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 six months endedSeptember 30, 2022 and 2021 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 endedSeptember 30, 2022 and 2021 as "Interim 2023" and "Interim 2022," respectively. Accordingly, we refer to the six-month periods endedSeptember 30, 2022 and 2021 as "YTD 2023" and "YTD 2022," 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 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 project bids; (iii) our ability to generate more facility maintenance, repair and operations or upgrades or expansions 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; 19 -------------------------------------------------------------------------------- (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 outbreak of a global pandemic, including the current pandemic (COVID-19 and its variants); (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 successfully develop and improve our products and successfully implement new technologies; (vi) competition from various other sources providing similar heat tracing and process heating products and services, or alternative technologies, to customers; (vii) our ability to deliver existing orders within our backlog; (viii) our ability to bid and win new contracts; (ix) the imposition of certain operating and financial restrictions contained in our debt agreements; (x) our revenue mix; (xi) our ability to grow through strategic acquisitions; (xii) our ability to manage risk through insurance against potential liabilities (xiii) changes in relevant currency exchange rates; (xiv) tax liabilities and changes to tax policy; (xv) impairment of goodwill and other intangible assets; (xvi) our ability to attract and retain qualified management and employees, particularly in our overseas markets; (xvii) our ability to protect our trade secrets; (xviii) our ability to protect our intellectual property; (xix) our ability to protect data and thwart potential cyber-attacks; (xx) a material disruption at any of our manufacturing facilities; (xxi) our dependence on subcontractors and third-party suppliers; (xxii) our ability to profit on fixed-price contracts; (xxiii) the credit risk associated to our extension of credit to customers; (xxiv) our ability to achieve our operational initiatives; (xxv) unforeseen difficulties with expansions, relocations, or consolidations of existing facilities; (xxvi) potential liability related to our products as well as the delivery of products and services; (xxvii) our ability to comply with foreign anti-corruption laws; (xxviii) export control regulations or sanctions; (xxix) changes in government administrative policy; (xxx) the current geopolitical instability inRussia andUkraine and related sanctions by theU.S. and Canadian governments andEuropean Union ; (xxxi) environmental and health and safety laws and regulations as well as environmental liabilities; 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 for the fiscal year endedMarch 31, 2022 , filed with theSecurities and Exchange Commission (the "SEC") onMay 26, 2022 , 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, tubing bundles, industrial heating blankets
and chillers), 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 2023 and YTD 2022, approximately 59% and 65%,
respectively, of our revenues were generated from outside of the United States .
Revenue. Our revenues are derived from providing customers with a full suite of
innovative and reliable process heating solutions, including advanced heating
and filtration solutions for industrial and hazardous area applications. Revenue
recognized at a point in time based on when control goes over to the customer is
generally related to our product sales. Point in time revenue does not typically
require engineering or installation services. Revenue recognized over time
occurs on our projects where engineering or installation services, or a
combination of the two, are required. We recognize revenue related to such
projects in a systematic way that reflects the transfer of goods or services, or
a combination of goods and services, to the customer.
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We maintain four reportable segments based on four geographic countries or
regions in which we operate: (i) United States and Latin America ("US-LAM"),
(ii) Canada , (iii) Europe , Middle East and Africa ("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, food and beverage, and
other, which we refer to as our "key end markets."
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 large project
construction. Our backlog at September 30, 2022 , was $160.8 million , as compared
to $156.2 million at March 31, 2022 . 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 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 face challenges from time to
time with 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, expedited shipping and other inflationary factors.
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 plan expense/(income)" on our condensed
consolidated statements of operations and comprehensive income/(loss).
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 for the
fiscal year ended March 31, 2022 , filed with the SEC on May 26, 2022 , and in any
subsequent Quarterly Reports on Form 10-Q that we have filed or may file with
the SEC , including those described below. These factors include the following:
•Impact of product mix. Typically, our customers require our products as well as
our engineering and construction services. The level of service and construction
needs 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 products, for which we
recognize revenue at a point in time. 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.
