Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

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

For the transition period from ________ to ________

Commission File Number: 001-35159

THERMON GROUP HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



Delaware	27-2228185
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

7171 Southwest Parkway, Building 300, Suite 200, Austin, Texas 78735

(Address of principal executive offices) (zip code)

(512) 690-0600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	THR	New York Stock Exchange

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. ☒Yes ☐No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒Yes ☐ No

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



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes ☒ No

As of November 4, 2019, the registrant had 32,750,999 shares of common stock, par value $0.001 per share, outstanding.

THERMON GROUP HOLDINGS, INC.

QUARTERLY REPORT

FOR THE QUARTER ENDED SEPTEMBER 30, 2019

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 September 30, 2019 and March 31, 2019	1
Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended September 30, 2019 and 2018	2
Condensed Consolidated Statements of Equity for the three and six months ended September 30, 2019 and 2018	3
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2019 and 2018	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk	33
Item 4. Controls and Procedures	34
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	35
Item 1A. Risk Factors	35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3. Defaults Upon Senior Securities	35
Item 4. Mine Safety Disclosures	35
Item 5. Other Information	35
Item 6. Exhibits	35
EXHIBIT INDEX	36
EX-31.1
EX-31.2
EX-32.1
EX-32.2
SIGNATURE	37

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Thermon Group Holdings, Inc.

Condensed Consolidated Balance Sheets

(Dollars in Thousands, except share and per share data)



	September 30, 2019			March 31, 2019
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	39,014		$	31,402
Accounts receivable, net of allowance for doubtful accounts of $968 and $987 as of September 30, 2019 and March 31, 2019, respectively	98,075			105,323
Inventories, net	65,779			64,890
Contract assets	15,822			26,454
Prepaid expenses and other current assets	10,669			7,320
Income tax receivable	5,239			4,389
Total current assets	234,598			239,778
Property, plant and equipment, net of depreciation and amortization of $43,105 and $38,414 as of September 30, 2019 and March 31, 2019, respectively	74,580			74,955
Goodwill	205,515			204,995
Intangible assets, net	118,136			126,596
Operating lease right-of-use assets	14,170			—
Deferred income taxes	2,973			3,829
Other long term assets	5,718			5,609
Total assets	$	655,690		$	655,762
Liabilities
Current liabilities:
Accounts payable	$	24,652		$	22,705
Accrued liabilities	22,251			27,848
Current portion of long term debt	2,500			2,500
Borrowings under revolving credit facility	9,439			11,225
Contract liabilities	5,409			6,814
Lease liabilities	2,669			235
Income taxes payable	1,780			1,961
Total current liabilities	68,700			73,288
Long-term debt, net of current maturities and deferred debt issuance costs and debt discounts of $5,432 and $6,271 as of September 30, 2019 and March 31, 2019, respectively	187,318			197,729
Deferred income taxes	24,688			28,139
Non-current lease liabilities	13,048			386
Other non-current liabilities	7,629			7,271
Total liabilities	301,383			306,813
Equity
Common stock: $.001 par value; 150,000,000 authorized; 32,742,439 and 32,624,200 shares issued and outstanding at September 30, 2019 and March 31, 2019, respectively	33			33
Preferred stock: $.001 par value; 10,000,000 authorized; no shares issued and outstanding	—			—
Additional paid in capital	224,260			223,040
Accumulated other comprehensive loss	(48,990		)	(48,949		)
Retained earnings	179,004			170,621
Total Thermon Group Holdings, Inc. shareholders' equity	354,307			344,745
Non-controlling interests	—			4,204
Total equity	354,307			348,949
Total liabilities and equity	$	655,690		$	655,762

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

Thermon Group Holdings, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(Dollars in Thousands, except share and per share data)



	Three Months Ended September 30, 2019			Three Months Ended September 30, 2018			Six Months Ended September 30, 2019			Six Months Ended September 30, 2018

