Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars in Thousands, Except Share and Per Share Data)

 

1. Basis of Presentation and Accounting Policy Information

On April 30, 2010, a group of investors led by entities affiliated with CHS Capital LLC  (“CHS”) and two other private equity firms (together with CHS, our “private equity sponsors”) acquired a controlling interest in Thermon Holding Corp. and its subsidiaries from Thermon Holdings, LLC (“Predecessor”) for approximately $321,500 in a transaction that was financed by approximately $129,252 of equity investments by our private equity sponsors and certain members of our current and former management team (collectively, the “management investors”) and $210,000 of debt raised in an exempt Rule 144A senior secured note offering to qualified institutional investors (collectively, the “CHS Transactions”). The proceeds from the equity investments and debt financing were used both to finance the acquisition and pay related transaction costs. As a result of the CHS Transactions, Thermon Group Holdings, Inc. became the ultimate parent of Thermon Holding Corp. Thermon Group Holdings, Inc. (“TGH”) and its direct and indirect subsidiaries are referred to collectively as “we”, “our”, the “Company” or “Successor” herein. 

In the CHS Transactions, the senior secured notes were issued by Thermon Finance, Inc., which immediately after the closing of the CHS Transactions was merged into our wholly-owned subsidiary Thermon Industries, Inc. 

The CHS Transactions were accounted for as a purchase combination. The purchase price was allocated to the assets and liabilities acquired based on their estimated fair values. While the Company takes responsibility for the allocation of assets acquired and liabilities assumed, it consulted with an independent third party to assist with the appraisal process. 

Pushdown accounting was employed to reflect the purchase price paid by our new owner. 

The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto of TGH for the year ended March 31, 2012 . In our opinion, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary to present fairly our financial position at September 30, 2012 and March 31, 2012 , and the results of our operations for the three and six months ended September 30, 2012 and 2011 .  Certain reclassifications have been made to the prior period presentation of cash flows to conform to the current period presentation. Specifically, we have provided further detail to the c ondensed consolidated statement of cash flows related to premiums paid on redemptions included within cash used in operating activities. The reclassification did not change total cash used in operating activities.

Use of Estimates

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. While our management has based their assumptions and estimates on the facts and circumstances existing at September 30, 2012 , actual results could differ from those estimates and affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements.  The operating results for the three and six month period ended September 30, 2012 are not necessarily indicative of the results that may be achieved for the fiscal year ending March 31, 2013 . 

Corrections of classification errors in previously reported Condensed Consolidated Statement of Cash Flows

During the second quarter of fiscal 2013, the Company identified a classification error in its cash flow statements for the year ended March 31, 2012 and for the three months ended June 30, 2012 related to the classification of excess income tax benefits associated with stock option exercises. Such benefits were improperly classified as a cash inflow from operating activities rather than a cash inflow from financing activities in the fourth quarter of fiscal year 2012 and in the first quarter of fiscal year 2013. The result of this error was an overstatement of cash flows from operating activities of $2,181 for the year ended March 31, 2012 and $1,243 in the first quarter of fiscal 2013. The classification errors had no effect on the reported changes in cash and cash equivalents, and also had no effect on the consolidated balance sheet, the consolidated statement of comprehensive income (loss), or the consolidated statement of stockholders' equity.

The reduction to cash flows from operating activities for the excess tax deduction has been properly reflected in the cash flow statement for the six months ended September 30, 2012. Based on our evaluation of relevant quantitative and

qualitative factors, we determined that the classification errors are immaterial to our prior period financial statements and did not warrant an amendment of our financial statements for fiscal 2012 or the first quarter of fiscal 2013. In future filings, the Company plans to correct the comparative presentation of the prior periods in future filings as follows:

Recent Accounting Pronouncements

In May 2011, the FASB updated FASB ASC 820 that resulted in common fair value measurement and disclosure requirements in U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs).  Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  We have adopted ASC 820 effective April 1, 2012, and is being applied prospectively. In conjunction with adopting ASC 820, we disclosed the fair value of investments and the inputs used to estimate that fair value.

