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 1311 – CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS:
The changes in accumulated other comprehensive loss by component for the nine months ended December 31, 20172022 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 | ) |
Other comprehensive income before reclassifications |
|
| — |
|
|
| (283 | ) |
|
| (283 | ) |
Amounts reclassified from accumulated other comprehensive loss |
|
| 674 |
|
|
| — |
|
|
| 674 |
|
Net current-period other comprehensive income |
|
| 674 |
|
|
| (283 | ) |
|
| 391 |
|
Balance at December 31, 2016 |
| $ | (10,258 | ) |
| $ | (27 | ) |
| $ | (10,285 | ) |
|
| Pension and |
|
| Foreign |
|
| Total |
| |||
Balance at April 1, 2022 |
| $ | (6,970 | ) |
| $ | 499 |
|
| $ | (6,471 | ) |
Other comprehensive loss before reclassifications |
|
| — |
|
|
| (519 | ) |
|
| (519 | ) |
Amounts reclassified from accumulated other comprehensive |
|
| 393 |
|
|
| — |
|
|
| 393 |
|
Net current-period other comprehensive income (loss) |
|
| 393 |
|
|
| (519 | ) |
| $ | (126 | ) |
Balance at December 31, 2022 |
| $ | (6,577 | ) |
| $ | (20 | ) |
| $ | (6,597 | ) |
|
| Pension and |
|
| Foreign |
|
| Total |
| |||
Balance at April 1, 2021 |
| $ | (7,698 | ) |
| $ | 301 |
|
| $ | (7,397 | ) |
Other comprehensive income before reclassifications |
|
| 68 |
|
|
| 201 |
|
|
| 269 |
|
Amounts reclassified from accumulated other comprehensive |
|
| 563 |
|
|
| — |
|
|
| 563 |
|
Net current-period other comprehensive income |
|
| 631 |
|
|
| 201 |
|
|
| 832 |
|
Balance at December 31, 2021 |
| $ | (7,067 | ) |
| $ | 502 |
|
| $ | (6,565 | ) |
17
The reclassifications out of accumulated other comprehensive loss by component for the three and nine months ended December 31, 20172022 and 20162021 are as follows:
Details about Accumulated Other |
| Amount Reclassified from |
|
|
| Affected Line Item in the Condensed | ||||||
|
| Three Months Ended |
|
|
|
| ||||||
|
| December 31, |
|
|
|
| ||||||
|
| 2022 |
|
|
| 2021 |
|
|
|
| ||
Pension and other postretirement benefit items: |
|
|
|
|
|
|
|
|
|
| ||
Amortization of actuarial loss |
| $ | (169 | ) | (1) |
| $ | (270 | ) | (1) |
| Loss before benefit for income taxes |
|
|
| (38 | ) |
|
|
| (60 | ) |
|
| Benefit for income taxes |
|
| $ | (131 | ) |
|
| $ | (210 | ) |
|
| Net loss |
Details about Accumulated Other |
| Amount Reclassified from |
|
|
| Affected Line Item in the Condensed | ||||||
|
| Nine Months Ended |
|
|
|
| ||||||
|
| December 31, |
|
|
|
| ||||||
|
| 2022 |
|
|
| 2021 |
|
|
|
| ||
Pension and other postretirement benefit items: |
|
|
|
|
|
|
|
|
|
| ||
Amortization of actuarial loss |
| $ | (505 | ) | (1) |
| $ | (725 | ) | (1) |
| Loss before benefit for income taxes |
|
|
| (112 | ) |
|
|
| (162 | ) |
|
| Benefit for income taxes |
|
| $ | (393 | ) |
|
| $ | (563 | ) |
|
| 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 | ||||||
|
| 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 |
NOTE 12 – LEASES:
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 |
|
|
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 secondlease, unless there is a transfer of title 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 contractual 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 December 31, 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 right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make payments in exchange for that right of use. Finance lease ROU assets and operating lease ROU assets are included in the line items "Property, plant and equipment, net" and "Operating lease assets", respectively, 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 Company previously entered into related party operating leases with Ascent Properties Group, LLC ("Ascent"), for an office and manufacturing building in Arvada, Colorado, as well as machinery and equipment. During the third quarter of fiscal 20182023, the Company entered into another lease with Ascent for another manufacturing building in Arvada, Colorado. In connection with such leases, the Company made fixed minimum lease payments to the lessor of $211 and $632 during the first halfthree and nine-month periods ended December 31, 2022, respectively, and is obligated to make payments of $211 during the remainder of fiscal 2017,2023. Future fixed minimum lease payments under these leases as of December 31, 2022 are $6,738.
18
The discount rate implicit within the Company’s workforce was aligned with market conditions by reducingleases is generally not readily determinable, and therefore, the numberCompany uses an incremental borrowing rate in determining the present value of management, officelease payments based on rates available at commencement.
The weighted average remaining lease term and manufacturing positions. As a result, restructuring chargesdiscount rate for finance and operating leases are as follows:
|
| December 31, |
|
| December 31, |
|
| ||
|
| 2022 |
|
| 2021 |
|
| ||
Finance Leases |
|
|
|
|
|
|
| ||
Weighted-average remaining lease term in years |
|
| 0.67 |
|
|
| 1.67 |
|
|
Weighted-average discount rate |
|
| 10.67 | % |
|
| 10.67 | % |
|
|
|
|
|
|
|
|
| ||
Operating Leases |
|
|
|
|
|
|
| ||
Weighted-average remaining lease term in years |
|
| 7.22 |
|
|
| 7.72 |
|
|
Weighted-average discount rate |
|
| 3.25 | % |
|
| 3.27 | % |
|
19
The components of $316 and $630 were recognized inlease expense are as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| ||||||||||
|
| December 31, |
|
| December 31, |
|
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| ||||
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Amortization of right-of-use assets |
| $ | 5 |
|
| $ | 5 |
|
| $ | 15 |
|
| $ | 15 |
|
|
Interest on lease liabilities |
|
| — |
|
|
| 1 |
|
|
| 2 |
|
|
| 4 |
|
|
Operating lease cost |
|
| 355 |
|
|
| 384 |
|
|
| 1,026 |
|
|
| 924 |
|
|
Short-term lease cost |
|
| 6 |
|
|
| 3 |
|
|
| 11 |
|
|
| 18 |
|
|
Total lease cost |
| $ | 366 |
|
| $ | 393 |
|
| $ | 1,054 |
|
| $ | 961 |
|
|
Operating lease costs during the nine months ended December 31, 20172022 and 2016,2021 were included within cost of sales and selling, general and administrative expenses.
As of December 31, 2022, future minimum payments required under non-cancelable leases were:
|
| Operating |
|
| Finance |
| ||
Remainder of 2023 |
| $ | 301 |
|
| $ | 6 |
|
2024 |
|
| 1,293 |
|
|
| 11 |
|
2025 |
|
| 1,298 |
|
|
| — |
|
2026 |
|
| 1,309 |
|
|
| — |
|
2027 |
|
| 1,349 |
|
|
| — |
|
2028 and thereafter |
|
| 4,328 |
|
|
| — |
|
Total lease payments |
|
| 9,878 |
|
|
| 17 |
|
|
|
|
|
|
|
| ||
Less – amount representing interest |
|
| 1,111 |
|
|
| 1 |
|
Present value of net minimum lease payments |
| $ | 8,767 |
|
| $ | 16 |
|
NOTE 13 – DEBT:
On June 1, 2021, the Company entered into a $20,000five-year term 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.
Long term debt is comprised of the following:
|
| December 31, |
|
| March 31, |
|
| ||
|
| 2022 |
|
| 2022 |
|
| ||
Bank of America term loan |
| $ | 15,000 |
|
| $ | 18,500 |
|
|
Less: unamortized debt issuance costs |
|
| (816 | ) |
|
| (122 | ) |
|
|
|
| 14,184 |
|
|
| 18,378 |
|
|
Less: current portion |
|
| 2,000 |
|
|
| 2,000 |
|
|
Total |
| $ | 12,184 |
|
| $ | 16,378 |
|
|
As of December 31, 2022, future minimum payments required were as follows:
Remainder of 2023 |
| $ | 500 |
|
2024 |
|
| 2,000 |
|
2025 |
|
| 2,000 |
|
2026 |
|
| 10,500 |
|
2027 |
|
| — |
|
2028 and thereafter |
|
| — |
|
Total |
| $ | 15,000 |
|
20
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 option and the bank's approval at any time up to $40,000. As of December 31, 2022 and March 31, 2022, there was $0 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 December 31, 2022, the BSBY rate was 3.95916%. 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 December 31, 2022, there was $5,954 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.
The Company has entered into amendment agreements with Bank of America since origination. Under the amended agreements, the Company is not required to comply 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 the Company for the fiscal year ending March 31, 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 covenants 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 total maximum leverage ratio of 4.0 to 1.0 for the twelve-month period ending December 31, 2022 and 3.0 to 1.0 for the period ending March 31, 2023; 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 December 31, 2022, the Company was in compliance with the amended financial covenants of its loan agreement. At December 31, 2022, the amount available under the revolving credit facility was $9,926, subject to the above liquidity and leverage covenants.
In connection with the waiver and amendments discussed above, the Company is 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.
On June 1, 2021, the Company entered into an agreement to amend its letter of credit 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 incurs 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 term of the 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 December 31, 2022, there was $6,471 letters of credit outstanding with HSBC. The agreement is subject to an annual renewal by the bank on July 31 of each year.
Letters of credit outstanding as of December 31, 2022 and March 31, 2022 were $12,578 and $12,233, respectively. The restructuring charges included severance
NOTE 14 – OTHER OPERATING EXPENSE (INCOME), NET:
On November 29, 2021, the Company and related employee benefit costs. The charges areJeffrey F. Glajch entered into a Severance and Transition Agreement (the "Agreement") pursuant to which Mr. Glajch agreed to retire from his position the earlier of June 30, 2022 or as of a date upon which the Company and Mr. Glajch otherwise mutually agreed. As a result, each month an expense of $70 is recognized and included in the caption “Restructuring Charge” inother operating expense (income), net on the Condensed Consolidated Statements of Income and Retained Earnings. The reconciliation ofOperations. At December 31, 2021, 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
Therelated liability of $100 and $120 at December 31, 2017 and March 31, 2017 respectively, is$140 was included in the caption “Accrued Compensation”Other long-term liabilities in the Condensed Consolidated Balance Sheets.
21
NOTE 15 – ACCOUNTING AND REPORTING CHANGES:
InOn August 9, 2021, the normal courseCompany and James R. Lines entered into a Severance and Transition Agreement (the "Transition Agreement") pursuant to which Mr. Lines resigned from his position as the Company’s Chief Executive Officer and as a member of the Company's Board of Directors, and from positions he held with all Company subsidiaries and affiliates, effective as of the close of business management evaluates all new accounting pronouncements issued byon August 31, 2021. The Transition Agreement provides that for a period of 18 months following 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 have on the Company's consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers." This guidance establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising fromseparation date, Mr. Lines is paid his base salary as well as health care premiums. As a company’s contracts with customers. The guidance requires companies to applyresult, a five-step model when recognizing revenue to depict the transfer 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 historical financial information is presented in accordance with the new standard and (2) a modified retrospective approach where the guidance is applied to the most current period presentedliability was recorded in the financial statements. In August 2015, the FASB issued ASU No 2015-14 "Revenue from Contracts with Customers: Deferralamount 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$798 in the first quarter of its fiscal year ending March 31, 2019. The Company has developed a project plan and is currently reviewing its contracts and evaluating the impact of the guidance on its revenue. The Company currently believes that the most significant impact of adopting the guidance will be the timing of revenue recognition. The Company believes that revenue on the majority of its contracts will continue to be recognized upon shipment while revenue on its larger contracts are expected to be recognized over time as these contracts meet specific criteria established in the new standards. The Company is 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.
In February 2016,Balance Sheets and recognized against other operating expense (income), net on the FASB issued ASU No. 2016-02, "Leases (Topic 842)"Condensed Consolidated Statements of Operations.
During the 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 expense (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.22
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.
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”) ends March 31, 2018.2023 ("fiscal 2023").
HighlightsAcquisition
Highlights forWe completed the three andacquisition of BN on June 1, 2021, which changed the composition of our end market mix. For the nine months ended December 31, 2017 include:2022, sales to the defense and space industries were 53% of our business compared with approximately 25% of sales prior to the acquisition. The remaining 47% of our third 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.
Net salesThe 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 third quarter of fiscal 2018 were $17,281, down 24% compared with $22,654 forcontingent earn-out. In the thirdsecond quarter of the fiscal year ended March 31, 2017 (we refer2022 ("fiscal 2022"), the earn-out agreement was terminated and the contingent liability was reversed into other operating expense (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 December 31, 2022 include:
Net (loss) and (loss)income per diluted share for the third quarter of fiscal 20182023 were ($11,622)$368 and ($1.19), respectively. Excluding the non-cash impairment and other charges related to the commercial nuclear power business as well as the impact of the Tax Cuts and Jobs Act (P.L. 115-97) (the “Tax Act”), net income and income$0.03 per diluted share, were ($1) and $0.00, respectively, compared with $1,840a loss of $3,730 and $0.19,$0.35 per share, respectively, for the third quarter of fiscal 2017. Net (loss)2022. This increase over the prior year was driven by an improved mix of sales related to higher margin projects (commercial space and (loss) per diluted shareaftermarket)
23
Orders booked in the third quarter of fiscal 20182023 were $40,528, up 129%$20,044 compared withto $67,964 in the third quarter of fiscal 2017 when orders were $17,699. Orders booked in2022. This decrease was primarily due to project timing and 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 at September 30, 2017variable order patterns for our larger energy, space and $82,590 at March 31, 2017.
Gross profit margin and operating margin for the third quarter of fiscal 2018 were 21% and (89%) respectively, compared with 28% and 11%, respectively, for the third quarter of fiscal 2017. Gross profit margin and operating margin for the first nine months of fiscal 2018 were 22% and (26%) compared with 23% and 6%, respectively, for the first nine months of fiscal 2017. Excluding the impairment and other charges related to the commercial nuclear power business, the operating margin in the third quarter was (1%).defense customers. For the first nine months of fiscal 20182023, orders were $151,863 and 2017, excludingour ratio of orders to net sales was 133%. We believe the repeat U.S. Navy orders received during the year validates the investments 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 which increased 6% during the third quarter charges previously noted, as well as a restructuring charge in each year, the operating marginof fiscal 2023. For additional information on this performance indicator, see "Orders and Backlog" below.
Cash and short-term investments$293,671 at December 31, 2017 were $74,182,2022, compared with $72,102 on$313,340 at September 30, 20172022. This decrease was primarily due to the lower amount of orders during the third quarter of fiscal 2023. 80% of our backlog at December 31, 2022 was to the defense industry, which we believe provides stability and $73,474visibility to our business. For additional information on this performance indicator see "Orders and Backlog" below.
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," "outlook," "plan," "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:
2022 and elsewhere in the current and future economic environments affecting us andreports we file with 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 contained in this report.
SEC. 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.
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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.
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, 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 conservation and the increasing use 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 returns. 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 following several years of reduced capital spending in eacha low oil price environment. Additionally, the financial performance of some of our larger energy customers has improved as of late, which may provide funding for capital spending. 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, but also revamping and turnaround for routine maintenance. Oil prices have risen over the past six months from $45 to over $60 per barrel. As a result, certain projects where our equipment is utilized have begun to proceed, however, it is not clear whether a sustained capital spending recovery in our markets has begun.
Capital spendingkey players in the nuclear market for both new capacity and to maintain existing facilities continues to trend downward. Capital spendingindustry. We expect that 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”)long term, extended space exploration will become more prevalent, and the decision to cease building the two new reactors locatedwe anticipate that our thermal/fluid management and environmental control and life support system turbomachinery will play important roles. We are also participating in Summer, South Carolina has dramatically impacted the healthfuture aerospace power and propulsion system development through supply of the
18
domestic nuclear market. The contracted capital spending within the commercial nuclearfluid and thermal management systems components. Small power market has had the effect of measurably reducing new ordersdense systems are imperative for these applications, 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 our technology and expertise will result in capital investment necessaryenable us 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 expectachieve sales growth in this market as well. For the first nine months of fiscal 2023, sales to the space industry represented 12.5% of our naval nuclear propulsion business based onsales compared to 0% prior to the BN acquisition. However, sales and orders to the space industry are variable in nature and many of our strategic actionscustomers, who are key players in the industry, have yet to achieve profitability and may be unable to continue operations without additional funding. Thus, future revenue and growth to this market can be uncertain and may negatively impact our business.
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The chart below illustrates our strategy to increase our participation in the defense market. The defense market sharecomprised 80% of our total backlog at December 31, 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.
*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 ongoing war between Russia and the 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 operations. In addition, the U.S. federal debt ceiling crisis and central bank monetary policies could result in an economic recession and impact our backlog asresults of December 31, 2017 isoperations. While there could ultimately be a material impact on our operations and liquidity from marketsthese events, at the time of this 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 |
|
| Nine Months Ended |
| ||||||||||
|
| December 31, |
|
| December 31, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Net sales |
| $ | 39,873 |
|
| $ | 28,774 |
|
| $ | 114,091 |
|
| $ | 83,077 |
|
Gross profit |
| $ | 6,227 |
|
| $ | 561 |
|
| $ | 18,251 |
|
| $ | 4,918 |
|
Gross profit margin |
|
| 16 | % |
|
| 2 | % |
|
| 16 | % |
|
| 6 | % |
SG&A expenses (1) |
| $ | 5,558 |
|
| $ | 5,003 |
|
| $ | 16,649 |
|
| $ | 15,173 |
|
SG&A as a percent of sales |
|
| 14 | % |
|
| 17 | % |
|
| 15 | % |
|
| 18 | % |
Net income (loss) |
| $ | 368 |
|
| $ | (3,730 | ) |
| $ | 848 |
|
| $ | (7,348 | ) |
Diluted income (loss) per share |
| $ | 0.03 |
|
| $ | (0.35 | ) |
| $ | 0.08 |
|
| $ | (0.70 | ) |
Total assets |
| $ | 207,657 |
|
| $ | 196,080 |
|
| $ | 207,657 |
|
| $ | 196,080 |
|
Total assets excluding cash and cash equivalents |
| $ | 190,442 |
|
| $ | 182,089 |
|
| $ | 190,442 |
|
| $ | 182,089 |
|
(1)
|
| 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 |
|
|
|
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The Third Quarterfollowing tables provides our net sales by product line and First Nine Monthsgeographic region including the percentage of Fiscal 2018 Compared Withtotal and change in comparison to the Third Quarterprior year for each category and First Nine Monthsperiod presented:
of Fiscal 2017
SalesNet sales for the third quarter of fiscal 20182023 were $17,281,$39,873, an increase of 39% from the third quarter of fiscal 2022 and was across our diversified revenue base. The growth in our defense market was due to improved execution and the timing of the achievement of project milestones, while the growth in our commercial space market was driven by newly awarded programs, which continue to ramp up. Growth in our refining market was primarily due to strength in our commercial aftermarket as customers continue to maintain their facilities without making significant capital investments. Domestic sales as a 24% decrease as comparedpercentage of net sales remained relatively consistent with sales of $22,654the prior year at 83% for the third quarter of fiscal 2017. Our domestic2023 and were primarily to the defense and space markets, which represented 54% and 9% of net sales, as a percentage of aggregate product sales, were 65% inrespectively, for the third quarter of fiscal 2018 compared with 77% in the third quarter of fiscal 2017. Domestic sales year-over-year decreased $6,160, or 35%. International sales increased $787, or 15%, in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017. Sales in the three months ended December 31, 2017 were 31% to the refining industry, 24% to the chemical2023 and petrochemical industries, 10% to the power industry, including the nuclear market, and 35% to other commercial and industrial applications, including theare U.S. Navy. Sales in the three months ended December 31, 2016 were 28% to the refining industry, 19% to the chemical and petrochemical industries, 19% to the power industry, including the nuclear market, and 34% to other commercial and industrial applications, including the U.S. Navy. Fluctuationsbased. 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 nine months of fiscal 2023 were $114,091, an increase of 37% from the first nine 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, net sales benefitted from strong growth in commercial aftermarket sales of approximately $10,000 in comparison to the prior year, which is included in our refining and chemical/petrochemical markets, and growth in our commercial space market which was driven by newly awarded programs. 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 third quarter of fiscal 20182023 was 21%16%, compared with 28%2% for the third quarter of fiscal 2017. Gross profit2022. This increase was primarily due to an improved mix of sales related to higher margin projects (commercial space and aftermarket) and improved execution and pricing on defense contracts, partially offset by higher incentive based compensation. Results for the third quarter of fiscal 2018 decreased 43% compared with2022 included the impact of first article Navy project labor and material cost overruns. In the third quarter of fiscal 2017,2023, we completed an additional first article U.S. Navy project, and remain on schedule to $3,585 from $6,301. Gross profit was impactedcomplete the remaining first article projects by lower sales and margins were impacted by a weaker mixthe end of projects and less cost absorption.the second quarter of fiscal 2024.
Our grossGross profit margin for the first nine months of fiscal 20182023 was 22%16%, compared with 23%6% for the first nine months of fiscal 2017. Gross profit for2022. This increase was primarily driven by the same factors impacting the quarter results discussed above. In the first nine months of fiscal 2018 decreased 20%2023, we completed four first article U.S. Navy projects. In addition to the above, the first nine months of fiscal 2023 includes two additional months of operations from BN compared withto the first nine months of fiscal 2017, to $12,281 from $15,422. The decrease in gross profit was due to lower volume.2022.
SG&A expenses as a percent of salesexpense including amortization 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%,2023 was $5,558 compared withto $5,003 for the third quarter of fiscal 20172022. This increase was due to higher incentive compensation, partially offset by cost savings and deferred initiatives. These efforts included reducing the use of outside sales agents, cost management, and delayed hiring of non-critical positions. Additionally, the third quarter of fiscal 2022 included $111 of acquisition and integration costs incurred in connection with the BN acquisition. As a result, 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%expense as a percentage of sales in the third quarter of fiscal 2018. 2023 was 14% of sales compared with 17% of sales in the prior year period.
SG&A expensesexpense including amortization for the first nine months of fiscal 2023 was $16,649 up $1,476 compared with $15,173 for the first nine months of fiscal 2022. Approximately $1,400 of this increase was due to having two additional months of BN results in the first nine 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 deferred initiatives, which included reducing the use of $810, or 8%, compared withoutside sales agents, cost management and delayed hiring of non-critical positions. Additionally, SG&A expense for the first nine months of fiscal 2017 SG&A expenses2022 included $373 of $10,637. This increase was principally related toacquisition and integration costs incurred in connection with the benefit of insurance proceeds of $759 received in the prior year and the $234 bad debt 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.
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During the third quarter of fiscal 2018, we performed our annual goodwill and intangible asset impairment review. We estimated 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, and the bankruptcy of Westinghouse which resulted in the stoppage of work at the Summer, SC nuclear facility.BN acquisition. As a result, in the third quarterSG&A expense as a percentage 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, we incurred a $46 revenue reversal, and a $234 bad debt charge, related to the bankruptcy 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% 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.
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. Interest expense for the three and nine-month periods ended December 31, 2017 was $3 and $8, respectively, 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% in the second quarter to 23% in the third quarter as well assales in the first nine months of fiscal 20182023 was due primarily15% of sales compared with 18% of sales in the prior year period.
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During the second quarter of fiscal 2022, we terminated the BN contingent earn-out agreement and the contingent liability of $1,900 was reversed into other operating expense (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 adjustmentsprovide 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 second and third quarters of fiscal 2022 we incurred $798 and $140, respectively, of severance costs related to the Tax Act. Thedeparture of our former Chief Executive Officer and former Chief Financial Officer, which was also recorded into other operating expense (income), net.
Net interest expense for the third quarter of fiscal 2023 was $294 compared to $120 in the third quarter of fiscal 2022 due to an increase in interest rates since the third quarter of fiscal 2022, partially offset by lower debt levels of $14,566 due to repayments made since the third quarter of fiscal 2022.
Net interest expense for the first nine months of fiscal 2023 was $697 compared to $257 in the first nine months of fiscal 2022 primarily due to the borrowings related to the BN acquisition, as well as increased interest rates since the time of the acquisition.
Our effective tax ratesrate in the third quarter of fiscal 2023 was 16%, compared with 19% in the third quarter of fiscal 2022. Our effective tax rate for the comparable three andfirst nine month periodsmonths of fiscal 2017 were 29% and 27%2023 was 22%, respectively.compared with 20% for the first nine months of fiscal 2022. This increase was primarily due to discrete tax expense recognized in the first quarter of fiscal 2023 related to the vesting of restricted stock awards. Our expected effective tax rate for fiscal 2023 is approximately 23% due to an expected higher mix of income in higher tax rate jurisdictions.
Net (loss)The net result of the above is that net income and (loss)earnings per diluted share for the third quarter of fiscal 2023 were $368 and $0.03 per share, respectively, compared with a loss of $3,730 and $0.35 per share, respectively, for the third quarter of fiscal 2022. Adjusted net income and adjusted net income per diluted share for the third quarter of fiscal 20182023 were ($11,622)$857 and ($1.19),$0.08 per share, respectively, compared with $1,840a loss of $2,903 and $0.19,$0.27 per share, respectively, for the third quarter of fiscal 2017. Excluding impairment and other related charges2022. See "Non-GAAP Measures" below for our commercial nuclear business as well as the gain from implementationa reconciliation of the Tax Act,adjusted net income (loss) and adjusted net income (loss) per diluted share forto 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. comparable GAAP amount.
Net (loss) income and (loss)net income per diluted share for the first nine months of fiscal 20182023 were ($10,677)$848 and ($1.09),$0.08 per share, respectively, compared with net incomea loss of $3,222$7,348 and income$0.70 per diluted share, of $0.33respectively, for the first nine months of fiscal 2017. Excluding the items noted above as well as restructuring charges in each year,2022. Adjusted net income and adjusted net income per diluted share for the first nine months of fiscal 20182023 were $1,168$2,511 and $0.12,$0.24 per share, respectively, compared with a loss of $6,353 and were $3,663 and $0.38 in$0.60 per share, respectively, for the first nine months of fiscal 2017.2022. 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 are they 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:
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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:
|
| December 31, |
|
| March 31, |
| ||
|
| 2022 |
|
| 2022 |
| ||
Cash and cash equivalents |
| $ | 17,215 |
|
| $ | 14,741 |
|
Working capital (1) |
|
| 26,398 |
|
|
| 27,796 |
|
Working capital ratio(1) |
|
| 1.3 |
|
|
| 1.5 |
|
Working capital excluding cash and cash equivalents |
|
| 9,183 |
|
|
| 13,055 |
|
Working capital excluding cash and cash equivalents as a percent |
|
| 6.0 | % |
|
| 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 generatedprovided by operating activities for the first nine months of fiscal 20182023 was $3,874,$8,946 compared with $10,707$14,552 of cash used by operating activities for the first nine months of fiscal 2017. The decrease2022. This increase was primarily due to higher cash net income during the first nine months of fiscal 2023 than the comparable prior year period, as well as lower net working capital levels. In the third quarter of fiscal 2023 we collected a $7,750 customer deposit related to material purchases for a large U.S. Navy order that will be paid over the next twelve months as materials are received. Net repayment of debt for the first nine months of fiscal 2023 was $3,517 compared to a net borrowing of $28,735 for the comparable period in fiscal 2022 primarily due to the cash generation year over year was attributable to lower earnings, an increase in accounts receivable, an increase in income taxes receivable and a smaller decrease in inventories, partly offset by higher unbilled revenue.used for the acquisition of BN of $59,563.
Dividend payments and capital expenditures in the first nine months of fiscal 20182023 were $2,638$0 and $543,$2,394, respectively, compared with $2,616$3,524 and $241,$1,909, respectively, for the first nine 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$17,215 at December 31, 20172022 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 held for near-term needs in short-term, less than 365 days, certificates of deposit, money market accounts or U.S. government instruments, generally with maturity periods of up to 180 days. Our money market account isprovided by operating activities was used to securitize our outstanding lettersfund capital expenditures and repayment of credit, which reduces our cost on those letters of credit. Approximately 95%debt. At December 31, 2022, approximately $6,625 of our cash and investments arecash equivalents was used to secure our letters of credit and $3,028 of our cash was held in the U.S. The remaining 5% is invested inby our China operations. and India subsidiaries.
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.
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 December 31, 2022, there was $0 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 December 31, 2022, the BSBY rate was 3.95916%. As of December 31, 2022, there was $5,954 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 were 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
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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 December 31, 2022, we were $7,401in compliance with the amended financial covenants of our loan agreement and $8,372, respectively. The outstanding lettersour leverage ratio as calculated in accordance with the terms of the credit facility was 2.5. At December 31, 2022, the amount available under the revolving credit facility was $9,926 subject to the above liquidity and leverage 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 December 31, 2017 were issued by JP Morgan Chase, HSBC, as well as Bank of America (under our previous credit facility). There were no2022 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 linesthan letters of credit was $25,168 and $25,761 at December 31, 2017 and March 31, 2017, respectively. incurred in the ordinary course of 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 futurefuture.
Orders and to supportBacklog
The following tables provides our growth strategies.
Ordersorders by product line and Backlog
Orders forgeographic region including the three-month period ended December 31, 2017 were $40,528 compared with $17,699 for the same periodpercentage of total and change in comparison to the prior year an increasefor each category and period presented:
Management 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 supplyprovide products and/or services. Domestic orders were 47% of total orders, or $19,144, and international orders were 53% of total orders, or $21,384, in the current quarter compared with the third quarter of fiscal 2017, when domestic orders were 59%, or $10,396, of total orders, and international orders were 41%, or $7,303, of total orders. Over 80% of the international ordersOrders booked in the third quarter of fiscal 20182023 were from Canada.
During$20,044 compared to $67,964 in the first nine monthsthird quarter of fiscal 2018, orders were $68,679, compared with $57,1232022. This decrease was primarily due to project timing and the variable nature of order patterns for the same period of fiscal 2017, an increase of $11,556, or 20%. our larger energy, space and defense customers.
For the first nine months of fiscal 2018,2023, orders were $151,863 compared to $120,215 for the first nine months of fiscal 2022. Our ratio of orders to net sales for the first nine months of fiscal 2023 was 133%. We believe the increased level of repeat U.S. Navy orders received during the year validates the investments 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, which increased approximately $7,300 during the first nine months of fiscal 2023 compared to the prior year and is included in the refining and chemical/petrochemical markets above. This increase was offset by a lower level of larger capital projects as our energy and chemical customers continue to defer such investment to future periods. We believe there is the possibility of a cyclical upturn in energy and chemical capital project orders increasedfollowing several years of reduced capital spending. However, we do not expect the next cycle to be as robust as years past due to the factors discussed above under "Current Market Conditions." The increase in space orders for the first nine months of fiscal 2023 over the comparable prior year period was due to newly awarded programs as well as having an additional two months of BN operations included in the results for the first nine months of fiscal 2023.
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Orders to the United States represented 81% of total orders for the first nine months of fiscal 2023 and is relatively consistent with the prior year. These orders were primarily to the defense and space markets, which represented 58% and 8% of orders, respectively, and are U.S. based.
The following table provides our backlog by $19,121, power orders increased $812, chemical and petrochemical decreased by $6,167 and other commercial and industrial applications,product line, including the U.S. Navy, decreased by $2,210. See “Current Market Conditions” abovepercentage of total, for additional information.each category and period presented:
Backlog was $96,246$293,671 at December 31, 2017,2022, an increase of 14% compared with $72,981$256,537 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%50% of orders currently in our backlog are expected to be converted to sales within one year 5%and 20% 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. At December 31, 2017, 35%Navy that have a long conversion cycle (up to six years).
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. The following is our expectations for fiscal 2023:
See “Cautionary Note Regarding Forward-Looking Statements” and "Non-GAAP Measures" above for additional information about forward-looking statements and non-GAAP measures. We have 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 future operating results is subject to many factors out of our backlog was attributablecontrol or not readily predictable.
Our results for the first nine months of fiscal 2023 were in-line with our expectations and give us confidence we will be able to equipment for refinery project work, 4% for chemicalachieve our full year guidance. Fiscal 2022 and petrochemical projects, 6% for power projects, including nuclear, 51% foryear-to-date fiscal 2023 results were impacted by our large, lower margin, first article U.S. Navy projects and 4%we believe this negative impact will continue through the end of the second 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, 2016, 17% of our backlog was attributed to equipment for refinery project work, 14% for chemical and petrochemical projects, 9% for power projects, 57% forthese larger U.S. Navy projects will be at higher margins through increased pricing and 3%better execution.
Our expectations for other industrial applications. At December 31, 2017, we had no projects on hold.
Strategysales and Outlook
Prolonged weakness in the global energy markets has continued 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 anticipate that the nuclear power market will continue to be weak and unpredictable during the next few years, and this determination led to the impairment of our goodwill 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. We believe that production overhead absorption will be weak, which we expect in turn will put continued pressure on gross profit margins inat planned capacity, have access to our fourth quarter.global supply chain including our subcontractors, and do not experience significant COVID-19-related disruptions or any other unforeseen events.
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.
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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.
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, 2017,2022, 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 three months andfirst nine months ended December 31, 2017of fiscal 2023 were 35% and 33%, respectively,20% of total sales compared with 23% and 26%, respectively,22% 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 nine 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 nine months of fiscal 2023, foreign currency exchange rate fluctuations reduced our cash balances by $212 primarily due to the strengthening of the U.S. dollar relative to the Chinese RMB). RMB and India INR.
We have limited exposure to foreign currency purchases. In each of the first three and nine months of fiscal 2018,2023, our purchases in foreign currencies represented 1%approximately 9% 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, 20172022 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 ongoing war between Russia and creditthe 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, 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. Atinterest rate movements. As of December 31, 2017,2022, we had $15,000 outstanding on our term loan, $0 outstanding on our revolving credit facility and no projectsinterest rate derivatives outstanding. See ''Debt'' in Note 13 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 $15,000 of variable rate debt outstanding at December 31, 2022 would have an impact of approximately $150 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-FinancePresident - Finance & Administration 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-FinancePresident - Finance & Administration 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 SUBSIDIARIES
Barber-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 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 end of the period covered by this report 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
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PART II - OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Part I - 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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Item 6. Exhibits INDEX OF EXHIBITS |
(31) | ||||
| Rule 13a-14(a)/15d-14(a) Certifications | |||
+ | 31.1 | |||
++ | 31.2 | |||
(32) | Section 1350 Certification | |||
+ | 32.1 | |||
(101) | Interactive Data File | |||
+ | 101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||
+ | 101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||
+ | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
+ | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
+ | 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||
+ | 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
(104) | Cover Page Interactive Data File embedded within the Inline XBRL document | ||||
+ ++ # | Exhibit filed with this report | ||||
Exhibit furnished with this report | |||||
Management contract or compensation plan | |||||
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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 | |||
By: | /s/ | ||
| |||
Vice President-Finance | |||
| |||
Date: February 2, 20186, 2023
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