Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2011

 

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)

 

 

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.

 

 

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).

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act.

 

 

 

 

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).

 

 

As of August 8, 2011, each registrant had the following number of shares of common stock outstanding:

 

Thermon Group Holdings, Inc.:  29,523,641 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.

 

 

Table of Contents

 

EXPLANATORY NOTE

 

This quarterly report (“this quarterly report”) combines the Quarterly Reports on Form 10-Q for the quarter ended June 30, 2011 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 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 the business as a whole in the same manner as 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), this quarterly report refers to actions or holdings as our actions or holdings and, unless otherwise indicated, means the actions or holdings of TGH and THC and their respective subsidiaries, as one consolidated company.

 

Finally, in connection with the IPO:

 

·                        TGH amended its amended and restated certificate of incorporation to increase its authorized capital stock and effect a 192.458681-for-one split of the common stock of TGH, which occurred on March 31, 2011;

 

·                        the two classes of TGH common stock were automatically converted into a single class of voting common stock;

 

·                        TGH and its stockholders adopted a second amended and restated certificate of incorporation;

 

Table of Contents

 

·                        TGH initially issued and sold 4,000,000 shares of its common stock and subsequently issued and sold 575,098 shares of its common stock pursuant to a partial exercise of the underwriters’ overallotment option;

 

·                        certain stockholders of TGH initially sold 6,000,000 shares of TGH common stock and subsequently sold 74,902 shares of TGH common stock pursuant to a partial exercise of the underwriters’ overallotment option;

 

·                        options to purchase 2,757,524 shares of TGH common stock granted under the Thermon Group Holdings, Inc. Restricted Stock and Stock Option Plan (the “2010 Equity Plan”) accelerated and became immediately exercisable; and

 

·                        options to purchase 117,600 shares of TGH common stock were granted under the Thermon Group Holdings, Inc. 2011 Long-Term Incentive Plan (the “LTIP”).

 

Unless stated otherwise or the context otherwise requires, all information in this quarterly report gives effect to and assumes the occurrence of the foregoing actions.

 

Table of Contents

 

THERMON GROUP HOLDINGS, INC. and THERMON HOLDING CORP. (Combined)

 

QUARTERLY REPORT

FOR THE QUARTER ENDED JUNE 30, 2011

 

TABLE OF CONTENTS

 

	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Thermon Group Holdings, Inc. and its Consolidated Subsidiaries Condensed Consolidated Balance Sheets as of June 30, 2011 and March 31, 2011	1
Condensed Consolidated Statements of Operations for the three months ended June 30, 2011 (“Successor”), the period from May 1, 2010 to June 30, 2010 (“Successor”) and the period from April 1 through April 30, 2010 (“Predecessor”).	2
Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2011 (“Successor”), the period from May 1, 2010 to June 30, 2010 (“Successor”) and the period from April 1 through April 30, 2010 (“Predecessor”).	3
Notes to Condensed Consolidated Financial Statements	4
Item 1. (continued) Financial Statements (Unaudited)
Thermon Holding Corp. and its Consolidated Subsidiaries Condensed Consolidated Balance Sheets as of June 30, 2011 and March 31, 2011	15
Condensed Consolidated Statements of Operations for the three months ended June 30, 2011 (“Successor”), the period from May 1, 2010 to June 30, 2010 (“Successor”) and the period from April 1 through April 30, 2010 (“Predecessor”).	16
Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2011 (“Successor”), the period from May 1, 2010 to June 30, 2010 (“Successor”) and the period from April 1 through April 30, 2010 (“Predecessor”).	17
Notes to Condensed Consolidated Financial Statements	18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3. Quantitative and Qualitative Disclosures About Market Risk	49
Item 4. Controls and Procedures	50
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	52
Item 1A. Risk Factors	52
Item 2. Unregistered Sales of Equity of Equity Securities and Use of Proceeds	52
Item 3. Defaults Upon Senior Securities	52
Item 5. Other Information	53
Item 6. Exhibits	53
SIGNATURE	54
EXHIBIT INDEX	55
EX-31.1
EX-31.2
EX-31.3
EX-31.4
EX-32.1
EX-32.2
EX-31.3
EX-31.4

 

i

Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1 — Financial Statements of Thermon Group Holdings, Inc.

