THERMON GROUP HOLDINGS, INC. Introduction and Special Note Regarding Forward-Looking Statements Management's discussion and analysis of our financial condition and results of operations is provided as a supplement to the unaudited condensed consolidated financial statements and accompanying notes thereto for the three and nine months endedDecember 31, 2021 and 2020 to help provide an understanding of our financial condition, changes in our financial condition and results of our operations. In this quarterly report, we refer to the three-month periods endedDecember 31, 2021 and 2020 as "Interim 2022" and "Interim 2021," respectively, and the nine-month periods endedDecember 31, 2021 and 2020 as "YTD 2022" and "YTD 2021," respectively. The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our unaudited condensed consolidated financial statements and related notes included in Item 1 above. This quarterly report includes forward-looking statements within the meaning of theU.S. federal securities laws in addition to historical information. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding our industry, business strategy, plans, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. When used in this discussion, the words "anticipate," "assume," "believe," "budget," "continue," "contemplate," "could," "should," "estimate," "expect," "intend," "may," "plan," "possible," "potential," "predict," "project," "will," "would," "future," and similar terms and phrases are intended to identify forward-looking statements in this quarterly report. Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are 22 -------------------------------------------------------------------------------- beyond our control, which could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows. These forward-looking statements include, but are not limited to, statements regarding: (i) our plans to strategically pursue emerging growth opportunities, including strategic acquisitions, in diverse regions and across industry sectors; (ii) our plans to secure more new facility (or Greenfield) project bids; (iii) our ability to generate more facility maintenance, repair and operations or upgrades or expansions, or (MRO/UE) revenue, from our existing and future installed base; (iv) our ability to timely deliver backlog; (v) our ability to respond to new market developments and technological advances; (vi) our expectations regarding energy consumption and demand in the future and its impact on our future results of operations; (vii) our plans to develop strategic alliances with major customers and suppliers; (viii) our expectations that our revenues will increase; (ix) our belief in the sufficiency of our cash flows to meet our needs for the next year; (x) our ability to integrate acquired companies; (xi) our ability to successfully achieve synergies from acquisitions; and (xii) our ability to make required debt repayments. Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, (i) the effect of outbreaks of the novel strain of coronavirus (COVID-19); (ii) general economic conditions and cyclicality in the markets we serve; (iii) future growth of energy, chemical processing and power generation capital investments; (iv) our ability to operate successfully in foreign countries; (v) our ability to deliver existing orders within our backlog; (vi) our ability to bid and win new contracts; (vii) the imposition of certain operating and financial restrictions contained in our debt agreements; (viii) tax liabilities and changes to tax policy; (ix) our ability to successfully develop and improve our products and successfully implement new technologies; (x) competition from various other sources providing similar heat tracing and process heating products and services, or alternative technologies, to customers; (xi) our revenue mix; (xii) our ability to grow through strategic acquisitions; (xiii) changes in relevant currency exchange rates; (xiv) impairment of goodwill and other intangible assets; (xv) our ability to attract and retain qualified management and employees, particularly in our overseas markets; (xvi) our ability to protect our trade secrets; (xvii) our ability to protect our intellectual property; (xiii) our ability to protect data and thwart potential cyber-attacks; (xix) a material disruption at any of our manufacturing facilities; (xx) our dependence on subcontractors and third-party suppliers; (xxi) our ability to profit on fixed-price contracts; (xxii) the credit risk associated to our extension of credit to customers; (xxiii) our ability to achieve our operational initiatives; (xxiv) unforeseen difficulties with expansions, relocations, or consolidations of existing facilities; (xxv) potential liability related to our products as well as the delivery of products and services; (xxvi) our ability to comply with foreign anti-corruption laws; (xxvii) export control regulations or sanctions; (xxviii) changes in government administrative policy; (xxix) geopolitical instability inRussia andUkraine and related sanctions by theU.S. government; (xxx) environmental and health and safety laws and regulations as well as environmental liabilities; (xxxi) our ability to remediate the material weakness identified in a previous quarterly period; and (xxxii) climate change and related regulation of greenhouse gases; and (xxxiii) those factors listed under Item 1A, "Risk Factors" included in our Annual Report on Form 10-K/A for the fiscal year endedMarch 31, 2021 filed with theSecurities and Exchange Commission (the "SEC") onMay 27, 2021 and in any subsequent Quarterly Reports on Form 10-Q, Current Reports on Form 8-K or other filings that we have filed or may file with theSEC . Any one of these factors or a combination of these factors could materially affect our future results of operations and could influence whether any forward-looking statements contained or incorporated by reference in this quarterly report ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required to do so under applicable securities laws. Business Overview and Company History We are one of the largest providers of highly engineered industrial process heating solutions for process industries. For over 65 years, we have served a diverse base of thousands of customers around the world in attractive and growing markets, including chemical and petrochemical, oil and gas, power generation, commercial, rail and transit, and other, which we refer to as our "key end markets." We offer a full suite of products (heating units, heating cables, temporary power solutions and tubing bundles), services (engineering, installation and maintenance services) and software (design optimization and wireless and network control systems) required to deliver comprehensive solutions to some of the world's largest and most complex projects. With a legacy of innovation and continued investment in research and development, Thermon has established itself as a technology leader in hazardous or classified areas, and we are committed to developing sustainable solutions for our customers. We serve our customers through a global network of sales and service professionals and distributors in more than 30 countries and through our eight manufacturing facilities on three continents. These global capabilities and longstanding relationships with some of the largest multinational oil and gas, chemical processing, power and engineering, procurement and construction ("EPC") companies in the world have enabled us to diversify our revenue streams and opportunistically access high growth markets worldwide. During YTD 2022 and YTD 2021, approximately 59% and 64%, respectively, of our revenues were 23 -------------------------------------------------------------------------------- generated from outside ofthe United States . We actively pursue both organic and inorganic growth initiatives that serve to advance our corporate strategy. Revenue. Our revenues are derived from providing customers with a full suite of innovative and reliable process heating solutions, including electric and steam heat tracing, tubing bundles, control systems, design optimization, engineering services, installation services and portable power solutions. Additionally, ourThermon Heating Systems ("THS") product line offers a suite of advanced heating and filtration solutions for industrial and hazardous area applications. Historically, our