as follows:
| | | | | | | | | | | | | | | | | |
| | | Options Outstanding |
| | | Number of Shares | | Weighted Average Exercise Price |
| Balance at March 31, 2019 | | 327,439 | | $ | 8.92 | |
| Granted | | — | | — | |
| Exercised | | (159,062) | | 6.24 | |
| Forfeited | | (5,361) | | 18.69 | |
| Balance at March 31, 2020 | | 163,016 | | $ | 12.25 | |
| Granted | | 71,780 | | 14.28 | |
| Exercised | | (97,156) | | 6.81 | |
| Forfeited | | (16,171) | | 14.28 | |
| Expired | | (10,068) | | $ | 14.73 | |
| Balance at March 31, 2021 | | 111,401 | | $ | 16.53 | |
| Granted | | — | | — | |
| Exercised | | (8,100) | | 12.00 | |
| Forfeited | | (9,742) | | 14.28 | |
| Expired | | (4,322) | | 16.30 | |
| Balance at March 31, 2022 | | 89,237 | | $ | 17.20 | |
For fiscal 2022, 2021, and 2020 the intrinsic value of stock option exercises was $60, $646, and $3,240, respectively. As of March 31, 2022, there was no unrecognized expense related to unvested stock option awards.
The following table summarizes information about stock options outstanding as of March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2022 | | Number Vested and Exercisable | | Weighted Average Contractual Life (Years) | | Weighted Average Exercise Price | | Aggregate Intrinsic Value at March 31, 2022 |
| | | | | | | | | | | | | | | | |
| $14.28 | | 45,867 | | 8.2 | | 14.28 | | | $ | 88,065 | | | — | | | 8.2 | | — | | | — | |
| $19.64 | | 28,499 | | 4.8 | | 19.64 | | | — | | | 28,499 | | | 4.8 | | 19.64 | | | — | |
| $21.52 | | 14,871 | | 0.3 | | 21.52 | | | — | | | 14,871 | | | 0.3 | | 21.52 | | | — | |
| | | | | | | | | | | | | | | | |
| $14.28 - $21.52 | | 89,237 | | | 5.8 | | | $ | 17.20 | | | $ | 88,065 | | | 43,370 | | | 5.8 | | | $ | 20.28 | | | $ | — | |
The aggregate intrinsic value in the preceding table represents the total intrinsic value based on our closing stock price of $16.20 as of March 31, 2022, 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. 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 2022, 2021, and 2020 we issued 32,136, 52,098 and 26,608 fully vested common shares which had a total fair value of $570, $712, and $660 based on the closing price of our common stock on the date of issuance, respectively. As of March 31, 2022, 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 2022, 2021, and 2020.
| | | | | | | | | | | | | | | | | |
| Restricted Stock Units | | Number of Shares | | Weighted Average Grant Fair Value |
| 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 | |
| Granted | | 139,242 | | 17.62 | |
| Released | | (125,089) | | 19.42 | |
| Forfeited | | (24,524) | | 14.81 | |
| Balance of unvested units at March 31, 2022 | | 294,153 | | $ | 16.26 | |
Based on our closing stock price of $16.20, the aggregate intrinsic value of the unvested restricted stock units at March 31, 2022 was $4,765. Total unrecognized expense related to unvested restricted stock awards was approximately $2,905 as of March 31, 2022. We anticipate this expense to be recognized over a weighted average period of approximately 1.6 years.
Performance Stock Units
During fiscal 2022, 2021, and 2020, performance stock unit awards were issued to our executive officers and other members of management and had total estimated grant date fair values of $1,689, $1,947 and $2,285, respectively. For the fiscal 2022 awards, the performance indicator for these awards is a combination of stock price and the Company's Adjusted EBITDA. The target number of shares is 37,738 and 57,330 for the stock price awards and Adjusted EBITDA awards, respectively. For those awards utilizing a stock price indicator, the stock price indicator measures our stock price relative to a predetermined peer group of companies with similar business characteristics as ours. Since the stock price indicator is 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. For those awards utilizing an Adjusted EBITDA indicator, the Adjusted EBITDA indicator establishes the target Adjusted EBITDA for each of the three years ending March 31, 2025. Since these are performance-based stock 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 2022 and 2021, certain Adjusted EBITDA-based performance stock awards that were scheduled to vest did not meet the minimum Adjusted EBITDA indicator. Accordingly, 67,220 and 130,835 of previously outstanding performance stock units were forfeited during fiscal 2022 and 2021, respectively. There were no such awards in fiscal 2020.
