|
1. Organization and Summary of Significant Accounting Policies
Organization
On April 30, 2010, a group of investors led by entities affiliated with CHS Capital LLC (“CHS”) and two other private equity firms acquired a controlling interest in Thermon Holding Corp. and its subsidiaries from Thermon Holdings, LLC (“Predecessor”) for approximately $321,500 in a transaction that was financed by approximately $129,252 of equity investments by CHS, two other private equity firms and certain members of our current and former management team (collectively, the “management investors”) and $210,000 of debt raised in an exempt Rule 144A senior secured note offering to qualified institutional investors (collectively, the “CHS Transactions”). The proceeds from the equity investments and debt financing were used both to finance the acquisition and pay related transaction costs. As a result of the CHS Transactions, Thermon Group Holdings, Inc. became the ultimate parent of Thermon Holding Corp. Thermon Group Holdings, Inc. and its direct and indirect subsidiaries are referred to collectively as “we”, “our”, the “Company” or “Successor” herein. We refer to CHS and the two other private equity fund investors collectively as “our private equity sponsors.”
In the CHS Transactions, the senior secured notes were issued by Thermon Finance, Inc., which immediately after the closing of the CHS Transactions was merged into our wholly-owned subsidiary Thermon Industries, Inc.
The CHS Transactions was accounted for as a purchase combination. The purchase price was allocated to the assets acquired based on their estimated fair values, and liabilities assumed were recorded based upon their actual value. While the Company takes responsibility for the allocation of assets acquired and liabilities assumed, it consulted with an independent third party to assist with the appraisal process.
Pushdown accounting was employed to reflect the purchase price paid by our new owner.
We have prepared our consolidated financial statements as if Thermon Group Holdings, Inc. had been in existence throughout all relevant periods. The historical financial and other data prior to the closing of the CHS Transactions on April 30, 2010 have been prepared using the historical results of operations and bases of the assets and liabilities of the Predecessor. Our historical financial data prior to May 1, 2010 may not be indicative of our future performance.
Thermon Holdings, LLC ( “Predecessor”) was organized by Audax Private Equity Fund II, L.P. and its affiliates (“Audax”) to acquire a controlling interest in Thermon Industries, Inc. and its subsidiaries, which acquisition occurred on August 30, 2007 (such acquisition, the “Audax Transaction”). The CHS Transactions which closed on April 30, 2010, resulted in the liquidation of the equity balances that belonged to the Predecessor. The settlement of equity balances and associated transaction expenses of the Predecessor are reported in the Period from April 1, 2010 to April 30, 2010. In May 2011, Thermon Group Holdings, Inc. completed its initial public offering (“IPO”) of common shares in which it issued 4,575,098 new common shares and received net proceeds of $48,600, net of underwriting discounts and commissions and estimated offering expenses. Refer to Note 18.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. Consolidated subsidiaries domiciled in foreign countries comprised approximately 66%, 62%, 70%, and 66% of the Company’s consolidated sales and $33,912, $16,271, $18,509 and $17,500 of the Company’s consolidated pretax income for fiscal year 2012, for the periods from May 1, 2010 to March 31, 2011 and from April 1, 2010 to April 30, 2010 (the two periods which represent fiscal year 2011), fiscal year 2010, respectively, and 54% and 50%, of the Company’s consolidated total assets at March 31, 2012 and 2011, respectively.
Segment Reporting
The Company’s senior management allocates resources and assesses the performance of its electrical and steam heat tracing of piping, vessels, instrumentation and associated equipment sales activities as one segment.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
Cash Equivalents
Cash and cash equivalents consist of cash in bank and money market funds. All highly liquid investments purchased with maturities of three months or less from time of purchase are considered to be cash equivalents.
Receivables
The Company’s receivables are recorded at cost when earned and represent claims against third parties that will be settled in cash. The carrying value of the Company’s receivables, net of allowance for doubtful accounts, represents their estimated net realizable value. If events or changes in circumstances indicate specific receivable balances may be impaired, further consideration is given to the Company’s ability to collect those balances and the allowance is adjusted accordingly. The Company has established an allowance for doubtful accounts based upon an analysis of aged receivables. Past-due receivable balances are written-off when the Company’s internal collection efforts have been unsuccessful in collecting the amounts due.
The Company’s primary base of customers operates in the oil, chemical processing and power generation industries. Although the Company has a concentration of credit risk within these industries, the Company has not experienced significant collection losses on sales to these customers. The Company’s foreign receivables are not concentrated within any one geographic region nor are they subject to any current economic conditions that would subject the Company to unusual risk. The Company does not generally require collateral or other security from customers.
The Company performs credit evaluations of new customers and sometimes require deposits, prepayments or use of trade letters of credit to mitigate our credit risk. Allowance for doubtful account balances are $1,434 and $1,487 as of March 31, 2012 and 2011, respectively. Although we have fully provided for these balances, we continue to pursue collection of these receivables.