sales are primarily to industrial customers for petroleum and chemical plants, oil and gas production facilities and power generation facilities. Our petroleum customers represent a significant portion of our business. We serve all three major categories of customers in the petroleum industry, including in upstream exploration/production, midstream transportation and downstream refining. Overall, demand for industrial heat tracing solutions falls into two categories: (i) new facility construction, which we refer to as "Greenfield" projects, and (ii) recurring maintenance, repair and operations and facility upgrades or expansions, which we refer to as "MRO/UE." Greenfield construction projects often require comprehensive heat tracing solutions. We believe that Greenfield revenue consists of sales revenues by a customer in excess of$1 million annually (excluding sales to resellers), and typically includes most orders for projects related to facilities that are new or that are built independent of existing facilities. We refer to sales revenues by a customer of less than$1 million annually as MRO/UE revenue, as we believe such revenues are typically derived from MRO/UE. Based on our experience, we believe that$1 million in annual sales is an appropriate threshold for distinguishing between Greenfield revenue and MRO/UE revenue. However, we often sell our products to intermediaries that subcontract our services; accordingly, we have limited visibility into how our products or services may ultimately be used and can provide no assurance that our categorization may accurately reflect the sources of such revenue. Furthermore, our customers do not typically enter into long-term forward maintenance contracts with us. In any given year, certain of our smaller Greenfield projects may generate less than$1 million in annual sales, and certain of our larger plant expansions or upgrades may generate in excess of$1 million in annual sales, though we believe that such exceptions are few in number and insignificant to our overall results of operations. Our THS product line has been excluded from the Greenfield and MRO/UE calculations as substantially all revenue attributed to THS products would be classified as MRO/UE under these definitions. We maintain four reportable segments based on four geographic countries or regions in which we operate: (i)United States andLatin America ("US-LAM"), (ii)Canada , (iii)Europe ,Middle East andAfrica ("EMEA") and (iv)Asia-Pacific ("APAC"). Within our four reportable segments, our core products and services are focused on the following markets: chemical and petrochemical, oil, gas, power generation, commercial, rail and transit, and other, which we refer to as our "key end markets." We offer a full suite of products (heating units, heating cables, temporary power solutions and tubing bundles), services (engineering, installation and maintenance services) and software (design optimization and wireless and network control systems) required to deliver comprehensive solutions to some of the world's largest and most complex projects. We report the results of our THS product line in all four reportable segments, and the results of our TPS product line in the US-LAM andCanada reportable segments. Each of our reportable segments serves a similar class of customers, including engineering, procurement and construction companies, international and regional oil and gas companies, commercial sub-contractors, electrical component distributors and direct sales to existing plant or industrial applications. Profitability within our segments is measured by operating income. Profitability can vary in each of our reportable segments based on the competitive environment within the region, the level of corporate overhead, such as the salaries of our senior executives and the level of research and development and marketing activities in the region, as well as the mix of products and services. For purposes of this note, revenue is attributed to individual countries or regions on the basis of the physical location and jurisdiction of organization of the subsidiary that invoices the material and services. We believe that our pipeline of planned projects, in addition to our backlog of signed purchase orders, provides us with some visibility into our future revenue. Historically, we have experienced few order cancellations, and the cancellations that have occurred in the past have not been material compared to our total contract volume or total backlog. The small number of order cancellations is attributable in part to the fact that a large portion of our solutions are ordered and installed toward the end of Greenfield project construction. Our backlog atDecember 31, 2021 was$145.7 million , as compared to$114.2 million atMarch 31, 2021 . The timing of recognition of revenue out of backlog is not always certain, as it is subject to a variety of factors that may cause delays, many of which are beyond our control (such as customers' delivery schedules and levels of capital and maintenance expenditures). When delays occur, the recognition of revenue associated with the delayed project is likewise deferred. Cost of sales. Our cost of sales primarily includes the costs of raw material items used in the manufacturing of our products, costs of ancillary products that are sourced from external suppliers and construction labor cost. Additional costs of revenue include contract engineering costs directly associated to projects, direct labor costs, shipping and handling costs, and other costs associated with our manufacturing/fabrication operations. The other costs associated with our manufacturing/fabrication operations are primarily indirect production costs, including depreciation, indirect labor costs, warranty-related costs, and the costs of manufacturing support functions such as logistics and quality assurance. Key raw material costs include 24 -------------------------------------------------------------------------------- polymers, copper, stainless steel, insulating material, and other miscellaneous parts related to products manufactured or assembled as part of our heat tracing solutions. Raw material costs have been stable in the past; however, we have begun to experience temporary shortages related to the global supply chain issues driven by the COVID-19 pandemic in certain raw materials as well as an increase in costs of these materials due to use of alternate suppliers, higher freight costs, increased lead times, and expedited shipping. Also, we have seen labor inefficiencies and increased overtime in certain of our facilities due to temporary shortages in raw materials required for production, as well as time and attendance issues and labor shortages in certain of our facilities. We cannot provide any assurance that we will continue to mitigate temporary raw material shortages or be able to pass along such cost increases, including the potential impacts of tariffs or supply chain challenges, to our customers in the future, and if we are unable to do so, our results of operations may be adversely affected. Operating expenses. Our selling, general and administrative expenses are primarily comprised of compensation and related costs for sales, marketing, pre-sales engineering and administrative personnel, plus other sales related expenses as well as other costs related to research and development, insurance, professional fees, the global integrated business information system, and provisions for bad debts. In addition, our deferred compensation expense includes a non-qualified deferred compensation plan for certain highly compensated employees where payroll contributions are made by the employees on a pre-tax basis. The expense/income associated with our deferred compensation plan is titled "Deferred compensation expense/(income)" on our condensed consolidated statements of operations and comprehensive income. Key drivers affecting our results of operations. Our results of operations and financial condition are affected by numerous factors, including those described under the caption "Risk Factors" in our Annual Report on Form 10-K/A for the fiscal year endedMarch 31, 2021 filed with theSEC onMay 27, 2021 and in any subsequent Quarterly Reports on Form 10-Q that we have filed or may file with theSEC , including those described below. These factors include the following: •Timing of