UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2012
 
OR
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 001-35159 (Thermon Group Holdings, Inc.)
 
Commission File Number: 333-168915-05 (Thermon Holding Corp.)
 
THERMON GROUP HOLDINGS, INC.
THERMON HOLDING CORP.
(Exact name of registrant as specified in its charter)
 
Delaware (Thermon Group Holdings, Inc.)
Delaware (Thermon Holding Corp.)
 
27-2228185 (Thermon Group Holdings, Inc.)
26-0249310 (Thermon Holding Corp.)
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
100 Thermon Drive, San Marcos, Texas 78666
(Address of principal executive offices)
 
(512) 396-5801
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Thermon Group Holdings, Inc.  x Yes  o No
 
Thermon Holding Corp.  o Yes  x No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Thermon Group Holdings, Inc.  x Yes  o No
 
Thermon Holding Corp.  x Yes  o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Thermon Group Holdings, Inc.
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
 
Smaller reporting company o

 


1



 Thermon Holding Corp.
 
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Thermon Group Holdings, Inc.  o Yes  x No
 
Thermon Holding Corp.  o Yes  x No
As of February 11, 2013, each registrant had the following number of shares of common stock outstanding:
 
Thermon Group Holdings, Inc.:  31,139,628 shares, par value $0.001 per share.
 
Thermon Holding Corp.: 100,000 shares, par value $0.001 per share.  Thermon Group Holdings, Inc. is the sole stockholder of Thermon Holding Corp. common stock.
 
Thermon Holding Corp. meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.




2



EXPLANATORY NOTE 
This quarterly report (“this quarterly report”) combines the Quarterly Reports on Form 10-Q for the quarter ended December 31, 2012 of Thermon Group Holdings, Inc. and Thermon Holding Corp. 
Unless stated otherwise or the context otherwise requires, references in this quarterly report to: 
“TGH” mean Thermon Group Holdings, Inc., a Delaware corporation;
“THC” mean Thermon Holding Corp., a Delaware corporation; and 
“we,” “our,” “us” or “the Company” mean TGH, THC and their consolidated subsidiaries taken together as one company.
TGH was incorporated in Delaware in March 2010 in connection with the acquisition by an affiliate of CHS Capital LLC, or CHS, of a majority interest in us on April 30, 2010, which we refer to, together with certain transactions related to such acquisition described below, as the CHS Transactions.  TGH is the sole stockholder of THC.
THC is a direct wholly-owned subsidiary of TGH and was incorporated in Delaware in 2007 in connection with the acquisition by an affiliate of the Audax Group private equity firm, or Audax, of a majority interest in us in August 2007, which we refer to as the Audax Transaction.
TGH is a holding company that conducts all of its business through THC and its subsidiaries. In May 2011, TGH completed an initial public offering (or “IPO”) of its common stock. In the aggregate, 10,650,000 shares of TGH common stock were sold in the IPO at a price to the public of $12.00 per share.  TGH’s common stock, which we refer to as our common stock, is listed on the New York Stock Exchange under the symbol “THR.”
THC owns 100% of the outstanding shares of common stock of Thermon Industries, Inc. (“TII”), which in connection with the CHS Transactions in April 2010,  issued $210,000,000 aggregate principal amount of 9.500% Senior Secured Notes due 2017, which have been registered with the Securities and Exchange Commission (or “SEC”) under the Securities Act of 1933, as amended (or the “Securities Act”), and which we refer to as our senior secured notes.  THC and the domestic subsidiaries of TII are guarantors of our senior secured notes.
We believe combining the Quarterly Reports on Form 10-Q of TGH and THC into this single report provides the following benefits: 
it enhances investors’ understanding of TGH and THC by enabling investors to view  our business as a whole in the same manner that management views and operates the business;
it eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both TGH and THC; and
it creates time and cost efficiencies for both companies through the preparation of one combined report instead of two separate reports.
In order to highlight the differences between TGH and THC, there are sections in this quarterly report that separately discuss TGH and THC, including separate financial statements and notes thereto and separate Exhibit 31 and Exhibit 32 certifications.  In the sections that combine disclosure for TGH and THC (i.e., where the disclosure refers to the consolidated company) references  to our actions or holdings relate to the actions or holdings of TGH and THC and their respective subsidiaries, as one consolidated company, unless otherwise indicated therein.




THERMON GROUP HOLDINGS, INC. and THERMON HOLDING CORP. (Combined)
 
QUARTERLY REPORT
FOR THE QUARTER ENDED December 31, 2012
 
TABLE OF CONTENTS
 
Page
PART I — FINANCIAL INFORMATION
 
 
Thermon Group Holdings, Inc. and its Consolidated Subsidiaries
 
 
Thermon Holding Corp. and its Consolidated Subsidiaries
 
PART II — OTHER INFORMATION
 
EX-31.1
 
EX-31.2
 
EX-31.3
 
EX-31.4
 
EX-32.1
 
EX-32.2
 
EX-32.3
 
EX-32.4
 
 

i



PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements of Thermon Group Holdings, Inc.
Condensed Consolidated Balance Sheets
(Dollars in Thousands, except share and per share data)

 
December 31,
2012
 
March 31,
2012
 
(unaudited)
 
 
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
28,389

 
$
21,468

Accounts receivable, net of allowance for doubtful accounts of $858 and $1,434 as of December 31, 2012 and March 31, 2012, respectively
55,899

 
50,037

Inventories, net
40,923

 
38,453

Costs and estimated earnings in excess of billings on uncompleted contracts
2,674

 
1,996

Income taxes receivable
5,070

 
5,193

Prepaid expenses and other current assets
7,099

 
6,853

Deferred income taxes
3,396

 
3,664

Total current assets
143,450

 
127,664

Property, plant and equipment, net
31,097

 
27,661

Goodwill
117,984

 
118,007

Intangible assets, net
136,320

 
144,801

Debt issuance costs, net
4,570

 
7,446

Total assets
$
433,421

 
$
425,579

Liabilities and shareholders’ equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
24,156

 
$
15,728

Accrued liabilities
15,057

 
22,442

Current portion of long term debt

 
21,000

Billings in excess of costs and estimated earnings on uncompleted contracts
2,178

 
2,446

Income taxes payable
2,385

 
1,374

Obligations due to settle the CHS Transactions
3,325

 
3,528

Total current liabilities
47,101

 
66,518

Long-term debt, net of current maturities
118,145

 
118,145

Deferred income taxes
43,073

 
45,999

Other noncurrent liabilities
2,702

 
2,437

Common stock: $.001 par value; 150,000,000 authorized; 31,110,662 and 30,208,084 shares issued and outstanding at December 31, 2012 and March  31, 2012, respectively
31

 
30

Preferred stock: $.001 par value; 10,000,000 authorized; no shares issued and outstanding

 

Additional paid in capital
200,808

 
191,998

Accumulated other comprehensive income
3,146

 
3,362

Retained earnings (accumulated deficit)
18,415

 
(2,910
)
Shareholders’ equity
222,400

 
192,480

Total liabilities and shareholders' equity
$
433,421

 
$
425,579

 
The accompanying notes are an integral part of these condensed consolidated financial statements

1



Thermon Group Holdings, Inc.
 
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Dollars in Thousands, except share and per share data)
 

 Three Months Ended December 31, 2012
 
 Three Months Ended December 31, 2011
 
Nine Months Ended December 31, 2012
 
Nine Months Ended December 31, 2011
 
 
 
 
 
 
 
 
Sales
$
76,750

 
$69,197
 
$
211,951

 
$202,483
Cost of sales
41,799

 
35,506

 
111,022

 
104,852

Gross profit
34,951

 
33,691

 
100,929

 
97,631

Operating expenses:
 
 
 
 
 
 
 
Marketing, general and administrative and engineering
16,885

 
15,300

 
47,394

 
59,603

Amortization of intangible assets
2,813

 
2,809

 
8,405

 
8,572

Income from operations
15,253

 
15,582

 
45,130

 
29,456

Other income/(expenses):
 
 
 
 
 
 
 
Interest income
36

 
72

 
93

 
239

Interest expense
(3,116
)
 
(4,203
)
 
(12,176
)
 
(16,023
)
Loss on retirement of senior secured notes

 
(229
)
 

 
(3,195
)
Miscellaneous income (expense)
(274
)
 
(215
)
 
(137
)
 
(1,402
)
Income before provision for income taxes
11,899

 
11,007

 
32,910

 
9,075

Income tax expense
4,161

 
4,074

 
11,585

 
3,294

Net income
$7,738
 
$6,933
 
$21,325
 
$5,781
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income
$
7,738

 
$
6,933

 
$
21,325

 
$
5,781

Foreign currency translation adjustment
(180
)
 
113

 
(216
)
 
(11,017
)
Comprehensive income (loss)
$7,558
 
$7,046
 
$21,109
 
$(5,236)
Income per common share:
 
 
 
 
 
 
 
Basic
$0.25
 
$0.23
 
$0.70
 
$0.20
Diluted
0.24

 
0.22

 
0.67

 
0.19

Weighted-average shares used in computing net income per common share:
 
 
 
 
 
 
 
Basic
30,947,064

 
29,586,956

 
30,672,803

 
28,937,292

Diluted
31,871,097

 
31,216,493

 
31,725,724

 
30,480,160

 
The accompanying notes are an integral part of these condensed consolidated financial statements

2



Thermon Group Holdings, Inc.
 