 

 Condensed Consolidated Balance Sheets

(Dollars in Thousands)

 

		June 30, 2011 (Unaudited)			March 31, 2011
Assets
Current assets:
Cash and cash equivalents		$	31,604		$	51,266
Accounts receivable, net of allowance for doubtful accounts of $1,473 and $1,487 as of June 30, 2011 and March 31, 2011, respectively		45,893			40,013
Inventories, net		34,317			31,118
Costs and estimated earnings in excess of billings on uncompleted contracts		1,816			2,063
Income taxes receivable		7,824			2,462
Prepaid expenses and other current assets		6,882			7,633
Deferred income taxes		1,342			2,779
Total current assets		129,678			137,334
Property, plant and equipment, net		23,098			21,686
Goodwill		121,522			120,750
Intangible assets, net		157,013			159,056
Debt issuance costs, net		9,258			11,573
Other noncurrent assets		—			633
		$	440,569		$	451,032
Liabilities and shareholder’s/members’ equity
Current liabilities:
Accounts payable		$	20,548		$	18,573
Accrued liabilities		18,319			28,972
Current portion of long term debt		—			21,000
Borrowings under revolving lines of credit		—			2,063
Billings in excess of costs and estimated earnings on uncompleted contracts		431			1,110
Income taxes payable		—			7,934
Obligations due to settle the CHS Transaction		3,841			4,213
Total current liabilities		43,139			83,865
Long-term debt, net of current maturities		168,000			189,000
Deferred income taxes		49,592			49,809
Other noncurrent liabilities		1,865			1,826
Common stock, 29,523,641 at June 30, 2011 and 24,933,407 at March 31, 2011, shares issued and outstanding $.001 par value, 150,000,000 authorized		30			25
Preferred stock, no shares issued and outstanding $.001 par value, 10,000,000 authorized		—			—
Additional paid in capital		186,422			131,416
Foreign currency translation adjustment		11,426			10,031
Accumulated deficit		(19,905		)	(14,940		)
Shareholders’ equity		177,973			126,532
		$	440,569		$	451,032

 

See accompanying notes.

 

1

Table of Contents

 

Thermon Group Holdings, Inc.

 

Condensed Consolidated Statements of Operations (Unaudited)

(Dollars in Thousands)

 

		Three Months			For the Period From May 1,			For the Period From April 1, Through
		Ended June 30, 2011			Through June 30, 2010			April 30, 2010
		(Successor)			(Successor)			(Predecessor)
Sales		$	64,618		$	37,513		$	13,063
Cost of sales		32,629			25,343			6,447
Gross profit		31,989			12,170			6,616
Operating expenses:
Marketing, general and administrative and engineering		29,616			8,550			4,263
Amortization of other intangible assets		2,885			5,126			215
Income (loss) from operations		(512		)	(1,506		)	2,138
Other income/(expenses):
Interest income		91			1			7
Interest expense		(6,790		)	(5,845		)	(6,229		)
Loss on retirement of debt		(630		)	—			—
Success fees to owners related to the CHS Transaction		—			(3,022		)	(4,716		)
Miscellaneous expense		(14		)	(2,700		)	(8,901		)
Loss before provision for income taxes		(7,855		)	(13,072		)	(17,701		)
Income taxes benefit		2,889			899			17,434
Net loss		$	(4,966	)	$	(12,173	)	$	(267	)
Loss per common share:
Basic		$	(0.18	)	$	(0.49	)	$	(5.11	)
Diluted		$	(0.18	)	$	(0.49	)	$	(5.11	)
Weighted-average shares used in computing net loss per common share:
Basic		27,738,534			24,900,332			52,253
Diluted		27,738,534			24,900,332			52,253

 

See accompanying notes.

 

2

Table of Contents

 

Thermon Group Holdings, Inc.

 

Condensed Consolidated Statement of Cash Flows (Unaudited)

(Dollars in Thousands)

 

		Three Months Ended June 30, 2011			For the Period From May 1, Through June 30, 2010			For the Period From April 1, Through April 30, 2010
		(Successor)			(Successor)			(Predecessor)
Operating activities
Net loss		$	(4,966	)	$	(12,173	)	$	(267	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		3,946			10,517			392
Amortization of debt costs		2,315			2,346			2,586
Stock compensation expense		6,341			—			—
Provision (benefit) for deferred income taxes		753			(3,029		)	(15,122		)
Changes in operating assets and liabilities:
Accounts receivable		(5,470		)	(5,167		)	1,365
Inventories		(2,927		)	849			(1,719		)
Costs and estimated earnings and billings on construction contracts		(366		)	(375		)	34
Other current and noncurrent assets		2,329			(2,061		)	(3,151		)
Accounts payable		1,948			3,280			825
Accrued liabilities and noncurrent liabilities		(10,605		)	3,464			9,515
Income taxes payable		(13,676		)	(1,054		)	(860		)
Net cash used in operating activities		(20,378		)	(3,403		)	(6,402		)
Investing activities
Purchases of property, plant and equipment		(2,379		)	(777		)	(97		)
Cash paid for Thermon Holding Corp. (net of cash acquired of $2,852)		(372		)	(311,448		)	—
Other investing activities		—			(1,081		)	(1,397		)
Net cash used in investing activities		(2,751		)	(313,306		)	(1,494		)
Financing activities
Proceeds from senior secured notes		—			210,000			—
Payments on senior secured notes		(42,000		)	—			—
Proceeds from revolving line of credit		—			4,204			—
Payments on revolving lines of credit and long-term debt		(2,063		)	(1,453		)	(19,385		)
Capital contributions		48,669			129,252			—
Premiums paid on redemption of senior secured notes		(1,260		)	—			—
Debt issuance costs		—			(15,473		)	—
Net cash provided by (used in) financing activities		3,346			326,530			(19,385		)
Effect of exchange rate changes on cash and cash equivalents		121			(913		)	(14		)
Change in cash and cash equivalents		(19,662		)	8,908			(27,295		)
Cash and cash equivalents at beginning of period		51,266			—			30,147
Cash and cash equivalents at end of period		$	31,604		$	8,908		$	2,852

