NOTE 1413 – LEASES:
The 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
16
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 lease, 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 June 30, 2021,2022, the Company did not have any material leases that have been signed but not commenced.
Right-of-use (“ROU”("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,"Property, plant and equipment, net”net" and “Operating"Operating lease assets”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 discount rate implicit within the Company’s leases is generally not readily determinable, and therefore, the Company uses an incremental borrowing rate in determining the present value of lease payments based on rates available at commencement.
The weighted average remaining lease term and discount rate for finance and operating leases are as follows:
|
| June 30, |
|
| June 30, |
|
| June 30, |
| June 30, |
| |||||
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||
Finance Leases |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Weighted-average remaining lease term in years |
|
| 2.16 |
|
|
| 2.72 |
|
|
| 1.17 |
|
|
| 2.16 |
|
Weighted-average discount rate |
|
| 10.71 | % |
|
| 10.04 | % |
|
| 10.67 | % |
|
| 10.71 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Operating Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Weighted-average remaining lease term in years |
|
| 8.24 |
|
|
| 1.81 |
|
|
| 7.35 |
|
|
| 8.24 |
|
Weighted-average discount rate |
|
| 3.29 | % |
|
| 5.49 | % |
|
| 3.27 | % |
|
| 3.29 | % |
16
The components of lease expense are as follows:
|
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
| |||||||
|
| June 30, |
|
| June 30, |
|
| June 30, |
| |||||||
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Amortization of right-of-use assets |
| $ | 5 |
|
| $ | 5 |
|
| $ | 5 |
|
| $ | 5 |
|
Interest on lease liabilities |
|
| 1 |
|
|
| 2 |
|
|
| 1 |
|
|
| 1 |
|
Operating lease cost |
|
| 156 |
|
|
| 40 |
|
|
| 384 |
|
|
| 156 |
|
Short-term lease cost |
|
| 5 |
|
|
| 3 |
|
|
| 4 |
|
|
| 5 |
|
Total lease cost |
| $ | 167 |
|
| $ | 50 |
|
| $ | 394 |
|
| $ | 167 |
|
Operating lease costs during the three monthsthree-month periods ended June 30, 20212022 and 20202021 were included within cost of sales and selling, general and administrative expenses.
As of June 30, 2021,2022, future minimum payments required under non-cancelable leases are:were:
|
| Operating |
|
| Finance |
| ||
Remainder of 2023 |
| $ | 961 |
|
| $ | 19 |
|
2024 |
|
| 1,200 |
|
|
| 11 |
|
2025 |
|
| 1,183 |
|
|
| 0 |
|
2026 |
|
| 1,189 |
|
|
| 0 |
|
2027 |
|
| 1,225 |
|
|
| 0 |
|
2028 and thereafter |
|
| 3,709 |
|
|
| 0 |
|
Total lease payments |
|
| 9,467 |
|
|
| 30 |
|
|
|
|
|
|
|
| ||
Less – amount representing interest |
|
| 1,104 |
|
|
| 2 |
|
Present value of net minimum lease payments |
| $ | 8,363 |
|
| $ | 28 |
|
|
| Operating Leases |
|
| Finance Leases |
| ||
Remainder of 2022 |
| $ | 1,002 |
|
| $ | 19 |
|
2023 |
|
| 1,265 |
|
|
| 26 |
|
2024 |
|
| 1,123 |
|
|
| 11 |
|
2025 |
|
| 1,135 |
|
|
| — |
|
2026 |
|
| 1,169 |
|
|
| — |
|
2027 and thereafter |
|
| 4,856 |
|
|
| — |
|
Total lease payments |
|
| 10,550 |
|
|
| 56 |
|
|
|
|
|
|
|
|
|
|
Less – amount representing interest |
|
| 1,366 |
|
|
| 6 |
|
Present value of net minimum lease payments |
| $ | 9,184 |
|
| $ | 50 |
|
NOTE 1514 – DEBT:
On June 1, 2021, the Company entered into a $20,000 $20,000five-year term loan with Bank of America. The term loan requires monthly principal payments of $167$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%1.50%, subject to a 0.00%0.00% floor. In addition, on
Long term debt is comprised of the following:
|
| June 30, |
|
| March 31, |
|
| ||
|
| 2022 |
|
| 2022 |
|
| ||
Bank of America term loan |
| $ | 18,000 |
|
| $ | 18,500 |
|
|
