Thermon Group Holdings Inc (THR) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Thermon third-quarter 2014 conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Sarah Alexander. Ma'am, you may begin.

Thank you, Shannon. Good morning, and thank you for joining us for today's earnings conference call. We issued an earnings press release this morning which has been filed with the SEC on Form 8-K, and is also available on the Investor Relations section of our website at www.thermon.com.

A replay of today's call will be available on our website after the conclusion of this call. This broadcast is the property of Thermon. Any redistribution, retransmission, or rebroadcast, in any form, without the express written consent of the Company is prohibited.

During this call, our comments may include forward-looking statements. These forward-looking statements are subject to risks and uncertainties, and our actual results may differ materially from the views expressed today. Some of these risks have been set forth in the press release and in our annual report on Form 10-K that was filed with the SEC last June.

We also would like to advise you that all forward-looking statements made on today's call are intended to fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may include, among others, our outlook for future performance and revenue growth, leverage ratios, acquisitions, and various other aspects of our business.

During this call, we may also discuss adjusted EPS, adjusted EBITDA, adjusted net income, free cash flow per share, and return on equity, which are non-GAAP financial measures as defined under the rules of the Securities and Exchange Commission, and are intended as supplemental measures of our financial performance that are not required by, or presented in, accordance with US generally accepted accounting principles. These measures should be considered in addition to, not as substitutes for income from operations, net income, net income per share, net cash provided by operating activities, and other measures of financial performance reported in accordance with GAAP.

And now it's my pleasure to turn the call over to Rodney Bingham, our President and Chief Executive Officer.

Thank you, Sarah. Good morning, everyone, and thank you for joining our conference call and your continued interest in Thermon. Today we have two of our senior vice presidents joining me on this earnings call: Jay Peterson, our CFO, will follow me and present the financial details of FY14's third quarter; George Alexander, our Executive Vice President of Global Sales, will assist in the Q&A session by answering questions that pertain to global market segments and/or industry trends.

For those of you not familiar with Thermon, we are a leading global provider of thermal solutions. We serve the oil, gas, chemical, and power generation industries. Our heat-tracing systems provide freeze protection and temperature control for piping, vessels, and instrumentation. These mission-critical systems insure the continuous and safe operation of industrial facilities.

While Jay will discuss financial details in a moment, I would like to touch on some Q3 highlights. Our gross profit for Q3 was a record high of $36.1 million, or 50.5% of sales. This is primarily due to the strength of the MRO/UE revenue during the quarter. In particular, we saw a significant increase in MRO revenue in all four geographic regions, which drove MRO revenue to 76% of total sales.

Two key drivers for this MRO increase were: cold weather, which is part of our heating season; and our growing install base around the world. Our new manufacturing facility enabled us to meet the peak heating season demands without disruption of delivery schedules and/or any order cancellations. These strong margins, coupled with on-target SG&A expenses, produced a record adjusted EPS of $0.37, and a record adjusted EBITDA of $22 million.

While we achieved record results in gross margins, EPS, and free cash flow, we did have a 7% decline in Q3 revenue year on year. This decline was attributed to a slowdown in greenfield orders and billings for North America and Asia Pacific. The Q3 revenue split of 76% MRO, 24% greenfield, signifies a strong MRO billings with the favorable product mix that produced those record gross margins, a little over 50%.

We are continuing to experience FX headwinds, which have negatively impacted our revenue by $2.7 million to date. Macroeconomic factors and construction chronology have softened our greenfield project billings for the year. Because of these trends, we are revising our FY14 annual revenue guidance from mid single-digit growth to flattish year over year. Our fundamental business model remains strong, and we are on track to set records for gross margins, earnings, and free cash flow per share in FY14.

Our backlog for Q3 ended at a solid $90.5 million. We are currently in the middle of our annual budgeting process, and we'll have more detail for FY15 yearly guidance on the next earnings call in May. We continue to add infrastructure and assets to support our growth strategies for both greenfield and the MRO revenues.

Our global footprint continues to be a key component of our strategy to provide value to our customers worldwide and penetrate those targeted end markets -- oil, gas, power, and chemical. We are also continuing to benefit from a rebound in the chemical, petrochemical and power sectors that are related to the shale oil and gas developments in the United States. Thermon's updated pipeline is very robust, with over 500 project opportunities and approximately $1 billion in estimated value. This is an increase over last quarter.