Sales	$	102,935		$	90,154		$	194,647		$	179,056
Cost of sales	57,503			49,795			112,073			98,968
Gross profit	45,432			40,359			82,574			80,088
Operating expenses:
Marketing, general and administrative and engineering	28,130			26,191			55,848			51,903
Amortization of intangible assets	4,461			5,496			8,894			11,273
Income from operations	12,841			8,672			17,832			16,912
Other income/(expenses):
Interest income	65			48			116			123
Interest expense	(3,951		)	(3,985		)	(7,721		)	(7,588		)
Other income/(expenses)	(172		)	346			61			228
Income before provision for income taxes	8,783			5,081			10,288			9,675
Income tax expense	1,862			1,756			1,906			2,972
Net income	$	6,921		$	3,325		$	8,382		$	6,703
Income (loss) attributable to non-controlling interests	9			98			(1		)	434
Net income available to Thermon Group Holdings, Inc.	$	6,912		$	3,227		$	8,383		$	6,269
Comprehensive income (loss):
Net income available to Thermon Group Holdings, Inc.	$	6,912		$	3,227		$	8,383		$	6,269
Foreign currency translation adjustment	(4,813		)	3,206			(378		)	(5,061		)
Other	337			—			337			—
Comprehensive income	$	2,436		$	6,433		$	8,342		$	1,208
Net Income per common share:
Basic	$	0.21		$	0.10		$	0.26		$	0.19
Diluted	0.21			0.10			0.25			0.19
Weighted-average shares used in computing net income per common share:
Basic	32,727,023			32,571,432			32,681,410			32,536,499
Diluted	33,244,387			33,102,803			33,111,778			32,970,494

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

Thermon Group Holdings, Inc.

Condensed Consolidated Statements of Equity (Unaudited)

(Dollars in Thousands)



	Common Stock Outstanding	Common Stock		Additional Paid-in Capital			Retained Earnings		Non-controlling Interests			Accumulated Other Comprehensive Income (Loss)			Total
Balances at March 31, 2019	32,624,200	$	33	$	223,040		$	170,621	$	4,204		$	(48,949	)	$	348,949
Issuance of common stock in exercise of stock options	5,417	—		62			—		—			—			62
Issuance of common stock as deferred compensation to employees	39,139	—		—			—		—			—			—
Issuance of common stock as deferred compensation to executive officers	32,621	—		—			—		—			—			—
Issuance of common stock as deferred compensation to directors	3,654	—		—			—		—			—			—
Stock compensation expense	—	—		1,019			—		—			—			1,019
Repurchase of employee stock units on vesting	—	—		(784		)	—		—			—			(784		)
Net income available to Thermon Group Holdings, Inc.	—	—		—			1,471		—			—			1,471
Foreign currency translation adjustment	—	—		—			—		—			4,435			4,435
Remeasurement of non-controlling interest	—	—		(315		)	—		315			—			—
Income attributable to non-controlling interests (loss)	—	—		—			—		(10		)	—			(10		)
Balances at June 30, 2019	32,705,031	$	33	$	223,022		$	172,092	$	4,509		$	(44,514	)	$	355,142
Issuance of common stock as deferred compensation to employees	16,262	—		—			—		—			—			—
Issuance of common stock as deferred compensation to executive officers	14,757	—		—			—		—			—			—
Issuance of common stock as deferred compensation to directors	6,389	—		—			—		—			—			—
Stock compensation expense	—	—		1,323			—		—			—			1,323
Repurchase of employee stock units on vesting	—	—		(95		)	—		—			—			(95		)
Net income available to Thermon Group Holdings, Inc.	—	—		—			6,912		—			—			6,912
Foreign currency translation adjustment	—	—		—			—		—			(4,813		)	(4,813		)
Purchase of shares from non-controlling interests	—	—		—			—		(4,508		)	—			(4,508		)
Remeasurement of non-controlling interest	—	—		10			—		(10		)	—			—
Income attributable to non-controlling interests	—	—		—			—		9			—			9
Other	—	—		—			—		—			337			337
Balances at September 30, 2019	32,742,439	$	33	$	224,260		$	179,004	$	—		$	(48,990	)	$	354,307

