Annual report pursuant to Section 13 and 15(d)

Goodwill and Other Intangible Assets

v3.4.0.3
Goodwill and Other Intangible Assets
12 Months Ended
Mar. 31, 2016
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangible Assets
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. Prior to the acquisition, IPI was formerly a customer and subcontractor to the Company for the past 17 years. 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 IPI acquisition. For the period from August 1, 2015 to March 31, 2016, IPI contributed $8,863 of revenue and a generated a pre-tax loss of $353.
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

     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 year ended March 31, 2016, we incurred $33 of transaction expenses related to the IPI acquisition which were recorded within marketing, general and administrative and engineering expenses on the consolidated statements of operations and comprehensive income.

Our provisional estimate of identifiable intangible assets at March 31, 2016 that were related to the IPI transaction consisted of the following:
 
Amortization period
 
Gross Carrying Amount at March 31, 2016
 
Accumulated Amortization
 
Net Carrying Amount at March 31, 2016
Order backlog
6 months

$
437


$
437


$

Customer relationships
10 years

10,720


715


10,005

Trademark
8 years

1,820


152


1,668

Non-compete agreement
3 years

807


179


628

Total


$
13,784


$
1,483


12,301



The weighted average useful life of acquired finite lived intangible assets related to the IPI transaction is 9.0 years.
    
At March 31, 2016, approximately $4,002 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 ended April 1, 2016. Since the terms of the performance based note assume continued employment of 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. At March 31, 2016, the Company determined that the performance metrics had been achieved and accrued $5,775 (converted to U.S. currency) as payable under the performance based note.

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 $7,992 of goodwill in connection with the Sumac acquisition that we expect will be partially deductible for Canadian taxation purposes. For the twelve months ended March 31, 2016, Sumac contributed $11,710 of revenue and contributed pre-tax income of $3,546.

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

Fair value of total consideration transferred
$
10,956


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

     Inventories
1,299
     Other current assets
33
     Property, plant and equipment
1,316
     Identifiable intangible assets
3,085
     Goodwill
7,992
     Deferred tax asset
111

Total assets
15,529

Liabilities assumed:
 
     Current liabilities
935
Total liabilities
935

Non-controlling interests
3,638

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 in the year ended March 31, 2015.

Our identifiable intangible assets at March 31, 2016 that were related to the Sumac transaction consisted of the following:
 
Amortization period
 
Gross Carrying Amount at March 31, 2016
 
Accumulated Amortization
 
Net Carrying Amount at March 31, 2016
Backlog
6 months
 
$
203

 
$
203

 
$

Customer relationships
4 years
 
2,612

 
653

 
1,959

Non-compete agreement
2 years
 
194

 
97

 
97

Total
 
 
$
3,009

 
$
953

 
$
2,056



The weighted average useful life of acquired finite lived intangible assets related to Sumac transaction is 3.6 years.
    
At March 31, 2016, approximately $1,097 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 and Impairment of Goodwill and Intangibles

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 aforementioned benefits of the acquisition. The Company paid cash consideration of $3,890.

During the fourth quarter of fiscal 2016, the Company received notice that a significant distribution partner for Unitemp intended to end its relationship with the Company. Previously, Unitemp had performed distribution services for its manufacturing partner in addition to product services directly to the end customer. The Company also concluded that the overall financial performance of Unitemp was below the forecast used at acquisition. As part of its annual assessment of goodwill and intangible assets, the carrying values of Unitemp's goodwill and other intangible assets were tested for potential impairment. The results of our step-one goodwill analysis concluded that the carrying value of Unitemp's goodwill was less than its fair value. As a result, the Company initiated the second step of the goodwill impairment test, which involved calculating the implied fair value of goodwill by allocating the fair value of the reporting unit to all assets and liabilities of the reporting unit other than goodwill, and comparing it to the carrying amount of goodwill. Utilizing the income approach, the Company determined that the implied fair value of goodwill related to the Unitemp reporting unit was less than the carrying value and impaired 100% of the Unitemp reporting unit's goodwill balance during the fourth quarter of fiscal 2016. A goodwill impairment charge of $1,240 was recorded within our consolidated statements of operations during the year ended March 31, 2016. The undiscounted cash flows of the amortizing customer relationship intangible asset were determined to be less than its carrying value; therefore, all of the remaining customer relationship assets was impaired. In addition, a portion of the trademark asset was also impaired based on the present value of relief from royalty estimations. The combined impairment charge for intangible assets for the Unitemp reporting unit was $473 for the year ended March 31, 2016.
    
Consideration to or on behalf of sellers at close
$
3,890

Fair value of total consideration transferred
$
3,890



The following table summarizes the fair value of the assets and liabilities assumed as originally allocated at the March 2, 2015 acquisition date:
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
     Deferred tax liability
718
Total liabilities
1,133

Purchase price
$
3,890



The fair value of accounts receivables represents the Company's best estimate of the outstanding receivables as of the acquisition that we estimate we will collect. In total, the gross balance due is $1,346 of which all were collected subsequent to acquisition.

In total, $34 of costs were incurred related to the Unitemp Transaction in the year ended March 31, 2015.