Greenfield projects. Our results of operations in recent years have been impacted by the various construction phases of large Greenfield projects. On our large Greenfield projects we are typically designated as the heat tracing provider of choice by the project owner. We then engage with multiple contractors to address incorporating various heat tracing solutions throughout the overall project. Our largest Greenfield projects may generate revenue for several quarters. In the early stages of a Greenfield project, our revenues are typically realized from the provision of engineering services. In the middle stages, or the material requirements phase, we typically experience the greatest demand for our heat tracing cable, at which point our revenues tend to accelerate. Revenues tend to decrease gradually in the final stages of a project and are generally derived from installation services and demand for electrical panels and other miscellaneous electronic components used in the final installation of heat tracing cable, which we frequently outsource from third-party manufacturers. Therefore, we typically provide a mix of products and services during each phase of a Greenfield project, and our margins fluctuate accordingly. •Cyclicality of end-users' markets. Demand for our products and services depends in large part upon the level of capital and maintenance expenditures of our customers and end users, in particular those in the energy, chemical processing and power generation industries, and firms that design and construct facilities for these industries. These customers' expenditures historically have been cyclical in nature and vulnerable to economic downturns. Greenfield projects, and in particular large Greenfield projects (i.e., new facility construction projects generating in excess of$5 million in annual sales), historically have been a substantial source of revenue growth, and Greenfield revenues tend to be more cyclical than MRO/UE revenues. A sustained decrease in capital and maintenance spending or in new facility construction by our customers could have a material adverse effect on the demand for our products and services and our business, financial condition and results of operations. •Acquisition strategy. In recent years, we have been executing on a strategy to grow the Company through the acquisition of businesses that are either in the process heating solutions industry or provide complementary products and solutions for the markets and customers we serve. We actively pursue both organic and inorganic growth initiatives that serve to advance our corporate strategy. •Impact of product mix. Typically, both Greenfield and MRO/UE customers require our products as well as our engineering and construction services. The level of service and construction needs will affect the profit margin for each type of revenue. We tend to experience lower margins from our design optimization, engineering, installation and maintenance services than we do from sales of our heating cable, tubing bundle and control system products. We also tend to experience lower margins from our outsourced products, such as electrical switch gears and transformers, than we do from our manufactured products. Accordingly, our results of operations are impacted by our mix of products and services. 25 --------------------------------------------------------------------------------
We estimate that Greenfield and MRO/UE related revenues have each made the following contribution as a percentage of total revenue in the periods listed:
Three Months Ended December 31 ,* Nine months ended December 31,*
2021 2020 2021 2020
Greenfield 42 % 38 % 36 % 38 %
MRO/UE 58 % 62 % 64 % 62 %
* THS products have been excluded from the table above. Substantially all
revenue attributable to our THS product line would be classified as MRO/UE under
the current definitions.
We believe that our analysis of Greenfield and MRO/UE is an important measure to
explain the trends in our business to investors. Greenfield revenue is an
indicator of both our ability to successfully compete for new contracts as well
as the economic health of the industries we serve. Furthermore, Greenfield
revenue is an indicator of potential MRO/UE revenue in future years. THS has
been excluded from MRO/UE calculations to enhance comparability across periods
as most of revenue attributable to the THS product line would be classified as
MRO/UE.
For MRO/UE orders, the sale of our manufactured products typically represents a
higher proportion of the overall revenues associated with such orders than the
provision of our services. Greenfield projects, on the other hand, require a
higher level of our services than MRO/UE orders and often require us to purchase
materials from third party vendors. Therefore, we typically realize higher
margins from MRO/UE revenues than Greenfield revenues.
•Large and growing installed base. Customers typically use the incumbent heat
tracing provider for MRO/UE projects to avoid complications and compatibility
problems associated with switching providers. As new Greenfield projects are
completed, our installed base continues to grow, and we expect that such
installed base will continue to generate ongoing high margin MRO/UE revenues.
For Interim 2022 and Interim 2021, MRO/UE sales (excluding sales attributable to
our THS product line) comprised approximately 58% and 62% of our consolidated
revenues, respectively. A sustained decline in Greenfield projects could slow
the growth in our installed base and reduce demand for our MRO/UE business and
have a material adverse effect on our business, financial condition and results
of operations.
•Seasonality of MRO/UE revenues. MRO/UE revenues for the legacy heat tracing
business are typically highest during the second and third fiscal quarters, as
most of our customers perform preventative maintenance prior to the winter
season.
Recent Developments
The COVID-19 pandemic and the measures being taken to address and limit the
spread of the virus have adversely affected the economies and financial markets
of many countries, resulting in an economic downturn that negatively impacted,
and may negatively impact in the future, global demand for our products and
services. Although we believe the general economic environment in which we
operate has improved significantly since the onset of the COVID-19 pandemic, we
may experience a decline in the demand of our products and services or
disruptions in raw materials or labor required for manufacturing that could
materially and negatively impact our business, financial condition, results of
operation and overall financial performance in future periods.
The Company continues to invest in our three long-term strategic initiatives:
diversifying our revenues into adjacent markets as the global economy
transitions to a more sustainable energy future, increased investment in the
Eastern Hemisphere as a response to a growing middle class, and offering
technology enabled maintenance solutions that improve our customer's efficiency
and safety. Our efforts to diversify the business's end markets is starting to
show early signs of success through increased customer engagement. Additionally,
we are continuing to receive orders from key customers related to our recently
launched Genesis Network technology, which helps our customers more efficiently
and safely monitor and maintain their heating systems by utilizing our software,
analytics, hardware and process heating maintenance expert services. We are
benefiting from the increasing global demand for our solutions, particularly in
North America . While we are seeing improvements in many key metrics by which we
measure the business, including revenue, we also recognized higher costs in the
nine months ended December 31, 2021 due to higher raw material and labor costs
due to global supply chain challenges and underreported warranty costs
associated with the operational execution of a large project in our US-LAM
segment that completed in a prior year.
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The Company enacted certain cost reduction efforts in fiscal 2021 to counter the
economic impacts of the COVID-19 pandemic. These specific cost reduction efforts
are substantially complete. See Item 1A, "Risk Factors" of our Annual Report on
Form 10-K/A for the fiscal year ended March 31, 2021 filed with the SEC on May
27, 2021 .