The following table summarizes the annual changes in our allowance for doubtful accounts:
|
Predecessor:
|
|
|
|
|
Balance at March 31, 2009
|
|
$
|
1,233
|
|
|
Additions charged to expense
|
|
881
|
|
|
Write-off of uncollectible accounts
|
|
(279
|
)
|
|
Balance at March 31, 2010
|
|
$
|
1,835
|
|
|
Reduction to expense
|
|
(53
|
)
|
|
Write-off of uncollectible accounts
|
|
—
|
|
|
Balance at April 30, 2010
|
|
$
|
1,782
|
|
|
Successor:
|
|
|
|
|
Balance at May 1, 2010
|
|
$
|
1,782
|
|
|
Additions charged to expense
|
|
792
|
|
|
Write-off of uncollectible accounts
|
|
(1,087
|
)
|
|
Balance at March 31, 2011
|
|
$
|
1,487
|
|
|
Additions charged to expense
|
|
307
|
|
|
Write-off of uncollectible accounts
|
|
(360
|
)
|
|
Balance at March 31, 2012
|
|
$
|
1,434
|
|
Inventories
Inventories, principally raw materials and finished goods, are valued at the lower of cost (weighted average cost) or market.
Revenue Recognition
Revenues from sales of products are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectability is probable. On average, less than 20% of our annual revenues are derived from the installation of heat tracing solutions for which we apply construction-type accounting. These construction-related contracts are awarded on a competitive bid and negotiated basis. We offer our customers a range of contracting options, including cost-reimbursable, fixed-price and hybrid, which has both cost-reimbursable and fixed-price characteristics. Our construction contract revenue is primarily recognized using the percentage-of-completion method, based on the percentage that actual costs-to-date bear to total estimated costs to complete each contract. We follow the guidance of FASB ASC Revenue Recognition Topic 605-35 for accounting policies relating to our use of the percentage-of-completion method, estimating costs and revenue recognition, including the recognition of profit incentives, unapproved change orders and claims and combining and segmenting contracts. We utilize the cost-to-cost approach to measure the extent of progress toward completion, as we believe this method is less subjective than relying on assessments of physical progress. Under the cost-to-cost approach, the use of total estimated cost to complete each contract is a significant variable in the process of determining recognized revenue and is a significant factor in the accounting for contracts. Significant estimates that impact the cost to complete each contract are costs of engineering, materials, components, equipment, labor and subcontracts; labor productivity; schedule durations, including subcontract and supplier progress; liquidated damages; contract disputes, including claims; achievement of contractual performance requirements; and contingency, among others. The cumulative impact of revisions in total cost estimates as contracts progress is reflected in the period in which these changes become known, including the recognition of any losses expected to be incurred on contracts in progress. Due to the various estimates inherent in our construction contract accounting, actual results could differ from those estimates. Our historical construction contract cost estimates have generally been accurate, and management does not believe that there is a reasonable likelihood that there will be a material change in future estimates or the methodology used to calculate these estimates.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for renewals and improvements that significantly extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs of assets are charged to operations as incurred when assets are sold or retired, the cost and accumulated depreciation are removed from the accounts and any gain or loss is credited or changed to operations.
Depreciation is computed using the straight-line method over the following lives:
|
|
|
Useful Lives in Years
|
|
|
Land improvements
|
|
15 to 20
|
|
|
Buildings and improvements
|
|
10 to 40
|
|
|
Machinery and equipment
|
|
3 to 25
|
|
|
Office furniture and equipment
|
|
3 to 10
|
|
Fair Value Measurements
Financial instruments for which the Company did not elect the fair value option include cash and cash equivalents, accounts receivable, other current assets, current and long-term debt, accounts payable, and other current liabilities. The carrying amounts of these financial instruments, approximate their fair values due to their short-term nature or variable rates.
Goodwill and Other Intangible Assets
The Company records goodwill for the costs in excess of net asset value of the purchased businesses related to the acquisition made by the Company. On an annual basis, the Company performs a qualitative assessment of the carrying value of goodwill. The objective of the assessment is to determine if the fair value of the reporting unit is greater than the carrying amount of the goodwill. If the qualitative assessment indicates that the fair value of the reporting unit is greater than the goodwill being carried, then a second step valuation is deemed unnecessary. If however, the qualitative assessment indicates that fair value is less than the carrying value of the goodwill then the second step valuation approach will be completed. If the second step valuation indicates the implied fair value of the goodwill is less than the carrying amount of the goodwill, an impairment loss would be reported. The annual qualitative assessment considers such factors as the Company’s market capitalization, our current and expected financial performance, the relative performance of our industry as well as other relevant indicators. The Company determined that no impairment of goodwill existed during the year ended March 31, 2012 or during the period from May 1, 2010 to March 31, 2011.