Less: unamortized debt issuance costs |
|
| (935 | ) |
|
| (122 | ) |
|
|
|
| 17,065 |
|
|
| 18,378 |
|
|
Less: current portion |
|
| 2,000 |
|
|
| 2,000 |
|
|
Total |
| $ | 15,065 |
|
| $ | 16,378 |
|
|
As of June 30, 2022, future minimum payments required were as follows:
Remainder of 2023 |
| $ | 1,500 |
|
2024 |
|
| 2,000 |
|
2025 |
|
| 2,000 |
|
2026 |
|
| 12,500 |
|
2027 |
|
| 0 |
|
2028 and thereafter |
|
| 0 |
|
Total |
| $ | 18,000 |
|
17
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 providesprovided a $30,000$30,000 line of credit, including letters of credit and bank guarantees, expandable at the Company’sCompany's option and the bank’sbank's approval at any time up to $40,000.$40,000. As of June 30, 2021, the Company had $2,5002022 and March 31, 2022, there was $0 outstanding on the line of credit. The agreement has a five-year term. Amounts outstanding under the facility agreement bear interest at a rate equal to BSBY plus 1.50%1.50%, subject to a 0.00%0.00% floor. As of June 30, 2021,2022, the BSBY rate was 0.0558%0.881430%. Outstanding letters of credit under thethis agreement are subject to a fee of 1.50%1.50% per annum of the outstanding undrawn amount of each letter of credit that is not secured by cash and 0.6%0.60% of each letter of credit that is secured by cash. The upfront fee for both the term loan and revolving credit facility was 0.20% of the committed facilities and amountsAmounts available for borrowing under the revolving credit facility are subject to an unused commitment fee of 0.25%0.25%. As of June 30, 2022, there was $5,079 letters of credit outstanding with Bank of America.
Under the original Bank of America term loan agreement and revolving credit facility, the Company covenantscovenanted to maintain a maximum total leverage ratio, as defined in such agreements, of 3.0 to 1.0, andwith 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 1.201.2 to 1.0 and minimum margined assets, as defined in such agreements, of 100%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.
On March 31, 2022 and June 7, 2022, the Company entered into amendment agreements with Bank of America. 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, 2022 and at all times thereafter, all of the Company's deposit accounts, except certain foreign subsidiary 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 June 30, 2022, the Company was in compliance with the amended financial covenants of its loan agreement. At June 30, 2022, the amount available under the revolving credit facility was $10,840.
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’sCompany's line of credit from $15,000$15,000 to $7,500.$7,500. Under the amended agreement, the Company incurs an annual facility fee of $5$5 and outstanding letters of credit are subject to a fee of between 0.75%0.75% and 0.85%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%3% plus the bank’sbank's prime rate. The Company's obligations under the agreement are secured by cash held with the bank. As of June 30, 2022, there was $7,435 letters of credit outstanding with HSBC. The agreement is subject to an annual renewal by the bank on July 31 of each year.
As of June 30, 2022, the Company had letters of credit outstanding of $174 remaining on its former revolving credit facility with JPMorgan Chase Bank, N.A.
Letters of credit outstanding as of June 30, 20212022 and March 31, 20212022 were $8,711$12,688 and $11,567,$12,233, respectively.
NOTE 16 – ACCOUNTING AND REPORTING CHANGES:
In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board ("FASB"), the Securities and Exchange Commission, the Emerging Issues Task Force, the American Institute of Certified Public Accountants or any other authoritative accounting body to determine the potential impact they may have on the Company's consolidated financial statements.