In June 2011, the FASB updated FASB ASC 220, Comprehensive Income (FASB ASC 220) that gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  We have adopted ASC 220 effective April 1, 2012 and in conjunction with adopting ASC 220, we chose to present the components of comprehensive income within a single statement of other comprehensive income or loss. ASC 220 affects presentation and disclosure only and therefore adoption did not affect our results as reported in our consolidated financial statements.

2. Fair Value Measurements

Fair Value . We measure fair value based on authoritative accounting guidance, which defines fair value, establishes a framework for measuring fair value as well as expands on required disclosures regarding fair value measurements.

Inputs are referred to as assumptions that market participants would use in pricing the asset or liability. The uses of inputs in the valuation process are categorized into a three-level fair value hierarchy.

Financial assets and liabilities with carrying amounts approximating fair value include cash, trade accounts receivable, accounts payable, accrued expenses and other current liabilities. The carrying amount of these financial assets and liabilities approximates fair value because of their short maturities.  At September 30, 2012 and March 31, 2012 , no assets or liabilities were valued using Level 3 criteria. 

Information about our long-term debt that is not measured at fair value follows:

Our senior secured notes trade on over the counter markets.  As the quoted price is only available through a dealer, the Company concluded the market is not active enough to be classified as a Level 1 valuation.  However, the pricing is indirectly observable through dealers and has been classified as Level 2.  Differences between carrying value and fair value are primarily due to instruments that provide fixed interest rates or contain fixed interest rate elements. Inherently, such instruments are subject to fluctuations in fair value due to movements in interest rates.

3. Earnings and Net Income (Loss) per Common Share

Basic earnings per share (EPS) and net loss per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during each period. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares and common share equivalents outstanding (if dilutive) during each period. The number of common share equivalents, which includes options and both restricted and performance stock units, is computed using the treasury stock method.  With regard to the performance stock units, we assumed that the target number of shares would be issued within the calculation of diluted net income per common share.

The reconciliation of the denominators used to calculate basic EPS and diluted EPS for the three and six months ended September 30, 2012 and 2011, respectively, are as follows:

(1)          For the six months ended September 30, 2011 the Company was in a net loss position, therefore 1,671,801 common stock equivalents were not included in the calculation of diluted loss per common share since they would have had an anti-dilutive effect.

4. Inventories

Inventories consisted of the following:

5. Goodwill

The carrying amount of goodwill as of September 30, 2012 is as follows:

The excess purchase price over the fair value of assets acquired is recorded as goodwill. Goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach based on the market capitalization of the reporting unit. Our annual impairment test will be performed as of January 1, 2013. At September 30, 2012 , there were no indicators of a goodwill impairment.  Goodwill is not deductible for tax purposes.

6. Accrued Liabilities

Accrued current liabilities consisted of the following:

7. Related-Party Transactions

We paid management fees including a termination fee in connection with our IPO to our private equity sponsors of $8,120 in the six months ended September 30, 2011 .  The termination fee is included as part of Marketing, general and administrative and engineering expense. We did not pay management fees during the six months ended September 30, 2012.

Included in our consolidated balance sheet is “Obligations due to settle the CHS Transactions” which totaled $3,391 and $3,528 at September 30, 2012 and March 31, 2012 , respectively.  These amounts represent amounts due to the Predecessor owners in final settlement of the acquisition by our private equity sponsors of a controlling interest in us that was completed on April 30, 2010.  During the three and six months ended September 30, 2012 , we paid $6 and $137 , respectively; to the Predecessor owners and during the three and six months ended September 30, 2011 we paid, $154 and $372 , respectively; to the Predecessor owners, in each case reflected in "Obligations due to settle the CHS Transactions".  At September 30, 2012 , the amount outstanding represents the estimate of tax refunds due from government entities that have not been received but are related to the final tax periods filed by the Predecessor and remaining encumbered cash to be released as letters of credit expire.

8. Short-Term Revolving Lines of Credit

The Company’s subsidiary in the Netherlands has a revolving credit facility in the amount of Euro 4,000 (equivalent to $5,142 USD at September 30, 2012 ). The facility is collateralized by receivables, inventory, equipment, furniture and real estate. No loans were outstanding on this facility at September 30, 2012 or March 31, 2012 .

