Thermon Group Holdings, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Goodwill

Goodwill

6 Months Ended

Sep. 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. 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 $13,249 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	9,026
Goodwill	13,249
Total assets	28,321
Liabilities assumed:
Current liabilities	2,203
Uncertain tax position liability	1,119
Noncurrent deferred tax liability	3,249
Total liabilities	6,571
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 September 30, 2016 and March 31, 2016 that were related to the IPI transaction consisted of the following:



	Amortization period	Gross Carrying Amount at September 30, 2016		Accumulated Amortization		Net Carrying Amount at September 30, 2016		Gross Carrying Amount March 31, 2016		Accumulated Amortization		Net Carrying Amount at March 31, 2016

Customer relationships	8 years	$	5,962	$	869	$	5,093	$	10,720	$	715	$	10,005
Trademark	8 years	1,820		265		1,555		1,820		152		1,668
Non-compete agreement	3 years	807		314		493		$	807	$	179	$	628
Total		$	8,589	$	1,448	$	7,141	$	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 six months ended September 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	$	5,962
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 the six months ended September 30, 2016.

At September 30, 2016, approximately $4,006 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 six months ended September 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. At the acquisition date, 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 September 30, 2016 and March 31, 2016 that were related to the Sumac transaction consisted of the following:



	Amortization period	Gross Carrying Amount at September 30, 2016		Accumulated Amortization		Net Carrying Amount at September 30, 2016		Gross Carrying Amount March 31, 2016		Accumulated Amortization		Net Carrying Amount at March 31, 2016

Customer relationships	4 years	2,586		970		1,616		2,612		653		1,959
Non-compete agreement	2 years	192		144		48		194		97		97
Total		$	2,778	$	1,114	$	1,664	$	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 September 30, 2016, approximately $543 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 September 30, 2016		Accumulated Amortization		Net Carrying Amount at September 30, 2016		Gross Carrying Amount March 31, 2016		Accumulated Amortization		Net Carrying Amount at March 31, 2016
Trademarks	$	45,078	$	381	$	44,697	$	45,234	$	237	$	44,997
Developed technology	9,913		3,236		6,677		9,950		2,988		6,962
Customer relationships	100,578		59,884		40,694		105,720		54,913		50,807
Certification	447		—		447		449		—		449
Other	2,629		2,088		541		2,631		1,848		783
Total	$	158,645	$	65,589	$	93,056	$	163,984	$	59,986	$	103,998

Goodwill

The carrying amount of goodwill by operating segment as of September 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	3,045		—			—			—		3,045
Foreign currency translation impact	—		(441		)	(156		)	—		(597		)
Balance as of September 30, 2016	$	52,016	$	44,047		$	19,271		$	8,624	$	123,958

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 $7,717 in goodwill associated with that transaction will be partially deductible for tax purposes in Canada. All other goodwill at September 30, 2016 is not deductible for tax purposes.

During the year ended March 31, 2016, revenue from our Canadian operations (excluding our Sumac acquisition) decreased by approximately 54% as compared to the year ended March 31, 2015. During the six months ended September 30, 2016, we experienced a further revenue decline of 10% as compared to the six months ended September 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 September 30, 2016 is $36,330 and the net intangible assets are $24,285. As of September 30, 2016, we determined it was more likely than not that there is no impairment of goodwill or other intangible assets, based on our prior quantitative tests performed during the year ended March 31, 2016, which concluded the fair value of the reporting unit was in excess of the carrying value. The results of the Canadian reporting unit for the six months ended September 30, 2016 remain consistent with our cash flow forecasts from the prior fiscal year. 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.

- 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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