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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, 2022
OR
☐ 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:
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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 1, 2023, the registrant had 33,503,561 shares of common stock, par value $0.001 per share, outstanding.
THERMON GROUP HOLDINGS, INC.
QUARTERLY REPORT
FOR THE QUARTER ENDED DECEMBER 31, 2022
TABLE OF CONTENTS
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PART I — FINANCIAL INFORMATION | |
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PART II — OTHER INFORMATION | |
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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, 2022 | | March 31, 2022 |
| (Unaudited) | | |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 35,363 | | | $ | 41,445 | |
Accounts receivable, net of allowances of $3,344 and $2,177 as of December 31, 2022, and March 31, 2022, respectively | 92,380 | | | 95,305 | |
Inventories, net | 91,418 | | | 71,650 | |
Contract assets | 16,597 | | | 19,626 | |
Prepaid expenses and other current assets | 15,981 | | | 11,786 | |
Income tax receivable | 1,469 | | | 4,626 | |
Total current assets | $ | 253,208 | | | $ | 244,438 | |
Property, plant and equipment, net of depreciation and amortization of $67,024 and $63,954 as of December 31, 2022, and March 31, 2022, respectively | 61,039 | | | 66,039 | |
Goodwill | 221,195 | | | 212,754 | |
Intangible assets, net | 96,162 | | | 94,908 | |
Operating lease right-of-use assets | 10,377 | | | 10,534 | |
Deferred income taxes | 778 | | | 1,211 | |
Other non-current assets | 7,336 | | | 6,785 | |
Total assets | $ | 650,095 | | | $ | 636,669 | |
Liabilities | | | |
Current liabilities: | | | |
Accounts payable | $ | 30,003 | | | $ | 33,567 | |
Accrued liabilities | 28,234 | | | 26,971 | |
Current portion of long-term debt | 10,219 | | | 7,929 | |
Borrowings under revolving credit facility | 24,500 | | | — | |
Contract liabilities | 9,780 | | | 8,010 | |
Lease liabilities | 3,506 | | | 3,624 | |
Income taxes payable | 3,570 | | | 897 | |
Total current liabilities | $ | 109,812 | | | $ | 80,998 | |
Long-term debt, net | 97,574 | | | 120,431 | |
Deferred income taxes | 12,531 | | | 17,943 | |
Non-current lease liabilities | 9,642 | | | 9,659 | |
Other non-current liabilities | 9,032 | | | 8,434 | |
Total liabilities | $ | 238,591 | | | $ | 237,465 | |
Commitments and contingencies (Note 10) | | | |
Equity | | | |
Common stock: $0.001 par value; 150,000,000 authorized; 33,495,287 and 33,364,722 shares issued and outstanding at December 31, 2022 and March 31, 2022, respectively | $ | 33 | | | $ | 33 | |
Preferred stock: $0.001 par value; 10,000,000 authorized; no shares issued and outstanding | — | | | — | |
Additional paid in capital | 238,399 | | | 234,549 | |
Accumulated other comprehensive loss | (56,423) | | | (38,906) | |
Retained earnings | 229,495 | | | 203,528 | |
Total equity | $ | 411,504 | | | $ | 399,204 | |
Total liabilities and equity | $ | 650,095 | | | $ | 636,669 | |
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/(Loss) (Unaudited)
(Dollars in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2022 | | Three Months Ended December 31, 2021 | | Nine Months Ended December 31, 2022 | | Nine Months Ended December 31, 2021 |
Sales | $ | 122,110 | | | $ | 100,613 | | | $ | 318,109 | | | $ | 253,090 | |
Cost of sales | 71,660 | | | 59,866 | | | 184,508 | | | 154,084 | |
Gross profit | 50,450 | | | 40,747 | | | 133,601 | | | 99,006 | |
Operating expenses: | | | | | | | |
Selling, general and administrative expenses | 30,889 | | | 22,099 | | | 83,046 | | | 66,820 | |
Deferred compensation plan expense/(income) | 464 | | | 292 | | | (499) | | | 610 | |
