UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2017September 30, 2022
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or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________
Commission File Number 1-8462001-08462
GRAHAM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 16-1194720 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
20 Florence Avenue, Batavia, New York | 14020 |
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(Address of principal executive offices) | (Zip Code) |
585-343-2216585-343-2216
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, Par Value $0.10 Per Share | GHM | NYSE |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes ☒ No ☐
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes ☒ No ☐
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitionthe definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ |
| Accelerated filer |
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Non-accelerated filer |
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| Smaller reporting company |
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Emerging growth company | ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of January 30, 2018,November 1, 2022, there were outstanding 9,768,02610,611,061 shares of the registrant’s common stock, par value $.10$0.10 per share.
Graham Corporation and Subsidiaries
Index to Form 10-Q
As of December 31, 2017September 30, 2022 and March 31, 20172022 and for the Threethree and Nine-Month Periods Ended December 31, 2017six months ended September 30, 2022 and 20162021
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Part I. |
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Item 1. |
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Item 2. |
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Item 3. |
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Item 4. |
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Part II. |
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Item |
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Item 6. | 33 | |
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2
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 2017SEPTEMBER 30, 2022
PART I – FINANCIAL INFORMATION
3Item 1. Unaudited Condensed Consolidated Financial Statements
GRAHAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
|
| Three Months Ended |
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| Nine Months Ended |
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| Three Months Ended |
| Six Months Ended |
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| December 31, |
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| December 31, |
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| September 30, |
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| September 30, |
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| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
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| 2022 |
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| 2021 |
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| 2022 |
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| 2021 |
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| (Amounts in thousands, except per share data) |
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| (Amounts in thousands, except per share data) |
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| (Amounts in thousands, except per share data) |
| (Amounts in thousands, except per share data) |
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Net sales |
| $ | 17,281 |
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| $ | 22,654 |
|
| $ | 55,356 |
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| $ | 66,145 |
|
| $ | 38,143 |
|
| $ | 34,146 |
|
| $ | 74,218 |
|
| $ | 54,303 |
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Cost of products sold |
|
| 13,696 |
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|
| 16,353 |
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|
| 43,075 |
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| 50,723 |
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| 32,863 |
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| 30,703 |
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|
| 62,194 |
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|
| 49,946 |
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Gross profit |
|
| 3,585 |
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|
| 6,301 |
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|
| 12,281 |
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| 15,422 |
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|
| 5,280 |
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|
| 3,443 |
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|
| 12,024 |
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|
| 4,357 |
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Other expenses and income: |
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Selling, general and administrative |
|
| 4,007 |
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| 3,746 |
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| 11,270 |
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| 10,462 |
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| 5,059 |
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| 4,973 |
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| 10,544 |
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| 9,805 |
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Selling, general and administrative – amortization |
|
| 59 |
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|
| 58 |
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|
| 177 |
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|
| 175 |
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|
| 273 |
|
|
| 274 |
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|
| 547 |
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|
| 365 |
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Impairment of goodwill and intangible assets |
|
| 14,816 |
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| — |
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| 14,816 |
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|
| — |
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Restructuring charge |
|
| — |
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|
| — |
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|
| 316 |
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| 630 |
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Other operating income, net |
|
| — |
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| (1,102 | ) |
|
| — |
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| (1,102 | ) |
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Operating income (loss) |
|
| (52 | ) |
|
| (702 | ) |
|
| 933 |
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| (4,711 | ) |
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Other income, net |
|
| (62 | ) |
|
| (145 | ) |
|
| (125 | ) |
|
| (305 | ) |
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Interest income |
|
| (142 | ) |
|
| (100 | ) |
|
| (455 | ) |
|
| (272 | ) |
|
| (24 | ) |
|
| (14 | ) |
|
| (32 | ) |
|
| (31 | ) |
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Interest expense |
|
| 3 |
|
|
| 3 |
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|
| 8 |
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| 7 |
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|
| 270 |
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| 129 |
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|
| 435 |
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| 168 |
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Total other expenses and income |
|
| 18,743 |
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| 3,707 |
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| 26,132 |
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| 11,002 |
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(Loss) income before provision for income taxes |
|
| (15,158 | ) |
|
| 2,594 |
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| (13,851 | ) |
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| 4,420 |
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(Benefit) provision for income taxes |
|
| (3,536 | ) |
|
| 754 |
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| (3,174 | ) |
|
| 1,198 |
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Net (loss) income |
|
| (11,622 | ) |
|
| 1,840 |
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| (10,677 | ) |
|
| 3,222 |
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Retained earnings at beginning of period |
|
| 109,731 |
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| 108,655 |
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| 110,544 |
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| 109,013 |
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Dividends |
|
| (880 | ) |
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| (876 | ) |
|
| (2,638 | ) |
|
| (2,616 | ) | |||||||||||||||||
Retained earnings at end of period |
| $ | 97,229 |
|
| $ | 109,619 |
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| $ | 97,229 |
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| $ | 109,619 |
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Income (loss) before provision (benefit) for income taxes |
|
| (236 | ) |
|
| (672 | ) |
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| 655 |
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| (4,543 | ) |
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Provision (benefit) for income taxes |
|
| (40 | ) |
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| (180 | ) |
|
| 175 |
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|
| (925 | ) |
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Net income (loss) |
| $ | (196 | ) |
| $ | (492 | ) |
| $ | 480 |
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| $ | (3,618 | ) |
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Per share data |
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Basic: |
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Net (loss) income |
| $ | (1.19 | ) |
| $ | 0.19 |
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| $ | (1.09 | ) |
| $ | 0.33 |
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Net income (loss) |
| $ | (0.02 | ) |
| $ | (0.05 | ) |
| $ | 0.05 |
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| $ | (0.35 | ) |
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Diluted: |
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Net (loss) income |
| $ | (1.19 | ) |
| $ | 0.19 |
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| $ | (1.09 | ) |
| $ | 0.33 |
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Net income (loss) |
| $ | (0.02 | ) |
| $ | (0.05 | ) |
| $ | 0.05 |
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| $ | (0.35 | ) |
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Weighted average common shares outstanding: |
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Basic |
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| 9,768 |
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| 9,727 |
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| 9,762 |
|
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| 9,709 |
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| 10,617 |
|
|
| 10,681 |
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| 10,614 |
|
|
| 10,442 |
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Diluted |
|
| 9,768 |
|
|
| 9,733 |
|
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| 9,762 |
|
|
| 9,714 |
|
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| 10,617 |
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| 10,681 |
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| 10,618 |
|
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| 10,442 |
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Dividends declared per share |
| $ | 0.09 |
|
| $ | 0.09 |
|
| $ | 0.27 |
|
| $ | 0.27 |
|
| $ | — |
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| $ | 0.11 |
|
| $ | — |
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| $ | 0.22 |
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See Notes to Condensed Consolidated Financial Statements.
43
GRAHAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) INCOME
(Unaudited)
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| December 31, |
|
| December 31, |
| ||||||||||
|
| 2017 |
|
| 2016 |
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| 2017 |
|
| 2016 |
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| (Amounts in thousands) |
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| (Amounts in thousands) |
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Net (loss) income |
| $ | (11,622 | ) |
| $ | 1,840 |
|
| $ | (10,677 | ) |
| $ | 3,222 |
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Other comprehensive income: |
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Foreign currency translation adjustment |
|
| 76 |
|
|
| (135 | ) |
|
| 216 |
|
|
| (283 | ) |
Defined benefit pension and other postretirement plans net of income tax expense (benefit) of $(17) and $123, for the three months ended December 31, 2017 and 2016, respectively, and $169 and $369 for the nine months ended December 31, 2017 and 2016, respectively |
|
| 279 |
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|
| 225 |
|
|
| 619 |
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|
| 674 |
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Total other comprehensive income |
|
| 355 |
|
|
| 90 |
|
|
| 835 |
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|
| 391 |
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Total comprehensive (loss) income |
| $ | (11,267 | ) |
| $ | 1,930 |
|
| $ | (9,842 | ) |
| $ | 3,613 |
|
|
| Three Months Ended |
|
| Six Months Ended |
|
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|
| September 30, |
|
| September 30, |
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|
| 2022 |
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| 2021 |
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| 2022 |
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| 2021 |
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| (Amounts in thousands) |
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| (Amounts in thousands) |
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Net income (loss) |
| $ | (196 | ) |
| $ | (492 | ) |
| $ | 480 |
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| $ | (3,618 | ) |
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Other comprehensive (loss) income: |
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|
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|
|
|
|
|
|
|
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Foreign currency translation adjustment |
|
| (337 | ) |
|
| (35 | ) |
|
| (680 | ) |
|
| 93 |
|
|
Defined benefit pension and other postretirement plans net |
|
| 131 |
|
|
| 251 |
|
|
| 262 |
|
|
| 421 |
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Total other comprehensive (loss) income |
|
| (206 | ) |
|
| 216 |
|
|
| (418 | ) |
|
| 514 |
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Total comprehensive income (loss) |
| $ | (402 | ) |
| $ | (276 | ) |
| $ | 62 |
|
| $ | (3,104 | ) |
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See Notes to Condensed Consolidated Financial Statements.
54
GRAHAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| September 30, 2022 |
|
| March 31, 2022 |
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| (Amounts in thousands, except per share data) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
| $ | 14,122 |
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| $ | 14,741 |
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Trade accounts receivable, net of allowances ($84 and $87 at September 30 and |
|
| 27,109 |
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| 27,645 |
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Unbilled revenue |
|
| 30,670 |
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|
| 25,570 |
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Inventories |
|
| 19,848 |
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|
| 17,414 |
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Prepaid expenses and other current assets |
|
| 2,235 |
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|
| 1,391 |
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Income taxes receivable |
|
| 570 |
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|
| 459 |
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Total current assets |
|
| 94,554 |
|
|
| 87,220 |
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Property, plant and equipment, net |
|
| 24,354 |
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|
| 24,884 |
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Prepaid pension asset |
|
| 7,384 |
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|
| 7,058 |
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Operating lease assets |
|
| 7,887 |
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|
| 8,394 |
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Goodwill |
|
| 23,523 |
|
|
| 23,523 |
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Customer relationships, net |
|
| 11,013 |
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|
| 11,308 |
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Technology and technical know-how, net |
|
| 9,427 |
|
|
| 9,679 |
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Other intangible assets, net |
|
| 8,300 |
|
|
| 8,990 |
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Deferred income tax asset |
|
| 2,288 |
|
|
| 2,441 |
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Other assets |
|
| 175 |
|
|
| 194 |
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Total assets |
| $ | 188,905 |
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| $ | 183,691 |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Short-term debt obligations |
| $ | 2,500 |
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| $ | — |
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Current portion of long-term debt |
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| 2,000 |
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|
| 2,000 |
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Current portion of finance lease obligations |
|
| 23 |
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|
| 23 |
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Accounts payable |
|
| 20,149 |
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|
| 16,662 |
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Accrued compensation |
|
| 9,745 |
|
|
| 7,991 |
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Accrued expenses and other current liabilities |
|
| 4,781 |
|
|
| 6,047 |
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Customer deposits |
|
| 26,079 |
|
|
| 25,644 |
|
|
Operating lease liabilities |
|
| 972 |
|
|
| 1,057 |
|
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Income taxes payable |
|
| 8 |
|
|
| — |
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Total current liabilities |
|
| 66,257 |
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|
| 59,424 |
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Long-term debt |
|
| 14,625 |
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|
| 16,378 |
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Finance lease obligations |
|
| — |
|
|
| 11 |
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Operating lease liabilities |
|
| 7,103 |
|
|
| 7,460 |
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Deferred income tax liability |
|
| 104 |
|
|
| 62 |
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|
Accrued pension and postretirement benefit liabilities |
|
| 1,663 |
|
|
| 1,666 |
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Other long-term liabilities |
|
| 2,187 |
|
|
| 2,196 |
|
|
Total liabilities |
|
| 91,939 |
|
|
| 87,197 |
|
|
Commitments and contingencies (Note 10) |
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|
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Stockholders’ equity: |
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Preferred stock, $1.00 par value, 500 shares authorized |
|
| — |
|
|
| — |
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Common stock, $0.10 par value, 25,500 shares authorized, 10,758 and 10,801 shares |
|
| 1,076 |
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|
| 1,080 |
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Capital in excess of par value |
|
| 27,849 |
|
|
| 27,770 |
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Retained earnings |
|
| 77,556 |
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|
| 77,076 |
|
|
Accumulated other comprehensive loss |
|
| (6,889 | ) |
|
| (6,471 | ) |
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Treasury stock (147 and 164 shares at September 30 and March 31, 2022, respectively) |
|
| (2,626 | ) |
|
| (2,961 | ) |
|
Total stockholders’ equity |
|
| 96,966 |
|
|
| 96,494 |
|
|
Total liabilities and stockholders’ equity |
| $ | 188,905 |
|
| $ | 183,691 |
|
|
|
| December 31, |
|
| March 31, |
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|
| 2017 |
|
| 2017 |
| ||
|
| (Amounts in thousands, except per share data) |
| |||||
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
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Cash and cash equivalents |
| $ | 36,159 |
|
| $ | 39,474 |
|
Investments |
|
| 38,023 |
|
|
| 34,000 |
|
Trade accounts receivable, net of allowances ($336 and $168 at December 31 and March 31, 2017, respectively) |
|
| 16,555 |
|
|
| 11,483 |
|
Unbilled revenue |
|
| 10,709 |
|
|
| 15,842 |
|
Inventories |
|
| 8,899 |
|
|
| 9,246 |
|
Prepaid expenses and other current assets |
|
| 1,181 |
|
|
| 681 |
|
Income taxes receivable |
|
| 1,288 |
|
|
| — |
|
Total current assets |
|
| 112,814 |
|
|
| 110,726 |
|
Property, plant and equipment, net |
|
| 16,098 |
|
|
| 17,021 |
|
Prepaid pension asset |
|
| 3,110 |
|
|
| 2,340 |
|
Goodwill |
|
| 1,222 |
|
|
| 6,938 |
|
Permits |
|
| 1,700 |
|
|
| 10,300 |
|
Other intangible assets, net |
|
| 3,433 |
|
|
| 4,068 |
|
Other assets |
|
| 246 |
|
|
| 177 |
|
Total assets |
| $ | 138,623 |
|
| $ | 151,570 |
|
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of capital lease obligations |
| $ | 105 |
|
| $ | 107 |
|
Accounts payable |
|
| 9,386 |
|
|
| 10,295 |
|
Accrued compensation |
|
| 4,418 |
|
|
| 5,189 |
|
Accrued expenses and other current liabilities |
|
| 2,722 |
|
|
| 3,723 |
|
Customer deposits |
|
| 17,814 |
|
|
| 12,407 |
|
Income taxes payable |
|
| — |
|
|
| 317 |
|
Total current liabilities |
|
| 34,445 |
|
|
| 32,038 |
|
Capital lease obligations |
|
| 67 |
|
|
| 143 |
|
Deferred income tax liability |
|
| 736 |
|
|
| 4,051 |
|
Accrued pension liability |
|
| 534 |
|
|
| 467 |
|
Accrued postretirement benefits |
|
| 780 |
|
|
| 761 |
|
Other long-term liabilities |
|
| 126 |
|
|
| — |
|
Total liabilities |
|
| 36,688 |
|
|
| 37,460 |
|
Commitments and contingencies (Note 11) |
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value, 500 shares authorized |
|
|
|
|
|
|
|
|
Common stock, $.10 par value, 25,500 shares authorized 10,579 and 10,548 shares issued and 9,768 and 9,740 shares outstanding at December 31 and March 31, 2017, respectively |
|
| 1,058 |
|
|
| 1,055 |
|
Capital in excess of par value |
|
| 23,573 |
|
|
| 23,176 |
|
Retained earnings |
|
| 97,229 |
|
|
| 110,544 |
|
Accumulated other comprehensive loss |
|
| (7,599 | ) |
|
| (8,434 | ) |
Treasury stock (811 and 808 shares at December 31 and March 31, 2017, respectively) |
|
| (12,326 | ) |
|
| (12,231 | ) |
Total stockholders’ equity |
|
| 101,935 |
|
|
| 114,110 |
|
Total liabilities and stockholders’ equity |
| $ | 138,623 |
|
| $ | 151,570 |
|
See Notes to Condensed Consolidated Financial Statements.