We strategically amended our senior secured credit facilities in order to
realize cost savings on interest expense associated with our long-term debt.
Refer to Note 8, "Long-Term Debt" in Item 1 of this quarterly report for more
information.
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Results of Operations (Three-month periods ended
The following table sets forth our unaudited condensed consolidated statements
of operations for the three months ended
Three Months Ended December 31, Increase/(Decrease)
(dollars in thousands)
2021 2020 $ %
Consolidated Statements of Operations Data:
Sales $ 100,613 $ 79,604 $ 21,009 26 %
Cost of sales 59,866 42,644 17,222 40 %
Gross profit 40,747 36,960 3,787 10 %
Operating expenses:
Selling, general and administrative expenses 22,099 20,283 1,816 9 %
Deferred compensation plan expense/(income) 292 599 (307) (51) %
Amortization of intangible assets 2,187 2,135 52 2 %
Restructuring and other charges/(income) - 3,783 (3,783) (100) %
Income/(loss) from operations 16,169 10,160 6,009 59 %
Other income/(expenses):
Interest expense, net (842) (2,433) 1,591 (65) %
Other income/(expense) (627) 874 (1,501) (172) %
Income/(loss) before provision for income taxes 14,700 8,601 6,099 71 %
Income tax expense/(benefit) 3,430 2,426 1,004 41 %
Net income/(loss) $ 11,270 $ 6,175 $ 5,095 83 %
As a percent of sales:
Gross profit 40.5 % 46.4 % -590 bps
Selling, general and administrative expenses 22.0 % 25.5 % -350 bps
Income/(loss) from operations 16.1 % 12.8 % 330 bps
Net income/(loss) 11.2 % 7.8 % 340 bps
Effective tax rate 23.3 % 28.2 % -490 bps
Three Months Ended December 31, 2021 ("Interim 2022") Compared to the Three
Months Ended December 31, 2020 ("Interim 2021")
Revenues. Revenues for Interim 2022 were $100.6 million compared to $79.6
million for Interim 2021. The increase is attributable to especially strong
demand from our customers in the US-LAM and Canada operating segments, with
revenue rising $20.1 million or 68% in US-LAM, and $6.1 million or 24% in
Canada . These increases were partially offset by revenue declines of $4.2
million or 25% in EMEA, and $1.0 million or 12% in APAC. Sales related to our
products ("point-in-time") grew $11.5 million versus Interim 2021, while our
project-related ("over-time") sales grew $9.5 million .
Our sales mix (excluding our THS product line) in Interim 2022 was 42%
Greenfield and 58% MRO/UE, as compared to 38% Greenfield and 62% MRO/UE in
Interim 2021. Greenfield revenue is historically at or near 40%. Additionally,
our revenue was positively impacted by $0.9 million in Interim 2022 when
compared to foreign exchange translation rates that were in effect in Interim
2021, though partially offset elsewhere by somewhat higher cost of sales
resulting from similar foreign exchange impacts.
Gross profit and margin. Gross profit totaled $40.7 million in Interim 2022,
compared to $37.0 million in Interim 2021. Gross margins were 40.5% and 46.4% in
Interim 2022 and Interim 2021, respectively. The lower gross margin in Interim
2022 is primarily attributable to higher project costs, including the impacts of
a large, one-time project in our US-LAM segment
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as well as supply chain challenges, which have driven up prices of raw materials
and labor costs as we source from secondary suppliers, experience increased
freight charges, and face a challenging labor market. Our gross margin was
positively impacted by the Canadian Emergency Wage Subsidy ("CEWS") in Interim
2021, as we recorded a subsidy in the amount of $1.4 million , while our benefit
was $0.2 million in Interim 2022. Please see Note 1, "Basis of Presentation" in
our financial statements, for more information on CEWS.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") were $22.1 million in Interim 2022, compared to
$20.3 million in Interim 2021. The increase in SG&A expenses in Interim 2022 was
driven by greater sales activity, such as relatively higher salaries & benefits,
accrued performance-based short term incentive compensation and sales
commissions. These were partly offset by other net decreases within SG&A. SG&A
as a percent of sales was 22.0% in Interim 2022 versus 25.5% in Interim 2021,
which is attributable to the Company's ongoing cost control efforts.
Deferred compensation plan expense/(income). Deferred compensation plan
expense/(income) was $0.3 million and $0.6 million in Interim 2022 and Interim
2021, respectively. The decrease in Interim 2022 is attributable in part to
market fluctuations in the underlying balances owed to employees as compared to
Interim 2021. To note, this compensation plan expense/(income) is materially
offset in other income/(expense) where the Company records market gains/(losses)
on related investment assets.
Amortization of intangible assets. Amortization of intangible assets was $2.2
million in Interim 2022, compared to $2.1 million in Interim 2021, relatively
flat quarter over quarter.
Restructuring and other charges/(income). Restructuring and other
charges/(income) was zero in Interim 2022, compared to $3.8 million in Interim
2021. The Company enacted certain restructuring activities in Interim 2021 not
present in Interim 2022. Refer to Note 3, "Restructuring and other
charges/(income)" for additional detail.
Interest expense, net. Interest expense, net, was $(0.8) million and $(2.4)
million in Interim 2022 and Interim 2021, respectively. The decrease in interest
expense is primarily due to a lower average interest rate during Interim 2022
than Interim 2021. Additionally, our average outstanding balance of debt during
Interim 2022 was lower at $136.3 million versus $171.9 million during Interim
2021. See Note 8, "Long-Term Debt," for additional information on our long-term
debt.
Other income/(expense). Other income/(expense) was $(0.6) million and $0.9
million in Interim 2022 and Interim 2021, respectively. The increase primarily
relates to increased net losses on foreign exchange transactions of
approximately $1.2 million . The remaining variance is attributable to relatively
less gains on the company's non-qualified deferred compensation plan than in the
prior year due to market fluctuations. These gains are offset by deferred
compensation plan expense as noted above.
