Thermon(THR) - 2020 Q4 - Annual Report

Part I Item 1. Business Thermon provides global industrial process heating solutions, with recurring MRO/UE revenue and strategic acquisitions expanding its market footprint - The company operates in the estimated $4.0 billion industrial process heating market, serving major end markets like Oil & Gas, Chemical Processing, Power Generation, and Transportation[34][35] - Recurring revenue from Maintenance, Repair, and Operations or Upgrades/Expansions (MRO/UE) is a key driver, representing about 60% of fiscal 2020 revenue, excluding the THS acquisition[24] - Strategic acquisitions have expanded the company's product portfolio. The October 2017 acquisition of THS added environmental and process heating products, while the April 2015 acquisition of Sumac added temporary electrical power solutions[25][26][33] Business Overview - Thermon provides comprehensive industrial process heating solutions, including products (heating units, cables, power solutions), services (engineering, installation, maintenance), and software (design, control systems)[22] - The company serves a diverse customer base in oil & gas, chemical processing, power generation, transportation, and mining through a global network across more than 30 countries with ten manufacturing facilities on three continents[22] Company History - Founded in 1954, the company went public in May 2011 (IPO) and is listed on the NYSE under the ticker "THR"[29][31] - Acquired a 75% interest in Sumac in April 2015 and the remaining 25% in fiscal 2020, holding 100% of the equity interest[32] - Acquired 100% of CCI Thermal Technologies Inc. (now THS) in October 2017 for approximately $204.6 million USD, expanding into advanced heating and filtration solutions[33] Industry Overview Industrial Process Heating Market Size by End Market (2019 Estimate) | End Market | Estimated Revenue ($) | Market Share (%) | | :--- | :--- | :--- | | Total Market | ~$4.0 billion | 100% | | Oil & Gas | ~$1.5 billion | ~38% | | Chemical Processing | ~$560 million | ~14% | | Power Generation | ~$280 million | ~7% | | Transportation | ~$240 million | ~6% | - The global industrial process heating market is highly fragmented. Thermon believes it is one of the few providers with a global footprint and a comprehensive suite of products and services, which is preferred by large multinational customers[34] Segments - The company operates in four geographic reportable segments: United States and Latin America (US-LAM), Canada, Europe, Middle East and Africa (EMEA), and Asia-Pacific (APAC)[37] - Recent acquisitions have been integrated into these segments: THS operations are reported through US-LAM and Canada, Unitemp in EMEA, IPI in US-LAM, and Sumac (TPS) is aggregated in the Canada segment[37] Products, Services and Software - Thermon offers a comprehensive range of products including electric and steam heat tracing cables, tubing bundles, control systems, and various process and environmental heaters[38] - The company provides extensive project services, including engineering, design, project management, and turnkey construction installation, often automated by custom software technology[51][52][53] - Through acquisitions, the product line has expanded to include temporary power solutions (Thermon Power Solutions) and advanced heating/filtration systems (Thermon Heating Systems)[39][54] Manufacturing and Operations - The company operates ten manufacturing facilities across three continents, with its principal facility for flexible heating cables located in San Marcos, Texas[57] - In 2017, a new manufacturing facility was completed in Russia to better serve the region with local production of key products[64] - Critical raw materials include polymers, graphite, copper, and stainless steel. The company uses multiple suppliers for most materials to mitigate supply risk[66] Competition - The industrial process heating market is fragmented. Thermon's most significant competitor in the industrial electric heat tracing market is nVent Electric plc (NYSE: NVT)[74] - In the broader industrial process heating market, competitors vary by end-market but generally include nVent Electric, NIBE, Watlow, and Chromalox[74] Item 1A. Risk Factors The company faces significant risks from macroeconomic factors, industry cyclicality, operational disruptions, global regulatory complexities, and stock market volatility - The COVID-19 pandemic poses a significant risk, potentially causing reduced demand, operational disruptions, and a slowdown in customer capital spending[84][86] - A significant portion of revenue is tied to the cyclical oil and gas markets; a sustained downturn in energy prices or demand could adversely affect business, as seen with recent price volatility[88][90] - The company has substantial indebtedness ($176.0 million at March 31, 2020), and debt agreements impose operating and financial restrictions that could impair financial condition[97] - Global operations expose the company to risks including political/economic instability, changes in trade relations and tariffs, and complex foreign laws, with approximately 59% of fiscal 2020 revenues generated outside the U.S[91][92] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[153] Item 2. Properties The company's headquarters are in Austin, Texas, with principal