65
GRAHAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| Six Months Ended |
| |||||
|
| September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Operating activities: |
| (Dollar amounts in thousands) |
| |||||
Net income (loss) |
| $ | 480 |
|
| $ | (3,618 | ) |
Adjustments to reconcile net income (loss) to net cash used by operating |
|
|
|
|
|
| ||
Depreciation |
|
| 1,724 |
|
|
| 1,399 |
|
Amortization |
|
| 1,238 |
|
|
| 1,009 |
|
Amortization of actuarial losses |
|
| 336 |
|
|
| 455 |
|
Amortization of debt issuance costs |
|
| 93 |
|
|
| — |
|
Equity-based compensation expense |
|
| 312 |
|
|
| 330 |
|
Gain on disposal or sale of property, plant and equipment |
|
| — |
|
|
| 13 |
|
Change in fair value of contingent consideration |
|
| — |
|
|
| (1,900 | ) |
Deferred income taxes |
|
| 174 |
|
|
| 693 |
|
(Increase) decrease in operating assets: |
|
|
|
|
|
| ||
Accounts receivable |
|
| 38 |
|
|
| (2,289 | ) |
Unbilled revenue |
|
| (5,283 | ) |
|
| (1,944 | ) |
Inventories |
|
| (2,560 | ) |
|
| 3,278 |
|
Prepaid expenses and other current and non-current assets |
|
| (782 | ) |
|
| (1,233 | ) |
Income taxes receivable |
|
| (136 | ) |
|
| (2,894 | ) |
Operating lease assets |
|
| 901 |
|
|
| 432 |
|
Prepaid pension asset |
|
| (325 | ) |
|
| (603 | ) |
Increase (decrease) in operating liabilities: |
|
|
|
|
|
| ||
Accounts payable |
|
| 3,730 |
|
|
| (4,477 | ) |
Accrued compensation, accrued expenses and other current and non-current |
|
| 553 |
|
|
| 779 |
|
Customer deposits |
|
| 544 |
|
|
| 1,835 |
|
Operating lease liabilities |
|
| (840 | ) |
|
| (387 | ) |
Long-term portion of accrued compensation, accrued pension liability |
|
| (595 | ) |
|
| 420 |
|
Net cash used by operating activities |
|
| (398 | ) |
|
| (8,702 | ) |
Investing activities: |
|
|
|
|
|
| ||
Purchase of property, plant and equipment |
|
| (1,176 | ) |
|
| (1,227 | ) |
Redemption of investments at maturity |
|
| — |
|
|
| 5,500 |
|
Acquisition of Barber-Nichols, LLC |
|
| — |
|
|
| (59,563 | ) |
Net cash used by investing activities |
|
| (1,176 | ) |
|
| (55,290 | ) |
Financing activities: |
|
|
|
|
|
| ||
Borrowings of short-term debt obligations |
|
| 5,000 |
|
|
| 4,000 |
|
Principal repayments on debt |
|
| (3,511 | ) |
|
| (510 | ) |
Proceeds from the issuance of debt |
|
| — |
|
|
| 20,000 |
|
Repayments on lease financing obligations |
|
| (136 | ) |
|
| (91 | ) |
Payment of debt issuance costs |
|
| (122 | ) |
|
| (150 | ) |
Dividends paid |
|
| — |
|
|
| (2,353 | ) |
Purchase of treasury stock |
|
| (22 | ) |
|
| (41 | ) |
Net cash provided by financing activities |
|
| 1,209 |
|
|
| 20,855 |
|
Effect of exchange rate changes on cash |
|
| (254 | ) |
|
| 68 |
|
Net decrease in cash and cash equivalents |
|
| (619 | ) |
|
| (43,069 | ) |
Cash and cash equivalents at beginning of period |
|
| 14,741 |
|
|
| 59,532 |
|
Cash and cash equivalents at end of period |
| $ | 14,122 |
|
| $ | 16,463 |
|
|
| Nine Months Ended |
| |||||
|
| December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Operating activities: |
| (Dollar amounts in thousands) |
| |||||
Net (loss) income |
| $ | (10,677 | ) |
| $ | 3,222 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
| 1,490 |
|
|
| 1,571 |
|
Amortization |
|
| 177 |
|
|
| 175 |
|
Amortization of unrecognized prior service cost and actuarial losses |
|
| 788 |
|
|
| 1,043 |
|
Impairment of goodwill and purchased intangible assets |
|
| 14,816 |
|
|
| — |
|
Stock-based compensation expense |
|
| 362 |
|
|
| 433 |
|
Loss on disposal or sale of property, plant and equipment |
|
| 1 |
|
|
| 1 |
|
Deferred income taxes |
|
| (3,498 | ) |
|
| 10 |
|
(Increase) decrease in operating assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (5,029 | ) |
|
| 1,126 |
|
Unbilled revenue |
|
| 5,170 |
|
|
| (2,651 | ) |
Inventories |
|
| 352 |
|
|
| 1,697 |
|
Prepaid expenses and other current and non-current assets |
|
| (591 | ) |
|
| (489 | ) |
Income taxes receivable |
|
| (1,605 | ) |
|
| 1,109 |
|
Prepaid pension asset |
|
| (770 | ) |
|
| — |
|
Increase (decrease) in operating liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
| (1,005 | ) |
|
| (2,173 | ) |
Accrued compensation, accrued expenses and other current and non-current liabilities |
|
| (1,593 | ) |
|
| (558 | ) |
Customer deposits |
|
| 5,400 |
|
|
| 6,699 |
|
Long-term portion of accrued compensation, accrued pension liability and accrued postretirement benefits |
|
| 86 |
|
|
| (508 | ) |
Net cash provided by operating activities |
|
| 3,874 |
|
|
| 10,707 |
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
| (543 | ) |
|
| (241 | ) |
Proceeds from disposal of property, plant and equipment |
|
| 1 |
|
|
| — |
|
Purchase of investments |
|
| (34,023 | ) |
|
| (39,000 | ) |
Redemption of investments at maturity |
|
| 30,000 |
|
|
| 45,000 |
|
Net cash (used) provided by investing activities |
|
| (4,565 | ) |
|
| 5,759 |
|
Financing activities: |
|
|
|
|
|
|
|
|
Principal repayments on capital lease obligations |
|
| (78 | ) |
|
| (38 | ) |
Issuance of common stock |
|
| — |
|
|
| 79 |
|
Dividends paid |
|
| (2,638 | ) |
|
| (2,616 | ) |
Purchase of treasury stock |
|
| (119 | ) |
|
| (29 | ) |
Excess tax deficiency on stock awards |
|
| — |
|
|
| (26 | ) |
Net cash used by financing activities |
|
| (2,835 | ) |
|
| (2,630 | ) |
Effect of exchange rate changes on cash |
|
| 211 |
|
|
| (231 | ) |
Net (decrease) increase in cash and cash equivalents |
|
| (3,315 | ) |
|
| 13,605 |
|
Cash and cash equivalents at beginning of year |
|
| 39,474 |
|
|
| 24,072 |
|
Cash and cash equivalents at end of period |
| $ | 36,159 |
|
| $ | 37,677 |
|
See Notes to Condensed Consolidated Financial Statements.
76
GRAHAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
|
| Common Stock |
|
| Capital in |
|
|
|
|
| Accumulated |
|
|
|
|
| Total |
| ||||||||||
|
|
|
|
| Par |
|
| Excess of |
|
| Retained |
|
| Comprehensive |
|
| Treasury |
|
| Stockholders' |
| |||||||
|
| Shares |
|
| Value |
|
| Par Value |
|
| Earnings |
|
| Loss |
|
| Stock |
|
| Equity |
| |||||||
Balance at April 1, 2022 |
|
| 10,801 |
|
| $ | 1,080 |
|
| $ | 27,770 |
|
| $ | 77,076 |
|
| $ | (6,471 | ) |
| $ | (2,961 | ) |
| $ | 96,494 |
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
| 676 |
|
|
| (212 | ) |
|
|
|
|
| 464 |
| ||||
Forfeiture of shares |
|
| (32 | ) |
|
| (3 | ) |
|
| 3 |
|
|
|
|
|
|
|
|
|
|
|
| — |
| |||
Recognition of equity-based |
|
|
|
|
|
|
|
| 114 |
|
|
|
|
|
|
|
|
|
|
|
| 114 |
| |||||
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (21 | ) |
|
| (21 | ) | |||||
Balance at June 30, 2022 |
|
| 10,769 |
|
|
| 1,077 |
|
|
| 27,887 |
|
|
| 77,752 |
|
|
| (6,683 | ) |
|
| (2,982 | ) |
|
| 97,051 |
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
| (196 | ) |
|
| (206 | ) |
|
|
|
|
| (402 | ) | ||||
Issuance of shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
| ||||||
Forfeiture of shares |
|
| (11 | ) |
|
| (1 | ) |
|
| 1 |
|
|
|
|
|
|
|
|
|
|
|
| — |
| |||
Recognition of equity-based |
|
|
|
|
|
|
|
| 198 |
|
|
|
|
|
|
|
|
|
|
|
| 198 |
| |||||
Issuance of treasury stock |
|
|
|
|
|
|
|
| (237 | ) |
|
|
|
|
|
|
|
| 356 |
|
|
| 119 |
| ||||
Balance at September 30, 2022 |
|
| 10,758 |
|
| $ | 1,076 |
|
| $ | 27,849 |
|
| $ | 77,556 |
|
| $ | (6,889 | ) |
| $ | (2,626 | ) |
| $ | 96,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock |
|
| Capital in |
|
|
|
|
| Accumulated |
|
|
|
|
| Total |
| ||||||||||
|
|
|
|
| Par |
|
| Excess of |
|
| Retained |
|
| Comprehensive |
|
| Treasury |
|
| Stockholders' |
| |||||||
|
| Shares |
|
| Value |
|
| Par Value |
|
| Earnings |
|
| Loss |
|
| Stock |
|
| Equity |
| |||||||
Balance at April 1, 2021 |
|
| 10,748 |
|
| $ | 1,075 |
|
| $ | 27,272 |
|
| $ | 89,372 |
|
| $ | (7,397 | ) |
| $ | (12,393 | ) |
| $ | 97,929 |
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
| (3,126 | ) |
|
| 298 |
|
|
|
|
|
| (2,828 | ) | ||||
Issuance of shares |
|
| 135 |
|
|
| 13 |
|
|
| (13 | ) |
|
|
|
|
|
|
|
|
|
|
| — |
| |||
Forfeiture of shares |
|
| (9 | ) |
|
| (1 | ) |
|
| 1 |
|
|
|
|
|
|
|
|
|
|
|
| — |
| |||
Dividends |
|
|
|
|
|
|
|
|
|
|
| (1,177 | ) |
|
|
|
|
|
|
|
| (1,177 | ) | |||||
Recognition of equity-based |
|
|
|
|
|
|
|
| 353 |
|
|
|
|
|
|
|
|
|
|
|
| 353 |
| |||||
Issuance of treasury stock |
|
|
|
|
|
|
|
| (194 | ) |
|
|
|
|
|
|
|
| 9,158 |
|
|
| 8,964 |
| ||||
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (41 | ) |
|
| (41 | ) | |||||
Balance at June 30, 2021 |
|
| 10,874 |
|
|
| 1,087 |
|
|
| 27,419 |
|
|
| 85,069 |
|
|
| (7,099 | ) |
|
| (3,276 | ) |
|
| 103,200 |
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
| (492 | ) |
|
| 216 |
|
|
|
|
|
| (276 | ) | ||||
Issuance of shares |
|
| 27 |
|
|
| 3 |
|
|
| (3 | ) |
|
|
|
|
|
|
|
|
|
|
| — |
| |||
Forfeiture of shares |
|
| (91 | ) |
|
| (9 | ) |
|
| 9 |
|
|
|
|
|
|
|
|
|
|
|
| — |
| |||
Dividends |
|
|
|
|
|
|
|
|
|
|
| (1,177 | ) |
|
|
|
|
|
|
|
| (1,177 | ) | |||||
Recognition of equity-based |
|
|
|
|
|
|
|
| (23 | ) |
|
|
|
|
|
|
|
|
|
|
| (23 | ) | |||||
Issuance of treasury stock |
|
|
|
|
|
|
|
| (63 | ) |
|
|
|
|
|
|
|
| 191 |
|
|
| 128 |
| ||||
Balance at September 30, 2021 |
|
| 10,810 |
|
| $ | 1,081 |
|
| $ | 27,339 |
|
| $ | 83,400 |
|
| $ | (6,883 | ) |
| $ | (3,085 | ) |
| $ | 101,852 |
|
See Notes to Condensed Consolidated Financial Statements.
7
GRAHAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except per share data)
NOTE 1 – BASIS OF PRESENTATION:
Graham Corporation's (the "Company's") Condensed Consolidated Financial Statements include its (i) wholly-owned foreign subsidiarysubsidiaries located in Suzhou, China and (ii)Ahmedabad, India at September 30 and March 31, 2022, and its recently acquired wholly-owned domestic subsidiary, Barber-Nichols, LLC ("BN"), located in Lapeer, Michigan.Arvada, Colorado at September 30, 2022 and for the period June 1, 2021 through March 31, 2022 (See Note 2). The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-018-03 of Regulation S-X, each as promulgated by the U.S. Securities and Exchange Commission. The Company's Condensed Consolidated Financial Statements do not include all information and notes required by GAAP for complete financial statements. The unaudited Condensed Consolidated Balance Sheet as of March 31, 20172022 presented herein was derived from the Company’s audited Consolidated Balance Sheet as of March 31, 2017.2022. For additional information, please refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 20172022 ("fiscal 2017"2022"). In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included in the Company's Condensed Consolidated Financial Statements.
The Company's results of operations and cash flows for the three and ninesix months ended December 31, 2017September 30, 2022 are not necessarily indicative of the results that may be expected for the current fiscal year, which ends March 31, 20182023 ("fiscal 2018"2023").
NOTE 2 – ACQUISITION:
On June 1, 2021, the Company acquired BN, a designer and manufacturer of turbomachinery products located in Arvada, Colorado that serves the defense and aerospace industry as well as the energy and cryogenic markets. The Company believes this acquisition furthers its growth strategy through market and product diversification, broadens its offerings and strengthens its presence in the defense industry, builds on its presence in the energy markets and adds capabilities in the space industry.
This transaction was accounted for as a business combination which requires that assets acquired and liabilities assumed be recognized at their fair value as of the acquisition date. The purchase price of $72,014 was comprised of 610 shares of the Company's common stock, representing a value of $8,964 at a price of $14.69 per share, and cash consideration of $61,150, subject to certain potential adjustments, including a customary working capital adjustment. The cash consideration was funded through cash on-hand and debt proceeds. The purchase agreement included a contingent earn-out dependent upon certain financial measures of BN post-acquisition, in which the sellers were eligible to receive up to $14,000 in additional cash consideration. At June 30, 2021, a liability of $1,900 was recorded for the contingent earn-out. Subsequent to the acquisition, the earn out agreement was terminated and the contingent liability was reversed into Other operating income, net, on the Company’s Condensed Consolidated Statement of Operations. Prior to the acquisition, BN and Ascent Properties Group, LLC, a related party, entered into a nine year operating lease agreement for an office and manufacturing building in Arvada, Colorado. This lease was acquired as part of the Company's acquisition of BN and has a monthly payment in the amount of $40 with a 3% yearly escalation. Also prior to the acquisition, BN and Ascent Properties Group, LLC entered into a seven-year equipment lease agreement to lease various machinery and equipment. This equipment lease was also acquired as part of the Company's acquisition of BN and has a monthly payment of $16. Acquisition related costs of $93 and $262 were expensed in the three and six month periods ending September 30, 2021, and are included in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.
The cost of the acquisition was allocated to the assets acquired and liabilities assumed based upon its estimated fair value at the date of the acquisition. The following table summarizes the final purchase price allocation, after adjustments were recorded in the measurement period, of the assets acquired and liabilities assumed:
8
|
| June 1 |
| |
|
| 2021 |
| |
Assets acquired: |
|
|
| |
Cash and cash equivalents |
| $ | 868 |
|
Accounts receivable, net of allowances |
|
| 8,074 |
|
Unbilled revenue |
|
| 7,068 |
|
Inventories |
|
| 3,549 |
|
Prepaid expenses and other current assets |
|
| 476 |
|
Property, plant & equipment, net |
|
| 8,037 |
|
Operating lease assets |
|
| 9,026 |
|
Goodwill |
|
| 23,523 |
|
Customer relationships |
|
| 11,800 |
|
Technology and technical know-how |
|
| 10,100 |
|
Other intangibles, net |
|
| 10,600 |
|
Total assets acquired |
|
| 93,121 |
|
Liabilities assumed: |
|
|
| |
Accounts payable |
|
| 1,842 |
|
Accrued compensation |
|
| 1,341 |
|
Accrued expenses and other current |
|
| 707 |
|
Customer deposits |
|
| 6,048 |
|
Operating lease liabilities |
|
| 9,066 |
|
Other long-term liabilities |
|
| 2,103 |
|
Total liabilities assumed |
|
| 21,107 |
|
Purchase price |
| $ | 72,014 |
|
The fair value of acquisition-related intangible assets includes customer relationships, technology and technical know-how, backlog and trade name. Backlog and trade name are included in the line item "Other intangible assets, net" in the Condensed Consolidated Balance Sheet. The fair value of customer relationships were calculated using an income approach, specifically the Multi Period Excess Earnings method, which incorporates assumptions regarding retention rate, new customer growth and customer related costs. The fair value of trade name and technology and technical know-how were both calculated using a Relief from Royalty method, which develops a market based royalty rate used to reflect the after tax royalty savings attributable to owning the intangible asset. The fair value of backlog was determined using a net realizable value methodology, and was computed as the present value of the expected sales attributable to backlog less the remaining costs to fulfill the backlog.
The purchase price was allocated to specific intangible assets as follows:
| Weighted Average Amortization Period |
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Amount |
| |||
At September 30, 2022 |
|
|
|
|
|
|
|
|
|
| |||
Intangibles subject to amortization: |
|
|
|
|
|
|
|
|
|
| |||
Customer relationships | 20 years |
| $ | 11,800 |
|
| $ | 787 |
|
| $ | 11,013 |
|
Technology and technical know-how | 20 years |
|
| 10,100 |
|
|
| 673 |
|
|
| 9,427 |
|
Backlog | 4 years |
|
| 3,900 |
|
|
| 2,300 |
|
|
| 1,600 |
|
|
|
| $ | 25,800 |
|
| $ | 3,760 |
|
| $ | 22,040 |
|
|
|
|
|
|
|
|
|
|
|
| |||
Intangibles not subject to amortization: |
|
|
|
|
|
|
|
|
|
| |||
Tradename | Indefinite |
| $ | 6,700 |
|
| $ | — |
|
| $ | 6,700 |
|
|
|
| $ | 6,700 |
|
| $ | — |
|
| $ | 6,700 |
|
Technology and technical know-how and customer relationships are amortized in selling, general and administrative expense on a straight line basis over their estimated useful lives. Backlog is amortized in cost of products sold over the projected conversion period based on management estimates at time of purchase. Intangible asset amortization was $619 and $784 for the three months ended September 30, 2022 and 2021, respectively, and $1,238 and $1,009 for the six months ended September 30, 2022 and 2021, respectively. The estimated annual amortization expense is as follows:
9
|
| Annual Amortization |
| |
Remainder of 2023 |
| $ | 1,238 |
|
2024 |
|
| 1,782 |
|
2025 |
|
| 1,318 |
|
2026 |
|
| 1,095 |
|
2027 |
|
| 1,095 |
|
2028 and thereafter |
|
| 15,512 |
|
Total intangible amortization |
| $ | 22,040 |
|
|
|
|
|
The Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2021 included net sales from BN of $16,486 and $19,957, respectively. The following unaudited pro forma information presents the consolidated results of operations of the Company as if the BN acquisition had occurred at the beginning of the fiscal period presented:
|
| Six Months Ended |
| |
|
| September 30, 2021 |
| |
Net sales |
| $ | 69,779 |
|
Net loss |
|
| (2,256 | ) |
Loss per share |
|
|
| |
Basic |
| $ | (0.21 | ) |
Diluted |
| $ | (0.21 | ) |
The unaudited pro forma information presents the combined operating results of Graham Corporation and BN, with the results prior to the acquisition date adjusted to include the pro forma impact of the adjustment of depreciation of fixed assets based on the preliminary purchase price allocation, the adjustment to interest income reflecting the cash paid in connection with the acquisition, including acquisition-related expenses, at the Company’s weighted average interest income rate, interest expense and loan origination fees at the Company’s current interest rate, amortization expense related to the fair value adjustments for intangible assets, non-recurring acquisition-related costs and the impact of income taxes on the pro forma adjustments utilizing the applicable statutory tax rate.
The unaudited pro forma results are presented for illustrative purposes only. These pro forma results do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of the beginning of each of the periods presented, nor does the pro forma data intend to be a projection of results that may be obtained in the future.
