thr-20200930

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, 2020

☐ 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, 2020, the registrant had 33,180,452 shares of common stock, par value $0.001 per share, outstanding.

THERMON GROUP HOLDINGS, INC.

QUARTERLY REPORT

FOR THE QUARTER ENDED September 30, 2020

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, 2020 and March 31, 2020			1
Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended September 30, 2020 and 2019			2
Condensed Consolidated Statements of Equity for the three and six months ended September 30, 2020 and 2019			3
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2020 and 2019			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			34
Item 4. Controls and Procedures			35
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 3. Defaults Upon Senior Securities			36
Item 4. Mine Safety Disclosures			36
Item 5. Other Information			36
Item 6. Exhibits			36
EXHIBIT INDEX			37
EX-3.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
SIGNATURE			38

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, 2020		March 31, 2020
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	51,362	$	43,237

Accounts receivable, net of allowances of $1,003 and $834 as of September 30, 2020 and March 31, 2020, respectively	66,104		92,478
Inventories, net	71,317		60,273
Contract assets	11,979		10,194
Prepaid expenses and other current assets	11,435		9,219
Income tax receivable	7,370		2,535

Total current assets	219,567		217,936
Property, plant and equipment, net of depreciation and amortization of $50,589 and $43,550 as of September 30, 2020 and March 31, 2020, respectively	72,691		72,542
Goodwill	206,071		197,978
Intangible assets, net	104,174		104,546
Operating lease right-of-use assets	15,049		16,637
Deferred income taxes	2,944		2,904
Other long-term assets	6,579		8,362
Total assets	$	627,075	$	620,905
Liabilities
Current liabilities:
Accounts payable	$	25,162	$	25,070
Accrued liabilities	21,269		23,757
Current portion of long-term debt	2,500		2,500

Contract liabilities	3,108		4,538
Lease liabilities	3,947		3,553
Income taxes payable	219		1,217

Total current liabilities	56,205		60,635
Long-term debt, net of current maturities and deferred debt issuance costs and debt discounts of $3,962 and $4,447 as of September 30, 2020 and March 31, 2020, respectively	168,288		169,053
Deferred income taxes	21,623		22,245
Non-current lease liabilities	14,072		15,571
Other non-current liabilities	8,288		6,962
Total liabilities	268,476		274,466
Commitments and contingencies (Note 11)

Equity
Common stock: $.001 par value; 150,000,000 authorized; 33,169,798 and 32,916,818 shares issued and outstanding at September 30, 2020 and March 31, 2020, respectively	33		33
Preferred stock: $.001 par value; 10,000,000 authorized; no shares issued and outstanding	—		—
Additional paid in capital	229,998		227,741
Accumulated other comprehensive loss	(49,744)		(63,894)
Retained earnings	178,312		182,559


Total equity	358,599		346,439
Total liabilities and equity	$	627,075	$	620,905

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, 2020		Three Months Ended September 30, 2019		Six Months Ended September 30, 2020		Six Months Ended September 30, 2019

Sales	$	66,406	$	102,935	$	123,254	$	194,647
Cost of sales	37,475		57,503		70,204		112,073
Gross profit	28,931		45,432		53,050		82,574
Operating expenses:
Marketing, general and administrative and engineering	23,788		28,130		51,629		55,848
Amortization of intangible assets	2,097		4,461		5,130		8,894
Income (loss) from operations	3,046		12,841		(3,709)		17,832
Other income/(expenses):
Interest income	17		65		42		116
Interest expense	(2,433)		(3,951)		(5,013)		(7,721)

Other income/(expense)	582		(172)		1,314		61
Income (loss) before provision for income taxes	1,212		8,783		(7,366)		10,288
Income tax expense (benefit)	(626)		1,862		(3,119)		1,906
Net income (loss)	$	1,838	$	6,921	$	(4,247)	$	8,382
Income (loss) attributable to non-controlling interests	—		9		—		(1)
Net income (loss) available to Thermon Group Holdings, Inc.	$	1,838	$	6,912	$	(4,247)	$	8,383
Comprehensive income (loss):
Net income (loss) available to Thermon Group Holdings, Inc.	$	1,838	$	6,912	$	(4,247)	$	8,383
Foreign currency translation adjustment	5,254		(4,813)		14,729		(378)
Other	(199)		337		(579)		337
Comprehensive income	$	6,893	$	2,436	$	9,903	$	8,342
Net income (loss) per common share:
Basic	$	0.06	$	0.21	$	(0.13)	$	0.26
Diluted	0.06		0.21		(0.13)		0.25
Weighted-average shares used in computing net income per common share:
Basic	33,164,921		32,727,023		33,075,902		32,681,410
Diluted	33,417,654		33,244,387		33,075,902		33,111,778

