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, 2014

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

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


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


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


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

Financial assets and liabilities with carrying amounts approximating fair value include cash, 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, 2014 and March 31, 2013, no assets or liabilities were valued using Level 3 criteria.

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



	March 31, 2014				March 31, 2013
	Carrying Value		Fair Value		Carrying Value		Fair Value		Valuation Technique
Financial Liabilities
Senior secured credit facility	$	121,500	$	121,500	$	—	$	—	Level 2 - Market Approach
9.5% senior secured notes	$	—	$	—	$	118,145	$	131,436	Level 2 - Market Approach

At March 31, 2014, the fair value of our variable rate term loan approximates its carrying value as we pay interest based on the current market rate. 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. Differences between the fair value and the carrying value for the senior secured notes as of March 31, 2013 are primarily due to the instruments' fixed interest rate. Inherently, such instruments are subject to fluctuations in fair value due to movements in interest rates. Our 9.5% senior secured notes, which we fully redeemed in fiscal 2014, traded on over the counter markets. As the quoted price was only available through a dealer, the Company concluded the market was not active enough to be classified as a Level 1 valuation. However, the pricing was indirectly observable through dealers and has been classified as Level 2.

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 largely 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, 2014 and March 31, 2013, the notional amounts of forward contracts were as follows:



Notional amount of foreign exchange forward contracts by currency
	March 31, 2014		March 31, 2013
Russian Ruble	$	772	$	4,233
Euro	2,386		2,510
Canadian Dollar	—		2,134
South Korean Won	532		919
Indian Rupee	2,574		329
Mexican Peso	1,077		—
Other	837		—
Total notional amounts	$	8,178	$	10,125



	March 31, 2014				March 31, 2013
	Fair Value				Fair Value
	Assets		Liabilities		Assets		Liabilities
Foreign exchange contract forwards	$	35	$	93	$	87	$	32

Recognized foreign currency gains or losses related to our forward contracts in the accompanying consolidated statements of operations and comprehensive income were a loss of $309 and a gain of $3 for fiscal 2014 and fiscal 2013, respectively. In fiscal 2012, we incurred losses of $554 on our foreign currency forward contracts. Gains and losses from our forward contracts were offset by transaction gain and losses from the settlement of transactions denominated in foreign currencies. Our net foreign currency losses were $613, $423, and $1,625 for fiscal 2014, fiscal 2013, and fiscal 2012, respectively. Foreign currency gains and losses are recorded within other expense in our consolidated statements of operations and comprehensive income.

Interest Rate Swap

On June 13, 2013, the Company entered into an interest rate swap contract to reduce the exposure to interest rate fluctuations associated with its variable rate term loan. Under the agreement we will pay a fixed amount and receive or make payments based on a variable rate. Effective July 1, 2013, the Company designated the interest rate swap contract as a cash flow hedge pursuant to ASC 815. The Company formally documents all relationships between the hedging instrument and hedged item, its risk management objective and strategy, as well as counter-party creditworthiness. At each reporting period our interest rate swap contract is adjusted to fair value based on dealer quotes, which consider forward curves and volatility levels (Level 2). Unrealized gains, representing derivative assets, are reported within accounts receivable, net and unrealized losses, representing derivative liabilities, are reported within accrued liabilities on the accompanying condensed consolidated balance sheets. As of March 31, 2014, the fair value of the interest rate swap contract was an unrealized gain of $108. The change in fair value of the derivative instrument is recorded in accumulated other comprehensive loss to the extent the derivative instruments are deemed effective. Ineffectiveness is measured based on the changes in fair value of the interest rate swap contract and the change in fair value of the hypothetical derivative and is recognized in earnings in the period in which ineffectiveness is realized. Based on the criteria established by ASC 815, the interest rate swap contract is deemed to be highly effective. Any realized gains or losses resulting from the interest rate swap contract are recognized within interest expense. Gains and losses from our interest rate swap contract are offset by changes in the variable interest rate on our term loan. Since the effective date of our interest rate swap contract, interest expense on outstanding principal has been 3.62%. We have hedged 100% of the future interest payments on our variable rate term loan through its maturity date.

The following table summarizes the aggregate unrealized loss in accumulated other comprehensive loss, and the losses reclassified into earnings for the year ended March 31, 2014:



	Year Ended March 31, 2014
Unrealized gain/(loss) at beginning of the period	$	—
Add: gain/(loss) from change in fair value of cash flow hedge	(689		)
Add: non-fair value derivative asset transferred into accumulated other comprehensive income	(211		)
Less: loss reclassified into earnings from effective hedge	(797		)
Less: ineffective portion of hedge transferred into earnings	(22		)
Unrealized loss at end of the period	$	(81	)

We did not have any interest rate swaps during the years ended March 31, 2013 and March 31, 2012, respectively.

Transfers out of accumulated other comprehensive loss

During the year ended March 31, 2014, $797 and $22 of were transferred out of accumulated other comprehensive loss related to realized losses on our interest rate swap contract, and hedge ineffectiveness, respectively.

- 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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