NOTE 3 – REVENUE RECOGNITION:
The Company recognizes revenue on contracts when or as it satisfies a performance obligation by transferring control of the product to the customer. For contracts in which revenue is recognized upon shipment, control is generally transferred when products are shipped, title is transferred, significant risks of ownership have transferred, the Company has rights to payment, and rewards of ownership pass to the customer. For contracts in which revenue is recognized over time, control is generally transferred as the Company creates an asset that does not have an alternative use to the Company and the Company has an enforceable right to payment for the performance completed to date.
The following table presents the Company’s revenue disaggregated by product line and geographic area:
10
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
Product Line |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Refining |
| $ | 7,568 |
|
| $ | 6,317 |
|
| $ | 15,443 |
|
| $ | 10,936 |
|
Chemical/Petrochemical |
|
| 5,804 |
|
|
| 3,483 |
|
|
| 11,679 |
|
|
| 8,086 |
|
Defense |
|
| 14,855 |
|
|
| 19,798 |
|
|
| 24,655 |
|
|
| 26,877 |
|
Space |
|
| 4,306 |
|
|
| 1,292 |
|
|
| 10,768 |
|
|
| 2,017 |
|
Other Commercial |
|
| 5,610 |
|
|
| 3,256 |
|
|
| 11,673 |
|
|
| 6,387 |
|
Net sales |
| $ | 38,143 |
|
| $ | 34,146 |
|
| $ | 74,218 |
|
| $ | 54,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Geographic Region |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Asia |
| $ | 4,255 |
|
| $ | 5,483 |
|
| $ | 8,503 |
|
| $ | 8,992 |
|
Canada |
|
| 1,707 |
|
|
| 879 |
|
|
| 2,704 |
|
|
| 2,087 |
|
Middle East |
|
| 686 |
|
|
| 963 |
|
|
| 1,145 |
|
|
| 1,575 |
|
South America |
|
| 399 |
|
|
| 236 |
|
|
| 1,860 |
|
|
| 478 |
|
U.S. |
|
| 30,325 |
|
|
| 26,201 |
|
|
| 58,494 |
|
|
| 40,095 |
|
All other |
|
| 771 |
|
|
| 384 |
|
|
| 1,512 |
|
|
| 1,076 |
|
Net sales |
| $ | 38,143 |
|
| $ | 34,146 |
|
| $ | 74,218 |
|
| $ | 54,303 |
|
In the current quarter, the Company changed the descriptions of its disaggregated product line information to reflect the way in which management evaluates the business performance of its products and services. The Company's products and services include the design and manufacture of mission critical fluid, power, heat transfer and vacuum technologies for the defense, space, energy and process industries. The prior period results were reclassified to conform with the current period presentation.
A performance obligation represents a promise in a contract to provide a distinct good or service to a customer. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Transaction price reflects the amount of consideration to which the Company expects to be entitled in exchange for transferred products. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized as the performance obligation is satisfied. In certain cases, the Company may separate a contract into more than one performance obligation, while in other cases, several products may be part of a fully integrated solution and are bundled into a single performance obligation. If a contract is separated into more than one performance obligation, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods underlying each performance obligation. The Company has made an accounting policy election to exclude from the measurement of the contract price all contracts withtaxes assessed by government authorities that are collected by the Company from its customers. The Company does not adjust the contract price for the effects of a planned manufacturing processfinancing component if the Company expects, at contract inception, that the period between when a product is transferred to a customer and when the customer pays for the product will be one year or less. Shipping and handling fees billed to the customer are recorded in excessrevenue and the related costs incurred for shipping and handling are included in cost of four weeks (which approximates 575 direct labor hours) usingproducts sold.
Revenue on the percentage-of-completion method. The majority of the Company'sCompany’s contracts, as measured by number of contracts, is recognized upon shipment to the customer. Revenue on larger contracts, which are fewer in number but represent the majority of revenue, is recognized under this methodology.over time. Revenue from contracts that is recognized upon shipment accounted for approximately 25% and 20% of revenue for the three-month periods ended September 30, 2022 and 2021, respectively, and revenue from contracts that is recognized over time accounted for approximately 75% and 80% of revenue for the three-month periods ended September 30, 2022 and 2021, respectively. Revenue from contracts that is recognized upon shipment accounted for approximately 30% and 25% of revenue for the six-month periods ended September 30, 2022 and 2021, respectively, and revenue from contracts that is recognized over time accounted for approximately 70% and 75% of revenue for the six-month periods ended September 30, 2022 and 2021, respectively. The Company recognizes revenue over time when contract performance results in the creation of a product for which the Company does not have an alternative use and the contract includes an enforceable right to payment in an amount that corresponds directly with the value of the performance completed. To measure progress towards completion on performance obligations for which revenue is recognized over time the Company utilizes an input method based upon a ratio of direct labor hours incurred to date to management’s estimate of the total labor hours to be incurred on each contract, an input method based upon a ratio of total contract costs incurred to date to management’s estimate of the total contract costs to be incurred or an output method based upon completion of operational milestones, depending upon the nature of the contract. The Company has established the systems and procedures essential to developing the estimates required to account for contracts using the percentage-of-completion method. The percentage-of-completion method is determinedperformance obligations over time. These procedures include monthly review by comparing actual labormanagement of costs incurred, to a specific date to management's estimateprogress towards completion, identified risks and opportunities, sourcing determinations, changes in estimates of the total laborcosts yet to be incurred, on each contract or completionavailability of operational milestones assigned to each contract. Contracts in progress are reviewed monthlymaterials, and execution by management, and salessubcontractors. Sales and earnings are adjusted in current accounting periods based on
11
revisions in the contract value due to pricing changes and estimated costs at completion. Losses on contracts are recognized immediately when evident to management.
RevenueThe timing of revenue recognition, invoicing and cash collections affect trade accounts receivable, unbilled revenue (contract assets) and customer deposits (contract liabilities) on the Condensed Consolidated Balance Sheets. Unbilled revenue represents revenue on contracts not accounted for using the percentage-of-completion methodthat is recognized utilizingover time and exceeds the completed contract method. The majority of the Company's contracts (as opposed to revenue) have a planned manufacturing process of less than four weeks and the results reported under this method do not vary materially from the percentage-of-completion method. The Company recognizes revenue and all related costs on these contracts upon substantial completion or shipmentamount that has been billed to the customer. Substantial completionUnbilled revenue is consistently definedseparately presented in the Condensed Consolidated Balance Sheets. The Company may have an unconditional right to payment upon billing and prior to satisfying the performance obligations. The Company will then record a contract liability and an offsetting asset of equal amount until the deposit is collected and the performance obligations are satisfied. Customer deposits are separately presented in the Condensed Consolidated Balance Sheets. Customer deposits are not considered a significant financing component as they are generally received less than one year before the product is completed or used to procure specific material on a contract, as well as related overhead costs incurred during design and construction.
Net contract assets (liabilities) consisted of the following:
|
| September 30, 2022 |
|
| March 31, 2022 |
|
| Change |
| |||
|
|
|
|
|
|
|
|
|
| |||
Unbilled revenue (contract assets) |
| $ | 30,670 |
|
| $ | 25,570 |
|
| $ | 5,100 |
|
Customer deposits (contract liabilities) |
|
| (26,079 | ) |
|
| (25,644 | ) |
|
| (435 | ) |
Net contract assets (liabilities) |
| $ | 4,591 |
|
| $ | (74 | ) |
| $ | 4,665 |
|
Contract liabilities at least 95% complete with regard to direct labor hours. Customer acceptance is generally required throughout the construction processSeptember 30 and March 31, 2022 include $8,588 and $4,216, respectively, of customer deposits for which the Company has no further material obligations under its contracts afteran unconditional right to collect payment. Trade accounts receivable, as presented on the Condensed Consolidated Balance Sheets, includes corresponding balances at September 30 and March 31, 2022, respectively. Revenue recognized in the three and six months ended September 30, 2022 that was included in the contract liability balance at March 31, 2022 was $ 8,127 and $16,557, respectively. Changes in the net contract liability balance during the six months ended September 30, 2022 were impacted by a $5,100 increase in contract assets, of which $33,220 was due to contract progress offset by invoicing to customers of $28,120. In addition, contract liabilities increased $435 driven by new customer deposits of $16,992 offset by revenue is recognized.recognized in the current period that was included in the contract liability balance at March 31, 2022.
Receivables billed but not paid under retainage provisions in the Company’s customer contracts were $1,141$2,777 and $971$3,182 at December 31, 2017September 30 and March 31, 2017,2022, respectively.
NOTE 3 – INVESTMENTS:
InvestmentsIncremental costs to obtain a contract consist of certificatessales employee and agent commissions. Commissions paid to employees and sales agents are capitalized when paid and amortized to selling, general and administrative expense when the related revenue is recognized. Capitalized costs, net of deposits with financial institutions. All investments have original maturities of greater thanamortization, to obtain a contract were $35 and $32 at September 30 and March 31, 2022, respectively, and are included in the line item "Prepaid expenses and other current assets" in the Condensed Consolidated Balance Sheets. The related amortization expense was $23 and $24 in the three months ended September 30, 2022 and less than one year2021, respectively, and are classified$24 and $34 in the six-month periods ended September 30, 2022 and 2021, respectively.
The Company’s remaining unsatisfied performance obligations represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. The Company also refers to this measure as held-to-maturity, asbacklog. As of September 30, 2022, the Company believes it hashad remaining unsatisfied performance obligations of $313,340. The Company expects to recognize revenue on approximately 40% to 45% of the intentremaining performance obligations within one year, 25% to 30% in one to two years and ability to hold the securities to maturity. Investments are stated at amortized cost which approximates fair value. All investments held by the Company at December 31, 2017 are scheduled to mature on or before May 31, 2018.remaining beyond two years.
NOTE 4 – INVENTORIES:
Inventories are stated at the lower of cost or market,net realizable value, using the average cost method. Unbilled revenue in the Condensed Consolidated Balance Sheets represents revenue recognized that has not been billed to customers on contracts accounted for on the percentage-of-completion method. For contracts accounted for on the percentage-of-completion method, progress payments are netted against unbilled revenue to the extent the payment is less than the unbilled revenue for the applicable contract. Progress payments exceeding unbilled revenue are netted against inventory to the extent the payment is less than or equal to the inventory balance relating to the applicable contract, and the excess is presented as customer deposits in the Condensed Consolidated Balance Sheets.
Major classifications of inventories are as follows:
|
| December 31, |
|
| March 31, |
| ||
|
| 2017 |
|
| 2017 |
| ||
Raw materials and supplies |
| $ | 3,034 |
|
| $ | 3,016 |
|
Work in process |
|
| 9,334 |
|
|
| 12,573 |
|
Finished products |
|
| 935 |
|
|
| 891 |
|
|
|
| 13,303 |
|
|
| 16,480 |
|
Less - progress payments |
|
| 4,404 |
|
|
| 7,234 |
|
Total |
| $ | 8,899 |
|
| $ | 9,246 |
|
|
| September 30, |
|
| March 31, |
| ||
|
| 2022 |
|
| 2022 |
| ||
Raw materials and supplies |
| $ | 4,131 |
|
| $ | 4,145 |
|
Work in process |
|
| 13,904 |
|
|
| 11,631 |
|
Finished products |
|
| 1,813 |
|
|
| 1,638 |
|
Total |
| $ | 19,848 |
|
| $ | 17,414 |
|
12
NOTE 5 – INTANGIBLE ASSETS:EQUITY-BASED COMPENSATION:
Intangible assets are comprised of the following:
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Impairment Loss |
|
| Net Carrying Amount |
| ||||
At December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
| $ | 2,700 |
|
| $ | 1,267 |
|
| $ | — |
|
| $ | 1,433 |
|
Intangibles not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permits |
| $ | 10,300 |
|
| $ | — |
|
| $ | 8,600 |
|
| $ | 1,700 |
|
Tradename |
|
| 2,500 |
|
|
| — |
|
|
| 500 |
|
|
| 2,000 |
|
|
| $ | 12,800 |
|
| $ | — |
|
| $ | 9,100 |
|
| $ | 3,700 |
|
At March 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
| $ | 2,700 |
|
| $ | 1,132 |
|
| $ | — |
|
| $ | 1,568 |
|
Intangibles not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permits |
| $ | 10,300 |
|
| $ | — |
|
| $ | — |
|
| $ | 10,300 |
|
Tradename |
|
| 2,500 |
|
|
| — |
|
|
| — |
|
|
| 2,500 |
|
|
| $ | 12,800 |
|
| $ | — |
|
| $ | — |
|
| $ | 12,800 |
|
Finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives. Intangible amortization expense for each of the three-month periods ended December 31, 2017 and 2016 was $45. Intangible amortization expense for each of the nine-month periods ended December 31, 2017 and 2016 was $135. As of December 31, 2017, amortization expense is estimated to be $45 for the remainder of fiscal 2018 and $180 in each of the fiscal years ending March 31, 2019,The 2020 2021 and 2022.
During the third quarter of fiscal 2018, the Company performed its annual goodwill and intangible asset impairment review. The Company assesses impairment by comparing the fair value of its reporting units and intangible assets to their related carrying value. Accounting Standards Update No. 2015-07, “Fair Value Measurement (Topic 820), establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 – Valuations based on quoted prices in active markets for identical assets of liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2 – Valuations determined from quoted prices for similar assets of liabilities in active markets, quoted prices for identical instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The Company estimated the fair value of intangible assets and goodwill of its commercial nuclear power business related to the December 2010 acquisition of Energy Steel & Supply Co. (“Energy Steel”) using the income approach. Under the income approach, the fair value of the business is calculated based on the present value of estimated future cash flows. Cash flow projections are based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected cash flows. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy outlined above. The impairment review indicated that the fair value of the permits, tradename and goodwill of the business were substantially lower than the carrying value due to reduced investment from the U.S. nuclear power market, the strength of the Energy Steel brand relative to larger more vertically integrated suppliers, and the bankruptcy of Westinghouse Electric Company which resulted in the stoppage of work at the Summer, SC nuclear facility. As a result, in the third quarter of fiscal 2018 the Company recorded impairment losses of $8,600, $500, and $5,716 for permits, tradename and goodwill, respectively.
NOTE 6 – STOCK-BASED COMPENSATION:
The Amended and Restated 2000 Graham Corporation Equity Incentive Plan to Increase Shareholder Value,(the "2020 Plan"), as approved by the Company’s stockholders at the Annual Meetingannual meeting of stockholders on July 28, 2016,August 11, 2020, provides for the issuance of up to 1,375422 shares of common stock in connection with grants of incentive stock options, non-qualified stock options, restricted stock awardsunits and performancestock awards to officers, key employees and outside directors: provided, however,directors, including 112 shares that became available under the 2020 Plan from the Company’s prior plan, the Amended and Restated 2000 Graham Corporation Incentive Plan to Increase Shareholder Value (the "2000 Plan"). As of August 11, 2020, the effective date of the 2020 Plan, no more than 467 further awards will be granted under the 2000 Plan. However, 13 shares of commonunvested restricted stock may be usedunder the 2000 Plan remain subject to the terms of such plan until the time such shares of restricted stock vest or are forfeited.
The following restricted stock units were granted in the six months ended September 30, 2022:
|
| Six Months Ended |
|
| |
|
| September 30, |
|
| |
|
| 2022 |
|
| |
Officers |
| $ | 186 |
|
|
Directors |
|
| 37 |
|
|
|
| $ | 223 |
|
|
112 restricted stock units, granted to officers, vest 100% on the third anniversary of the grant date subject to the satisfaction of the performance metrics for awards other thanthe applicable three-year period. 56 restricted stock options. Stock options may beunits, granted at prices not less thanto officers, vest 33⅓% per year over a three-year term. 18 restricted stock units, granted to an officer, vest 100% on the fair market value atthird anniversary of the dategrant date. 37 restricted stock units, granted to directors, vest 100% on the first year anniversary of the grant date. No restricted stock units were granted in the three-month period ended September 30, 2022 and expire no later than ten years after the date of grant.2021.
No restricted stock awards were granted in the three-month periodsthree and six-month period ended December 31, 2017 and 2016.September 30, 2022. Restricted stock awards for 27 shares were granted in the nine-month periodsthree-month period ended December 31, 2017 and 2016 were 59 and 82, respectively. RestrictedSeptember 30, 2021, 18 shares of which vest 100% on the third anniversary of the grant date subject to the satisfaction of the performance metrics for the applicable three-year period and 9 shares that vest 33⅓% per year over a three-year term. Restricted stock awards of 162 shares were granted in the six-months period ended September 30, and 432021. 88 restricted shares granted to officers in fiscal 2018 and fiscal 2017, respectively,2022 vest 100%100% on the third anniversary of the grant date subject to the satisfaction of the performance metrics for the applicable three-year period. Restricted54 restricted shares of 22 and 31 granted to officers and key employees in fiscal 2018 and fiscal 2017, respectively,2022 vest 33⅓% per year over a three-year term. Restricted20 restricted shares of 7 and 8 granted to directors in the first quarter of fiscal 2018 and fiscal 2017, respectively,2022, vest 100%100% on the first year anniversary of the grant date. No stock option awards were granted in the three-month or nine-month periodssix-month period ended December 31, 2017September 30, 2022 and 2016 December 31, 2017 and 2016.2021.
During the three months ended December 31, 2017September 30, 2022 and 2016,2021, the Company recognized stock-basedequity-based compensation costs related to stock option and restricted stock awards of $213$201 and $200,($22), respectively. The income tax benefit recognized related to stock-basedequity-based compensation was $24$44 and $70($6) for the three months ended December 31, 2017September 30, 2022 and 2016,2021, respectively. During the ninesix months ended December 31, 2017September 30, 2022 and 2016,2021, the Company recognized stock-basedequity-based compensation costs related to stock option and restricted stock awards of $362$306 and $427,$315, respectively. The income tax benefit recognized related to stock-basedequity-based compensation was $77$67 and $151$69 for the ninesix months ended December 31, 2017September 30, 2022 and 2016,2021, respectively.
The Company has an Employee Stock Purchase Plan, as amended (the "ESPP"), which allows eligible employees to purchase shares of the Company's common stock at a discount of up to 15%15% of its fair market value on the (i)(1) last, (ii)(2) first or (iii)(3) lower of the last or first day of the six-month offering period. AAs of September 30, 2022, a total of 200400 shares of common stock may be purchased under the ESPP. In each ofDuring the three months ended December 31, 2017September 30, 2022 and 2016,2021, the Company recognized stock-basedequity-based compensation costs of $0($3) and ($1), respectively, related to the ESPP and $0($1) and ($1), respectively, of related tax benefits. During the nine monthssix-month periods ended December 31, 2017September 30, 2022 and 2016,2021, the Company recognized stock-basedequity-based compensation costs of $0$6 and $6,$15, respectively, related to the ESPP and $0$1 and $2,$4, respectively, of related tax benefits.