After applying the impact of the aforementioned impairment charge, the intangible assets for the Unitemp reporting unit at March 31, 2016 were as follows:
 
Amortization period
 
Gross Carrying Amount at March 31, 2016
 
Accumulated Amortization
 
Net Carrying Amount at March 31, 2016
 
Gross Carrying Amount at March 31, 2015
 
Accumulated Amortization
 
Net Carrying Amount at March 31, 2015
Trademarks
8 years
 
$
373

 
$
85

 
$
288

 
$
780

 
8

 
$
772

Developed Technology
3 years
 
86

 
31

 
55

 
107

 
3

 
104

Customer Relationships
5 years
 

 

 

 
368

 
6

 
362

Total

 
$
459

 
$
116

 
$
343

 
$
1,255

 
$
17

 
$
1,238



The weighted average useful life of the remaining finite lived intangible assets related to Unitemp transaction is 7.1 years.
    
At March 31, 2016, approximately $287 of the purchase price was held in escrow to secure the indemnification obligations in the event of any breaches of representations and warranties contained in the definitive agreements.

The carrying amount of goodwill for all reporting segments as of March 31, 2016, is as follows:
 
 
United States
 
Canada
 
Europe
 
Asia
 
Total
Balance as of March 31, 2014
 
$
38,767

 
$
43,106

 
$
23,615

 
$
8,624

 
$
114,112

Goodwill acquired
 

 

 
1,630

 

 
1,630

Foreign currency translation impact
 

 
(5,483
)
 
(5,027
)
 

 
(10,510
)
Balance as of March 31, 2015
 
$
38,767

 
$
37,623

 
$
20,218

 
$
8,624

 
105,232

Goodwill acquired
 
10,204

 
7,992

 

 

 
18,196

Goodwill impaired
 

 

 
(1,240
)
 

 
(1,240
)
Foreign currency translation impact
 

 
(1,127
)
 
449

 

 
(678
)
Balance as of March 31, 2016
 
$
48,971

 
$
44,488

 
$
19,427

 
$
8,624

 
$
121,510



The Sumac transaction was structured as an asset purchase, and we expect that a portion of the $7,992 in goodwill associated with that transaction will be deductible for tax purposes in Canada. All other goodwill at March 31, 2016 is not deductible for tax purposes. Goodwill allocated to our segment in Asia is denominated in U.S. currency and therefore is not affected by foreign currency translation impact.
Intangible assets from the CHS Transactions at March 31, 2016 and March 31, 2015 consisted of the following:
 
 
Gross Carrying Amount at March 31, 2016
 
Accumulated Amortization
 
Net Carrying Amount at March 31, 2016
 
Gross Carrying Amount at March 31, 2015
 
Accumulated Amortization
 
Net Carrying Amount at March 31, 2015
Trademarks
 
$
43,041

 
$

 
$
43,041

 
$
43,034

 
$

 
$
43,034

Developed technology
 
9,864

 
2,957

 
6,907

 
9,862

 
2,469

 
7,393

Customer relationships
 
92,388

 
53,545

 
38,843

 
92,581

 
44,195

 
48,386

Certifications
 
449

 

 
449

 
449

 

 
449

Other
 
1,630

 
1,572

 
58

 
1,630

 
1,317

 
313

Total
 
$
147,372

 
$
58,074

 
$
89,298

 
$
147,556

 
$
47,981

 
$
99,575



Trademarks and certifications have indefinite lives. Developed technology, customer relationships and other intangible assets have estimated lives of 20 years, 10 years and 6 years, respectively. The weighted average useful life for the group is 10 years. Portions of intangible assets are valued in foreign currencies; accordingly changes in indefinite life intangible assets at March 31, 2016 and 2015 were the result of foreign currency translation adjustments.

The Company recorded amortization expense of $12,754, $10,775, and $11,090 in fiscal 2016, fiscal 2015 and fiscal 2014, respectively for intangible assets. Annual amortization of intangible assets for the next five years and thereafter will approximate the following:
2017
 
$
12,387

2018
 
12,230

2019
 
12,024

2020
 
11,282

2021
 
2,860

Thereafter
 
9,725

Total
 
$
60,508



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 is performed during the fourth quarter of our fiscal year.
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 year ended March 31, 2016, revenue from our organic Canadian operations (excluding our Sumac acquisition) has decreased by approximately 54% as compared to the year ended March 31, 2015.
    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 March 31, 2016 is $36,694 and the net intangible assets are $25,941. Beginning in the second quarter of fiscal 2016, we began to perform quarterly goodwill impairment assessments of our organic Canadian reporting unit utilizing the income approach, based on discounted future cash flows, which are derived from internal forecasts and economic expectations, and the market approach, based on market multiples of guideline public companies. Based on the goodwill impairment assessments, the estimated fair value of the organic Canadian reporting unit exceeded the carrying value. As such, there was no impairment of goodwill or intangible assets as of the respective reporting periods. The most significant inputs in the Company's goodwill impairment test are the projected financial information, the weighted average cost of capital and market multiples for similar transactions. If the overall economic conditions or energy market in Canada or factors specific to the Company deteriorate further, it could negatively impact the Company's future goodwill impairment tests. We will continue to monitor our organic Canadian reporting unit's goodwill and intangible asset valuations and test for potential impairments until the overall market conditions in such region improve.