Our management team would like to thank our employees throughout our global organization for their hard work and dedication. We would also like to thank our customers, investors, and advisors for their support and confidence. Thank you, again, for joining us today.

Jay Peterson, our CFO, will now address the details of our financial performance for our Q3.

Thank you, Rodney. Good morning. Today I will discuss our third-quarter results, starting with orders and top-line revenue.

Orders for the quarter totaled $70 million, and that's a decline of 1% relative to Q3 of last year. Our revenue this past quarter totaled $71.5 million, a decrease of 7% relative to the prior year's quarter. I would like to accentuate the fact that, excluding the Kearl Lake project, we have actually grown orders, gross margins, and backlog during this last quarter and fiscal year, diminishing our financial reliance on this mega project.

During this quarter, our MRO revenue grew by 22% to a record level of $54 million, whereas greenfield revenue declined by 47%. Our fastest growing geographies in the quarter were the US and Europe, growing 5% and 23%, respectively. And note that our revenue was negatively impacted by FX in the amount of $1.2 million, and that was primarily due to the weakness in the Canadian dollar.

Our backlog of firm orders ended December at $90.5 million, and that's essentially flat with September of 2013. And note that FX has negatively impacted our backlog by approximately $2.2 million over the last 12 months.

Now turning to gross margins, margin dollars this quarter totaled a record $36.1 million, and, relative to the prior year, our margins increased by 500 basis points to nearly 51%. This margin increase was due to the strong mix of MRO/UE at 76% of revenues and, to a lesser extent, material cost reductions, specifically copper and resins.

Now for operating expense and head count, our core operating expenses for the quarter, that is SG&A -- and this excludes D&A and any transaction-related expenses -- totaled $14.7 million, and that's a 9.2% year-on-year decrease. And this reduction was due to personnel-related cost and bad debt expenses.

Our OpEx as a percent of revenue this past quarter, was a very competitive 20.6%, again, excluding D&A. Our full-time employees at the end of December totaled 831, virtually flat with September and the start of the fiscal year.

Now, discussing below-the-line highlights, including interest expense and taxes, earlier this year we refinanced our 9.5% long-term bonds with a five-year bank note, currently with an interest rate of 3.6%. And this refinancing will add approximately $0.16 a share in earnings over the next 12 months. The rate will vary depending on our leverage ratios, however, the rate will not fluctuate with any movements in LIBOR. And note that, over the last three years, we have reduced our interest expense by nearly $16 million a year.

And, as previously disclosed, we were able to declare a permanent reinvestment position with the earnings from most of our foreign affiliates, reducing our tax rate from the mid-30%s down to the mid-20%s. And this event will save the Company in excess of $1 million a year in both cash and earnings.

Now turning to earnings, GAAP net income for the quarter totaled $12.6 million. Our GAAP EPS for the quarter totaled a record $0.39 a share, and $0.37 a share after a one-time favorable tax adjustment. The $0.02 adjustment to GAAP earnings relates to a tax accrual dating back to the 2010 CHS acquisition of THR that will not require payment, and a explanation of this adjustment can be found in our earnings press release and our 10-Q.

Also note that our GAAP EPS was negatively impacted by approximately $0.015, due to the combined effects of FX translation and transaction adjustments. And also note that our GAAP EPS is negatively impacted by $0.09 a share per quarter due to the non-cash amortization expense from the 2010 purchase of the Company by our former sponsor.

Our free cash flow EPS was at an all-time high in Q3, and it totaled $0.58, and this is nearly double the $0.31 a share in the prior period. Our adjusted EBITDA totaled a record 2.2 -- I'm sorry, $22 million this past quarter, and that's up from $19 million in the prior-year period. EBITDA as a percent of revenue was a healthy 31% in Q3, and that's up from 25% from one year ago.

Finally, our balance sheet. Our cash balance grew to a record level of $67 million in Q3, and that's an increase of nearly $24 million in the last 12 months. Leverage at the end of December -- and this is on a net debt basis -- fell to a low of 0.8, down from the approximately 4 times in 2010, and we are positioned to reduce our leverage further in the future.