In December 2019, the FASB issued Accounting Standards Update ("ASU") No. 2019-12, “Simplifying the Accounting for Income Taxes.” The amended guidance simplifies the accounting for income taxes, eliminating certain exceptions to the general income tax principles, in an effort to reduce the cost and complexity of application. The amended guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The guidance requires application on either a prospective, retrospective or modified retrospective basis, contingent on the income tax exception being applied. The Company adopted the new guidance, on a prospective basis, on April 1, 2021. The adoption of this ASU did not have a material impact on the Company’s 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.
NOTE 17 – SUBSEQUENT EVENTS:
On August 10, 2021, the Company announced that its Board of Directors has appointed Daniel J. Thoren as its President and Chief Executive Officer, effective August 31, 2021. Mr. Thoren will also join the Board of Directors upon assuming the new role. He will succeed James R. Lines, who plans to retire from the Company and step down from the Board of Directors. The Company will incur a one-time charge for the separation of James R. Lines that will be recorded in the second quarter of fiscal year 2022.18
Item 2.Management’s Discussion and Analysis ofof 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 and chemical/petrochemicalprocess industries. For the defense industry, our equipment is used in nuclear and non-nuclear propulsion, power, fluid transfer, and thermal management systems. For the space industry our equipment is used in propulsion, power and energy management systems and for undersea propulsionlife support systems. Our energy and power systems. Ournew energy markets include oil refining, cogeneration, and multiple alternative power.and clean power applications including hydrogen. For the chemical and petrochemical industries, our equipment is used in fertilizer, ethylene, methanol and downstream chemical facilities. We also
Our brands are a provider of specialized systems and equipment for the aerospace and space industries.
Our global brand is built upon 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 brand isbrands are built.
Our corporate headquarters areis located in Batavia, New York. We have production facilities co-located with our headquarters in Batavia. We have aOur wholly-owned subsidiary, Barber-Nichols, LLC ("BN"), based in Arvada, Colorado, that designs, develops, manufactures and sells specialty turbomachinery products for the aerospace, cryogenic, defense and energy markets (see "Acquisition" below). We also have wholly-owned foreign subsidiaries, Graham Vacuum and Heat Transfer Technology (Suzhou) Co., Ltd. ("GVHTT"), located in Suzhou, China and Graham India Private Limited ("GIPL"), located in Ahmedabad, India. GVHTT provides sales and engineering support for us in the People'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.
We completed the acquisition of Barber-Nichols, LLC ("BN") on June 1, 2021.
Our current fiscal year (which we refer to as "fiscal 2022"2023") ends March 31, 2022.2023.
Acquisition
Acquisition
We completed the acquisition of Barber-Nichols, LLC ("BN")BN on June 1, 2021. BN was foundedFounded as a specialty turbomachinery engineering company in 1966.1966, BN has growngrew rapidly from programs that involve complex production and systemsystems integration. BN is located in Arvada, Colorado, a suburb of Denver. BN uses a combination ofBy integrating knowledge in rotating equipment, power generation cycles, and electrical management systems, andBN has participated insuccessfully won the design and development of different power, fluid transfer, and propulsion systems used in underwater vehicles.vehicles among many other accomplishments.
The acquisition of BN is expected to changechanged the composition of the Company’s futureour end market mix. We expect approximatelyFor the first quarter of fiscal 2023, sales to the defense and space industries were 45%-50% of our business for the last ten monthscompared with approximately 25% of fiscal 2022, after the acquisition, to provide equipmentsales prior to the U.S. Navy. We expectacquisition. The remaining 55% of our first quarter fiscal 2023 sales came from the energy market to be 35%-40% of sales and the aerospacerefining, chemical/petrochemical and other commercial markets. These markets represented approximately 75% of our sales prior to be 10%-15% of sales.the acquisition. BN has outperformed expectations since being acquired.