Amortization of intangible assets | 2,367 | | | 2,187 | | | 7,072 | | | 6,613 | |
Restructuring and other charges/(income) | 2,668 | | | — | | | 2,668 | | | (414) | |
Income/(loss) from operations | 14,062 | | | 16,169 | | | 41,314 | | | 25,377 | |
Other income/(expenses): | | | | | | | |
Interest expense, net | (1,877) | | | (842) | | | (4,120) | | | (5,029) | |
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Other income/(expense) | 659 | | | (627) | | | (592) | | | (3,517) | |
Income/(loss) before provision for income taxes | 12,844 | | | 14,700 | | | 36,602 | | | 16,831 | |
Income tax expense/(benefit) | 4,419 | | | 3,430 | | | 10,637 | | | 5,424 | |
Net income/(loss) | $ | 8,425 | | | $ | 11,270 | | | $ | 25,965 | | | $ | 11,407 | |
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Comprehensive income/(loss): | | | | | | | |
Net income/(loss) | $ | 8,425 | | | $ | 11,270 | | | $ | 25,965 | | | $ | 11,407 | |
Foreign currency translation adjustment | 5,403 | | | (413) | | | (17,560) | | | (3,843) | |
Other miscellaneous income/(loss) | (75) | | | (96) | | | 43 | | | (109) | |
Comprehensive income/(loss) | $ | 13,753 | | | $ | 10,761 | | | $ | 8,448 | | | $ | 7,455 | |
Net income/(loss) per common share: | | | | | | | |
Basic | $ | 0.25 | | | $ | 0.34 | | | $ | 0.78 | | | $ | 0.34 | |
Diluted | $ | 0.25 | | | $ | 0.33 | | | $ | 0.77 | | | $ | 0.34 | |
Weighted-average shares used in computing net income/(loss) per common share: | | | | | | | |
Basic | 33,493,540 | | | 33,340,000 | | | 33,457,048 | | | 33,292,614 | |
Diluted | 33,879,733 | | | 33,658,104 | | | 33,756,218 | | | 33,481,964 | |
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, 2022 | 33,364,722 | | | $ | 33 | | | $ | 234,549 | | | $ | 203,528 | | | | | $ | (38,906) | | | $ | 399,204 | |
| | | | | | | | | | | | | |
Issuance of common stock as deferred compensation to employees | 30,352 | | | — | | | — | | | — | | | | | — | | | — | |
Issuance of common stock as deferred compensation to executive officers | 64,294 | | | — | | | — | | | — | | | | | — | | | — | |
Issuance of common stock as deferred compensation to directors | 8,766 | | | — | | | — | | | — | | | | | — | | | — | |
Stock compensation expense | — | | | — | | | 1,193 | | | — | | | | | — | | | 1,193 | |
Repurchase of employee stock units on vesting | — | | | — | | | (552) | | | — | | | | | — | | | (552) | |
| | | | | | | | | | | | | |
Net income/(loss) | — | | | — | | | — | | | 6,556 | | | | | — | | | 6,556 | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | | | (5,152) | | | (5,152) | |
Other | — | | | — | | | — | | | 1 | | | | | 2 | | | 3 | |
| | | | | | | | | | | | | |
Balances at June 30, 2022 | 33,468,134 | | | $ | 33 | | | $ | 235,190 | | | $ | 210,085 | | | | | $ | (44,056) | | | $ | 401,252 | |
| | | | | | | | | | | | | |
Issuance of common stock as deferred compensation to employees | 5,544 | | | — | | | — | | | — | | | | | — | | | — | |
| | | | | | | | | | | | | |
Issuance of common stock as deferred compensation to directors | 9,930 | | | — | | | — | | | — | | | | | — | | | — | |
Stock compensation expense | — | | | — | | | 1,251 | | | — | | | | | — | | | 1,251 | |
Repurchase of employee stock units on vesting | — | | | — | | | (34) | | | — | | | | | — | | | (34) | |
Net income/(loss) | — | | | — | | | — | | | 10,984 | | | | | — | | | 10,984 | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | | | (17,811) | | | (17,811) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Other | — | | | — | | | — | | | — | | | | | 116 | | | 116 | |
Balances at September 30, 2022 | 33,483,608 | | | $ | 33 | | | $ | 236,407 | | | $ | 221,069 | | | | | $ | (61,751) | | | $ | 395,758 | |
| | | | | | | | | | | | | |
Issuance of common stock as deferred compensation to employees | 512 | | | — | | | — | | | — | | | | | — | | | — | |