Lastly, our business continues to be highly capital efficient. Over the last nine months, CapEx -- and this includes both growth and maintenance capital -- amounted to a total of $2.4 million, or approximately 1% of revenue. Our conversion ratio -- and this is defined as EBITDA less CapEx divided by EBITDA -- totaled a very strong 94% on a year-to-date basis.

I would now like to turn the call back over to Shannon.

Thank you.

(Operator Instructions)

Our first question is from Jeff Hammond of KeyBanc Capital. You may begin.

Hello. Good morning.

Good morning.

Hello, Jeffrey.

Yes. So just on the greenfield -- I mean, is this something maybe you were anticipating, or are there some timing issues, or you have started to see some real slowness? Maybe just kind of flesh out what has really changed on the greenfield side?

Jeff, this is George. In, as Rodney mentioned, we had some softness in Asia. We had a very tough comp from a year ago. The good news is that the backlog from Asia as it relates to the EPC market there is strong, as well as the quotations activity in that market. So we do see strength going forward.

In Canada, that is another area that was soft in Q3. We are coming off of the mega projects in Canada, so we are seeing some slowdown in general in Canada, mostly because of the influence of the shale gas and oil activity in the US, we think. But again, the fundamentals of the business in Canada remain very strong.

The MRO business based on our install base remain very strong. But there is no doubt that there is some softness in the greenfield activity. But our quotation level is high, our backlog remains steady and strong, so that gives us some reason for optimism going forward.

Okay. So when does the Kearl project kind of wrap up and or start to ramp down? And what is kind of the visibility around other mega projects or other orders in Canada replacing that?

Well, we are starting to deliver the last phase of the Kearl project now, and we will continue through Q4. There will probably be a little bit that goes into FY15, but we are in the final phases of that.

In terms of the business going forward, like we have talked about on previous calls, most of the activity that we are involved with in Canada is around the SAG-D processes, and there is still a lot of activity there. They aren't -- they do not represent the same magnitude as the upgraders or the mega projects. But again, our activity in Canada is still strong, but without an upgrader, or without a mega project in the mix, we do expect some slowdown in the greenfield billings in Canada.

Okay. And just, and I know you are still kind of going through your budget. But as you look at kind of quoting activity and kind of this project ramping down, I mean, does that make it difficult to grow greenfield into FY15?

It will represent a challenge, yes, to grow it. But again, our quoting activity globally is strong, so we have some reason for optimism there, but yes, it will represent a challenge.

Okay. And then just real quick on the MRO side, can you just talk about sustainability of strength into January or February here with the cold weather? And how likely that is to be strong again as we finish the year?

Yes. So we -- our MRO activity we believe will continue to be strong through the winter, through the heating season. As you know, there is some seasonality to our business, and we are appreciative of the cold winter in North America, certainly. It does help the business, but we are -- the driver for our growth in MRO though, is largely the increased install base that we have, and the global fingerprint, the serviceability that we provide to our install base.

Okay. Thanks. I will get back in queue.

Thank you. Our next question is from Tim Mulrooney of William Blair

Good morning.

Good morning, Tim.

Just staying on MRO for a second. I know you said it was up in all regions, but I am wondering if any particular end market, oil or gas, or petro chems stood out and provided such a large boost to the MRO revenue?

Yes, Tim, this is Jay. From a geographic perspective, the growth was pervasive. I don't have the breakdown by end markets, but I will tell you that across the four major geographies, all four geographies had double-digit growth. So we are real happy with that performance in the quarter.

Okay. Thank you, Jay. And then, last quarter you highlighted that Europe was strengthening a little bit. Is that something you are still seeing, or did things pull back at all in the third quarter? Can you just talk about what you are seeing in that region specifically?

Yes. As we have reported in the past, Europe is coming off of some slowdown. But particularly in Q3, we saw a very good rebound in Europe, which is promising, and also it was -- it wasn't concentrated in any one particular area. It was pretty much across all regions in Europe. So we are very happy about that, very encouraged about that. And in addition to that, again the level of quotation activity in Europe is also up.