The BN transaction was accounted for as a business combination, which requires that assets acquired and liabilities assumed be recognized at their fair value as of the acquisition date. The purchase price of $72,014 was comprised of 610 shares of the Company’s common stock, representing a value of $8,964 at $14.69 per share, and cash consideration of $61,150, subject to certain potential adjustments, including a customary working capital adjustment.$61,150. The cash consideration was funded through cash on-hand and debt proceeds (See Note 15)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 with respect to the acquisition also includesincluded a contingent earn-out dependent upon certain financial measures of BN post-acquisition, pursuant to which the sellers arewere eligible to receive up to $14,000 in additional cash consideration. As ofAt June 30, 2021, a liability of $1,900 was recorded for the contingent earn-out. If achieved,In the second quarter of the fiscal year ended March 31, 2022 (which we refer to as "fiscal 2022"), the earn-out will be payable in fiscal year 2025agreement was terminated and will be treated as additional purchase price. Acquisition related costs of $169 were expensed in the first quarter of fiscal 2022 and are included in Selling, general and administrative expenses in thecontingent liability was reversed into other operating income, net, on our Condensed Consolidated Statement of Operations. In connection with the termination of this earn-out agreement, we entered into a Performance Bonus Agreement (the "Bonus Agreement") to provide certain employees of BN with performance-based awards considering the BN business results on a stand-alone basis. The purpose of the bonus arrangement is to align a broader number of the BN leadership team with the achievement of BN performance objectives. The Bonus Agreement provides for payments to be made for certain performance-based results of BN for fiscal years ending March 31, 2024, 2025, and 2026 and can range between $2,000 to $4,000 per year.
Highlights
Summary
Highlights for the three months ended June 30, 20212022 include:
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Cautionary Note Regarding Forward-Looking Statements
This report and other documents we file with the Securities and Exchange Commission ("SEC") include "forward-looking statements"forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
amended (the "Exchange Act"). All statements other than statements of historical fact are forward-looking statements for purposes of this report. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results implied by the forward-looking statements. SuchForward-looking statements are indicated by words such as "anticipate," "believe," "continue," "could," "estimate," "may," "intend," "expect," "predict," "project," "potential," "should," "will," and similar words and expressions.
Forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors include,that could cause our actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements including, but are not limited to, those described in the risks and uncertainties identified by us under the heading "Risk Factors" section in Item 1A of our Annual Report on Form 10-K for fiscal 2021.
Forward-looking statements may also include, but are not limited to, statements about:
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Forward-looking statements are usually accompanied by words such as "anticipate," "believe," "contemplate," "continue," "could," "estimate," "may," "might," "intend," "interest," "appear," "expect," "suggest," "plan," "predict," "project," "encourage," "potential," "should," "view," "will,"2022 and similar expressions. Actual results could differ materially from historical results or those implied by the forward-looking statements containedelsewhere in this report.
21
Undue reliance should not be placed on our forward-looking statements. New risks and uncertainties arise from time to time and we cannot predict these events or how they may affect us and cause actual results to differ materially from those expressed or implied by our forward-looking statements. Therefore, you should not rely on our forward-looking statements as predictions of future events. When considering these risks, uncertainties and assumptions, you should keep in mind the cautionary statements contained in this report and any documents incorporated herein by reference. You should read this document and the documents that we reference in this Quarterly Report on Form 10-Q (the "Form 10-Q") completely and with the understanding that our actual future results may be materially different from what we expect. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
All forward-looking statements included in this Form 10-Q are made only as of the date indicated or as of the date of this Form 10-Q. Except as required by law, we undertake no obligation to update or announce any revisions to forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.
20
Current Market Conditions
Demand for our equipment and systems for the defense industry is expected to remain strong and continue to expand, based on defense budget plans, the plannedprojected procurement of submarines, aircraft carriers and undersea propulsion and power systems. Submarines, both Virginiasystems and Columbia classes, are considered critical to national defense. We do not anticipate demand for our equipment and systems will abate and is actually reported to continue to increase in the coming years. With the addition of revenue from the BN acquisition, consolidated revenue for the U.S. Navy is projected to be $60 million to $70 million in the current fiscal year, with growth expected in subsequent years.solutions we provide. In addition to U.S. Navy applications, we also provide specialty pumps, turbines, and compressors and controllers for various fluid and thermal management systems used in DoDDepartment of Defense radar, laser, electronics and power systems. We have built a leading position, and in some instances, a sole sourcingsource position, for certain systems and equipment supportingfor the confidencedefense industry.