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 (loss)		Accumulated Other Comprehensive Income (Loss)		Total
Balances at March 31, 2020	32,916,818	$	33	$	227,741	$	182,559	$	(63,894)	$	346,439
Issuance of common stock in exercise of stock options	81,995	—		437		—		—		437
Issuance of common stock as deferred compensation to employees	39,458	—		—		—		—		—
Issuance of common stock as deferred compensation to executive officers	63,477	—		—		—		—		—
Issuance of common stock as deferred compensation to directors	13,520	—		—		—		—		—
Stock compensation expense	—	—		1,133		—		—		1,133
Repurchase of employee stock units on vesting	—	—		(557)		—		—		(557)

Net loss available to Thermon Group Holdings, Inc.	—	—		—		(6,085)		—		(6,085)
Foreign currency translation adjustment	—	—		—		—		9,475		9,475
Other	—	—		—		—		(380)		(380)

Balances at June 30, 2020	33,115,268	$	33	$	228,754	$	176,474	$	(54,799)	$	350,462
Issuance of common stock in exercise of stock options	1,344	—		15		—		—		15
Issuance of common stock as deferred compensation to employees	33,789	—		—		—		—		—
Issuance of common stock as deferred compensation to executive officers	6,005	—		—		—		—		—
Issuance of common stock as deferred compensation to directors	13,392	—		—		—		—		—
Stock compensation expense	—	—		1,358		—		—		1,358
Repurchase of employee stock units on vesting	—	—		(129)		—		—		(129)
Net income available to Thermon Group Holdings, Inc.	—	—		—		1,838		—		1,838
Foreign currency translation adjustment	—	—		—		—		5,254		5,254



Other	—	—		—		—		(199)		(199)
Balances at September 30, 2020	33,169,798	$	33	$	229,998	$	178,312	$	(49,744)	$	358,599


	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		—		—
Loss attributable to non-controlling interests	—	—		—		—		(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

Thermon Group Holdings, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)


	Six Months Ended September 30, 2020		Six Months Ended September 30, 2019
Operating activities
Net income (loss)	$	(4,247)	$	8,382
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	10,643		13,956
Amortization of deferred debt issuance costs	515		870


Stock compensation expense	2,491		2,342
Deferred income taxes	(2,142)		(462)
Release of reserve for uncertain tax positions, net	—		(2,343)
Loss on long-term cross currency swap	3,491		798
Remeasurement gain on intercompany balances	(4,537)		(147)
Changes in operating assets and liabilities:
Accounts receivable	29,767		6,313
Inventories	(9,431)		(958)
Contract assets	(3,169)		9,054
Other current and non-current assets	(3,593)		(4,432)
Accounts payable	(17)		1,052
Accrued liabilities and non-current liabilities	(1,228)		(3,542)
Income taxes payable and receivable	(5,939)		(833)
Net cash provided by operating activities	12,604		30,050
Investing activities
Purchases of property, plant and equipment	(4,132)		(3,839)
Sale of rental equipment	37		145




Net cash used in investing activities	(4,095)		(3,694)
Financing activities

Proceeds from revolving credit facility	37,189		10,000
Payments on long-term debt and revolving credit facility	(38,714)		(23,131)

Purchase of shares from non-controlling interests	—		(4,508)
Proceeds from exercise of stock options	452		62
Repurchase of employee stock units on vesting	(686)		(879)
Payments on finance leases	(139)		(79)
Net used in financing activities	(1,898)		(18,535)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	1,304		(121)
Change in cash, cash equivalents and restricted cash	7,915		7,700
Cash, cash equivalents and restricted cash at beginning of period	46,007		33,841
Cash, cash equivalents and restricted cash at end of period	$	53,922	$	41,541

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. In addition to our heat tracing products, we also provide (i) industrial process heating solutions focused on advanced heating and filtration solutions for industrial and hazardous area applications, which are sold under our Thermon Heating Solutions (or “THS”) brand, and (ii) 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, which are sold under our Thermon Power Solutions (or “TPS”) brand. As a manufacturer, we offer a full suite of products (such as heating units, heating cables, tubing bundles and control systems) and services (such as design optimization, engineering, installation and maintenance services) required to deliver comprehensive solutions to complex projects.