Income tax expense/(benefit). Income tax expense was $3.4 million in Interim
2022 on pre-tax income of $14.7 million compared to income tax expense of $2.4
million in Interim 2021 on pre-tax income of $8.6 million . Our effective tax
rate was 23.3% and 28.2% in Interim 2022 and Interim 2021, respectively. During
Interim 2022, the Company recorded a tax benefit of $0.5 million related to
Russian withholding taxes at its Russian subsidiary when an intercompany
dividend was able to be distributed in advance of a statutory withholding rate
increase. The effective tax rate in Interim 2021 was impacted by changes in the
estimate of the full year global annual effective income tax rate.
Our global anticipated annual effective income tax rate before discrete events
was 26.1% and 26.9% for Interim 2022 and Interim 2021, respectively. This
estimate is based on a forecast of earnings in all of our jurisdictions. The
effective income tax rate represents the weighted average of the estimated tax
expense over our global income before tax. (See Note 11, "Income Taxes," for
additional detail).
Net income/(loss). Net income/(loss) was
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Results of Operations (Nine-month periods ended December 31, 2021 and 2020)
The following table sets forth our unaudited condensed consolidated statements
of operations for the nine months ended December 31, 2021 and 2020,
respectively, and indicates the amount of change and percentage change between
periods.
Nine Months Ended
December 31, Increase/(Decrease)
(dollars in thousands)
2021 2020 $ %
Consolidated Statements of Operations Data:
Sales $ 253,090 $ 202,858 $ 50,232 25 %
Cost of sales 154,084 112,848 41,236 37 %
Gross profit 99,006 90,010 8,996 10 %
Operating expenses:
Selling, general and administrative expenses 66,820 66,222 598 1 %
Deferred compensation plan expense/(income) 610 1,380 (770) (56) %
Amortization of intangible assets 6,613 7,265 (652) (9) %
Restructuring and other charges/(income) (414) 8,692 (9,106) (105) %
Income/(loss) from operations 25,377 6,451 18,926
Other income/(expenses):
Interest expense, net (5,029) $ (7,404) 2,375 (32) %
Other income/(expense) (3,517) 2,188 (5,705) (261) %
Income/(loss) before provision for income taxes 16,831 1,235 15,596 1263 %
Income tax expense/(benefit) 5,424 (693) 6,117 (883) %
Net income/(loss) $ 11,407 $ 1,928 $ 9,479 492 %
As a percent of sales:
Gross profit 39.1 % 44.4 % -530 bps
Selling, general and administrative expenses 26.4 % 32.6 % -620 bps
Income/(loss) from operations 10.0 % 3.2 % 680 bps
Net income/(loss) 4.5 % 1.0 % 350 bps
Effective tax rate 32.2 % (56.1) %
Nine Months Ended
Revenues. Revenues for YTD 2022 were$253.1 million , compared to$202.9 million for YTD 2021. Management attributes the increase to strong growth in our US-LAM segment of$30.7 million , or 42%,$17.9 million , or 28%, in ourCanada segment and$5.4 million , or 14% in our EMEA segment. These increases were slightly offset by a decrease in our APAC segment of$(3.8) million , or (13)%, because of continued impacts of the COVID-19 pandemic and related restrictions. Sales related to our products grew$37.1 million versus YTD 2021 while project-related sales also increased$13.1 million over YTD 2021 in the same period. Project, or over time sales, were increased in part by a large, one-time project in our US-LAM segment. Our sales mix (excluding sales attributable to our THS product line) in YTD 2022 was 36% Greenfield and 64% MRO/UE, as compared to 38% Greenfield and 62% MRO/UE in YTD 2021. Greenfield revenue is typically at or near 40%. Additionally, our revenue was positively impacted by$3.1 million in YTD 2022 when compared to foreign exchange translation rates that were in effect in YTD 2021, though partially offset by higher cost of sales resulting from similar foreign exchange impacts. Gross profit and margin. Gross profit totaled$99.0 million in YTD 2022, compared to$90.0 million in YTD 2021, an increase primarily due to the increase in revenues mentioned above. This increase was partially offset by increased costs on some of our large projects, including the impacts of a large, one-time project in our US-LAM segment, plus a$2.8 million 30 -------------------------------------------------------------------------------- charge in the period related to warranty costs associated with the operational execution of a US-LAM project that was completed in a prior year. Additionally, we have experienced supply chain and labor challenges, which have driven up prices of raw materials as we source from secondary suppliers and face increased freight charges, as well as higher labor costs. Gross margins were 39.1% and 44.4% in YTD 2022 and YTD 2021, respectively. Our gross margin was positively impacted by the Canadian Emergency Wage Subsidy ("CEWS") in YTD 2022 in the amount of$1.4 million , through which we received government subsidies with respect to our Canadian manufacturing operations. The impact associated with CEWS was greater in YTD 2021, as we recorded a subsidy in the amount of$3.6 million . Please see Note 1, "Basis of Presentation" in our financial statements, for more information on CEWS. Selling, general and administrative expenses. SG&A was$66.8 million in YTD 2022, compared to$66.2 million in YTD 2021. Though SG&A was positively impacted by CEWS in the amount of$0.5 million in YTD 2022, it was less than the$2.0 million in YTD 2021. We also had an incremental$0.8 million versus YTD 2021 in bad debt expense mostly related to potentially uncollectible receivables in our EMEA reportable segment. Other increases within SG&A were driven mostly by greater sales activity in YTD 2022. Partially offsetting the aforementioned increases, the Company benefited from cost control measures put in place in fiscal 2021. SG&A improved as percentage of sales to 26.4% in YTD 2022 from 32.6% in YTD 2021. Please see Note 1, "Basis of Presentation" in our financial statements, for more information on CEWS. Deferred compensation plan expense/(income). Deferred compensation plan expense was$0.6 million and$1.4 million in YTD 2022 and YTD 2021, respectively. The decrease in expense in YTD 2022 is attributable in part to market fluctuations in the underlying balances owed to employees as compared to YTD 2021. To note, this compensation plan expense/(income) is materially offset in other income/(expense) where the Company records market gains/(losses) on the related invested assets. Restructuring and other charges/(income) Restructuring and other charges/(income) were$(0.4) million versus$8.7 million in YTD 2021. We substantially completed our reduction-in-force initiative in Fiscal 2021, and therefore the entire decrease in charges can be attributed to the lack of activity in YTD 2022. Refer to Note 3, "Restructuring and other charges/(income)." Amortization of intangible assets. Amortization of intangible assets was$6.6 million in YTD 2022 and$7.3 million in YTD 2021. The decrease in amortization expense is attributable to normal amortization expense coupled with foreign exchange impacts as compared to YTD 2021. Interest expense net. Interest expense, net, was$(5.0) million in YTD 2022, compared to$(7.4) million in YTD 2021. The decrease in interest expense is due to a lower average debt principal balance of$140.6 million YTD 2022 versus$172.6 million in YTD 2021 and lower interest rates stemming from the amendment of