Our traditional energy markets are undergoing significant transition. While we have in near term outlook.
The energy and petrochemical marketsexpect that fossil fuels will continue to be impacted by demand disruption caused by the COVID-19 global pandemic. Western energy markets are further impacted by alternative energy growth with reduced reliance of fossil-based fuels. This, we believe, has caused our crude oil refining customers to reduce sustaining or MRO spending and dramatically scale back strategic growth investment. Our western energy and crude oil refining customers are not expected to return to previous levels of investmentan important component in the near term, though weglobal energy industry for many years to come, there are seeing some improvements compared with the second half of last year. Within our emerging or developing markets, we anticipate new capacity investment will occursignificant changes in the latter half ofpriorities for capital investments by our customers and the current fiscal year. This market needs local refining capacity to meet local demand for petroleum products.
regions in which those investments are being made. We continue to believeexpect that the energy markets, in particular crude oil refining, simultaneous with the above-described reduction in demand, are undergoing a more fundamental evolution. We believe that systemic changes in the energy markersmarkets, which are occurring and that such changes are being driven, in part,influenced by the increasing use by consumers of alternative fuels, in lieu of fossil fuels. As a result, we anticipatewill lead to demand growth for fossil-based fuels will bethat is less than the global GDP growth rate. Accordingly, we expect that crude oil refiners will focus new investments toward the installed base, and that inefficient refineries will close and new refining capacity will be co-located where fuels and petrochemicals are produced. We also 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 services.
We expect Asian investment in chemical/petrochemical new capacity will return during the next 12-18 months while our Western integrated energy companies with petrochemical production assets will continue to limit capital investment. The timing and catalyst for a recovery in our commercialthese markets (crude oil refining and chemical/petrochemical markets)petrochemical) remains uncertain. Accordingly, we believe that in the near term the quantity of projects available for us to compete for will be fewerremain low and that thenew project pricing environment will remain challenging.
Of note, over the last year we have experienced an increase in our energy and chemical aftermarket orders, primarily from the domestic market. Aftermarket orders have historically been a leading indicator of future capital investment by our customers in their facilities for upgrades and expansions. As such we believe there is the possibility of a cyclical upturn in the next twelve months following several years of reduced capital spending in a low oil price environment. 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. While this business is small currently, we believe that weWe are positioning the Company to be a more significant contributor as these markets continue to develop.
We believe in the near and medium terms 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 or related products. Consequently, when global economies return to stable growth,As such, we expect investment in new global chemical and petrochemical capacity will resumeimprove and that such investments will drive growth in demand for our products and services.
BNOur turbomachinery, pumps and cryogenic products and market access provide revenue and growth potential in the commercial space/aerospace markets. As theThe commercial space market has grown and evolved rapidly, BN has providedand we provide rocket engine turbopumpturbo pump systems and components for many of the launch providers. We expect that in the long term extended space travelexploration will become more prevalent, and we anticipate that our thermal/fluid management and environmental control and life support system turbomachinery will play important roles. BN isWe are also participating in future aerospace power and propulsion system development through supply of fluid and thermal management systems components. Small power dense systems are imperative for these applications and we believe our technology and expertise will allowenable us to participateachieve sales growth in this market as well. For the first quarter of fiscal 2023, sales to the space industry represented 18% of our sales compared to 4% in the first quarter of fiscal 2022.
The chart below showsillustrates our strategy to increase our participation in the impact of our successful diversification strategy.defense and space markets. The defense market comprised 80%74% of our total backlog at June 30, 2021.2022. We believe this diversification is especially beneficial when our commercialrefining and process markets are weak, as is presently the case.