Condensed Consolidated Statement of Cash Flows (Unaudited)
(Dollars in Thousands)
 
 
Nine Months Ended December 31, 2012
 
Nine Months Ended December 31, 2011
Operating activities
 

 
 

Net income
$
21,325

 
$
5,781

Adjustment to reconcile net income to net cash (used in), provided by operating activities:
 

 
 

Depreciation and amortization
10,306

 
10,623

Amortization of debt costs
3,124

 
4,100

Stock compensation expense
869

 
6,457

Benefit for deferred income taxes
(2,975
)
 
(175
)
Premiums paid on redemptions, included as financing activities

 
3,825

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(5,902
)
 
(8,209
)
Inventories
(2,811
)
 
(10,413
)
Costs and estimated earnings in excess of billings on uncompleted contracts
(356
)
 
(591
)
Other current and noncurrent assets
371

 
1,013

Accounts payable
8,375

 
4,904

Accrued liabilities and noncurrent liabilities
(6,928
)
 
(11,488
)
Income taxes payable
746

 
(12,308
)
Net cash (used in) provided by operating activities
26,144

 
(6,481
)
Investing activities
 

 
 

Purchases of property, plant and equipment
(5,245
)
 
(6,179
)
Cash paid for Thermon Holding Corp.
(203
)
 
(663
)
Net cash used in investing activities
(5,448
)
 
(6,842
)
Financing activities
 

 
 

Payments on senior secured notes
(21,000
)
 
(70,855
)
Proceeds from revolving line of credit

 
9,000

Payments on revolving lines of credit and long term debt

 
(2,063
)
Issuance costs associated with revolving line of credit
(248
)
 

Capital contributions

 
48,459

Proceeds from exercise of stock options
4,571

 
1,579

Benefit from excess tax deduction from option exercises
3,369

 

Premium paid on retirement of senior secured notes
(630
)
 
(3,825
)
Net cash (used in) financing activities
(13,938
)
 
(17,705
)
Effect of exchange rate changes on cash and cash equivalents
163

 
(462
)
Change in cash and cash equivalents
6,921

 
(31,490
)
Cash and cash equivalents at beginning of period
21,468

 
51,266

Cash and cash equivalents at end of period
$
28,389

 
$
19,776

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

3



Thermon Group Holdings, Inc.
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)
 
1. Basis of Presentation and Accounting Policy Information
On April 30, 2010, a group of investors led by entities affiliated with CHS Capital LLC  (“CHS”) and two other private equity firms (together with CHS, our “private equity sponsors”) acquired a controlling interest in Thermon Holding Corp. and its subsidiaries from Thermon Holdings, LLC (“Predecessor”) for approximately $321,500 in a transaction that was financed by approximately $129,252 of equity investments by our private equity sponsors and certain members of our current and former management team (collectively, the “management investors”) and $210,000 of debt raised in an exempt Rule 144A senior secured note offering to qualified institutional investors (collectively, the “CHS Transactions”). The proceeds from the equity investments and debt financing were used both to finance the acquisition and pay related transaction costs. As a result of the CHS Transactions, Thermon Group Holdings, Inc. became the ultimate parent of Thermon Holding Corp. Thermon Group Holdings, Inc. (“TGH”) and its direct and indirect subsidiaries are referred to collectively as “we”, “our”, the “Company” or “Successor” herein. 
In the CHS Transactions, the senior secured notes were issued by Thermon Finance, Inc., which immediately after the closing of the CHS Transactions was merged into our wholly-owned subsidiary Thermon Industries, Inc. 
The CHS Transactions were accounted for as a purchase combination. The purchase price was allocated to the assets and liabilities acquired based on their estimated fair values. While the Company takes responsibility for the allocation of assets acquired and liabilities assumed, it consulted with an independent third party to assist with the appraisal process. 
Pushdown accounting was employed to reflect the purchase price paid by our new owner. 
The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto of TGH for the year ended March 31, 2012. In our opinion, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary to present fairly our financial position at December 31, 2012 and March 31, 2012, and the results of our operations for the three and nine months ended December 31, 2012 and 2011.  Certain reclassifications have been made to the prior period presentation of cash flows to conform to the current period presentation. Specifically, we have provided further detail to the condensed consolidated statement of cash flows related to premiums paid on redemptions included within cash used in operating activities. The reclassification did not change total cash used in operating activities.
Use of Estimates
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. While our management has based their assumptions and estimates on the facts and circumstances existing at December 31, 2012, actual results could differ from those estimates and affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements.  The operating results for the three and nine month period ended December 31, 2012 are not necessarily indicative of the results that may be achieved for the fiscal year ending March 31, 2013

Corrections of classification errors in previously reported Condensed Consolidated Statement of Comprehensive Income (Loss)

During the third quarter of fiscal 2013, we identified a classification error in our consolidated statements of operations and comprehensive income for all previously reported periods. We determined that freight charges that were invoiced to customers had been recorded as a reduction to cost of sales instead of as additional sales. The result of this error was an understatement of sales and cost of sales of $313 for the three months ended September 30, 2012, $317 for the three months ended June 30, 2012, $360 for the three months ended December 31, 2011, $328 for the three months ended September 30, 2011 and $317 for the three months ended June 30, 2011. The classification errors had no effect on the reported gross profit, income from operations or net income and also had no effect on the consolidated balance sheet, the consolidated statement of cash flows or the consolidated statement of shareholders' equity.

Though the correction of the classification errors had no effect on our gross profit, it did result in a slight reduction to our previously reported gross margin as a percentage of revenue as follows below:

4



 
 
Three Months Ended September 30, 2012
 
Three Months Ended June 30, 2012
 
 Three Months Ended December 31, 2011
 
Three Months Ended September 30, 2011
 
Three Months Ended June 30, 2011
As reported:
 
 
 
 
 
 
 
 
 
 
Sales
 
$
67,358

 
$
67,213

 
$
68,837

 
$
68,023

 
$
64,618

Cost of sales
 
34,719

 
33,874

 
35,146

 
36,072

 
32,629

Gross profit
 
32,639

 
33,339

 
33,691

 
31,951

 
31,989

Gross profit as a percentage of revenue
 
48.5
%
 
49.6
%
 
48.9
%
 
47.0
%
 
49.5
%

 
 
Three Months Ended September 30, 2012
 
 Three Months Ended June 30, 2012
 
 Three Months Ended December 31, 2011
 
Three Months Ended September 30, 2011
 
Three Months Ended June 30, 2011
As corrected:
 
 
 
 
 
 
 
 
 
 
Sales
 
$
67,671

 
$
67,530

 
$
69,197

 
$
68,351

 
$
64,935

Cost of sales
 
35,032

 
34,191

 
35,506

 
36,400

 
32,946

Gross profit
 
32,639

 
33,339

 
33,691

 
31,951

 
31,989

Gross profit as a percentage of revenue
 
48.2
%
 
49.4
%
 
48.7
%
 
46.7
%
 
49.3
%


Corrections of classification errors in previously reported Condensed Consolidated Statement of Cash Flows

During the second quarter of fiscal 2013, the Company identified a classification error in its cash flow statements for the year ended March 31, 2012 and for the three months ended June 30, 2012 related to the classification of excess income tax benefits associated with stock option exercises. Such benefits were improperly classified as a cash inflow from operating activities rather than a cash inflow from financing activities in the fourth quarter of fiscal year 2012 and in the first quarter of fiscal year 2013. The result of this error was an overstatement of cash flows from operating activities of $2,181 for the year ended March 31, 2012 and $1,243 in the first quarter of fiscal 2013. The classification errors had no effect on the reported changes in cash and cash equivalents, and also had no effect on the consolidated balance sheet, the consolidated statement of comprehensive income (loss), or the consolidated statement of stockholders' equity.


The reduction to cash flows from operating activities for the excess tax deduction has been properly reflected in the cash flow statement for the nine months ended December 31, 2012. Based on our evaluation of relevant quantitative and qualitative factors, we determined that the classification errors are immaterial to our prior period financial statements and did not warrant an amendment of our financial statements for fiscal 2012 or the first quarter of fiscal 2013. The Company plans to correct the comparative presentation of the prior periods in future filings as follows:


5



 
Three Months Ended
 
Year Ended
 
June 30, 2012

 
March 31, 2012

Cash flows from operating activities:
 
 
 
As reported
$1,600
 
$5,293
Error correction
(1,243
)
 
(2,181
)
As adjusted
357

 
3,112

 
 
 
 
Cash flows from financing activities:
 
 
 
As reported
$(6,949)
 
$(24,852)
Error correction
1,243

 
2,181

As adjusted
(5,706
)
 
(22,671
)
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board ("FASB") updated FASB ASC 820 that resulted in common fair value measurement and disclosure requirements in U.S. generally accepted accounting principles ("GAAP") and International Financial Reporting Standards (IFRSs).  Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  We have adopted ASC 820 effective April 1, 2012, and it is being applied prospectively. In conjunction with adopting ASC 820, we disclosed the fair value of investments and the inputs used to estimate that fair value.
In June 2011, the FASB updated FASB ASC 220, Comprehensive Income (FASB ASC 220) that gives an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  We have adopted ASC 220 effective April 1, 2012 and in conjunction with adopting ASC 220, we chose to present the components of comprehensive income within a single statement of other comprehensive income or loss. ASC 220 affects presentation and disclosure only and therefore adoption did not affect our results as reported in our consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-02, which updated the guidance in ASC Topic 350, Intangibles – Goodwill and Other. The amendments in this Update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. Under these amendments, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on a qualitative assessment, that it is not more likely than not that the indefinite-lived intangible asset is impaired. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The amendments are not expected to have an impact on our financial condition or results of operations.