We estimate that Over time and Point in time revenues have each made the
following contribution as a percentage of total revenue in the periods listed:
Three Months Ended September 30, Six months ended September 30,
2022 2021 2022 2021
Over time 38 % 38 % 38 % 38 %
Point in time 62 % 62 % 62 % 62 %
21-------------------------------------------------------------------------------- Our Over time revenue includes (i) products and services which are billed on a time and materials basis, and (ii) fixed fee contracts for complex turnkey solutions. For our time and materials service contracts, we recognize revenues as the products and services are provided over the term of the contract and have determined that the stated rate for installation services and products is representative of the stand-alone selling price for those services and products. Our turnkey projects, or fixed fee projects, offer our customers a comprehensive solution for heat tracing from the initial planning stage through engineering/design, manufacture, installation and final proof-of-performance and acceptance testing. Turnkey services also include project planning, product supply, system integration, commissioning and on-going maintenance. Turnkey solutions, containing multiple deliverables, are customer specific and do not have an alternative use and present an unconditional right to payment, and thus are treated as a single performance obligation with revenues recognized over time as work progresses. For revenue recognized under fixed fee turnkey contracts, we measure the costs incurred that contribute towards the satisfaction of our performance obligation as a percentage of the total cost of production (the "cost-to-cost method"), and we recognize a proportionate amount of contract revenue, as the cost-to-cost method appropriately depicts performance towards satisfaction of the performance obligation. Changes to the original cost amount may be required during the life of the contract and such estimates are reviewed on a regular basis. Sales and gross profits are adjusted using the cumulative catch-up method for revisions in estimated contract costs. Reviews of estimates have not generally resulted in significant adjustments to our results of operations. Point in time revenue represents goods transferred to customers at a point in time and is recognized when obligations under the terms of the contract with the customer are satisfied; generally this occurs with the transfer of control upon shipment. •Timing of large projects. Our results of operations in recent years have been impacted by the various construction phases of large 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 projects may generate revenue for several quarters. In the early stages of a large 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 large project, and our margins may 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, oil, gas, 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. Large projects historically have been a substantial source of revenue growth, and large project revenues tend to be more cyclical than maintenance and repair 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. Refer to Note 2, "Acquisition," for more discussion of our recent acquisition.
Recent Developments
The Company has paused new investments in, and new orders for oil and gas customers by, our Russian affiliate. We have resumed limited service to select non-oil and gas customers inRussia and customers outside ofRussia , and we expect to fulfill our existing agreements while remaining in compliance with applicable laws, including applicable sanctions and trade controls. We continue to assess the impact of the Russo-Ukrainian war on our results of operations, financial position and overall performance as the situation develops and any broader implications it may have on the global economy. Given our decision to resume only limited operations in ourRussia facility, we executed a reduction-in-force equating to 14 positions, leaving enough positions to address existing and anticipated business needs inAugust 2022 . The cost to enact the reduction-in-force was not material to the Company. 22 -------------------------------------------------------------------------------- OnMay 31, 2022 , our subsidiaryThermon Holding Corp. , as buyer, acquired Powerblanket, ("Powerblanket"), fromGlacier Capital LLC , as seller (the "Acquisition"). Powerblanket is a leading North American supplier of heated blankets built upon patented heat spreading technology, and portable industrial chillers. The purchase price for the acquisition was$35.3 million . Refer to Note 2, "Acquisition," for more information. 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 continue to negatively impact, global demand for our products and services. We are still experiencing effects of lockdowns inAsia , which are impacting our results in our APAC segment. The effect of loosening pandemic restrictions outside of APAC, along with pent-up demand from periods of stagnant lockdown and uncertainty have combined to strengthen customer demand from most regions we serve, especially inNorth America . During periods of the pandemic we experienced, and we may in the future experience, a decline in the demand of our products and services or disruptions in raw materials or labor required for manufacturing that has in the past, and may in the future, materially and negatively impact our business, financial condition, results of operation and overall financial performance. We continue to monitor the pandemic restrictions and other effects the pandemic may have on our business. 23 --------------------------------------------------------------------------------