 

See accompanying notes.

 

3

Table of Contents

 

Thermon Group Holdings, Inc.

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars in Thousands, Except Per Share Data)

 

1. Basis of Presentation

 

On April 30, 2010, a group of investors led by entities affiliated with CHS Capital LLC  (“CHS”) and two other private equity firms 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 $129,200 of equity investments by CHS, two other private equity firms and certain members of our current and former management team (collectively, the “management investors”) and $210,000 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.  We refer to CHS and the two other private equity fund investors collectively as “our private equity sponsors”.

 

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 acquired based on their estimated fair values, and liabilities assumed were recorded based upon their actual value. 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.

 

We have prepared our consolidated financial statements as if Thermon Group Holdings, Inc. had been in existence throughout all relevant periods. The historical financial and other data prior to the closing of the CHS Transactions on April 30, 2010 have been prepared using the historical results of operations and bases of the assets and liabilities of the Predecessor. Our historical financial data prior to May 1, 2010 may not be indicative of our future performance. The CHS Transactions which closed on April 30, 2010, resulted in the liquidation of the equity balances that belonged to the previous owner.  Accordingly, the consolidated statement of operations and cash flows are reported separately for the period from April 1, 2010 to April 30, 2010 for the (“Predecessor”).  The settlement of equity balances and associated transaction expenses of the Predecessor are reported in the Period from April 1, 2010 to April 30, 2010.

 

In May 2011, Thermon Group Holdings, Inc. completed its initial public offering (“IPO”) of common shares in which it issued 4,575,098 new common shares and received net proceeds of $48,669, net of underwriting discounts and commissions and estimated offering expenses. Refer to Note 13, “Shareholders’ Equity”.

 

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, 2011. 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 June 30, 2011 and March 31, 2011, and the results of our operations and the cash flows for the three months ended June 30, 2011, the period from May 1, 2010 to June 30, 2010 and the period from April 1 through April 30, 2010. Operating results for the period from May 1 through June 30, 2010 and for the period from April 1 through April 30, 2010 are not necessarily indicative of the results that may be expected for the three months ending June 30, 2011. Certain reclassifications have been made to the prior period presentation to conform to the current period presentation.  All dollar and share amounts are presented in thousands, unless otherwise noted.

 

4

Table of Contents

 

2. Recent Accounting Pronouncements

 

In October 2009, the Financial Accounting Standards Board (“FASB”)  issued an Accounting Standards Update 2009-13 (“ASU 2009-13”) that amended the accounting rules addressing revenue recognition for multiple- deliverable revenue arrangements by eliminating the criterion for objective and reliable evidence of fair value for the undelivered products or services. Instead, revenue arrangements with multiple deliverables should be divided into separate units of accounting provided the deliverables meet certain criteria. Additionally the ASU 2009-13 provides for elimination of the use of the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables based on their relative selling price. A hierarchy for estimating such selling price is included in the update.  The Company adopted this ASU in the three month period ended June 30, 2011 and concluded it did not have a material impact on our consolidated financial position or results of operations.

 

In January 2010, the FASB updated FASB ASC 820 that requires additional disclosures and clarifies existing disclosures regarding fair value measurements. The additional disclosures include 1) transfers in and out of Levels 1 and 2 and 2) roll forward activity in Level 3 fair value measurements. The update provides amendments that clarify existing disclosures on 1) level of disaggregation and 2) disclosures about inputs and valuation techniques. This update is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. The Company adopted this ASU.  on April 1, 2010 as required and subsequently adopted on April 1, 2011, the update surrounding disclosures on level 3 fair value measurements, and concluded it did not have a material impact on our consolidated financial position or results of operations.