2. Fair Value Measurements
Fair Value. We measure fair value based on authoritative accounting guidance, which defines fair value, establishes a framework for measuring fair value and expands on required disclosures regarding fair value measurements.
Inputs are referred to as assumptions that market participants would use in pricing the asset or liability. The uses of inputs in the valuation process are categorized into a three-level fair value hierarchy.
Level 1 — uses quoted prices in active markets for identical assets or liabilities we have the ability to access.
Level 2 — uses observable inputs other than quoted prices in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

6



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 December 31, 2012 and March 31, 2012, no assets or liabilities were valued using Level 3 criteria. 
Information about our long-term debt that is not measured at fair value follows:
 
December 31, 2012
 
March 31, 2012
 
 
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
Valuation Technique
Financial Liabilities
 

 
 

 
 

 
 

 
 
Long-term debt
$
118,145

 
$
132,027

 
$
139,145

 
$
153,755

 
Level 2 - Market Approach
 
Our senior secured notes trade on over the counter markets.  As the quoted price is only available through a dealer, the Company concluded the market is not active enough to be classified as a Level 1 valuation.  However, the pricing is indirectly observable through dealers and has been classified as Level 2.  Differences between carrying value and fair value are primarily due to instruments that provide fixed interest rates or contain fixed interest rate elements. Inherently, such instruments are subject to fluctuations in fair value due to movements in interest rates.
Foreign Currency Forward Contracts
We transact business in various foreign currencies and have established a program that primarily utilizes foreign currency forward contracts to offset the risk associated with the effects of certain foreign currency exposures. Under this program, increases or decreases in our foreign currency exposures are offset by gains or losses on the forward contracts to mitigate foreign currency transaction gains or losses. These foreign currency exposures typically arise from intercompany transactions. Our forward contracts generally have terms of 90 days or less. 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 largely offset gains and losses resulting from settlement of payments received from our foreign operations which are settled in U.S. dollars. All outstanding foreign currency forward contracts are marked to market at the end of the period with unrealized gains and losses included in miscellaneous expense. The fair value is determined by quoted prices from active foreign currency markets (Level 2 fair value).  The balance sheet reflects 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 December 31, 2012 and March 31, 2012, the notional amounts of forward contracts we held to sell U.S. Dollars in exchange for other major international currencies were as follows:
Notional amount of foreign exchange forward contracts by currency
 
December 31, 2012
 
March 31, 2012
Russian Ruble
$
5,904

 
$
5,625

Euro
2,909

 
7,495

Canadian Dollar
1,219

 
1,309

South Korean Won
1,490

 

Other
497

 

Total notional amounts
$
12,019

 
$
14,429

The condensed consolidated balance sheets reflects unrealized gains and losses at their fair value as of the reporting date. Unrealized gains are reflected in accounts receivable, net and unrealized losses within accrued liabilities.

7



 
 
December 31, 2012
 
March 31, 2012
 
 
Fair Value
 
Fair Value
 
 
Assets
Liabilities
 
Assets
Liabilities
Foreign exchange contract forwards
 
$
17

$
67

 
$
8

$
196



Foreign currency gains or losses related to our forward contracts in the accompanying condensed consolidated statements of operations were a loss of $425 and a gain of $126 for the three months ended December 31, 2012 and 2011, respectively and a loss of $164 and a gain of $126 for the nine months ended December 31, 2012 and 2011, respectively. Gains and losses from our forward contracts were offset by transaction gains or losses incurred with the settlement of transactions denominated in foreign currencies. Our net foreign currency gains and losses were losses of $242 and $213 for the three months ended December 31, 2012 and 2011, respectively, and losses of $181 and $1,456 for the nine months ended December 31, 2012 and 2011, respectively.

3. Earnings and Net Income per Common Share
Basic earnings per share (EPS) and net loss per share is computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted net loss per share is computed by dividing net loss 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 assumed that the target number of shares would be issued within the calculation of diluted net income per common share.
The reconciliation of the denominators used to calculate basic EPS and diluted EPS for the three and nine months ended December 31, 2012 and 2011, respectively, are as follows:
 
 Three Months Ended December 31, 2012
 
 Three Months Ended December 31, 2011
 
Nine Months Ended December 31, 2012
 
Nine Months Ended December 31, 2011
Basic net income per common share
 

 
 

 
 
 
 
Net income
$
7,738

 
$
6,933

 
$
21,325

 
$
5,781

Weighted-average common shares outstanding
30,947,064

 
29,586,956

 
30,672,803

 
28,937,292

Basic net income per common share
$
0.25

 
$
0.23

 
$
0.70

 
$
0.20

 
 Three Months Ended December 31, 2012
 
 Three Months Ended December 31, 2011
 
Nine Months Ended December 31, 2012
 
Nine Months Ended December 31, 2011
Diluted net income per common share
 

 
 

 
 

 
 

Net income
$
7,738

 
$
6,933

 
$
21,325

 
$
5,781

Weighted-average common shares outstanding
30,947,064

 
29,586,956

 
30,672,803

 
28,937,292

Common share equivalents:
 
 
 
 
 
 
 
Stock options issued
868,110

 
1,629,537

 
1,028,056

 
1,542,868

Restricted and performance stock units issued
55,923

 

 
24,865

 

Weighted average shares outstanding – dilutive
31,871,097

 
31,216,493

 
31,725,724

 
30,480,160

Diluted net income per common share
$
0.24

 
$
0.22

 
$
0.67

 
$
0.19


4. Inventories
Inventories consisted of the following:

8



 
December 31,
2012
 
March 31,
2012
Raw materials
$
14,487

 
$
11,721

Work in process
2,365

 
1,402

Finished goods
25,221

 
26,424

 
42,073

 
39,547

Valuation reserves
(1,150
)
 
(1,094
)
Inventories, net
$
40,923

 
$
38,453

 
5. Goodwill
The carrying amount of goodwill as of December 31, 2012 is as follows:
 
Amount
Balance as of March 31, 2012
$
118,007

Foreign currency translation impact
(23
)
Balance as of December 31, 2012
$
117,984

The excess purchase price over the fair value of assets acquired is recorded as goodwill. Goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach based on the market capitalization of the reporting unit. Our annual impairment test will be performed as of January 1, 2013. At December 31, 2012, there were no indicators of a goodwill impairment.  Goodwill is not deductible for tax purposes.

6. Accrued Liabilities
Accrued current liabilities consisted of the following:
 
December 31,
2012
 
March 31,
2012
Accrued employee compensation and related expenses
$
7,616

 
$
10,970

Interest
1,896

 
6,162

Customer prepayment
1,298

 
1,518

Warranty reserve
749

 
857

Professional fees
1,052

 
1,346

Sales tax payable
323

 
183

Compliance costs

 
55

Other
2,123

 
1,351

Total accrued current liabilities
$
15,057

 
$
22,442

7. Related-Party Transactions
We paid management fees, including a termination fee, of $8,120 in connection with our IPO to our private equity sponsors in the nine months ended December 31, 2011.  The termination fee is included as part of Marketing, general and administrative and engineering expense. We did not pay management fees during the nine months ended December 31, 2012.
Included in our consolidated balance sheet is “Obligations due to settle the CHS Transactions,” which totaled $3,325 and $3,528 at December 31, 2012 and March 31, 2012, respectively.  These amounts represent amounts due to the Predecessor owners in final settlement of the acquisition by our private equity sponsors of a controlling interest in us that was completed on April 30, 2010.  During the three and nine months ended December 31, 2012, we paid $67 and $203, respectively to the Predecessor owners and during the three and nine months ended December 31, 2011 we paid, $137 and $663, respectively to the Predecessor owners, in each case reflected in "Obligations due to settle the CHS Transactions".  At December 31, 2012, the amount outstanding represents the estimate of tax refunds due from government entities that have not been received but are related to the final tax periods filed by the Predecessor and remaining encumbered cash to be released as letters of credit expire.
8. Short-Term Revolving Lines of Credit

9



The Company’s subsidiary in the Netherlands has a revolving credit facility in the amount of Euro 4,000 (equivalent to $5,286 USD at December 31, 2012). The facility is collateralized by receivables, inventory, equipment, furniture and real estate. No loans were outstanding on this facility at December 31, 2012 or March 31, 2012.
The Company’s subsidiary in India has a revolving credit facility in the amount of 80,000 Rupees (equivalent to $1,460 USD at December 31, 2012). The facility is collateralized by receivables, inventory, real estate, a letter of credit and cash. No loans were outstanding under the facility at December 31, 2012 or March 31, 2012
The Company’s subsidiary in Australia has a revolving credit facility in the amount of $325 Australian Dollars (equivalent to $337 USD at December 31, 2012). The facility is collateralized by real estate. No loans were outstanding under the facility at December 31, 2012 or March 31, 2012.
The Company’s subsidiary in Japan has a revolving credit facility in the amount of 45,000 Japanese Yen (equivalent to $524 USD at December 31, 2012).  No loans were outstanding under the Japanese revolving credit facility at December 31, 2012 or March 31, 2012.
Under the Company’s principal revolving credit facility described below in Note 9, “Long-Term Debt,” there were no outstanding borrowings at either December 31, 2012, or March 31, 2012, respectively. 
9. Long-Term Debt
Long-term debt consisted of the following:
 
December 31,
2012
 
March 31,
2012
9.500% Senior Secured Notes, due May 2017
$
118,145

 
$
139,145

 
118,145

 
139,145

Less current portion

 
(21,000
)
 
$
118,145

 
$
118,145

 
Revolving Credit Facility and Senior Secured Notes
Revolving credit facility.  On August 7, 2012, Thermon Industries, Inc. and Thermon Canada Inc. terminated their existing revolving credit facility, and entered into a new credit facility agreement with a new syndicate of lenders led by JP Morgan Chase Bank, N.A. as administrative agent. As a result of the termination, we accelerated the remaining $1,447 of unamortized deferred debt costs associated with the previous revolving credit facility, which is included as interest expense. Under the revolving line of credit, we have available up to $40,000 of aggregate loans, of which up to $20,000 is available to our Canadian subsidiary, subject to borrowing base availability. Availability of funds under our new revolving credit facility is determined by a borrowing base equal to the sum of 85% of eligible accounts receivable, plus 65% of eligible inventory, plus 85% of the net orderly liquidation value of eligible equipment, plus 80% of the fair market value of eligible owned real property. In no case shall availability under our revolving credit facility exceed the commitments thereunder. As of December 31, 2012, we had $37,420 of capacity available under our revolving credit facility after taking into account the borrowing base, outstanding loan advances and letters of credit. In addition to our revolving credit facility, we have various short term revolving lines of credit available to us at our foreign affiliates.  At December 31, 2012, we had no outstanding borrowings under the revolving credit facility. Had there been any outstanding borrowings, the interest rate would have been approximately 3%.
The new revolving credit facility will mature in 2015. Any borrowings on our revolving credit facility will incur interest expense that is variable in relation to the LIBOR rate, plus approximately 2.5%. Borrowings denominated in Canadian Dollars under the Canadian facility bear interest at a variable rate in relation to the bankers’ acceptance rate, as set forth in the revolving credit facility. In addition to paying interest on outstanding borrowings under our revolving credit facility, we are required to pay a 0.4% per annum commitment fee to the lenders in respect of the unutilized commitments thereunder and letter of credit fees equal to the LIBOR margin or the bankers’ acceptance rate, as applicable, on the undrawn amount of all outstanding letters of credit. 
Senior secured notes.  As of December 31, 2012, we had $118,145 of indebtedness outstanding under our senior secured notes with annual cash interest expense of approximately $11,224. Our senior secured notes mature on May 1, 2017 and accrue interest at a fixed rate of 9.5%. We pay interest in cash semi-annually on May 1 and November 1 of each year.  Our senior secured notes were issued in a Rule 144A exempt senior secured note offering to qualified institutional investors.  The