The Company’s subsidiary in India has a revolving credit facility in the amount of 80,000 Rupees (equivalent to $1,518 USD at September 30, 2012 ). The facility is collateralized by receivables, inventory, real estate, a letter of credit, and cash. No loans were outstanding under the facility at September 30, 2012 or March 31, 2012 . 

The Company’s subsidiary in Australia has a revolving credit facility in the amount of $325 Australian Dollars (equivalent to $337 USD at September 30, 2012 ). The facility is collateralized by real estate. No loans were outstanding under the facility at September 30, 2012 or March 31, 2012 .

The Company’s subsidiary in Japan has a revolving credit facility in the amount of 45,000 Japanese Yen (equivalent to $578 USD at September 30, 2012 ).  The facility is collateralized by a standby letter of credit in the amount of $300 issued as part of the revolving credit facility referred to in Note 9, “Long-Term Debt”. No loans were outstanding under the Japanese revolving credit facility at September 30, 2012 or March 31, 2012 .

Under the Company’s principal revolving credit facility described below in Note 9, “Long-Term Debt,” there were no outstanding borrowings at either September 30, 2012 , or March 31, 2012 , respectively. 

9. Long-Term Debt

Long-term debt consisted of the following:

Revolving Credit Facility and Senior Secured Notes

Revolving credit facility.   On August 7, 2012, Thermon Industries, Inc. and Thermon Canada Inc. terminated its existing revolving credit facility, and entered into a new credit facility agreement with a new syndicate of lenders led by JP Morgan Chase Bank, N.A. as administrative agent. As a result of the termination, we accelerated the remaining $1,447 of unamortized deferred debt costs associated with the previous revolving credit facility, which is included as interest expense. Under the revolving line of credit, we have available up to $40,000 of aggregate loans of which up to $20,000 is available to our Canadian subsidiary, subject to borrowing base availability. Availability of funds under our new revolving credit facility is determined by a borrowing base equal to the sum of 85% of eligible accounts receivable, plus 65% of eligible inventory, plus 85% of the net orderly liquidation value of eligible equipment, plus 80% of the fair market value of eligible owned real property. In no case shall availability under our revolving credit facility exceed the commitments thereunder. As of September 30, 2012 , we had $39,205 of capacity available under our revolving credit facility after taking into account the borrowing base, outstanding loan advances and letters of credit. In addition to our revolving credit facility, we have various short term revolving lines of credit available to us at our foreign affiliates.  At September 30, 2012 , we had no outstanding borrowings under the revolving credit facility. Had there been any outstanding borrowings, the interest rate would have been approximately 3% .

The new revolving credit facility will mature in 2015. Any borrowings on our revolving credit facility will incur interest expense that is variable in relation to the LIBOR rate, plus approximately 2.5% . Borrowings denominated in Canadian Dollars under the Canadian facility bear interest at a variable rate in relation to the bankers’ acceptance rate, as set forth in the revolving credit facility. In addition to paying interest on outstanding borrowings under our revolving credit facility, we are required to pay a 0.4% per annum commitment fee to the lenders in respect of the unutilized commitments thereunder and letter of credit fees equal to the LIBOR margin or the bankers’ acceptance rate, as applicable, on the undrawn amount of all outstanding letters of credit. 

Senior secured notes.   As of September 30, 2012 , we had $118,145 of indebtedness outstanding under our senior

secured notes with annual cash interest expense of approximately $11,224 . Our senior secured notes mature on May 1, 2017 and accrue interest at a fixed rate of 9.5% . We pay interest in cash semi-annually on May 1 and November 1 of each year.  Our senior secured notes were issued in a Rule 144A exempt senior secured note offering to qualified institutional investors.  The proceeds were used to fund the purchase price for the CHS Transactions and related transaction costs.  In January 2011, we consummated an offer to exchange the old restricted senior secured notes for new, SEC-registered senior secured notes. 

During the six months ended September 30, 2012 and 2011 , the Company made partial redemptions of the senior secured notes in the amount of $21,000 and $66,590 , respectively.  In connection with these redemptions, the Company paid cash premiums on redemption of $630 and $3,596 for the six months ended September 30, 2012 and 2011 , respectively. As a result of these partial redemptions, we accelerated the amortization of deferred debt cost of $871 and $2,922 for the six months ended September 30, 2012 and 2011 , respectively.  These expenses were included in interest expense for the periods reported. 

