Quarterly report pursuant to Section 13 or 15(d)

Goodwill

v3.3.0.814
Goodwill
6 Months Ended
Sep. 30, 2015
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangible Assets
Acquisition, Goodwill and Other Intangible Assets

Industrial Process Insulators ("IPI") Transaction

On July 31, 2015, a wholly owned indirect subsidiary of the Company acquired 100% of the capital stock of Industrial Process Insulators ("IPI") for $21,750, subject to a customary working capital adjustment. The results of IPI's operations have been included in the consolidated financial statements since that date. IPI is an insulation contractor serving the refining, petrochemical, power and energy, marine and pulp and paper industries in the United States, with a significant presence in the Texas and Louisiana Gulf Coast region. IPI has served as a customer and valued subcontractor to the Company for the past seventeen years and some members of IPI's senior management team are former company employees. The acquisition is expected to enhance our turn-key product offerings and strengthen our presence and relationships in the Gulf Coast region as IPI serves many of the same end-markets as those served by our core thermal solutions business. We recognized $10,204 in goodwill associated with the acquisition during the three months ended September 30, 2015.

Consideration to or on behalf of sellers at close
$
21,750

Fair value of total consideration transferred
$
21,750



The following table summarizes the preliminary fair value of the assets and liabilities assumed:
Assets acquired:

Cash
$
1,526

     Accounts receivable
3,723

Inventories
474

     Other current assets
204
     Property, plant and equipment
119
     Identifiable intangible assets
13,784
     Goodwill
10,204
Total assets
30,034

Liabilities assumed:

     Current liabilities
2,203
Uncertain tax position liability
1,119

     Noncurrent deferred tax liability
4,962
Total liabilities
8,284

Total consideration
$
21,750



The fair value of accounts receivable represents IPI's gross outstanding receivables as of the acquisition date that we estimate will be fully collectible.

For the three and six months ended September 30, 2015, we incurred $33 of transaction expenses related to the IPI acquisition which were recorded within marketing, general and administrative and engineering expenses on the condensed consolidated statements of operations and comprehensive income (loss).

Our provisional estimate of identifiable intangible assets at September 30, 2015 that were related to the IPI transaction consisted of the following:
 
Amortization period
 
Gross Carrying Amount at September 30, 2015
 
Accumulated Amortization
 
Net Carrying Amount at September 30, 2015
 
 
 
 
 
 
 
 
Order backlog
6 months
 
$
437

 
$
146

 
$
291

Customer relationships
10 years
 
10,720

 
179

 
10,541

Trademark
8 years
 
1,820

 
38

 
1,782

Other
3 years
 
807

 
44

 
763

Total
 
 
$
13,784

 
$
407

 
$
13,377



The weighted average useful life of acquired finite lived intangible assets related to the IPI transaction is 9.0 years.
    
At September 30, 2015, approximately $4,000 of the purchase price was held in escrow to secure the sellers' indemnification obligations in the event of any breaches of representations and warranties contained in the definitive agreements.

Sumac Transaction

On April 1, 2015, Thermon Canada, Inc. ("TCI"), a wholly owned indirect subsidiary of the Company, acquired a 75% controlling interest in the business previously operated by Sumac Fabrication Company Limited ("Sumac") for $10,956, (based on the Canadian Dollar to U.S. Dollar exchange rate on April 1, 2015) in cash, plus a non-interest bearing note ("performance based note") with a principal amount of $5,905 (based on the Canadian Dollar to U.S. Dollar exchange rate on April 1, 2015) that matures on April 1, 2016, with the actual amount payable at maturity ranging from zero up to a maximum of $7,500 Canadian Dollars, subject to the achievement of certain performance metrics during the 12 month period ending April 1, 2016. Since the terms of the performance based note include continued employment by Sumac's principals, the estimated payout will be accrued on a ratable basis as compensation expense until the actual amount becomes determinable on April 1, 2016.