Other intangible assets include indefinite lived intangible assets for which we must also perform an annual test of impairment. The Company’s indefinite lived intangible assets consist primarily of trademarks. The fair value of the Company’s trademarks is calculated using a “relief from royalty payments” methodology. This approach involves first estimating reasonable royalty rates for each trademark then applying these royalty rates to a net sales stream and discounting the resulting cash flows to determine the fair value. The royalty rate is estimated using both a market and income approach. The market approach relies on the existence of identifiable transactions in the marketplace involving the licensing of trademarks similar to those owned by the Company. The income approach uses a projected pretax profitability rate relevant to the licensed income stream. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of each trademark. This fair value is then compared with the carrying value of each trademark. The results of this test at March 31, 2012 and 2011 indicated that there was no impairment of our indefinite life intangible assets.
Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amounts to the future undiscounted cash flows that the assets are expected to generate. If the long-lived assets are considered impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds the estimated fair value and is recorded in the period the determination was made.
Income Taxes
The income tax amounts recorded in these consolidated financial statements relate to Thermon Group Holdings, Inc. and its subsidiaries through which substantially all of the operations of the Company are derived. The Company accounts for income taxes under the asset and liability method that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact the Company’s financial position or results of operations. In estimating future tax consequences, all expected future events are considered other than enactments of changes in tax laws or rates. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized.
The Company is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. We must estimate the potential outcome of such uncertain tax issues. We account for these uncertain tax issues pursuant to ASC 740, Income Taxes, which contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.
Foreign Currency Transactions and Translation
Exchange adjustments resulting from foreign currency transactions are recognized in income as realized. For the Company’s non-U.S. Dollar functional currency subsidiaries, assets and liabilities of foreign subsidiaries are translated into U.S. Dollars using year-end exchange rates. Income and expense items are translated at a weighted average exchange rate prevailing during the year. Adjustments resulting from translation of financial statements are reflected as a separate component of shareholders/member’s equity.
Warranties
The Company offers a standard warranty on product sales in which they will replace a defective product for a period of one year. Warranties on construction projects are negotiated individually, are typically one year in duration, and may include the cost of labor to replace products. Factors that affect the Company’s warranty liability include the amount of sales, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Research and Development
Research and development expenditures are expensed when incurred and are included in marketing, general and administrative and engineering expenses. Research and development expenses include salaries, direct costs incurred, and building and overhead expenses. The amounts expensed for fiscal year 2012, the period from May 1, 2010 to March 31, 2011 and April 1 to April 30, 2010 and for fiscal year 2010 were $881, $1,770, $1,676, and $1,087, respectively.
Shipping and Handling Cost
The Company includes shipping and handling costs as part of cost of goods sold.
Economic Dependence
No customer represented more than 10% of the Company’s accounts receivable at March 31, 2012 or 2011.
Reclassifications
Certain reclassifications of prior year of “Notes receivable and other,” as reported on the consolidated balance sheet, were made to conform to current year presentations. Amounts reported in the prior periods for other expense “Loss on disposition of property, plant and equipment” was reclassified as a component of “Cost of sale” and Marketing, general and administrative and engineering.” Such reclassifications had no impact on net income or total members’ equity.
Recent Accounting Pronouncements
In June 2011, the FASB updated FASB ASC 220, Comprehensive Income (FASB ASC 220) that gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The update does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The update does not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. The update does not affect how earnings per share is calculated or presented. The update should be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We are currently evaluating the requirements of this update and have not yet determined the impact on our consolidated financial statements.
In September 2011, the FASB updated FASB ASC 350, Goodwill and Other (FASB ASC 350) that gives an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary The Company adopted this update in the fourth quarter of fiscal year 2012 and the adoption will not have a material impact on our financial statements.
In January 2010, the FASB updated FASB ASC 820, Fair Value Measurements and Disclosures (FASB ASC 820) that requires additional disclosures and clarifies existing disclosures regarding fair value measurements. The additional disclosures include (i) transfers in and out of Levels 1 and 2 and (ii) activity in Level 3 fair value measurements. The update provides amendments that clarify existing disclosures on level of disaggregation and disclosures about inputs and valuation techniques. This update is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted the update on April 1, 2010 as required and subsequently adopted on April 1, 2011, the update surrounding disclosures on Level 3 fair value measurements and concluded it did not have a material impact on our consolidated financial position or results of operations. In May 2011, the FASB updated FASB ASC 820 that resulted in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (IFRSs). Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. This will be implemented for us during the quarter ending June 30, 2012. We are currently evaluating the requirements of this update and have not yet determined the impact on our consolidated financial statements.
|