Okay. Thank you.

Thanks, Tim.

Thank you. Our next question is from Scott Graham of Jefferies. You may begin.

Hi, good morning.

Good morning, Scott.

I think it was Jay that started to go over the sales by region, US up 5%, Europe up 23%. Was that the full business, or was that just the MRO piece?

That was the inclusive of greenfield and MRO.

Okay. Great. Could you then tell us what the sales were in the other regions?

Yes. Canada was down 17%, and that is specifically due to Kearl

Okay.

Asia PAC, due to a very strong comp in the prior year, I believe that was with Korea from a couple very large projects with EPCs in Korea, was down 38%. And the exact numbers on this, Scott, you can find in our Q that will be coming out later today.

That is great. Thank you. The Greenfield number of down 47%, I just -- I think an earlier question alluded to this, and maybe you can just unbundle that for us a little more? I certainly understand that there are project roll-offs and what have you. But I guess, we kind of knew this coming into the quarter. So can you maybe unbundle the minus 47% a little bit more, and then maybe tell us what caught you by surprise?

Well, in Canada specifically, the issue is the -- one of the issues is the age old-subject of scheduling of projects, and when we get the information to complete the engineering, and thus deliver -- the particularly the buyoffs, not the heating cable, but the control systems, the switch racks and that sort of thing.

And that -- there was some of that as it relates to Kearl. And again, there was some softness in terms of our overall billings in greenfield projects in Canada. And that just has to do with when orders are awarded, and when we are released to start construction on a project.

Okay. Fair enough. Thank you. My next question is on the orders, which I think you indicated were down 1% year over year. And if my notes are correct, the comparison on that is a minus15% from the year ago period. So is this -- I know that the orders and the bookings -- a lot of that is greenfield -- so could you help us understand, why orders were kind of down 1% on what was a fairly easy comparison?

Yes. I have got the year-to-date numbers, Scott, at my disposal.

All right.

If you -- [took] Kearl, is the main driver there. If you strip out Kearl for the year, we are up almost double digit, 9% in order activity, and 6% for the specific Q3 performance.

Okay. And when is the Kearl sort of comp issue behind us, Jay?

Well, we will have to go another three or four quarters, until Kearl becomes virtually fully eradicated from the backlog and from invoicing. So we have got a couple, three more quarters in front of us at least.

Okay. So it would be fair to say that, if the dynamics of the markets don't change, that we could be looking at another flat year of sales in next year?

A little early to make that statement. As you know, we have got an international footprint, and we are seeing some favorable dynamics in Europe, in the US, and some of the other geographies that we have got a strong install base. So we are not ready to declare that. But we will be able to provide further guidance once we go through our budgeting process, which literally has started over the last week or so and will conclude late in March.

All right. That is helpful. I have other questions, but I will jump back in the queue. Thank you.

Thank you. Our next question is from Charley Brady of BMO Capital Markets. You may begin.

Hello, thanks. I apologize. I dropped off a little bit, so I apologize if you covered this. But just on the margin, on the gross margin, given the meaningful shift, greenfield MRO, as you look out not only to Q4, but even if we look out into FY15 -- I know you don't want to give guidance there, but I think we are just trying to get a handle on, obviously that gross margin shift makes a pretty meaningful impact on the earnings picture for Thermon.

So do you expect, even if the revenues have started to taper off maybe a little less than what you kind of envisioned a few months ago, because of some project and greenfield stuff. The fact that the MRO mix seems to be up pretty strong, across the board, that would drive a gross margin higher than obviously the historical average you talked about, and therefore mitigate some of the downside on the revenue?

Yes, in a vacuum that, in fact would happen. However, when we look out to FY15, we believe that our revenue complexion will go back to our normal mix of 60% MRO, 40% greenfield, and that will temper margins a little bit. But again, that is a good thing, because of the growing install base.

Okay. Can I ask -- I guess that makes me ask the question of, what gives you confidence that it will revert back, given that you have greenfield slowing, and you have MRO up significantly, why would that revert back so significantly to the historic average?

One of the reasons is the backlog that we have, and the timing of those scheduled shipments for the greenfield projects that are in the backlog. As we have talked about before, our backlog is largely contained up with greenfield projects. The margin difference for comparing a greenfield project and an MRO is -- there is a significant difference.