10
NOTE 76 – INCOME (LOSS) INCOME PER SHARE:
Basic income (loss) income per share is computed by dividing net income (loss) income by the weighted average number of common shares outstanding for the period. Diluted income (loss) income per share is calculated by dividing net income (loss) income by the weighted average number
13
of common shares outstanding and, when applicable, potential common shares outstanding during the period. A reconciliation of the numerators and denominators of basic and diluted income (loss) income per share is presented below:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| December 31, |
|
| December 31, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Basic (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
| $ | (11,622 | ) |
| $ | 1,840 |
|
| $ | (10,677 | ) |
| $ | 3,222 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
| 9,768 |
|
|
| 9,727 |
|
|
| 9,762 |
|
|
| 9,709 |
|
Basic (loss) income per share |
| $ | (1.19 | ) |
| $ | .19 |
|
| $ | (1.09 | ) |
| $ | .33 |
|
Diluted income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
| $ | (11,622 | ) |
| $ | 1,840 |
|
| $ | (10,677 | ) |
| $ | 3,222 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
| 9,768 |
|
|
| 9,727 |
|
|
| 9,762 |
|
|
| 9,709 |
|
Stock options outstanding |
|
| — |
|
|
| 6 |
|
|
| — |
|
|
| 5 |
|
Weighted average common and potential common shares outstanding |
|
| 9,768 |
|
|
| 9,733 |
|
|
| 9,762 |
|
|
| 9,714 |
|
Diluted (loss) income per share |
| $ | (1.19 | ) |
| $ | .19 |
|
| $ | (1.09 | ) |
| $ | .33 |
|
|
| Three Months Ended |
|
| Six Months Ended |
|
| ||||||||||
|
| September 30, |
|
| September 30, |
|
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| ||||
Basic income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | (196 | ) |
| $ | (492 | ) |
| $ | 480 |
|
| $ | (3,618 | ) |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares |
|
| 10,617 |
|
|
| 10,681 |
|
|
| 10,614 |
|
|
| 10,442 |
|
|
Basic income (loss) per share |
| $ | (0.02 | ) |
| $ | (0.05 | ) |
| $ | 0.05 |
|
| $ | (0.35 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | (196 | ) |
| $ | (492 | ) |
| $ | 480 |
|
| $ | (3,618 | ) |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares |
|
| 10,617 |
|
|
| 10,681 |
|
|
| 10,614 |
|
|
| 10,442 |
|
|
Restricted stock units outstanding |
|
| — |
|
|
| — |
|
|
| 4 |
|
|
| — |
|
|
Weighted average common and |
|
| 10,617 |
|
|
| 10,681 |
|
|
| 10,618 |
|
|
| 10,442 |
|
|
Diluted income (loss) per share |
| $ | (0.02 | ) |
| $ | (0.05 | ) |
|
| 0.05 |
|
| $ | (0.35 | ) |
|
None of the options to purchase shares of common stock which totaled 69 were included in the computation of diluted loss per share for the three and nine months ended December 31, 2017 as the effect would be anti-dilutive due to the net loss in the periods. Options to purchase a total of 16 shares of common stock were outstanding at December 31, 2016 but were not included in the above computation of diluted income per share in the three and nine-month periods ended December 31, 2016 given their exercise prices as they would not be dilutive upon issuance.
NOTE 87 – PRODUCT WARRANTY LIABILITY:
The reconciliation of the changes in the product warranty liability is as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| December 31, |
|
| December 31, |
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||||
Balance at beginning of period |
| $ | 301 |
|
| $ | 582 |
|
| $ | 538 |
|
| $ | 686 |
|
| $ | 496 |
|
| $ | 522 |
|
| $ | 441 |
|
| $ | 626 |
|
BN warranty accrual acquired |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 169 |
| ||||||||||||||||
Expense (income) for product warranties |
|
| 22 |
|
|
| (81 | ) |
|
| (59 | ) |
|
| 31 |
|
|
| 13 |
|
|
| (5 | ) |
|
| 90 |
|
|
| (21 | ) |
Product warranty claims paid |
|
| (22 | ) |
|
| (4 | ) |
|
| (178 | ) |
|
| (220 | ) |
|
| (22 | ) |
|
| (68 | ) |
|
| (44 | ) |
|
| (325 | ) |
Balance at end of period |
| $ | 301 |
|
| $ | 497 |
|
| $ | 301 |
|
| $ | 497 |
|
| $ | 487 |
|
| $ | 449 |
|
| $ | 487 |
|
| $ | 449 |
|
Income of $59$5 and $21 for product warranties in the ninethree and six months ended December 31, 2017 and the income of $81 in the three months ended December 31, 2016September 30, 2021, respectively, resulted from the reversal of provisions made that were no longer required due to lower claims experience.
The product warranty liability is included in the line item "Accrued expenses and other current liabilities" in the Condensed Consolidated Balance Sheets.
11
NOTE 9 -8 – CASH FLOW STATEMENT:
Interest paid was $8$362 and $7$135 in the nine-monthsix-month periods ended December 31, 2017September 30, 2022 and 2016.2021, respectively. Income taxes paid for the ninesix months ended December 31, 2017September 30, 2022 and 20162021 were $1,801$151 and $104,$1,318, respectively.
In the nine months ended December 31, 2017At September 30, 2022 and 2016, non-cash activities included the issuance of treasury stock valued at $63 and $107, respectively, to the Company’s Employee Stock Purchase Plan.
At December 31 2017 and 2016, respectively,2021, there were $29$205 and $31$39, respectively, of capital purchases that were recorded in accounts payable and are not included in the caption "Purchase of property, plant and equipment" in the Condensed Consolidated Statements of Cash Flows.
The $59,563 of cash utilized for the acquisition of BN included the cash consideration of $61,150, net of cash acquired of $1,587. Upon completion of the final purchase price allocation and after the adjustments made during the measurement period, the cash utilized for the acquisition was $60,282, including cash consideration of $61,150, net of cash acquired of $868. In the three months ended June 30, 2021, non-cash activities included the issuance of 610 treasury shares valued at $8,964, included as part of the consideration for the acquisition.
14
Non-cash activities included pension adjustments, net of income tax, of $68.
NOTE 109 – EMPLOYEE BENEFIT PLANS:
The components of pension cost are as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| December 31, |
|
| December 31, |
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||||
Service cost |
| $ | 149 |
|
| $ | 151 |
|
| $ | 448 |
|
| $ | 451 |
|
| $ | 83 |
|
| $ | 94 |
|
| $ | 166 |
|
| $ | 187 |
|
Interest cost |
|
| 356 |
|
|
| 362 |
|
|
| 1,067 |
|
|
| 1,087 |
|
|
| 308 |
|
|
| 298 |
|
|
| 616 |
|
|
| 598 |
|
Expected return on assets |
|
| (743 | ) |
|
| (718 | ) |
|
| (2,232 | ) |
|
| (2,155 | ) |
|
| (542 | ) |
|
| (682 | ) |
|
| (1,085 | ) |
|
| (1,364 | ) |
Amortization of actuarial loss |
|
| 253 |
|
|
| 337 |
|
|
| 760 |
|
|
| 1,013 |
|
|
| 165 |
|
|
| 229 |
|
|
| 330 |
|
|
| 442 |
|
Net pension cost |
| $ | 15 |
|
| $ | 132 |
|
| $ | 43 |
|
| $ | 396 |
| ||||||||||||||||
Net pension cost (benefit) |
| $ | 14 |
|
| $ | (61 | ) |
| $ | 27 |
|
| $ | (137 | ) |
The Company madeno contributions to its defined benefit pension plan during the ninesix months ended December 31, 2017 of $52September 30, 2022 and does notnot expect to make any contributions to the plan for the balance of fiscal 2018.2023.
The components of the postretirement benefit cost are as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
| Six Months Ended |
| |||||||||||||||||||||
|
| December 31, |
|
| December 31, |
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||||
Interest cost |
| $ | 6 |
|
| $ | 5 |
|
| $ | 19 |
|
| $ | 19 |
|
| $ | 3 |
|
| $ | 4 |
|
| $ | 7 |
|
| $ | 7 |
|
Amortization of actuarial loss |
|
| 9 |
|
|
| 11 |
|
|
| 28 |
|
|
| 30 |
|
|
| 3 |
|
|
| 6 |
|
|
| 6 |
|
|
| 12 |
|
Net postretirement benefit cost |
| $ | 15 |
|
| $ | 16 |
|
| $ | 47 |
|
| $ | 49 |
|
| $ | 6 |
|
| $ | 10 |
|
| $ | 13 |
|
| $ | 19 |
|
The Company paid no benefits related to its postretirement benefit plan during the ninesix months ended December 31, 2017.September 30, 2022. The Company expects to pay benefits of approximately $83$63 for the balance of fiscal 2018.2023.
The components of net periodic benefit cost other than service cost are included in the line item "Other income, net" in the Condensed Consolidated Statements of Operations.
The Company self-funds the medical insurance coverage it provides to its U.S.Batavia based employees. The Company maintains a stop loss insurance policy in order to limit its exposure to claims. The liability of $134$209 and $174$164 on December 31, 2017September 30, 2022 and March 31, 2017,2022, respectively, related to the self-insured medical plan is primarily based upon claim history and is included in the caption “Accrued compensation”"Accrued compensation" as a current liability in the Condensed Consolidated Balance Sheets.
NOTE 1110 – COMMITMENTS AND CONTINGENCIES:
The Company has been named as a defendant in lawsuits alleging personal injury from exposure to asbestos allegedly contained in, or accompanying, products made by the Company. The Company is a co-defendant with numerous other defendants in these lawsuits and intends to vigorously defend itself against these claims. The claims in the Company’s current lawsuits are similar to those made in previous asbestos-related suits that named the Company as a defendant, which either were dismissed when it was shown that the Company had not supplied products to the plaintiffs’ places of work or were settled for immaterial amounts. The Company cannot provide any assurances that any pending or future matters will be resolved in the same manner as previous lawsuits.
As of December 31, 2017,September 30, 2022, the Company was subject to the claims noted above, as well as other legal proceedings and potential claims that have arisen in the ordinary course of business.
12
Although the outcome of the lawsuits, legal proceedings or potential claims to which the Company is, or may become, a party to cannot be determined and an estimate of the reasonably possible loss or range of loss cannot be made for the majority of the claims, management does not believe that the outcomes, either individually or in the aggregate, will have a material adverse effect on the Company’s results of operations, financial position or cash flows.
NOTE 1211 – INCOME TAXES:
The Company files federal and state income tax returns in several domestic and international jurisdictions. In most tax jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed. The Company is subject to U.S. federal examination for the tax years 20152018 through 20172021 and examination in state tax jurisdictions for
15
the tax years 20132017 through 2017.2021. The Company is subject to examination in the People’s Republic of China for tax years 20142018 through 2016.2021 and in India for tax year 2018 through 2021.
There was no liability for unrecognized tax benefits at either December 31, 2017September 30, 2022 or March 31, 2017.2022.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act, which is effective on January 1, 2018, significantly revises the U.S. tax code by, among other changes, lowering the corporate income tax rate from 35% to 21%, requiring a one-time transition tax on accumulated foreign earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes on certain foreign sourced earnings. At December 31, 2017, the Company has not completed its accounting for the tax effects of the Tax Act; however, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax.
The Company remeasured certain U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, and provisionally recorded an income tax benefit of $1,575 related to such remeasurement in the third quarter of fiscal 2018. The Company is still analyzing certain aspects of the Tax Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
The one-time transition tax is based on the total post-1986 earnings and profits (“E&P”) of our foreign subsidiary that has previously been deferred from U.S. income taxes. The Company recorded a provisional amount for its one-time transition liability of its foreign subsidiary resulting in additional income tax expense of $137 in the third quarter of fiscal 2018. The Company has not yet completed its calculation of the total post-1986 foreign E&P for the foreign subsidiary. The transition tax is based in part on the amount of those earnings held in cash and other specified assets. The amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.
NOTE 1312 – CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS:
The changes in accumulated other comprehensive loss by component for the ninesix months ended December 31, 2017September 30, 2022 and 20162021 are as follows:
|
| Pension and Other Postretirement Benefit Items |
|
| Foreign Currency Items |
|
| Total |
| |||
Balance at April 1, 2017 |
| $ | (8,439 | ) |
| $ | 5 |
|
| $ | (8,434 | ) |
Other comprehensive income before reclassifications |
|
| — |
|
|
| 216 |
|
|
| 216 |
|
Amounts reclassified from accumulated other comprehensive loss |
|
| 619 |
|
|
| — |
|
|
| 619 |
|
Net current-period other comprehensive income |
|
| 619 |
|
|
| 216 |
|
|
| 835 |
|
Balance at December 31, 2017 |
| $ | (7,820 | ) |
| $ | 221 |
|
| $ | (7,599 | ) |
|
| Pension and Other Postretirement Benefit Items |
|
| Foreign Currency Items |
|
| Total |
| |||||||||||||||
Balance at April 1, 2016 |
| $ | (10,932 | ) |
| $ | 256 |
|
| $ | (10,676 | ) | ||||||||||||
|
| Pension and |
|
| Foreign |
|
| Total |
| |||||||||||||||
Balance at April 1, 2022 |
| $ | (6,970 | ) |
| $ | 499 |
|
| $ | (6,471 | ) | ||||||||||||
Other comprehensive income before reclassifications |
|
| — |
|
|
| (283 | ) |
|
| (283 | ) |
|
| — |
|
|
| (680 | ) |
|
| (680 | ) |
Amounts reclassified from accumulated other comprehensive loss |
|
| 674 |
|
|
| — |
|
|
| 674 |
|
|
| 262 |
|
|
| — |
|
|
| 262 |
|
Net current-period other comprehensive income |
|
| 674 |
|
|
| (283 | ) |
|
| 391 |
|
|
| 262 |
|
|
| (680 | ) |
| $ | (418 | ) |
Balance at December 31, 2016 |
| $ | (10,258 | ) |
| $ | (27 | ) |
| $ | (10,285 | ) | ||||||||||||
Balance at September 30, 2022 |
| $ | (6,708 | ) |
| $ | (181 | ) |
| $ | (6,889 | ) |
|
| Pension and |
|
| Foreign |
|
| Total |
| |||
Balance at April 1, 2021 |
| $ | (7,698 | ) |
| $ | 301 |
|
| $ | (7,397 | ) |
Other comprehensive income before reclassifications |
|
| 68 |
|
|
| 93 |
|
|
| 161 |
|
Amounts reclassified from accumulated other comprehensive |
|
| 353 |
|
|
| — |
|
|
| 353 |
|
Net current-period other comprehensive income |
|
| 421 |
|
|
| 93 |
|
|
| 514 |
|
Balance at September 30, 2021 |
| $ | (7,277 | ) |
| $ | 394 |
|
| $ | (6,883 | ) |
The reclassifications out of accumulated other comprehensive loss by component for the three and ninesix months ended December 31, 2017September 30, 2022 and 20162021 are as follows:
Details about Accumulated Other Comprehensive Loss Components |
| Amount Reclassified from Accumulated Other Comprehensive Loss |
|
|
| Affected Line Item in the Condensed Consolidated Statements of Income and Retained Earnings | ||||||
|
| Three Months Ended |
|
|
|
| ||||||
|
| December 31, |
|
|
|
| ||||||
|
| 2017 |
|
|
| 2016 |
|
|
|
| ||
Pension and other postretirement benefit items: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial loss |
| $ | (262 | ) | (1) |
| $ | (348 | ) | (1) |
| Income before provision for income taxes |
|
|
| 17 |
|
|
|
| (123 | ) |
|
| Provision for income taxes |
|
| $ | (279 | ) |
|
| $ | (225 | ) |
|
| Net income |
Details about Accumulated Other |
| Amount Reclassified from |
|
|
| Affected Line Item in the Condensed | ||||||
|
| Three Months Ended |
|
|
|
| ||||||
|
| September 30, |
|
|
|
| ||||||
|
| 2022 |
|
|
| 2021 |
|
|
|
| ||
Pension and other postretirement benefit items: |
|
|
|
|
|
|
|
|
|
| ||
Amortization of actuarial income (loss) |
| $ | 168 |
| (1) |
| $ | (236 | ) | (1) |
| Income (loss) before benefit for income taxes |
|
|
| 37 |
|
|
|
| (53 | ) |
|
| Benefit for income taxes |
|
| $ | 131 |
|
|
| $ | (183 | ) |
|
| Net income (loss) |
Details about Accumulated Other |
| Amount Reclassified from |
|
|
| Affected Line Item in the Condensed | ||||||
|
| Six Months Ended |
|
|
|
| ||||||
|
| September 30, |
|
|
|
| ||||||
|
| 2022 |
|
|
| 2021 |
|
|
|
| ||
Pension and other postretirement benefit items: |
|
|
|
|
|
|
|
|
|
| ||
Amortization of actuarial loss |
| $ | 336 |
| (1) |
| $ | (455 | ) | (1) |
| Loss before benefit for income taxes |
|
|
| 74 |
|
|
|
| (102 | ) |
|
| Benefit for income taxes |
|
| $ | 262 |
|
|
| $ | (353 | ) |
|
| Net loss |
Details about Accumulated Other Comprehensive Loss Components |
| Amount Reclassified from Accumulated Other Comprehensive Loss |
|
|
| Affected Line Item in the Condensed Consolidated Statements of Income and Retained Earnings | ||||||
|
| Nine Months Ended |
|
|
|
| ||||||
|
| December 31, |
|
|
|
| ||||||
|
| 2017 |
|
|
| 2016 |
|
|
|
| ||
Pension and other postretirement benefit items: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial loss |
| $ | (788 | ) | (1) |
| $ | (1,043 | ) | (1) |
| Income before provision for income taxes |
|
|
| (169 | ) |
|
|
| (369 | ) |
|
| Provision for income taxes |
|
| $ | (619 | ) |
|
| $ | (674 | ) |
|
| Net income |
16
|
|
NOTE 13 – LEASES:
NOTE 14 – RESTRUCTURING CHARGE:
In eachThe Company leases certain manufacturing facilities, office space, machinery and office equipment. An arrangement is considered to contain a lease if it conveys the right to use and control an identified asset for a period of time in exchange for consideration. If it is determined that an arrangement contains a lease, then a classification of a lease as operating or finance is determined by evaluating the five criteria outlined in the lease accounting guidance at inception. Leases generally have remaining terms of one year to five years, whereas leases with an initial term of twelve months or less are not recorded on the Condensed Consolidated Balance Sheets. The depreciable life of leased assets related to finance leases is limited by the expected term of the second quarterlease, unless there is a transfer of fiscal 2018title or purchase option that the Company believes is reasonably certain of exercise. Certain leases include options to renew or terminate. Renewal options are exercisable per the discretion of the Company and vary based on the nature of each lease. The term of the lease includes renewal periods only if the Company is reasonably certain that it will exercise the renewal option. When determining if a renewal option is reasonably certain of being exercised, the Company considers several factors, including but not limited to, the cost of moving to another location, the cost of disrupting operations, whether the purpose or location of the leased asset is unique and the first halfcontractual terms associated with extending the lease. The Company’s lease agreements do not contain any residual value guarantees or any material restrictive covenants and the Company does not sublease to any third parties. As of fiscal 2017,September 30, 2022, the Company did not have any material leases that have been signed but not commenced.
