Thermon Group Holdings, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

Fair Value Measurements

12 Months Ended

Mar. 31, 2020

We measure fair value based on authoritative accounting guidance, which defines fair value, establishes a framework for measuring fair value and expands on required disclosures regarding fair value measurements.

Inputs are referred to as assumptions that market participants would use in pricing the asset or liability. The uses of inputs in the valuation process are categorized into a three-level fair value hierarchy.


•	Level 1 — uses quoted prices in active markets for identical assets or liabilities we have the ability to access.


•	Level 2 — uses observable inputs other than quoted prices in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.


•	Level 3 — uses one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment.

Financial assets and liabilities with carrying amounts approximating fair value include cash, trade accounts receivable, accounts payable, accrued expenses and other current liabilities. The carrying amount of these financial assets and liabilities approximates fair value because of their short maturities. At March 31, 2020 and 2019, no assets or liabilities were valued using Level 3 criteria.

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



	March 31, 2020				March 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value		Valuation Technique
Financial Liabilities
Outstanding principal amount of senior secured credit facility	$	176,000	$	150,480	$	206,500	$	206,500	Level 2 - Market Approach
Outstanding borrowings from revolving line of credit	$	—	$	—	$	11,225	$	11,225	Level 2 - Market Approach

At March 31, 2020 and 2019, the fair value of our long-term debt is based on market quotes available for issuance of debt with similar terms. As the quoted price is only available for similar financial assets, the Company concluded the pricing is indirectly observable through dealers and has been classified as Level 2. The Company believes the decline in fair value as of March 31, 2020 is temporary due to the COVID-19 pandemic. The fair value of our revolving line of credit as of March 31, 2019 approximates its carrying value as we pay interest based on the current market rate.

Acquisition Related Foreign Exchange Option

In connection with the execution of the purchase agreement for the THS acquisition on October 3, 2017, we entered into a combination of option contracts to secure the exchange rate of $200,000 CAD that would be contributed by the Company at closing on October 30, 2017. The options were structured such that the $200,000 CAD would be exchanged for no more than $162,100 and no less than $159,200 USD. At settlement date, Thermon took delivery of $200,000 CAD for $159,200. At closing of the THS acquisition, the Canadian dollar weakened such that the actual spot foreign exchange rate was $155,900. The resulting difference of $3,326 was recognized as realized loss on foreign exchange in fiscal 2018.

Cross Currency Swap

The Company has entered into a long-term cross currency swap to hedge the currency rate fluctuations related to a $54,603 intercompany receivable at March 31, 2020 from our wholly-owned Canadian subsidiary, Thermon Canada Inc., maturing on October 30, 2022. Periodic principal payments are to be settled twice annually with interest payments settled quarterly through the cross currency derivative contract. We do not designate the cross currency swap as a cash flow hedge under ASC 815, Derivatives and Hedging ("ASC 815"). At March 31, 2020, we recorded $2,502 of unrealized mark-to-market gains on the cross-currency swap which is reported as "Other income and expense", in the consolidated statements of operations and comprehensive income. Cross currency swap contracts are measured on a recurring basis at fair value and are classified as Level 2 measurements. Hedge assets in the amount of $4,011 and $1,768 were included in "Other long term assets" in the consolidated balance sheet at March 31, 2020 and 2019, respectively. For the twelve months ended March 31, 2020, the gain on the long-term cross currency swap derivative contract was offset by unrealized losses on the intercompany note of $2,539 for a net loss of $37.

Deferred Compensation Plan Assets

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” at March 31, 2020 and March 31, 2019 were $2,849 and $1,557, respectively, of deferred compensation plan assets held by the Company. Deferred compensation plan assets (mutual funds) are measured at fair value on a recurring basis based on quoted market prices in active markets (Level 1). The Company has a corresponding liability to participants of $2,886 and $1,520 included in “Other long-term liabilities” in the consolidated balance sheets at March 31, 2020 and March 31, 2019, respectively. Please refer to Note 13 "Employee Benefits" for further discussion.

Foreign Currency Forward Contracts

We transact business in various foreign currencies and have established a program that primarily utilizes foreign currency forward contracts to offset the risk associated with fluctuations of certain foreign currencies. 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 typically arise from intercompany transactions. Our forward contracts generally have terms of 30 days. We do not use forward contracts for trading purposes or designate these forward contracts as hedging instruments pursuant to ASC 815. We adjust the carrying amount of all contracts to their fair value at the end of each reporting period and unrealized gains and losses are included in our results of operations for that period. These gains and losses are intended to offset gains and losses resulting from settlement of payments received from our foreign operations which are settled in U.S. dollars. All outstanding foreign currency forward contracts are marked to market at the end of the period with unrealized gains and losses included in other expense. The fair value is determined by quoted prices from active foreign currency markets (Level 2). The consolidated balance sheets reflect unrealized gains within accounts receivable, net and unrealized losses within accrued liabilities. Our ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the contracts mature. As of March 31, 2020 and 2019, the notional amounts of forward contracts were as follows:



Notional amount of foreign exchange forward contracts by currency
	March 31, 2020		March 31, 2019
Russian Ruble	$	1,103	$	—
Euro	500		—
Canadian Dollar	1,500		1,500
South Korean Won	3,500		2,000
Mexican Peso	2,000		—
Australian Dollar	700		900
Great Britain Pound	500		3,000
Total notional amounts	$	9,803	$	7,400



	March 31, 2020				March 31, 2019
	Fair Value				Fair Value
	Assets		Liabilities		Assets		Liabilities
Foreign exchange contract forwards	$	140	$	49	$	8	$	53

Recognized foreign currency gains or losses related to our forward contracts in the accompanying consolidated statements of operations and comprehensive income were losses of $437, $125 and $96 for fiscal 2020, fiscal 2019 and fiscal 2018, respectively. Gains and losses from our forward contracts are intended to be offset by transaction gains and losses from the settlement of transactions denominated in foreign currencies. Our net foreign currency losses were $580, $228, and $5,725 for fiscal 2020, fiscal 2019, and fiscal 2018, respectively. Foreign currency gains and losses are recorded within other expense in our consolidated statements of operations and comprehensive income.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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