thr-20211231

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 December 31, 2021

☐ 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 February 2, 2022, the registrant had 33,350,311 shares of common stock, par value $0.001 per share, outstanding.

THERMON GROUP HOLDINGS, INC.

QUARTERLY REPORT

FOR THE QUARTER ENDED DECEMBER 31, 2021

TABLE OF CONTENTS


			Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 3 1 , 2021 and March 31, 2021			2
Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended December 3 1 , 2021 and 2020			3
Condensed Consolidated Statements of Equity for the three and n ine months ended December 3 1 , 2021 and 2020			4
Condensed Consolidated Statements of Cash Flows for the nine months ended December 3 1 , 2021 and 2020			6
Notes to Condensed Consolidated Financial Statements			7
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			37
Item 1A. Risk Factors			37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3. Defaults Upon Senior Securities			37
Item 4. Mine Safety Disclosures			38
Item 5. Other Information			38
Item 6. Exhibits			38
EXHIBIT INDEX			39
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2
SIGNATURE			40

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)


	December 31, 2021		March 31, 2021
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	32,566	$	40,124

Accounts receivable, net of allowances of $2,689 and $2,074 as of December 31, 2021 and March 31, 2021, respectively	89,422		74,501
Inventories, net	69,634		63,790
Contract assets	21,248		11,379
Prepaid expenses and other current assets	12,007		8,784
Income tax receivable	7,936		8,231

Total current assets	$	232,813	$	206,809
Property, plant and equipment, net of depreciation and amortization of $62,722 and $55,555 as of December 31, 2021 and March 31, 2021, respectively	66,299		72,630
Goodwill	211,389		213,038
Intangible assets, net	96,398		103,784
Operating lease right-of-use assets	10,935		12,619
Deferred income taxes	1,083		2,586
Other long-term assets	7,553		6,412
Total assets	$	626,470	$	617,878
Liabilities
Current liabilities:
Accounts payable	$	34,799	$	19,722
Accrued liabilities	22,731		23,888
Current portion of long-term debt	7,004		2,500

Contract liabilities	6,568		2,959
Lease liabilities	3,335		3,511
Income taxes payable	417		218

Total current liabilities	$	74,854	$	52,798
Long-term debt, net	125,092		143,017
Deferred income taxes	18,532		21,006
Non-current lease liabilities	10,312		12,373
Other non-current liabilities	9,120		9,812
Total liabilities	$	237,910	$	239,006


Commitments and contingencies (Note 9)
Equity
Common stock: $0.001 par value; 150,000,000 authorized; 33,341,899 and 33,225,808 shares issued and outstanding at December 31, 2021 and March 31, 2021, respectively	$	33	$	33
Preferred stock: $0.001 par value; 10,000,000 authorized; no shares issued and outstanding	—		—
Additional paid in capital	233,555		231,322
Accumulated other comprehensive loss	(39,871)		(35,919)
Retained earnings	194,843		183,436


Total equity	$	388,560	$	378,872
Total liabilities and equity	$	626,470	$	617,878

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 December 31, 2021		Three Months Ended December 31, 2020		Nine Months Ended December 31, 2021		Nine Months Ended December 31, 2020
Sales	$	100,613	$	79,604	$	253,090	$	202,858
Cost of sales	59,866		42,644		154,084		112,848
Gross profit	40,747		36,960		99,006		90,010
Operating expenses:
Selling, general and administrative expenses	22,099		20,283		66,820		66,222
Deferred compensation plan expense/(income)	292		599		610		1,380
Amortization of intangible assets	2,187		2,135		6,613		7,265
Restructuring and other charges/(income)	—		3,783		(414)		8,692
Income/(loss) from operations	16,169		10,160		25,377		6,451
Other income/(expenses):
Interest expense, net	(842)		(2,433)		(5,029)		(7,404)

Other income/(expense)	(627)		874		(3,517)		2,188
Income/(loss) before provision for income taxes	14,700		8,601		16,831		1,235
Income tax expense/(benefit)	3,430		2,426		5,424		(693)
Net income/(loss)	$	11,270	$	6,175	$	11,407	$	1,928


Comprehensive income/(loss):
Net income/(loss)	$	11,270	$	6,175	$	11,407	$	1,928
Foreign currency translation adjustment	(413)		14,516		(3,843)		29,245
Other miscellaneous income/(loss)	(96)		(152)		(109)		(731)
Comprehensive income/(loss)	$	10,761	$	20,539	$	7,455	$	30,442
Net income/(loss) per common share:
Basic	$	0.34	$	0.19	$	0.34	$	0.06
Diluted	0.33		0.18		0.34		0.06
Weighted-average shares used in computing net income/(loss) per common share:
Basic	33,340,000		33,180,562		33,292,614		33,110,877
Diluted	33,658,104		33,419,573		33,481,964		33,234,357

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, 2021	33,225,808	$	33	$	231,322	$	183,436	$	(35,919)	$	378,872
Issuance of common stock in exercise of stock options	8,100	—		97		—		—		97
Issuance of common stock as deferred compensation to employees	23,858	—		—		—		—		—
Issuance of common stock as deferred compensation to executive officers	42,326	—		—		—		—		—
Issuance of common stock as deferred compensation to directors	7,368	—		—		—		—		—
Stock compensation expense	—	—		1,178		—		—		1,178
Repurchase of employee stock units on vesting	—	—		(548)		—		—		(548)

Net income/(loss)	—	—		—		(340)		—		(340)
Foreign currency translation adjustment	—	—		—		—		4,195		4,195
Other	—	—		—		—		(64)		(64)

Balances at June 30, 2021	33,307,460	$	33	$	232,049	$	183,096	$	(31,788)	$	383,390

Issuance of common stock as deferred compensation to employees	10,687	—		—		—		—		—
Issuance of common stock as deferred compensation to executive officers	7,344	—		—		—		—		—
Issuance of common stock as deferred compensation to directors	8,352	—		—		—		—		—
Stock compensation expense	—	—		1,246		—		—		1,246
Repurchase of employee stock units on vesting	—	—		(14)		—		—		(14)
Net income/(loss)	—	—		—		477		—		477
Foreign currency translation adjustment	—	—		—		—		(7,625)		(7,625)



Other	—	—		(1)		1		51		51
Balances at September 30, 2021	33,333,843	$	33	$	233,280	$	183,574	$	(39,362)	$	377,525

Issuance of common stock as deferred compensation to employees	52	—		—		—		—		—

Issuance of common stock as deferred compensation to directors	8,004	—		—		—		—		—
Stock compensation expense	—	—		275		—		—		275

Net income/(loss)	—	—		—		11,270		—		11,270
Foreign currency translation adjustment	—	—		—		—		(413)		(413)
Other	—	—		—		(1)		(96)		(97)
Balances at December 31, 2021	33,341,899	$	33	$	233,555	$	194,843	$	(39,871)	$	388,560


	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 income/(loss)	—	—		—		(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/(loss)	—	—		—		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
Issuance of common stock in exercise of stock options	—	—		16		—		—		16
Issuance of common stock as deferred compensation to employees	1,867	—		—		—		—		—
Issuance of common stock as deferred compensation to directors	14,553	—		—		—		—		—
Stock compensation expense	—	—		430		—		—		430
Repurchase of employee stock units on vesting	—	—		(2)		—		—		(2)
Net income/(loss)	—	—		—		6,175		—		6,175
Foreign currency translation adjustment	—	—		—		—		14,516		14,516
Other	—	—		8		—		(160)		(152)
Balances at December 31, 2020	33,186,218	$	33	$	230,450	$	184,487	$	(35,388)	$	379,582

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

Thermon Group Holdings, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)


	Nine Months Ended December 31, 2021		Nine Months Ended December 31, 2020
Operating activities
Net income/(loss)	$	11,407	$	1,928
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Depreciation and amortization	15,349		15,617
Amortization of deferred debt issuance costs	495		773

Loss on extinguishment of debt	2,569		—
Stock compensation expense	2,699		2,921
Deferred income taxes	(878)		(2,698)
Reserve for uncertain tax positions, net	58		—
(Gain)/Loss on long-term cross currency swap	(1,391)		5,068
Remeasurement (gain)/loss on intercompany balances	(556)		(6,996)
Loss on sale of business, net of cash surrendered	310		2,045
Changes in operating assets and liabilities:			0
Accounts receivable	(15,471)		21,028
Inventories	(6,137)		(10,618)
Contract assets	(6,287)		(2,148)
Other current and non-current assets	(3,293)		(2,833)
Accounts payable	15,221		(2,263)
Accrued liabilities and non-current liabilities	(824)		(991)
Income taxes payable and receivable	475		(5,354)
Net cash provided by/(used in) operating activities	$	13,746	$	15,479
Investing activities
Purchases of property, plant and equipment	(2,920)		(4,708)
Sale of rental equipment	235		65




Net cash provided by/(used in) in investing activities	$	(2,685)	$	(4,643)
Financing activities
Proceeds from Term Loan A	140,425		—
Proceeds from revolving credit facility	15,959		37,189
Payments on long-term debt and revolving credit facility	(171,862)		(44,339)
Issuance costs associated with revolving line of credit and long term debt	(1,248)		—

Proceeds from exercise of stock options	97		468
Repurchase of employee stock units on vesting	(562)		(688)
Payments on finance leases	(96)		(218)
Net cash provided by/(used in) financing activities	$	(17,287)	$	(7,588)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(821)		3,057
Change in cash, cash equivalents and restricted cash	(7,047)		6,305
Cash, cash equivalents and restricted cash at beginning of period	42,450		46,006
Cash, cash equivalents and restricted cash at end of period	$	35,403	$	52,311

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

Thermon Group Holdings, Inc. and its direct and indirect subsidiaries are referred to collectively as “we,” “our,” or the “Company” herein. We are one of the largest providers of highly engineered industrial process heating solutions for process industries. We offer a full suite of products (heating units, heating cables, temporary power solutions and tubing bundles), services (engineering, installation and maintenance services) and software (design optimization and wireless and network control systems) required to deliver comprehensive solutions to some of the world's largest and most complex projects.

Our condensed consolidated financial statements are prepared in conformity with generally accepted accounting principles in the United States ("GAAP") and the requirements of the United States Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, the accompanying condensed consolidated financial statements do not include all disclosures required for full annual financial statements and should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2021 ("fiscal 2021"). In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments considered necessary to present fairly our financial position at December 31, 2021 and March 31, 2021, and the results of our operations for the three and nine months ended December 31, 2021 and 2020. Certain prior year amounts have been reclassified to conform with the current year's presentation.

Impact of the COVID-19 Pandemic

The 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 negatively impacted, and may continue to negatively impact, global demand for our products and services. Although we believe the general economic environment in which we operate has improved since the onset of the COVID-19 pandemic, we may experience a decline in the demand of our products and services or disruptions in raw materials or labor required for manufacturing that could materially and negatively impact our business, financial condition, results of operation and overall financial performance in future periods. We have experienced increased costs across our global supply chain as we focus on meeting growing demand from our customers. In certain circumstances, we have had issues with a lack of availability of certain raw materials as well as increases in costs of our raw materials due to: use of alternate suppliers, higher freight costs, increased lead times, and expedited shipping. Also, we have seen labor inefficiencies and increased overtime in certain of our facilities due to temporary shortages in raw materials required for production. These increased costs have contributed to lower-than-anticipated margins in the three and nine months ended December 31, 2021.

On April 11, 2020, the Canadian government officially enacted the Canadian Emergency Wage Subsidy (the “CEWS”) for the purposes of assisting employers in financial hardship due to the COVID-19 pandemic and of reducing potential layoffs of employees. The CEWS, which was made retroactive to March 15, 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 related distributions from the Canadian government.

We recorded $199 and $1,448 to "Cost of sales" in our condensed consolidated statement of operations for the three and nine months ended December 31, 2021, respectively. We recorded $4 and $504 to "Selling, general and administrative expenses" in our condensed consolidated statement of operations for the three and nine months ended December 31, 2021, respectively.

We recorded $1,399 and $3,552 to "Cost of sales" in our condensed consolidated statement of operations for the three and nine months ended December 31, 2020, respectively. We recorded $301 an $1,953 to "Selling, general and administrative expenses" in our condensed consolidated statement of operations for the three and nine months ended December 31, 2020, respectively.

Additionally, we capitalized $2 and $430 in "Inventories, net" at December 31, 2021 and March 31, 2021.

We anticipate our benefit from the CEWS program to decline in fiscal 2022 as we become less qualified for the subsidy and as the program ended in October 2021.