21
*Note: FYE refers to 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 |
| |||||
|
| June 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Net sales |
| $ | 36,075 |
|
| $ | 20,157 |
|
Gross profit |
| $ | 6,744 |
|
| $ | 914 |
|
Gross profit margin |
|
| 19 | % |
|
| 5 | % |
SG&A expenses (1) |
| $ | 5,759 |
|
| $ | 4,923 |
|
SG&A as a percent of sales |
|
| 16 | % |
|
| 24 | % |
Net income (loss) |
| $ | 676 |
|
| $ | (3,126 | ) |
Diluted income (loss) per share |
| $ | 0.06 |
|
| $ | (0.31 | ) |
Total assets |
| $ | 184,213 |
|
| $ | 185,366 |
|
Total assets excluding cash and cash equivalents |
| $ | 171,308 |
|
| $ | 166,223 |
|
|
| Three Months Ended |
| |||||
|
| June 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Net sales |
| $ | 20,157 |
|
| $ | 16,710 |
|
Gross profit |
| $ | 914 |
|
| $ | 1,568 |
|
Gross profit margin |
|
| 5 | % |
|
| 9 | % |
SG&A expenses (1) |
| $ | 4,923 |
|
| $ | 3,902 |
|
SG&A as a percent of sales |
|
| 24 | % |
|
| 23 | % |
Net loss |
| $ | (3,126 | ) |
| $ | (1,818 | ) |
Diluted loss per share |
| $ | (0.31 | ) |
| $ | (0.18 | ) |
Total assets |
| $ | 185,366 |
|
| $ | 146,106 |
|
Total assets excluding cash, cash equivalents and investments |
| $ | 166,223 |
|
| $ | 78,934 |
|
|
|
The First Quarter of Fiscal 20222023 Compared Withwith the First Quarter of Fiscal 20212022
Sales for the first quarter of fiscal 20222023 were $20,157, a 21%$36,075, an increase of $15,918 or 79% from sales of $16,710$20,157 for the first quarter of fiscal 2021. Our domestic2022. 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 fiscal 2022. Additionally, our sales continued to benefit from our diversified revenue base including strong growth in commercial aftermarket and the space market. These increases were partially offset by continued supply chain constraints, which caused a delay in material receipts and related shipments. Domestic sales as a percentage of aggregate sales were 78% in the first quarter of fiscal 2023 compared with 69% in the first quarter of fiscal 2022 compared with 56%reflecting the increase in our defense and space industry businesses which is all U.S. based. Sales in the first quarter of fiscal 2021. Domestic sales increased $4,456 in the first quarter of fiscalthree months ended June 30, 2022 or 47% year-over-year, primarily duewere 22% to the acquisition of BN, which contributed $3,415 inrefining industry, 16% to the quarterchemical and petrochemical industries, 27% for the one month that we owned the company. International sales decreased $1,009, or 14%, in the first quarter of fiscal 2022 compared with the first quarter of fiscal 2021.defense (U.S. Navy) industry, 18% to space, and 17% to other commercial and industrial applications. Sales in the three months ended June 30, 2021 were 23% to the refining industry, 23% to the chemical and petrochemical industries, 35% for the defense (U.S. Navy) industry, 4% to space, and 15% to other commercial and industrial applications. Sales in the three months ended June 30, 2020 were 16% to the refining industry, 48% to the chemical and petrochemical industries, 21% for the defense (U.S. Navy) industry and
23
15% to other commercial and industrial applications. The three months ended June 30, 2020 were heavily impacted by our decision to shut down operations while continuing to support our employees. We operated at approximately 50% capacity during this time. Fluctuation in sales among markets, products and geographic locations varies, sometimes significantly, from quarter-to-quarter based on timing and magnitude of projects. See also "Current Market Conditions," above. For additional information on anticipated future sales and our markets, see "Orders and Backlog" below.
