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Text: We hope everyone is staying safe and healthy during the global pandemic and appreciate your interest in Thermon.
During the call, we will also discuss some items that do not conform to generally accepted accounting principles.
These non-GAAP measures should be considered in addition to and not as a substitute for measures of financial performance reported in accordance with GAAP.
We hope everyone listening is staying safe and in good health.
We appreciate you joining our conference call and for your continued interest in Thermon.
Jay Peterson, our CFO is with me and will provide additional information on our financial performance after my remarks.
Since our last update in February, a lot has changed, but the safety and security of our employees, customers, suppliers and the communities in which we work and live remains a top priority.
As a supplier to critical infrastructure, we remained open for business and to continue to support our global customers.
Our crisis response team has been operating since February, leading our global response in coordination with local site management to ensure that we are able to safely operate our manufacturing locations, while being responsive to our customers' needs.
Like many others, we have suspended business travel, adopted work from home policies, where possible and implemented staggered shifts, additional PPE, frequent sanitation of common areas and enhanced our health and safety communications for all employees.
In the early stages of the COVID-19 pandemic, our focus has been on value preservation.
We took steps to ensure access to cash if needed and have an active broad-based cost reduction to align our cost structure to the level of incoming business.
These cost-out actions will reduce SG&A by $16 million in the fiscal year and just over $17 million on an annualized basis.
In addition, we have cut capital budgets by over 50% to $4 million in fiscal year 2021.
We've also modeled a range of scenarios that give us confidence.
We have the cash and financial strength to weather this contraction while positioning the business for growth in the recovery.
While the COVID-19 crisis has had an acute near-term impact to our business in late Q4 of 2020 and now in Q1 of fiscal year 2021, the supply demand imbalance in the old markets and reduced capital and operating budgets will have a lasting impact over the next 18 months to 24 months.
Despite the uncertainty in our current operating environment, it's important to remind the investment community that the long-term strengths of Thermon's business model remain intact.
We are leading global brand and the breadth of our solutions are well-positioned within the high value niche of industrial process heating.
As an example, we've recently launched our USX heat trace and ultra-high temperature self regulating trace heater, which extends our industry leading performance and quality standards, in addition to three other new product introductions in our fourth quarter.
Over the 65 plus years of our existence, we have built a global installed base and have long lasting relationships with loyal customers around the world.
In order to ensure we maintain and grow our installed base, we have initiated key account management programs as well as established global sales councils to facilitate the collaboration across our regions and product lines for both our Greenfield and MRO/UE revenue streams.
For the process heating business, we continue to invest in both our people and our product offerings and we are starting to see the impact of those investments bear fruit with positive revenue growth year-over-year and sequentially in the fourth quarter.
The combination of our recent investments in research and development and the expertise of our engineering team results in mission critical technology with high barriers to entry, especially in hazardous locations.
While operating and maintenance budgets maybe challenged by the current COVID-19 restrictions and commodity pricing, our customers supply the world with the transportation, energy and chemicals, just to mention a few that are the foundation for modern life.
As the world begins to reopen and maintenance activity resumes, so too will our MRO/UE business.
This business combined with low capital intensity is the key to the resilience of our business model that has enabled us to generate cash during prior downturns and will allow us to continue to generate positive cash flows over the next 12 months.
Our current net debt to adjusted EBITDA ratio of 2.1 times means we are entering this difficult period from a position of strength.
In FY 2020, we generated $61 million in free cash flow, paid down $38 million in debt and finished the year with $43 million in cash, with an additional $60 million in revolving credit.
While we observed weaker discretionary spending beginning in our fiscal Q3, the unprecedented impact of COVID-19 on the global economy as well as the dislocation in oil and gas markets starting in March has combined to reduce our customers' capital and operating budgets for at least the next 12 months.
We anticipate challenging market conditions until oil supply and demand reach equilibrium and commodity prices recover.
I would like to turn now to our Q4 results.
As a reminder, before COVID-19, we began to see a slowdown in discretionary spending, combined with lower capital spending that began in our -- late in our second quarter.