 

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.  The update does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The update does not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items.  The update does not affect how earnings per share is calculated or presented.  The update should be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  We are currently evaluating the requirements of this update and have not yet determined the impact on our consolidated financial statements.

 

3. Net Loss Per Common Share

 

Basic net loss per share is computed by dividing net loss 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 include options and P units, is computed using the treasury stock method.

 

The basic and diluted net loss per share calculations are presented below (in thousands, except for per share amounts):

 

		Successor						Predecessor
		Three Months Ended June 30, 2011			For the period From May 1, 2010 Through June 30, 2010			For the Period From April 1, Through April 30, 2010
Basic net loss per common share
Net loss		$	(4,966	)	$	(12,173	)	$	(267	)
Weighted-average common shares outstanding(1)		27,738,534			24,900,332			52,253
Basic net loss per common share		$	(0.18	)	$	(0.49	)	$	(5.11	)

(1)          As the Company was in a net loss position for each of the periods presented there was no dilutive effect on net loss per common share as the Class P units issued by the predecessor and options issued by the successor are antidilutive. Therefore, both basic and diluted net loss per common share were $(0.18) for the three months ended June 30, 2011, $(0.49) for the period from May 1, 2010 through June 30, 2010 and $(5.11) for the period April 1, 2010 through April 30, 2010.

 

5

Table of Contents

 

4. Inventories

 

Inventories consisted of the following:

 

		June 30,			March 31,
		2011			2011
Raw materials		$	13,183		$	9,847
Work in process		1,747			2,307
Finished goods		21,019			20,669
		35,949			32,823
Valuation reserves		(1,632		)	(1,705		)
Net inventory		$	34,317		$	31,118

 

5. Property, Plant and Equipment

 

Property, plant and equipment consisted of the following:

 

		June 30,			March 31,
		2011			2011
Land, buildings and improvements		$	13,486		$	13,495
Machinery and equipment		6,844			7,378
Office furniture and equipment		2,698			2,595
Construction in process		2,988			—
		26,016			23,468
Accumulated depreciation		(2,918		)	(1,782		)
		$	23,098		$	21,686

 

6.  Intangibles

 

Intangible assets at June 30, 2011 were related to the CHS Transactions and consisted of the following:

 

		Net Carrying Amount at March 31, 2011			Accumulated Amortization			Net Carrying Amount at June 30, 2011
Trademarks		$	49,403		$	—		$	49,403
Developed technology		10,721			141			10,580
Customer relationships		97,079			2,680			94,399
Certification		516			—			516
Other		1,337			64			1,273
		$	159,056		$	2,885		156,171
Currency translation adjustment								842
Total								$	157,013

 

Trademarks and certifications have indefinite lives. Developed technology, customer relationships, and other intangible assets have estimated lives of 20 years, 10 years, and 6 years, respectively. The weighted average useful life for the group is 10 years.

 

6

Table of Contents

 

7. Goodwill

 

The carrying amount of goodwill as of June 30, 2011, is as follows:

 

		Amount
Balance as of March 31, 2011		$	120,750
Acquisitions		—
Divestitures		—
Foreign currency translation impact		772
Balance as of June 30, 2011		$	121,522

 

The excess purchase price over the fair value of assets acquired is recorded as goodwill. As we have one operating segment, we allocate goodwill to one reporting unit for goodwill impairment testing. 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, 2012. Goodwill is not deductible for tax purposes.

 

8. Accrued Liabilities

 

Accrued current liabilities consisted of the following:

 

		June 30, 2011			March 31, 2011
Accrued employee compensation and related expenses		$	9,565		$	9,333
Interest		2,580			9,083
Customer prepayment		2,107			6,866
Warranty reserve		586			1,325
Professional fees		927			774
Compliance costs		55			55
Other		2,499			1,536
Total accrued current liabilities		$	18,319		$	28,972

 

9. Related-Party Transactions

 

We paid management fees including a termination fee in connection with our IPO to our private equity sponsors of $8,105 in the three months ended June 30, 2011.  In the prior year periods of May 1, to June 30, 2010 and April 1 to April 30, 2010, we paid management fees (both “Successor” and “Predecessor”) of $333 and $79,

 

7

Table of Contents

 

respectively. Management fees including the termination fee are included as part of Marketing, general and administrative and engineering expense. Additionally, in the prior year periods of May 1, to June 30, 2010 and April 1 to April 30, 2010, we paid success fees to owners (both Successor and Predecessor) of $3,022 and $4,716, respectively.