That is attributed to the fact that there is a product mix issue. And again, our backlog in some of the markets like Korea as we have talked about is strong, and the timing of those shipments are such that when they ship, they aren't going to have a bit of a downward affect on margins, to the extent that we think it will return to the more traditional levels. But certainly through the winter, through the heating season, when MRO is expected to be a higher percentage of our total, we think that the margin strength that we have right now, will continue through the winter.

Do you expect greenfield shipments over the next 12 months to be equal to the prior12 months, or is it up or down versus that?

Well, we are going through our budgeting process as we speak. So I can't speak to specifics for FY15 at this point in time, but we do believe that Thermon will grow over time. But I can't speak specifically to the next 12 years until we complete our budgeting --

12 months

12 months. I am sorry. (Laughter).

Fair enough. Thanks. I will hop back in the queue. Thanks.

Thank you. Our next question is from Katherine Thompson of Thompson Research. You may begin.

Good morning, guys. This is Steven Ramsey, filling in for Katherine. The first question, could you give any kind of update on utilization rates from your expanded manufacturing facilities?

Well, we have -- as we said earlier in the call, we had -- we came very well through our peak demand period, which we are still in right now. And the utilization rates over the next several months being the heating season has been very high, as we would expect they were.

But again, the most important or germane fact, is that we had no order delays, scheduling issues or any canceled orders, which is very key that time of year for freeze protection revenue streams, particularly the MRO business. When it is cold, they need the product. You got to have it on hand, and you got to be able to refill your market distribution channel, which that expansion that we did a 1.5 year ago has allowed us to do now. So a very positive impact for us.

Great. Thanks. And my last question, CapEx this year so far has been lower, much lower relative to last year. Do you expect the current pace of capital expenditures over the next few quarters to continue at this pace, or do you have any significant investments planned for the next few quarter?

For this, balance of this fiscal year, we believe the 1%-ish number may be a little bit higher than that, 1.25%. For next year, however, we are looking at an expansion of our production capabilities for our two bundle product. And in that fiscal year, our CapEx for both expansion and maintenance capital will be closer to 2%. But in the next 90 days, very similar to the percentage we have seen over the last nine months.

Excellent. That is all.

Thanks, Steven.

Thank you. Our next question is from Jonathan Braatz of Kansas City Capital. You may begin.

Morning, everyone.

Good morning, John.

Returning back to the install base, you indicated that maybe the harsh weather this winter has helped business a little bit. I wonder if you could maybe clarify that a little bit or maybe quantify it?

And more importantly, as you have spoken about the install basis is rising, and you are seeing -- you have got a lot more business out there, is there a opportunity to see as you look forward, to see double-digit growth in that business consistently over the 3 to 5 year time horizon?

Well, to answer your first question about the effects of harsh winters, that is definitely related to the preparedness of the customer base and the region. So the further south, you go in North America, generally speaking, the more likely a plant would be less prepared to deal with a severe winter. So whenever we have these -- when we have snow in Texas like we did this morning, that is a good thing. Because most of the user base is not necessarily prepared for a harsh winter.

That is not true in the colder climates. Whether it is harsh or not, it is still cold, and still requires attention to detail, as it relates to preventive maintenance on for -- for flow control and for freeze protection.

The second part of your question, yes, we do believe that there is an annual annuity if you will, on install base. We think about 7%, 5% to 7% of the install base, the capital spend gets replaced every year, due to maintenance that is performed on inline equipment like pumps and valves and moving -- mechanical equipment in the pipeline. So we do expect that number to grow year over year as our install base grows.

Okay. Going back to the first part -- about the facilities in the southern part of the, let's say the United States, that they are less prepared. So when you have some harsh weather like we have right now, are there some like quote-unquote emergency services that you provide? I mean, were they without freeze protection?

Yes, and that is also directly related to what Rodney mentioned of, as it relates to our capacity, that our ability to respond to emergency needs, to be able to deliver product tomorrow. Because again, whenever plants do experience freeze-ups, it is a -- it can be a emergency situation, in terms of potentially having to shut a plant down. So, yes, we do provide those services, and the availability of product is crucial.