| | | | | | | | | | | | | |
Issuance of common stock as deferred compensation to directors | 11,167 | | | — | | | — | | | — | | | | | — | | | — | |
Stock compensation expense | — | | | — | | | 1,994 | | | — | | | | | — | | | 1,994 | |
Repurchase of employee stock units on vesting | — | | | — | | | (2) | | | — | | | | | — | | | (2) | |
Net income/(loss) | — | | | — | | | — | | | 8,425 | | | | | — | | | 8,425 | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | | | 5,403 | | | 5,403 | |
Other | — | | | — | | | — | | | 1 | | | | | (75) | | | (74) | |
Balances at December 31, 2022 | 33,495,287 | | | $ | 33 | | | $ | 238,399 | | | $ | 229,495 | | | | | $ | (56,423) | | | $ | 411,504 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | |
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, 2022 | | Nine Months Ended December 31, 2021 |
Operating activities | | | |
Net income/(loss) | $ | 25,965 | | | $ | 11,407 | |
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: | | | |
Depreciation and amortization | 14,557 | | | 15,349 | |
Amortization of deferred debt issuance costs | 230 | | | 495 | |
| | | |
Loss on extinguishment of debt
| — | | | 2,569 | |
Impairment of property, plant, and equipment | 367 | | | — | |
Stock compensation expense | 4,438 | | | 2,699 | |
Deferred income taxes | (4,186) | | | (878) | |
Reserve for uncertain tax positions, net | 36 | | | 58 | |
(Gain)/loss on long-term cross currency swap | — | | | (1,391) | |
Remeasurement (gain)/loss on intercompany balances | 134 | | | (556) | |
Loss on sale of business, net of cash surrendered | — | | | 310 | |
Changes in operating assets and liabilities: | | | 0 |
Accounts receivable | 1,145 | | | (15,471) | |
Inventories | (18,047) | | | (6,137) | |
Contract assets | 4,447 | | | (6,287) | |
Other current and non-current assets | (695) | | | (3,293) | |
Accounts payable | (4,066) | | | 15,221 | |
Accrued liabilities and non-current liabilities | 1,433 | | | (824) | |
Income taxes payable and receivable | 5,847 | | | 475 | |
Net cash provided by/(used in) operating activities | $ | 31,605 | | | $ | 13,746 | |
Investing activities | | | |
Purchases of property, plant and equipment | (5,173) | | | (2,920) | |
Sale of rental equipment | 163 | | | 235 | |
| | | |
Cash paid for acquisitions, net of cash acquired | (35,299) | | | — | |
| | | |
| | | |
Net cash provided by/(used in) in investing activities | $ | (40,309) | | | $ | (2,685) | |
Financing activities | | | |
Proceeds from Term Loan A | — | | | 140,425 | |
Proceeds from revolving credit facility | 34,500 | | | 15,959 | |
Payments on long-term debt and revolving credit facility | (27,121) | | | (171,862) | |
Issuance costs associated with revolving line of credit and long term debt | — | | | (1,248) | |
| | | |
Proceeds from exercise of stock options | — | | | 97 | |
Repurchase of employee stock units on vesting | (588) | | | (562) | |
Payments on finance leases | (62) | | | (96) | |
Net cash provided by/(used in) financing activities | $ | 6,729 | | | $ | (17,287) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (754) | | | (821) | |
Change in cash, cash equivalents and restricted cash | (2,729) | | | (7,047) | |
Cash, cash equivalents and restricted cash at beginning of period | 43,931 | | | 42,450 | |
Cash, cash equivalents and restricted cash at end of period | $ | 41,202 | | | $ | 35,403 | |
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, tubing bundles, industrial heating blankets and chillers), 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, 2022 ("fiscal 2022"). In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments considered necessary to present fairly our financial position at December 31, 2022 and March 31, 2022, and the results of our operations for the three and nine months ended December 31, 2022 and 2021.