 

Included in our Consolidated Balance Sheet is “Obligations due to settle the CHS Transaction” which totaled $3,841 and $4,213 at June 30, 2011 and March 31, 2011, respectively.  These amounts represent amounts due to the Predecessor owners in final settlement of the sale that was completed on April 30, 2010.  During the three months ended June 30, 2011, we paid $372 to the Predecessor owners for cash amounts that were released during the three month period.  At June 30, 2011, 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.

 

10. 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 $5,756 USD at June 30, 2011) collateralized by receivables, inventory, equipment, furniture and real estate. No loans were outstanding on this facility at June 30, 2011 or March 31, 2011.

 

The Company’s subsidiary in India has a revolving credit facility in the amount of 80,000 rupees (equivalent to $1,761 USD at June 30, 2011). The facility is collateralized by receivables, inventory, real estate, a letter of credit, and cash. No loans were outstanding under the facility at June 30, 2011 or March 31, 2011.

 

The Company’s subsidiary in Australia has a revolving credit facility in the amount of $325 Australian Dollars (equivalent to $344 USD at June 30, 2011). The facility is collateralized by real estate. The facilities had no loans outstanding as of June 30, 2011 or March 31, 2011.

 

The Company’s subsidiary in Japan has a revolving credit facility in the amount of 45,000 Japanese Yen (equivalent to $556 USD at June 30, 2011).  The credit facility is collateralized by a standby letter of credit in the amount of $300 issued as part of the revolving credit facility referred to in Note 11, “Long-Term Debt”. No loans were outstanding under the Japanese revolving credit facility at June 30, 2011 or March 31, 2011.

 

11. Long-Term Debt

 

Long- term debt consisted of the following:

 

		June 30, 2011			March 31,2011
9.500% Senior Secured Notes, due May 2017		$	168,000		$	210,000
		168,000			210,000
Less current portion		—			(21,000		)
		$	168,000		$	189,000

 

Revolving Credit Facility and Senior Secured Notes

 

Revolving credit facility.  Simultaneously with the closing of the CHS Transactions and the sale of our senior secured notes, our wholly owned subsidiary, Thermon Industries, Inc., entered into a five-year, $40.0 million senior secured revolving credit facility, which we refer to as our revolving credit facility, of which up to $20.0 million is available to our Canadian subsidiary, subject to borrowing base availability. Availability of funds under our revolving credit facility is determined by a borrowing base equal to the sum of 85% of eligible accounts receivable, plus 60% of eligible inventory, plus 85% of the net orderly liquidation value of eligible equipment, plus 50% 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 June 30, 2011, we had $38.2 million of capacity available under our revolving credit facility after taking into account the borrowing base, outstanding loan advances and letters of

 

8

Table of Contents

 

credit. In addition to our revolving credit facility, we have various short term revolving lines of credit available to us at our foreign affiliates, and no borrowings were outstanding under any such lines of credit at June 30, 2011.

 

The 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. 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 0.75% 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. At June 30, 2011, we had no outstanding borrowings under our revolving credit facility. Had there been outstanding borrowings, the interest rate on the facility would have been 5.75%.

 

Senior secured notes.  As of June 30, 2011, we had $168.0 million of indebtedness outstanding under our senior secured notes with annual cash interest expense of approximately $16.0 million. Our senior secured notes mature on May 1, 2017 and accrue interest at a fixed rate of 9.500%. We pay interest in cash semi-annually on May 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. See Note 19, “Subsequent Events” regarding redemption of notes in August 2011.

 

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 exceptions.

 

Information about our long-term debt that is not measured at fair value follows:

 

		June 30, 2011						March 31, 2011
		Carrying Value			Fair Value			Carrying Value			Fair Value			Valuation Technique
Financial Liabilities
Long-term debt		$	168,000		$	181,000		$	210,000		$	225,800		Level 2 - Market Approach

 

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.

 

9

Table of Contents

 

Other Financial Assets and Liabilities

 

Financial assets and liabilities with the carrying amounts approximating fair value include cash and cash equivalents, accounts receivable, other current assets, current debt, accounts payable and other current liabilities.

 

12. Commitments and Contingencies

 

At June 30, 2011, the Company had in place letter of credit guarantees from banks securing performance obligations of the Company. These arrangements totaled approximately $5,250 and related to certain sales contracts and local lines of credit for which $2,097 is secured by cash deposits. Included in prepaid expenses and other current assets at June 30, 2011 and March 31, 2011, was approximately $2,097 and $2,133, 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.

 

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 premises liability. Four cases are currently pending. Insurers are defending us in three of the four lawsuits, and we expect that an insurer will defend us in the remaining three matters. Of the concluded suits, there were five 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 $450 in estimated settlement of these 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 June 30, 2011, we have not recorded a tax liability reserve related to this matter with the Agency due to its early stages , as a loss is not probable or estimable.  While we will vigorously contest this ruling, we expect that any liability, if any, will be covered under an indemnity agreement with the Predecessor owners.