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, 2020. 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, 2020 and March 31, 2020, and the results of our operations for the three and six months ended September 30, 2020 and 2019.

Impact of COVID-19 Pandemic

The recent COVID-19 pandemic and the measures being taken to address and limit the spread of the virus have adversely affected the economies and financial markets of many countries, resulting in an economic downturn that has negatively impacted, and may continue to negatively impact, global demand for our products and services. We may experience a decline in the demand of our products and services that could materially and negatively impact our business, financial condition, results of operation and overall financial performance in future periods.

On April 11, 2020, the Canadian government officially enacted the Canadian Emergency Wage Subsidy (“CEWS”) for the purposes of assisting employers in financial hardship due to the COVID-19 pandemic and of reducing potential lay-offs of employees. The CEWS, which was made retroactive to March 1, 2020, generally provides “eligible entities” with a wage subsidy of up to 75% of “eligible remuneration” paid to an eligible employee per week, limited to a certain weekly maximum. On September 23, 2020, the Canadian government announced that the CEWS program would be extended through the summer of 2021 and announced certain modifications to the subsidy calculation. Our Canadian operations have benefited from such wage subsidies and have received distributions from the Canadian government during the six months period ended September 30, 2020. During the three and six month ended September 30, 2020, we recorded subsidies in the amount of $2,532 and $4,948, respectively, for which we qualify, as an offset or reduction to the related underlying expenses and assets, accordingly.

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, 2020, 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, 2020 are not necessarily indicative of the results that may be achieved for the fiscal year ending March 31, 2021.

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,
	2020		2019
Cash and cash equivalents	$	51,362	$	39,014
Restricted cash included in prepaid expenses and other current assets	2,190		2,054
Restricted cash included in other long-term assets	370		473
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	53,922	$	41,541

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

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 adopted this standard effective April 1, 2020, and such adoption did not have a material impact on our consolidated financial statements.

Intangibles- In January 2017, the FASB issued Accounting Standards Update 2017-04 Intangibles - Goodwill and other (“ASC 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 adopted this standard effective April 1, 2020, and such adoption did not have a material impact on 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 and cash equivalents, 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, 2020 and March 31, 2020, no assets or liabilities were valued using Level 3 criteria.

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


	September 30, 2020				March 31, 2020
	Carrying Value		Fair Value		Carrying Value		Fair Value		Valuation Technique



Financial Liabilities
Outstanding principal amount of senior secured credit facility	$	174,750	$	173,439	$	176,000	$	150,480	Level 2 - Market Approach

At September 30, 2020 and March 31, 2020, the fair value of our long-term debt is based on market quotes available for issuance of debt with similar terms. As the quoted price is only available for similar financial assets, the Company concluded the pricing is indirectly observable through dealers and has been classified as Level 2. The Company believes the decline in fair value as of March 31, 2020 was temporary due to the COVID-19 pandemic.

Cross Currency Swap

The Company has entered into a long-term cross currency swap to hedge the currency rate fluctuations related to a $42,958 intercompany receivable at September 30, 2020 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 Topic 815, Derivatives and Hedging ("ASC 815"). We recorded $1,507 and $3,450 of unrealized mark-to-market losses on the cross currency swap, which is reported as "Other income and expense", in the condensed consolidated statement operations and comprehensive income for the three and six months ended September 30, 2020, respectively. 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 $1,000 and $4,011 were included in "Other long-term assets" in the condensed consolidated balance sheet as of September 30, 2020 and March 31, 2020, respectively. For the six months ended September 30, 2020, the loss on the long-term cross currency swap derivative contract was offset by unrealized gain on the intercompany note of $3,805 for a net gain of $355.