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



	Common Stock Outstanding	Common Stock		Additional Paid-in Capital			Retained Earnings		Non-controlling Interests			Accumulated Other Comprehensive Income (Loss)			Total
Balances at March 31, 2018	32,492,339	$	32	$	222,622		$	148,812	$	5,928		$	(36,541	)	$	340,853
Issuance of common stock in exercise of stock options	5,928	1		81			—		—			—			82
Issuance of common stock as deferred compensation to employees	23,307	—		—			—		—			—			—
Issuance of common stock as deferred compensation to executive officers	20,876	—		—			—		—			—			—
Issuance of common stock as deferred compensation to directors	5,212	—		—			—		—			—			—
Stock compensation expense	—			1,004			—		—			—			1,004
Repurchase of employee stock units on vesting	—	—		(398		)	—		—			—			(398		)
Net income available to Thermon Group Holdings, Inc.	—	—		—			3,042		—			—			3,042
Foreign currency translation adjustment	—	—		—			—		—			(8,264		)	(8,264		)
Income attributable to non-controlling interests	—	—		—			—		336			—			336
Balances at June 30, 2018	32,547,662	$	33	$	223,309		$	151,854	$	6,264		$	(44,805	)	$	336,655
Issuance of common stock in exercise of stock options	—	—		153			—		—			—			153
Issuance of common stock as deferred compensation to employees	38,507	—		—			—		—			—			—
Issuance of common stock as deferred compensation to directors	5,240	—		—			—		—			—			—
Stock compensation expense	—	—		1,085			—		—			—			1,085
Repurchase of employee stock units on vesting	—	—		(161		)	—		—			—			(161		)
Net income available to Thermon Group Holdings, Inc.	—	—		—			3,227		—			—			3,227
Foreign currency translation adjustment	—	—		—			—		—			1,748			1,748
Purchase of shares from non-controlling interests	—	—		(3,612		)	—		(3,508		)	1,455			(5,665		)
Remeasurement of non-controlling interest	—	—		(3,083		)	—		3,083			—			—
Income attributable to non-controlling interests	—	—		—			—		98			—			98
Balances at September 30, 2018	32,591,409	$	33	$	217,691		$	155,081	$	5,937		$	(41,602	)	$	337,140

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

Thermon Group Holdings, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)



	Six Months Ended September 30, 2019			Six Months Ended September 30, 2018
Operating activities
Net income	$	8,382		$	6,703
Adjustment to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	13,956			15,826
Amortization of deferred debt issuance costs	870			734
Amortization of inventory step-up	—			172
Stock compensation expense	2,342			2,089
Deferred income taxes	(2,343		)	(2,010		)
Release of reserve for uncertain tax positions	(462		)	—
Long term cross currency swap	798			(634		)
Remeasurement loss/(gain) on intercompany balances	(147		)	1,800
Changes in operating assets and liabilities:
Accounts receivable	6,313			9,463
Inventories	(958		)	(11,862		)
Contract assets	9,054			(6,301		)
Other current and non-current assets	(4,432		)	(4,928		)
Accounts payable	1,052			252
Accrued liabilities and non-current liabilities	(3,542		)	(4,915		)
Income taxes payable and receivable	(833		)	(4,273		)
Net cash provided by operating activities	30,050			2,116
Investing activities
Purchases of property, plant and equipment	(3,839		)	(5,702		)
Sale of rental equipment	145			522
Proceeds from sale of property, plant and equipment	—			23
Proceeds from the sale of investments	—			958
Net cash used in investing activities	(3,694		)	(4,199		)
Financing activities
Proceeds from revolving credit facility	10,000			22,009
Payments on long term debt and revolving credit facility	(23,131		)	(17,790		)
Purchase of shares from non-controlling interests	(4,508		)	(5,665		)
Proceeds from exercise of stock options	62			233
Repurchase of employee stock units on vesting	(879		)	(559		)
Payments on finance leases	(79		)	(122		)
Net cash used in financing activities	(18,535		)	(1,894		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(121		)	(1,459		)
Change in cash, cash equivalents and restricted cash	7,700			(5,436		)
Cash, cash equivalents and restricted cash at beginning of period	33,841			36,327
Cash, cash equivalents and restricted cash at end of period	$	41,541		$	30,891