Use of Estimates

Generally accepted accounting principles 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 management has based their assumptions and estimates on the facts and circumstances existing at December 31, 2021, 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 nine months ended December 31, 2021 are not necessarily indicative of the results that may be achieved for the fiscal year ending March 31, 2022 ("fiscal 2022").

We increased our allowance for doubtful accounts at December 31, 2021 to $2,689 from $2,074 at March 31, 2021. The increase in the period is primarily attributable to an accrual for bad debts related to potentially uncollectible receivables, mainly in our EMEA reportable segment.

We typically record compensation cost related to performance stock units that are initially deemed probable to meet our performance target 100% of the award fair value. However, during the three months ended December 31, 2021, we adjusted our compensation cost to reflect the likelihood of certain performance stock units granted in fiscal 2020 vesting based on the Company's financial performance. We determined that these awards were not probable to meet the related performance condition; therefore we have recorded income from a reversal of compensation cost of $1,073. We also recognized incremental compensation cost in the three months ended December 31, 2021 of $107 on certain fiscal 2021 and 2022 performance stock units based on the expected financial performance of the Company.

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, and restricted cash included in prepaid expenses and other current assets and restricted cash included in other long-term assets reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the statements of cash flows.


	December 31,
	2021		2020
Cash and cash equivalents	$	32,566	$	49,617
Restricted cash included in prepaid expenses and other current assets	2,496		2,314
Restricted cash included in other long-term assets	341		380
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows	$	35,403	$	52,311

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.

Correction of an Error

During the second quarter of fiscal 2022, we identified an error in our previously issued unaudited condensed consolidated financial statements as of and for the three months ended June 30, 2021, as well as our consolidated financial statements as of and for the three months ended March 31, 2021. The error was due to underreported warranty costs associated with the operational execution of a large project in our US-LAM segment that completed in a prior year for which we are supplying engineering services, installation services, and equipment. Management evaluated the materiality of the error from a qualitative and quantitative perspective and concluded that the error was not material to any one quarterly period. Accordingly, we corrected the error in the consolidated balance sheets at March 31, 2021 and consolidated statements of operations and comprehensive income for the three and twelve months ended March 31, 2021. We also corrected the error in the unaudited condensed consolidated balance sheets at June 30, 2021, and unaudited condensed consolidated statements of operations and comprehensive income for the three months ended June 30, 2021 is as follows:


Consolidated Balance Sheets	March 31, 2021				March 31, 2021
	as reported		Adjustments		as corrected
Accrued liabilities	$	23,517	$	371	$	23,888
Deferred income taxes	21,088		(82)		21,006
Retained earnings	$	183,725	(289)		183,436


Consolidated Statement of Operations and Comprehensive Income	Three Months Ended March 31, 2021				Three Months Ended March 31, 2021
	as reported		Adjustments		as corrected
Sales	$	73,323	$	—	$	73,323
Cost of sales	46,090		371		46,461
Gross profit	27,233		(371)		26,862
Net income/(loss)	$	(763)	$	(288)	$	(1,051)
Net income/(loss) per common share:
Basic	$	(0.02)	$	(0.01)	$	(0.03)
Diluted	$	(0.02)	$	(0.01)	$	(0.03)


Consolidated Statement of Operations and Comprehensive Income	Twelve Months Ended March 31, 2021				Twelve Months Ended March 31, 2021
	as reported		Adjustments		as corrected
Sales	$	276,181	$	—	$	276,181
Cost of sales	158,938		371		159,309
Gross profit	117,243		(371)		116,872
Net income/(loss)	$	1,165	$	(288)	$	877
Net income/(loss) per common share:
Basic	$	0.04	$	(0.01)	$	0.03
Diluted	$	0.03	$	0.00	$	0.03


Consolidated Balance Sheets	June 30, 2021				June 30, 2021
	as reported		Adjustments		as corrected
Accrued liabilities	$	20,046	$	2,002	$	22,048
Income taxes payable	678		(424)		254
Deferred income taxes	21,880		(82)		21,798
Retained earnings	$	184,591	(1,496)		183,095


	Three Months Ended June 30, 2021				Three Months Ended June 30, 2021
	as reported		Adjustments		as corrected
Sales	$	71,155	$	—	$	71,155
Cost of sales	42,986		1,631		44,617
Gross profit	28,169		(1,631)		26,538
Net income/(loss)	$	867	$	(1,207)	$	(340)
Net income/(loss) per common share:
Basic	$	0.03	$	(0.04)	$	(0.01)
Diluted	$	0.03	$	(0.04)	$	(0.01)

Recent Accounting Pronouncements

Business Combinations - In October 2021, the FASB issued Accounting Standards Update, ("ASU") 2021-08 - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASC 805). ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. Under this "Topic 606 approach," the acquirer applies the revenue model as if it had originated the contracts. This is a departure from the current requirement to measure contract assets and contract liabilities at fair value. The ASU is effective for all public business entities in annual and interim periods starting after December 15, 2022 and early adoption is permitted. We intend to evaluate the option to early adopt should we execute a business combination before mandatory adoption. Adopting this standard could have a material impact on revenue associated with an acquired business.

Government Assistance - In November 2021, the FASB issued Accounting Standards Update 2021-10 - Government Assistance, which creates new Codification Topic 832 (government assistance). This new topic addresses the requirement for disclosures when an entity receives government assistance. The requirements state the entity should disclose the nature of the transactions and the related accounting policies used, the line items on the balance sheet and income statement that are affected and the amounts applicable to each financial statement line item, and significant terms and conditions of the transactions. Topic 832 is effective for all public business entities in annual periods in fiscal years beginning after December 15, 2021. Early application is permitted. We have early adopted this standard effective October 1, 2021, and it did not have a material impact on our financial statements.

Reference Rate Reform - In March 2020, the FASB issued Accounting Standards Update 2020-04 - Reference Rate Reform (ASC 848). The update is intended to provide temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This ASU became effective in March of 2020. As of December 31, 2021, we have not yet elected any optional expedients provided in the standard. We will apply the accounting relief, if necessary, as relevant contract and hedge accounting relationship modifications are made during the reference rate reform transition period.

Income Taxes - In December 2019, the FASB issued Accounting Standards Update 2019-12 - Income Taxes (ASC 740): Simplifying the Accounting for Income Taxes. This ASU amends ASC 740 to simplify certain requirements related to income taxes, specifically as it relates to interim period accounting for changes in tax law and year-to-date loss limitation in interim period accounting. The new standard is effective for fiscal years beginning after December 15, 2020. We adopted this standard effective April 1, 2021, 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 use 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 December 31, 2021 and March 31, 2021, 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:


	December 31, 2021				March 31, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value		Valuation Technique



Financial Liabilities
Outstanding principal amount of senior secured credit facility	$	132,780	$	132,116	$	148,500	$	148,871	Level 2 - Market Approach

At December 31, 2021 and March 31, 2021, 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.

Cross Currency Swap

On September 29, 2021, we terminated a long-term cross currency swap we previously entered into through transactions related to the amendment to our term loan and revolving credit facility. The previous intercompany receivable, for which we had the swap, was settled with us by our wholly-owned Canadian subsidiary, Thermon Canada Inc. Refer to Note 8,"Long-Term Debt" for more information regarding our debt transactions. There were no transactions related to the long-term cross currency swap in the three months ended December 31, 2021, and there was not a balance associated with the swap in our condensed consolidated balance sheets as of December 31, 2021.

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 sheets at December 31, 2021 and March 31, 2021 were $5,710 and $5,047, 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 $5,258 and $4,608 included in “Other long-term liabilities” in the condensed consolidated balance sheets at December 31, 2021 and March 31, 2021, respectively. In fiscal 2022, deferred compensation plan expense/(income) is included as such in the condensed consolidated statement of operations, and therefore is excluded from "Selling, general and administrative expenses." Deferred compensation expense/(income) was $292 and $599 for the three months ended December 31, 2021 and 2020, respectively, and $610 and $1,380 for the nine months ended December 31, 2021 and 2020, 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 operations and comprehensive income. Our unrealized gains on investments were $314 and $651, respectively, for the three months ended December 31, 2021 and 2020, respectively, and $620 and $1,419 for the nine months ended December 31, 2021 and 2020, 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 address 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 operations and 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 December 31, 2021 and March 31, 2021, the notional amounts of forward contracts were as follows:


Notional amount of foreign currency forward contracts by currency
	December 31, 2021		March 31, 2021
Russian Ruble	$	1,701	$	3,000

Canadian Dollar	3,500		5,500
South Korean Won	1,850		5,000

Mexican Peso	1,850		1,500
Australian Dollar	1,300		900



Great Britain Pound	—		500

Total notional amounts	$	10,201	$	16,400

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


	December 31, 2021				March 31, 2021
	Fair Value				Fair Value
	Assets		Liabilities		Assets		Liabilities
Foreign currency forward contracts	$	63	$	64	$	61	$	32

Foreign currency gains or losses related to our forward contracts in the accompanying condensed consolidated statements of operations and comprehensive income were losses of $(637) and of $(388) in the three months ended December 31, 2021 and 2020, respectively, and losses of $(861) and $(437) for the nine months ended December 31, 2021 and 2020, 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 December 31, 2021 and 2020, our net foreign currency transactions resulted in losses of $(949) and gains of $109, respectively, and losses of $(1,634) and gains of $85 for the nine months ended December 31, 2021 and 2020, respectively.

3. Restructuring and Other Charges/(Income)

In fiscal 2021, we enacted certain restructuring initiatives to align our cost structure with the decline in demand for our products and services at that time primarily due to COVID-19 and supply/demand fluctuations in commodity prices. We are substantially complete with these initiatives. We recorded the following charges/(income) as it relates to restructuring.

Fiscal 2022 charges/(income)

No activity was recorded for the three months ended December 31, 2021. For the nine months ended December 31, 2021, we recorded $(103) for severance-related activity in our Canadian segment which was recorded to "Restructuring and other charges/(income)" in our condensed consolidated statements of operations and comprehensive income. Additionally, we recorded $(311) in cash receipts related to receivables existing prior to the sale of our South Africa business, which was completed in fiscal 2021.

Fiscal 2021 charges/(income)

The Company eliminated approximately 66 and 262 hourly and salaried positions and incurred $997 and $5,858 in one-time severance costs during the three and nine months ended December 31, 2020, respectively, which was recorded to "Restructuring and other charges/(income)" in our condensed consolidated statements of operations and comprehensive income.

In addition, we incurred $429 in lease impairment costs primarily related to one of our Canadian facilities that was substantially vacated by December 31, 2020, as the Company executed efforts to optimize its global manufacturing footprint. We also exercised the early termination option for one of our existing leases in Canada, which resulted in the remeasurement of the related right-of-use asset and lease liability and accelerated the lease amortization and expense to align with the cease use date of the facility. We substantially vacated the facility by December 31, 2020. As a result, we recorded an incremental $144 and $191 in lease abandonment charges during the three and nine months ended December 31, 2020, respectively. Both of these lease-related costs were recorded to restructuring and other charges/(income) in our condensed consolidated statements of operations and comprehensive income.

Disposal of South Africa Business

On December 15, 2020, a Sale of Shares Agreement was entered into between one of our consolidated subsidiaries and an investor consortium (the "TSAPL Purchasers"). As a result of this agreement, 100% of the outstanding common shares of our consolidated subsidiary, Thermon South Africa Proprietary Limited (the "South Africa Business"), were sold to the TSAPL Purchasers, with aggregate proceeds of 2,500 South African Rand (ZAR), or $167, as partial satisfaction of an existing note receivable. In addition, the TSAPL Purchasers committed to settle operational receivables attributable to other Thermon Group Holdings, Inc. subsidiaries that were existing at the time of sale.

After evaluating our presence in the region served by the South Africa Business, the Company decided to centralize and consolidate our business structure and streamline our organization. A member of the TSAPL Purchasers was the current general manager of the operations at the time of sale. This sale is accompanied by a distribution agreement whereby the new owners will distribute our products, thus continuing the Company's presence in the region. We believes this is an opportunity to optimize the business while pivoting to a new relationship that will better enable us to serve our customers.

As a result of the sale and in accordance with ASC 360-10, we recognized a loss on the sale of a business of $2,214, which included the impact of a currency translation adjustment of $828. This loss was recognized within restructuring and other charges/(income) on the condensed consolidated statements of operations and comprehensive income. The reported loss on sale of stock is not deductible for tax. Prior to the disposal, the South Africa Business's results were reported within the "Europe, Middle East and Africa" segment.