For performance stock units, 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 zero percent to two hundred 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, 2022.
| | | | | | | | | | | | | | | | | |
| Fiscal Year Granted | Target | | Minimum | | Maximum |
| Fiscal 2020 | 92,394 | | — | | 184,788 |
| Fiscal 2021 | 136,350 | | — | | 272,700 |
| Fiscal 2022 | 95,068 | | — | | 190,136 |
In fiscal 2022, 2021 and 2020, the performance objectives for 91,164, 4,476 and 79,144 awards, respectively, were earned.
At March 31, 2022, there was $1,783 in stock compensation that remained to be expensed, which will be recognized over a period of 1.3 years.
17. Other Income/(Expense)
Other expense consisted of the following:
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, 2022 | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 |
| Foreign currency transaction gain/(loss) | $ | (2,377) | | | $ | 1,094 | | | $ | (143) | |
| Gain/(loss) on foreign exchange forwards | 441 | | | (811) | | | (437) | |
| Gain/(loss) on investments from deferred compensation plan | (285) | | | 1,635 | | | (498) | |
| Other income/(expense) | (1,944) | | | 217 | | | (480) | |
| Total | $ | (4,165) | | | $ | 2,135 | | | $ | (1,558) | |
18. Income Taxes
Income taxes included in the consolidated income statement consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2022 | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 |
| Current provision: | | | | | |
| Federal provision | $ | 634 | | | $ | (4,662) | | | $ | (759) | |
| Foreign provision | 8,907 | | | 6,098 | | | 9,359 | |
| State provision | 441 | | | 197 | | | 279 | |
| Deferred provision: | | | | | |
| Federal deferred benefit | (231) | | | (1,963) | | | (796) | |
| Foreign deferred benefit | (1,396) | | | (1,084) | | | (2,895) | |
| State deferred benefit | (22) | | | (107) | | | (46) | |
| Total provision for income taxes | $ | 8,333 | | | $ | (1,521) | | | $ | 5,142 | |
Deferred income tax assets and liabilities were as follows:
| | | | | | | | | | | | | | | | | |
| | | March 31, |
| | | 2022 | | 2021 |
| Deferred tax assets: | | | | |
| Accrued liabilities and reserves | | $ | 5,483 | | | $ | 5,428 | |
| Stock option compensation | | 736 | | | 593 | |
| Foreign deferred benefits | | 1,626 | | | 1,954 | |
| Net operating loss carry-forward | | 801 | | | 1,224 | |
| Inventories | | 415 | | | 383 | |
| Interest limitation | | 94 | | | 204 | |
| Capitalized transaction costs | | 95 | | | 119 | |
| | | | | |
| Foreign tax credit carry forward | | 214 | | | 721 | |
| | | | | |
| Valuation allowance | | (248) | | | (282) | |
| | | | | |
| Total deferred tax assets | | $ | 9,216 | | | $ | 10,344 | |
| Deferred tax liabilities: | | | | |
| Intangible assets | | $ | (5,969) | | | $ | (5,959) | |
| Intangible and other - foreign | | (14,139) | | | (16,789) | |
| Property, plant and equipment | | (4,277) | | | (4,969) | |
| Prepaid expenses | | (205) | | | (227) | |
| Unrealized loss on hedge | | (18) | | | — | |
| Undistributed foreign earnings | | (1,340) | | | (820) | |
| Total deferred tax liabilities | | $ | (25,948) | | | $ | (28,764) | |
| Net deferred tax liability | | $ | (16,732) | | | $ | (18,420) | |
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, 2022 | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 |
| U.S. | | $ | 4,240 | | | $ | (15,818) | | | $ | (8,603) | |
| Non-U.S. | | 24,185 | | | 15,174 | | | 25,681 | |
| Income from continuing operations | | $ | 28,425 | | | $ | (644) | | | $ | 17,078 | |