And those emergency services, is -- can that be done at a higher margin?

Absolutely.

Okay. So you have some enhanced margins when you have that -- some harsh weather like we have seen?

Yes, this is Rodney. Also too, in the southeast and Gulf Coast parts of the United States, we also have infrastructure in place to actually provide services to go troubleshoot and install the product, as well as the product supply.

All right. Thank you very much.

Thank you, John.

Thank you. Our next question is from AJ Strasser of Cooper Creek Partners. You may begin.

Hello.

Good morning, AJ.

Good morning.

Congratulations on a really strong kind of profitable quarter.

Just going back -- and I know it has been asked a couple of ways now. Just to give us a sense of how kind of sustainable this gross margin is, maybe you could just comment a little bit on the current quarter? To the extent that we are still in the heating season, which we are, and the dynamics that were at play in Q3 should continue to Q4, why wouldn't we continue to see gross margin kind of stay at the 50% range?

Yes. Just one thing from a financial perspective, and then I will ask George to comment on the specifics of what we are seeing of late. And that is, you mentioned the strong profitability.

One of the inherent niceties, if you will, of our business model is that we can throw off very strong gross margins, both dollars, percentage and EPS, when we have a predominantly high mix of MRO. So even though we would like to have more greenfield sales, when they do dip, and when they dip significantly like they did this last quarter, we can still throw off very strong earnings.

And in terms of the dynamics of this particular quarter, I will turn that back to George.

We are still in the heating season. So there is some reason to believe that our strong margins will continue into -- throughout the heating season, and until the end of the heating season. But again just to reiterate, once our greenfield project activity and backlog start to reach the point where we are shipping that material, which does have a product mix of buyoffs that are at much lower margins, that will have an impact.

But certainly, through the heating season, which will go into Q4, we do expect some strength there in the margins to continue.

Okay. Thank you.

Thanks, AJ.

Thank you. We have a follow-up question from Scott Graham with Jefferies. You may begin.

Hello, again. I wanted to see if anything in the SG&A line, if there is anything there like a reversal of an accrual, incentive or anything like that, that would have begin rise to the -- that SG&A number that we saw?

Yes, there is a lot of dynamics in SG&A, Scott, as I am certain you can appreciate. When we have less greenfield activity or our revenues might be down, ostensibly there could be less commissions.

We did have a small bad debt reversal in the quarter of a couple $100,000. And since we have not hit certain milestones from our short-term incentive plan, there would be either less accrual, or even a recapture of a prior accrual in terms of incentive.

So there is a lot of different things that could come into play in a given quarter.

Okay. Thank you.

And I guess this is more of a question for you, George, and certainly glad to hear about the identification of more projects and higher dollars around the world. It seems, however, that, given where the backlog is, given where the bookings have been, that the leveraging of the facilities expansion has really maybe been a little bit -- I don't want to put words in your mouth -- but certainly a little slower than I would have expected, in terms of booking some projects, even smaller projects around the world, that you are now capable of executing under.

So I guess, when we talk now about the Kearl project being a bit of a hang up on the comps, I guess I would have thought we would have had more replacement business there. I guess I wanted you to maybe comment on my view, if your view is equal to my view that maybe this facility expansion is -- that we haven't leveraged it to the extent that maybe we would have thought about a year ago?

Well, Scott, the comps that mega projects create for us are ones that we don't want to plug in projections that relate to the impact of mega projects that are out there in front of us, because of the fact that we don't have any control over their schedules.

As it relates to the number of projects that we are quoting that are not mega projects, as I have said, that activity is up. So it does give us reason for optimism there. But certainly, we do have to take into account that we have got to win more of those. We have got to capture more of those, and execute more of those than -- to equal the comp that is created by rolling off of a mega project.

So, I guess, I am kind of -- I feel like there is still reason to be positive about the greenfield activity on a global scale. We do have a challenge in terms of matching the performance in the greenfield activity in Canada.

Understood. Okay. Thanks a lot.

Thanks, Scott.

Thank you. Our next question is a follow-up from Jeff Hammond of KeyBanc Capital. You may begin.