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

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

Thermon Group Holdings, Inc. and its direct and indirect subsidiaries are referred to collectively as “we,” “our,” or the “Company” herein. We are a provider of highly engineered industrial process heating solutions for process industries. Our core thermal solutions product - also referred to as heat tracing - provides an external heat source to pipes, vessels and instruments for the purposes of freeze protection, temperature and flow maintenance, environmental monitoring, and surface snow and ice melting. As a manufacturer, we offer a full suite of products (heating units, heating cables, tubing bundles and control systems) and services (design optimization, engineering, installation and maintenance services) required to deliver comprehensive solutions to complex projects. On October 30, 2017, we, through a wholly-owned subsidiary, consummated the acquisition of 100% of the equity interests of CCI Thermal Technologies Inc. (the “THS acquisition”), which was amalgamated with such subsidiary immediately after the closing of the acquisition to form Thermon Heating Systems, Inc. ("THS"), an indirect, wholly-owned subsidiary of the Company. THS is engaged in industrial process heating, focused on the development and production of advanced heating and filtration solutions for industrial and hazardous area applications. In addition to our thermal solution offerings, we offer temporary power products that are designed to provide a safe and efficient means of supplying temporary electrical power distribution and lighting at energy infrastructure facilities for new construction and during maintenance and turnaround projects at operating facilities.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2019. 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 September 30, 2019 and March 31, 2019, and the results of our operations for the three and six months ended September 30, 2019 and 2018.

Use of Estimates

Generally accepted accounting principles (“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 September 30, 2019, actual results could differ from those estimates and affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities and the corresponding revenues and expenses as of the date of the financial statements. The operating results for the three and six months ended September 30, 2019 are not necessarily indicative of the results that may be achieved for the fiscal year ending March 31, 2020.

Restricted Cash and Cash Equivalents

The Company maintains restricted cash related to certain letter of credit guarantees and performance bonds securing performance obligations. The following table provides a reconciliation of cash, cash equivalents, restricted cash included in prepaid expenses and other current assets and restricted cash included in other long term assets reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows.



	September 30,
	2019		2018
Cash and cash equivalents	$	39,014	$	28,481
Restricted cash included in prepaid expenses and other current assets	2,054		1,759
Restricted cash included in other long term assets	473		651
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	41,541	$	30,891

Amounts shown in restricted cash included in prepaid expenses and other current assets and other long term assets represent those required to be set aside by a contractual agreement, which contain cash deposits pledged as collateral on

performance bonds and letters of credit. Amounts shown in restricted cash in other long term assets represent such agreements that require a commitment term longer than one year.

Recent Accounting Pronouncements

Leases - In February 2016, the FASB issued Accounting Standard Update 2016-02 “Leases” (“ASC Topic 842”), which provides guidance on the recognition, measurement, presentation and disclosure on leases. Under the standard, substantially all leases will be reported on the balance sheet as right-of-use assets and lease liabilities. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. The Company adopted the amended guidance using the modified retrospective method as of April 1, 2019. Please refer to Note 3 "Leases" for further discussion, including the impact the adoption had on our condensed consolidated financial statements.

Financial Instruments- In June 2016, the FASB issued Accounting Standards Update 2016-13 “Financial Instruments-Credit Losses” (“ASC Topic 326”), which amends the guidance on the impairment of financial instruments. The standard adds an impairment model, referred to as current expected credit loss, which is based on expected losses rather than incurred losses. The standard applies to most debt instruments, trade receivables, lease receivables, reinsurance receivables, financial guarantees and loan commitments. Under the guidance, companies are required to disclose credit quality indicators disaggregated by year of origination for a five-year period. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. We do not anticipate that this will have a material impact to our consolidated financial statements.

Intangibles- In January 2017, the FASB issued Accounting Standards Update 2017-04 “Intangibles - Goodwill and other” (“ASC Topic 350”), which amends and simplifies the accounting for goodwill impairment by eliminating step 2 of the goodwill impairment test. Under the amended guidance, goodwill impairment will be measured as the excess of the reporting unit’s carrying value over its fair value, not to exceed the carrying amount of goodwill for that reporting unit. The changes are effective for annual and interim periods beginning after December 15, 2019, and amendments should be applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. We plan to adopt the amended guidance on April 1, 2020 for the fiscal year ending March 31, 2021. We do not anticipate that this will have a material impact to our consolidated financial statements.

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 September 30, 2019 and March 31, 2019, no assets or liabilities were valued using Level 3 criteria.

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



	September 30, 2019				March 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value		Valuation Technique
Financial Liabilities
Outstanding principal amount of senior secured credit facility	$	195,250	$	195,250	$	206,500	$	206,500	Level 2 - Market Approach
Outstanding borrowings from revolving line of credit	$	9,439	$	9,439	$	11,225	$	11,225	Level 2 - Market Approach

At September 30, 2019 and March 31, 2019, the fair value of our variable rate term loan and revolving line of credit approximates its carrying value as we pay interest based on the current market rate. As the quoted price is only available for similar financial assets, the Company concluded the pricing is indirectly observable through dealers and has been classified as Level 2.