Results of Operations - Three-month periods ended
The following table sets forth our unaudited condensed consolidated statements
of operations for the three months ended
(Dollars in thousands) Three Months Ended September 30, Increase/(Decrease)
2022 2021 $ %
Consolidated Statements of Operations
Data:
Sales $ 100,557 $ 81,322 $ 19,235 24 %
Cost of sales 54,631 49,601 5,030 10 %
Gross profit 45,926 31,721 14,205 45 %
Operating expenses:
Selling, general and administrative
expenses 27,754 23,320 4,434 19 %
Deferred compensation plan
expense/(income) (303) (14) (289) 2064 %
Amortization of intangible assets 2,437 2,190 247 11 %
Restructuring and other charges/(income) - - - nm
Income/(loss) from operations 16,038 6,225 9,813 158 %
Other income/(expenses):
Interest expense, net (1,408) (2,022) 614 (30) %
Other income/(expense) (335) (2,956) 2,621 (89) %
Income/(loss) before provision for income
taxes 14,295 1,247 13,048 1046 %
Income tax expense/(benefit) 3,311 770 2,541 330 %
Net income/(loss) $ 10,984 $ 477 $ 10,507 2203 %
As a percent of sales: Change in basis points
Gross profit 45.7 % 39.0 % 670 bps
Selling, general and administrative
expenses 27.6 % 28.7 % -110 bps
Income/(loss) from operations 15.9 % 7.7 % 820 bps
Net income/(loss) 10.9 % 0.6 % 1030 bps
Effective tax rate 23.2 % 61.7 %
Three Months Ended
Revenues. Revenues increased in Interim 2023 primarily due to strong performance in our US-LAM andCanada reportable segments, which grew revenues$17.0 million , or 56%, and$9.8 million , or 39%, respectively, compared to Interim 2022. We experienced strong maintenance-related spending from our customers in both segments. Our recent acquisition of Powerblanket in the US-LAM segment contributed$3.0 million in revenue growth in Interim 2023. Our EMEA and APAC segments contracted in Interim 2023, with declines of$(7.0) million , or (42)%, and$(0.6) million , or (7)%, respectively, compared to Interim 2022. Impacting revenue in EMEA were the effects of the Russo-Ukrainian war to our Russian affiliate, as well as the overall recessionary environment which resulted in fewer projects and less volume and consequently, greater competition. Impacting revenue in APAC were the lingering effects of COVID-19 lockdowns in certain areas of the region, partially moderated by signs of recovery in the rest of the region. Separately, revenue was negatively impacted in Interim 2023 by foreign exchange rates by$3.1 million . Point in time revenues in Interim 2023 were$62.3 million , or 62%, of total sales, while Over time revenues were$38.2 million , or 38%. This compares to 62% Point in time revenues and 38% Over time revenues in Interim 2022. Refer to the "Overview" section above for definitions of Point in time and Over time revenue. 24 -------------------------------------------------------------------------------- Gross profit and margin. The higher gross profit in Interim 2023 is primarily attributable to volume increases driven by strong Point in time and Over time sales in our US-LAM andCanada segments, price increases, and operational efficiencies. These positive drivers were partially offset by incremental costs driven by global supply chain challenges. Over time sales margins in Interim 2022 were primarily impacted by similar incremental costs from supply chain challenges as well as warranty costs associated with the operational execution of a US-LAM project that was completed in a prior year and lower margin associated with a large, one-time project in our US-LAM segment. Selling, general and administrative expenses. The increase in SG&A expenses in Interim 2023 was driven by greater sales activity, resulting in higher salaries & benefits, performance-based incentive compensation, sales commissions, as well as increased travel and marketing costs. SG&A as a percent of sales was 27.6% in Interim 2023 versus 28.7% in Interim 2022, which is attributable to the Company's ongoing cost control efforts. Deferred compensation plan expense/(income). The increase in deferred compensation plan income in Interim 2023 is attributable in part to market fluctuations in the underlying balances owed to employees as compared to Interim 2022. 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. Refer to Note 3, "Fair Value Measurements," for more information. Amortization of intangible assets. Amortization of intangible assets in Interim 2023 increased slightly over Interim 2022, as we began to amortize more intangible assets following our acquisition of Powerblanket in the first fiscal quarter of the 2023. Please refer to Note 2, "Acquisition," for more information regarding our acquisition.