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, 2022 | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 |
| Notional U.S. federal income tax expense at statutory rate | | $ | 5,969 | | | $ | (135) | | | $ | 3,586 | |
| Adjustments to reconcile to the income tax provision: | | | | | | |
| | Impact of U.S. global intangible taxes and benefits | | (210) | | | (1,859) | | | 926 | |
| | U.S. net operating loss carry-back rate difference | | — | | | (1,470) | | | — | |
| | South Africa divestiture | | — | | | 526 | | | — | |
| Rate difference-international subsidiaries | | 1,223 | | | 513 | | | 1,181 | |
| | Withholding on Canadian intercompany dividend | | 301 | | | — | | | — | |
| | Impact on deferred tax liability for statutory rate change | | 74 | | | 332 | | | (1,231) | |
| | Undistributed foreign earnings | | 713 | | | 359 | | | 259 | |
| | U.S. state income tax provision, net | | 451 | | | 48 | | | 143 | |
| | Charges/(benefits) related to uncertain tax positions | | 77 | | | 79 | | | (408) | |
| | Non-deductible charges | | 150 | | | 239 | | | 349 | |
| | Change in valuation allowance | | 34 | | | (475) | | | 152 | |
| | Other, net | | (449) | | | 322 | | | 185 | |
| Provision for income taxes | | $ | 8,333 | | | $ | (1,521) | | | $ | 5,142 | |
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”) (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.
Consistent with provisions allowed under the Tax Act, the net $4,007 calculated Transition Tax liability will be paid over an eight year period beginning in fiscal year 2019. At March 31, 2022, $2,187 of the Transition Tax liability is included in “Other non-current liabilities” in the consolidated balance sheets.
Given the Tax Act’s significant changes and the opportunities to repatriate cash tax free, we have reevaluated our current permanent reinvestment position. Accordingly, we 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. At March 31, 2022 we have accrued $1,340 as an additional deferred tax liability associated with the future repatriation of earnings from jurisdictions that withhold taxes on foreign paid dividends.
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.
As of March 31, 2022, the Company had foreign tax net operating loss carry-forwards ("NOLs") of $3,072. Of this amount, $657 may be carried forward indefinitely. As of March 31, 2022, the tax years 2018 through 2021 remain open to examination by the major taxing jurisdictions to which we are subject.
At March 31, 2022, reserves for uncertain tax position consisted of uncertain tax positions related to the final Transition Tax that we determined could be overturned if the calculations were examined by tax authorities. The reserves for the Transition Tax will remain subject to 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, 2022 | | Year Ended March 31, 2021 |
| Beginning balance | $ | 808 | | | $ | 729 | |
| Release of reserve | — | | | — | |
| | | |
| | | |
| Interest and penalties on prior reserves | 77 | | | 79 | |
| Reserve for uncertain income taxes - included in "Other non-current liabilities" | $ | 885 | | | $ | 808 | |
19. 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, 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, 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. We report the results of our THS product line in all four reportable segments, and the results of our TPS product line in the US-LAM and Canada reportable segments. Each of our reportable segments serves a similar class of customers, including engineering, procurement and construction companies, international and regional oil companies, 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. 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, 2022 | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 |