Cross Currency Swap

The Company has entered into a long term cross currency swap to hedge the currency rate fluctuations related to a $66,248 intercompany receivable at September 30, 2019 from our wholly-owned Canadian subsidiary, Thermon Canada Inc., maturing on October 30, 2022. Periodic principal payments are to be settled twice annually with interest payments settled quarterly through the cross currency derivative contract. We do not designate the cross currency swap as a cash flow hedge under ASC 815. At September 30, 2019, we recorded $797 of unrealized mark-to-market gains on the cross-currency swap which is reported as "Other income and expense", in the condensed consolidated statement operations and comprehensive income. Cross currency swap contracts are measured on a recurring basis at fair value and are classified as Level 2 measurements. Hedge assets in the amount of $984 and $1,768, were included in "Other long-term assets" in the condensed consolidated balance sheet at September 30, 2019 and March 31, 2019, respectively. For the six months ended September 30, 2019, the gain on the long-term cross currency swap derivative contract was offset by unrealized losses on the intercompany note of $698 for a net loss of $98.

Deferred Compensation Plan

The Company provides a non-qualified deferred compensation plan for certain highly compensated employees where payroll contributions are made by the employees on a pre-tax basis. Included in “Other long-term assets” in the condensed consolidated balance sheet at September 30, 2019 and March 31, 2019 were $3,216 and $1,557, respectively, of deferred compensation plan assets held by the Company. Deferred compensation plan assets (mutual funds) are measured at fair value on a recurring basis based on quoted market prices in active markets (Level 1). The Company has a corresponding liability to participants of $3,256 and $1,520 included in “Other long-term liabilities” in the condensed consolidated balance sheet at September 30, 2019 and March 31, 2019, respectively. Deferred compensation expense included in marketing, general and administrative and engineering were $36 and $44 for the three months ended September 30, 2019 and 2018, respectively, and $139 and $46 for the six months ended September 30, 2019 and 2018, respectively. Expenses and income from our deferred compensation plan were offset by unrealized gains and losses for the deferred compensation plan included in other expense on our condensed consolidated statements of comprehensive income. Our unrealized gains and losses on investments were gains of $21 and $34 for the three months ended September 30, 2019 and 2018, respectively, and gains of $116 and $31 for the six months ended September 30, 2019 and 2018, respectively.

Trade Related Foreign Currency Forward Contracts

We transact business in various foreign currencies and have established a program that primarily utilizes foreign currency forward contracts to 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 arise from intercompany transactions as well as third party accounts receivable or payable that are denominated in foreign currencies. Our forward contracts generally have terms of 30 days. We do not use forward contracts for trading purposes or designate these forward contracts as hedging instruments pursuant to ASC 815. We adjust the carrying amount of all contracts to their fair value at the end of each reporting period and unrealized gains and losses are included in our results of operations for that period. These gains and losses are designed to offset gains and losses resulting from settlement of receivables or payables by our foreign operations which are settled in currency other than the local transactional currency. The fair value is determined by quoted prices from active foreign currency markets (Level 2). The condensed consolidated balance sheets reflect unrealized gains within accounts receivable, net and unrealized losses within accrued liabilities. Our ultimate realized gain or loss with respect to currency fluctuations will

depend on the currency exchange rates and other factors in effect as the contracts mature. As of September 30, 2019 and March 31, 2019, the notional amounts of forward contracts were as follows:



Notional amount of foreign currency forward contracts by currency
	September 30, 2019		March 31, 2019
Russian Ruble	$	1,128	$	—
Euro	500		—
Canadian Dollar	2,000		1,500
South Korean Won	1,000		2,000
Mexican Peso	500		—
Australian Dollar	700		900
Great Britain Pound	1,000		3,000
Total notional amounts	$	6,828	$	7,400

The following table represents the fair value of our foreign currency forward contracts:



	September 30, 2019				March 31, 2019
	Fair Value				Fair Value
	Assets		Liabilities		Assets		Liabilities
Foreign currency forward contracts	$	3	$	44	$	8	$	53

Foreign currency gains or losses related to our forward contracts in the accompanying condensed consolidated statements of operations and comprehensive income were a loss of $199 and gain of $70 in the three months ended September 30, 2019 and 2018, respectively, and losses of $241 and $25 for the six months ended September 30, 2019 and 2018, respectively. Gains and losses from our forward contracts were offset by transaction gains or losses incurred with the settlement of transactions denominated in foreign currencies. For the three months ended September 30, 2019 and 2018, our net foreign currency transactions were a loss of $90 and gain of $339, respectively, and gains of $123 and $263 for the six months ended September 30, 2019 and 2018, respectively.