10



proceeds were used to fund the purchase price for the CHS Transactions and related transaction costs.  In January 2011, we consummated an offer to exchange the old restricted senior secured notes for new, SEC-registered senior secured notes. 
During the nine months ended December 31, 2012 and 2011, the Company made partial redemptions of the senior secured notes in the amount of $21,000 and $70,855, respectively.  In connection with these redemptions, the Company paid cash premiums on redemption of $630 and $3,825 for the nine months ended December 31, 2012 and 2011, respectively. As a result of these partial redemptions, we accelerated the amortization of deferred debt cost of $871 and $3,096 for the nine months ended December 31, 2012 and 2011, respectively.  These expenses were included in interest expense for the periods reported. 
Guarantees; security.  The obligations under our revolving credit facility and our senior secured notes are guaranteed on a senior secured basis by the Company and each of its existing and future domestic restricted subsidiaries, other than Thermon Industries, Inc., the issuer of the senior secured notes. The obligations under our revolving credit facility are secured by a first priority perfected security interest in substantially all of our and the guarantors’ assets, subject to certain exceptions, permitted liens and encumbrances reasonably acceptable to the agent under our revolving credit facility. Our senior secured notes and guarantees are also secured by liens on substantially all of our and the guarantors’ assets, subject to certain exceptions; provided, however, that the liens are contractually subordinated to the liens thereon that secure our revolving credit facility. 
Restrictive covenants.  The revolving credit facility and senior secured notes contain various restrictive covenants that include restrictions or limitations on our ability to: incur additional indebtedness or issue disqualified capital stock unless certain financial tests are satisfied; pay dividends, redeem subordinated debt or make other restricted payments; make certain investments or acquisitions; issue stock of subsidiaries; grant or permit certain liens on our assets; enter into certain transactions with affiliates; merge, consolidate or transfer substantially all of our assets; incur dividend or other payment restrictions affecting certain of our subsidiaries; transfer or sell assets, including capital stock of our subsidiaries; and change the business we conduct. However, all of these covenants are subject to customary exceptions.

10. Commitments and Contingencies
At December 31, 2012, the Company had in place letter of credit guarantees and performance bonds securing performance obligations of the Company. These arrangements totaled approximately $14,890.  Of this amount, $2,055 is secured by cash deposits at the Company’s financial institutions.  The remaining $12,835 represents a reduction of the available amount of the Company’s short term and long term revolving lines of credit and performance bonds that the Company has secured. Included in prepaid expenses and other current assets at December 31, 2012 and March 31, 2012, was approximately $2,055 and $2,398, respectively, of cash deposits pledged as collateral on performance bonds and letters of credit. 
The Company is involved in various legal proceedings that arise from time to time in the ordinary course of doing business and believes that adequate reserves have been established for any probable losses. Expenses related to litigation are included in operating income. We do not believe that the outcome of any of these proceedings 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 or cash flows in any one accounting period. 
The Company has no outstanding legal matters outside of matters arising in the ordinary course of business, except as described below. We can give no assurances we will prevail in any of these matters.
Asbestos Litigation—Since 1999, we have been named as one of many defendants in 16 personal injury suits alleging exposure to asbestos from our products. None of the cases alleges or has alleged premises liability. Two cases are currently pending. Insurers are defending us in one of the two lawsuits, and we expect that an insurer will defend us in the remaining matter. Of the concluded suits, there were seven cost of defense settlements and the remainder were dismissed without payment. There are no claims unrelated to asbestos exposure for which coverage has been sought under the policies that are providing coverage. 
Indian Sales Tax and Customs Disputes—Our Indian subsidiary is currently disputing assessments of administrative sales tax and customs duties with Indian tax and customs authorities. In addition, we currently have a customs duty case before the Supreme Court in India, on appeal by custom authorities. We have reserved $188 in estimated settlement of the remaining matters.
Notice of Tax Dispute with the Canada Revenue Agency—On June 13, 2011, we received notice from the Canada Revenue Agency (“Agency”) advising us that they disagree with the tax treatment we proposed with respect to certain asset

11



transfers that was completed in August 2007 by our Predecessor owners.  As a result, the Agency proposes to disallow the interest deductions taken in Canada for tax years 2008, 2009 and 2010.   In total these interest deductions amounted to $11,640.  The statutory tax rate in Canada is approximately 25%, therefore the tax due that is requested by the Agency is approximately $2,910.  At December 31, 2012, we have not recorded a tax liability reserve related to this matter with the Agency, as a loss is not probable or estimable.  While we will vigorously contest this ruling, we expect that any liability will be covered under an indemnity agreement with the Predecessor owners.

11. Stock-Based Compensation Expense
Since the completion of the CHS Transactions on April 30, 2010, the board of directors has adopted and the shareholders have approved two stock option award plans.  The 2010 Thermon Group Holdings, Inc. Restricted Stock and Stock Option Plan (“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 contractors compensation in the form of stock options or restricted stock awards. 
At December 31, 2012, there were 1,337,376 options outstanding.  Stock compensation expense was $475, $58, $869 and $6,456 during the three and nine months ended December 31, 2012 and 2011, respectively.  TGH completed its IPO on May 5, 2011. As a result, we recorded stock compensation expense of $6,310 during the nine months ended December 31, 2011 which represented all unamortized stock compensation under the 2010 Plan.
During the nine months ended December 31, 2012, we issued various stock compensation awards to employees and directors of the company. On August 2, 2012, 56,532 options and 71,923 restricted stock units were granted to certain employees. Also on August 2, 2012, 12,546 restricted stock awards were issued to our directors and a target amount of 44,146 performance stock units were granted to our named executive officers. The closing price of our stock on the date of these grants was $21.52.
The stock options were valued by using a Black Scholes option pricing model. We arrived at a total fair value for the option awards of $501 by applying a volatility assumption of 40.5%, a risk free rate of 0.63%, expected term of 6.66 years and no expected dividend. The fair value of these options will be expensed on a straight line basis over five years.
The restricted stock units that were issued to our employees have a total fair value of $1,548 as determined by the closing price of our stock on August 2, 2012 which will be expensed on a straight-line basis over three years. At each anniversary of the restricted stock units, one-third of the shares will become vested for the employees and the shares of stock will become issued and outstanding.
The restricted stock awards issued to our directors have a total fair value of $270 as determined by the price of our stock at closing on August 2, 2012 which will be expensed on a straight line basis over one year. The stock associated with the director's awards has already been issued and is included in our shares outstanding. On the anniversary of the grant date, the restrictions will be removed.
The performance stock units issued to our four named executive officers had a total fair value at grant date of $960. The performance indicator for these stock awards is based on the market performance of our stock price as compared to a pre-determined peer group of companies with similar business characteristics as ours. Since the performance indicator is market based, we prepared a Monte Carlo valuation model to calculate the probable outcome of the performance measure to arrive at the fair value. We will expense the fair value over three years ending at each of our fiscal year ends during the performance period, whether or not the market condition is met. At the end of each fiscal year, one-third of the performance units will be evaluated. It will then be determined how many shares of stock will be issued. In each year, the possible number of shares that will be issued ranges from zero to 29,430 in the aggregate. Shares that are not awarded in a given year will be forfeited.
The right to purchase shares under the options vests over a five to ten-year period, beginning on the date of grant. Stock options must be exercised within ten 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 estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods. During the three and nine month periods ended December 31, 2012, we did not make any changes in accounting principles or methods of estimates relating to stock-based compensation expense.

12



12. Income Taxes
Our anticipated annual effective tax rate before discrete events of approximately 34.8% has been applied to our consolidated pre-tax income for the nine month period ended December 31, 2012. Our anticipated annual effective tax rate after discrete events of approximately 35.2% differs from the tax rate before the discrete event due to the additional accrued interest and penalties recorded on uncertain tax positions (discussed below). Our anticipated annual effective tax rate was different than the U.S. federal statutory rate primarily due to state taxes, a difference in rates between the U.S. and foreign jurisdictions, and certain permanent differences, such as nondeductible meals and entertainment and compensation expenses.  For the nine months ended December 31, 2011, the Company’s provision for income taxes reflects an effective rate of approximately 38.0% and an after discrete event rate of 37.1%. The effective tax rate was higher than the U.S. statutory rate due to state taxes, a difference in rates between the U.S. and foreign jurisdictions, and certain permanent differences, such as nondeductible compensation expenses. For the three month period ended December 31, 2012 and 2011, the Company recorded tax expense of $4,161 and $4,074 on pre-`tax income of $11,899 and $11,007, respectively. For the nine month period ended December 31, 2012 and 2011, the Company recorded tax expense of $11,585 and $3,294 on pre-tax income of $32,910 and $9,075, respectively.
As of December 31, 2012, we have established a long-term liability for uncertain tax positions in the amount of $1,509. There have been no material adjustments to the liability during the nine month period ended December 31, 2012.  All of our unrecognized tax benefits at December 31, 2012 would affect our effective income tax rate if recognized, though the Company does not expect to recognize any tax benefits in the next twelve months.  The Company recognizes related accrued interest and penalties as income tax expense and has accrued $106 for the nine months ended December 31, 2012, resulting in a cumulative total accrual of $1,615.
Tax years 2007 through 2010 generally remain open to examination by the major taxing jurisdictions to which we are subject.  The Company’s U.S. federal income tax returns are under exam for the Predecessor’s tax period ending April 30, 2010 and the tax years ended March 31, 2010, 2009 and 2008. The Company’s Canadian federal income tax returns are under exam for the Predecessor’s tax years ended March 31, 2008, 2009 and 2010. See Note 10, “Commitments and Contingencies”.
13. Geographic Information
We have defined our operating segments based on geographic regions. These regions share similar economic characteristics, product mix, customers and distribution methods. Accordingly, we have elected to aggregate these geographic regions into a single reportable segment.
Within our single reporting segment, we present additional detail for those countries or regions that generate significant revenue and operating income. During the nine months ended December 31, 2012, we changed our basis of presentation of additional geographic information from the Eastern and Western Hemispheres to the four geographic regions of the United States, Canada, Europe and Asia. Each of these regions were reported previously within the hemisphere presentation, therefore there is no material difference with this change in presentation of geographic information.  For purposes of this note, revenue is attributed to individual countries on the basis of the physical location and jurisdiction of organization of the subsidiary that invoices the material and services.
Total sales and operating income classified by major geographic area in which the Company operates are as follows:

13



 
 Three Months Ended December 31, 2012
 
 Three Months Ended December 31, 2011
 
Nine Months Ended December 31, 2012
 
Nine Months Ended December 31, 2011
Sales by geographic area:
 

 
 

 
 
 
 
United States
$
21,843

 
$
25,328

 
$
61,197

 
$
71,061

Canada
27,997

 
17,925

 
73,707

 
60,267

Europe
13,700

 
19,089

 
44,584

 
49,444

Asia
13,210

 
6,855

 
32,463

 
21,711

 
$
76,750

 
$
69,197

 
$
211,951

 
$
202,483

Operating income:
 

 
 

 
 
 
 
United States
$
3,105

 
$
5,497

 
$
11,664

 
$
6,694

Canada
10,559

 
7,022

 
25,859

 
20,663

Europe
(343
)
 
1,805

 
3,234

 
6,401

Asia
2,471

 
1,279

 
5,434

 
3,839

Unallocated:
 

 
 

 


 
 
Management fees

 
(21
)
 

 
(8,141
)
Other
(539
)
 

 
(1,061
)
 

 
$
15,253

 
$
15,582

 
$
45,130

 
$
29,456


14



PART I — FINANCIAL INFORMATION
 
Item 1. (continued) — Financial Statements of Thermon Holding Corp.
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
 
 
December 31,
2012
 
March 31,
2012
 
(Unaudited)
 
 
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
28,389

 
$
21,468

Accounts receivable, net of allowance for doubtful accounts of $858 and $1,434 as of December 31, 2012 and March 31, 2012, respectively
55,899

 
50,037

Inventories, net
40,923

 
38,453

Costs and estimated earnings in excess of billings on uncompleted contracts
2,674

 
1,996

Income taxes receivable
5,070

 
5,193

Prepaid expenses and other current assets
7,099

 
6,853

Deferred income taxes
3,396

 
3,664

Total current assets
143,450

 
127,664

Property, plant and equipment, net
31,097

 
27,661

Goodwill
117,984

 
118,007

Intangible assets, net
136,320

 
144,801

Debt issuance costs, net
4,570

 
7,446

Total assets
$
433,421

 
$
425,579

Liabilities and shareholders’ equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
24,156

 
15,728

Accrued liabilities
15,057

 
22,442

Current portion of long term debt

 
21,000

Billings in excess of costs and estimated earnings on uncompleted contracts
2,178

 
2,446

Income taxes payable
2,385

 
1,374

Obligations due to settle the CHS Transactions
3,325

 
3,528

Total current liabilities
47,101

 
66,518

Long-term debt, net of current maturities
118,145

 
118,145

Deferred income taxes
43,073

 
45,999

Other noncurrent liabilities
2,702

 
2,437

 
 
 
 
Additional paid in capital
200,839

 
192,028

Accumulated other comprehensive income
3,146

 
3,362

Retained earnings (accumulated deficit)
18,415

 
(2,910
)
Shareholders’ equity
222,400

 
192,480

Total liabilities and shareholders' equity
$
433,421

 
$
425,579

 
The accompanying notes are an integral part of these condensed consolidated financial statements

15



Thermon Holding Corp.
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Dollars in Thousands)
 
 Three Months Ended December 31, 2012
 
 Three Months Ended December 31, 2011
 
Nine Months Ended December 31, 2012
 
Nine Months Ended December 31, 2011
Sales
$
76,750

 
$
69,197

 
$
211,951

 
$
202,483

Cost of sales
41,799

 
35,506

 
111,022

 
104,852

Gross profit
34,951

 
33,691

 
100,929

 
97,631

Operating expenses:
 

 
 

 
 
 
 
Marketing, general and administrative and engineering
16,885

 
15,300

 
47,394

 
59,603

Amortization of intangible assets
2,813

 
2,809

 
8,405

 
8,572

Income from operations
15,253

 
15,582

 
45,130

 
29,456

Other income/(expenses):
 

 
 

 
 
 
 
Interest income
36

 
72

 
93

 
239

Interest expense
(3,116
)
 
(4,203
)
 
(12,176
)
 
(16,023
)
Loss on retirement of senior secured notes

 
(229
)
 

 
(3,195
)
Miscellaneous income (expense)
(274
)
 
(215
)
 
(137
)
 
(1,402
)
Income before provision for income taxes
11,899

 
11,007

 
32,910

 
9,075

Income tax expense
4,161

 
4,074

 
11,585

 
3,294

Net income
$
7,738

 
$
6,933

 
$
21,325

 
$
5,781

Comprehensive income (loss):
 

 
 

 
 
 
 
Net income
$
7,738

 
$
6,933

 
$
21,325

 
$
5,781

Foreign currency translation adjustment
(180
)
 
113

 
(216
)
 
(11,017
)
Comprehensive income (loss)
$
7,558

 
$
7,046

 
$
21,109

 
$
(5,236
)
 
The accompanying notes are an integral part of these condensed consolidated financial statements

16



Thermon Holding Corp.
Condensed Consolidated Statement of Cash Flows (Unaudited)
(Dollars in Thousands)
 
Nine Months Ended December 31, 2012
 
Nine Months Ended December 31, 2011
Operating activities
 

 
 

Net income
$
21,325

 
$
5,781

Adjustment to reconcile net income to net cash (used in), provided by operating activities:
 

 
 

Depreciation and amortization
10,306

 
10,623

Amortization of debt costs
3,124

 
4,100

Stock compensation expense
869

 
6,457

Benefit for deferred income taxes
(2,975
)
 
(175
)
Premiums paid on redemptions, included as financing activities

 
3,825

Changes in operating assets and liabilities:
0

 
 

Accounts receivable
(5,902
)
 
(8,209
)
Inventories
(2,811
)
 
(10,413
)
Costs and estimated earnings in excess of billings on uncompleted contracts
(356
)
 
(591
)
Other current and noncurrent assets
371

 
1,013

Accounts payable
8,375

 
4,904

Accrued liabilities and noncurrent liabilities
(6,928
)
 
(11,488
)
Income taxes payable
746

 
(12,308
)
Net cash (used in) provided by operating activities
26,144

 
(6,481
)
Investing activities
 

 
 

Purchases of property, plant and equipment
(5,245
)
 
(6,179
)
Cash paid for Thermon Holding Corp.
(203
)
 
(663
)
Net cash used in investing activities
(5,448
)
 
(6,842
)
Financing activities
 

 
 

Payments on senior secured notes
(21,000
)
 
(70,855
)
Proceeds from revolving line of credit

 
9,000

Payments on revolving lines of credit and long term-debt

 
(2,063
)
Issuance costs associated with revolving line of credit
(248
)
 

Capital contributions

 
50,288

Proceeds from stock option exercises
4,571

 

Benefit from excess tax deduction from option exercises
3,369

 

Premium paid on retirement of senior secured notes
(630
)
 
(3,825
)
Net cash used in financing activities
(13,938
)
 
(17,455
)
Effect of exchange rate changes on cash and cash equivalents
163

 
(462
)
Change in cash and cash equivalents
6,921

 
(31,240
)
Cash and cash equivalents at beginning of period
21,468

 
51,016

Cash and cash equivalents at end of period
$
28,389

 
$
19,776

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

17



Thermon Holding Corp.
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in Thousands, Except Share Data)
 
1. Basis of Presentation and Accounting Policy Information
On April 30, 2010, a group of investors led by entities affiliated with CHS Capital LLC  (“CHS”) and two other private equity firms (together with CHS, our “private equity sponsors”) acquired a controlling interest in Thermon Holding Corp. and its subsidiaries from Thermon Holdings, LLC (“Predecessor”) for approximately $321,500 in a transaction that was financed by approximately $129,252 of equity investments by our private equity sponsors and certain members of our current and former management team (collectively, the “management investors”) and $210,000 of debt raised in an exempt Rule 144A senior secured note offering to qualified institutional investors (collectively, the “CHS Transactions”). The proceeds from the equity investments and debt financing were used both to finance the acquisition and pay related transaction costs. As a result of the CHS Transactions, Thermon Group Holdings, Inc. (“TGH”) became the ultimate parent of Thermon Holding Corp. Thermon Holding Corp. (“THC”) and its direct and indirect subsidiaries are referred to collectively in these unaudited consolidated financial statements of THC as “we”, “our”, the “Company” or “Successor” herein.
In the CHS Transactions, the senior secured notes were issued by Thermon Finance, Inc., which immediately after the closing of the CHS Transactions was merged into our wholly-owned subsidiary Thermon Industries, Inc. 
The CHS Transactions were accounted for as a purchase combination. The purchase price was allocated to the assets and liabilities acquired based on their estimated fair values. While the Company takes responsibility for the allocation of assets acquired and liabilities assumed, it consulted with an independent third party to assist with the appraisal process. 
Pushdown accounting was employed to reflect the purchase price paid by our new owner. 
The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto of TGH for the year ended March 31, 2012. In our opinion, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary to present fairly our financial position at December 31, 2012 and March 31, 2012, and the results of our operations for the three and nine months ended December 31, 2012 and 2011.  Certain reclassifications have been made to the prior period presentation of cash flows to conform to the current period presentation. Specifically, we have provided further detail to the condensed consolidated statement of cash flows related to premiums paid on redemptions included within cash used in operating activities. The reclassification did not change total cash used in operating activities.
Use of Estimates
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. While our management has based their assumptions and estimates on the facts and circumstances existing at December 31, 2012, actual results could differ from those estimates and affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements.  The operating results for the three and nine month period ended December 31, 2012 are not necessarily indicative of the results that may be achieved for the fiscal year ending March 31, 2013

Corrections of classification errors in previously reported Condensed Consolidated Statement of Comprehensive Income (Loss)

During the third quarter of fiscal 2013, the we identified a classification error in our statements of operations and comprehensive income for all previously reported periods. We determined that freight charges that were invoiced to customers had been recorded as a reduction to cost of sales instead of as additional sales. The result of this error was an understatement of sales and cost of sales of $313 for the three months ended September 30, 2012, $317 for the three months ended June 30, 2012, $360 for the three months ended December 31, 2011, $328 for the three months ended September 30, 2011 and $317 for the three months ended June 30, 2011. The classification errors had no effect on the reported gross profit, income from operations or net income and also had no effect on the consolidated balance sheet, the consolidated statement of cash flows or the consolidated statement of shareholders' equity.