 

We can give no assurances we will prevail in any of these matters.

 

10

Table of Contents

 

Warranty Reserve— Changes in the Company’s product liability are as follows:

 

		Three Months Ended June 30, 2011 (Successor)			For the Period From May 1, Through June 30, 2010 (Successor)			For the Period From April 1, Through April 30, 2010 (Predecessor)
Balance at beginning of period		$	1,325		$	1,057		$	699
Provision for warranties issued		2			104			19
Reclassification of other liabilities		—			—			339
Settlements		(741		)	(197		)	—
Balance at end of period		$	586		$	964		$	1,057

 

13. Shareholders’ Equity

 

In May, 2011, we completed an initial public offering of our common stock. We issued 4,575,098 new common shares for which we received $48,669 after deductions for expenses, underwriting discounts and commissions. The gross offering price was $12.00 per share.   In addition, some of our stockholders participated in the offering and sold a total of 6,074,902 shares at a gross offering price of $12.00 per share, for which they were paid directly.  After completion of the initial public offering and the issuance of 15,136 restricted shares (see note 15, “Stock-Based Compensation Expense”), Thermon Group Holdings had 29,523,641 shares outstanding with 150,000,000 authorized at June 30, 2011.   At June 30, 2011, CHS and two other private equity firms controlled approximately 53.3% of the common stock of Thermon Group Holdings.

 

Thermon Group Holdings also has  10,000,000 preferred shares authorized with none issued.

 

14. Comprehensive Income (Loss)

 

Our comprehensive income (loss) is comprised of net loss, foreign currency translation, unrealized gains and losses on forward and option contracts and securities classified as available for sale. Comprehensive income (loss) for the three month periods ended June 30, 2011 and June 30, 2010, was as follows:

 

		Three Months Ended June 30, 2011 (Successor)			For the Period From May 1, Through June 30, 2010 (Successor)			For the Period From April 1, Through April 30, 2010 (Predecessor)
Comprehensive Income (Loss):
Net Loss		$	(4,966	)	$	(12,173	)	$	(267	)
Foreign currency translation gains (losses), net of taxes		1,395			(11,105		)	(576		)
Total comprehensive loss		$	(3,571	)	$	(23,278	)	$	(843	)

 

15. Stock-Based Compensation Expense

 

On October 20, 2010, October 27, 2010 and March 1, 2011 our board of directors granted certain employees and directors options to purchase a combined total of 2,757,524 shares of our common stock under the Restricted Stock and Stock Option Plan.  The exercise price for these options was $5.20 per share for the grants issued in October and $9.82 for the grants issued in March.  All options granted have a ten year term. The options are for the purchase of shares of common stock of Thermon Group Holdings, Inc. At the completion of the IPO, all

 

11

Table of Contents

 

outstanding options that were granted under our Restricted Stock and Stock Option Plan became vested and may be exercised.  While options may be exercised, any shares purchased are subject to certain lock-up restrictions regarding their sale which begin to expire 180 days after the IPO.  For the three months ended June 30, 2011, the company recorded stock compensation expense of $6,310 which represented all unamortized stock compensation expense related to the outstanding stock options under the Restricted Stock and Stock Option Plan.

 

Options issued during the three months ended June 30, 2011 totaling 117,600 shares, each with an exercise price of $12.00 per share, were granted under our 2011 Long-term Incentive Plan for which stock compensation expense was not accelerated.  They vest ratably over five years with 20% at each anniversary date of the grant.  We valued these options with a Black-Scholes model. Due to the fact that the common stock underlying the options was not publicly traded prior to the IPO, we based the expected volatility on a comparable group of companies. The expected term is based on the simplified method due to the lack of historical exercise data. The risk-free rate for periods within the contractual life of the option is based on the Treasury bill coupon rate for U.S. Treasury securities with a maturity that approximates the expected term. We do not intend to pay dividends on our common stock for the foreseeable future, and accordingly we used a dividend yield of zero. Accordingly the assumptions we were an estimated volatility of 45%, life of option of 6.66 years, risk free rate of 3.25% and no dividend assumption. The weighted-average estimated grant date fair value for employee stock options granted in fiscal 2012 was $5.99 per share. For the three months ended June 30, 2011, the Company recorded stock-based compensation expense of $23.