Restructuring and other charges/(income). Restructuring and other charges/(income) was zero in Interim 2023 and Interim 2022.
Interest expense, net. The decrease in interest expense is primarily due to a lower average outstanding balance of debt during Interim 2023, which was$118.2 million versus$143.8 million during Interim 2022, as well as lower interest rates stemming from the Company's amendment to its Credit Agreement inSeptember 2021 . See Note 9, "Debt," for additional information on our long-term debt.
Other income/(expense). The decrease in expense primarily relates to debt
extinguishment costs of
Income tax expense/(benefit). Our effective tax rate was 23.2% and 61.7% in Interim 2023 and Interim 2022, respectively. During Interim 2023, the Company recorded a tax benefit of$0.2 million related to Russian withholding taxes at its Russian subsidiary. The effective tax rate in Interim 2022 was impacted by additional tax expense of$0.5 million primarily related to withholding taxes on an intercompany dividend from our Canadian subsidiary and other discrete tax items. Refer to Note 12, "Income Taxes," for additional detail.
Net income/(loss). The change in net income/(loss) is explained by the changes noted in the sections above.
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Results of Operations - Six-month periods ended
The following table sets forth our unaudited condensed consolidated statements of operations for the six months endedSeptember 30, 2022 and 2021, respectively, and indicates the amount of change and percentage change between periods. Six Months Ended (Dollars in thousands) September 30, Increase/(Decrease) 2022 2021 $ % Consolidated Statements of Operations Data: Sales$ 195,999 $ 152,477 $ 43,522 29 % Cost of sales 112,848 94,218 18,630 20 % Gross profit 83,151 58,259 24,892 43 % Operating expenses: Selling, general and administrative expenses 52,157 44,721 7,436 17 % Deferred compensation plan expense/(income) (963) 318 (1,281) (403) % Amortization of intangible assets 4,705 4,426 279 6 % Restructuring and other charges/(income) - (414) 414 (100) % Income/(loss) from operations 27,252 9,208 18,044 Other income/(expenses): Interest expense, net (2,243) (4,187) 1,944 (46) % Other income/(expense) (1,251) (2,890) 1,639 (57) % Income/(loss) before provision for income taxes 23,758 2,131 21,627 1015 % Income tax expense/(benefit) 6,218 1,994 4,224 212 % Net income/(loss)$ 17,540 $ 137 $ 17,403 12703 % As a percent of sales: Change in basis points Gross profit 42.4 % 38.2 % 420 bps Selling, general and administrative expenses 26.6 % 29.3 % -270 bps Income/(loss) from operations 13.9 % 6.0 % 790 bps Net income/(loss) 8.9 % 0.1 % 880 bps Effective tax rate 26.2 % 93.6 %
Six Months Ended
Revenues. Revenue increased in YTD 2023 compared to YTD 2022 due to strong performance in our US-LAM andCanada segments. US-LAM revenue increased$39.9 million , or 75%, whileCanada revenue increased$16.6 million , or 33%. We experienced strong maintenance-related spending from our customers in both segments. Our recent acquisition of Powerblanket in the US-LAM segment contributed$4.0 million in revenue growth. These increases were partly offset by contractions in our EMEA and APAC segments, with decreases in revenue of$(11.9) million , or (38)% and$(1.2) million , or (7)%, respectively. The ongoing effects of the Russo-Ukrainian war as well as the overall recessionary environment impacted the results in EMEA, while lingering COVID-19 lockdowns and their effects delayed the recovery in APAC. Separately, revenue was negatively impacted in YTD 2023 by foreign exchange rates by approximately,$6.0 million .
Point in time revenue and Over time revenue comprised 62% and 38% of sales in both YTD 2023 and YTD 2022, respectively.