Guarantees; security.   The obligations under our revolving credit facility and our senior secured notes are guaranteed on a senior secured basis by the Company and each of its existing and future domestic restricted subsidiaries, other than Thermon Industries, Inc., the issuer of the senior secured notes. The obligations under our revolving credit facility are secured by a first priority perfected security interest in substantially all of our and the guarantors’ assets, subject to certain exceptions, permitted liens and encumbrances reasonably acceptable to the agent under our revolving credit facility. Our senior secured notes and guarantees are also secured by liens on substantially all of our and the guarantors’ assets, subject to certain exceptions; provided, however, that the liens are contractually subordinated to the liens thereon that secure our revolving credit facility. 

Restrictive covenants.   The revolving credit facility and senior secured notes contain various restrictive covenants that include restrictions or limitations on our ability to: incur additional indebtedness or issue disqualified capital stock unless certain financial tests are satisfied; pay dividends, redeem subordinated debt or make other restricted payments; make certain investments or acquisitions; issue stock of subsidiaries; grant or permit certain liens on our assets; enter into certain transactions with affiliates; merge, consolidate or transfer substantially all of our assets; incur dividend or other payment restrictions affecting certain of our subsidiaries; transfer or sell assets, including capital stock of our subsidiaries; and change the business we conduct. However, all of these covenants are subject to customary exceptions.

Foreign Currency Transaction Risk

We transact business in various foreign currencies and have established a program that primarily utilizes foreign currency forward contracts to offset the risk associated with the effects of certain foreign currency exposures. Under this program, increases or decreases in our foreign currency exposures are offset by gains or losses on the forward contracts, to mitigate foreign currency transaction gains or losses. These foreign currency exposures typically arise from intercompany transactions. Our forward contracts generally have terms of 90 days or less. We do not use forward contracts for trading purposes nor do we designate these forward contracts as hedging instruments pursuant to ASC 815. We adjust the carrying amount of all contracts to their fair value at the end of each reporting period and unrealized gains and losses are included in our results of operations for that period. These gains and losses largely offset gains and losses resulting from settlement of payments received from our foreign operations which are settled in U.S. dollars. All outstanding foreign currency forward contracts are marked to market at the end of the period with unrealized gains and losses included in miscellaneous expense. The fair value is determined by quoted prices from active foreign currency markets (Level 2 fair value).  The balance sheet reflects unrealized gains within prepaid expenses and other current assets and unrealized losses within accrued liabilities. Our ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the contracts mature. As of September 30, 2012 and March 31, 2012 , the notional amounts of forward contracts we held to sell U.S. Dollars in exchange for other major international currencies were $22,938 and $14,429 , respectively.

Net foreign exchange transaction gains or losses included in the accompanying condensed consolidated statements of operations were a gain of $8 and a loss of $1,151 in the three months ended September 30, 2012 and 2011 , respectively and a gain of $61 and a loss of $1,242 for the six months ended September 30, 2012 and 2011 , respectively. The fair values of foreign currency forward contracts were not significant individually and approximated a loss of $106 at September 30, 2012 and a loss of $188 at March 31, 2012 .

10. Commitments and Contingencies

At September 30, 2012 , the Company had in place letter of credit guarantees and performance bonds securing performance obligations of the Company. These arrangements totaled approximately $11,970 .  Of this amount, $2,262 is secured by cash deposits at the Company’s financial institutions.  The remaining $9,708 represents a reduction of the available amount of the Company’s short term and long term revolving lines of credit. Included in prepaid expenses and other current assets at September 30, 2012 and March 31, 2012 , was approximately $2,262 and $2,398 , respectively, of cash deposits pledged as collateral on performance bonds and letters of credit. 

The Company is involved in various legal proceedings that arise from time to time in the ordinary course of doing business and believes that adequate reserves have been established for any probable losses. Expenses related to litigation are included in operating income. We do not believe that the outcome of any of these proceedings would have a significant adverse effect on our financial position, long-term results of operations, or cash flows. It is possible, however, that charges related to these matters could be significant to our results or cash flows in any one accounting period. 

The Company has no outstanding legal matters outside of matters arising in the ordinary course of business, except as described below. We can give no assurances we will prevail in any of these matters.