 

During the three months ended June 30, 2011, the Company issued a total of 15,136 shares of restricted stock to members of its board of directors.  The restricted shares vest in one half increments over two years at the anniversary of the grant. While the restricted shares are considered issued for purposes of total common shares outstanding at the time of the grant, they are subject to restrictions on transfer or sale until each anniversary vesting date. We valued the restricted shares at $11.89 per share which was the market closing price at the date of the grant.  We will expense the value of the restricted shares as stock compensation expense ratably over the vesting period unless any portion is forfeited.

 

16. Miscellaneous Income (Expense)

 

Miscellaneous income (expense) is as follows:

 

		Three Months Ended June 30, 2011			For the Period From May 1, Through June 30, 2010			For the Period From April 1, Through April 30, 2010
		(Successor)			(Successor)			(Predecessor)
Professional fees and expenses related to CHS Transactions		$	—		$	(3,073	)	$	(5,660	)
Employee bonus payments paid in connection with CHS Transactions		—			—			(3,545		)
Changes in estimates for compliance fees and costs		—			600			—
Other		(14		)	(227		)	304
Total		$	(14	)	$	(2,700	)	$	(8,901	)

 

17. Income Taxes

 

Our anticipated annual effective tax rate of approximately 35.2% has been applied to our consolidated

 

12

Table of Contents

 

pre-tax loss for the period from April 1, 2011 through June 30, 2011. 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 US and foreign jurisdictions, and certain permanent differences, such as nondeductible compensation expenses.  For the three months ended June 30, 2010, the Company’s provision for income taxes reflects an effective tax rate of approximately 59.6%. The effective tax rate was higher than the U.S. statutory rate due to deferred taxes released when the outstanding Canadian debt facility was retired.  In each of the three months ended June 30, 2011 and June 30, 2010, the Company recorded approximately $2,889 and $18,333 of income tax benefit on pre-tax losses of approximately $7,855 and $30,773, respectively.

 

For the period from April 1 through April 30, 2010 of the Predecessor, an income tax benefit of approximately $17,434 was recorded on a pre-tax loss of $17,701. In connection with the CHS Transactions, the Canadian debt facility was repaid releasing a deferred tax liability of $14,945. Without the benefit of the deferred tax reversal related to the Canadian debt facility, the benefit rate amounted to approximately 14.1%. This benefit rate was increased by foreign tax credits and exchange losses associated with repatriated earnings and decreased by the amount of sellers’ expense stemming from the CHS Transactions that is anticipated to be non-deductible.

 

As of June 30, 2011, we have established a long-term liability for uncertain tax positions in the amount of $1,237 and have recognized no material adjustments to the liability recorded as of March 31, 2011.  All of our unrecognized tax benefits at June 30, 2011 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 $26 for the three months ending June 30, 2011, resulting in a cumulative total accrual of $87.

 

Tax years 2007 through 2010 generally remain open to examination by the major taxing jurisdictions to which we are subject.  The Company’s US federal income tax returns are under exam for the Predecessor’s  tax years ending April 30, 2010 and March 31, 2010, and as of June 30, 2011 no adjustments have been proposed. The Company’s Canadian federal income tax returns are under exam for the Predecessor’s tax years ending March 31, 2008, 2009 and 2010. See Note 12, “Commitments and Contingencies”.

 

18. Geographic Information

 

We have defined our operating segment based on geographic regions. We sell our products in two geographic regions. Our sales in these regions share similar economic characteristics, similar product mix, similar customers and similar distribution methods. Accordingly we have elected to aggregate these two geographic regions into a single operating segment. Revenue from the sale of our products which are similar in nature and revenue from construction and engineering are reflected as sales in our consolidated statement of operations.

 

Within its operating segment, the Company has provided further detail for those countries or regions that generate significant revenue and operating income.  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.

 

13

Table of Contents

 

Total sales and operating income classified by major geographic area in which the Company operates are as follows:

 

		Three Months Ended June 30, 2011			For the Period From May 1, Through June 30, 2010			For the Period From April 1, Through April 30, 2010
		(Successor)			(Successor)			(Predecessor)
Sales by geographic area:
Western hemisphere
United States		$	21,095		$	11,574		$	4,959
Canada		20,836			11,388			3,992
Elsewhere in the western hemisphere		374			195			25
Intercompany sales		17,685			7,093			3,850
		59,990			30,250			12,826
Eastern hemisphere:
Europe		16,513			10,956			2,970
Asia		5,437			3,402			1,117
Intercompany sales		774			196			51
		22,724			14,554			4,138
Eliminations of intercompany sales		(18,096		)	(7,291		)	(3,901		)
		64,618			37,513			13,063
Operating income (loss)
Western hemisphere
United States		$	(3,118	)	$	(1,792	)	$	1,126
Canada		6,333			341			1,066
Elsewhere in the western hemisphere		117			37			(30		)
Eastern hemisphere:
Europe		3,235			(509		)	125
Asia		1,026			787			18
Unallocated:
Management fees		(8,105		)	(334		)	(79		)
Other		—			(36		)	(88		)
		$	(512	)	$	(1,506	)	$	2,138

