Quarterly report pursuant to Section 13 or 15(d)

Goodwill

v3.5.0.2
Goodwill
3 Months Ended
Jun. 30, 2016
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangible Assets
Acquisitions, 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 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 $13,422 in goodwill associated with the IPI acquisition.
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
8,756
     Goodwill
13,422
Total assets
28,224

Liabilities assumed:

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

     Noncurrent deferred tax liability
3,152
Total liabilities
6,474

Total consideration
$
21,750



The fair value of accounts receivable represents IPI's gross outstanding receivables as of the acquisition date, all of which were fully collected.

Our identifiable intangible assets at June 30, 2016 and March 31, 2016 that were related to the IPI transaction consisted of the following:
 
Amortization period
 
Gross Carrying Amount at June 30, 2016
 
Accumulated Amortization
 
Net Carrying Amount at June 30, 2016
 
Gross Carrying Amount March 31, 2016
 
Accumulated Amortization
 
Net Carrying Amount at March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
8 years
 
$
5,692

 
$
652

 
$
5,040

 
$
10,720

 
$
715

 
$
10,005

Trademark
8 years
 
1,820

 
209

 
1,611

 
1,820

 
152

 
1,668

Non-compete agreement
3 years
 
807

 
246

 
561

 
$
807

 
$
179

 
$
628

Total
 
 
$
8,319

 
$
1,107

 
$
7,212

 
$
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 the three months ended June 30, 2016, 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

 
$
5,692

Goodwill
10,204

 
13,422

Noncurrent deferred tax liability
4,962

 
3,152



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 $330 during the three months ended June 30, 2016.

At June 30, 2016, 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 the three months ended June 30, 2016, 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.

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 all of which were fully collected.

Our identifiable intangible assets at June 30, 2016 and March 31, 2016 that were related to the Sumac transaction consisted of the following:
 
Amortization period
 
Gross Carrying Amount at June 30, 2016
 
Accumulated Amortization
 
Net Carrying Amount at June 30, 2016
 
Gross Carrying Amount March 31, 2016
 
Accumulated Amortization
 
Net Carrying Amount at March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
4 years
 
2,626

 
821

 
1,805

 
2,612

 
653

 
1,959

Non-compete agreement
2 years
 
195

 
121

 
74

 
194

 
97

 
97

Total
 
 
$
2,821

 
$
942

 
$
1,879

 
$
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 June 30, 2016, approximately $1,103 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.
Our total other intangible assets consisted of the following:
 
 
Gross Carrying Amount at June 30, 2016
 
Accumulated Amortization
 
Net Carrying Amount at June 30, 2016
 
Gross Carrying Amount March 31, 2016
 
Accumulated Amortization
 
Net Carrying Amount at March 31, 2016
Trademarks
 
$
45,160

 
$
305

 
$
44,855

 
$
45,234

 
$
237

 
$
44,997

Developed technology
 
9,933

 
3,111

 
6,822

 
9,950

 
2,988

 
6,962

Customer relationships
 
100,634

 
57,341

 
43,293

 
105,720

 
54,913

 
50,807

Certification
 
448

 

 
448

 
449

 

 
449

Other
 
2,632

 
1,998

 
634

 
2,631

 
1,848

 
783

Total
 
$
158,807

 
$
62,755

 
$
96,052

 
$
163,984

 
$
59,986

 
$
103,998



Goodwill
The carrying amount of goodwill by operating segment as of June 30, 2016 is as follows:
 
United States
 
Canada
 
Europe
 
Asia
 
Total
Balance as of March 31, 2016
$
48,971

 
$
44,488

 
$
19,427

 
$
8,624

 
$
121,510

Adjustments to purchase price allocation
3,218

 

 

 

 
3,218

Foreign currency translation impact

 
241

 
(356
)
 

 
(115
)
Balance as of June 30, 2016
$
52,189

 
$
44,729

 
$
19,071

 
$
8,624

 
$
124,613


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, 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. The most significant inputs in the Company's goodwill impairment tests are projected financial information, the weighted average cost of capital and market multiples for similar transactions. Our annual impairment test is performed during the fourth quarter of our fiscal year. The Sumac transaction was structured as an asset purchase and we expect that the $7,836 in goodwill associated with that transaction will be partially deductible for tax purposes in Canada. All other goodwill at June 30, 2016 is not deductible for tax purposes.

During the year ended March 31, 2016, revenue from our organic Canadian operations (excluding our Sumac acquisition) decreased by approximately 54% as compared to the year ended March 31, 2015. During the three months ended June 30, 2016, we experienced a further revenue decline of 19% as compared to the three months ended June 30, 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 June 30, 2016 is $36,892 and the net intangible assets are $25,371. As of June 30, 2016, we determined it was more likely than not that there is no impairment of goodwill or other intangible assets. We will continue to monitor our Canadian reporting unit's goodwill and other intangible asset valuations and test for potential impairments until the overall market conditions in such region improve. Changes in estimates and assumptions used to determine whether impairment exists or future declines in actual and forecasted operating results and/or market conditions in Canada, especially in energy markets, could indicate a need to reevaluate the fair value of our Canadian reporting unit and may ultimately result in an impairment to goodwill and/or indefinite-lived intangible assets of our Canadian reporting unit in future periods.