manufacturing and warehousing operations in San Marcos, Texas, and numerous other global facilities supporting international business - The company's headquarters and principal executive offices are located in Austin, Texas[155] - Principal manufacturing and warehousing operations are located in San Marcos, Texas. The company also has facilities in Canada, the Netherlands, France, United Kingdom, Germany, Russia, Mexico, China, Korea, Japan, India, Australia, Malaysia, Bahrain and South Africa[156] Item 3. Legal Proceedings The company is involved in various legal proceedings, including a class action in Quebec, but does not anticipate a significant adverse financial impact - The company is involved in various legal proceedings but does not believe the outcome will have a significant adverse effect on its financial position or long-term results[426][427] - As of March 31, 2020, the company has accrued $3.9 million for estimated additional costs related to the operational execution of projects[427] - In January 2020, a class action application was filed in Quebec, Canada related to certain heating elements manufactured by THS. The company believes the claim is without merit and is unable to estimate a possible loss at this time[428] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[158] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Thermon's common stock trades on the NYSE, with no cash dividends paid since 2010 due to a focus on growth and credit facility restrictions - The company's common stock is traded on the New York Stock Exchange (NYSE) under the symbol "THR"[161] - The company has not declared or paid any cash dividends since April 30, 2010, and does not currently intend to, as it plans to retain earnings for business growth. Its credit facility also limits the ability to pay dividends[164] Item 6. Selected Financial Data This section provides a five-year financial summary, showing fiscal 2020 sales of $383.5 million and net income of $11.9 million Selected Financial Data (Fiscal Years 2016-2020) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales | $383,486 | $412,642 | $308,609 | $264,130 | $281,928 | | Gross Profit | $161,638 | $175,940 | $143,811 | $111,931 | $131,315 | | Income from Operations | $32,663 | $48,509 | $32,738 | $22,444 | $36,761 | | Net Income | $11,936 | $23,169 | $13,219 | $14,984 | $23,650 | | Diluted EPS | $0.36 | $0.69 | $0.36 | $0.45 | $0.71 | | Total Assets | $620,905 | $655,762 | $662,477 | $454,080 | $468,677 | | Total Debt (Principal) | $176,000 | $206,500 | $225,000 | $81,000 | $94,500 | | Backlog | $105,445 | $119,956 | $159,624 | $106,880 | $81,242 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses fiscal 2020 results, noting a 7% revenue decrease to $383.5 million due to project demand and market weakness, while liquidity remains strong with $70.7 million cash from operations - Revenue for fiscal 2020 decreased by 7% to $383.5 million from $412.6 million in fiscal 2019, attributed to lower Greenfield project demand and weakening European markets, with a further decline in Q4 due to COVID-19 and falling oil prices[197][199] - The sales mix (excluding THS) shifted to 40% Greenfield and 60% MRO/UE in fiscal 2020, compared to 49% Greenfield and 51% MRO/UE in fiscal 2019. Greenfield revenue is an indicator of new contracts and future MRO/UE potential[187][188] - In response to COVID-19 uncertainty, the company took precautionary measures including limiting spending, drawing down $30.0 million on its credit facility (post year-end), reducing payroll expenses, and cutting the FY2021 capital expenditure budget[193] - Net cash from operating activities increased significantly to $70.7 million in fiscal 2020 from $23.2 million in fiscal 2019, mainly due to improved working capital management[226] Results of Operations Fiscal 2020 vs. Fiscal 2019 Performance | Metric | Fiscal 2020 ($M) | Fiscal 2019 ($M) | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $383.5 | $412.6 | (7.0%) | | Gross Profit | $161.6 | $175.9 | (8.0%) | | Gross Margin | 42.1% | 42.6% | (0.5 pts) | | Net Income | $11.9 | $22.8 | (47.5%) | - The decrease in gross profit was primarily due to lower revenue and a $4.7 million one-time charge for operational execution expenses[200] - Marketing, general and administrative costs increased by 3.6% to $106.2 million, attributed to planned increases to support business growth experienced in fiscal 2019[201] Liquidity and Capital Resources - Primary liquidity sources are cash from operations and a $60.0 million revolving credit facility. As of March 31, 2020, the company had $43.2 million in cash and no outstanding borrowings on the revolver[214][216] - Subsequent to year-end, in April 2020, the company drew down $41.4 million on its revolving credit facility as a precautionary measure due to COVID-19 uncertainty[215] - Total outstanding principal on the term loan B facility was $176.0 million as of March 31, 2020. The company made voluntary prepayments of $28.0 million during fiscal 2020[218] Cash Flow Summary (Fiscal Years) | Cash Flow Activity | FY 2020 ($M) | FY 2019 ($M) | | :--- | :--- | :--- | | Net cash provided by operating activities | $70.7 | $23.2 | | Net cash used in investing activities | ($10.0) | ($10.1) | | Net cash used in financing activities | ($46.5) | ($14.1) | Critical Accounting Policies and Estimates - Key estimates include revenue recognition (especially for long-term contracts), allowances for doubtful accounts, inventory reserves, and valuation of goodwill and other intangible assets[239] - Goodwill is tested for impairment annually or more frequently if indicators are present. The company performed its annual test in Q4 fiscal 2020 and determined no impairment existed, despite considering the business decline from COVID-19 and lower oil prices as an indicator[248][400] - The company adopted new lease accounting standards (ASC 842) on April 1, 2019, resulting in the recognition of right-of-use assets and lease liabilities on the balance sheet[241] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations, particularly with 59% of revenue from outside the U.S., interest rate changes on its $176.0 million variable-rate debt, and commodity price volatility - The company is exposed to foreign currency risk as 59% of fiscal 2020 revenue was generated outside the U.S. The largest exposures are the Canadian Dollar and the Euro against the U.S. Dollar[270][272] - A hypothetical 10% appreciation of the U.S. dollar relative to the Canadian Dollar would decrease net income by $1.2 million for fiscal 2020[272] - Interest rate risk stems from the variable-rate term loan B facility, which had $176.0 million outstanding at March 31, 2020. A one percent change in the interest rate would impact annual interest expense by approximately $1.7 million[279] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for fiscal years 2018-2020, with KPMG LLP issuing an unqualified opinion on both financial statements and internal controls - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of the company's internal control over financial reporting as of March 31, 2020[286][298] - The company adopted the new lease accounting standard (ASC 842) on April 1, 2019, using the modified retrospective method. This was identified as a critical audit matter due to the judgment required in its application[288][292] Notes to Consolidated Financial Statements - Segment reporting is based on four geographic regions: US-LAM, Canada, EMEA, and APAC. For fiscal 2020, US-LAM and Canada were the largest segments by revenue, contributing $155.5 million and $128.4 million, respectively[319][463] - The company adopted the new revenue recognition standard (ASC 606) on April 1, 2018. For fiscal 2020, approximately 59.6% of revenue was recognized at a point in time, and 40.4% was recognized over time[330][378][379] - As of March 31, 2020, goodwill was $198.0 million and net intangible assets were $104.5 million. No impairments were recorded in fiscal 2020, 2019, or 2018[333][400][401] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[469] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of March 31, 2020, having remediated a prior material weakness - Management concluded that disclosure controls and procedures were effective as of March 31, 2020[470] - Management assessed internal control over financial reporting as effective as of March 31, 2020. This assessment was based on the COSO framework[472] - The company successfully remediated a material weakness in internal control over financial reporting that existed at March 31, 2019[474] Item 9B. Other Information The company reports no other information for this item - None[475] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement, including the company's code of conduct - Information regarding directors, executive officers, and the audit committee is incorporated by reference from the 2020 Definitive Proxy Statement[478][480] - The company has adopted a written code of business conduct and ethics that applies to all employees, officers, and directors, which is available on its website[481] Item 11. Executive Compensation Information on executive and director compensation is incorporated by reference from the 2020 Definitive Proxy Statement - All information regarding executive compensation is incorporated by reference from the 2020 Definitive Proxy Statement[482] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2020 Proxy Statement, with 1,393,936 securities available for future issuance under equity plans - Information on security ownership is incorporated by reference from the 2020 Definitive Proxy Statement[485] Equity Compensation Plan Information as of March 31, 2020 | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price ($) | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 550,445 | N/A | 1,393,936 | | Not approved by security holders | 60,002 | $5.68 | — | | Total | 610,447 | N/A | 1,393,936 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2020 Definitive Proxy Statement - All information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2020 Definitive Proxy Statement[490] Item 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2020 Definitive Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the 2020 Definitive Proxy Statement[492] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the annual report, including key agreements and certifications - This section lists all exhibits filed with the Form 10-K, including the Credit Agreement, equity incentive plans, and CEO/CFO certifications[495][497] Item 16. Form 10-K Summary The company did not provide a Form 10-K summary - None[500]