Right-of-use ("ROU") lease assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. ROU assets represent the Company’s workforce was aligned with market conditions by reducingright to use an underlying asset for the numberlease term and lease liabilities represent the Company’s obligation to make payments in exchange for that right of management, officeuse. Finance lease ROU assets and manufacturing positions. As a result, restructuring charges of $316 and $630 were recognized in the nine months ended December 31, 2017 and 2016, respectively. The restructuring charges included severance and related employee benefit costs. The chargesoperating lease ROU assets are included in the caption “Restructuring Charge” in the Condensed Consolidated Statements of Incomeline items "Property, plant and Retained Earnings. The reconciliation of the changes in the restructuring reserve is as follows:
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||
|
| December 31, |
|
| December 31, |
| ||
|
| 2017 |
|
| 2016 |
| ||
Balance at beginning of period |
| $ | 120 |
|
| $ | 74 |
|
Expense for restructuring |
|
| 316 |
|
|
| 630 |
|
Amounts paid for restructuring |
|
| (336 | ) |
|
| (549 | ) |
Balance at end of period |
| $ | 100 |
|
| $ | 155 |
|
14
The liability of $100equipment, net" and $120 at December 31, 2017 and March 31, 2017"Operating lease assets", respectively, is included in the caption “Accrued Compensation” in the Condensed Consolidated Balance Sheets. The current portion and non-current portion of finance and operating lease liabilities are all presented separately in the Condensed Consolidated Balance Sheets.
The discount rate implicit within the Company’s leases is generally not readily determinable, and therefore, the Company uses an incremental borrowing rate in determining the present value of lease payments based on rates available at commencement.
The weighted average remaining lease term and discount rate for finance and operating leases are as follows:
|
| September 30, |
|
| September 30, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Finance Leases |
|
|
|
|
|
| ||
Weighted-average remaining lease term in years |
|
| 0.92 |
|
|
| 1.91 |
|
Weighted-average discount rate |
|
| 10.67 | % |
|
| 10.72 | % |
|
|
|
|
|
|
| ||
Operating Leases |
|
|
|
|
|
| ||
Weighted-average remaining lease term in years |
|
| 7.25 |
|
|
| 7.91 |
|
Weighted-average discount rate |
|
| 3.28 | % |
|
| 3.26 | % |
17
The components of lease expense are as follows:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Amortization of right-of-use assets |
| $ | 5 |
|
| $ | 5 |
|
| $ | 10 |
|
| $ | 10 |
|
Interest on lease liabilities |
|
| 1 |
|
|
| 2 |
|
|
| 2 |
|
|
| 3 |
|
Operating lease cost |
|
| 287 |
|
|
| 384 |
|
|
| 671 |
|
|
| 540 |
|
Short-term lease cost |
|
| 1 |
|
|
| 10 |
|
|
| 5 |
|
|
| 15 |
|
Total lease cost |
| $ | 294 |
|
| $ | 401 |
|
| $ | 688 |
|
| $ | 568 |
|
Operating lease costs during the six-month periods ended September 30, 2022 and 2021 were included within cost of sales and selling, general and administrative expenses.
As of September 30, 2022, future minimum payments required under non-cancelable leases were:
|
| Operating |
|
| Finance |
| ||
Remainder of 2023 |
| $ | 487 |
|
| $ | 13 |
|
2024 |
|
| 1,215 |
|
|
| 11 |
|
2025 |
|
| 1,200 |
|
|
| — |
|
2026 |
|
| 1,209 |
|
|
| — |
|
2027 |
|
| 1,245 |
|
|
| — |
|
2028 and thereafter |
|
| 3,770 |
|
|
| — |
|
Total lease payments |
|
| 9,126 |
|
|
| 24 |
|
|
|
|
|
|
|
| ||
Less – amount representing interest |
|
| 1,051 |
|
|
| 1 |
|
Present value of net minimum lease payments |
| $ | 8,075 |
|
| $ | 23 |
|
NOTE 1514 – ACCOUNTING AND REPORTING CHANGES:DEBT:
InOn June 1, 2021, the normal courseCompany entered into a $20,000five-year term loan with Bank of business, management evaluatesAmerica. The term loan requires monthly principal payments of $167 through June 1, 2026, with the remaining principal amount plus all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), the Securities and Exchange Commission, the Emerging Issues Task Force, the American Institute of Certified Public Accountants or any other authoritative accounting bodies to determine the potential impact they may haveinterest due on the maturity date. The interest rate on the term loan is the applicable Bloomberg Short-Term Bank Yield Index ("BSBY"), plus 1.50%, subject to a 0.00% floor.
Long term debt is comprised of the following:
|
| September 30, |
|
| March 31, |
|
| ||
|
| 2022 |
|
| 2022 |
|
| ||
Bank of America term loan |
| $ | 17,500 |
|
| $ | 18,500 |
|
|
Less: unamortized debt issuance costs |
|
| (875 | ) |
|
| (122 | ) |
|
|
|
| 16,625 |
|
|
| 18,378 |
|
|
Less: current portion |
|
| 2,000 |
|
|
| 2,000 |
|
|
Total |
| $ | 14,625 |
|
| $ | 16,378 |
|
|
As of September 30, 2022, future minimum payments required were as follows:
Remainder of 2023 |
| $ | 1,000 |
|
2024 |
|
| 2,000 |
|
2025 |
|
| 2,000 |
|
2026 |
|
| 12,500 |
|
2027 |
|
| — |
|
2028 and thereafter |
|
| — |
|
Total |
| $ | 17,500 |
|
18
On June 1, 2021, the Company terminated its revolving credit facility agreement with JPMorgan Chase Bank, N.A. and entered into a five-year revolving credit facility with Bank of America that provided a $30,000 line of credit, including letters of credit and bank guarantees, expandable at the Company's consolidated financial statements.option and the bank's approval at any time up to $40,000. As of September 30, 2022 and March 31, 2022, there was $2,500 and $0 outstanding on the line of credit, respectively. Amounts outstanding under the facility agreement bear interest at a rate equal to BSBY plus 1.50%, subject to a 0.00% floor. As of September 30, 2022, the BSBY rate was 3.9509%. Outstanding letters of credit under this agreement are subject to a fee of 1.50% per annum of the outstanding undrawn amount of each letter of credit that is not secured by cash and 0.60% of each letter of credit that is secured by cash. Amounts available for borrowing under the revolving credit facility are subject to an unused commitment fee of 0.25%. As of September 30, 2022, there was $5,706 letters of credit outstanding with Bank of America.
Under the original Bank of America term loan agreement and revolving credit facility, the Company covenanted to maintain a maximum total leverage ratio, as defined in such agreements, of 3.0 to 1.0, with an allowable increase to 3.25 to 1.0 following an acquisition for a period of twelve months following the closing of the acquisition. In addition, the Company covenanted to maintain a minimum fixed charge coverage ratio, as defined in such agreements, of 1.2 to 1.0 and minimum margined assets, as defined in such agreements, of 100% of total amounts outstanding on the revolving credit facility, including letters of credit. At December 31, 2021, the Company was out of compliance with its bank agreement covenants and was granted a waiver for noncompliance by Bank of America.
In May 2014,The Company has entered into amendment agreements with Bank of America since origination. Under the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contractsamended agreements, the Company is not required to comply with Customers." This guidance establishes principlesthe maximum total leverage ratio and the minimum fixed charge coverage ratio covenants contained in the original term loan agreement for reporting information about the nature, amount, timingperiods ending December 31, 2021 and uncertaintyMarch 31, June 30 and September 30, 2022. The principal balance outstanding on the line of revenue and cash flows arising from a company’s contracts with customers.credit may not exceed $15,000, unless letters of credit exceed $11,500, in which case the limit is $17,000, until the compliance date. The guidance requires companies to apply a five-step model when recognizing revenue to depictcompliance date is defined as the transferdate on which Bank of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. The guidance also includes a comprehensive set of disclosure requirements regarding revenue recognition. The guidance allows two methods of adoption: (1) a full retrospective approach where historicalAmerica has received all required financial information is presented in accordance with the new standard and (2) a modified retrospective approach where the guidance is appliedrespect to the most current period presented inCompany for the financial statements. In August 2015, the FASB issued ASU No 2015-14 "Revenue from Contracts with Customers: Deferral of the Effective Date," which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," to clarify the implementation guidance on principal versus agent. In April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," which clarifies the identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients," which clarifies the implementation guidance related to collectability, presentation of sales tax, noncash consideration, contract modifications and completed contracts at transition. The Company plans to adopt these standards using the modified retrospective approach in the first quarter of its fiscal year ending March 31, 2019.2023 and no event of default exists. In addition, on or before September 1, 2023 and at all times thereafter, all of the Company's deposit accounts, except certain accounts, will be either subject to a deposit account control agreement or maintained with Bank of America. The Company has developedcovenants to maintain EBITDA, as defined in such amendment, of at least ($700) for the twelve-month period ending June 30, 2022 and $1,800 for the twelve-month period ending September 30, 2022; maintain a project plantotal maximum leverage ratio of 4.0 to 1.0 for the twelve-month period ending December 31, 2022 and is currently reviewing its contracts3.0 to 1.0 for the period ending March 31, 2023; and evaluatingmaintain liquidity, as defined in such amendment, of at least $10,000 prior to the impactoccurrence of the guidance oncompliance date and $20,000 from and after the occurrence of the compliance date. As of September 30, 2022, the Company was in compliance with the amended financial covenants of its revenue. Theloan agreement. At September 30, 2022, the amount available under the revolving credit facility was $7,657, subject to the above liquidity and leverage covenants.
In connection with the waiver and amendments discussed above, the Company currently believes thatis required to pay a back-end fee of $725 to Bank of America payable upon the most significant impactearliest to occur of adopting(i) any default or event of default, (ii) the guidance willlast date of availability under the revolving credit facility, and (iii) repayment in full of all principal, interest, fees and other obligations, which may be waived or cancelled if certain criteria are met.
On June 1, 2021, the timingCompany entered into an agreement to amend its letter of revenue recognition. Thecredit facility agreement with HSBC Bank USA, N.A. and decreased the Company's line of credit from $15,000 to $7,500. Under the amended agreement, the Company believes that revenueincurs an annual facility fee of $5 and outstanding letters of credit are subject to a fee of between 0.75% and 0.85%, depending on the majorityterm of its contracts will continuethe letter of credit. Interest is payable on the principal amounts of unreimbursed letter of credit draws under the facility at a rate of 3% plus the bank's prime rate. The Company's obligations under the agreement are secured by cash held with the bank. As of September 30, 2022, there was $6,442 letters of credit outstanding with HSBC. The agreement is subject to be recognized upon shipment while revenuean annual renewal by the bank on its larger contracts are expectedJuly 31 of each year.
Letters of credit outstanding as of September 30, 2022 and March 31, 2022 were $12,148 and $12,233, respectively.
NOTE 15 – OTHER OPERATING INCOME, NET:
On August 9, 2021, the Company and James R. Lines entered into a Severance and Transition Agreement (the "Transaction Agreement") pursuant to be recognized over timewhich Mr. Lines resigned from his position as these contracts meet specific criteria establishedthe Company’s Chief Executive Officer and as a member of the board of directors, and from positions he held with all Company subsidiaries and affiliates, effective as of the close of business on August 31, 2021. The Transition Agreement provides that for a period of 18 months following the separation date, Mr. Lines is paid his base salary as well as health care premiums. As a result, a liability was recorded in the new standards. The Company isamount of $798 in the process of implementing changes to its business processes, systems and controls to support the recognition and disclosure requirements under the new guidance. See Note 2 for a description of the Company’s current revenue recognition policy.
In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory," which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted the new guidance in the first quarter of fiscal 2018. The adoption of this ASU did not have a material impactAccrued Compensation on the Company’s Condensed Consolidated Financial Statements. Balance Sheets and recognized against "Other operating income, net" on the Condensed Consolidated Statements of Operations.
19
In February 2016,During the FASB issued ASU No. 2016-02, "Leases (Topic 842)"second quarter ended September 30, 2021, the Company terminated the earn out agreement related to the acquisition of BN (see Note 2), therefore the Company recognized a change in fair value of the contingent liability in the amount of $1,900, which requires companies to recognize all leases as assets and liabilitieswas included in "Other operating income, net" on the consolidated balance sheet. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting guidance. As a result, the effect of leases on the consolidated statement of comprehensive income and the consolidated statement of cash flows is largely unchanged from previous generally accepted accounting principles. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company believes the adoption of this ASU may have a material impact on its assets and liabilities due to the addition of right-of-use assets and lease liabilities to its Consolidated Balance Sheet, however, it does not expect the guidance to have a material impact on itsCompany’s Condensed Consolidated Statement of Income or Consolidated Statement of Cash Flows.Operations.
In March 2016, the FASB issued ASU 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. The Company adopted the new guidance in the first quarter of fiscal 2018. The adoption of this ASU did not have a material impact on the Company’s Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230)", which clarifies the presentation and classification of eight specific issues on the cash flow statement. This ASU is effective for public businesses for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect the adoption of this ASU will have a material effect on its Consolidated Financial Statements.20
In March 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits (Topic 715)", which amended its guidance related to the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amended guidance requires the service cost component be disaggregated from the other components of net benefit cost. The service cost component of expense is required to be reported in the income statement in the same line item as other compensation costs within income from operations. The other components of net benefit cost are required to be presented separately from the service cost component outside of income from operations. This ASU is effective for public businesses for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of this ASU will have on its Consolidated Financial Statements.
Management does not expect any other recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company's consolidated financial statements.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollar(Dollar and share amounts in thousands, except per share data)
Overview
We are a global business that designs, manufacturesleader in the design and sellsmanufacture of mission critical equipmentfluid, power, heat transfer and vacuum technologies for the defense, space, energy defense and chemical/petrochemicalprocess industries. Our energy markets include oil refining, cogeneration, nuclear and alternative power. For the defense industry, our equipment is used in nuclear and non-nuclear propulsion, power, fluid transfer, and thermal management systems primarily for the U.S. Navy. For the space industry, our equipment is used in propulsion, power and energy management systems and for life support systems. Our energy and new energy markets include oil refining, cogeneration, and multiple alternative and clean power applications including hydrogen. For the chemical and petrochemical industries, our equipment is used in fertilizer, ammonia, ethylene, methanol and downstream chemical facilities.
Graham’s global brand isOur brands are built upon world-renownedour engineering expertise and close customer collaboration to design, develop, and produce mission critical equipment and systems that enable our customers to meet their economic and operational objectives. Continual improvement of our processes and systems to ensure qualified and compliant equipment are hallmarks of our brand. Our early engagement with customers and support until the end of service life are values upon which our brands are built.
Our corporate headquarters is co-located with our production facilities in vacuum and heat transfer technology, responsive and flexible service and high quality standards. We design and manufacture custom-engineered ejectors, vacuum pumping systems,Batavia, New York, where surface condensers and vacuum systems. Weejectors are also a leading nuclear code accredited fabricationdesigned, engineered, and specialty machining company. We supply components used inside reactor vessels and outside containment vessels of nuclear power facilities.manufactured. Our equipment can also be found in other diverse applications such as metal refining, pulp and paper processing, water heating, refrigeration, desalination, food processing, pharmaceutical, and heating, ventilating and air conditioning.
Our corporate headquarters are located in Batavia, New York. We have production facilities co-located with our headquarters in Batavia and also at our wholly-owned subsidiary, Energy Steel & Supply Co.Barber-Nichols, LLC ("Energy Steel"BN"), locatedbased in Lapeer, Michigan.Arvada, Colorado, designs, develops, manufactures and sells specialty turbomachinery products for the aerospace, cryogenic, defense and energy markets (see "Acquisition" below). We also have a wholly-owned foreign subsidiary,subsidiaries, Graham Vacuum and Heat Transfer Technology (Suzhou) Co., Ltd. ("GVHTT"), located in Suzhou, China.China and Graham India Private Limited ("GIPL"), located in Ahmedabad, India. GVHTT provides sales and engineering support for us in the People’sPeople's Republic of China and management oversight throughout Southeast Asia. GIPL serves as a sales and market development office focusing on the refining, petrochemical and fertilizer markets in India and the middle east.
Our current fiscal year (which we refer to as “fiscal 2018”"fiscal 2023") ends March 31, 2018.2023.
HighlightsAcquisition
We completed the acquisition of BN on June 1, 2021. Founded as a specialty turbomachinery engineering company in 1966, BN grew rapidly from programs that involve complex production and systems integration. By integrating knowledge in rotating equipment, power generation cycles, and electrical management systems, BN has successfully won the design and development of different power, fluid transfer, and propulsion systems used in underwater vehicles among many other accomplishments.
Highlights for
The acquisition of BN changed the three and nine months ended December 31, 2017 include:
Net sales forcomposition of our end market mix. For the thirdsecond quarter of fiscal 20182023, sales to the defense and space industries were $17,281, down 24%50% of our business compared with $22,654approximately 25% of sales prior to the acquisition. The remaining 50% of our second quarter fiscal 2023 sales came from the refining, chemical/petrochemical and other commercial markets. These markets represented approximately 75% of our sales prior to the acquisition.
