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
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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.
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Revenues tend to decrease gradually in the final stages of a project and are
generally derived from installation services and demand for electrical panels
and other miscellaneous electronic components used in the final installation of
heat tracing cable, which we frequently outsource from third-party
manufacturers. Therefore, we typically provide a mix of products and services
during each phase of a Greenfield project, and our margins fluctuate
accordingly.
Cyclicality of end-users’ markets. Demand for our products and services
depends in large part upon the level of capital and maintenance expenditures of
our customers and end-users, 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.
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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
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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.
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Fiscal Year Ended March 31, Increase/(Decrease)
(dollars in thousands)
2021 2020 $ %
Consolidated Statements of Operations Data:
Sales $ 276,181 $ 383,486 $ (107,305) (28) %
Cost of sales 159,309 221,848 (62,539) (28) %
Gross profit 116,872 161,638 (44,766) (28) %
Operating expenses:
Selling, general and administrative expenses 89,834 111,589 (21,755) (19) %
Deferred compensation plan expense/(income) 1,564 (387) 1,951 (504) %
Amortization of intangible assets 9,445 17,773 (8,328) (47) %
Restructuring and other charges/(income) 8,623 – 8,623 – %
Income/(loss) from operations 7,406 32,663 (25,257) (77) %
Other income/(expenses):
Interest expense, net (10,185) (14,027) 3,842 (27) %
Other income/(expense) 2,135 (1,558) 3,693 (237) %
Income/(loss) before provision for income taxes (644) 17,078 (17,722) (104) %
Income tax expense/(benefit) (1,521) 5,142 (6,663) (130) %
Net income/(loss) $ 877 $ 11,936 $ (11,059) (93) %
Income (loss) attributable to non-controlling
interests – (2) 2 (100) %
Net income/(loss) available to Thermon Group
Holdings, Inc. $ 877 $ 11,938 $ (11,061) (93) %
As a percent of sales:
Gross profit 42.3 % 42.1 % 20 bps
Selling, general and administrative expenses 32.5 % 29.1 % 340 bps
Income/(loss) from operations 2.7 % 8.5 % -580 bps
Net income/(loss) 0.3 % 3.1 % -280 bps
Effective tax rate (236.2) % 30.1 %
Year Ended March 31, 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
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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
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is subject to change. See further details Note 11, “Long-Term Debt.” We also
have payment commitments of $3.7 million, mostly related to 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
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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,
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inventory obsolescence and potential excess cost adjustments have been within
our expectations, and management does not believe that there is a reasonable
likelihood that there will be a material change in future estimates or
assumptions used to calculate the inventory valuation reserves.
Significant judgments and estimates must be made and used in connection with
establishing these allowances. If our assumptions used to calculate these
allowances do not agree with our future ability to collect outstanding
receivables, or the actual demand for our inventory, 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
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evaluate, among other factors, the degree of probability of an unfavorable
outcome and the ability to make a reasonable estimate of the amount of loss.
Stock-based compensation expense. 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.
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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
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