Hello. Jay, you mentioned the tax rate in the mid 20%s, and I think that is the trend. Can you just give us an update on how we think the tax rate looks for the March quarter, and into the out years?

Yes. Based on all the tests we have done, in terms of being able to sustain US operations, including debt service, we believe that our permanent reinvestment position that we declared earlier this year, is something that is sustainable going out into the future. So that is good news. Going forward, somewhere in the 26% range, maybe 26.5% is what we are modeling internally. That is this year, next year, and thereafter.

Okay. Great.

And then, can you just comment on what you are seeing in the acquisition pipeline, and you continue to build cash? You mentioned your debt to EBITDA ratio being at all time lows, probably too low for your type of a company, and how you are maybe thinking about returning some of that cash to shareholders?

Yes, the -- our capital allocation strategy has not changed, Jeff. We will continue to, number one priority would be to reinvest in our business. We are certainly looking at acquisitions harder today than we ever had, due to some talent we recently brought into the business. Some prudent M&A transactions would also be high on the list.

We do have some modest amortization of our bank note, about $13.5 million a year. And then, could we do a dividend down the road? It is possible, but I think a lot of that is predicated on what the M&A horizon looks like. And then, there is obviously the possibility of somewhere down the road, some sort of security repurchase program. But I would tell you the first two are really the drivers that we are looking at.

So you mentioned spending more time on the M&A. I mean, are you seeing more come into your pipeline? Are you starting to look at adjacencies or outside of the core? Is there anything in the pipeline that looks closer to the finish line than not?

Yes, Jeff, it is Rodney. Currently at this time, we don't have anything closer to the finish line than we have in the past. However, the pipeline is significantly more populated with opportunities, as a result of the Senior VPs that we brought in several months ago, and the priority level has been ratcheted up several notches, in terms of what we are doing. And we do have a significant increase in the number of identified M&A opportunities that are available to us. And we are looking both obviously inside the core, as well as one or two valances outside that inner core.

Okay. Very helpful. Thanks.

Thanks, Jeff.

Our next question is a follow-up from Charley Brady of BMO Capital Markets. You may begin.

Yes, thanks. I was going to actually follow-up on the M&A, and you may have partially answered it. But so, could you maybe give a little more granularity outside of traditional heat tracing equipment, what would be something that you think would still fall within the umbrella of Thermon?

And second, you talked about spending some of the capital on reinvesting back in the business. Obviously, the CapEx is pretty skinny, so maybe some more granularity on what you mean by reinvesting back in the business? Is it just a ramp of R&D spend, or is that something else there?

Let me go backwards on you. In terms of CapEx, and in terms of spending, we are looking at -- obviously R&D is appropriate, as it relates to our inner core in developing new products for existing customers and existing opportunities. So that is a part of that mix, but also too, reinvesting in our business model.

A large component of our business is the service component, whether it is fee studies, engineering, analysis, engineering deliverables, field service or even turnkey construction. So you need personnel on site. In emerging markets, you need sales and marketing people out front leading it.

So that is the investment we are talking about reinvesting in the business, as well as the two bottle expansion we talked about earlier. So was there still one more question I didn't answer on that?

I was just going to -- I was looking for more granularity kind of on the M&A front. You talked about looking outside the traditional Thermon areas. I don't know if you can comment on a little more specifically, on kind of what you see fitting into that criteria that you are looking at?

Okay, our core is industrial, electric, heat tracing. So when we start looking outside the core, and besides vertical integration acquisitive opportunities, you are also looking at anything that would involving heating. It could be something other heaters besides heat tracing cables, process heaters. It could be steam tracing, that is an adjacent market. It could be commercial electric tracing, for institutional buildings, rail, industry, et cetera. So those are a couple of examples.

Great. That is helpful. Thank you.

Thanks, Charles.

Thank you. I am showing no further questions at this time. I would like to turn the conference back over to Rodney Bingham for closing remarks.

First of all, thank you, everybody, for attending the call today, and again thank you for your continued interest in Thermon. We feel like we had a very good quarter. I would like to have had some little more uptick in revenue.

However, as we have said several times before in the past, we still believe this is a good business to be in, and we still believe this is a good time. So, thank you very much, and we will look forward to the next earnings call.