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

Annual report pursuant to Section 13 and 15(d)

Acquisition, Goodwill and Other Intangible Assets

Acquisition, Goodwill and Other Intangible Assets

12 Months Ended

Mar. 31, 2017

Goodwill and Intangible Assets Disclosure [Abstract]

Acquisition, 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 fiscal 2017 and fiscal 2016, IPI contributed $12,896 and $8,863 of revenue, respectively, and generated a pre-tax income (loss) of $779 and $(353), respectively.



Consideration to or on behalf of sellers at close	$	21,750
Fair value of total consideration transferred	$	21,750

The following table summarizes the 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	9,026
Goodwill	13,249
Total assets	28,321
Liabilities assumed:
Current liabilities	2,203
Uncertain tax position liability	1,119
Deferred tax liability	3,249
Total liabilities	6,571
Total consideration	$	21,750

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 identifiable intangible assets at March 31, 2017, and March 31, 2016 that were related to the IPI transaction consisted of the following:



	Amortization period	Gross Carrying Amount at March 31, 2017		Accumulated Amortization		Net Carrying Amount at March 31, 2017		Gross Carrying Amount at March 31, 2016		Accumulated Amortization		Net Carrying Amount at March 31, 2016
Customer relationships	8 years	5,962		1,242		4,720		10,720		715		10,005
Trademark	8 years	1,820		379		1,441		1,820		152		1,668
Non-compete agreement	3 years	807		448		359		807		179		628
Total		$	8,589	$	2,069	$	6,520	$	13,347	$	1,046	12,301

The weighted average useful life of acquired finite lived intangible assets related to the IPI transaction is 7.2 years.

During fiscal 2017, we finalized our provisional purchase accounting for the IPI transaction. The table below summarizes our provisional estimates of the fair value of assets and liabilities assumed as well as the final fair value of assets and liabilities assumed:



	Provisional Fair Value		Final Fair Value
Customer relationships	$	10,720	$	5,962
Goodwill	10,204		13,249
Noncurrent deferred tax liability	4,962		3,249

We determined the useful lives of our customer relationships were 8 years, where we originally estimated the useful life to be 10 years. As a result of the change in the estimated fair value and useful life of our customer relationships, we recorded a cumulative reduction of amortization of intangible asset expense of $299 during fiscal 2017.

At March 31, 2017, approximately $4,005 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 matured 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. During fiscal 2017, we paid Sumac's principals $5,805 to satisfy all of the Company's obligations 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 fiscal 2017 and fiscal 2016, Sumac contributed $6,805 and $11,710 of revenue, respectively and contributed pre-tax income of $1,892 and $3,546, respectively.



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

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, 2017 and 2016 that were related to the Sumac transaction consisted of the following:



	Amortization period	Gross Carrying Amount at March 31, 2017		Accumulated Amortization		Net Carrying Amount at March 31, 2017		Gross Carrying Amount at March 31, 2016		Accumulated Amortization		Net Carrying Amount at March 31, 2016
Customer relationships	4 years	2,551		1,275		1,276		2,612		653		1,959
Non-compete agreement	2 years	189		189		—		194		97		97
Total		$	2,740	$	1,464	$	1,276	$	2,806	$	750	$	2,056

The weighted average useful life of acquired finite lived intangible assets related to Sumac transaction is 3.6 years.

At March 31, 2017, approximately $536 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 $1,713 for the year ended March 31, 2016. In fiscal 2017, there were no impairments to Unitemp intangible assets.



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

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, 2017, and March 31, 2016 were as follows:



	Amortization period	Gross Carrying Amount at March 31, 2017		Accumulated Amortization		Net Carrying Amount at March 31, 2017		Gross Carrying Amount at March 31, 2016		Accumulated Amortization		Net Carrying Amount at March 31, 2016
Trademarks	8 years	$	419	$	142	$	277	$	373	85		$	288
Developed Technology	3 years	96		67		29		86		31		55
Total		$	515	$	209	$	306	$	459	$	116	$	343

The weighted average useful life of the remaining finite lived intangible assets related to Unitemp transaction is 7.1 years.

For fiscal 2017 and 2016, Unitemp contributed $3,916 and $5,456 of revenue, respectively, and $672 and $2,221 of pre-tax losses, respectively.

The carrying amount of goodwill for all reporting segments as of March 31, 2017, is as follows:



	United States		Canada			Europe			Asia		Total
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 impairment	—		—			(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
Goodwill acquired	—		—			—			—		—
Goodwill impaired	—		—			—			—		—
Purchase price adjustment	3,045		—			—			—		3,045
Foreign currency translation impact	—		(1,044		)	(990		)	—		(2,034		)
Balance as of March 31, 2017	$	52,016	$	43,444		$	18,437		$	8,624	$	122,521

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, 2017 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.

Our total intangible assets at March 31, 2017, and 2016 consisted of the following (including IPI, Sumac, and Unitemp):



	Gross Carrying Amount at March 31, 2017		Accumulated Amortization		Net Carrying Amount at March 31, 2017		Gross Carrying Amount at March 31, 2016		Accumulated Amortization		Net Carrying Amount at March 31, 2016
Trademarks	$	44,563	$	521	$	44,042	$	45,234	$	237	$	44,997
Developed technology	9,796		3,454		6,342		9,950		2,988		6,962
Customer relationships	99,676		64,682		34,994		105,720		54,913		50,807
Certifications	442		—		442		449		—		449
Other	2,626		2,268		358		2,631		1,848		783
Total	$	157,103	$	70,925	$	86,178	$	163,984	$	59,986	$	103,998

Trademarks and certifications have indefinite lives with the exception of IPI and Unitemp trademarks, which have gross carrying amounts of $1,820 and $419, respectively, that are subject to amortization. The useful life of the trademarks amortized is estimated at 8 years. 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, 2017 and 2016 were the result of foreign currency translation adjustments.

The Company recorded amortization expense of $11,772, $12,112, and $10,775 in fiscal 2017, fiscal 2016 and fiscal 2015, respectively for intangible assets. Annual amortization of intangible assets for the next five years and thereafter will approximate the following:



2018	$	11,765
2019	11,556
2020	10,829
2021	2,507
2022	1,499
Thereafter	5,254
Total	$	43,410

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, 2017, revenue from our Canadian operations has decreased by approximately 27% as compared to the year ended March 31, 2016.

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 units. The goodwill balance in the Canadian reporting unit, and Sumac at March 31, 2017 was $35,833 and $7,611, respectively and the net intangible assets were $22,571 and $1,276, respectively. Beginning in the second quarter of fiscal 2016, we began to perform quarterly goodwill impairment assessments of our Canadian reporting units 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 assessment, the estimated fair value of the Canadian reporting units 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 Canadian reporting unit's goodwill and intangible asset valuations and test for potential impairments until the overall market conditions in such region improve.

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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