Restructuring and other charges/(income) by reportable segment were as follows:


	Three Months Ended December 31, 2021		Three Months Ended December 31, 2020		Nine Months Ended December 31, 2021		Nine Months Ended December 31, 2020

United States and Latin America	$	—	$	959	$	(46)	$	3,373
Canada	—		573		(186)		2,702
Europe, Middle East and Africa	—		2,251		(182)		2,607
Asia-Pacific	—		—		—		10
	$	—	$	3,783	$	(414)	$	8,692

Restructuring activity related to severance activity described above recorded in "Accrued liabilities" on the condensed consolidated balance sheets is summarized as follows for the nine months ended December 31, 2021 and December 31, 2020:


	Nine Months Ended December 31, 2021		Nine Months Ended December 31, 2020
Beginning balance	$	657	$	—
Costs/(income)	(103)		5,858
Less cash payments	(452)		(4,153)
Ending balance	$	102	$	1,705

4. Net Income/(Loss) per Common Share

Basic net income/(loss) per common share is computed by dividing net income/(loss) by the weighted average number of common shares outstanding during each period. Diluted net income/(loss) per common share is computed by dividing net income/(loss) by the weighted average number of common shares and common share equivalents outstanding (if dilutive) during each period. The number of common share equivalents, which includes options and both restricted and performance stock units, is computed using the treasury stock method. With regard to the performance stock units, we assume that the associated performance targets will be met at the target level of performance for purposes of calculating diluted net income/(loss) per common share until such time that it is probable that the performance target will not be met.

The reconciliations of the denominators used to calculate basic and diluted net income/(loss) per common share for the three and nine months ended December 31, 2021 and 2020, respectively, are as follows:


	Three Months Ended December 31, 2021		Three Months Ended December 31, 2020		Nine Months Ended December 31, 2021		Nine Months Ended December 31, 2020
Basic net income/(loss) per common share
Net income/(loss)	$	11,270	$	6,175	$	11,407	$	1,928
Weighted-average common shares outstanding	33,340,000		33,180,562		33,292,614		33,110,877
Basic net income/(loss) per common share	$	0.34	$	0.19	$	0.34	$	0.06


	Three Months Ended December 31, 2021		Three Months Ended December 31, 2020		Nine Months Ended December 31, 2021		Nine Months Ended December 31, 2020
Diluted net income/(loss) per common share
Net income/(loss)	$	11,270	$	6,175	$	11,407	$	1,928
Weighted-average common shares outstanding	33,340,000		33,180,562		33,292,614		33,110,877
Common share equivalents:
Stock options	271		2,733		1,660		21,155
Restricted and performance stock units	317,833		236,278		187,690		102,325
Weighted average shares outstanding – dilutive (1)	33,658,104		33,419,573		33,481,964		33,234,357
Diluted net income/(loss) per common share	$	0.33	$	0.18	$	0.34	$	0.06

(1) For the three and nine months ended December 31, 2021, 45,099 and 139,843 equity awards, respectively, were not included in the calculation of diluted net income/(loss) per common share, as they would have had an anti-dilutive effect. For the three and nine months ended December 31, 2020, 250,668 and 246,005 equity awards respectively, were not included in the calculation of diluted net income/(loss) per common share, as they would have had an anti-dilutive effect.

5. Inventories

Inventories consisted of the following:


	December 31, 2021		March 31, 2021
Raw materials	$	41,227	$	33,485
Work in process	4,394		4,071
Finished goods	25,990		28,008
	71,611		65,564
Valuation reserves	(1,977)		(1,774)
Inventories, net	$	69,634	$	63,790

6. Goodwill and Other Intangible Assets

The carrying amount of goodwill by operating segment as of December 31, 2021 is as follows:


	United States and Latin America		Canada		Europe, Middle East and Africa		Asia-Pacific		Total
Balance as of March 31, 2021	$	62,725	$	121,550	$	20,139	$	8,624	$	213,038

Foreign currency translation impact	—		(988)		(661)		—		(1,649)
Balance as of December 31, 2021	$	62,725	$	120,562	$	19,478	$	8,624	$	211,389

Goodwill is tested for impairment on an annual basis and between annual tests if indicators of potential impairment exist. We perform a qualitative analysis to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If required, we also perform a quantitative analysis using the income approach, based on discounted future cash flows, which are derived from internal forecasts and economic expectations, and the market approach, which is based on market multiples of guideline public companies. The most significant inputs in the Company's quantitative goodwill impairment tests are projected financial information, the weighted average cost of capital and market multiples for similar transactions. Our annual impairment test is performed during the fourth quarter of our fiscal year.

In the fourth quarter of fiscal 2021, we identified the prolonged economic effects of the COVID-19 pandemic to be an indicator of potential asset impairments in our reporting units. We performed our annual goodwill, intangible and tangible impairment assessments including our indefinite life trademarks. We analyzed our reporting units utilizing the income approach, based on discounted future cash flows, which are derived from internal forecasts and economic expectations, and the market approach, based on market multiples of guideline public companies. The impairment test for indefinite life trademarks utilized a relief from royalty analysis based on the cash flow streams attributable to the Thermon trademark. Based on the goodwill impairment assessment, the estimated fair value of our reporting units exceeded the carrying value. As such, there was no impairment of goodwill, intangible or tangible assets or our indefinite life trademarks as of the respective reporting periods. The most significant inputs in the Company's impairment test are the projected financial information, the weighted average cost of capital and market multiples for similar transactions. If overall economic conditions, our key end markets, or factors specific to the Company deteriorate significantly, it could negatively impact the Company's future impairment tests. We will continue to monitor our reporting units' goodwill and asset valuations and test for potential impairments.

No triggering events were identified during the three month period ended December 31, 2021 which would indicate that the fair value of any of our reporting units was less than its carrying amount.

Our total intangible assets consisted of the following:


	Gross Carrying Amount at December 31, 2021		Accumulated Amortization		Net Carrying Amount at December 31, 2021		Gross Carrying Amount at March 31, 2021		Accumulated Amortization		Net Carrying Amount at March 31, 2021
Products	$	65,712	$	(27,380)	$	38,332	$	66,250	$	(22,635)	$	43,615
Trademarks	45,195		(1,460)		43,735		45,581		(1,289)		44,292
Developed technology	9,940		(5,806)		4,134		10,028		(5,486)		4,542
Customer relationships	113,049		(103,305)		9,744		113,789		(102,911)		10,878
Certifications	453		—		453		457		—		457

Total	$	234,349	$	(137,951)	$	96,398	$	236,105	$	(132,321)	$	103,784

7. Accrued Liabilities

Accrued current liabilities consisted of the following:


	December 31, 2021		March 31, 2021
Accrued employee compensation and related expenses	$	13,001	$	11,765
Accrued interest	133		648
Customer prepayments	643		283
Warranty reserves	532		250
Professional fees	2,390		2,361
Sales taxes payable	2,224		2,404

Other(1)	3,808		6,177
Total accrued current liabilities	$	22,731	$	23,888

(1) Included in Other are accrued warranty-related costs of $2,677 associated with the operational execution of a US-LAM project that was completed in a prior year. Refer to Note 1, "Basis of Presentation" for more information.

8. Long-Term Debt

Long-term debt consisted of the following:


	December 31, 2021		March 31, 2021
Variable Rate Term Loan B due October 2024 net of deferred debt issuance costs and debt discounts of $2,983 as of March 31, 2021	$	—	$	145,517
Variable Rate Term Loan A due September 2026 net of deferred debt issuance costs of $684 as of December 31, 2021	132,096		—
Less current portion	(7,004)		(2,500)
Total long-term debt	$	125,092	$	143,017

Senior Secured Credit Facilities

On September 29, 2021, Thermon Group Holdings, Inc., as a credit party and a guarantor, Thermon Holding Corp. (“THC” or the “U.S. Borrower”) and Thermon Canada Inc. (the “Canadian Borrower” and together with THC, the “Borrowers”), as borrowers, entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with several banks and other financial institutions or entities from time to time (the “Lenders”) and JPMorgan Chase Bank, N.A., as Administrative Agent (the “Agent”), which was further amended on November 19, 2021.

The Credit Agreement is an amendment and restatement of that certain Credit Agreement dated October 30, 2017 by and among Borrowers, the lenders party thereto and JPMorgan Chase Bank, N.A. as administrative agent (the “Prior Credit Agreement”), and provides for the following credit facilities described below (collectively, the “Facilities”).

•Revolving Credit Facility: A USD $100,000 five-year secured revolving credit facility made available to the U.S. Borrower. The Revolving Credit Facility includes sublimits for letters of credit and swing-line loans (the “Revolving Credit Facility”).

•U.S. Term Loan Facility: A USD $80,000 five-year secured term loan A (the “U.S. Term Loan”) made available to the U.S. Borrower (the “U.S. Term Loan Facility”); and

•Canadian Term Loan Facility: A CAD $76,182 five-year term loan A (the “Canadian Term Loan” and, together with the U.S. Term Loan, the “Term Loans”) made available to the Canadian Borrower (the “Canadian Term Loan Facility,” and together with the U.S. Term Loan Facility, the “Term Loan Facilities”).

Proceeds of the Facilities were used at closing to repay and refinance the Borrowers’ existing indebtedness under the Prior Credit Agreement and pay all interest, fees and expenses related thereto, and thereafter are expected to be used for working capital and general corporate purposes.

The Credit Agreement allows for incremental term loans and incremental revolving commitments in an amount not to exceed USD $100,000.

Maturity and Repayment

Each of the Facilities terminates on September 29, 2026. Commencing January 1, 2022, each of the Term Loans will amortize as set forth in the table below, with payments on the first day of each January, April, July and October, with the balance of each Term Loan Facility due at maturity.


Installment Dates	Original Principal Amount
January 1, 2022 through October 1, 2022	1.25	%
January 1, 2023 through October 1, 2024	1.88	%
January 1, 2025 through July 1, 2026	2.50	%

Guarantees

The U.S. Term Loan and the obligations of the U.S. Borrower under the Revolving Credit Facility are guaranteed by the Company and all of the U.S. Borrower’s current and future wholly owned domestic material subsidiaries (the “U.S. Subsidiary Guarantors”), subject to certain exceptions. The Canadian Term Loan is guaranteed by the Company, the U.S. Borrower, the U.S. Subsidiary Guarantors and each of the wholly owned Canadian material subsidiaries of the Canadian Borrower, subject to certain exceptions.

Security

The U.S. Term Loan and the obligations of the U.S. Borrower under the Revolving Credit Facility are secured by a first lien on all of the assets of the Company, the U.S. Borrower and the U.S. Subsidiary Guarantors, including 100% of the capital stock of the U.S. Subsidiary Guarantors and 65% of the capital stock of the first tier material foreign subsidiaries of the Company, the U.S. Borrower and the U.S. Subsidiary Guarantors, subject to certain exceptions. The Canadian Term Loan is secured by a first lien on all of the assets of the Company, the U.S. Borrower, the U.S. Subsidiary Guarantors, the Canadian Borrower and the material Canadian subsidiaries of the Canadian Borrower, including 100% of the capital stock of the Canadian Borrower’s material Canadian subsidiaries.

Interest Rates and Fees

The U.S. Borrower will have the option to pay interest on the U.S. Term Loan and borrowings under the Revolving Credit Facility at a base rate, plus an applicable margin, or at a rate based on LIBOR plus an applicable margin. The Canadian Borrower will have the option to pay interest on the Canadian Term Loan at a prime rate, plus an applicable margin, or at a rate based on the Canadian Dollar Offered Rate, or "CDOR," plus an applicable margin.

Under the applicable Facilities, the margin for base rate loans and Canadian prime rate loans is 62.5 basis points and the applicable margin for LIBOR loans and CDOR loans is 162.5 basis points; provided that, following the completion of one full fiscal quarter after the closing date, the applicable margins will be determined based on a leverage-based performance grid.

In addition to paying interest on outstanding principal under the Revolving Credit Facility, the U.S. Borrower is required to pay a commitment fee in respect of unutilized revolving commitments of 0.25% per annum, provided that, following the completion of one full fiscal quarter after the closing date, the commitment fee will be determined based on a leverage-based performance grid.

Voluntary Prepayment

The Borrowers will be able to voluntarily prepay the principal of the loans outstanding under each of the Facilities without penalty or premium (subject to breakage fees) at any time in whole or in part.

Mandatory Prepayment

Each Borrower is required to repay its respective Term Loan with certain asset sale and insurance proceeds and certain debt proceeds.

Debt Issuance Costs

We incurred fees to third parties in connection with our entry into the Credit Agreement described above. The debt issuance costs of $1,248 were capitalized and will be amortized over the life of the Credit Agreement. Additionally, we recognized a loss on debt extinguishment of $2,569, which was recorded to Other income/(expense) on our condensed consolidated statements of operations and comprehensive income.