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, 2020 and March 31, 2020 were $4,132 and $2,849, respectively, of deferred compensation plan assets held by the Company. Deferred compensation plan assets (mutual funds) are measured at fair value on a recurring basis based on quoted market prices in active markets (Level 1). The Company has a corresponding liability to participants of $4,144 and $2,886 included in “Other long-term liabilities” in the condensed consolidated balance sheet at September 30, 2020 and March 31, 2020, respectively. Deferred compensation expense included in "marketing, general and administrative and engineering" were $781 and $36 for the three months ended September 30, 2020 and 2019, respectively, and $1,311 and $139 for the six months ended September 30, 2020 and 2019, respectively. Expenses and income from our deferred compensation plan were offset by unrealized gains and losses for the deferred compensation plan included in "Other income and expense" on our condensed consolidated statements of comprehensive income. Our unrealized gains and losses on investments were gains of $840 and $21 for the three months ended September 30, 2020 and 2019, respectively, and $1,363 and $116 for the six months ended September 30, 2020 and 2019, 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 "Other income and expense" on our condensed consolidated statements of comprehensive income. 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). Fair value amounts for such forward contracts on our condensed consolidated balance sheets are either classified as accounts receivable, net or accrued liabilities depending on whether the forward contract is in a gain (accounts receivable, net) or loss (accrued liabilities) position. 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, 2020 and March 31, 2020, the notional amounts of forward contracts were as follows:


Notional amount of foreign currency forward contracts by currency
	September 30, 2020		March 31, 2020
Russian Ruble	$	1,172	$	1,103
Euro	—		500
Canadian Dollar	11,500		1,500
South Korean Won	3,000		3,500

Mexican Peso	1,500		2,000
Australian Dollar	800		700



Great Britain Pound	500		500

Total notional amounts	$	18,472	$	9,803

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


	September 30, 2020				March 31, 2020
	Fair Value				Fair Value
	Assets		Liabilities		Assets		Liabilities
Foreign currency forward contracts	$	19	$	114	$	140	$	49

Foreign currency gains or losses related to our forward contracts in the accompanying condensed consolidated statements of operations and comprehensive income were losses of $145 and $199 in the three months ended September 30, 2020 and 2019, respectively, and losses of $49 and $241 for the six months ended September 30, 2020 and 2019, 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, 2020 and 2019, our net foreign currency transactions were gains of $150 and losses of $90, respectively, and gains of $331 and $123 for the six months ended September 30, 2020 and 2019, 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 ASC Topic 842 and its amendments and applied the transition provisions as of April 1, 2019. 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 facilities 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.

During the three months ended September 30, 2020, we exercised the early termination option in one of our existing leases in Canada, which resulted in the remeasurement of the related ROU asset and lease liability and accelerated the lease

amortization and expense to align with the cease use date of the facility. We intend to vacate the facility on December 31, 2020. The resulting incremental charges of $46 for abandonment treatment of the lease have been included in our restructuring charges for the three months ended September 30, 2020.

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 under our TPS product brand line 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. A small number of our lease agreements include fixed rental payments that are adjusted periodically for changes in the Consumer Price Index (“CPI”). Payments based on an index or rate such as CPI are included in the lease payments based on the commencement date index or rate. Estimated changes to the index or rate during the lease term are not considered in the determination of the lease payments.

Options to Extend or Terminate Leases

Most of our real property leases include early termination options and/or one or more options to renew, with renewal terms that can extend the lease term for an additional one to five years or longer. The exercise of lease termination and renewal options is at our sole discretion. If it is reasonably certain that we will exercise such renewal options, the periods covered by such renewal options are included in the lease term and are recognized as part of our 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 North American 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, 2020 for operating leases that commenced prior to April 1, 2020 to establish the lease liabilities. For operating leases that commenced during the six months ended September 30, 2020, 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, 2020		March 31, 2020
Weighted average remaining lease term
Operating	5.9		6.2
Finance	3.3		3.4

Weighted average discount rate
Operating	4.83	%	4.82	%
Finance	6.95	%	6.98	%

Supplemental balance sheet information related to leases was as follows:


Assets	Classification	September 30, 2020		March 31, 2020
Operating	Operating lease right-of-use assets	$	15,049	$	16,637
Finance	Property, plant and equipment	551		695
Total right-of-use assets		$	15,600	$	17,332

Liabilities
Current
Operating	Lease liabilities	$	3,743	$	3,352
Finance	Lease liabilities	204		201
Non-current
Operating	Non-current lease liabilities	13,703		15,060
Finance	Non-current lease liabilities	369		511
Total lease liabilities		$	18,019	$	19,124

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


Lease expense	Classification	Three Months Ended September 30, 2020		Three Months Ended September 30, 2019		Six Months Ended September 30, 2020		Six Months Ended September 30, 2019
Operating lease expense	Marketing, general and administrative and engineering	$	1,243	$	959	$	2,384	$	1,767