Though the correction of the classification errors had no effect on our gross profit, it did result in a slight reduction to our previously reported gross margin as a percentage of revenue as follows below:

18



 
Three Months Ended, September 30, 2012
 
Three Months Ended June 30, 2012
 
 Three Months Ended December 31, 2011
 
Three Months Ended September 30, 2011
 
Three Months Ended June 30, 2011
As reported:
 
 
 
 
 
 
 
 
 
Sales
$
67,358

 
$
67,213

 
$
68,837

 
$
68,023

 
$
64,618

Cost of sales
34,719

 
33,874

 
35,146

 
36,072

 
32,629

Gross profit
32,639

 
33,339

 
33,691

 
31,951

 
31,989

Gross profit as a percentage of revenue
48.5
%
 
49.6
%
 
48.9
%
 
47.0
%
 
49.5
%

 
Three Months, Ended September 30, 2012
 
 Three Months Ended June 30, 2012
 
 Three Months Ended December 31, 2011
 
Three Months Ended September 30, 2011
 
Three Months Ended June 30, 2011
As corrected:
 
 
 
 
 
 
 
 
 
Sales
$
67,671

 
$
67,530

 
$
69,197

 
$
68,351

 
$
64,935

Cost of sales
35,032

 
34,191

 
35,506

 
36,400

 
32,946

Gross profit
32,639

 
33,339

 
33,691

 
31,951

 
31,989

Gross profit as a percentage of revenue
48.2
%
 
49.4
%
 
48.7
%
 
46.7
%
 
49.3
%

Corrections of classification errors in previously reported Condensed Consolidated Statement of Cash Flows

During the second quarter of fiscal 2013, the Company identified a classification error in its cash flow statements for the year ended March 31, 2012 and for the three months ended June 30, 2012 related to the classification of excess income tax benefits associated with stock option exercises. Such benefits were improperly classified as a cash inflow from operating activities rather than a cash inflow from financing activities in the fourth quarter of fiscal year 2012 and in the first quarter of fiscal year 2013. The result of this error was an overstatement of cash flows from operating activities of $2,181 for the year ended March 31, 2012 and $1,243 in the first quarter of fiscal 2013. The classification errors had no effect on the reported changes in cash and cash equivalents, and also had no effect on the consolidated balance sheet, the consolidated statement of comprehensive income (loss), or the consolidated statement of stockholders' equity.


The reduction to cash flows from operating activities for the excess tax deduction has been properly reflected in the cash flow statement for the nine months ended December 31, 2012. Based on our evaluation of relevant quantitative and qualitative factors, we determined that the classification errors are immaterial to our prior period financial statements and did not warrant an amendment of our financial statements for fiscal 2012 or the first quarter of fiscal 2013. The Company plans to correct the comparative presentation of the prior periods in future filings as follows:

 
Three Months Ended
 
Year Ended
 
June 30, 2012

 
March 31, 2012

Cash flows from operating activities:
 
 
 
As reported
$1,600
 
$5,293
Error correction
(1,243
)
 
(2,181
)
As adjusted
357

 
3,112

 
 
 
 
Cash flows from financing activities:
 
 
 
As reported
$(6,949)
 
$(24,852)
Error correction
1,243

 
2,181

As adjusted
(5,706
)
 
(22,671
)

19




Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board ("FASB") updated FASB ASC 820 that resulted in common fair value measurement and disclosure requirements in U.S. generally accepted accounting principles ("GAAP") and International Financial Reporting Standards (IFRSs).  Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.   We have adopted ASC 820 effective April 1, 2012, and it is being applied prospectively. In conjunction with adopting ASC 820, we disclosed the fair value of investments and the inputs used to estimate that fair value.
In June 2011, the FASB updated FASB ASC 220, Comprehensive Income (FASB ASC 220) that gives an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  We have adopted ASC 220 effective April 1, 2012 and in conjunction with adopting ASC 220, we chose to present the components of comprehensive income within a single statement of other comprehensive income or loss. ASC 220 affects presentation and disclosure only and therefore adoption did not affect our results as reported in our consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-02, which updated the guidance in ASC Topic 350, Intangibles – Goodwill and Other. The amendments in this Update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. Under these amendments, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on a qualitative assessment, that it is not more likely than not that the indefinite-lived intangible asset is impaired. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The amendments are not expected to have an impact on our financial condition or results of operations.

2. Fair Value Measurements
Fair Value. We measure fair value based on authoritative accounting guidance, which defines fair value, establishes a framework for measuring fair value and expands on required disclosures regarding fair value measurements. 
Inputs are referred to as assumptions that market participants would use in pricing the asset or liability. The uses of inputs in the valuation process are categorized into a three-level fair value hierarchy.
Level 1 — uses quoted prices in active markets for identical assets or liabilities we have the ability to access.
Level 2 — uses observable inputs other than quoted prices in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — uses one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment.
Financial assets and liabilities with carrying amounts approximating fair value include cash, trade accounts receivable, accounts payable, accrued expenses and other current liabilities. The carrying amount of these financial assets and liabilities approximates fair value because of their short maturities.  At December 31, 2012 and March 31, 2012, no assets or liabilities were valued using Level 3 criteria.
Information about our long-term debt that is not measured at fair value follows:

20



 
December 31, 2012
 
March 31, 2012
 
 
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
Valuation Technique
Financial Liabilities
 

 
 

 
 

 
 

 
 
Long-term debt
$
118,145

 
$
132,027

 
$
139,145

 
$
153,755

 
Level 2 - Market Approach
 
Our senior secured notes trade on over the counter markets.  As the quoted price is only available through a dealer, the Company concluded the market is not active enough to be classified as a Level 1 valuation.  However, the pricing is indirectly observable through dealers and has been classified as Level 2.  Differences between carrying value and fair value are primarily due to instruments that provide fixed interest rates or contain fixed interest rate elements. Inherently, such instruments are subject to fluctuations in fair value due to subsequent movements in interest rates.
Foreign Currency Forward Contracts
We transact business in various foreign currencies and have established a program that primarily utilizes foreign currency forward contracts to offset the risk associated with the effects of certain foreign currency exposures. Under this program, increases or decreases in our foreign currency exposures are offset by gains or losses on the forward contracts to mitigate foreign currency transaction gains or losses. These foreign currency exposures typically arise from intercompany transactions. Our forward contracts generally have terms of 90 days or less. 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 largely offset gains and losses resulting from settlement of payments received from our foreign operations which are settled in U.S. dollars. All outstanding foreign currency forward contracts are marked to market at the end of the period with unrealized gains and losses included in miscellaneous expense. The fair value is determined by quoted prices from active foreign currency markets (Level 2 fair value).  The balance sheet reflects 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 December 31, 2012 and March 31, 2012, the notional amounts of forward contracts we held to sell U.S. Dollars in exchange for other major international currencies were as follows:
Notional amount of foreign exchange forward contracts by currency
 
December 31, 2012
 
March 31, 2012
Russian Ruble
$
5,904

 
$
5,625

Euro
2,909

 
7,495

Canadian Dollar
1,219

 
1,309

South Korean Won
1,490

 

Other
497

 

Total notional amounts
$
12,019

 
$
14,429

The condensed consolidated balance sheets reflects unrealized gains and losses at their fair value as of the reporting date. Unrealized gains are reflected in accounts receivable, net and unrealized losses within accrued liabilities.
 
 
December 31, 2012
 
March 31, 2012
 
 
Fair Value
 
Fair Value
 
 
Assets
Liabilities
 
Assets
Liabilities
Foreign exchange contract forwards
 
$
17

$
67

 
$
8

$
196

Foreign currency gains or losses related to our forward contracts in the accompanying condensed consolidated statements of operations were a loss of $425 and a gain of $126 for the three months ended December 31, 2012 and 2011, respectively and a loss of $164 and a gain of $126 for the nine months ended December 31, 2012 and 2011, respectively.

21



Gains and losses from our forward contracts were offset by transaction gains or losses incurred with the settlement of transactions denominated in foreign currencies. Our net foreign currency gains and losses were losses of $242 and $213 for the three months ended December 31, 2012 and 2011, respectively, and losses of $181 and $1,456 for the nine months ended December 31, 2012 and 2011, respectively.


3. Inventories
Inventories consisted of the following:
 
December 31,
2012
 
March 31,
2012
Raw materials
$
14,487

 
$
11,721

Work in process
2,365

 
1,402

Finished goods
25,221

 
26,424

 
42,073

 
39,547

Valuation reserves
(1,150
)
 
(1,094
)
Inventories, net
$
40,923

 
$
38,453

4. Goodwill
The carrying amount of goodwill as of December 31, 2012 is as follows:
 
Amount
Balance as of March 31, 2012
$
118,007

Foreign currency translation impact
(23
)
Balance as of December 31, 2012
$
117,984

The excess purchase price over the fair value of assets acquired is recorded as goodwill. Goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach based on the market capitalization of the reporting unit. Our annual impairment test will be performed as of January 1, 2013. At December 31, 2012, there were no indicators of a goodwill impairment.  Goodwill is not deductible for tax purposes.