Impact of the COVID-19 Pandemic and General Economic Environment
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. We are still experiencing effects of lockdowns in certain parts of Asia, which are impacting our results in our Asia-Pacific ("APAC") segment. The effect of loosening pandemic restrictions outside of APAC, along with pent-up demand from periods of stagnant lockdown and uncertainty have combined to strengthen customer demand from most regions we serve, especially in North America. During periods of the pandemic we have experienced, and may experience in the future, a decline in the demand of our products and services or disruptions in raw materials or labor required for manufacturing that has in the past, and may in the future, materially and negatively impact our business, financial condition, results of operation and overall financial performance. 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. We have also had to increase our inventory of certain items to ensure availability in the face of supply chain disruptions. We continue to monitor the pandemic restrictions and other effects the pandemic may have on our business.
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.
We recorded no transactions related to CEWS for the three and nine months ended December 31, 2022. We recorded $199 and $1,448 related to CEWS to "Cost of sales" in our condensed consolidated statement of operations for the three and nine months ended December 31, 2021. We recorded $4 and $504 related to CEWS to "Selling, general and administrative expenses" in our condensed consolidated statement of operations for the three and nine months ended December 31, 2021. We anticipate no benefit from the CEWS program in the fiscal year ending March 31, 2023 ("fiscal 2023"), 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 its assumptions and estimates on the facts and circumstances existing at December 31, 2022, 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, 2022, are not necessarily indicative of the results that may be achieved for fiscal 2023.
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 non-current 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, 2022 | | December 31, 2021 |
Cash and cash equivalents | $ | 35,363 | | | $ | 32,566 | |
Restricted cash included in prepaid expenses and other current assets | 5,813 | | | 2,496 | |
Restricted cash included in other non-current assets | 26 | | | 341 | |
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows | $ | 41,202 | | | $ | 35,403 | |
Amounts shown in restricted cash included in prepaid expenses and other current assets and other non-current assets represent those required to be set aside by a contractual agreement, which generally contain cash deposits pledged as collateral on performance bonds and letters of credit. Additionally, due to the uncertain nature of whether we can repatriate certain funds from our Russian subsidiary, we have classified $3,084 of the cash and cash equivalents held in our Russian subsidiary as restricted cash and included the related balance in prepaid expenses and other current assets. Amounts shown in restricted cash in other non-current assets represent such agreements that require a commitment term longer than one year.
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 with fiscal years starting after December 15, 2022, and early adoption is permitted. We are still evaluating this ASU and will consider early adoption with future acquisitions, if any.
2. Acquisition
Powerblanket
On May 31, 2022 (the "Acquisition Date"), Thermon Holding Corp., as buyer, acquired 100% of the issued and outstanding equity interests of Powerblanket (“Powerblanket”) from Glacier Capital LLC, as seller (the "Acquisition"). Powerblanket is a leading North American supplier of heated blankets built upon patented heat spreading technology and portable industrial chillers. The Acquisition increases our exposure to growing industrial and commercial end-markets through its freeze protection, temperature control and flow assurance solutions. We have integrated Powerblanket into our United States and Latin America ("US-LAM") reportable segment. From the period May 31, 2022 to December 31, 2022, Powerblanket contributed $11,848 in Sales and $1,302 in Net income/(loss) to our consolidated operating results. For the three months ended December 31, 2022, Powerblanket contributed $7,881 in Sales and $2,000 in Net income/(loss) to our consolidated operating results.