Asbestos Litigation— Since 1999, we have been named as one of many defendants in 16 personal injury suits alleging exposure to asbestos from our products. None of the cases alleges or has alleged premises liability. Two cases are currently pending. Insurers are defending us in one of the two lawsuits, and we expect that an insurer will defend us in the remaining matter. Of the concluded suits, there were seven cost of defense settlements and the remainder were dismissed without payment. There are no claims unrelated to asbestos exposure for which coverage has been sought under the policies that are providing coverage. 

Indian Sales Tax and Customs Disputes— Our Indian subsidiary is currently disputing assessments of administrative sales tax and customs duties with Indian tax and customs authorities. In addition, we currently have a customs duty case before the Supreme Court in India, on appeal by custom authorities. We have reserved $195 in estimated settlement of the remaining matters.

Notice of Tax Dispute with the Canada Revenue Agency— On June 13, 2011, we received notice from the Canada Revenue Agency (“Agency”) advising us that they disagree with the tax treatment we proposed with respect to certain asset transfers that was completed in August 2007 by our Predecessor owners.  As a result, the Agency proposes to disallow the interest deductions taken in Canada for tax years 2008, 2009 and 2010.   In total these interest deductions amounted to $11,640 .  The statutory tax rate in Canada is approximately 25% , therefore the tax due that is requested by the Agency is approximately $2,910 .  At September 30, 2012 , we have not recorded a tax liability reserve related to this matter with the Agency, as a loss is not probable or estimable.  While we will vigorously contest this ruling, we expect that any liability will be covered under an indemnity agreement with the Predecessor owners.

11. Stock-Based Compensation Expense

Since the completion of the CHS Transactions on April 30, 2010, the board of directors has adopted and the shareholders have approved two stock option award plans.  The 2010 Thermon Group Holdings, Inc. Restricted Stock and Stock Option Plan (“2010 Plan”) was approved on July 28, 2010.  The plan authorized the issuance of 2,767,171 stock options or restricted shares (on a post stock split basis).  On April 8, 2011, the board of directors approved the Thermon Group Holdings, Inc. 2011 Long-Term Incentive Plan (“2011 LTIP”). The 2011 LTIP made available 2,893,341 shares of the Company’s common stock that may be awarded to employees, directors or non-employee contractors compensation in the form of stock options or restricted stock awards. 

At September 30, 2012 , there were 1,581,273 options outstanding.  Stock compensation expense was $336 , $57 , $394 and $6,399 during the three and six months ended September 30, 2012 and 2011 , respectively.  Thermon Group Holdings completed its IPO on May 5, 2011. As a result, we recorded stock compensation expense of $ 6,310 during the six months ended September 30, 2011 which represented all unamortized stock compensation under the 2010 Plan.

During the three months ended September 30, 2012, we issued various stock compensation awards to employees and directors of the company. On August 2, 2012, 56,532 options and 71,923 restricted stock units were granted to certain employees. Also on August 2, 2012, 12,546 restricted stock awards were issued to our directors and a target amount of 44,146 performance stock units were granted to our named executive officers. The closing price of our stock on the date of these grants was $21.52 .

The stock options were valued by using a Black Scholes option pricing model. We arrived at a total fair value for the option awards of $501 by applying a volatility assumption of 40.5% , a risk free rate of 0.63% , expected term of 6.66 years and no expected dividend. The fair value of these options will be expensed on a straight line basis over five years.

The restricted stock units that were issued to our employees have a total fair value of $1,548 as determined by the closing price of our stock on August 2, 2012 which will be expensed on a straight-line basis over three years. At each anniversary of the restricted stock units, one-third of the shares will become vested for the employees and the shares of stock will become issued and outstanding.

The restricted stock awards issued to our directors have a total fair value of $270 as determined by the price of our stock at closing on August 2, 2012 which will be expensed on a straight line basis over one year. The stock associated with the director's awards has already been issued and is included in our shares outstanding with voting rights. On the anniversary of the grant date, the restrictions will be removed.