the company's credit facility inSeptember 2021 (see Note 8, "Long-Term Debt" for additional information on our long-term debt). Other income/(expense). Other income was income/(expense) of$(3.5) million and$2.2 million in YTD 2022 and YTD 2021, respectively. The increase primarily relates to our debt extinguishment charges of$2.6 million in Interim 2022, as we completed our debt amendment, as well as an increase in foreign exchange losses of$2.2 million . See Note 8, "Long-Term Debt," for additional information on our long-term debt and the amendment. The remaining variance is attributable to relatively less gains on the company's non-qualified deferred compensation plan than in the prior year due to market fluctuations. These gains are offset by deferred compensation plan expense as noted above. Income taxes. Income tax was a$5.4 million expense in YTD 2022 on pre-tax income of$16.8 million compared to an income tax benefit of$0.7 million in YTD 2021 on pre-tax net income of$1.2 million . Our effective tax rate was 32.2% and (56.1)% in YTD 2022 and YTD 2021, respectively. During YTD 2022, we recorded discrete tax items totaling$0.7 million related to withholding taxes inCanada andRussia . During YTD 2021, we had a discrete tax benefit totaling$1.9 million related to updated Internal Revenue Service rules regardingthe United States Global Intangible low-taxed income or ("GILTI tax") and related tax planning elections. Our anticipated annual effective income tax rate before discrete events is 26.1% in fiscal 2022. The anticipated annual effective tax rate is established by estimating anticipated tax rates in each of the countries where we earn taxable income as adjusted for known differences as well as our ability to apply any jurisdictional tax losses to prior or future periods. See Note 11, "Income Taxes," to our unaudited condensed consolidated financial statements included elsewhere in this quarterly report for further detail on income taxes. Net income/(loss) Net income/(loss) was$11.4 million in YTD 2022 as compared to$1.9 million in YTD 2021. The change in net income/(loss) is explained by the changes noted in the sections above. Contingencies 31 -------------------------------------------------------------------------------- See Note 9, "Commitments and Contingencies" to our unaudited condensed consolidated financial statements included above in Part I, Item 1. Financial Statements (Unaudited) of this quarterly report, which is hereby incorporated by reference into this Item 2. Liquidity and Capital Resources Our primary sources of liquidity are cash flows from operations and funds available under our revolving credit facility. Our primary liquidity needs are to finance our working capital, capital expenditures, debt service needs and potential future acquisitions. AtDecember 31, 2021 , we had$32.6 million in cash and cash equivalents. We manage our global cash requirements by maintaining cash and cash equivalents at various financial institutions throughout the world where we operate. Approximately$6.5 million , or 20%, of these amounts were held in domestic accounts with various institutions and approximately$26.1 million , or 80%, of these amounts were held in accounts outside ofthe United States with various financial institutions. While we require cash needs at our various foreign operations, excess cash is available for distribution tothe United States through intercompany dividends or debt reduction inCanada . Generally, we seek to maintain a cash and cash equivalents balance between$30.0 and$40.0 million . We will encounter periods where we may be above or below this range, due to, for example, inventory buildup for anticipated seasonal demand in fall and winter months, related cash receipts from credit sales in months that follow, debt maturities, restructuring activities, larger capital investments, severe and/or protracted economic downturns, acquisitions, or some combination of the above activities. The Company continues to manage its working capital requirements effectively through optimizing inventory levels, doing business with credit-worthy customers, and extending payments terms with its supplier base. Future Cash Requirements Our future capital requirements depend on many factors as noted throughout this report. We believe that, based on our current level of operations and related cash flows, plus cash on hand and available borrowings under our revolving credit facility, we will be able to meet our liquidity needs for the next twelve months and the foreseeable future. For fiscal 2022, we expect our capital expenditures to approximate 1.5% to 2.0% of revenue. Additionally, we will be required to pay$7.0 million in principal payments on our long-term debt in the next twelve months. See further details in Note 8, "Long-Term Debt" in Part I, Item 1. Financial Statements (Unaudited) of this quarterly report. We also have payment commitments of$4.5 million , mostly related to long-term information technology contracts, of which$2.8 million are due within the next twelve months. Strategic Investments Our long term plan includes investments in three key areas as we look to profitably grow the Company beyond its existing installed base. First, we expect to diversify our revenues into adjacent markets like commercial, food & beverage, transportation and other non-oil and gas industries where we can continue to differentiate our offerings through quality, safety and customer service, while also aligning Thermon's strategy around the energy transition toward a more sustainable global economy. Second, we expect higher levels of investment in the emerging markets over the coming decades to meet the needs of a larger middle class and will be investing in resources to more quickly respond to the unique needs of those local markets. Finally, we will continue expanding our technology enabled maintenance solutions, like our recently launched Genesis Network, which helps our customers more efficiently and safely monitor and maintain their heating systems by utilizing our software, analytics, hardware and process heating maintenance expert services. These three initiatives will include incremental investments, both organic and inorganic, over a multi-year period, but we expect will result in a more diversified, sustainable and profitable company over time. Discussion and Analysis of Cash Flows 32 --------------------------------------------------------------------------------
Nine Months Ended
December 31,
(dollars in thousands)
2021 2020 Increase/(Decrease)
Total cash provided by/(used in):
Operating activities $ 13,746 $ 15,479 $ (1,733)
Investing activities (2,685) (4,643) 1,958
Financing activities (17,287) (7,588) (9,699)
Free Cash Flow:(1)
Cash provided by operating activities $ 13,746 $ 15,479 $ (1,733)
Less: Cash used for purchases of property,
plant, and equipment (2,920) (4,708) 1,788
Plus: Sales of rental equipment 235 65 170
Free Cash Flow $ 11,061 $ 10,836 $ 225
(1) "Free Cash Flow" is a non-GAAP financial measure, which we define as net
cash provided by operating activities less cash used for the purchase of
property, plant, and equipment, net of sales of rental equipment and proceeds
from sales of land and buildings. Free Cash Flow is one measure management uses
internally to assess liquidity. Our calculation may not be comparable to
similarly titled measures reported by other companies.