The initial purchase price for the Acquisition was $35,000, subject to an adjustment for net working capital acquired at closing. Subsequent to the Acquisition Date, and commensurate with the purchase agreement, we increased the purchase price by $299 for net working capital acquired. We financed the Acquisition through the use of our Revolving Credit Facility as well as cash on hand. Powerblanket's revenue structure does not result in material contract assets or liabilities.
Acquisition Costs
In accordance with GAAP, costs incurred to complete the Acquisition are expensed as incurred. Total acquisition costs, which represent transaction costs, legal fees, and third-party professional fees were $278, of which $126 were incurred in the nine months ended December 31, 2022. No acquisition costs were incurred in the three months ended December 31, 2022. Acquisition costs are reflected in "Selling, general and administrative expenses" in our condensed consolidated statement of operations and comprehensive income/(loss).
Purchase Price Allocation
We have accounted for the Acquisition according to the business combinations guidance found in ASC 805 - Business Combinations, henceforth referred to as acquisition accounting. Acquisition accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. We used primarily Level 2 inputs to allocate the purchase price to the major categories of assets and liabilities shown below, with the exception of the contract-
based intangible asset, which was valued using Level 3 inputs. The carrying values of inventories, property, plant and equipment as well as leased assets approximated their respective fair values. During the measurement period, if new information is obtained about facts and circumstances that existed as of the Acquisition Date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date, we will revise the preliminary purchase price allocation. The effect of measurement period adjustments to the estimated fair values will be reflected as if the adjustments had been completed on the Acquisition Date. The impact of all changes that do not qualify as measurement period adjustments will be included in current period earnings.
| | | | | | | | |
Purchase Price Allocation |
| Amortization Period (years) | Fair Value |
Accounts receivable | | $ | 1,267 | |
Inventories | | 3,545 | |
Property, plant and equipment | | 391 | |
Other current assets | | 290 | |
Other non-current assets | | 954 | |
Intangibles: | | |
Customer relationships | 9.8 | 3,301 | |
Trademarks | 9.8 | 3,397 | |
Contract-based | 5.0 | 1,280 | |
Developed technology | 15.8 | 5,189 | |
Goodwill | | 18,620 | |
Total fair value of assets acquired | | $ | 38,234 | |
Accounts payable | | (1,098) | |
Accrued liabilities | | (637) | |
Other liabilities | | (1,200) | |
Total fair value of liabilities acquired | | $ | (2,935) | |
Purchase Price | | $ | 35,299 | |
Unaudited Pro Forma Financial Information
The following unaudited pro forma results of operations assume that the Acquisition occurred at the beginning of the periods presented. These unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations would have been if the Acquisition had occurred at the beginning of the periods presented, nor are they indicative of future results of operations. The pro forma results presented below are adjusted for the removal of acquisition and other related costs of $286 which were incurred in our first fiscal quarter ended June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
in thousands, unaudited | Three Months Ended December 31, 2022 | | Three Months Ended December 31, 2021 | | Nine Months Ended December 31, 2022 | | Nine Months Ended December 31, 2021 |
Sales | $ | 122,110 | | | $ | 107,443 | | | $ | 319,973 | | | $ | 265,350 | |
Net Income/(loss) | 8,425 | | | 12,623 | | | 25,588 | | | 13,438 | |
3. 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, 2022 and March 31, 2022, no assets or liabilities were valued using Level 3 criteria, except for those acquired in our recent acquisition of Powerblanket, discussed in Note 2, "Acquisition."