The BN transaction was accounted for as a business combination, which requires that assets acquired and liabilities assumed be recognized at their fair value as of the acquisition date. The purchase price of $72,014 was comprised of 610 shares of common stock, representing a value of $8,964 at $14.69 per share, and cash consideration of $61,150. The cash consideration was funded through cash on-hand and debt proceeds (See Note 2 to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q). The purchase agreement also included a contingent earn-out dependent upon certain financial measures of BN post-acquisition, pursuant to which the sellers were eligible to receive up to $14,000 in additional cash consideration. At June 30, 2021, a liability of $1,900 was recorded for the thirdcontingent earn-out. In the second quarter of the fiscal year ended March 31, 2017 (we2022 (which we refer to as "fiscal 2022"), the earn-out agreement was terminated and the contingent liability was reversed into other operating income, net, on our Condensed Consolidated Statement of Operations. In connection with the termination of this earn-out agreement, we entered into a Performance Bonus Agreement (the "Bonus Agreement") to provide certain employees of BN with performance-based awards based on the achievement of BN performance objectives for fiscal year endedyears ending March 31, 2017 as "fiscal 2017"). 2024, 2025, and 2026 and can range between $2,000 to $4,000 per year.
Summary
Highlights for the three months ended September 30, 2022 include:
21
Net (loss)loss and (loss)loss per diluted share for the thirdsecond quarter of fiscal 20182023 were ($11,622)$196 and ($1.19), respectively. Excluding$0.02 per share, respectively, compared with a loss of $492 and $0.05 per share, respectively, for the non-cash impairment and other charges related tosecond quarter of fiscal 2022. GAAP results for the commercial nuclear power business as well assecond quarter of fiscal 2022 benefitted from the impactreversal of the Tax Cuts and Jobs Act (P.L. 115-97) (the “Tax Act”),contingent earn-out of $1,900 offset by $798 of severance costs. Adjusted net income and income per diluted share were ($1) and $0.00, respectively, compared with $1,840 and $0.19, respectively, for the third quarter of fiscal 2017. Net (loss) and (loss) per diluted share for the first nine months of fiscal 2018 were ($10,677) and ($1.09), respectively. Excluding the impairment and other charges related to our commercial nuclear power business, the impact of the Tax Act change, as well as restructuring charges in each year,adjusted net income and income per diluted share for the first nine monthssecond quarter of fiscal 20182023 were $1,168$325 and $0.12,$0.03 per share, respectively, compared with an adjusted loss of $639 and $0.06 per share, respectively, for the second quarter of fiscal 2022. See "Non-GAAP Measures" below for a reconciliation of adjusted net income of $3,222(loss) and adjusted net income (loss) per diluted share of $0.33 forto the first nine monthscomparable GAAP amount. In the second quarter of fiscal 2017.
Orders booked in the thirdsecond quarter of fiscal 20182023 were $40,528, up 129% compared with$91,511 driven by repeat orders for critical U.S. Navy programs, which are included in total defense orders of $69,598. We believe these U.S. Navy orders validates the thirdinvestments we made, our position as a key supplier to the defense industry and our customer’s confidence in our execution. Additionally, orders continued to be strong in the commercial aftermarket and space markets which totaled $11,211 and $3,741, respectively, during the second quarter of fiscal 2017 when orders were $17,699. Orders booked in the first nine months of fiscal 2018 were $68,679, up 20% compared with the first nine months of fiscal 2017, when orders were $57,123.
Backlog was $96,246 at December 31, 2017, compared with $72,981$313,340 at September 30, 2017 and $82,5902022, compared with $260,675 at March 31, 2017.
Gross profit margin and operating margin forJune 30, 2022. This increase was primarily driven by the thirdorders during the second quarter. Our ratio of orders to net sales during the second quarter of fiscal 20182023 was 240%. 79% of our backlog at September 30, 2022 was to the defense industry. For more information on this performance indicator see "Orders and Backlog" below.
Cash and short-term investments at December 31, 2017 were $74,182, compared with $72,102 onAt September 30, 2017 and $73,474 at March 31, 2017.
Cautionary Note Regarding Forward-Looking Statements
This report and other documents we file with the Securities and Exchange Commission ("SEC") include “forward-looking statements”forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
amended (the "Exchange Act"). All statements other than statements of historical fact are forward-looking statements for purposes of this report. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results implied by the forward-looking statements. SuchForward-looking statements are indicated by words such as "anticipate," "believe," "continue," "could," "estimate," "may," "intend," "expect," "predict," "project," "potential," "should," "will," and similar words and expressions.
Forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors include,that could cause our actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements including, but are not limited to, those described in the risks and uncertainties identified by us under the heading "Risk Factors" section in Item 1A of our Annual Report on Form 10-K for fiscal 2017.
Forward-looking statements may also include, but are not limited to, statements about:
the current2022 and future economic environments affecting us and the markets we serve;
expectations regarding investments in new projects by our customers;
•sources of revenue and anticipated revenue, including the contribution from anticipated growth;
•expectations regarding achievement of revenue and profitability expectations;
•plans for future products and services and for enhancements to existing products and services;
our operations in foreign countries;
political instability in regions in which our customers are located;
our ability to implement our growth and acquisition strategy;
our ability to maintain existing nuclear power work or expand nuclear power work into new markets;
our ability to maintain or expand nuclear power work for the U.S. Navy;
our ability to successfully execute our existing contracts;
estimates regarding our liquidity and capital requirements;
timing of conversion of backlog to sales;
our ability to attract or retain customers;
the outcome of any existing or future litigation; and
our ability to increase our productivity and capacity.
Forward-looking statements are usually accompanied by words such as "anticipate," "believe," "estimate," "may," "might," "intend," "interest," "appear," "expect," "suggest," "plan," "encourage," "potential", "view" and similar expressions. Actual results could differ materially from historical results or those implied by the forward-looking statements containedelsewhere in this report.
Undue reliance should not be placed on our forward-looking statements. New risks and uncertainties arise from time to time and we cannot predict these events or how they may affect us and cause actual results to differ materially from those expressed or implied by our forward-looking statements. Therefore, you should not rely on our forward-looking statements as predictions of future events. When considering these risks, uncertainties and assumptions, you should keep in mind the cautionary statements contained in this report and any documents incorporated herein by reference. You should read this document and the documents that we reference in this Quarterly Report on Form 10-Q (the "Form 10-Q") completely and with the understanding that our actual future results may be materially different from what we expect. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
All forward-looking statements included in this Form 10-Q are made only as of the date indicated or as of the date of this Form 10-Q. Except as required by law, we undertake no obligation to update or announce any revisions to forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.
22
Current Market Conditions
AsDemand for our equipment and systems for the defense industry is expected to remain strong and continue to expand, based on our significant backlog, improved execution, long-standing relationship with the U.S. Navy, defense budget plans, the projected procurement of submarines, aircraft carriers and undersea propulsion and power systems and the solutions we provide. In addition to U.S. Navy applications, we also provide specialty pumps, turbines, compressors and controllers for various fluid and thermal management systems used in Department of Defense radar, laser, electronics and power systems. We have built a resultleading position, and in some instances a sole source position, for certain systems and equipment for the defense industry.
Our traditional energy markets are undergoing significant transition. While we expect that fossil fuels will continue to be an important component in the global energy industry for many years to come, there are significant changes in the priorities for capital investments by our customers and the regions in which those investments are being made. We expect that the changes in the energy markets, which are influenced by the increasing use by consumers of volatilityalternative fuels, will lead to demand growth for fossil-based fuels that is less than the global growth rate. Currently, opportunities in crudethe energy markets outside North America have been greater than opportunities inside of North America, but opportunities outside of North America are highly competitive and pricing is challenging. In those instances, we have been selective in the opportunities we have pursued in order to ensure we receive the proper return on our investment. Over the long term, we anticipate that future investment by refiners in renewable fuels (e.g., renewable diesel), in existing refineries (e.g., to expand feedstock processing flexibility and to improve conversion of oil to refined products) to gain greater throughput, or to build new capacity (e.g., integrated refineries with petrochemical products capabilities), will continue to drive demand for our products and natural gas prices,services. The timing and catalyst for a recovery in these markets (crude oil refining and chemical/petrochemical) remain uncertain. Accordingly, we believe that in the near term price uncertainty,the quantity of projects available for us to compete for will remain low and that new project pricing will remain challenging.
Of note, over the last year we have experienced an increase in our global energy marketsand chemical aftermarket orders, primarily from the domestic market. Aftermarket orders have historically been in a contracted state for the past three years. In response to the market conditions,leading indicator of future capital investment by our customers in their facilities for upgrades and expansions. As such we believe there is the downstream energy sector have sharplypossibility of a cyclical upturn in calendar year 2023 following several years of reduced capital spending in eacha low oil price environment. However, we do not expect the next cycle to be as robust as years past due to the factors discussed above.
The alternative and clean energy opportunities for our heat transfer, power production and fluid transfer systems are expected to continue to grow. We assist in designing, developing and producing equipment for hydrogen production, distribution and fueling systems, concentrated solar power and storage, and small modular nuclear systems. We are positioning the Company to be a more significant contributor as these markets continue to develop.
We believe that chemical and petrochemical capital investment will continue to decouple from energy investment. Over the long term, we expect that population growth, an expanding global middle class, and an increasing desire for improved quality of life and access to consumer products will drive increased demand for industrial goods within the plastics and resins value chain along with fertilizers and related products. As such, we expect investment in new global chemical and petrochemical capacity will improve and drive growth in demand for our products and services over the long term.
Our turbomachinery, pumps, and cryogenic products and market access provide revenue and growth potential in the commercial space/aerospace markets. The commercial space market has grown and evolved rapidly, and we provide rocket engine turbo pump systems and components to many of the last three years. This impacted not only new capacity, butkey players in the industry. We expect that in the long term, extended space exploration will become more prevalent, and we anticipate that our thermal/fluid management and environmental control and life support system turbomachinery will play important roles. We are also revampingparticipating in future aerospace power and turnaroundpropulsion system development through supply of fluid and thermal management systems components. Small power dense systems are imperative for routine maintenance. Oil prices have risen overthese applications, and we believe our technology and expertise will enable us to achieve sales growth in this market as well. For the pastfirst six months from $45of fiscal 2023, sales to over $60 per barrel. As a result, certain projects wherethe space industry represented 15% of our equipment is utilized have begunsales compared to proceed, however, it is not clear whether a sustained capital spending recovery in0% prior to the BN acquisition.
The chart below illustrates our markets has begun.
Capital spending in the nuclear market for both new capacity and to maintain existing facilities continues to trend downward. Capital spending in the nuclear market is down 25% to 35% compared with 3 to 4 years ago, according to a report from the Nuclear Energy Institute. Additionally, the March 2017 bankruptcy filing by Westinghouse Electric Company (“Westinghouse”) and the decision to cease building the two new reactors located in Summer, South Carolina has dramatically impacted the health of the
18
domestic nuclear market. The contracted capital spending within the commercial nuclear power market has had the effect of measurably reducing new orders and consequently reducing our sales.
Our long-term view for the refining and petrochemical markets is that fundamentals will drive increasing demand. These fundamentals include rising populations, strong emerging market economic growth, and overall global economic expansion, which we believe will result in capital investment necessary to satisfy increasing global energy demand.
Our naval nuclear propulsion market has demand tied to aircraft carrier and submarine vessel construction schedules of the primary shipyards who service the U.S. Navy. We expect growth in our naval nuclear propulsion business based on our strategic actionsstrategy to increase our participation in the defense market. The defense market sharecomprised 79% of our total backlog at September 30, 2022 and expected demand. Forgenerally have longer conversion times than our other markets. We believe this strategy shift provides us more information, referstability and visibility and is especially beneficial when our refining and process markets are weak.
23
*Note: FYE refers to fiscal year ended March 31
We have faced, and may continue to face, significant cost inflation, specifically in labor costs, raw materials, and other supply chain costs due to increased demand for raw materials and resources caused by the heading "Strategy and Outlook" within this Item 2broad disruption of this Quarterly Report on Form 10-Q.
In the near term, given the current market conditions, new order levels are expected to remain volatile from quarter to quarter.
The chart below showsglobal supply chain associated with the impact of COVID-19. International conflicts or other geopolitical events, including the 2022 Russian invasion of Ukraine, may further contribute to increased supply chain costs due to shortages in raw materials, increased costs for transportation and energy, disruptions in supply chains, and heightened inflation. Further escalation of geopolitical tensions may also lead to changes to foreign exchange rates and financial markets, any of which may adversely affect our diversification strategy. Nearly 60%business and supply chain, and consequently our results of operation. While there could ultimately be a material impact on our backlog asoperations and liquidity, at the time of December 31, 2017 is from marketsthis report, the impact could not served by us in the Fiscal 2007-2009 time frame.be determined.
Backlog Mix Illustrating Impact of Diversification Strategies
Backlog ($ million) at FYE*
*Fiscal year ended March 31
Results of Operations
To better understand the significant factors that influenced our performance during the periods presented, the following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the notes to our Condensed Consolidated Financial Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.
The following table summarizes our results of operations for the periods indicated:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Net sales |
| $ | 38,143 |
|
| $ | 34,146 |
|
| $ | 74,218 |
|
| $ | 54,303 |
|
Gross profit |
| $ | 5,280 |
|
| $ | 3,443 |
|
| $ | 12,024 |
|
| $ | 4,357 |
|
Gross profit margin |
|
| 14 | % |
|
| 10 | % |
|
| 16 | % |
|
| 8 | % |
SG&A expenses (1) |
| $ | 5,332 |
|
| $ | 5,247 |
|
| $ | 11,091 |
|
| $ | 10,170 |
|
SG&A as a percent of sales |
|
| 14 | % |
|
| 15 | % |
|
| 15 | % |
|
| 19 | % |
Net income (loss) |
| $ | (196 | ) |
| $ | (492 | ) |
| $ | 480 |
|
| $ | (3,618 | ) |
Diluted income (loss) per share |
| $ | (0.02 | ) |
| $ | (0.05 | ) |
| $ | 0.05 |
|
| $ | (0.35 | ) |
Total assets |
| $ | 188,905 |
|
| $ | 191,836 |
|
| $ | 188,905 |
|
| $ | 191,836 |
|
Total assets excluding cash and cash equivalents |
| $ | 174,783 |
|
| $ | 175,373 |
|
| $ | 174,783 |
|
| $ | 175,373 |
|
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| December 31, |
|
| December 31, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Net sales |
| $ | 17,281 |
|
| $ | 22,654 |
|
| $ | 55,356 |
|
| $ | 66,145 |
|
Gross profit |
| $ | 3,585 |
|
| $ | 6,301 |
|
| $ | 12,281 |
|
| $ | 15,422 |
|
Gross profit margin |
|
| 21 | % |
|
| 28 | % |
|
| 22 | % |
|
| 23 | % |
SG&A expense (1) |
| $ | 4,066 |
|
| $ | 3,804 |
|
| $ | 11,447 |
|
| $ | 10,637 |
|
SG&A as a percent of sales |
|
| 24 | % |
|
| 17 | % |
|
| 21 | % |
|
| 16 | % |
Net (loss) income |
| $ | (11,622 | ) |
| $ | 1,840 |
|
| $ | (10,677 | ) |
| $ | 3,222 |
|
Diluted (loss) income per share |
| $ | (1.19 | ) |
| $ | 0.19 |
|
| $ | (1.09 | ) |
| $ | 0.33 |
|
Total assets |
| $ | 138,623 |
|
| $ | 148,328 |
|
| $ | 138,623 |
|
| $ | 148,328 |
|
Total assets excluding cash, cash equivalents and investments |
| $ | 64,441 |
|
| $ | 75,651 |
|
| $ | 64,441 |
|
| $ | 75,651 |
|
|
|
The ThirdSecond Quarter and First NineSix Months of Fiscal 20182023 Compared Withwith the ThirdSecond Quarter and First NineSix Months
of Fiscal 20172022
SalesNet sales for the thirdsecond quarter of fiscal 20182023 were $17,281, a 24% decrease as compared with sales$38,143, an increase of $22,654 for12% from the thirdsecond quarter of fiscal 2017. Our domestic2022 and was across our diversified revenue base. This increase included growth in our commercial space market which increased $3,014 and our new energy market which increased approximately $1,500 as newly awarded programs continued to ramp up. Additionally, our sales
24
continued to benefit from strong growth in our commercial aftermarket, which increased $4,672. These increases were partially offset by lower defense sales of $4,943 due to project timing. Domestic sales as a percentage of aggregate product sales were 65%80% in the thirdsecond quarter of fiscal 20182023 compared with 77% in the thirdsecond quarter of fiscal 2017. Domestic sales year-over-year decreased $6,160, or 35%. International sales increased $787, or 15%,2022, reflecting the increase in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017.our defense and commercial space industry businesses which are U.S. based. Sales in the three months ended December 31, 2017September 30, 2022 were 31%20% to the refining industry, 24%15% to the chemical and petrochemical industries, 10%39% for the defense industry, 11% to the power industry, including the nuclear market,space, and 35%15% to other commercial and industrial applications includingwhich includes sales to the U.S. Navy.new energy market. Sales in the three months ended December 31, 2016September 30, 2021 were 28%18% to the refining industry, 19%10% to the chemical and petrochemical industries, 19%58% for the defense industry, 4% to the power industry, including the nuclear market,space, and 34%10% to other commercial and industrial applications, including the U.S. Navy. Fluctuationsapplications. Fluctuation in sales among markets, products and geographic locations can vary measurablyvaries, sometimes significantly, from quarter-to-quarter based on timing and magnitude of projects.
Net sales for the first six months of fiscal 2023 were $74,218, an increase of $19,915 or 37% from the first six months of fiscal 2022 and was across our diversified revenue base. Approximately $8,900 of this increase was due to having three months of BN results in the first quarter of fiscal 2023 compared to one month in the first quarter of fiscal 2022. Additionally, our sales continued to benefit from our diversified revenue base including strong growth in commercial aftermarket of approximately $7,000, commercial space market of $3,014 and our new energy market which increased approximately $1,500. These increases were partially offset by lower defense sales of $2,222 due to project timing. Domestic sales as a percentage of aggregate sales were 79% in the first six months of fiscal 2023 compared with 74% in the first six months of fiscal 2022, reflecting the increase in our defense and space industry businesses which are U.S. based. Sales in the six months ended September 30, 2022 were 21% to the refining industry, 16% to the chemical and petrochemical industries, 33% for the defense industry, 15% to space, and 15% to other commercial and industrial applications. Sales in the six months ended September 30, 2021 were 20% to the refining industry, 15% to the chemical and petrochemical industries, 49% for the defense industry, 4% to space, and 12% to other commercial and industrial applications. See also "Current Market Conditions," above. For additional information on anticipated future sales and our markets, see "Orders and Backlog" below.