Financial Covenants

In connection with the Credit Agreement, the Company is required, on a consolidated basis, to maintain certain financial covenant ratios. On the last day of any period of four fiscal quarters ending during a period set forth below, the Company must maintain a consolidated leverage ratio that does not exceed the ratios for such period set forth below (each of which ratios may be increased by 0.50:1.00 for each of the four fiscal quarters following certain acquisitions at the election of the U.S. Borrower):


Fiscal Quarter Ending						Consolidated Leverage Ratio
September 30, 2021 through September 30, 2022						3.75:1.00
December 31, 2022 and each fiscal quarter thereafter						3.50:1.00

In addition, on the last day of any period of four fiscal quarters ending on or after September 30, 2021, the Company must maintain a consolidated fixed charge coverage ratio of not less than 1.25:1.00. As of December 31, 2021, we were in compliance with all financial covenants of the Credit Agreement and there is no material uncertainty about our ongoing ability to comply with our covenants.

Other Covenants

The Credit Agreement contains restrictive covenants (in each case, subject to certain exclusions) that limit, among other things, the ability of the Company and its subsidiaries (including the Borrowers) to:

•incur additional indebtedness;

•grant liens;

•make fundamental changes;

•sell assets;

•make restricted payments;

•enter into sales and leasebacks;

•make investments;

•prepay certain indebtedness;

•enter into transactions with affiliates; and

•enter into restrictive agreements.

The covenants are subject to various baskets and materiality thresholds, with certain of the baskets to the restrictions on the repayment of subordinated or unsecured indebtedness, restricted payments and investments being available only when the Company’s pro forma leverage ratios are less than a certain level.

The Credit Agreement contains certain customary representations and warranties, affirmative covenants and events of default, including, among other things, payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under ERISA, judgment defaults, actual or asserted failure of any guaranty or security documents to be in full force and effect and change of control. If such an event of default occurs, the Agent will be entitled to take various actions, including the termination of the commitment for the Revolving Credit Facility, the acceleration of amounts due under the Credit Agreement and certain other actions that a secured creditor is customarily permitted to take following a default.

At December 31, 2021, we had no outstanding borrowings under the Revolving Credit Facility. We drew down on the Revolving Credit Facility in the ordinary course of business in the amount of $8,000 and paid that amount back in full during the three months ended December 31, 2021. We had $96,978 of available borrowing capacity thereunder after taking into account the borrowing base and $3,022 of outstanding letters of credit. The Term Loans bear interest at the LIBOR rate or CDOR rate, as applicable, in each case plus an applicable margin dictated by our leverage ratio (as described above). The interest rates on the Term Loan Facilities on December 31, 2021 were 2.16% for the Canadian Term Loan Facility, and 1.73% for the U.S. Term Loan Facility. Interest expense has been presented net of interest income on our condensed consolidated statements of operations and comprehensive income.

9. Commitments and Contingencies

Legal Proceedings and Other Contingencies

We are involved in various legal and administrative proceedings that arise from time to time in the ordinary course of doing business. Some of these proceedings may result in fines, penalties or judgments being assessed against us, which may adversely affect our financial results. In addition, from time to time, we are involved in various disputes, which may or may not be settled prior to legal proceedings being instituted and which may result in losses in excess of accrued liabilities, if any, relating to such unresolved disputes. Expenses related to litigation and other such proceedings or disputes reduce operating income as period expenses when incurred. As of December 31, 2021, management believes that adequate reserves have been established for any probable and reasonably estimable losses. Specifically, we have accrued $691 to "Accrued Liabilities" in the condensed consolidated balance sheets related to various claims. Also, because we have insurance policies in place for certain covered instances, we have recorded a corresponding receivable to "Prepaid expenses and other current assets" on the condensed consolidated balance sheets in the amount of $412. We expect that the contingency related to these amounts will be resolved in the next twelve months. We do not believe that the outcome of any of these proceedings or disputes would have a significant adverse effect on our financial position, long-term results of operations or cash flows. It is possible, however, that charges related to these matters could be significant to our results of operations or cash flows in any one accounting period.

In addition to the legal proceedings described above, in January 2020, the Company received service of process in a class action application in the Superior Court of Quebec, Montreal, Canada related to certain heating elements previously manufactured by THS and incorporated into certain portable construction heaters sold by certain manufacturers. The Company believes this claim is without merit and intends to vigorously defend itself against the claim. While the Company continues to dispute the allegations, in March 2021, it reached an agreement in principle with the plaintiff and other defendants to resolve this matter without admitting to any liability; such agreement remains subject to the agreement of the parties on the terms of a definitive settlement agreement. Settlement of this matter on the agreed terms will require the Company to contribute an amount that would not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. The settlement is subject to, among other things, approval by the Superior Court.

As of December 31, 2021, the Company has accrued $2,677 as estimated additional cost related to the operational execution of a project in our US-LAM segment that was completed in a prior year. Refer to Note 7, "Accrued Liabilities" in the notes herein for more information.

Letters of Credit and Bank Guarantees

At December 31, 2021, the Company had in place letter of credit guarantees and performance bonds securing certain performance obligations of the Company. These arrangements totaled $10,167. Of this amount, $1,335 is secured by cash deposits at the Company’s financial institutions and an additional $3,022 represents a reduction of the available amount of the Company's short-term and long-term revolving lines of credit. In addition to the arrangements totaling $10,167, our Indian subsidiary also has $4,877 in non-collateralized customs bonds outstanding to secure the Company's customs and duties obligations in India.

10. Revenue

Disaggregation of Revenue

We disaggregate our revenue from contracts with customers by geographic location, revenues recognized at point in time and revenues recognized over time, as we believe these best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

Revenue recognized at a point-in-time based on when control goes over to the customer is generally related to our product sales. Point-in-time revenue does not typically require engineering or installation services. Revenue recognized over time occurs on our projects where engineering or installation services, or a combination of the two, are required. We recognize revenue related to such projects in a systematic way that reflects the transfer of service to the customer.

Disaggregation of revenues from contracts with customers for the three and nine months ended December 31, 2021 and 2020 is as follows:


	Three Months Ended December 31, 2021						Three Months Ended December 31, 2020
	Revenues recognized at point in time		Revenues recognized over time		Total		Revenues recognized at point in time		Revenues recognized over time		Total
United States and Latin America	$	19,695	$	30,132	$	49,827	$	14,743	$	14,971	$	29,714
Canada	25,358		5,696		31,054		18,509		6,483		24,992
Europe, Middle East and Africa	7,896		5,041		12,937		7,932		9,212		17,144
Asia-Pacific	4,654		2,141		6,795		4,933		2,821		7,754
Total revenues	$	57,603	$	43,010	$	100,613	$	46,117	$	33,487	$	79,604


	Nine Months Ended December 31, 2021						Nine Months Ended December 31, 2020
	Revenues recognized at point in time		Revenues recognized over time		Total		Revenues recognized at point in time		Revenues recognized over time		Total
United States and Latin America	$	50,565	$	52,360	$	102,925	$	34,728	$	37,505	$	72,233
Canada	64,490		16,938		81,428		45,932		17,589		63,521
Europe, Middle East and Africa	21,218		23,148		44,366		21,449		17,492		38,941
Asia-Pacific	15,810		8,561		24,371		12,838		15,325		28,163
Total revenues	$	152,083	$	101,007	$	253,090	$	114,947	$	87,911	$	202,858

Performance Obligations

At December 31, 2021, revenues associated with our open performance obligations totaled $145,715, representing our backlog. Within this amount, approximately $46,313 will be earned as revenue in excess of one year. We expect to recognize the remaining revenues associated with unsatisfied or partially satisfied performance obligations within 12 months.

Contract Assets and Liabilities

As of December 31, 2021 and March 31, 2021, contract assets were $21,248 and $11,379, respectively. There were no losses recognized on our contract assets for the nine months ended December 31, 2021 and 2020. As of December 31, 2021 and March 31, 2021, contract liabilities were $6,568 and $2,959, respectively. The majority of contract liabilities at March 31, 2021 were recognized as revenue as of December 31, 2021. We typically recognize revenue associated with our contract liabilities within 12 months.

11. Income Taxes

Our effective income tax rate, after discrete tax events, was a 32.2% provision against income before taxes for the nine months ended December 31, 2021 and a benefit of 56.1% against income before taxes for the nine months ended December 31, 2020. During the nine months ended December 31, 2021, the Company recorded a discrete tax expense of $301 related to withholding taxes on an intercompany dividend from Canada to the United States in relation to the Amended and Restated Debt Agreement. Refer to Note 8, "Long-Term Debt." Also, during the nine months ended December 31, 2021, the Company recorded a discrete tax expense of $430 related to a change in withholding tax rates in its Russian subsidiary. Excluding the impact of withholding taxes in Canada and Russia and other discrete items, the Company estimates that the effective tax rate will be 26.1% for fiscal year 2022. The estimated effective income tax rate represents the weighted average of the estimated tax expense over our global income before tax. During the nine months ended December 31, 2020, we had a discrete tax benefit totaling $1,854 million related to updated Internal Revenue Service rules regarding the United States Global Intangible low-taxed income or ("GILTI tax") and related tax planning elections.

As of December 31, 2021, we have established a long-term liability for uncertain tax positions in the amount of $865. As of December 31, 2021, the tax years for the fiscal years ended March 31, 2016 through March 31, 2021 remain open to examination by the major taxing jurisdictions to which we are subject.

12. Segment Information

We maintain four reportable segments based on four geographic countries or regions in which we operate: (i) United States and Latin America ("US-LAM"), (ii) Canada, (iii) Europe, Middle East and Africa ("EMEA") and (iv) Asia-Pacific ("APAC"). Within our four reportable segments, our core products and services are focused on the following markets: chemical and petrochemical, oil, gas, power generation, commercial, rail and transit, and other, which we refer to as our "key end markets." We offer a full suite of products (heating units, heating cables, temporary power solutions and tubing bundles), services (engineering, installation and maintenance services) and software (design optimization and wireless and network control systems) required to deliver comprehensive solutions to some of the world's largest and most complex projects. We report the results of our THS product line in all four reportable segments, and the results of our TPS product line in the US-LAM and Canada reportable segments. Each of our reportable segments serves a similar class of customers, including engineering, procurement and construction companies, international and regional oil and gas companies, commercial sub-contractors, electrical component distributors and direct sales to existing plant or industrial applications. Profitability within our segments is measured by operating income. Profitability can vary in each of our reportable segments based on the competitive environment within the region, the level of corporate overhead, such as the salaries of our senior executives and the level of research and development and marketing activities in the region, as well as the mix of products and services. For purposes of this note, revenue is attributed to individual countries or regions on the basis of the physical location and jurisdiction of organization of the subsidiary that invoices the material and services.

Total sales to external customers, inter-segment sales, depreciation expense, amortization expense, income from operations, property, plant and equipment, net and total assets for each of our four reportable segments are as follows:


	Three Months Ended December 31, 2021		Three Months Ended December 31, 2020		Nine Months Ended December 31, 2021		Nine Months Ended December 31, 2020
Sales to External Customers:
United States and Latin America	$	49,827	$	29,714	$	102,925	$	72,233
Canada	31,054		24,992		81,428		63,521
Europe, Middle East and Africa	12,937		17,144		44,366		38,941
Asia-Pacific	6,795		7,754		24,371		28,163
	$	100,613	$	79,604	$	253,090	$	202,858
Inter-Segment Sales:
United States and Latin America	$	8,588	$	10,751	$	29,424	$	31,849
Canada	2,616		2,523		7,555		5,378
Europe, Middle East and Africa	295		542		1,137		1,615
Asia-Pacific	313		343		930		861
	$	11,812	$	14,159	$	39,046	$	39,703
Depreciation Expense:
United States and Latin America	$	1,396	$	1,647	$	4,331	$	4,727
Canada	1,245		1,144		3,967		3,255
Europe, Middle East and Africa	101		8		305		235
Asia-Pacific	43		40		133		135
	$	2,785	$	2,839	$	8,736	$	8,352
Amortization Expense:
United States and Latin America	$	295	$	295	$	885	$	1,169
Canada	1,858		1,797		5,624		5,452
Europe, Middle East and Africa	23		32		71		429
Asia-Pacific	11		11		33		215
	$	2,187	$	2,135	$	6,613	$	7,265
Income/(Loss) from Operations:
United States and Latin America	$	6,728	$	3,647	$	4,832	$	(4,185)
Canada	7,312		4,993		15,136		9,171
Europe, Middle East and Africa	2,026		802		6,464		2,278
Asia-Pacific	683		1,425		3,107		3,259
Unallocated:
Stock compensation	(275)		(430)		(2,698)		(2,921)
Public company costs	(305)		(277)		(1,464)		(1,151)
	$	16,169	$	10,160	$	25,377	$	6,451


	December 31, 2021		March 31, 2021
Property, Plant and Equipment, Net:
United States and Latin America	$	32,600	$	36,155
Canada	30,074		32,583
Europe, Middle East and Africa	2,969		3,141
Asia-Pacific	656		751
	$	66,299	$	72,630
Total Assets:
United States and Latin America	$	228,932	$	218,699
Canada	293,209		287,907
Europe, Middle East and Africa	71,085		77,798
Asia-Pacific	33,244		33,474
	$	626,470	$	617,878

Capital expenditures for our reportable segments were as follows:


	Three Months Ended December 31, 2021		Three Months Ended December 31, 2020		Nine Months Ended December 31, 2021		Nine Months Ended December 31, 2020
Capital Expenditures:
United States and Latin America	$	171	$	89	$	811	$	3,245
Canada	566		473		1,833		1,340
Europe, Middle East and Africa	92		10		223		59
Asia-Pacific	36		4		53		64
	$	865	$	576	$	2,920	$	4,708

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction and Special Note Regarding Forward-Looking Statements

Management’s discussion and analysis of our financial condition and results of operations is provided as a supplement to the unaudited condensed consolidated financial statements and accompanying notes thereto for the three and nine months ended December 31, 2021 and 2020 to help provide an understanding of our financial condition, changes in our financial condition and results of our operations. In this quarterly report, we refer to the three-month periods ended December 31, 2021 and 2020 as “Interim 2022” and “Interim 2021,” respectively, and the nine-month periods ended December 31, 2021 and 2020 as “YTD 2022” and “YTD 2021,” respectively. The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our unaudited condensed consolidated financial statements and related notes included in Item 1 above.