Information about our financial assets and liabilities is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | March 31, 2022 | | |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Valuation Technique |
Financial Assets | | | | | | | | | |
Deferred compensation plan assets | $ | 6,020 | | | $ | 6,020 | | | $ | 5,391 | | $ | 5,391 | | Level 1 - Active Markets |
Foreign currency contract forwards assets | 80 | | | 80 | | | 105 | | 105 | | Level 2 - Market Approach |
Financial Liabilities | | | | | | | | | |
Outstanding borrowings from revolving line of credit | $ | 24,500 | | | $ | 24,500 | | | $ | — | | | $ | — | | | Level 1 - Active Markets |
Outstanding principal amount of senior secured credit facility | 108,279 | | | 108,521 | | | 129,000 | | | 128,355 | | | Level 2 - Market Approach |
Deferred compensation plan liabilities | 5,416 | | | 5,416 | | | 4,837 | | | 4,837 | | | Level 1 - Active Markets |
Foreign currency contract forwards liabilities | 76 | | | 76 | | | — | | | — | | | Level 2 - Market Approach |
At December 31, 2022 and March 31, 2022, 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.
Additionally, we acquired certain assets and liabilities as disclosed in Note 2, "Acquisition" at fair value according to purchase price accounting.
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 non-current assets” in the condensed consolidated balance sheets at December 31, 2022 and March 31, 2022 were $6,020 and $5,391, 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 $5,416 and $4,837 included in “Other non-current liabilities” in the condensed consolidated balance sheets at December 31, 2022 and March 31, 2022, respectively. 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 plan expense/(income) was $464 and $292 for the three months ended December 31, 2022 and 2021, respectively, and $(499) and $610 for the nine months ended December 31, 2022 and 2021, 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/expense" on our condensed consolidated statements of operations and comprehensive income/(loss). Our unrealized losses and (gains) on investments were $(484) and $(314), respectively, for the three months ended December 31, 2022 and 2021, respectively, and $450 and $(620) for the nine months ended December 31, 2022 and 2021, 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/expense" on our condensed consolidated statements of operations and comprehensive income/(loss). 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, 2022 and March 31, 2022, the notional amounts of forward contracts were as follows:
| | | | | | | | | | | |
Notional amount of foreign currency forward contracts by currency |
| December 31, 2022 | | March 31, 2022 |
| | | |
Euro | $ | 1,000 | | | $ | — | |
Canadian Dollar | — | | | 4,000 | |
South Korean Won | — | | | 2,250 | |
| | | |
Mexican Peso | 1,500 | | | — | |
Australian Dollar | — | | | 1,000 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Total notional amounts | $ | 2,500 | | | $ | 7,250 | |
Foreign currency gains or losses related to our forward contracts in the accompanying condensed consolidated statements of operations and comprehensive income/(loss) were a gain of $102 and a loss of $(637) in the three months ended December 31, 2022 and 2021, respectively, and losses of $(510) and $(861) for the nine months ended December 31, 2022 and 2021, 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, 2022 and 2021, our net foreign currency transactions resulted in a gain of $193 and losses of $(949), respectively, and losses of $(140) and $(1,634) in the nine months ended December 31, 2022 and 2021.
4. Restructuring and Other Charges/(Income)
Impairment and other charges/(income)
In the third quarter of fiscal 2023, we identified a triggering event in our EMEA reportable segment. Given the continuing depressed economic conditions resulting from the Russo-Ukrainian war, including sanctions related thereto, the Company conducted a strategic assessment of its operations in its Russian subsidiary and we concluded that there was uncertainty in whether the Company could realize significant future economic benefits. Therefore, we recorded a total charge of $8,334 in the three months ended December 31, 2022. The charges were comprised of the following:
| | | | | | | | | | | | | | |
Charge | | Financial statement impact | | Amount |
Increase in Current Expected Credit Loss, or "CECL," allowance for credit loss for certain accounts receivable | | Accounts receivable, net; Selling, general and administrative expenses | | $ | 835 | |
Increase in inventory reserves | | Inventories, net; Cost of sales | | 4,831 | |
Contract asset adjustment | | Contract assets; Restructuring and other charges/(income) | | 327 | |
Prepaid expenses and other current assets adjustment | | Prepaid expenses and other current assets, Income tax receivable; Restructuring and other charges/(income) | | 1,477 | |
Impairment of Property, plant and equipment, net | | Property, plant and equipment, net; Restructuring and other charges/(income) | | 367 | |
Impairment of Operating lease right-of-use assets | | Operating lease right-of-use assets; Restructuring and other charges/(income) | | 389 | |
Impairment of Other non-current assets | | Deferred income taxes, Other non-current assets; Restructuring and other charges/(income) | | 108 | |
| | | | $ | 8,334 | |
All charges described above were recorded in our Europe, Middle East and Africa ("EMEA") reportable segment, with the exception of $241 of cost of sales from an increase in inventory reserves in our Canada reportable segment. Additionally,
we reclassified $3,084 of cash in our Russian subsidiary to restricted cash due to due to the uncertain nature of whether we can repatriate certain funds from our Russian subsidiary.