3. Leases

In February 2016, the FASB issued ASC Topic 842 which amends the accounting guidance on leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance leases or operating leases as determined pursuant to ASC Topic 842, with classification affecting the pattern of expense recognition in the income statement. The FASB also subsequently issued amendments to the standard, including providing an additional and optional transition method to adopt the new standard, as well as certain practical expedients related to land easements and lessor accounting.

The Company adopted Accounting Standard Update 2016-02 and its amendments and applied the transition provisions as of April 1, 2019. Prior year amounts were not recast under this transition approach and, therefore, prior year amounts are excluded from the leased properties footnote. The Company did not elect the package of practical expedients permitted under the transition guidance, which allows companies to carryforward historical assessments of: (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, the Company did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. The Company elected a policy of not recording leases on its condensed consolidated balance sheets when the leases have a term of 12 months or less and the Company is not reasonably certain to elect an option to purchase the leased asset. The Company recognizes payments on these leases within selling, administrative and other expenses on a straight-line basis over the lease term. Lease expense related to manufacturing facilites is included in overhead absorption rates and allocated to cost of sales. The Company elected the practical expedient to combine lease and non-lease components for all asset classes.

Description of Leases

The significant majority of our lease obligations are for real property. We lease numerous facilities relating to our operations, primarily for office, manufacturing and warehouse facilities, as well as both long-term and short-term employee housing. Leases for real property have terms ranging from month-to-month to ten years. We also lease various types of equipment, including vehicles, office equipment (such as copiers and postage machines), heavy warehouse equipment (such as fork lifts), heavy construction equipment (such as cranes), medium and light construction equipment used for customer project needs (such as pipe threading machines) and mobile offices and other general equipment that is normally associated with an office environment. Equipment leases generally have terms ranging from six months to five years.

Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We do not have any significant leases that have not yet commenced but that create significant rights and obligations for us.

We lease temporary power products produced by our Thermon Power Solutions Inc. (formerly known as Sumac Fabrication Co. Ltd.) (“TPS”) division to our customers on a short term basis. Lease contracts associated with such rental of the temporary power products have historically been month-to-month contracts without purchase options. No lease contracts in which the Company was the lessor have had an initial term in excess of one year. As such, lease revenues for temporary power products recognized under ASC Topic 842 in the interim period did not materially differ from leases that would have been recorded under ASC Topic 840.

Variable Lease Payments

A majority of our lease agreements include fixed rental payments. Certain of our lease agreements include fixed rental payments that are adjusted periodically for changes in the Consumer Price Index (“CPI”). Payments based on a change in an index or a rate are not considered in the determination of lease payments for purposes of measuring the related lease liability. While lease liabilities are not remeasured as a result of changes to the CPI, changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments are incurred.

Options to Extend or Terminate Leases

Most of our real property leases include early termination options and/or one or more options to renew, with renewal terms that can extend the lease term for an additional one to five years or longer. The exercise of lease termination and renewal options is at our sole discretion. If it is reasonably certain that we will exercise such renewal options, the periods covered by such renewal options are included in the lease term and are recognized as part of our ROU assets and lease liabilities. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

Discount Rate

The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. A large concentration of the Company's operating lease liabilities are attributed to our United States and Latin America operations. Many of our Europe, Middle East and Africa (“EMEA”) operations and Asia-Pacific operations borrow funds from the debt facilities maintained by our U.S. operating subsidiary and establish intercompany balances to account for these loans. This practice is due to the more preferential rates available to our U.S. operating subsidiary and/or the ease with which funds can be drawn from the debt facilities already established within the United States. With this in mind the Company has utilized its U.S. credit facility rate as the worldwide incremental borrowing rate. The Company used incremental borrowing rates as of April 1, 2019 for operating leases that commenced prior to April 1, 2019 to establish the lease liabilities. For operating leases which commenced during the six months ended September 30, 2019, rates applicable at or close to the time of the inception of the lease were used to establish the new lease's ROU liabilities.