Sumac is located in Fort McMurray, Alberta, Canada. Sumac's line of products and solutions are designed to provide a safe and efficient means of supplying temporary electrical power distribution and lighting at energy infrastructure facilities for new construction and during maintenance and turnaround projects at operating facilities. Sumac products include power distribution panels, master/slave sub-panels, power cords and lighting fixtures. Sumac products are sold to end-users operating in many of the same markets as our core thermal solutions, including heavy industrial settings, oil and gas refining and upgrading, power generation plants, petrochemical production facilities and mining operations. We believe we will be able to leverage our existing global sales force to further expand the reach of Sumac's product offerings. We recognized $9,255 of goodwill in connection with the Sumac acquisition that we expect will be deductible for Canadian taxation purposes.

Consideration to or on behalf of sellers at close
$
10,956

Fair value of total consideration transferred
$
10,956


The following table summarizes the preliminary fair value of the assets and liabilities assumed:
Assets acquired:
 
     Accounts receivable
$
1,693

     Inventories
1,299
     Other current assets
123
     Property, plant and equipment
1,316
     Identifiable intangible assets
2,645
     Goodwill
9,255
Total assets
16,331

Liabilities assumed:
 
     Current liabilities
1,025
     Noncurrent deferred tax liability
714
Total liabilities
1,739

Non-controlling interests
3,636

Total consideration
$
10,956



The fair value of accounts receivable represents Sumac's gross outstanding receivables as of the acquisition date that we estimate will be fully collectible.

In total, $134 of transaction costs were incurred related to the Sumac transaction, all of which were incurred prior to the six months ended September 30, 2015.

Our provisional estimate of identifiable intangible assets at September 30, 2015 that were related to the Sumac transaction consisted of the following:
 
Amortization period
 
Gross Carrying Amount at September 30, 2015
 
Accumulated Amortization
 
Net Carrying Amount at September 30, 2015
 
 
 
 
 
 
 
 
Backlog
6 months
 
$
176

 
$
176

 
$

Customer relationships
3 years
 
1,768

 
295

 
1,473

Other
10.3 years
 
566

 
63

 
503

Total
 
 
$
2,510

 
$
534

 
$
1,976




The weighted average useful life of acquired finite lived intangible assets related to Sumac transaction is 4.5 years.
    
At September 30, 2015, approximately $1,068 of the purchase price was held in escrow to secure the sellers' indemnification obligations in the event of any breaches of representations and warranties contained in the definitive agreements.

Unitemp Transaction

On March 2, 2015, Thermon South Africa Pty. Ltd., a wholly owned indirect subsidiary of the Company, acquired substantially all of the operating assets and assumed certain operating liabilities of Unitemp cc (Unitemp or the Unitemp Transaction). The results of Unitemp's operations have been included in the consolidated financial statements since that date. Unitemp offers heating, sensing, portable instruments, monitoring and control solutions to industrial customers throughout Sub-Saharan Africa through its headquarters in Cape Town, South Africa and a branch location in Johannesburg, South Africa. The acquisition is expected to strengthen the Company's presence in the region and leverage the pre-existing sales channels that Unitemp has in the region. The goodwill of $1,630 arising from the acquisition relates to the foregoing expected benefits of the acquisition. The Company paid cash consideration of $3,890.
    
Consideration to or on behalf of sellers at close
$
3,890

Fair value of total consideration transferred
$
3,890



The following table summarizes the preliminary fair value of the assets and liabilities assumed:
Assets acquired:
 
     Accounts receivable
$
1,346

     Inventories
655
     Other current assets
21
     Property, plant and equipment
77
     Identifiable intangible assets
1,294
     Goodwill
1,630
Total assets
5,023

Liabilities assumed:
 
     Current liabilities
415
     Noncurrent deferred tax liability
718
Total liabilities
1,133

Total consideration
$
3,890



The fair value of accounts receivable represents Unitemp's gross outstanding receivables as of the acquisition date that we estimate will be fully collectible.