We anticipated a weak Q4 relative to a historical revenue quarter in our fiscal year 2019, but expected this to be a short-term slowdown that would begin to reverse and gain momentum late in the first half of fiscal year '21.
Thermon's revenue of $88 million in fiscal Q4 was down 23% and at the lower end of our forecasted rage due to the impact of COVID-19 in the Western Hemisphere in Mach.
While our gross margins were up 90 basis points year-over-year, they were negatively impacted by 390 basis points by one-time adjustment associated with operational execution in the quarter.
Adjusted EBITDA of $9 million was down significantly due to lower volume and a cost base that does not yet reflect actions we have taken to address the lower volume environment we see moving forward.
Europe's Q4 was largely responsible for the revenue decline, which was down 38% from prior year.
The combination of adjustments to our cost base, including a new leader in the region and a stronger starting backlog, shift result and modest growth in Europe, Middle East, Africa in fiscal 2021.
Asia-Pacific was down 16% in our Q4 due to the early impact of the coronavirus in the region, but was able to show growth in fiscal 2020 despite the Q4 decline.
Turning now to discussion of our end markets.
Our end markets are bifurcated into those related to transportation fuels and other industrial markets.
We see upstream and downstream refining most greatly impacted by COVID-19 and the price of oil.
We anticipate the recovery of demand for transportation fuels to be protracted and the oil supply overhang will take 18 months to 24 months to rebalance with many factors impacting the timing.
We have repositioned the business such that upstream is a smaller percentage of the portfolio that during the last downturn, representing approximately 14% of fiscal 2020 revenues, with capital budgets being cut by 20% to 30% or more in certain markets or geographies, the bulk of those cuts by international oil companies have been focused on upstream capital budgets.
The downstream capital budgets have been less impacted, but we foresee numerous projects that have not yet passed FID being delayed or cancelled.
Downstream refining and petrochemical is our largest end market exposure and where we have grown our business since the downturn primarily in the petrochemical sector.
Here we are seeing a sharp contraction in the first quarter spending due to the inability to access facilities from maintenance due to COVID-19 restrictions and decline in demand for transportation fuels.
As restrictions are lifted and demand recovers, we expect budgets to be released and deferred spending to follow with maintenance budges recovering first and capital spending emerging later.
We anticipate the petrochemical markets to recover more quickly as the overall economy rebounds.
The midstream sector is better positioned to weather the current economic environment with a number of LNG projects in various stages of planning and execution.
The chemical market maintenance spending has slowed due to COVID-19 restrictions.
However, there are number of new projects that remain more than a year away from reaching our backlog, especially given current dynamics within their end markets.
These end markets are wide ranging and include agriculture, paint, polymers, etc.
, which stand to recover more quickly as restrictions are lifted.
Power and renewable markets have suffered a short-term impact and should continue to offer step -- steady opportunities in the mid-term.
Transportation and nuclear continue to offer an opportunity to diversify our revenue, especially in the global process heating markets.
The large order in light rail we mentioned last call was booked in our fourth quarter and demonstrates a multiyear opportunity we have to expand the installed base in the US and Canada.
We do expect mass transit projects to be negatively impacted in the short-term.
Given the backdrop of the external markets, I wanted to provide an update on our operations.
We have taken the following proactive actions to right-size our cost profile with current market conditions while continuing to invest in the future of our business.
With a focus on operating expenses, executive salary and director fee reductions were implemented effective April 1.
Other discretionary expenses like travel contractor and other third-party services were significantly reduced or eliminated.
While we continue to invest approximately 2.5% of our revenues in research and development and expect to release three to five new products in fiscal 2021.
We delayed spending on lower priority projects in the pipeline.
And unfortunately after other levers were exhausted, we made the difficult decision to execute a reduction in force in North American in May, which follows a similar decision made in Europe, Middle East Africa in our fiscal Q4.
We believe the above actions will reduce expenses for fiscal 2021 by over $16 million and helped us right-size the business for the demand environment that we see over the next 18 months to 24 months.
In addition to these cost actions around operating expenses, variable costs have been reduced to align capacity with the level of our incoming business.
We have set goals for continuous improvement initiatives to deliver an annual incremental 100 basis point improvement in gross margins.