This quarterly report includes forward-looking statements within the meaning of the U.S. federal securities laws in addition to historical information. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding our industry, business strategy, plans, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. When used in this discussion, the words "anticipate," "assume," "believe," "budget," "continue," "contemplate," "could," "should," "estimate," "expect," "intend," "may," "plan," "possible," "potential," "predict," "project," "will," "would," "future," and similar terms and phrases are intended to identify forward-looking statements in this quarterly report.

Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are

beyond our control, which could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows. These forward-looking statements include, but are not limited to, statements regarding: (i) our plans to strategically pursue emerging growth opportunities, including strategic acquisitions, in diverse regions and across industry sectors; (ii) our plans to secure more new facility (or Greenfield) project bids; (iii) our ability to generate more facility maintenance, repair and operations or upgrades or expansions, or (MRO/UE) revenue, from our existing and future installed base; (iv) our ability to timely deliver backlog; (v) our ability to respond to new market developments and technological advances; (vi) our expectations regarding energy consumption and demand in the future and its impact on our future results of operations; (vii) our plans to develop strategic alliances with major customers and suppliers; (viii) our expectations that our revenues will increase; (ix) our belief in the sufficiency of our cash flows to meet our needs for the next year; (x) our ability to integrate acquired companies; (xi) our ability to successfully achieve synergies from acquisitions; and (xii) our ability to make required debt repayments.

Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, (i) the effect of outbreaks of the novel strain of coronavirus (COVID-19); (ii) general economic conditions and cyclicality in the markets we serve; (iii) future growth of energy, chemical processing and power generation capital investments; (iv) our ability to operate successfully in foreign countries; (v) our ability to deliver existing orders within our backlog; (vi) our ability to bid and win new contracts; (vii) the imposition of certain operating and financial restrictions contained in our debt agreements; (viii) tax liabilities and changes to tax policy; (ix) our ability to successfully develop and improve our products and successfully implement new technologies; (x) competition from various other sources providing similar heat tracing and process heating products and services, or alternative technologies, to customers; (xi) our revenue mix; (xii) our ability to grow through strategic acquisitions; (xiii) changes in relevant currency exchange rates; (xiv) impairment of goodwill and other intangible assets; (xv) our ability to attract and retain qualified management and employees, particularly in our overseas markets; (xvi) our ability to protect our trade secrets; (xvii) our ability to protect our intellectual property; (xiii) our ability to protect data and thwart potential cyber-attacks; (xix) a material disruption at any of our manufacturing facilities; (xx) our dependence on subcontractors and third-party suppliers; (xxi) our ability to profit on fixed-price contracts; (xxii) the credit risk associated to our extension of credit to customers; (xxiii) our ability to achieve our operational initiatives; (xxiv) unforeseen difficulties with expansions, relocations, or consolidations of existing facilities; (xxv) potential liability related to our products as well as the delivery of products and services; (xxvi) our ability to comply with foreign anti-corruption laws; (xxvii) export control regulations or sanctions; (xxviii) changes in government administrative policy; (xxix) geopolitical instability in Russia and Ukraine and related sanctions by the U.S. government; (xxx) environmental and health and safety laws and regulations as well as environmental liabilities; (xxxi) our ability to remediate the material weakness identified in a previous quarterly period; and (xxxii) climate change and related regulation of greenhouse gases; and (xxxiii) those factors listed under Item 1A, “Risk Factors” included in our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on May 27, 2021 and in any subsequent Quarterly Reports on Form 10-Q, Current Reports on Form 8-K or other filings that we have filed or may file with the SEC. Any one of these factors or a combination of these factors could materially affect our future results of operations and could influence whether any forward-looking statements contained or incorporated by reference in this quarterly report ultimately prove to be accurate.

Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required to do so under applicable securities laws.

Business Overview and Company History

We are one of the largest providers of highly engineered industrial process heating solutions for process industries. For over 65 years, we have served a diverse base of thousands of customers around the world in attractive and growing markets, including chemical and petrochemical, oil and gas, power generation, commercial, rail and transit, and other, which we refer to as our "key end markets." We offer a full suite of products (heating units, heating cables, temporary power solutions and tubing bundles), services (engineering, installation and maintenance services) and software (design optimization and wireless and network control systems) required to deliver comprehensive solutions to some of the world's largest and most complex projects. With a legacy of innovation and continued investment in research and development, Thermon has established itself as a technology leader in hazardous or classified areas, and we are committed to developing sustainable solutions for our customers. We serve our customers through a global network of sales and service professionals and distributors in more than 30 countries and through our eight manufacturing facilities on three continents. These global capabilities and longstanding relationships with some of the largest multinational oil and gas, chemical processing, power and engineering, procurement and construction ("EPC") companies in the world have enabled us to diversify our revenue streams and opportunistically access high growth markets worldwide. During YTD 2022 and YTD 2021, approximately 59% and 64%, respectively, of our revenues were

generated from outside of the United States. We actively pursue both organic and inorganic growth initiatives that serve to advance our corporate strategy.

Revenue. Our revenues are derived from providing customers with a full suite of innovative and reliable process heating solutions, including electric and steam heat tracing, tubing bundles, control systems, design optimization, engineering services, installation services and portable power solutions. Additionally, our Thermon Heating Systems (“THS”) product line offers a suite of advanced heating and filtration solutions for industrial and hazardous area applications. Historically, our sales are primarily to industrial customers for petroleum and chemical plants, oil and gas production facilities and power generation facilities. Our petroleum customers represent a significant portion of our business. We serve all three major categories of customers in the petroleum industry, including in upstream exploration/production, midstream transportation and downstream refining. Overall, demand for industrial heat tracing solutions falls into two categories: (i) new facility construction, which we refer to as “Greenfield” projects, and (ii) recurring maintenance, repair and operations and facility upgrades or expansions, which we refer to as “MRO/UE.” Greenfield construction projects often require comprehensive heat tracing solutions. We believe that Greenfield revenue consists of sales revenues by a customer in excess of $1 million annually (excluding sales to resellers), and typically includes most orders for projects related to facilities that are new or that are built independent of existing facilities. We refer to sales revenues by a customer of less than $1 million annually as MRO/UE revenue, as we believe such revenues are typically derived from MRO/UE. Based on our experience, we believe that $1 million in annual sales is an appropriate threshold for distinguishing between Greenfield revenue and MRO/UE revenue. However, we often sell our products to intermediaries that subcontract our services; accordingly, we have limited visibility into how our products or services may ultimately be used and can provide no assurance that our categorization may accurately reflect the sources of such revenue. Furthermore, our customers do not typically enter into long-term forward maintenance contracts with us. In any given year, certain of our smaller Greenfield projects may generate less than $1 million in annual sales, and certain of our larger plant expansions or upgrades may generate in excess of $1 million in annual sales, though we believe that such exceptions are few in number and insignificant to our overall results of operations. Our THS product line has been excluded from the Greenfield and MRO/UE calculations as substantially all revenue attributed to THS products would be classified as MRO/UE under these definitions.

We believe that our pipeline of planned projects, in addition to our backlog of signed purchase orders, provides us with some visibility into our future revenue. Historically, we have experienced few order cancellations, and the cancellations that have occurred in the past have not been material compared to our total contract volume or total backlog. The small number of order cancellations is attributable in part to the fact that a large portion of our solutions are ordered and installed toward the end of Greenfield project construction. Our backlog at December 31, 2021 was $145.7 million, as compared to $114.2 million at March 31, 2021. The timing of recognition of revenue out of backlog is not always certain, as it is subject to a variety of factors that may cause delays, many of which are beyond our control (such as customers' delivery schedules and levels of capital and maintenance expenditures). When delays occur, the recognition of revenue associated with the delayed project is likewise deferred.

Cost of sales. Our cost of sales primarily includes the costs of raw material items used in the manufacturing of our products, costs of ancillary products that are sourced from external suppliers and construction labor cost. Additional costs of revenue include contract engineering costs directly associated to projects, direct labor costs, shipping and handling costs, and other costs associated with our manufacturing/fabrication operations. The other costs associated with our manufacturing/fabrication operations are primarily indirect production costs, including depreciation, indirect labor costs, warranty-related costs, and the costs of manufacturing support functions such as logistics and quality assurance. Key raw material costs include

polymers, copper, stainless steel, insulating material, and other miscellaneous parts related to products manufactured or assembled as part of our heat tracing solutions. Raw material costs have been stable in the past; however, we have begun to experience temporary shortages related to the global supply chain issues driven by the COVID-19 pandemic in certain raw materials as well as an increase in costs of these materials due to use of alternate suppliers, higher freight costs, increased lead times, and expedited shipping. Also, we have seen labor inefficiencies and increased overtime in certain of our facilities due to temporary shortages in raw materials required for production, as well as time and attendance issues and labor shortages in certain of our facilities. We cannot provide any assurance that we will continue to mitigate temporary raw material shortages or be able to pass along such cost increases, including the potential impacts of tariffs or supply chain challenges, to our customers in the future, and if we are unable to do so, our results of operations may be adversely affected.

Operating expenses. Our selling, general and administrative expenses are primarily comprised of compensation and related costs for sales, marketing, pre-sales engineering and administrative personnel, plus other sales related expenses as well as other costs related to research and development, insurance, professional fees, the global integrated business information system, and provisions for bad debts. In addition, our deferred compensation expense includes a non-qualified deferred compensation plan for certain highly compensated employees where payroll contributions are made by the employees on a pre-tax basis. The expense/income associated with our deferred compensation plan is titled "Deferred compensation expense/(income)" on our condensed consolidated statements of operations and comprehensive income.

Key drivers affecting our results of operations. Our results of operations and financial condition are affected by numerous factors, including those described under the caption “Risk Factors” in our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2021 filed with the SEC on May 27, 2021 and in any subsequent Quarterly Reports on Form 10-Q that we have filed or may file with the SEC, including those described below. These factors include the following:

•Timing of Greenfield projects. Our results of operations in recent years have been impacted by the various construction phases of large Greenfield projects. On our large Greenfield projects we are typically designated as the heat tracing provider of choice by the project owner. We then engage with multiple contractors to address incorporating various heat tracing solutions throughout the overall project. Our largest Greenfield projects may generate revenue for several quarters. In the early stages of a Greenfield project, our revenues are typically realized from the provision of engineering services. In the middle stages, or the material requirements phase, we typically experience the greatest demand for our heat tracing cable, at which point our revenues tend to accelerate. Revenues tend to decrease gradually in the final stages of a project and are generally derived from installation services and demand for electrical panels and other miscellaneous electronic components used in the final installation of heat tracing cable, which we frequently outsource from third-party manufacturers. Therefore, we typically provide a mix of products and services during each phase of a Greenfield project, and our margins fluctuate accordingly.