Operating Cash Flows
Net cash provided by/(used in) operating activities was$13.7 million in YTD 2022, compared to$15.5 million in YTD 2021. The decrease is driven by a use of cash to fund net working capital accounts of$13.1 million , partially offset by a change in non-cash items and increase in net income totaling$11.4 million . Our net working capital position changed as a result of an overall increase in sales activity in YTD 2022, which drove an increase in accounts receivable versus a large decline in accounts receivable in YTD 2021, when sales were not trending positively. Investing Cash Flows Cash Flows used in investing activities totaled$(2.7) million and$(4.6) million for YTD 2022 and YTD 2021, respectively. Net cash used in investing activities relates to the purchase of capital assets, primarily to maintain the existing operations of the business and includes purchases and sales of equipment in our rental business. In YTD 2022, we had higher purchases of rental equipment stemming from increased customer demand for products at that time. Financing Cash Flows Net cash provided by/(used in) financing activities totaled a use of cash of$(17.3) million and a use of cash of$(7.6) million in YTD 2022 and YTD 2021, respectively, a comparative increase in the use of cash from financing activities of$(9.7) million , mostly attributable to$7.9 million payments on Term Loan B in YTD 2022 before the amendment and restatement,$7.0 million in voluntary principal payments on the Term Loan A in YTD 2022, compared to the$5.0 million of voluntary prepayments in YTD 2021. Cash proceeds/payments in financing activities are primarily short-term borrowings net of contractual and principal payments on our outstanding long-term debt and revolving credit facility. Credit Facilities OnSeptember 29, 2021 ,Thermon Group Holdings, Inc. (the "Company"), as a credit party and a guarantor,Thermon Holding Corp. ("THC" or the "U.S. Borrower") andThermon Canada Inc. (the "Canadian Borrower" and together with THC, the "Borrowers"), as borrowers, entered into an Amended and Restated Credit Agreement (the "Credit Agreement") with several banks and other financial institutions or entities from time to time (the "Lenders") andJPMorgan Chase Bank, N.A ., as Administrative Agent (the "Agent"). The Credit Agreement is an amendment and restatement of that certain Credit Agreement datedOctober 30, 2017 by and among Borrowers, the lenders time to time party thereto andJPMorgan Chase Bank, N.A . as administrative agent (the "Prior Credit Agreement"), and provides for the credit facilities described in Note 8, "Long-Term Debt" in Part I, Item 1. Financial Statements (Unaudited) of this quarterly report. Other Non-GAAP Financial Measures 33 -------------------------------------------------------------------------------- In addition to evaluating our cash flow generation based upon operating, investing, and financing activities, the Company believes that the non-GAAP measure used in this section may provide investors and key stakeholders with another important perspective regarding our performance. The Company does not intend for this non-GAAP metric to be a substitute for the related GAAP measure, nor should it be viewed in isolation and without considering all relevant GAAP measurements. Moreover, our calculation may not be comparable to similarly titled measures reported by other companies. We define "Free Cash Flow" as net cash provided by operating activities less cash used for the purchase of property, plant, and equipment, net of sales of rental equipment as well as proceeds from sales of land and buildings. This metric should not be interpreted to mean the remaining cash that is available for discretionary spending, dividends, share repurchases, acquisitions, or other purposes, as it excludes significant, mandatory obligations, such as principal payments on the Company's long-term debt facility. Free cash flow is one measure that the Company uses internally to assess liquidity. Free Cash Flow totaled$11.1 million for YTD 2022 as compared to$10.8 million for YTD 2021, relatively flat comparatively, primarily due to lower cash flows from operations offset by reduced purchases on property, plant and equipment. Contractual Obligations and Off-Balance Sheet Arrangements There have been no material changes outside the ordinary course of business in the Company's contractual obligations during YTD 2022. The Company does not have any off-balance sheet arrangements or any interest in entities commonly referred to as variable interest entities, which include special purpose entities and other structured finance entities. See the Company's Annual Report on Form 10-K/A for the fiscal year endedMarch 31, 2021 filed onMay 27, 2021 for further details. Critical Accounting Polices Our condensed consolidated financial statements are prepared in conformity with GAAP. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K/A for the fiscal year endedMarch 31, 2021 filed with theSEC onMay 27, 2021 for a discussion of the Company's critical accounting policies and estimates. Recent Accounting Pronouncements See Note 1, "Basis of Presentation" to our unaudited condensed consolidated financial statements and accompanying notes thereto included above in Item 1. Financial Statements (Unaudited) of this quarterly report for information on recent accounting pronouncements, which is hereby incorporated by reference into this Item 2. Item 3. Quantitative and Qualitative Disclosures about Market Risk Our primary market risk exposures are the effect of fluctuations in foreign exchange rates, interest rates and commodity prices. Foreign currency risk relating to operations. We transact business globally and are subject to risks associated with fluctuating foreign exchange rates. Approximately 59% of our YTD 2022 consolidated revenue was generated by sales from our non-U.S. subsidiaries. Our non-U.S. subsidiaries generally sell their products and services in the local currency, but obtain a significant amount of their products from our manufacturing facilities located elsewhere, primarilythe United States ,Canada andEurope . Significant changes in the relevant exchange rates could adversely affect our margins on foreign sales of products. Our non-U.S. subsidiaries incur most of their expenses (other than intercompany expenses) in their local functional currency. These currencies include the Canadian Dollar, Euro, British Pound, Russian Ruble, Australian Dollar, South Korean Won, Chinese Renminbi, Indian Rupee, Mexican Peso, and Japanese Yen. During YTD 2022, our largest exposures to foreign exchange rates consisted primarily of the Canadian Dollar and the Euro against theU.S. dollar. The market risk related to the foreign currency exchange rates is measured by estimating the potential impact of a 10% change in the value of theU.S. dollar relative to the local currency exchange rates. The rates used to perform this analysis were based on a weighted average of the market rates in effect during the relevant period. A 10% appreciation of theU.S. dollar relative to the Canadian dollar would result in a net decrease in net income of$0.7 million for YTD 2022. Conversely, a 10% depreciation of theU.S. dollar relative to the Canadian dollar would result in a net increase in net income of$0.9 million for YTD 2022. A 10% appreciation of theU.S. dollar relative to the Euro would result in a$0.1 million decrease in net income. Conversely, a 10% depreciation of theU.S. dollar relative to the Euro would result in a net increase in net income of approximately$0.1 million for YTD 2022. 