While we don't intend to provide formal guidance for fiscal 2021 at this time, I did want to provide an update on our first quarter.
Our primary customers in the broader oil and gas, chemical and power sectors have significantly reduced capital and operating budgets in the last 90 days, which in turn limits the demand for both our Greenfield and maintenance solutions.
Since the pandemic took hold in early March, Thermon has not seen any significant cancellations from our backlog.
Orders in the first fiscal quarter to-date are down approximately 40% to 45% with our Greenfield business less impacted than our MRO/UE business.
The quick turn business has been particularly impacted due to the current health and safety precautions in place at many of our customer sites with only a minimum amount of work being conducted at this time.
As those health restrictions are loosened and local economies get back to work, we expect deferred or delayed maintenance repair and upgrade spending will return and be completed on site.
Our plan for fiscal 2021 assumes a weak first quarter in line with the lower incoming order rate.
We expect the cost out actions we have executed will begin to moderate the impact of lower volume on adjusted EBITDA margins and our reduced capex budget will contribute to a positive free cash flow for the year.
As the year progresses, we will reevaluate market conditions versus our internal plans and continue to update you as appropriate.
I firmly believe that despite the current external pressures, Thermon is well-positioned to control cost, generate cash and manage liquidity in the near-term and we will emerge a stronger, more profitable business as commodity markets adjust to the next normal.
We have a great team that is committed to delivering for our customers and shareholders and are hard at work executing those plans, while continuing to meet the high standards of health and safety that our current environment demands.
I will pause there and hand it over to Jay for the financials.
First off, given the backdrop caused by the unprecedented times with the impact of COVID-19 and the dislocation in oil and gas markets.
I would like to start by addressing our liquidity, cost management and provide some color around scenario planning.
This last quarter, we were able to both grow our cash and pay down debt.
Our cash and investments balance at the end of March improved to $43.2 million and we generated $14.4 million in free cash flow in the quarter and we are able to pay down $5.6 million in debt.
And year-to-date, we have generated $60.7 million in free cash flow and paid down $38 million in debt.
And we have access to a $60 million revolver line of credit subject to a consolidated leverage ratio of 4.5 to 1, that steps down to 3.75 to 1 in December of this year.
The debt pay down will reduce our interest expense next fiscal year by $0.04 a share, that's after tax and the reduction in amortization expense due to the previous private equity transaction, coupled with the interest expense savings will be accretive to our fiscal year '21 earnings per share by $0.23 a share and that's after tax with potential additional interest expense savings forthcoming.
Our gross debt amount at 3/31 was $176 million and net debt of $133 million with a net debt to EBITDA ratio of 2.1 times.
And as Bruce just mentioned, we have executed cost reduction actions in Europe in January to better align our expenses with our incoming European order rate.
In addition, last month, we took actions to reduce our run-rate spending by $17 million by reducing personnel costs, discretionary spending and consultant and contractor costs.
And before we get to the quarter's results, I would like to provide some context on the scenario planning we have recently completed and would emphasize that this does not reflect our current expectations for the business.
After accounting for the impact of the cost out actions that we have already executed, we believe our annualized breakeven revenue by which we mean the revenue levels where free cash flow is breakeven is between 35% and 40% lower than our fiscal year 2020 results.
And again, we do not believe this to be representative how our results for the next 12 months and we will continue to stay close to our customers and monitor leading indicators for any changes to our plan.
And we are continuing to manage discretionary spending, but at this point, we do not believe further cost-out actions are necessary.
Turning to revenue and orders, our revenue this past quarter totaled $88.4 million and that's a decline of 22.6% against the prior year quarter.
The decline was driven by our exceptional revenues in Q4 of '19, the weaker demand we had previously forecasted and the decline in oil prices that began six months ago.
The legacy revenue mix between MRO/UE and Greenfield was 60% and 40% respectively versus a 50:50 mix in Q4 of fiscal year '19.
And FX nominally decreased total revenue by $1.3 million and in constant currency, our revenue declined by 21%.