5. Accrued Liabilities
 
Accrued current liabilities consisted of the following:
 
 
December 31,
2012
 
March 31,
2012
Accrued employee compensation and related expenses
$
7,616

 
$
10,970

Interest
1,896

 
6,162

Customer prepayment
1,298

 
1,518

Warranty reserve
749

 
857

Professional fees
1,052

 
1,346

Sales tax payable
323

 
183

Compliance costs

 
55

Other
2,123

 
1,351

Total accrued current liabilities
$
15,057

 
$
22,442

 
6. Related-Party Transactions

22



We paid management fees, including a termination fee, of $8,120 in connection with our IPO to our private equity sponsors in the nine months ended December 31, 2011.  The termination fee is included as part of Marketing, general and administrative and engineering expense. We did not pay management fees during the nine months ended December 31, 2012.
Included in our consolidated balance sheet is “Obligations due to settle the CHS Transaction,” which totaled $3,325 and $3,528 at December 31, 2012 and March 31, 2012, respectively.  These amounts represent amounts due to the Predecessor owners in final settlement of the acquisition by our private equity sponsors of a controlling interest in us that was completed on April 30, 2010.  During the three and nine months ended December 31, 2012, we paid $67 and $203 respectively to the Predecessor owners and for the three and nine months ended December 31, 2011 we paid $137 and $663, respectively to the Predecessor owners, in each case reflected in "Obligations due to settle the CHS Transactions".  At December 31, 2012, the amount outstanding represents the estimate of tax refunds due from government entities that have not been received but are related to the final tax periods filed by the Predecessor and remaining encumbered cash to be released as letters of credit expire.

7. Short-Term Revolving Lines of Credit
The Company’s subsidiary in the Netherlands has a revolving credit facility in the amount of Euro 4,000 (equivalent to $5,286 USD at December 31, 2012). The facility is collateralized by receivables, inventory, equipment, furniture and real estate. No loans were outstanding on this facility at December 31, 2012 or March 31, 2012.
The Company’s subsidiary in India has a revolving credit facility in the amount of 80,000 Rupees (equivalent to $1,460 USD at December 31, 2012). The facility is collateralized by receivables, inventory, real estate, a letter of credit and cash. No loans were outstanding on this facility at December 31, 2012 or March 31, 2012
The Company’s subsidiary in Australia has a revolving credit facility in the amount of $325 Australian Dollars (equivalent to $337 USD at December 31, 2012). The facility is collateralized by real estate. No loans were outstanding under the facility at December 31, 2012 or March 31, 2012.
The Company’s subsidiary in Japan has a revolving credit facility in the amount of 45,000 Japanese Yen (equivalent to $524 USD at December 31, 2012).  No loans were outstanding under the Japanese revolving credit facility at December 31, 2012 or March 31, 2012.
Under the Company’s principal revolving credit facility described below in Note 8, “Long-Term Debt,” there were no outstanding borrowings at either December 31, 2012, and March 31, 2012, respectively. 

8. Long-Term Debt
Long-term debt consisted of the following:
 
December 31,
2012
 
March 31,
2012
9.500% Senior Secured Notes, due May 2017
$
118,145

 
$
139,145

 
118,145

 
139,145

Less current portion

 
(21,000
)
 
$
118,145

 
$
118,145

 
Revolving Credit Facility and Senior Secured Notes
Revolving credit facility.    On August 7, 2012, Thermon Industries, Inc. and Thermon Canada Inc. terminated their existing revolving credit facility, and entered into a new credit facility agreement with a new syndicate of lenders led by JP Morgan Chase Bank, N.A; as administrative agent. As a result of the termination, we accelerated the remaining $1,447 of unamortized deferred debt costs associated with the previous revolving credit facility, which is included as interest expense. Under the revolving line of credit, we have available up to $40,000 of aggregate loans, of which up to $20,000 is available to our Canadian subsidiary, subject to borrowing base availability. Availability of funds under our new revolving credit facility is determined by a borrowing base equal to the sum of 85% of eligible accounts receivable, plus 65% of eligible inventory, plus 85% of the net orderly liquidation value of eligible equipment, plus 80% of the fair market value of eligible owned real property. In no case shall availability under our revolving credit facility exceed the commitments thereunder. As of December 31, 2012, we had $37,420 of capacity available under our revolving credit facility after taking into account the

23



borrowing base, outstanding loan advances and letters of credit. In addition to our revolving credit facility, we have various short term revolving lines of credit available to us at our foreign affiliates.  At December 31, 2012, we had no outstanding borrowings under the revolving credit facility. Had there been any outstanding borrowings, the interest rate would have been approximately 3%
The new revolving credit facility will mature in 2015. Any borrowings on our revolving credit facility will incur interest expense that is variable in relation to the LIBOR rate, plus approximately 2.5%. Borrowings denominated in Canadian Dollars under the Canadian facility bear interest at a variable rate in relation to the bankers’ acceptance rate, as set forth in the revolving credit facility. In addition to paying interest on outstanding borrowings under our revolving credit facility, we are required to pay a 0.4% per annum commitment fee to the lenders in respect of the unutilized commitments thereunder and letter of credit fees equal to the LIBOR margin or the bankers’ acceptance rate, as applicable, on the undrawn amount of all outstanding letters of credit. 
Senior secured notes.  As of December 31, 2012, we had $118,145 of indebtedness outstanding under our senior secured notes with annual cash interest expense of approximately $11,224. Our senior secured notes mature on May 1, 2017 and accrue interest at a fixed rate of 9.5%. We pay interest in cash semi-annually on May 1 and November 1 of each year.  Our senior secured notes were issued in a Rule 144A exempt senior secured note offering to qualified institutional investors.  The proceeds were used to fund the purchase price for the CHS Transactions and related transaction costs.  In January 2011, we consummated an offer to exchange the old restricted senior secured notes for new, SEC-registered senior secured notes. 
During the nine months ended December 31, 2012 and 2011, the Company made partial redemptions of the senior secured notes in the amount of $21,000 and $70,855, respectively.  In connection with these redemptions, the Company paid cash premiums on redemption of $630 and $3,825 for the nine months ended December 31, 2012 and 2011, respectively. As a result of these partial redemptions, we accelerated the amortization of deferred debt cost of $871 and $3,096 for the nine months ended December 31, 2012 and 2011, respectively.  These expenses were included in interest expense for the periods reported. 
Guarantees; security.  The obligations under our revolving credit facility and our senior secured notes are guaranteed on a senior secured basis by the Company and each of its existing and future domestic restricted subsidiaries, other than Thermon Industries, Inc., the issuer of the senior secured notes. The obligations under our revolving credit facility are secured by a first priority perfected security interest in substantially all of our and the guarantors’ assets, subject to certain exceptions, permitted liens and encumbrances reasonably acceptable to the agent under our revolving credit facility. Our senior secured notes and guarantees are also secured by liens on substantially all of our and the guarantors’ assets, subject to certain exceptions; provided, however, that the liens are contractually subordinated to the liens thereon that secure our revolving credit facility. 
Restrictive covenants.  The revolving credit facility and senior secured notes contain various restrictive covenants that include restrictions or limitations on our ability to: incur additional indebtedness or issue disqualified capital stock unless certain financial tests are satisfied; pay dividends, redeem subordinated debt or make other restricted payments; make certain investments or acquisitions; issue stock of subsidiaries; grant or permit certain liens on our assets; enter into certain transactions with affiliates; merge, consolidate or transfer substantially all of our assets; incur dividend or other payment restrictions affecting certain of our subsidiaries; transfer or sell assets, including capital stock of our subsidiaries; and change the business we conduct. However, all of these covenants are subject to customary exceptions.

9. Commitments and Contingencies
At December 31, 2012, the Company had in place letter of credit guarantees and performance bonds securing performance obligations of the Company. These arrangements totaled approximately $14,890.  Of this amount, $2,055 is secured by cash deposits at the Company’s financial institutions.  The remaining $12,835 represents a reduction of the available amount of the Company’s short term and long term revolving lines of credit and performance bonds that the Company has secured. Included in prepaid expenses and other current assets at December 31, 2012 and March 31, 2012, was approximately $2,055 and $2,398, respectively, of cash deposits pledged as collateral on performance bonds and letters of credit. 
The Company is involved in various legal proceedings that arise from time to time in the ordinary course of doing business and believes that adequate reserves have been established for any probable losses. Expenses related to litigation are included in operating income. We do not believe that the outcome of any of these proceedings 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 or cash flows in any one accounting period. 

24



The Company has no outstanding legal matters outside of matters arising in the ordinary course of business, except as described below. We can give no assurances we will prevail in any of these matters.
Asbestos Litigation—Since 1999, we have been named as one of many defendants in 16 personal injury suits alleging exposure to asbestos from our products. None of the cases alleges or has alleged premises liability. Two cases are currently pending. Insurers are defending us in one of the two lawsuits, and we expect that an insurer will defend us in the remaining matter. Of the concluded suits, there were seven cost of defense settlements and the remainder were dismissed without payment. There are no claims unrelated to asbestos exposure for which coverage has been sought under the policies that are providing coverage. 
Indian Sales Tax and Customs Disputes—Our Indian subsidiary is currently disputing assessments of administrative sales tax and customs duties with Indian tax and customs authorities. In addition, we currently have a customs duty case before the Supreme Court in India, on appeal by custom authorities. We have reserved $188 in estimated settlement of the remaining matters.
Notice of Tax Dispute with the Canada Revenue Agency—On June 13, 2011, we received notice from the Canada Revenue Agency (“Agency”) advising us that they disagree with the tax treatment we proposed with respect to certain asset transfers that was completed in August 2007 by our Predecessor owners.  As a result, the Agency proposes to disallow the interest deductions taken in Canada for tax years 2008, 2009 and 2010.   In total these interest deductions amounted to $11,640  The statutory tax rate in Canada is approximately 25%, therefore the tax due that is requested by the Agency is approximately $2,910.  At December 31, 2012, we have not recorded a tax liability reserve related to this matter with the Agency, as a loss is not probable or estimable.  While we will vigorously contest this ruling, we expect that any liability will be covered under an indemnity agreement with the Predecessor owners.