| Sales to External Customers: | | | | | | |
| United States and Latin America | | $ | 154,187 | | | $ | 95,441 | | | $ | 155,465 | |
| Canada | | 115,442 | | | 90,853 | | | 128,364 | |
| Europe, Middle East and Africa | | 54,737 | | | 54,219 | | | 53,762 | |
| Asia-Pacific | | 31,308 | | | 35,668 | | | 45,895 | |
| | | $ | 355,674 | | | $ | 276,181 | | | $ | 383,486 | |
| Inter-segment Sales: | | | | | | |
| United States and Latin America | | $ | 40,169 | | | $ | 40,793 | | | $ | 48,891 | |
| Canada | | 11,629 | | | 7,272 | | | 4,764 | |
| Europe, Middle East and Africa | | 1,683 | | | 2,003 | | | 2,890 | |
| Asia-Pacific | | 1,325 | | | 1,221 | | | 991 | |
| | $ | 54,806 | | | $ | 51,289 | | | $ | 57,536 | |
| Depreciation Expense: | | | | | | |
| United States and Latin America | | $ | 5,729 | | | $ | 6,290 | | | $ | 6,304 | |
| Canada | | 5,117 | | | 4,454 | | | 3,462 | |
| Europe, Middle East and Africa | | 390 | | | 341 | | | 551 | |
| Asia-Pacific | | 179 | | | 192 | | | 185 | |
| | $ | 11,415 | | | $ | 11,277 | | | $ | 10,502 | |
| Amortization of Intangibles: | | | | | | |
| United States and Latin America | | $ | 1,145 | | | $ | 1,464 | | | $ | 5,752 | |
| Canada | | 7,472 | | | 7,301 | | | 9,665 | |
| Europe, Middle East and Africa | | 94 | | | 453 | | | 1,292 | |
| Asia-Pacific | | 79 | | | 227 | | | 1,064 | |
| | $ | 8,790 | | | $ | 9,445 | | | $ | 17,773 | |
| Income/(Loss) from Operations: | | | | | | |
| United States and Latin America | | $ | 9,699 | | | $ | (9,490) | | | $ | 6,346 | |
| Canada | | 22,913 | | | 15,242 | | | 24,946 | |
| Europe, Middle East and Africa | | 6,974 | | | 3,181 | | | 1,196 | |
| Asia-Pacific | | 4,559 | | | 3,917 | | | 6,628 | |
| Unallocated: | | | | | | |
| Public company costs | | (1,937) | | | (1,716) | | | (1,493) | |
| Stock compensation | | (3,803) | | | (3,728) | | | (4,960) | |
| | | $ | 38,405 | | | $ | 7,406 | | | $ | 32,663 | |
| | | | | | |
| | March 31, 2022 | | March 31, 2021 | | |
| Fixed Assets: | | | | | | |
| United States and Latin America | | $ | 31,919 | | | $ | 36,155 | | | |
| Canada | | 30,686 | | | 32,583 | | | |
| Europe, Middle East and Africa | | 2,796 | | | 3,141 | | | |
| Asia-Pacific | | 638 | | | 751 | | | |
| | $ | 66,039 | | | $ | 72,630 | | | |
| Total Assets: | | | | | | |
| United States and Latin America | | $ | 241,421 | | | $ | 218,699 | | | |
| Canada | | 296,459 | | | 287,907 | | | |
| Europe, Middle East and Africa | | 67,608 | | | 77,798 | | | |
| Asia-Pacific | | 31,181 | | | 33,474 | | | |
| | $ | 636,669 | | | $ | 617,878 | | | |
At March 31, 2022 and 2021, non-current deferred tax assets of $7,061 and $7,493 respectively, were applicable to the United States.
Capital expenditures by geographic area were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2022 | | Year Ended March 31, 2021 | | Year Ended March 31, 2020 |
| Capital Expenditures: | | | | | | |
| United States and Latin America | | $ | 1,267 | | | $ | 3,075 | | | $ | 5,607 | |
| Canada | | 3,593 | | | 4,866 | | | 4,221 | |
| Europe, Middle East and Africa | | 288 | | | 68 | | | 654 | |
| Asia-Pacific | | 72 | | | 123 | | | 373 | |
| | | $ | 5,220 | | | $ | 8,132 | | | $ | 10,855 | |
20. Subsequent Events
No subsequent events have been identified for the fiscal year ended March 31, 2022.