Sales for the first nine months of fiscal 2018 were $55,356, a decrease of $10,789, or 16% compared with sales of $66,145 for the first nine months of fiscal 2017. The decrease in fiscal 2018 year-to-date sales was due to weaker domestic sales. Our domestic sales, as a percentage of aggregate product sales, were 67% in the first nine months of fiscal 2018 compared with 74% in the same period in fiscal 2017. Domestic sales decreased $11,900, or 24%, while international sales increased by $1,111, or 7%. International sales accounted for 33% and 26% of total sales for the first nine months of fiscal 2018 and fiscal 2017, respectively. Sales in the first nine months of fiscal 2018 were 25% to the refining industry, 30% to the chemical and petrochemical industries, 14% to the power industry, including the nuclear market, and 31% to other commercial and industrial applications, including the U.S. Navy. Sales in the first nine months of fiscal 2017 were 31% to the refining industry, 22% to the chemical and petrochemical industries, 23% to the power industry, including the nuclear market, and 24% to other commercial and industrial applications, including the U.S. Navy.
Our grossGross profit margin for the thirdsecond quarter of fiscal 20182023 was 21%14%, compared with 28%10% for the thirdsecond quarter of fiscal 2017.2022. Gross profit for the thirdsecond quarter of fiscal 2018 decreased 43%2023 increased compared with fiscal 2017,2022, to $3,585$5,280 from $6,301. Gross profit was impacted by lower sales and margins$3,443. These increases were impacted by a weakerprimarily due to an improved mix of sales related to higher margin projects (space and less cost absorption.commercial aftermarket) and improved execution and pricing on defense contracts, partially offset by higher incentive compensation. In the second quarter of fiscal 2023, we shipped an additional first article U.S. Navy project and are on schedule to complete the remaining significant first article projects by the end of the first quarter of fiscal 2024.
Our grossGross profit margin for the first ninesix months of fiscal 20182023 was 22%16%, compared with 23%8% for the first ninesix months of fiscal 2017.2022. Gross profit for the first ninesix months of fiscal 2018 decreased 20%2023 increased compared with fiscal 2017,2022, to $12,281$12,024 from $15,422. The decrease in gross profit$4,357. These increases were primarily due to an improved mix of sales related to higher margin projects (space and commercial aftermarket) and improved execution and pricing on defense contracts, partially offset by higher incentive compensation. In the first six months of fiscal 2023, we completed three first article U.S. Navy projects. In addition to the above, the first six months of fiscal 2023 includes two additional months of operations from BN compared to the first six months of fiscal 2022.
SG&A expense including amortization for the second quarter of fiscal 2023 was $5,332 compared to $5,247 for the second quarter of fiscal 2022. This increase was due to lower volume.
higher incentive compensation, partially offset by cost savings and deferral initiatives. These efforts included reducing the use of outside sales agents, cost management, and delayed hiring of non-critical positions. As a result, SG&A expensesexpense as a percent of sales for the three and nine-month periods ended December 31, 2017 were 24% and 21%, respectively. SG&A expenses in the third quarter of fiscal 2018 were $4,066, an increase of $262, or 7%, compared with the third quarter of fiscal 2017 SG&A expenses of $3,804, due to bad debts in the commercial nuclear power market. Excluding the commercial nuclear power market bad debts, SG&A expenses were $3,832, or 22%percentage of sales in the thirdsecond quarter of fiscal 2018. 2023 was 14% of sales compared with 15% of sales in the comparable period in fiscal 2022.
SG&A expensesexpense including amortization for the first six months of fiscal 2023 was $11,091 up $921 compared with $10,170 for the first six months of fiscal 2022. Approximately $1,400 of this increase was due to having two additional months of BN results in the first ninesix months of fiscal 20182023 compared to the prior year period, as well as higher incentive compensation. These increases were $11,447, an increasepartially offset by cost savings and deferral initiatives which included reducing the use of $810, or 8%, compared withoutside sales agents, cost management and delayed hiring of non-critical positions. As a result, SG&A expense as a percentage of sales in the first ninesix months of fiscal 2017 SG&A expenses2023 was 15% of $10,637. This increase was principally related to the benefitsales compared with 19% of insurance proceeds of $759 receivedsales in the prior year and the $234 bad debtcomparable period in the commercial nuclear power market in the current three-month period, as described below. Excluding these two items, SG&A expenses were $183, or 2%, lower.fiscal 2022.
20
During the thirdsecond quarter of fiscal 2018,2022, we performed our annual goodwill and intangible asset impairment review. We estimatedterminated the fair value of intangible assets and goodwill of our commercial nuclear power business related to the December 2010 acquisition of Energy Steel & Supply Co. (“Energy Steel”). The impairment review indicated that the fair value of the permits, tradename and goodwill of the business were substantially lower than the carrying value due to reduced investment from the U.S. nuclear power market, the strength of the Energy Steel brand relative to larger more vertically integrated suppliers,BN contingent earn-out agreement and the bankruptcycontingent liability of Westinghouse which resulted$1,900 was reversed into other operating income, net, on our Condensed Consolidated Statement of Operations. In connection with the termination of this earn-out agreement, we entered into a Bonus Agreement to provide certain employees of BN with performance-based awards based on results of BN for fiscal years ending March 31, 2024, 2025, and 2026. Additionally, in the stoppage of work at the Summer, SC nuclear facility. As a result, in the thirdsecond quarter of fiscal 2018 we recorded impairment losses of $8,600, $500, and $5,716 for permits, tradename and goodwill, respectively. The total impairment charge was $14,816 before taxes and $12,852 after taxes. Additionally,2022 we incurred a $46 revenue reversal, and a $234 bad debt charge, related to the bankruptcy$798 of Westinghouse and the stoppage of work at the Summer, SC nuclear facility. The total before and after tax cost of these two charges was $280 and $208, respectively. Additionally, we recognized a gain of $1,416 related to the revaluation of deferred tax liabilities, which were impacted by the reduction in federal income tax rates from the Tax Act. The deferred tax gain of $1,438 included $2,034 for adjusting the rates on the deferred tax liability of the Energy Steel acquisition offset by a charge of $596 for other tax items.
Prior to the third quarter, in the first half of fiscal 2018, we incurred a pre-tax restructuring charge of $316 ($224 after tax) for severance costs related to certain headcount reductions. In the first half of fiscal 2017, we incurred a pre-tax restructuring charge of fiscal 2017 was $630 ($441 after tax) related to certain headcount reductions. The reduction in headcount in the first half of fiscal 2018 was approximately 6%departure of our global workforce. The annual savings from these reductions is expected to be $1,500. Approximately half of the savings should be realized in fiscal 2018.Chief Executive Officer, which was also recorded into other operating income, net.
Interest income for the three and nine-month periods ended December 31, 2017 was $142 and $455, respectively, compared with $100 and $272, respectively, for the same periods ended December 31, 2016. InterestNet interest expense for the three and nine-month periods ended December 31, 2017second quarter of fiscal 2023 was $3 and $8, respectively,$246 compared with $3 and $7, respectively, for the same periods ended December 31, 2016.
The reduction in the year-to-date effective tax rate from 28%to $115 in the second quarter of fiscal 2022 due to 23%an increase in interest rates since the second quarter of fiscal 2022, partially offset by lower debt levels of $4,375 due to repayments made since the second quarter of fiscal 2022.
25
Net interest expense for the first six months of fiscal 2023 was $403 compared to $137 in the third quarterfirst six months of fiscal 2022 primarily due to increased borrowings related to the BN acquisition, as well as increased interest rates since the first quarter of fiscal 2022.
Our effective tax rate in the second quarter of fiscal 2023 was 17%, compared with 27% in the second quarter of fiscal 2022. Our effective tax rate for the first six months of fiscal 2023 was 27%, compared with 20% for the first six months of fiscal 2022. This increase was primarily due to discrete tax expense recognized in the first nine monthsquarter of fiscal 2018 was due primarily to adjustments2023 related to the Tax Act. Thevesting of restricted stock awards. Our expected effective tax ratesrate for fiscal 2023 is 21% to 22% as the impact of these discrete tax items on our effective tax rate lessens over the course of fiscal 2023.
The net result of the above is that net loss and loss per diluted share for the comparable three and nine month periodssecond quarter of fiscal 20172023 were 29%$196 and 27%, respectively.
Net (loss)$0.02 per share, respectively, compared with a loss of $492 and $0.05 per share, respectively, for the second quarter of fiscal 2022. Adjusted net income and (loss)adjusted net income per diluted share for the thirdsecond quarter of fiscal 20182023 were ($11,622)$325 and ($1.19),$0.03 per share, respectively, compared with $1,840a loss of $639 and $0.19,$0.06 per share, respectively, for the thirdsecond quarter of fiscal 2017. Excluding impairment and other related charges for our commercial nuclear business as well as the gain from implementation of the Tax Act, net income and income per diluted share for the third quarter of fiscal 2018 were ($1) and $0.00, respectively, and were $1,840 and $0.19 in the third quarter of fiscal 2017.2022. Net (loss) income and (loss) income per diluted share for the first nine months of fiscal 2018 were ($10,677) and ($1.09), respectively, compared with net income of $3,222 and income per diluted share of $0.33 for the first nine months of fiscal 2017. Excluding the items noted above as well as restructuring charges in each year, net income and income per diluted share for the first ninesix months of fiscal 20182023 were $1,168$480 and $0.12,$0.05 per share, respectively, compared with a loss of $3,618 and were $3,663 and $0.38 in$0.35 per share, respectively, for the first ninesix months of fiscal 2017.2022. Adjusted net income and adjusted net income per diluted share for the first six months of fiscal 2023 were $1,654 and $0.16 per share, respectively, compared with a loss of $3,450 and $0.33 per share, respectively, for the first six months of fiscal 2022. See "Non-GAAP Measures" below for a reconciliation of adjusted net income (loss) and adjusted net income (loss) per diluted share to the comparable GAAP amount.
Non-GAAP Measures
Adjusted earnings (loss) before net interest expense, income taxes, depreciation and amortization ("EBITDA"), adjusted net income (loss), and adjusted net income (loss) per diluted share are provided for information purposes only and are not measures of financial performance under accounting principles generally accepted in the U.S. ("GAAP"). Management believes the presentation of these financial measures reflecting non-GAAP adjustments provides important supplemental information to investors and other users of our financial statements in evaluating the operating results of the Company. In particular, those charges and credits that are not directly related to operating performance, and that are not a helpful measure of the performance of our underlying business particularly in light of their unpredictable nature. These non-GAAP disclosures have limitations as analytical tools, should not be viewed as a substitute for net income (loss) or net income (loss) per diluted share determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. In addition, supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to net income (loss) or net income (loss) per diluted share determined in accordance with GAAP. Adjusted EBITDA, adjusted net income (loss) and adjusted net income (loss) per diluted share are key metrics used by management and our board of directors to assess the Company’s financial and operating performance and adjusted EBITDA is a basis for a portion of management's performance-based compensation.
Adjusted EBITDA excludes charges for depreciation, amortization, net interest expense, taxes, acquisition related expenses, and other unusual/nonrecurring expenses. Adjusted net income (loss) and adjusted net income (loss) per diluted share excludes intangible amortization, acquisition related expenses, other unusual/nonrecurring expenses and the related tax impacts of those adjustments.
A reconciliation of adjusted EBITDA, adjusted net income (loss), and adjusted net income (loss) per diluted share to net income (loss) in accordance with GAAP is as follows:
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
| September 30, |
|
| September 30, |
| ||||||||||
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Net income (loss) | $ | (196 | ) |
| $ | (492 | ) |
| $ | 480 |
|
| $ | (3,618 | ) |
Acquisition related inventory step-up expense |
| - |
|
|
| 41 |
|
|
| - |
|
|
| 41 |
|
Acquisition & integration costs |
| - |
|
|
| 93 |
|
|
| 54 |
|
|
| 262 |
|
Change in fair value of contingent consideration |
| - |
|
|
| (1,900 | ) |
|
| - |
|
|
| (1,900 | ) |
CEO and CFO transition costs |
| - |
|
|
| 798 |
|
|
| - |
|
|
| 798 |
|
Debt amendment costs |
| 41 |
|
|
| - |
|
|
| 194 |
|
|
| - |
|
Net interest expense |
| 246 |
|
|
| 115 |
|
|
| 403 |
|
|
| 137 |
|
Income taxes |
| (40 | ) |
|
| (180 | ) |
|
| 175 |
|
|
| (925 | ) |
Depreciation & amortization |
| 1,487 |
|
|
| 1,588 |
|
|
| 2,962 |
|
|
| 2,408 |
|
Adjusted EBITDA | $ | 1,538 |
|
| $ | 63 |
|
| $ | 4,268 |
|
| $ | (2,797 | ) |
Adjusted EBITDA margin % |
| 4.0 | % |
|
| 0.2 | % |
|
| 5.8 | % |
|
| -5.2 | % |
26
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||
| September 30, |
|
| September 30, |
| ||||||||||||
| 2022 |
|
| 2021 |
|
| 2022 |
|
|
| 2021 |
| |||||
Net income (loss) | $ | (196 | ) |
| $ | (492 | ) |
| $ | 480 |
|
|
| $ | (3,618 | ) | |
Acquisition related inventory step-up expense |
| - |
|
|
| 41 |
|
|
| - |
|
| - |
|
| 41 |
|
Acquisition & integration costs |
| - |
|
|
| 93 |
|
|
| 54 |
|
| - |
|
| 262 |
|
Amortization of intangible assets |
| 619 |
|
|
| 784 |
|
|
| 1,238 |
|
|
|
| 1,009 |
| |
Change in fair value of contingent consideration |
| - |
|
|
| (1,900 | ) |
|
| - |
|
|
|
| (1,900 | ) | |
CEO and CFO transition costs |
| - |
|
|
| 798 |
|
|
| - |
|
|
|
| 798 |
| |
Debt amendment costs |
| 41 |
|
|
| - |
|
|
| 194 |
|
|
|
| - |
| |
Normalize tax rate(1) |
| (139 | ) |
|
| 37 |
|
|
| (312 | ) |
|
|
| (42 | ) | |
Adjusted net income (loss) | $ | 325 |
|
| $ | (639 | ) |
| $ | 1,654 |
|
|
| $ | (3,450 | ) | |
Adjusted diluted earnings (loss) per share | $ | 0.03 |
|
| $ | (0.06 | ) |
| $ | 0.16 |
|
|
| $ | (0.33 | ) |
(1) Applies a normalized tax rate to non-GAAP adjustments, which are pre-tax, based upon the full fiscal year expected effective tax rate.
Liquidity and Capital Resources
The following discussion should be read in conjunction with our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows:
|
| September 30, |
|
| March 31, |
| ||
|
| 2022 |
|
| 2022 |
| ||
Cash and cash equivalents |
| $ | 14,122 |
|
| $ | 14,741 |
|
Working capital (1) |
|
| 28,297 |
|
|
| 27,796 |
|
Working capital ratio(1) |
|
| 1.4 |
|
|
| 1.5 |
|
Working capital excluding cash and cash equivalents |
|
| 14,175 |
|
|
| 13,055 |
|
Working capital excluding cash and cash equivalents as a percent |
|
| 9.9 | % |
|
| 10.6 | % |
|
| December 31, |
|
| March 31, |
| ||
|
| 2017 |
|
| 2017 |
| ||
Cash and investments |
| $ | 74,182 |
|
| $ | 73,474 |
|
Working capital |
|
| 78,369 |
|
|
| 78,688 |
|
Working capital ratio(1) |
|
| 3.3 |
|
|
| 3.5 |
|
Working capital excluding cash and investments |
|
| 4,187 |
|
|
| 5,214 |
|
|
|
Net cash generatedused by operating activities for the first ninesix months of fiscal 20182023 was $3,874,$398 compared with $10,707$8,702 of cash used for the first ninesix months of fiscal 2017. The2022. This decrease in cash generationused by operations was primarily due to higher cash net income during the first six months of fiscal 2023 than the comparable prior year over year was attributable toperiod, lower earnings, an increase in accounts receivable, an increase in income taxes receivableworking capital build, and a smaller decrease in inventories, partly offset by higher unbilled revenue.the timing of payments and receipts.
Dividend payments and capital expenditures in the first ninesix months of fiscal 20182023 were $2,638$0 and $543,$1,176, respectively, compared with $2,616$2,353 and $241,$1,227, respectively, for the first ninesix months of fiscal 2017.
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2022. In the fourth quarter of fiscal 2022, we suspended our dividend in accordance with the terms of our credit agreement with Bank of America. There can be no guarantee that we will pay dividends in the future and any determination by our board of directors with respect to dividends will depend on a variety of factors, including our future financial performance, organic growth and acquisition opportunities, general economic conditions and other factors, many of which are beyond our control. Capital expenditures for fiscal 20182023 are expected to be between approximately $1,500 and $2,500. We have a capital project for approximately $1,500 which will be completed in the next few months, however, it is not clear whether the payments will occur in this$3,000 to $4,000. Our fiscal year or early in next fiscal year. Approximately 80% of our fiscal 20182023 capital expenditures are expected to be primarily for productivity-enhancing machinery and equipment, with the remaining amounts expectedas well as for buildings and leasehold improvements to be used for information technology upgradesfund our growth and other items.cost improvement initiatives. The majority of our planned capital expenditures are discretionary.
Cash and investmentscash equivalents were $74,182 on December 31, 2017$14,122 at September 30, 2022 compared with $73,474 on$14,741 at March 31, 2017, up $708.
We invest net2022, as cash generated from operations in excess of cash heldused by operating activities and for near-term needs in short-term, less than 365 days, certificates of deposit, money market accounts or U.S. government instruments, generallycapital expenditures were funded with maturity periods of up to 180 days. Our money market account is used to securitizeamounts borrowed under our outstanding letters of credit which reduces our cost on those letters of credit. Approximately 95%facility. At September 30, 2022, approximately $6,400 of our cash and investments arecash equivalents was used to secure our letters of credit and $1,802 of our cash was held in the U.S. The remaining 5% is invested inby our China and India operations.
OurOn June 1, 2021, we entered into a $20,000 five-year loan with Bank of America. The term loan requires monthly principal payments of $167 through June 1, 2026, with the remaining principal amount plus all interest due on the maturity date. The interest rate on the term loan is the applicable Bloomberg Short-Term Bank Yield Index ("BSBY"), plus 1.50%, subject to a 0.00% floor.
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On June 1, 2021, we entered into a five-year revolving credit facility with JP Morgan Chase provides us withBank of America that provided a $30,000 line of credit, of $25,000, including letters of credit and bank guarantees.guarantees, expandable at our option and the bank's approval at any time up to $40,000. As of September 30, 2022, there was $2,500 outstanding on the line of credit. Amounts outstanding under the facility agreement bear interest at a rate equal to BSBY plus 1.50%, subject to a 0.00% floor. As of September 30, 2022, the BSBY rate was 3.9509%. As of September 30, 2022, there was $5,706 letters of credit outstanding with Bank of America.