Finance lease expense:
Amortization of ROU assets	Marketing, general and administrative and engineering	68		66		145		125
Interest expense on finance lease liabilities	Interest expense	11		13		22		26

Short-term lease expense	Marketing, general and administrative and engineering	30		252		51		715
Net lease expense		$	1,352	$	1,290	$	2,602	$	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, 2020		Six Months Ended September 30, 2019
Operating cash used for operating leases	$	1,697	$	1,365
Operating cash flows used for finance leases	22		26
Financing cash flows used for finance leases	139		108

Future lease payments under non-cancellable operating leases as of September 30, 2020 were as follows:


Future Lease Payments	Operating Leases		Finance Leases
Twelve months ending September 30,
2021	$	4,502	$	191
2022	3,886		159
2023	3,022		147
2024	2,105		105
2025	1,683		30
Thereafter	5,383		—
Total lease payments	$	20,581	$	632
Less imputed interest	(3,135)		(59)
Total lease liability	$	17,446	$	573

4. Restructuring

During the six months ended September 30, 2020, we enacted certain restructuring initiatives to align our current cost structure with the present decline in demand for our products and services primarily due to COVID-19 and depressed oil prices. Moreover, the Company eliminated approximately 85 and 196 positions during the three and six months ended September 30, 2020, respectively (both hourly and salaried positions), and incurred $1,941 and $4,862 in one-time severance costs during the three and six months ended September 30, 2020, respectively, which were recorded to marketing, general and administrative and engineering in our condensed consolidated statements of operations and comprehensive income. In addition, we incurred $46 in lease abandonment charges related to a Canadian facility we intend to vacate on December 31, 2020, which was recorded to marketing, general and administrative and engineering expense in our condensed consolidated statements of operations and comprehensive income.

Restructuring costs by reportable segment were as follows:


	Three Months Ended September 30, 2020		Six Months Ended September 30, 2020

United States and Latin America	$	351	$	2,414
Canada	1,270		2,128
Europe, Middle East and Africa	356		356
Asia-Pacific	10		10
	$	1,987	$	4,908

Restructuring activity related to accrued severance recorded to accrued liabilities in the condensed consolidated balance sheets is summarized as follows for the six months ended September 30, 2020:


	September 30, 2020

Beginning balance	$	—
Costs incurred	4,862
Less cash payments	(2,791)
Ending balance	$	2,071

5. 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 (loss) per common share for the three and six months ended September 30, 2020 and 2019, respectively, are as follows:


	Three Months Ended September 30, 2020		Three Months Ended September 30, 2019		Six Months Ended September 30, 2020		Six Months Ended September 30, 2019
Basic net income per common share
Net income (loss) available to Thermon Group Holdings, Inc.	$	1,838	$	6,912	$	(4,247)	$	8,383
Weighted-average common shares outstanding	33,164,921		32,727,023		33,075,902		32,681,410
Basic net income (loss) per common share	$	0.06	$	0.21	$	(0.13)	$	0.26


	Three Months Ended September 30, 2020		Three Months Ended September 30, 2019		Six Months Ended September 30, 2020		Six Months Ended September 30, 2019
Diluted net income per common share
Net income (loss) available to Thermon Group Holdings, Inc.	$	1,838	$	6,912	$	(4,247)	$	8,383
Weighted-average common shares outstanding	33,164,921		32,727,023		33,075,902		32,681,410
Common share equivalents:
Stock options	3,376		201,730		—		205,359
Restricted and performance stock units	249,357		315,634		—		225,009
Weighted average shares outstanding – dilutive (1)	33,417,654		33,244,387		33,075,902		33,111,778
Diluted net income (loss) per common share (2)	$	0.06	$	0.21	$	(0.13)	$	0.25

(1) For the three months ended September 30, 2020, 256,444 equity awards were not included in the calculation of diluted net income per common share, as they would have had an anti-dilutive effect. For the six months ended September 30, 2020 and 2019, 283,764 and 16,557 equity awards, respectively, were not included in the calculation of diluted net income per common share, as they would have had an anti-dilutive effect.

(2) As the Company incurred a net loss for the six months ended September 30, 2020, there was no dilutive effect on net loss per common share as common share equivalents are antidilutive. Therefore, both basic and diluted net loss per common share were $(0.13) for the six months ended September 30, 2020.

6. Inventories

Inventories consisted of the following: