Thermon(THR) - 2024 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, detailing the company's financial position, results of operations, and cash flows for the periods ended September 30, 2023 Condensed Consolidated Balance Sheets This section provides a summary of the company's financial position, detailing assets, liabilities, and equity as of September 30, 2023, and March 31, 2023 Balance Sheet Summary (in thousands) | Balance Sheet Items | September 30, 2023 | March 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $269,879 | $250,942 | | Total Assets | $663,723 | $649,629 | | Total Current Liabilities | $117,928 | $110,072 | | Total Liabilities | $221,417 | $230,641 | | Total Equity | $442,306 | $418,988 | Condensed Consolidated Statements of Operations This section outlines the company's financial performance, including sales, gross profit, and net income for the three and six months ended September 30, 2023, and 2022 Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Sales | $123,659 | $100,557 | $230,548 | $195,999 | | Gross Profit | $54,458 | $45,926 | $101,767 | $83,151 | | Income from Operations | $21,684 | $16,038 | $37,098 | $27,252 | | Net Income | $14,730 | $10,984 | $25,668 | $17,540 | | Diluted EPS | $0.43 | $0.33 | $0.75 | $0.52 | Condensed Consolidated Statements of Cash Flows This section details the company's cash inflows and outflows from operating, investing, and financing activities for the six months ended September 30, 2023, and 2022 Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $4,260 | $12,531 | | Net cash used in investing activities | $(5,574) | $(38,810) | | Net cash provided by/(used in) financing activities | $(4,596) | $17,943 | Notes to Condensed Consolidated Financial Statements This section provides additional details and explanations regarding significant accounting policies, acquisitions, debt, and segment information impacting the financial statements - On May 31, 2022, the company acquired 100% of Powerblanket for an initial purchase price of $35.0 million, financed through the Revolving Credit Facility and cash on hand. The acquisition is integrated into the US-LAM reportable segment[26][27] - Due to the Russo-Ukrainian war, the company authorized a withdrawal from its Russian operations on January 31, 2023. Charges related to this 'Russia Exit' totaled $304 thousand for the three months and $885 thousand for the six months ended September 30, 2023[41][42] - As of September 30, 2023, the company had $82.8 million in long-term debt (net) and $27.5 million in outstanding borrowings under its Revolving Credit Facility, with $70.1 million of available borrowing capacity[53][66] - For the six months ended September 30, 2023, total revenue was $230.5 million, with the US-LAM segment contributing $117.3 million and the Canada segment contributing $71.5 million[73][80] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion analyzes the company's financial performance, highlighting strong revenue growth, improved gross profit margins, and solid liquidity, driven by strategic initiatives and robust demand across segments Business Overview and Key Drivers This section provides an overview of the company's industrial process heating solutions business, its global market presence, and key factors influencing its revenue and backlog - The company is a global provider of industrial process heating solutions, serving key end markets like chemical, oil & gas, and power generation. Approximately 52% of revenues in YTD 2024 were generated outside the United States[89] - Backlog increased to $166.9 million at September 30, 2023, from $163.3 million at March 31, 2023, providing some visibility into future revenue[92] Revenue Mix as a Percentage of Total Revenue | Revenue Type | Three Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Point in time | 59% | 60% | | Over time | 41% | 40% | Results of Operations - Three Months Ended September 30, 2023 This section analyzes the company's financial performance for the three months ended September 30, 2023, highlighting sales, gross profit, and net income trends Quarterly Performance Summary (in thousands) | Metric | Q2 FY2024 | Q2 FY2023 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Sales | $123,659 | $100,557 | $23,102 | 23% | | Gross Profit | $54,458 | $45,926 | $8,532 | 19% | | Income from Operations | $21,684 | $16,038 | $5,646 | 35% | | Net Income | $14,730 | $10,984 | $3,746 | 34% | - Revenue growth was driven by all segments, particularly US-LAM (up 34%) and EMEA (up 40%), due to strong demand and increased project activity[108] - Gross margin decreased to 44.0% from 45.7% due to a revenue mix shift towards projects from higher-margin material sales[107][110] Results of Operations - Six Months Ended September 30, 2023 This section analyzes the company's financial performance for the six months ended September 30, 2023, focusing on sales, gross profit, and net income trends Six-Month Performance Summary (in thousands) | Metric | YTD 2024 | YTD 2023 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Sales | $230,548 | $195,999 | $34,549 | 18% | | Gross Profit | $101,767 | $83,151 | $18,616 | 22% | | Income from Operations | $37,098 | $27,252 | $9,846 | 36% | | Net Income | $25,668 | $17,540 | $8,128 | 46% | - Revenue increased across all segments, led by US-LAM (up 26%), due to strong demand for projects[120] - Gross margin improved by 170 basis points to 44.1%, enhanced by customer price increases and operational efficiencies, despite a mix shift towards lower-margin project revenue[119][121] Liquidity and Capital Resources This section assesses the company's liquidity position, including cash balances, available credit, and cash flow trends from operating, investing, and financing activities - As of September 30, 2023, the company had $30.5 million in cash and cash equivalents and $70.1 million available under its revolving credit facility. 82% of cash was held outside the U.S.[132] Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Operating activities | $4,260 | $12,531 | | Investing activities | $(5,574) | $(38,810) | | Financing activities | $(4,596) | $17,943 | - The decrease in operating cash flow was primarily due to a $15 million investment in working capital, partially offset by higher net income. The decrease in investing cash flow was due to the Powerblanket acquisition in the prior year period[138][139] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, primarily from fluctuations in foreign exchange rates, interest rates, and commodity prices, with a significant portion of revenue generated outside the U.S. - A 10% appreciation of the U.S. dollar would decrease YTD 2024 net income by $0.8 million relative to the Canadian Dollar and $0.1 million relative to the Euro[151] - The company uses foreign currency forward contracts to mitigate risk, with $6.0 million in notional contracts outstanding as of September 30, 2023[153] - The company has variable-rate debt. A 1% change in interest rates would result in a $1.1 million change in annual interest expense based on outstanding borrowings at September 30, 2023[155] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that as of the end of the quarter, disclosure controls and procedures were effective to provide reasonable assurance that required information is properly recorded, processed, and reported[157] - No changes in internal control over financial reporting occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[158] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is involved in a class action lawsuit in Quebec, Canada, regarding heating elements, with an agreement in principle reached that is not expected to materially impact its financial position - The company reached an agreement in principle to resolve a class action lawsuit in Quebec related to certain heating elements. The settlement amount is not expected to be material[68][69][160] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended March 31, 2023, were reported - No material changes from the risk factors disclosed in the Annual Report on Form 10-K for the fiscal year ended March 31, 2023, were reported[161] Other Items (2-6) This section confirms no unregistered sales of equity securities, no defaults on senior securities, no mine safety disclosures, and no Rule 10b5-1 trading plan changes by directors or executive officers during the quarter - During the three months ended September 30, 2023, there were no unregistered sales of equity securities, no defaults on senior securities, and no adoption or termination of Rule 10b5-1 trading plans by directors or executive officers[162][163][165]