Orders for the quarter totaled $90.5 million versus $105.7 million in the prior year quarter for a decline of 14%, again two factors previously mentioned.
Our backlog of orders ended March at $105.7 million versus $120 million as of March of '19 and that's a decrease of 12%.
And gross margins in our backlog improved to 33% versus 32% at the end of March '19.
And our book-to-bill for the quarter was slightly positive at 1.02.
Moving on to gross margins.
Margins were 40.3% and that's a 90 basis point improvement versus the comp period and that was mainly driven by a favorable Greenfield MRO mix.
And our gross profit declined by 9.4% due to the double-digit revenue decline or by 20.9% versus the record comp period and gross margins were impacted in the quarter by 390 basis points due to a one-time charge related to operational execution.
Operating expenses for the quarter, that is SG&A and this excludes depreciation and amortization of intangibles totaled $26.4 million versus $24.3 million in the prior quarter, which includes $1 million of expenses relating to the restructuring in EMEA.
Our opex as a percent of revenue was 29.9%, again excluding depreciation and amortization and that's an increase of 860 basis points from the prior year level of 21.3%.
And we expect to take a one-time charge of approximately $2.8 million for cost reductions that occurred during May in our Q1 income statement.
Moving on to earnings.
GAAP earnings per share for the quarter totaled a negative $0.09 compared to the prior year quarter of $0.20 and that's a decline of $0.29 per share.
Adjusted earnings per share as defined by GAAP earnings per share less amortization expense and any-one time charges totaled $0.01 a share relative to $0.32 a share in the prior year quarter.
Adjusted EBITDA declined by 57.6% versus the comparison quarter and adjusted EBITDA as a percent of revenue was 10.2% and that's a decline of 880 basis points versus the comp period and adjusted EBITDA totaled $9.2 million this past quarter.
And our EBITDA conversion ratio and that's defined as EBITDA less capex divided by EBITDA for the last 12 months was 84.4%.
Our capex spend for the fourth quarter totaled $3.9 million and that is inclusive of both growth and maintenance capital with fiscal year 2020 capex totaling $10 million.
And we expect fiscal year '21 capex to be reduced by 60% to $4.0 million.
Free cash flow per share for fiscal year '20 was $1.83 and that's a non-GAAP measure, but it reinforces our ability to generate cash.
Taxes, the tax rate for the year was 30% and was impacted due to the non-deductibility of interest expense due to the GILTI tax provision.
Moving on to full year highlights.
Revenue for the year totaled $383.5 million and that's a decline of 7.1% over the prior year driven mainly by our EMEA, where we have taken significant measures to adjust our cost structure and position the region for modest growth in fiscal year '21.
Gross profit for the year was $161.6 million, a decline of 81% over the prior year.
Gross margins were 42.1% and that's a 50 basis point decline over the prior year.
And SG&A was $100.8 million and that's a 3.4% increase over the prior year and that excludes the cost of our cost-out actions throughout this year.
Adjusted EBITDA for the year was $64.3 million and that's a decline of 22.9% over the prior year and 16.8% as a percent of sales.
GAAP earnings per share for the year was $0.36 and that's a decline of $0.33 and adjusted earnings per share was $0.75 or a decline of $0.44.
And in closing due to the current global economy and the uncertainty in our end markets, we are not providing any formal guidance at this time.
We will continue to evaluate this as the year unfolds and provide you with an update on our next call.
And lastly, our capital allocation priority is to continue to reduce our debt through continued optional debt repayment.
Our balance sheet is strong and we remain confident in our current liquidity and ability to generate cash this fiscal year, which we expect will provide valuable flexibility in the future.

user
compname posts quarterly loss per share of $0.09.
thermon group holdings inc qtrly revenue of $88.4 million, a decrease of 23% compared to $114.2 million.
thermon group holdings inc qtrly loss per share $0.09.
thermon group holdings inc qtrly adjusted earnings per share $0.01.
thermon group holdings - q4 2020 total orders were $90.5 million versus $105.7 million in q4 2019.
thermon group holdings - q4 2020 backlog of $105.7 million represents $14.3 million, or 12%, decrease versus q4 2019 backlog of $120.0 million.

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