•Cyclicality of end-users' markets. Demand for our products and services depends in large part upon the level of capital and maintenance expenditures of our customers and end users, in particular those in the energy, chemical processing and power generation industries, and firms that design and construct facilities for these industries. These customers' expenditures historically have been cyclical in nature and vulnerable to economic downturns. Greenfield projects, and in particular large Greenfield projects (i.e., new facility construction projects generating in excess of $5 million in annual sales), historically have been a substantial source of revenue growth, and Greenfield revenues tend to be more cyclical than MRO/UE revenues. A sustained decrease in capital and maintenance spending or in new facility construction by our customers could have a material adverse effect on the demand for our products and services and our business, financial condition and results of operations.

•Acquisition strategy. In recent years, we have been executing on a strategy to grow the Company through the acquisition of businesses that are either in the process heating solutions industry or provide complementary products and solutions for the markets and customers we serve. We actively pursue both organic and inorganic growth initiatives that serve to advance our corporate strategy.

•Impact of product mix. Typically, both Greenfield and MRO/UE customers require our products as well as our engineering and construction services. The level of service and construction needs will affect the profit margin for each type of revenue. We tend to experience lower margins from our design optimization, engineering, installation and maintenance services than we do from sales of our heating cable, tubing bundle and control system products. We also tend to experience lower margins from our outsourced products, such as electrical switch gears and transformers, than we do from our manufactured products. Accordingly, our results of operations are impacted by our mix of products and services.

We estimate that Greenfield and MRO/UE related revenues have each made the following contribution as a percentage of total revenue in the periods listed:


	Three Months Ended December 31,*				Nine months ended December 31,*
	2021		2020		2021		2020
Greenfield	42	%	38	%	36	%	38	%
MRO/UE	58	%	62	%	64	%	62	%

* THS products have been excluded from the table above. Substantially all revenue attributable to our THS product line would be classified as MRO/UE under the current definitions.

We believe that our analysis of Greenfield and MRO/UE is an important measure to explain the trends in our business to investors. Greenfield revenue is an indicator of both our ability to successfully compete for new contracts as well as the economic health of the industries we serve. Furthermore, Greenfield revenue is an indicator of potential MRO/UE revenue in future years. THS has been excluded from MRO/UE calculations to enhance comparability across periods as most of revenue attributable to the THS product line would be classified as MRO/UE.

For MRO/UE orders, the sale of our manufactured products typically represents a higher proportion of the overall revenues associated with such orders than the provision of our services. Greenfield projects, on the other hand, require a higher level of our services than MRO/UE orders and often require us to purchase materials from third party vendors. Therefore, we typically realize higher margins from MRO/UE revenues than Greenfield revenues.

•Large and growing installed base. Customers typically use the incumbent heat tracing provider for MRO/UE projects to avoid complications and compatibility problems associated with switching providers. As new Greenfield projects are completed, our installed base continues to grow, and we expect that such installed base will continue to generate ongoing high margin MRO/UE revenues. For Interim 2022 and Interim 2021, MRO/UE sales (excluding sales attributable to our THS product line) comprised approximately 58% and 62% of our consolidated revenues, respectively. A sustained decline in Greenfield projects could slow the growth in our installed base and reduce demand for our MRO/UE business and have a material adverse effect on our business, financial condition and results of operations.

•Seasonality of MRO/UE revenues. MRO/UE revenues for the legacy heat tracing business are typically highest during the second and third fiscal quarters, as most of our customers perform preventative maintenance prior to the winter season.

Recent Developments

The Company continues to invest in our three long-term strategic initiatives: diversifying our revenues into adjacent markets as the global economy transitions to a more sustainable energy future, increased investment in the Eastern Hemisphere as a response to a growing middle class, and offering technology enabled maintenance solutions that improve our customer’s efficiency and safety. Our efforts to diversify the business's end markets is starting to show early signs of success through increased customer engagement. Additionally, we are continuing to receive orders from key customers related to our recently launched Genesis Network technology, which helps our customers more efficiently and safely monitor and maintain their heating systems by utilizing our software, analytics, hardware and process heating maintenance expert services. We are benefiting from the increasing global demand for our solutions, particularly in North America. While we are seeing improvements in many key metrics by which we measure the business, including revenue, we also recognized higher costs in the nine months ended December 31, 2021 due to higher raw material and labor costs due to global supply chain challenges and underreported warranty costs associated with the operational execution of a large project in our US-LAM segment that completed in a prior year.

The Company enacted certain cost reduction efforts in fiscal 2021 to counter the economic impacts of the COVID-19 pandemic. These specific cost reduction efforts are substantially complete. See Item 1A, "Risk Factors" of our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2021 filed with the SEC on May 27, 2021.

We strategically amended our senior secured credit facilities in order to realize cost savings on interest expense associated with our long-term debt. Refer to Note 8, "Long-Term Debt" in Item 1 of this quarterly report for more information.

Results of Operations (Three-month periods ended December 31, 2021 and 2020)

The following table sets forth our unaudited condensed consolidated statements of operations for the three months ended December 31, 2021 and 2020 and indicates the amount of change and percentage change between periods.


	Three Months Ended December 31,						Increase/(Decrease)
	(dollars in thousands)
	2021			2020			$		%
Consolidated Statements of Operations Data:
Sales	$	100,613		$	79,604		$	21,009	26	%
Cost of sales	59,866			42,644			17,222		40	%
Gross profit	40,747			36,960			3,787		10	%
Operating expenses:
Selling, general and administrative expenses	22,099			20,283			1,816		9	%

Deferred compensation plan expense/(income)	292			599			(307)		(51)	%
Amortization of intangible assets	2,187			2,135			52		2	%
Restructuring and other charges/(income)	—			3,783			(3,783)		(100)	%
Income/(loss) from operations	16,169			10,160			6,009		59	%
Other income/(expenses):
Interest expense, net	(842)			(2,433)			1,591		(65)	%

Other income/(expense)	(627)			874			(1,501)		(172)	%
Income/(loss) before provision for income taxes	14,700			8,601			6,099		71	%
Income tax expense/(benefit)	3,430			2,426			1,004		41	%
Net income/(loss)	$	11,270		$	6,175		$	5,095	83	%

As a percent of sales:
Gross profit	40.5		%	46.4		%	-590 bps
Selling, general and administrative expenses	22.0		%	25.5		%	-350 bps
Income/(loss) from operations	16.1		%	12.8		%	330 bps
Net income/(loss)	11.2		%	7.8		%	340 bps

Effective tax rate	23.3		%	28.2		%	-490 bps

Three Months Ended December 31, 2021 (“Interim 2022”) Compared to the Three Months Ended December 31, 2020 (“Interim 2021”)

Revenues. Revenues for Interim 2022 were $100.6 million compared to $79.6 million for Interim 2021. The increase is attributable to especially strong demand from our customers in the US-LAM and Canada operating segments, with revenue rising $20.1 million or 68% in US-LAM, and $6.1 million or 24% in Canada. These increases were partially offset by revenue declines of $4.2 million or 25% in EMEA, and $1.0 million or 12% in APAC. Sales related to our products ("point-in-time") grew $11.5 million versus Interim 2021, while our project-related ("over-time") sales grew $9.5 million.

Our sales mix (excluding our THS product line) in Interim 2022 was 42% Greenfield and 58% MRO/UE, as compared to 38% Greenfield and 62% MRO/UE in Interim 2021. Greenfield revenue is historically at or near 40%. Additionally, our revenue was positively impacted by $0.9 million in Interim 2022 when compared to foreign exchange translation rates that were in effect in Interim 2021, though partially offset elsewhere by somewhat higher cost of sales resulting from similar foreign exchange impacts.

Gross profit and margin. Gross profit totaled $40.7 million in Interim 2022, compared to $37.0 million in Interim 2021. Gross margins were 40.5% and 46.4% in Interim 2022 and Interim 2021, respectively. The lower gross margin in Interim 2022 is primarily attributable to higher project costs, including the impacts of a large, one-time project in our US-LAM segment

as well as supply chain challenges, which have driven up prices of raw materials and labor costs as we source from secondary suppliers, experience increased freight charges, and face a challenging labor market. Our gross margin was positively impacted by the Canadian Emergency Wage Subsidy ("CEWS") in Interim 2021, as we recorded a subsidy in the amount of $1.4 million, while our benefit was $0.2 million in Interim 2022. Please see Note 1, “Basis of Presentation” in our financial statements, for more information on CEWS.

Selling, general and administrative expenses. Selling, general and administrative expenses ("SG&A") were $22.1 million in Interim 2022, compared to $20.3 million in Interim 2021. The increase in SG&A expenses in Interim 2022 was driven by greater sales activity, such as relatively higher salaries & benefits, accrued performance-based short term incentive compensation and sales commissions. These were partly offset by other net decreases within SG&A. SG&A as a percent of sales was 22.0% in Interim 2022 versus 25.5% in Interim 2021, which is attributable to the Company's ongoing cost control efforts.

Deferred compensation plan expense/(income). Deferred compensation plan expense/(income) was $0.3 million and $0.6 million in Interim 2022 and Interim 2021, respectively. The decrease in Interim 2022 is attributable in part to market fluctuations in the underlying balances owed to employees as compared to Interim 2021. To note, this compensation plan expense/(income) is materially offset in other income/(expense) where the Company records market gains/(losses) on related investment assets.

Amortization of intangible assets. Amortization of intangible assets was $2.2 million in Interim 2022, compared to $2.1 million in Interim 2021, relatively flat quarter over quarter.

Restructuring and other charges/(income). Restructuring and other charges/(income) was zero in Interim 2022, compared to $3.8 million in Interim 2021. The Company enacted certain restructuring activities in Interim 2021 not present in Interim 2022. Refer to Note 3, "Restructuring and other charges/(income)" for additional detail.

Interest expense, net. Interest expense, net, was $(0.8) million and $(2.4) million in Interim 2022 and Interim 2021, respectively. The decrease in interest expense is primarily due to a lower average interest rate during Interim 2022 than Interim 2021. Additionally, our average outstanding balance of debt during Interim 2022 was lower at $136.3 million versus $171.9 million during Interim 2021. See Note 8, "Long-Term Debt," for additional information on our long-term debt.

Other income/(expense). Other income/(expense) was $(0.6) million and $0.9 million in Interim 2022 and Interim 2021, respectively. The increase primarily relates to increased net losses on foreign exchange transactions of approximately $1.2 million. The remaining variance is attributable to relatively less gains on the company's non-qualified deferred compensation plan than in the prior year due to market fluctuations. These gains are offset by deferred compensation plan expense as noted above.

Income tax expense/(benefit). Income tax expense was $3.4 million in Interim 2022 on pre-tax income of $14.7 million compared to income tax expense of $2.4 million in Interim 2021 on pre-tax income of $8.6 million. Our effective tax rate was 23.3% and 28.2% in Interim 2022 and Interim 2021, respectively. During Interim 2022, the Company recorded a tax benefit of $0.5 million related to Russian withholding taxes at its Russian subsidiary when an intercompany dividend was able to be distributed in advance of a statutory withholding rate increase. The effective tax rate in Interim 2021 was impacted by changes in the estimate of the full year global annual effective income tax rate.

Our global anticipated annual effective income tax rate before discrete events was 26.1% and 26.9% for Interim 2022 and Interim 2021, respectively. This estimate is based on a forecast of earnings in all of our jurisdictions. The effective income tax rate represents the weighted average of the estimated tax expense over our global income before tax. (See Note 11, “Income Taxes,” for additional detail).

Net income/(loss). Net income/(loss) was $11.3 million in Interim 2022 as compared to $6.2 million in Interim 2021. The change in net income/(loss) is explained by the changes noted in the sections above.

Results of Operations (Nine-month periods ended December 31, 2021 and 2020)

The following table sets forth our unaudited condensed consolidated statements of operations for the nine months ended December 31, 2021 and 2020, respectively, and indicates the amount of change and percentage change between periods.