Gross profit and margin. Gross profit increased$24.9 million on stronger sales, and gross margin was up 420 bps Although sales mix was consistent, we have delivered greater sales in both Over time sales as well as Point in time sales during YTD 2023. Gross margin was further augmented by strong price increases as well as operational efficiencies. Gross margin in YTD 2022 was diluted, in part, by warranty costs associated with the operational execution of a large project in our US-LAM segment that was completed in a prior year, which was somewhat offset by benefits from the Canadian Emergency Wage program ("CEWS"). Refer to Note 1, "Basis of Presentation," for more information on CEWS. 26 -------------------------------------------------------------------------------- Selling, general and administrative expenses. Selling, general and administrative expenses ("SG&A") increased$7.4 million in YTD 2023 compared to YTD 2022 driven by costs associated with greater sales activity, resulting in increases in salaries and benefits, incentive pay, commissions, travel, and marketing costs. In addition, costs increased in YTD 2023 due to the acquisition of Powerblanket. However, SG&A as a percent of sales decreased by 270 bps, which is attributable to continued cost discipline. Deferred compensation plan expense/(income). Deferred compensation plan expense/(income) generated income in YTD 2023 due to market fluctuations in the underlying balances owed to employees. This compensation plan expense/(income) is materially offset in other income/(expense) where the Company recorded market gains/(losses) on related investment assets. Refer to Note 3, "Fair Value Measurements," for more information.
Restructuring and other charges/(income). There were no restructuring charges/(income) in YTD 2023. Refer to Note 4, "Restructuring," for discussion of activity in the prior year.
Amortization of intangible assets. Amortization of intangible assets was relatively flat in YTD 2023 as compared to YTD 2022. Activity within these accounts is driven by periodic straight-line amortization of our acquired intangibles. Because our acquisition of Powerblanket was affected for only part of YTD 2023, it did not have a significant impact on the amortization in the period. Interest expense, net. Interest expense, net decreased in YTD 2023 as compared to YTD 2022 due to a lower average interest rate on our outstanding principal, as well as a lower average outstanding debt. Refer to Note 9, "Debt," for more information on our outstanding debt. Other income/(expense). Other income/(expense) decreased in YTD 2023 primarily due to the debt extinguishment costs that we recognized in YTD 2022 that were absent in YTD 2023, partially offset by market fluctuations in the underlying investments associated with our non-qualified deferred compensation plan. These unrealized losses on investments were materially offset by deferred compensation plan income as noted above. Income taxes. Income tax expense was$6.2 million in YTD 2023 on pre-tax income of$23.8 million compared to income tax expense of$2.0 million in YTD 2022 on pre-tax income of$2.1 million , an increase of$4.2 million in income tax expense. Our effective tax rate was 26.2% and 93.6% in YTD 2023 and YTD 2022, respectively. During YTD 2022, we recorded discrete tax items totaling$1.5 million primarily related to withholding taxes inCanada andRussia and other discrete tax items.
Net income/(loss). The change in net income/(loss) is explained by the changes noted above.
Contingencies See Note 10, "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. AtSeptember 30, 2022 , we had$31.9 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 21%, of these amounts were held in domestic accounts with various institutions and approximately$25.3 million , or 79%, 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 27 -------------------------------------------------------------------------------- facility, we will be able to meet our liquidity needs for the next twelve months and the foreseeable future. We had$29.0 million of borrowings outstanding on our revolving credit facility atSeptember 30, 2022 . The$29.0 million was borrowed to support the acquisition of Powerblanket. Please refer to Note 2, "Acquisition," for more information regarding our acquisition. For fiscal 2023, we expect our capital expenditures to approximate 2.5% to 3.5% of revenue. Additionally, we expect to pay$9.3 million in principal payments on our long-term debt, as well as$3.4 million related to our leased assets in the next twelve months. See further details in Note 9, "Debt," in Part I, Item 1. Financial Statements (Unaudited) of this quarterly report. We also have payment commitments of$3.4 million , mostly related to long-term information technology contracts, of which$2.0 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, as evidenced by our investment in our legacy business as well as our recent acquisition of Powerblanket, over a multi-year period, but we expect will result in a more diversified, sustainable, and profitable company over time.
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