Under the original term loan agreement and revolving credit facility, we covenanted to maintain a maximum total leverage ratio, as defined in such agreements, of 3.0 to 1.0, with an allowable increase to 3.25 to 1.0 for a period of twelve months following the closing of an acquisition. In addition, we covenanted to maintain a minimum fixed charge coverage ratio, as defined in such agreements, of 1.2 to 1.0 and minimum margined assets, as defined in such agreements, of 100% of total amounts outstanding on the revolving credit facility, including letters of credit. At December 31, 2021, we were out of compliance with our JP Morgan Chasebank agreement allows uscovenants and were granted a waiver for noncompliance by Bank of America.
We entered into amendment agreements with Bank of America since origination. Under the amended agreements, we are not required to increasecomply with the maximum total leverage ratio and the minimum fixed charge coverage ratio covenants contained in the original term loan agreement for the periods ending December 31, 2021 and March 31, June 30 and September 30, 2022. The principal balance outstanding on the line of credit may not exceed $15,000, unless letters of credit exceed $11,500, in which case the limit is $17,000, until the compliance date. The compliance date is defined as the date on which Bank of America has received all required financial information with respect to us for the fiscal year ending March 31, 2023 and no event of default exists. In addition, on or before September 1, 2023 and at our discretion, up to another $25,000, for total availability of $50,000. Borrowings under this credit facility are secured byall times thereafter, all of our assets.deposit accounts, except certain accounts, will be either subject to a deposit account control agreement or maintained with Bank of America. We also havecovenant to maintain EBITDA, as defined in such amendment, of at least ($700) for the twelve-month period ending June 30, 2022 and $1,800 for the twelve-month period ending September 30, 2022; maintain a $5,000 unsecured linetotal maximum leverage ratio of credit with HSBC, N.A. Letters of credit outstanding on4.0 to 1.0 for the twelve-month period ending December 31, 20172022 and 3.0 to 1.0 for the period ending March 31, 20172023; and maintain liquidity, as defined in such amendment, of at least $10,000 prior to the occurrence of the compliance date and $20,000 from and after the occurrence of the compliance date. As of September 30, 2022, we were $7,401in compliance with the amended financial covenants of our loan agreement. At September 30, 2022, the amount available under the revolving credit facility was $7,657 subject to the above liquidity and $8,372, respectively. The outstandingleverage covenants.
In connection with the waiver and amendments discussed above, we are required to pay a back-end fee of $725 to Bank of America payable upon the earliest to occur of (i) any default or event of default, (ii) the last date of availability under the revolving credit facility, and (iii) repayment in full of all principal, interest, fees and other obligations, which may be waived or cancelled if certain criteria are met.
We did not have any off-balance sheet arrangements as of September 30, 2022 and 2021, other than letters of credit asincurred in the ordinary course of December 31, 2017 were issued by JP Morgan Chase, HSBC, as well as Bank of America (under our previous credit facility). There were no other amounts outstanding on our credit facilities at December 31, 2017 and March 31, 2017. The borrowing rate under our JP Morgan Chase facility as of December 31, 2017 was the bank’s prime rate, or 4.50%. Availability under the JP Morgan Chase and HSBC lines of credit was $25,168 and $25,761 at December 31, 2017 and March 31, 2017, respectively. business.
We believe that cash generated from operations, combined with our investments andthe liquidity provided by available financing capacity under our credit facility, will be adequate both to meet our cash needs for the immediate future and to support our growth strategies.future.
OrdersOrders and Backlog
Orders for the three-month period ended December 31, 2017 were $40,528 compared with $17,699 for the same period in the prior year, an increaseManagement uses orders and backlog as measures of 129%.our current and future business and financial performance. Orders represent written communications received from customers requesting us to supply products and/or services. Orders for the three-month period ended September 30, 2022 were $91,511 compared with $31,386 for the same period last year. This increase is attributable to strong demand across all of our diversified revenue base. More specifically, the second quarter of fiscal 2023 order level was driven by:
Domestic orders in the second quarter of fiscal 2023 were 47%93% of total orders or $19,144, and international orders were 53% of total orders, or $21,384, in the current quarter compared with the thirdsecond quarter of fiscal 2017,2022 when domestic orders were 59%, or $10,396, of total orders, and international orders were 41%, or $7,303,80% of total orders. Over 80%Our ratio of orders to net sales during the international orders in the thirdsecond quarter of fiscal 2018 were from Canada.2023 was 2.4.
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During the first ninesix months of fiscal 2018,2023, orders were $68,679,$131,819, compared with $57,123$52,253 for the same period of fiscal 2017,2022. Domestic orders were 87% of total orders in the first six months of fiscal 2023 compared with 77% for the same period of fiscal 2022. Our ratio of orders to net sales for the first six months of fiscal 2023 was 1.78.
Backlog was $313,340 at September 30, 2022, an increase of $11,556, or 20%. For the first nine months of fiscal 2018, refining orders increased by $19,121, power orders increased $812, chemical and petrochemical decreased by $6,167 and other commercial and industrial applications, including the U.S. Navy, decreased by $2,210. See “Current Market Conditions” above for additional information.
Backlog was $96,246 at December 31, 2017,22% compared with $72,981$256,536 at September 30, 2017, a 32% increase.March 31, 2022. Backlog is defined as the total dollar value of orders received for which revenue has not yet been recognized. Approximately 55%40% to 60%45% of orders currently in our backlog are expected to be converted to sales within one year 5% to 10% are expected to ship between 12 and 24 months, and 25% to 35% beyond30% after one year but within two years. The majority of the orders that are expected to convert beyond twelve months are for the defense industry, specifically the U.S. Navy.Navy that have a long conversion cycle (up to six years). At December 31, 2017, 35%September 30, 2022, 79% of our backlog was attributable to equipmentdefense projects, 9% for refinery project work, 4% for chemical and petrochemical projects, 6%4% for power projects, including nuclear, 51% for U.S. Navyspace projects and 4% for other industrial applications. At DecemberMarch 31, 2016, 17%2022, 76% of our backlog was attributedattributable to equipmentdefense projects, 10% for refinery project work, 14%5% for chemical and petrochemical projects, 9%4% for powerspace projects 57%and 5% for other industrial applications.
Outlook
Our objective is to leverage our engineering know-how and depth of application experience to identify more opportunities for our products and technologies in our targeted markets.
Sales in fiscal 2023 are expected to be in the range of $135,000 to $150,000. We expect gross profit margins for the fiscal year to be approximately 16% to 17% of sales and SG&A expenses to be 15% to 16% of sales. Adjusted EBITDA is expected to be $6,500 to $9,500 for fiscal 2023. Our results for the first half of fiscal 2023 were in-line with our expectations and give us confidence we will be able to achieve our full year guidance. Fiscal 2022 and year-to-date fiscal 2023 results were impacted by our large, lower margin, first article U.S. Navy projects and 3%we believe this negative impact will continue through the first quarter of 2024 when the last of these larger first article projects is completed. We expect repeat orders for other industrial applications. At December 31, 2017, we had nothese larger U.S. Navy projects on hold.
Strategywill be at higher margins through increased pricing and Outlook
Prolonged weakness in the global energy markets has continuedbetter execution. It is also important to negatively impact our business in fiscal 2018. Our oil refining and chemical market customer spending has started to improve compared with last year, but this will have no effect on our fiscal 2018 sales. We anticipatenote that the nuclear power market will continue to be weak and unpredictable during the next few years, and this determination ledCompany's third quarter is typically impacted by lower labor hours due to the impairment of our goodwillholidays.
Our expectations for sales and intangible assets which we recognized in the third quarter.
Despite the current downturn, we continue to believe in the long-term potential of the energy markets we serve. We intend to expand our participation and market share. We believe this anticipated long-term strength will support our strategy to significantly grow our business when the energy markets begin to recover. We have invested in capacity to serve our commercial, refining and chemical/petrochemical customers, as well as to expand the work we do for the U.S. Navy. In addition to these organic growth
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opportunities, we continue to look for acquisitions or other business combinationsprofitability assume that we believe will allow usbe able to expand our presence in both our existing and ancillary markets. We are focused on growing our business, reducing earnings volatility, and further diversifying our business and product lines.
The prolonged contraction in the energy markets we serve continues to cause near-term uncertainty, affecting our outlook for fiscal 2018. We expect revenue in fiscal 2018 to be approximately $75,000.
We expect gross profit margin in fiscal 2018 to be in the 21% to 22% range. We are experiencing the impact of lower pricing from orders received over the past year and the under-utilization ofoperate our production facilities in fiscal 2018.at planned capacity, have access to our global supply chain including our subcontractors, and do not experience significant COVID-19-related disruptions or any other unforeseen events. We believe that production overhead absorption will be weak, which we expect in turn will put continued pressure on gross profit margins inhave not reconciled non-GAAP forward-looking Adjusted EBITDA to its most directly comparable GAAP measure, as permitted by Item 10(e)(1)(i)(B) of Regulation S-K. Such reconciliation would require unreasonable efforts to estimate and quantify various necessary GAAP components largely because forecasting or predicting our fourth quarter.future operating results is subject to many factors out of our control or not readily predictable.
SG&A during fiscal 2018 is expected to be between $15,000 and $15,500. Our effective tax rate during fiscal 2018, excluding the tax effect of the impairment loss and the one-time impact of the new Tax Act recorded in the third quarter, is expected to be between 24% and 26%, which we have lowered due to the reduced federal corporate income tax rate. Fiscal 2018 will benefit from the fiscal fourth quarter being taxed at a lower rate.
We continue to expect operating cash flow in fiscal 2018 will be lower than fiscal 2017. Fiscal 2017 cash flow benefited from the build-up of customer deposits.29
Contingencies and Commitments
We have been named as a defendant in lawsuits alleging personal injury from exposure to asbestos allegedly contained in or accompanying our products. We are a co-defendant with numerous other defendants in these lawsuits and intend to vigorously defend ourselves against these claims. The claims in our current lawsuits are similar to those made in previous asbestos lawsuits that named us as a defendant. Such previous lawsuits either were dismissed when it was shown that we had not supplied products to the plaintiffs’ places of work, or were settled by us for immaterial amounts.
As of December 31, 2017,September 30, 2022, we are subject to the claims noted above, as well as other legal proceedings and potential claims that have arisen in the ordinary course of business. Although the outcome of the lawsuits, legal proceedings or potential claims to which we are or may become a party cannot be determined and an estimate of the reasonably possible loss or range of loss cannot be made for the majority of the claims, we do not believe that the outcomes, either individually or in the aggregate, will have a material adverse effect on our results of operations, financial position or cash flows.
Critical Accounting Policies, Estimates, and Judgments
Our unaudited condensed consolidated financial statements are based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make significant assumptions.We believe that the most critical accounting estimates used in the preparation of our condensed consolidated financial statements relate to labor hour estimates, total cost, and establishment of operational milestones which are used to recognize revenue under the percentage-of-completion method, fair value estimates of identifiable tangible and intangible assets acquired in business combinations,over time, accounting for contingencies, under which we accrue a loss when it is probable that a liability has been incurred and the amount can be reasonably estimated, accounting for business combinations and intangible assets, and accounting for pensions and other postretirement benefits. For further information, refer to Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8 "Financial Statements and Supplementary Data" included in our Annual Report on Form 10-K for the year ended March 31, 2017. 2022.
Off Balance Sheet Arrangements
We did not have any off balance sheet arrangements as of December 31, 2017 or March 31, 2017, other than operating leases and letters of credit.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks (i.e., the risk of loss arising from market changes) to which we are exposed are foreign currency exchange rates, price risk, and project cancellationinterest rate risk.
The assumptions applied in preparing the following qualitative and quantitative disclosures regarding foreign currency exchange rate, price risk and project cancellationinterest rate risk are based upon volatility ranges experienced by us in relevant historical periods, our current knowledge of the marketplace, and our judgment of the probability of future volatility based upon the historical trends and economic conditions of the markets in which we operate.
Foreign Currency
International consolidated sales for the threefirst six months and nine months ended December 31, 2017of fiscal 2023 were 35% and 33%, respectively,21% of total sales compared with 23% and 26%, respectively, for the same periodsperiod of fiscal 2017.2022. Operating in markets throughout the world exposes us to movements in currency exchange rates. Currency movements can affect sales in several ways, the foremost being our ability to compete for orders against foreign competitors that base their prices on relatively weaker currencies. Business lost due to competition for orders against competitors using a relatively weaker currency cannot be quantified. In addition, cash can be adversely impacted by the conversion of sales made by us in a foreign currency to U.S. dollars. In each of the first three and ninesix months of each of fiscal 20182023 and fiscal 2017,2022, substantially all sales by us and our wholly-owned subsidiaries, for which we were paid, were denominated in the local currency of the respective subsidiary (U.S. dollars, Chinese RMB or India INR). For the first six months of fiscal 2023, foreign currency exchange rate fluctuations reduced our cash balances by $254 primarily due to the strengthening of the U.S. dollar relative to the Chinese RMB). RMB.
We have limited exposure to foreign currency purchases. In each of the first three and ninesix months of fiscal 2018,2023, our purchases in foreign currencies represented 1%approximately 7% of the cost of products sold. In the first three and nine months of 2017, our purchases in foreign currencies represented 2% and 3% of cost of products sold, respectively. At certain times, we may enter into forward foreign currency exchange agreements to hedge our exposure against potential unfavorable changes in foreign currency values on significant sales and purchase contracts negotiated in foreign currencies. Forward foreign currency exchange contracts were not used in the periods being reported on in this Quarterly Report on Form 10-Q and as of December 31, 2017September 30, 2022 and March 31, 2017,2022, we held no forward foreign currency contracts.
Price Risk
Operating in a global marketplace requires us to compete with other global manufacturers which, in some instances, benefit from lower production costs and more favorable economic conditions. Although we believe that our customers differentiate our products on the basis of our manufacturing quality, and engineering experience, and excellence,customer service, among other things, such lower production costs and more favorable economic conditions mean that certain of our competitors are able to offer products similar to ours at lower prices. In extreme market downturns, such as we recently experienced, we typically experiencesee depressed price levels. Moreover, theAdditionally, we have faced, and may
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continue to face, significant cost of metalsinflation, specifically in labor costs, raw materials, and other supply chain costs due to increased demand for raw materials used in our products have experienced significant volatility. Such factors, in addition toand resources caused by the global effects of the ongoing volatility andbroad disruption of the capitalglobal supply chain associated with the impact of COVID-19. International conflicts or other geopolitical events, including the 2022 Russian invasion of Ukraine, may further contribute to increased supply chain costs due to shortages in raw materials, increased costs for transportation and creditenergy, disruptions in supply chains, and heightened inflation. Further escalation of geopolitical tensions may also lead to changes to foreign exchange rates and financial markets, have resulted in downward demandany of which may adversely affect our business and pricing pressuresupply chain, and consequently our results of operation. While there could ultimately be a material impact on our products.operations and liquidity, at the time of this report, the impact could not be determined.
Project CancellationInterest Rate Risk
In connection with the BN acquisition, we entered into a $20,000 five-year term loan and Project Continuation Risk
Open ordersa five-year revolving credit facility with Bank of America. The term loan and revolving credit facility bear interest rates that are reviewed continuously through communications with customers. If it becomes evidenttied to us thatBSBY, plus 1.50%, subject to a project is delayed well beyond its original shipment date,0.00% floor. As part of our risk management will moveactivities, we evaluate the project into "placed on hold" (i.e., suspended) category. Furthermore, if a project is cancelled byuse of interest rate derivatives to add stability to interest expense and to manage our customer, it is removed from our backlog. We attempt to mitigate the risk of cancellation by structuring contracts with our customers to maximize the likelihood that progress payments made to us for individual projects cover the costs we have incurred. As a result, we do not believe we have a significant cash exposure to projects which may be cancelled. At December 31, 2017,interest rate movements. As of September 30, 2022, we had $17,500 outstanding on our term loan, $2,500 outstanding on our revolving credit facility and no projectsinterest rate derivatives outstanding. See ''Debt'' in Note 14 to the Unaudited Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on hold. Form 10-Q for additional information about our outstanding debt. A hypothetical one percentage point (100 basis points) change in the BSBY rate on the $20,000 of variable rate debt outstanding at September 30, 2022 would have an impact of approximately $200 on our interest expense for fiscal 2023.
Item 4.Controls Controls and Procedures
Conclusion regarding the effectiveness of disclosure controls and procedures
Our President and Chief Executive Officer (principal(our principal executive officer) and Vice President-Finance & AdministrationPresident - Finance and Chief Financial Officer (principal(our principal financial officer) each have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, and as of such date, our President and Chief Executive Officer and Vice President-Finance & AdministrationPresident - Finance and Chief Financial Officer concluded that our disclosure controls and procedures were effective in all material respects.
Changes in internal control over financial reporting
ThereOther than the events discussed under the section entitled Barber-Nichols Acquisition below, there has been no change to our internal control over financial reporting during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting.
GRAHAM CORPORATION AND SUBSIDIARIESBarber-Nichols Acquisition
FORMOn June 1, 2021, we acquired Barber-Nichols, LLC, a privately-owned designer and manufacturer of turbomachinery products for the aerospace, cryogenic, defense and energy markets, located in Arvada, Colorado. For additional information regarding the acquisition, refer to Note 2 to the Unaudited Condensed Consolidated Financial Statements included in Item 1 in this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 2 in this Quarterly Report on Form 10-Q. Based on the recent completion of this acquisition and, pursuant to the Securities and Exchange Commission’s guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment for a period not to exceed one year from the date of acquisition, the scope of our assessment of the effectiveness of internal control over financial reporting as of the year ended March 31, 2022 does not include Barber-Nichols, LLC. We plan to include Barber-Nichols, LLC in our annual assessment for the fiscal year ending March 31, 2023.
DECEMBER 31 2017
PART II - OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Part 1 – Item 1A of the Company’s Form 10-K for the fiscal year ended March 31, 2022.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Dividend Policy
We do not currently pay a cash dividend on our common stock. Our credit facility with Bank of America contains certain provisions that restrict our payment of cash dividends. Any future determination by our board of directors regarding dividends will depend on a variety of factors, including our compliance with the terms of the credit agreement, organic growth and acquisition opportunities, future financial performance, general economic conditions and financial, competitive, regulatory, and other factors, many of which are beyond our control. There can be no guarantee that we will pay dividends in the future.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GRAHAM CORPORATION
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(On behalf of the Registrant and as Principal Financial Officer) |
Date: February 2, 2018November 7, 2022
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