	Nine Months Ended December 31,						Increase/(Decrease)
	(dollars in thousands)
	2021			2020			$		%
Consolidated Statements of Operations Data:
Sales	$	253,090		$	202,858		$	50,232	25	%
Cost of sales	154,084			112,848			41,236		37	%
Gross profit	99,006			90,010			8,996		10	%
Operating expenses:
Selling, general and administrative expenses	66,820			66,222			598		1	%
Deferred compensation plan expense/(income)	610			1,380			(770)		(56)	%
Amortization of intangible assets	6,613			7,265			(652)		(9)	%
Restructuring and other charges/(income)	(414)			8,692			(9,106)		(105)	%
Income/(loss) from operations	25,377			6,451			18,926
Other income/(expenses):
Interest expense, net	(5,029)			$	(7,404)		2,375		(32)	%

Other income/(expense)	(3,517)			2,188			(5,705)		(261)	%
Income/(loss) before provision for income taxes	16,831			1,235			15,596		1263	%
Income tax expense/(benefit)	5,424			(693)			6,117		(883)	%
Net income/(loss)	$	11,407		$	1,928		$	9,479	492	%

As a percent of sales:
Gross profit	39.1		%	44.4		%	-530 bps
Selling, general and administrative expenses	26.4		%	32.6		%	-620 bps
Income/(loss) from operations	10.0		%	3.2		%	680 bps
Net income/(loss)	4.5		%	1.0		%	350 bps

Effective tax rate	32.2		%	(56.1)		%

Nine Months Ended December 31, 2021 (“YTD 2022”) Compared to the Nine Months Ended December 31, 2020 (“YTD 2021”)

Revenues. Revenues for YTD 2022 were $253.1 million, compared to $202.9 million for YTD 2021. Management attributes the increase to strong growth in our US-LAM segment of $30.7 million, or 42%, $17.9 million, or 28%, in our Canada segment and $5.4 million, or 14% in our EMEA segment. These increases were slightly offset by a decrease in our APAC segment of $(3.8) million, or (13)%, because of continued impacts of the COVID-19 pandemic and related restrictions. Sales related to our products grew $37.1 million versus YTD 2021 while project-related sales also increased $13.1 million over YTD 2021 in the same period. Project, or over time sales, were increased in part by a large, one-time project in our US-LAM segment.

Our sales mix (excluding sales attributable to our THS product line) in YTD 2022 was 36% Greenfield and 64% MRO/UE, as compared to 38% Greenfield and 62% MRO/UE in YTD 2021. Greenfield revenue is typically at or near 40%. Additionally, our revenue was positively impacted by $3.1 million in YTD 2022 when compared to foreign exchange translation rates that were in effect in YTD 2021, though partially offset by higher cost of sales resulting from similar foreign exchange impacts.

Gross profit and margin. Gross profit totaled $99.0 million in YTD 2022, compared to $90.0 million in YTD 2021, an increase primarily due to the increase in revenues mentioned above. This increase was partially offset by increased costs on some of our large projects, including the impacts of a large, one-time project in our US-LAM segment, plus a $2.8 million

charge in the period related to warranty costs associated with the operational execution of a US-LAM project that was completed in a prior year. Additionally, we have experienced supply chain and labor challenges, which have driven up prices of raw materials as we source from secondary suppliers and face increased freight charges, as well as higher labor costs. Gross margins were 39.1% and 44.4% in YTD 2022 and YTD 2021, respectively. Our gross margin was positively impacted by the Canadian Emergency Wage Subsidy ("CEWS") in YTD 2022 in the amount of $1.4 million, through which we received government subsidies with respect to our Canadian manufacturing operations. The impact associated with CEWS was greater in YTD 2021, as we recorded a subsidy in the amount of $3.6 million. Please see Note 1, “Basis of Presentation” in our financial statements, for more information on CEWS.

Selling, general and administrative expenses. SG&A was $66.8 million in YTD 2022, compared to $66.2 million in YTD 2021. Though SG&A was positively impacted by CEWS in the amount of $0.5 million in YTD 2022, it was less than the $2.0 million in YTD 2021. We also had an incremental $0.8 million versus YTD 2021 in bad debt expense mostly related to potentially uncollectible receivables in our EMEA reportable segment. Other increases within SG&A were driven mostly by greater sales activity in YTD 2022. Partially offsetting the aforementioned increases, the Company benefited from cost control measures put in place in fiscal 2021. SG&A improved as percentage of sales to 26.4% in YTD 2022 from 32.6% in YTD 2021. Please see Note 1, “Basis of Presentation” in our financial statements, for more information on CEWS.

Deferred compensation plan expense/(income). Deferred compensation plan expense was $0.6 million and $1.4 million in YTD 2022 and YTD 2021, respectively. The decrease in expense in YTD 2022 is attributable in part to market fluctuations in the underlying balances owed to employees as compared to YTD 2021. To note, this compensation plan expense/(income) is materially offset in other income/(expense) where the Company records market gains/(losses) on the related invested assets.

Restructuring and other charges/(income) Restructuring and other charges/(income) were $(0.4) million versus $8.7 million in YTD 2021. We substantially completed our reduction-in-force initiative in Fiscal 2021, and therefore the entire decrease in charges can be attributed to the lack of activity in YTD 2022. Refer to Note 3, "Restructuring and other charges/(income)."

Amortization of intangible assets. Amortization of intangible assets was $6.6 million in YTD 2022 and $7.3 million in YTD 2021. The decrease in amortization expense is attributable to normal amortization expense coupled with foreign exchange impacts as compared to YTD 2021.

Interest expense net. Interest expense, net, was $(5.0) million in YTD 2022, compared to $(7.4) million in YTD 2021. The decrease in interest expense is due to a lower average debt principal balance of $140.6 million YTD 2022 versus $172.6 million in YTD 2021 and lower interest rates stemming from the amendment of the company's credit facility in September 2021 (see Note 8, "Long-Term Debt" for additional information on our long-term debt).

Other income/(expense). Other income was income/(expense) of $(3.5) million and $2.2 million in YTD 2022 and YTD 2021, respectively. The increase primarily relates to our debt extinguishment charges of $2.6 million in Interim 2022, as we completed our debt amendment, as well as an increase in foreign exchange losses of $2.2 million. See Note 8, "Long-Term Debt," for additional information on our long-term debt and the amendment. The remaining variance is attributable to relatively less gains on the company's non-qualified deferred compensation plan than in the prior year due to market fluctuations. These gains are offset by deferred compensation plan expense as noted above.

Income taxes. Income tax was a $5.4 million expense in YTD 2022 on pre-tax income of $16.8 million compared to an income tax benefit of $0.7 million in YTD 2021 on pre-tax net income of $1.2 million. Our effective tax rate was 32.2% and (56.1)% in YTD 2022 and YTD 2021, respectively. During YTD 2022, we recorded discrete tax items totaling $0.7 million related to withholding taxes in Canada and Russia. During YTD 2021, we had a discrete tax benefit totaling $1.9 million related to updated Internal Revenue Service rules regarding the United States Global Intangible low-taxed income or ("GILTI tax") and related tax planning elections.

Our anticipated annual effective income tax rate before discrete events is 26.1% in fiscal 2022. The anticipated annual effective tax rate is established by estimating anticipated tax rates in each of the countries where we earn taxable income as adjusted for known differences as well as our ability to apply any jurisdictional tax losses to prior or future periods. See Note 11, “Income Taxes,” to our unaudited condensed consolidated financial statements included elsewhere in this quarterly report for further detail on income taxes.

Net income/(loss) Net income/(loss) was $11.4 million in YTD 2022 as compared to $1.9 million in YTD 2021. The change in net income/(loss) is explained by the changes noted in the sections above.

Contingencies

See Note 9, "Commitments and Contingencies" to our unaudited condensed consolidated financial statements included above in Part I, Item 1. Financial Statements (Unaudited) of this quarterly report, which is hereby incorporated by reference into this Item 2.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operations and funds available under our revolving credit facility. Our primary liquidity needs are to finance our working capital, capital expenditures, debt service needs and potential future acquisitions.

At December 31, 2021, we had $32.6 million in cash and cash equivalents. We manage our global cash requirements by maintaining cash and cash equivalents at various financial institutions throughout the world where we operate. Approximately $6.5 million, or 20%, of these amounts were held in domestic accounts with various institutions and approximately $26.1 million, or 80%, of these amounts were held in accounts outside of the United States with various financial institutions. While we require cash needs at our various foreign operations, excess cash is available for distribution to the United States through intercompany dividends or debt reduction in Canada.

Generally, we seek to maintain a cash and cash equivalents balance between $30.0 and $40.0 million. We will encounter periods where we may be above or below this range, due to, for example, inventory buildup for anticipated seasonal demand in fall and winter months, related cash receipts from credit sales in months that follow, debt maturities, restructuring activities, larger capital investments, severe and/or protracted economic downturns, acquisitions, or some combination of the above activities. The Company continues to manage its working capital requirements effectively through optimizing inventory levels, doing business with credit-worthy customers, and extending payments terms with its supplier base.

Future Cash Requirements

Our future capital requirements depend on many factors as noted throughout this report. We believe that, based on our current level of operations and related cash flows, plus cash on hand and available borrowings under our revolving credit facility, we will be able to meet our liquidity needs for the next twelve months and the foreseeable future.

For fiscal 2022, we expect our capital expenditures to approximate 1.5% to 2.0% of revenue. Additionally, we will be required to pay $7.0 million in principal payments on our long-term debt in the next twelve months. See further details in Note 8, "Long-Term Debt" in Part I, Item 1. Financial Statements (Unaudited) of this quarterly report. We also have payment commitments of $4.5 million, mostly related to long-term information technology contracts, of which $2.8 million are due within the next twelve months.

Strategic Investments

Our long term plan includes investments in three key areas as we look to profitably grow the Company beyond its existing installed base.

First, we expect to diversify our revenues into adjacent markets like commercial, food & beverage, transportation and other non-oil and gas industries where we can continue to differentiate our offerings through quality, safety and customer service, while also aligning Thermon’s strategy around the energy transition toward a more sustainable global economy.

Second, we expect higher levels of investment in the emerging markets over the coming decades to meet the needs of a larger middle class and will be investing in resources to more quickly respond to the unique needs of those local markets.

Finally, we will continue expanding our technology enabled maintenance solutions, like our recently launched Genesis Network, which helps our customers more efficiently and safely monitor and maintain their heating systems by utilizing our software, analytics, hardware and process heating maintenance expert services.

These three initiatives will include incremental investments, both organic and inorganic, over a multi-year period, but we expect will result in a more diversified, sustainable and profitable company over time.

Discussion and Analysis of Cash Flows


	Nine Months Ended December 31,
	(dollars in thousands)
	2021		2020		Increase/(Decrease)
Total cash provided by/(used in):
Operating activities	$	13,746	$	15,479	$	(1,733)
Investing activities	(2,685)		(4,643)		1,958
Financing activities	(17,287)		(7,588)		(9,699)

Free Cash Flow:(1)
Cash provided by operating activities	$	13,746	$	15,479	$	(1,733)
Less: Cash used for purchases of property, plant, and equipment	(2,920)		(4,708)		1,788
Plus: Sales of rental equipment	235		65		170
Free Cash Flow	$	11,061	$	10,836	$	225

(1) "Free Cash Flow" is a non-GAAP financial measure, which we define as net cash provided by operating activities less cash used for the purchase of property, plant, and equipment, net of sales of rental equipment and proceeds from sales of land and buildings. Free Cash Flow is one measure management uses internally to assess liquidity. Our calculation may not be comparable to similarly titled measures reported by other companies.

Operating Cash Flows

Net cash provided by/(used in) operating activities was $13.7 million in YTD 2022, compared to $15.5 million in YTD 2021. The decrease is driven by a use of cash to fund net working capital accounts of $13.1 million, partially offset by a change in non-cash items and increase in net income totaling $11.4 million. Our net working capital position changed as a result of an overall increase in sales activity in YTD 2022, which drove an increase in accounts receivable versus a large decline in accounts receivable in YTD 2021, when sales were not trending positively.

Investing Cash Flows

Cash Flows used in investing activities totaled $(2.7) million and $(4.6) million for YTD 2022 and YTD 2021, respectively. Net cash used in investing activities relates to the purchase of capital assets, primarily to maintain the existing operations of the business and includes purchases and sales of equipment in our rental business. In YTD 2022, we had higher purchases of rental equipment stemming from increased customer demand for products at that time.

Financing Cash Flows

Net cash provided by/(used in) financing activities totaled a use of cash of $(17.3) million and a use of cash of $(7.6) million in YTD 2022 and YTD 2021, respectively, a comparative increase in the use of cash from financing activities of $(9.7) million, mostly attributable to $7.9 million payments on Term Loan B in YTD 2022 before the amendment and restatement, $7.0 million in voluntary principal payments on the Term Loan A in YTD 2022, compared to the $5.0 million of voluntary prepayments in YTD 2021. Cash proceeds/payments in financing activities are primarily short-term borrowings net of contractual and principal payments on our outstanding long-term debt and revolving credit facility.

Credit Facilities

On September 29, 2021, Thermon Group Holdings, Inc. (the “Company”), as a credit party and a guarantor, Thermon Holding Corp. (“THC” or the “U.S. Borrower”) and Thermon Canada Inc. (the “Canadian Borrower” and together with THC, the “Borrowers”), as borrowers, entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with several banks and other financial institutions or entities from time to time (the “Lenders”) and JPMorgan Chase Bank, N.A., as Administrative Agent (the “Agent”).