In total, $34 of transaction costs were incurred related to the Unitemp Transaction, all of which were incurred prior to the six months ended September 30, 2015.

Our provisional estimate of identifiable intangible assets that were related to the Unitemp Transaction consisted of the following:
 
Amortization period
 
Gross Carrying Amount at September 30, 2015
 
Accumulated Amortization
 
Net Carrying Amount at September 30, 2015
 
Gross Carrying Amount at March 31, 2015
 
Accumulated Amortization
 
Net Carrying Amount at March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
8 years
 
$
673

 
$
49

 
$
624

 
$
780

 
$
8

 
$
772

Developed Technology
3 years
 
92

 
34

 
58

 
107

 
3

 
104

Customer Relationships
5 years
 
318

 
21

 
297

 
368

 
6

 
362

Total
 
 
$
1,083

 
$
104

 
$
979

 
$
1,255

 
$
17

 
$
1,238




The weighted average useful life of acquired finite lived intangible assets related to Unitemp transaction is 6.7 years.

At September 30, 2015, approximately $302 of the purchase price was held in escrow to secure the sellers' indemnification obligations in the event of any breaches of representations and warranties contained in the definitive agreements.
Other intangible assets related to previous transactions consisted of the following:
 
 
Gross Carrying Amount at September 30, 2015
 
Accumulated Amortization
 
Net Carrying Amount at September 30, 2015
 
Gross Carrying Amount at March 31, 2015
 
Accumulated Amortization
 
Net Carrying Amount at March 31, 2015
Trademarks
 
$
42,649

 
$

 
$
42,649

 
$
43,034

 
$

 
$
43,034

Developed technology
 
9,775

 
2,688

 
7,087

 
9,862

 
2,469

 
7,393

Customer relationships
 
91,604

 
48,397

 
43,207

 
92,581

 
44,195

 
48,386

Backlog
 
8,975

 
8,975

 

 
9,129

 
9,129

 

Certification
 
445

 

 
445

 
449

 

 
449

Other
 
1,630

 
1,445

 
185

 
1,630

 
1,317

 
313

Total
 
$
155,078

 
$
61,505

 
$
93,573

 
$
156,685

 
$
57,110

 
$
99,575



Goodwill
The carrying amount of goodwill as of September 30, 2015 is as follows:
 
Amount
Balance as of March 31, 2015
$
105,232

Goodwill acquired
19,459

Foreign currency translation impact
(1,969
)
Balance as of September 30, 2015
$
122,722


The excess purchase price over the fair value of assets acquired is recorded as goodwill. 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. In addition to the qualitative analysis, we also perform a quantitative analysis using the income approach. Our annual impairment test will be performed during the fourth quarter of our fiscal year. The Sumac transaction was structured as an asset purchase and the $9,255 in goodwill associated with that transaction will be deductible for tax purposes in Canada. All remaining goodwill at September 30, 2015 is not deductible for tax purposes.

During the three months ended September 30, 2015, we completed a restructuring of our Canadian operations in which we reduced approximately 34% of our Canadian workforce and closed two sales offices. The employee severance and office closure costs totaled $578.
During the six months ended September 30, 2015, revenue from our organic Canadian operations (excluding our recent Sumac acquisition) has decreased by approximately 57% over the six months ended September 30, 2014.
    We consider the recent decline in our Canadian business, which management believes is attributable to lower oil prices and the reduction of capital investments in the Canadian oil sands region, to be an indicator of potential asset impairments in our Canadian reporting unit. The goodwill balance in the Canadian reporting unit at September 30, 2015 is $35,709 and the net intangible assets are $26,621. During the three months ended September 30, 2015, we performed an interim goodwill and intangible asset impairment assessment of our Canadian reporting unit utilizing the income approach, based on discounted future cash flows, which are derived from internal forecasts and economic expectations. Based on the interim goodwill impairment assessment, the estimated fair value of the Canadian reporting unit exceeded the carrying value. As such, there was no impairment of goodwill or intangible assets as of September 30, 2015.