10. Stock-Based Compensation Expense
We record stock-based compensation expense related to stock-based awards that are made by TGH, our parent entity, to our employees, directors or non-employee contractors.  Stock compensation expense was $475, $58, $869 and $6,456 during the three and nine months ended December 31, 2012 and 2011, respectively.  Thermon Group Holdings completed its IPO on May 5, 2011. As a result, we recorded stock compensation expense of $6,310 during the nine months ended December 31, 2011 which represented all unamortized stock compensation then outstanding.
During the nine months ended December 31, 2012, we issued various stock compensation awards to employees and directors of the company. On August 2, 2012, 56,532 options and 71,923 restricted stock units were granted to certain employees. Also on August 2, 2012, 12,546 restricted stock awards were issued to our directors and a target amount of 44,146 performance stock units were granted to our named executive officers. The closing price of our stock on the date of these grants was $21.52
The stock options were valued by using a Black Scholes option pricing model. We arrived at a total fair value for the option awards of $501 by applying a volatility assumption of 40.5%, a risk free rate of 0.63%, expected term of 6.66 years and no expected dividend. The fair value of these options will be expensed on a straight line basis over five years.
The restricted stock units that were issued to our employees have a total fair value of $1,548 as determined by the closing price of our stock on August 2, 2012 which will be expensed on a straight-line basis over three years. At each anniversary of the restricted stock units, one-third of the shares will become vested for the employees and the unrestricted shares of stock will become issued and outstanding.
The restricted stock awards issued to our directors have a total fair value of $270 as determined by the price of our stock at closing on August 2, 2012 which will be expensed on a straight line basis over one year. The director's restricted stock has already been issued and is included in our shares outstanding. On the anniversary of the grant date, the restrictions will be removed.
The performance stock units issued to our four named executive officers had a total fair value at grant date of $960. The performance indicator for these stock awards is based on the market performance of our stock price as compared to a pre-determined peer group of companies with similar business characteristics as ours. Since the performance indicator is market based, we prepared a Monte Carlo valuation model to calculate the probable outcome of the performance measure to arrive at the fair value. We will expense the fair value over three years ending at each of our fiscal year ends during the performance period, whether or not the market conditions are met. At the end of each fiscal year, one-third of the performance units will be

25



evaluated. It will then be determined how many shares of stock will be issued. In each year, the possible number of shares that will be issued ranges from zero to 29,430 in the aggregate. Shares that are not awarded in a given year will be forfeited.
The right to purchase shares under the options vests over a five to ten-year period, beginning on the date of grant. Stock options must be exercised within ten 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 estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods. During the nine month period ended December 31, 2012, we did not make any changes in accounting principles or methods of estimates relating to stock based compensation expense.
11. Income Taxes
Our anticipated annual effective tax rate before discrete events of approximately 34.8% has been applied to our consolidated pre-tax income for the nine month period ended December 31, 2012. Our anticipated annual effective tax rate after discrete events of approximately 35.2% differs from the tax rate before the discrete event due to the additional accrued interest and penalties recorded on uncertain tax positions (discussed below). Our anticipated annual effective tax rate was different than the U.S. federal statutory rate primarily due to state taxes, a difference in rates between the U.S. and foreign jurisdictions, and certain permanent differences, such as nondeductible meals and entertainment and compensation expenses.  For the nine months ended December 31, 2011, the Company’s provision for income taxes reflects an effective rate before discrete events of approximately 38.0% and an after discrete event rate of 37.1%. The effective tax rate was higher than the U.S. statutory rate due to state taxes, a difference in rates between the U.S. and foreign jurisdictions, and certain permanent differences, such as nondeductible compensation expenses. For the three month period ended December 31, 2012 and 2011, the Company recorded tax expense of $4,161 and $4,074 on pre-tax income of $11,899 and $11,007, respectively. For the nine month period ended December 31, 2012 and 2011, the Company recorded tax expense of $11,585 and $3,294 on pre-tax income of $32,910 and $9,075, respectively.
As of December 31, 2012, we have established a long-term liability for uncertain tax positions in the amount of $1,509. There have been no material adjustments to the liability during the nine month period ended December 31, 2012.  All of our unrecognized tax benefits at December 31, 2012 would affect our effective income tax rate if recognized, though the Company does not expect to recognize any tax benefits in the next twelve months.  The Company recognizes related accrued interest and penalties as income tax expense and has accrued $106 for the nine months ended December 31, 2012, resulting in a cumulative total accrual of $1,615.
Tax years 2007 through 2010 generally remain open to examination by the major taxing jurisdictions to which we are subject.  The Company’s U.S. federal income tax returns are under exam for the Predecessor’s tax period ended April 30, 2010 and the tax years ended March 31, 2010, 2009 and 2008. The Company’s Canadian federal income tax returns are under exam for the Predecessor’s tax years ended March 31, 2008, 2009 and 2010. See Note 10, “Commitments and Contingencies”.

12. Geographic Information
We have defined our operating segments based on geographic regions. These regions share similar economic characteristics, product mix, customers and distribution methods. Accordingly, we have elected to aggregate these geographic regions into a single reportable segment.
Within our single reporting segment, we present additional detail for those countries or regions that generate significant revenue and operating income. During the nine months ended December 31, 2012, we changed our basis of presentation of additional geographic information from the Eastern and Western Hemispheres to the four geographic regions of the United States, Canada, Europe and Asia. Each of these regions were reported previously within the hemisphere presentation, therefore there is no material difference with this change in presentation of geographic information.  For purposes of this note, revenue is attributed to individual countries on the basis of the physical location and jurisdiction of organization of the subsidiary that invoices the material and services.
Total sales and operating income classified by major geographic area in which the Company operates are as follows:


26



 
 Three Months Ended December 31, 2012
 
 Three Months Ended December 31, 2011
 
Nine Months Ended December 31, 2012
 
Nine Months Ended December 31, 2011
Sales by geographic area:
 

 
 

 
 
 
 
United States
$
21,843

 
$
25,328

 
$
61,197

 
$
71,061

Canada
27,997

 
17,925

 
73,707

 
60,267

Europe
13,700

 
19,089

 
44,584

 
49,444

Asia
13,210

 
6,855

 
32,463

 
21,711

 
$
76,750

 
$
69,197

 
$
211,951

 
$
202,483

Operating income :
 

 
 

 
 
 
 
United States
$
3,105

 
$
5,497

 
$
11,664

 
$
6,694

Canada
10,559

 
7,022

 
25,859

 
20,663

Europe
(343
)
 
1,805

 
3,234

 
6,401

Asia
2,471

 
1,279

 
5,434

 
3,839

Unallocated:
 

 
 

 


 
 
Management fees

 
(21
)
 

 
(8,141
)
Other
(539
)
 

 
(1,061
)
 

 
$
15,253

 
$
15,582

 
$
45,130

 
$
29,456


13. Guarantor Consolidation
 
The senior secured notes issued by Thermon Industries, Inc., our wholly-owned subsidiary, are guaranteed by THC and our other existing, wholly-owned domestic subsidiaries: Thermon Manufacturing Company, Thermon Heat Tracing Services, Inc., Thermon Heat Tracing Services-I, Inc. and Thermon Heat Tracing Services-II, Inc. (collectively, the “Guarantors”).  Our foreign subsidiaries (collectively, the “Non-Guarantors”) are not guarantors of the senior secured notes.
 
The following tables set forth financial information of the Guarantors and Non-Guarantors for the condensed consolidated balance sheets as of December 31, 2012  and March 31, 2012 the condensed consolidated statements of comprehensive income (loss) for the three and nine months ended December 31, 2012 and December 31, 2011 and the condensed consolidated statements of cash flows for the nine months ended December 31, 2012 and December 31, 2011.  The information is presented on the equity method of accounting together with elimination entries necessary to reconcile to the consolidated financial statements.























27



 
Thermon Holding Corp.
 
Condensed Balance Sheet (Unaudited)
 
December 31, 2012
 
Thermon Holding
Corp. (Guarantor)
 
Thermon
Industries, Inc.
(Issuer)
 
Thermon
Manufacturing
Company and US
Subsidiaries
(Guarantor)
 
International
Subsidiaries
(Non-guarantors)
 
Eliminations
 
Consolidated
Assets
 

 
 

 
 

 
 

 
 

 
 

Current assets:
 

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$

 
$

 
$
9,990

 
$
18,399

 
$

 
$
28,389

Accounts receivable, net

 

 
30,917

 
44,503

 
(19,521
)
 
55,899

Inventories, net

 

 
21,332

 
21,533

 
(1,942
)
 
40,923

Costs and estimated earnings in excess of billings on uncompleted contracts

 

 
2,373

 
301

 

 
2,674

Income taxes receivable

 

 
5,093

 
(23
)
 

 
5,070

Prepaid expenses and other current assets

 
354

 
954

 
5,070

 
721

 
7,099

Deferred Income taxes

 

 
2,752

 
644

 

 
3,396

Total current assets

 
354

 
73,411

 
90,427

 
(20,742
)
 
143,450

Property, plant and equipment, net

 

 
25,601

 
5,496

 

 
31,097

Goodwill

 

 
47,391

 
70,593

 

 
117,984

Intangible assets, net
887

 

 
67,638

 
67,795

 

 
136,320

Debt Issuance costs, net

 
4,570

 

 

 

 
4,570

Investment in subsidiaries
141,361

 
264,389

 
91,887

 

 
(497,637
)
 

Total assets
$
142,248

 
$
269,313

 
$
305,928

 
$
234,311

 
$
(518,379
)
 
$
433,421

Liabilities and shareholders' equity
 

 
 

 
 

 
 

 
 

 
 

Current liabilities:
 

 
 

 
 

 
 

 
 

 
 

Accounts payable
$

 
$

 
$
12,358

 
$
11,798

 
$

 
$
24,156

Accrued liabilities

 
1,870

 
5,179

 
8,008

 

 
15,057

Obligations in settlement of the CHS Transactions