The Credit Agreement is an amendment and restatement of that certain Credit Agreement dated October 30, 2017 by and among Borrowers, the lenders time to time party thereto and JPMorgan Chase Bank, N.A. as administrative agent (the “Prior Credit Agreement”), and provides for the credit facilities described in Note 8, "Long-Term Debt" in Part I, Item 1. Financial Statements (Unaudited) of this quarterly report.

Other Non-GAAP Financial Measures

In addition to evaluating our cash flow generation based upon operating, investing, and financing activities, the Company believes that the non-GAAP measure used in this section may provide investors and key stakeholders with another important perspective regarding our performance. The Company does not intend for this non-GAAP metric to be a substitute for the related GAAP measure, nor should it be viewed in isolation and without considering all relevant GAAP measurements. Moreover, our calculation may not be comparable to similarly titled measures reported by other companies.

We define “Free Cash Flow” as net cash provided by operating activities less cash used for the purchase of property, plant, and equipment, net of sales of rental equipment as well as proceeds from sales of land and buildings. This metric should not be interpreted to mean the remaining cash that is available for discretionary spending, dividends, share repurchases, acquisitions, or other purposes, as it excludes significant, mandatory obligations, such as principal payments on the Company’s long-term debt facility. Free cash flow is one measure that the Company uses internally to assess liquidity.

Free Cash Flow totaled $11.1 million for YTD 2022 as compared to $10.8 million for YTD 2021, relatively flat comparatively, primarily due to lower cash flows from operations offset by reduced purchases on property, plant and equipment.

Contractual Obligations and Off-Balance Sheet Arrangements

There have been no material changes outside the ordinary course of business in the Company’s contractual obligations during YTD 2022. The Company does not have any off-balance sheet arrangements or any interest in entities commonly referred to as variable interest entities, which include special purpose entities and other structured finance entities. See the Company’s Annual Report on Form 10-K/A for the fiscal year ended March 31, 2021 filed on May 27, 2021 for further details.

Critical Accounting Polices

Our condensed consolidated financial statements are prepared in conformity with GAAP. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2021 filed with the SEC on May 27, 2021 for a discussion of the Company’s critical accounting policies and estimates.

Recent Accounting Pronouncements

See Note 1, “Basis of Presentation” to our unaudited condensed consolidated financial statements and accompanying notes thereto included above in Item 1. Financial Statements (Unaudited) of this quarterly report for information on recent accounting pronouncements, which is hereby incorporated by reference into this Item 2.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our primary market risk exposures are the effect of fluctuations in foreign exchange rates, interest rates and commodity prices.

Foreign currency risk relating to operations. We transact business globally and are subject to risks associated with fluctuating foreign exchange rates. Approximately 59% of our YTD 2022 consolidated revenue was generated by sales from our non-U.S. subsidiaries. Our non-U.S. subsidiaries generally sell their products and services in the local currency, but obtain a significant amount of their products from our manufacturing facilities located elsewhere, primarily the United States, Canada and Europe. Significant changes in the relevant exchange rates could adversely affect our margins on foreign sales of products. Our non-U.S. subsidiaries incur most of their expenses (other than intercompany expenses) in their local functional currency. These currencies include the Canadian Dollar, Euro, British Pound, Russian Ruble, Australian Dollar, South Korean Won, Chinese Renminbi, Indian Rupee, Mexican Peso, and Japanese Yen.

During YTD 2022, our largest exposures to foreign exchange rates consisted primarily of the Canadian Dollar and the Euro against the U.S. dollar. The market risk related to the foreign currency exchange rates is measured by estimating the potential impact of a 10% change in the value of the U.S. dollar relative to the local currency exchange rates. The rates used to perform this analysis were based on a weighted average of the market rates in effect during the relevant period. A 10% appreciation of the U.S. dollar relative to the Canadian dollar would result in a net decrease in net income of $0.7 million for YTD 2022. Conversely, a 10% depreciation of the U.S. dollar relative to the Canadian dollar would result in a net increase in net income of $0.9 million for YTD 2022. A 10% appreciation of the U.S. dollar relative to the Euro would result in a $0.1 million decrease in net income. Conversely, a 10% depreciation of the U.S. dollar relative to the Euro would result in a net increase in net income of approximately $0.1 million for YTD 2022.

The geographic areas outside the United States in which we operate are generally not considered to be highly inflationary. Nonetheless, these foreign operations are sensitive to fluctuations in currency exchange rates arising from, among other things, certain intercompany transactions that are generally denominated in U.S. dollars rather than their respective functional currencies. The net impact of foreign currency transactions on our condensed consolidated statements of operations were losses of $1.6 million and gains of $0.1 million in YTD 2022 and YTD 2021, respectively.

As of December 31, 2021, we had approximately $10.2 million in notional forward contracts to reduce our exposure to foreign currency exchange rate fluctuations. These forward contracts were in place to offset in part the foreign currency exchange risk to intercompany payables due from our foreign operations to be settled in U.S. dollars. See Note 2, “Fair Value Measurements” to our unaudited condensed financial statements included above in Item 1. Financial Statements (Unaudited) of this quarterly report for further information regarding our foreign currency forward contracts.

We estimate that our sales were positively impacted by $3.1 million in YTD 2022 when compared to foreign exchange translation rates that were in effect in YTD 2021. Foreign currency impact on revenue is calculated by comparing actual current period revenue in U.S. dollars to the theoretical U.S. Dollar revenue we would have achieved based on the weighted-average foreign exchange rates in effect in the comparative prior periods for all applicable foreign currencies. At each balance sheet date, we translate our assets and liabilities denominated in foreign currency to U.S. dollars. The balances of our foreign equity accounts are translated at their historical value. The difference between the current rates and the historical rates are posted to our currency translation account and reflected in the shareholders’ equity section of our condensed consolidated balance sheets. The unrealized effects of foreign currency translations were losses of $3.8 million and gains of $29.2 million in YTD 2022 and YTD 2021, respectively. The comparative decrease in YTD 2022 foreign currency translation gains is primarily due to the weakening of the Canadian dollar and Euro relative to the U.S. dollar as compared to YTD 2021. Foreign currency translation gains or losses are reported as part of comprehensive income or loss in the condensed consolidated statements of operations and comprehensive income. Foreign currency transactions gains and losses are included in net income or loss as part of other income and expense in the condensed consolidated statements of operations and comprehensive income.

Foreign currency risks related to intercompany notes. The Company has terminated its cross currency swap as of September 29, 2021. See Note 2, “Fair Value Measurements” to our unaudited condensed financial statements included above in Item 1. Financial Statements of this quarterly report for further information regarding our cross currency swap.

Interest rate risk and foreign currency risk relating to debt. Borrowings under our Term Loan Facilities and the Revolving Credit Facility incur interest expense that is variable in relation to the LIBOR and CDOR rate. As of December 31, 2021, we had $132.8 million of outstanding principal under our Term Loan Facilities and no borrowings under the Revolving Credit Facility. The interest rates for borrowings under our term loan A credit facility were 2.16% for our Canadian Term Loan Facility and 1.73% for the U.S. Term Loan Facility as of December 31, 2021. Based on the outstanding borrowings, a 1% change in the interest rate would result in a $1.3 million increase or decrease, as applicable, in our annual interest expense.

Commodity price risk. We use various commodity-based raw materials in our manufacturing processes. Generally, we acquire such components at market prices and do not typically enter into long-term purchase commitments with suppliers or hedging instruments to mitigate commodity price risk. As a result, we are subject to market risks related to changes in commodity prices and supplies of key components of our products. Raw material costs have been stable in the past; however, we have begun to experience temporary shortages in certain raw materials as well as an increase in costs of these materials due to: use of alternate suppliers, higher freight costs, increased lead times, and expedited shipping. Also, we have seen construction labor inefficiencies and increased overtime in certain of our facilities due to temporary shortages in raw materials required for production. We cannot provide any assurance that we will continue to mitigate temporary raw material shortages or be able to pass along such cost increases, including the potential impacts of tariffs or supply chain challenges, to our customers in the future, and if we are unable to do so, our results of operations may be adversely affected.

Item 4. Controls and Procedures

Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated,

can provide only reasonable assurance of achieving the desired control objectives. Management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as of September 30, 2021, due to the material weakness described below.

We identified a material weakness in internal control over financial reporting during the preparation of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2021. We did not have properly designed controls and policies to ensure the accuracy and completeness of the project completion status associated with the reserve for large warranty-related project remediation work.

A material weakness, as defined in Rule 12b-2 under the Exchange Act, is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. This material weakness resulted in immaterial misstatements in the consolidated financial statements included in our Annual Report on Form 10-K/A for the year ended March 31, 2021, and in the unaudited condensed consolidated financial statements included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 as described further in Note 1. "Basis of Presentation" to the unaudited condensed consolidated financial statements included in Item 1 of this quarterly report.

Notwithstanding such material weaknesses in internal control over financial reporting, our Chief Executive Officer and Chief Financial Officer have concluded that our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.

Remediation Efforts and Status of Material Weakness

The Company is in the process of enhancing the design of certain internal controls over financial reporting related to accounting for warranty reserves in accordance with a remediation plan for the material weakness, which includes updating the Company’s controls associated with the completeness and accuracy of information used in determining the accrual for large warranty-related project remediation work and subsequent application of those controls. These enhanced controls will be tested for effectiveness in future periods.

Changes in Internal Control Over Financial Reporting

Other than as discussed above, there have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2021 filed with the SEC on May 27, 2021, except as set forth below.

We have identified a material weakness in our internal control over financial reporting, which could, if not remediated, result in material misstatements in our financial statements and have a material adverse effect on our business and the market price of our common stock.

Effective internal controls are necessary for us to provide reliable financial statements and to effectively prevent fraud. We maintain a system of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Although we have concluded that our consolidated financial statements as of September 30, 2021 have been prepared in accordance with generally accepted accounting principles, and present fairly, in all material respects, the financial condition, results of operations and cash flows of the Company, we have identified a material weakness in internal control over financial reporting primarily related to the controls over the reserve for warranties, as described in further detail in Part I - Item 4. “Controls and Procedures” of this quarterly report. Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected and corrected on a timely basis.

We are in the process of implementing a remediation plan, as described further in Item 4, "Controls and Procedures," but if our remediation plan is insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal controls over financial reporting are discovered or occur in the future, our financial statements may contain material misstatements, and we could be required to restate our financial results. In addition, if we are unable to successfully remediate this material weakness and if we are unable to produce accurate and timely financial statements, the market price of our common stock may be adversely affected, and we may be unable to maintain compliance with the listing requirements of the New York Stock Exchange.

Changes in government administrative policy, including changes to existing trade agreements and government sanctions, could have a material adverse effect on us.

As a result of changes to government administrative policy, there may be changes to existing trade agreements, increased economic sanctions or greater restrictions on free trade generally, significant increases in tariffs on goods imported into the U.S., Canada or the European Union, particularly tariffs on products manufactured in China and Mexico, among other possible changes. Changes in social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently manufacture and sell products, and any resulting negative sentiments towards these countries as a result of such changes, could have an adverse effect on our business, financial condition, results of operations and cash flows. For example, further economic sanctions by the U.S. and other nations in response to the Russo-Ukrainian conflict could have an adverse effect on our ability to conduct business in Russia, which, in turn, could have an adverse effect on our business, financial condition and results of operations. At December 31, 2021, the amount of our backlog in our Russian subsidiary was approximately $14.9 million.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of our equity securities during the three months ended December 31, 2021.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

Item 6. Exhibits

See Exhibit Index below for a list of exhibits filed as part of this quarterly report, which Exhibit Index is incorporated herein by reference.

EXHIBIT INDEX


Exhibit Number						Description

10.1						Amendment No. 1 to the Amended and Restated Credit Agreement dated November 19, 2021.*

10.2						Transition and Consulting Agreement and General Release, dated January 25, 2022 , between René van der Salm and Thermon Group Holdings, Inc.*

31.1						Certification of Bruce Thames, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2						Certification of Kevin Fox, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1						Certification of Bruce Thames, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2						Certification of Kevin Fox, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

101						Interactive Data Files formatted in Inline eXtensible Business Reporting Language (iXBRL) pursuant to Rule 405 of Regulation S-T: (i) the cover page, (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statements of Operations and Comprehensive Income, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements*

104						Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)*

__________________________________

* Filed herewith

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	THERMON GROUP HOLDINGS, INC. (registrant)
Date: February 3, 2022	By:	/s/ Kevin Fox
	Name:	Kevin Fox
	Title:	Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)