The performance stock units issued to our four named executive officers had a total fair value at grant date of $960 . The performance indicator for these stock awards is based on the market performance of our stock price as compared to a pre-determined peer group of companies with similar business characteristics as ours. Since the performance indicator is market based, we prepared a Monte Carlo valuation model to calculate the probable outcome of the performance measure to arrive at the fair value. We will expense the fair value over three years ending at each of our fiscal year ends during the performance period, whether or not the market condition is met. At the end of each fiscal year, one-third of the performance units will be evaluated. It will then be determined how many shares of stock will be issued. In each year, the possible number of shares that will be issued ranges from zero to 29,430 in the aggregate. Shares that are not awarded in a given year will be forfeited.

The right to purchase shares under the options vests over a five to ten -year period, beginning on the date of grant. Stock options must be exercised within ten years from date of grant. Stock options were issued with an exercise price which was equal to the market price of our common stock at the grant date. We estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods. During the three and six month periods ended September 30, 2012 , we did not make any changes in accounting principles or methods of estimates relating to stock-based compensation expense.

12. Income Taxes

Our anticipated annual effective tax rate before discrete events of approximately 35.0% has been applied to our consolidated pre-tax income for the six month period ended September 30, 2012 . Our anticipated annual effective tax rate after discrete events of approximately 35.3% differs from the tax rate before the discrete event due to the additional accrued interest and penalties recorded on uncertain tax positions (discussed below). Our anticipated annual effective tax rate was different than the U.S. federal statutory rate primarily due to state taxes, a difference in rates between the U.S. and foreign jurisdictions, and certain permanent differences, such as nondeductible meals and entertainment and compensation expenses.  For the six months ended September 30, 2011 , the Company’s provision for income taxes reflects an effective benefit rate before discrete events of approximately 36.3% and an after discrete event benefit rate of 40.4% . The effective tax rate was higher than the U.S. statutory rate due to state taxes, a difference in rates between the U.S. and foreign jurisdictions, and certain permanent differences, such as nondeductible compensation expenses. For the three month period ended September 30, 2012 and 2011 , the Company recorded tax expense of $3,790 and $2,109 on pre-tax income of $10,777 and $5,923 , respectively. For the six month period ended September 30, 2012 and 2011 , the Company recorded tax expense of $7,424 and a tax benefit of $780 on pre-tax income of $21,011 and a pre-tax loss of $1,932 , respectively.

As of September 30, 2012 , we have established a long-term liability for uncertain tax positions in the amount of $1,578 . There have been no material adjustments to the liability during the six month period ended September 30, 2012 .  All of our unrecognized tax benefits at September 30, 2012 would affect our effective income tax rate if recognized, though the Company does not expect to recognize any tax benefits in the next twelve months.  The Company recognizes related accrued interest and penalties as income tax expense and has accrued $73 for the six months ended September 30, 2012 , resulting in a cumulative total accrual of $272 .

Tax years 2007 through 2010 generally remain open to examination by the major taxing jurisdictions to which we are subject.  The Company’s U.S. federal income tax returns are under exam for the Predecessor’s tax period ending April 30, 2010 and the tax years ended March 31, 2010, 2009 and 2008. As of September 30, 2012 no adjustments have been proposed. The Company’s Canadian federal income tax returns are under exam for the Predecessor’s tax years ended March 31, 2008, 2009 and 2010. See Note 10, “Commitments and Contingencies”.

13. Geographic Information

We have defined our operating segments based on geographic regions. These regions share similar economic characteristics, similar product mix, similar customers and similar distribution methods. Accordingly, we have elected to aggregate these geographic regions into a single reportable segment. Revenue from the sale of our products which are similar in nature and revenue from construction and engineering are reflected as sales in our consolidated statement of comprehensive income (loss).

During the six months ended September 30, 2012 , the Company changed its basis for reporting operating segments.

Previously, the operating segments were categorized between the Eastern and Western Hemispheres. Management has changed its basis for reporting such that the four geographic regions of the United States, Canada, Europe and Asia are now analyzed separately. Each of these regions were reported previously within the hemisphere presentation, therefore there is no material difference with this change in presentation of geographic information.  For purposes of this note, revenue is attributed to individual countries on the basis of the physical location and jurisdiction of organization of the subsidiary that invoices the material and services.

Total sales and operating income classified by major geographic area in which the Company operates are as follows:

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

The accompanying notes are an integral part of these condensed consolidated financial statements