The Company will continue to evaluate sales to international customers with a presence in the Russian Federation and engage in those sales to the extent permissible with various international sanctions.
Please refer to Note 7, "Goodwill and Other Intangible Assets," for more information on impairment, and Note 14, "Subsequent Events," for more information regarding the Company's operations in the Russian Federation.
Fiscal 2022 charges/(income)
In 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/(loss). 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.
Restructuring and other charges/(income) by reportable segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2022 | | Three Months Ended December 31, 2021 | | Nine Months Ended December 31, 2022 | | Nine Months Ended December 31, 2021 |
United States and Latin America | | $ | — | | | $ | — | | | $ | — | | | $ | (46) | |
Canada | | — | | | — | | | — | | | (186) | |
Europe, Middle East and Africa(1) | | 2,668 | | | — | | | 2,668 | | | (182) | |
Asia-Pacific | | — | | | — | | | — | | | — | |
| | $ | 2,668 | | | $ | — | | | $ | 2,668 | | | $ | (414) | |
(1) - these charges relate to the Company's Russian subsidiary and were included in "Restructuring and other charges/(income)" on our condensed consolidated statement of operations and comprehensive income/(loss). See the section labeled "Impairment and other charges/(income)" above for a full detail of charges.
5. Net Income/(Loss) per Common Share
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, 2022 and 2021, respectively, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2022 | | Three Months Ended December 31, 2021 | | Nine Months Ended December 31, 2022 | | Nine Months Ended December 31, 2021 |
Basic net income/(loss) per common share | | | | | | | |
Net income/(loss) | $ | 8,425 | | | $ | 11,270 | | | $ | 25,965 | | | $ | 11,407 | |
Weighted-average common shares outstanding | 33,493,540 | | | 33,340,000 | | | 33,457,048 | | | 33,292,614 | |
Basic net income/(loss) per common share | $ | 0.25 | | | $ | 0.34 | | | $ | 0.78 | | | $ | 0.34 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2022 | | Three Months Ended December 31, 2021 | | Nine Months Ended December 31, 2022 | | Nine Months Ended December 31, 2021 |
Diluted net income/(loss) per common share | | | | | | | | |
Net income/(loss) | | $ | 8,425 | | | $ | 11,270 | | | $ | 25,965 | | | $ | 11,407 | |
Weighted-average common shares outstanding | | 33,493,540 | | | 33,340,000 | | | 33,457,048 | | | 33,292,614 | |
Common share equivalents: | | | | | | | | |
Stock options | | 7,858 | | | 271 | | | 2,545 | | | 1,660 | |
Restricted and performance stock units | | 378,335 | | | 317,833 | | | 296,625 | | | 187,690 | |
Weighted average shares outstanding – dilutive (1) | | 33,879,733 | | | 33,658,104 | | | 33,756,218 | | | 33,481,964 | |
Diluted net income/(loss) per common share | | $ | 0.25 | | | $ | 0.33 | | | $ | 0.77 | | | $ | 0.34 | |
(1) For the three months ended December 31, 2022 and 2021, 28,499 and 45,099 equity awards, respectively and for the nine months ended December 31, 2022 and 2021, 39,517 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.
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 actual performance will be above or below target.
6. Inventories
Inventories consisted of