 

19. Subsequent Events

 

Partial redemption of notes

 

On July 8, 2011, Thermon Industries, Inc. (a subsidiary of Thermon Group Holdings)(the “Note Issuer”)  called for redemption of a portion of its outstanding 9.500% Senior Secured Notes due 2017.  The Note Issuer will redeem $24,590 aggregate principal amount of the outstanding $168,000 aggregate principal amount of the Notes.  The redemption price of the Notes is 109.5% of the principal amount redeemed, plus accrued and unpaid interest thereon until the redemption date, payable in cash. The redemption date will be August 8, 2011.

 

Expansion of San Marcos manufacturing facility

 

On July 27, 2011, during construction of the expansion of our manufacturing facility in San Marcos, Texas, a section of the partially completed steel framework collapsed during erection.  One employee of the erection subcontractor to the general contractor was killed.  There were no Thermon employees on the construction site at the time of the incident.  The cause of the incident is under investigation by OSHA.  Present estimates are that completion of the project will be delayed at least three months until the end of the 2012 fiscal year.  We do not expect significant adverse effects on our ability to produce and ship product as a result of the incident because we had built up inventory in preparation of the manufacturing downtime for the equipment move originally scheduled for October/November 2011.

 

14

Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1(continued) — Financial Statements of Thermon Holding Corp.

 

Condensed Consolidated Balance Sheets

(Dollars in Thousands)

 

		June 30, 2011 (Unaudited)			March 31, 2011
Assets
Current assets:
Cash and cash equivalents		$	31,604		$	51,016
Accounts receivable, net of allowance for doubtful accounts of $1,473 and $1,487 as of June 30, 2011 and March 31, 2011, respectively		45,893			40,013
Inventories, net		34,317			31,118
Costs and estimated earnings in excess of billings on uncompleted contracts		1,816			2,063
Income taxes receivable		7,824			2,462
Prepaid expenses and other current assets		6,882			7,633
Deferred income taxes		1,342			2,779
Total current assets		129,678			137,084
Property, plant and equipment, net		23,098			21,686
Goodwill		121,522			120,750
Intangible assets, net		157,013			159,056
Debt issuance costs, net		9,258			11,573
Other noncurrent assets		—			633
		$	440,569		$	450,782
Liabilities and shareholder’s/members’ equity
Current liabilities:
Accounts payable		$	20,548		$	18,573
Accrued liabilities		18,319			28,972
Current portion of long term debt		—			21,000
Borrowings under revolving lines of credit		—			2,063
Billings in excess of costs and estimated earnings on uncompleted contracts		431			1,110
Income taxes payable		—			7,934
Obligations due to settle the CHS Transactions		3,841			4,213
Total current liabilities		43,139			83,865
Long-term debt, net of current maturities		168,000			189,000
Deferred income taxes		49,592			49,809
Other noncurrent liabilities		1,865			1,826
Additional paid in capital		186,452			131,191
Foreign currency translation adjustment		11,426			10,031
Accumulated deficit		(19,905		)	(14,940		)
Shareholder’s equity		177,973			126,282
		$	440,569		$	450,782

 

See accompanying notes.

 

15

Table of Contents

 

Condensed Consolidated Statements of Operations (Unaudited)

(Dollars in Thousands)

 

		Three Months			For the Period From May 1,			For the Period From April 1, Through
		Ended June 30, 2011			Through June 30, 2010			April 30, 2010
		(Successor)			(Successor)			(Predecessor)
Sales		$	64,618		$	37,513		$	13,063
Cost of sales		32,629			25,343			6,447
Gross profit		31,989			12,170			6,616
Operating expenses:
Marketing, general and administrative and engineering		29,616			8,550			4,263
Amortization of other intangible assets		2,885			5,126			215
Income (loss) from operations		(512		)	(1,506		)	2,138
Other income/(expenses):
Interest income		91			1			7
Interest expense		(6,790		)	(5,845		)	(6,229		)
Loss on retirement of debt		(630		)	—			—
Success fees to owners related to the CHS Transactions		—			(3,022		)	(4,716		)
Miscellaneous expense		(14		)	(2,700		)	(8,901		)
Loss before provision for income taxes		(7,855		)	(13,072		)	(17,701		)
Income taxes benefit		2,889			899			17,434
Net loss		$	(4,966	)	$	(12,173	)	$	(267	)

 

See accompanying notes.

 

16