34 -------------------------------------------------------------------------------- The geographic areas outsidethe United States in which we operate are generally not considered to be highly inflationary. Nonetheless, these foreign operations are sensitive to fluctuations in currency exchange rates arising from, among other things, certain intercompany transactions that are generally denominated inU.S. dollars rather than their respective functional currencies. The net impact of foreign currency transactions on our condensed consolidated statements of operations were losses of$1.6 million and gains of$0.1 million in YTD 2022 and YTD 2021, respectively. As ofDecember 31, 2021 , we had approximately$10.2 million in notional forward contracts to reduce our exposure to foreign currency exchange rate fluctuations. These forward contracts were in place to offset in part the foreign currency exchange risk to intercompany payables due from our foreign operations to be settled inU.S. dollars. See Note 2, "Fair Value Measurements" to our unaudited condensed financial statements included above in Item 1. Financial Statements (Unaudited) of this quarterly report for further information regarding our foreign currency forward contracts. We estimate that our sales were positively impacted by$3.1 million in YTD 2022 when compared to foreign exchange translation rates that were in effect in YTD 2021. Foreign currency impact on revenue is calculated by comparing actual current period revenue inU.S. dollars to the theoreticalU.S. Dollar revenue we would have achieved based on the weighted-average foreign exchange rates in effect in the comparative prior periods for all applicable foreign currencies. At each balance sheet date, we translate our assets and liabilities denominated in foreign currency toU.S. dollars. The balances of our foreign equity accounts are translated at their historical value. The difference between the current rates and the historical rates are posted to our currency translation account and reflected in the shareholders' equity section of our condensed consolidated balance sheets. The unrealized effects of foreign currency translations were losses of$3.8 million and gains of$29.2 million in YTD 2022 and YTD 2021, respectively. The comparative decrease in YTD 2022 foreign currency translation gains is primarily due to the weakening of the Canadian dollar and Euro relative to theU.S. dollar as compared to YTD 2021. Foreign currency translation gains or losses are reported as part of comprehensive income or loss in the condensed consolidated statements of operations and comprehensive income. Foreign currency transactions gains and losses are included in net income or loss as part of other income and expense in the condensed consolidated statements of operations and comprehensive income. Foreign currency risks related to intercompany notes. The Company has terminated its cross currency swap as ofSeptember 29, 2021 . See Note 2, "Fair Value Measurements" to our unaudited condensed financial statements included above in Item 1. Financial Statements of this quarterly report for further information regarding our cross currency swap. Interest rate risk and foreign currency risk relating to debt. Borrowings under our Term Loan Facilities and the Revolving Credit Facility incur interest expense that is variable in relation to the LIBOR and CDOR rate. As ofDecember 31, 2021 , we had$132.8 million of outstanding principal under our Term Loan Facilities and no borrowings under the Revolving Credit Facility. The interest rates for borrowings under our term loan A credit facility were 2.16% for our Canadian Term Loan Facility and 1.73% for theU.S. Term Loan Facility as ofDecember 31, 2021 . Based on the outstanding borrowings, a 1% change in the interest rate would result in a$1.3 million increase or decrease, as applicable, in our annual interest expense. Commodity price risk. We use various commodity-based raw materials in our manufacturing processes. Generally, we acquire such components at market prices and do not typically enter into long-term purchase commitments with suppliers or hedging instruments to mitigate commodity price risk. As a result, we are subject to market risks related to changes in commodity prices and supplies of key components of our products. Raw material costs have been stable in the past; however, we have begun to experience temporary shortages in certain raw materials as well as an increase in costs of these materials due to: use of alternate suppliers, higher freight costs, increased lead times, and expedited shipping. Also, we have seen construction labor inefficiencies and increased overtime in certain of our facilities due to temporary shortages in raw materials required for production. We cannot provide any assurance that we will continue to mitigate temporary raw material shortages or be able to pass along such cost increases, including the potential impacts of tariffs or supply chain challenges, to our customers in the future, and if we are unable to do so, our results of operations may be adversely affected. Item 4. Controls and Procedures Controls and Procedures Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, 35 -------------------------------------------------------------------------------- can provide only reasonable assurance of achieving the desired control objectives. Management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as ofSeptember 30, 2021 , due to the material weakness described below. We identified a material weakness in internal control over financial reporting during the preparation of the Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2021 . We did not have properly designed controls and policies to ensure the accuracy and completeness of the project completion status associated with the reserve for large warranty-related project remediation work. A material weakness, as defined in Rule 12b-2 under the Exchange Act, is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim consolidated financial statements will not be prevented or detected on a timely basis. This material weakness resulted in immaterial misstatements in the consolidated financial statements included in our Annual Report on Form 10-K/A for the year endedMarch 31, 2021 , and in the unaudited condensed consolidated financial statements included in our Quarterly Report on Form 10-Q for the quarter endedJune 30, 2021 as described further in Note 1. "Basis of Presentation" to the unaudited condensed consolidated financial statements included in Item 1 of this quarterly report. Notwithstanding such material weaknesses in internal control over financial reporting, our Chief Executive Officer and Chief Financial Officer have concluded that our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity withU.S. GAAP. Remediation Efforts and Status of Material WeaknessThe Company is in the process of enhancing the design of certain internal controls over financial reporting related to accounting for warranty reserves in accordance with a remediation plan for the material weakness, which includes updating the Company's controls associated with the completeness and accuracy of information used in determining the accrual for large warranty-related project remediation work and subsequent application of those controls. These enhanced controls will be tested for effectiveness in future periods. Changes in Internal Control Over Financial Reporting Other than as discussed above, there have been no changes in the Company's internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 36
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