Lease Term and Discount Rate	September 30, 2019
Weighted average remaining lease term
Operating	6.7
Finance	2.5

Weighted average discount rate
Operating	4.63	%
Finance	7.98	%

Supplemental balance sheet information related to leases was as follows:



Assets	Classification	September 30, 2019
Operating	Operating lease right-of-use assets	$	14,170
Finance	Property, plant and equipment	395
Total right-of-use assets		$	14,565

Liabilities
Current
Operating	Lease liabilities	$	2,459
Finance	Lease liabilities	210
Non-current
Operating	Non-current lease liabilities	12,839
Finance	Non-current lease liabilities	209
Total lease liabilities		$	15,717

Supplemental statement of operations information related to leases was as follows:



Lease expense	Classification	Three Months Ended September 30, 2019		Six Months Ended September 30, 2019
Operating lease expense	Marketing, general and administrative and engineering	$	959	$	1,767

Finance lease expense:
Amortization of ROU assets	Marketing, general and administrative and engineering	66		125
Interest expense on finance lease liabilities	Interest expense	13		26

Short-term lease expense	Marketing, general and administrative and engineering	252		715
Net lease expense		$	1,290	$	2,633

Supplemental statement of cash flows information related to leases was as follows:



Cash paid for amounts included in the measurement of lease liabilities	Six Months Ended September 30, 2019
Operating cash used for operating leases	$	1,365
Operating cash flows used for finance leases	26
Financing cash flows used for finance leases	108

Future lease payments under non-cancellable operating leases as of September 30, 2019 were as follows:



Future Lease Payments	Operating Leases			Finance Leases
Twelve months ending September 30,
2020	$	3,110		$	236
2021	3,037			136
2022	2,828			51
2023	2,102			26
2024	1,332			—
Thereafter	5,997			—
Total lease payments	$	18,406		$	449
Less imputed interest	(3,108		)	(30		)
Total lease liability	$	15,298		$	419

4. Net Income per Common Share

Basic net income per common share is computed by dividing net income available to Thermon Group Holdings, Inc. by the weighted average number of common shares outstanding during each period. Diluted net income per common share is computed by dividing net income available to Thermon Group Holdings, Inc. by the weighted average number of common shares and common share equivalents outstanding (if dilutive) during each period. The number of common share equivalents, which includes options and both restricted and performance stock units, is computed using the treasury stock method. With regard to the performance stock units, we assumed that the associated performance targets will be met at the target level of performance for purposes of calculating diluted net income per common share.

The reconciliations of the denominators used to calculate basic and diluted net income per common share for the three and six months ended September 30, 2019 and 2018, respectively, are as follows:



	Three Months Ended September 30, 2019		Three Months Ended September 30, 2018		Six Months Ended September 30, 2019		Six Months Ended September 30, 2018
Basic net income per common share
Net income available to Thermon Group Holdings, Inc.	$	6,912	$	3,227	$	8,383	$	6,269
Weighted-average common shares outstanding	32,727,023		32,571,432		32,681,410		32,536,499
Basic net income per common share	$	0.21	$	0.10	$	0.26	$	0.19



	Three Months Ended September 30, 2019		Three Months Ended September 30, 2018		Six Months Ended September 30, 2019		Six Months Ended September 30, 2018
Diluted net income per common share
Net income available to Thermon Group Holdings, Inc.	$	6,912	$	3,227	$	8,383	$	6,269
Weighted-average common shares outstanding	32,727,023		32,571,432		32,681,410		32,536,499
Common share equivalents:
Stock options	201,730		219,205		205,359		218,521
Restricted and performance stock units	315,634		312,166		225,009		215,474
Weighted average shares outstanding – dilutive (1)	33,244,387		33,102,803		33,111,778		32,970,494
Diluted net income per common share	$	0.21	$	0.10	$	0.25	$	0.19

(1) For the six months ended September 30, 2019, 16,557 equity awards were not included in the calculation of diluted net income per common share, as they would have had an anti-dilutive effect.

5. Inventories

Inventories consisted of the following:



	September 30, 2019	March 31, 2019
Raw materials	$