22
Gross profit margin and operating margin for the first quarter of fiscal 2022 were 5% and (19%)2023 was 19%, respectively, compared with 9% and (14%), respectively,5% for the first quarter of fiscal 2021.2022. Gross profit for the first quarter of fiscal 2022 decreased2023 increased compared with fiscal 2021,2022, to $914$6,744 from $1,568,$914. These increases were primarily due to an improved mix includingof sales related to higher margin projects with lower margins, COVID-19 related liquidated damages(space and timingcommercial aftermarket) and improved execution on completed contracts, partially offset by higher incentive compensation. In the first quarter of expenses.fiscal 2023, we completed and shipped two first article U.S. Navy projects and are on schedule to complete the remaining first article projects throughout fiscal 2023. In addition to the above, first quarter fiscal 2023 includes three months of operations from BN compared to one month in the first quarter of fiscal 2022.
SG&A expensesexpense including amortization for the first quarter of fiscal 2023 was $5,759, up 17%, or $836, compared with $4,923 for the first quarter of fiscal 2022. Approximately $1,400 of this increase was due to having three months of BN results in the first quarter of fiscal 2023 compared to one month in fiscal 2022, partially offset by cost savings and deferral initiatives. These efforts included reducing the use of outside sales agents and delayed hiring. As a result, SG&A expense as a percentpercentage of sales in the first quarter of fiscal 2023 was 16% of sales compared with 24% of sales in the comparable period in fiscal 2022.
Net interest expense for the three-month periods ended June 30, 2021 and 2020 were 24% and 23%, respectively. SG&A expensesfirst quarter of fiscal 2023 was $157 compared to $22 in the first quarter of fiscal 2022 were $4,923, an increase of $1,021 compared withprimarily due to increased borrowings related to the BN acquisition, as well as increased interest rates since the first quarter of fiscal 2021 SG&A expenses of $3,902. The addition of BN, including the impact of purchase price amortization, accounted for $587 or half of the increase. The remaining increase was due to acquisition-related and organizational development costs.2022.
Interest income for the three-month periods ended June 30, 2021 and 2020 was $17 and $94, respectively. The decrease in interest income was due to lower market investment rates compared with rates during the prior year period as well as less cash and investments after the BN acquisition. Interest expense was $39 for the quarter ended June 30, 2021, compared with $5 for the quarter ended June 30, 2020. The increase was due to the interest on the term debt which was entered into in conjunction with the aforementioned acquisition.
Our effective tax rate in the first quarter of fiscal 20222023 was 19%24%, compared with 17%19% in the first quarter of fiscal 2021.2022. 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 21% to 22% as the impact of these discrete tax items on our effective tax rate lessens over the course of fiscal 2023.
Net lossincome and lossincome per diluted share for the first quarter of fiscal 20222023 were $676 and $0.06 per share, respectively, compared with a loss of $3,126 and $0.31 per share, respectively, compared with $1,818 and $0.18, respectively, infor the first quarter of fiscal 2021.2022. Adjusted net income and adjusted net income per diluted share for the first quarter of fiscal 2023 were $1,329 and $0.12 per share, respectively, compared with a loss of $2,807 and $0.28 per share, respectively, for the first quarter of fiscal 2022. See "Non-GAAP Measures" below for a reconciliation of adjusted net income (loss) and adjusted net income (loss) per diluted share to the comparable GAAP amount.
Non-GAAP Measures
Adjusted earnings (loss) before net interest expense, income taxes, depreciation and amortization ("EBITDA"), adjusted net income (loss), and adjusted net income (loss) per diluted share are provided for information purposes only and are not measures of financial performance under accounting principles generally accepted in the U.S. ("GAAP"). Management believes the presentation of these financial measures reflecting non-GAAP adjustments provides important supplemental information to investors and other users of our financial statements in evaluating the operating results of the Company. In particular, those charges and credits that are not directly related to operating performance, and that are not a helpful measure of the performance of our underlying business particularly in light of their unpredictable nature. These non-GAAP disclosures have limitations as analytical tools, should not be viewed as a substitute for net income (loss) or net income (loss) per diluted share determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. In addition, supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to net income (loss) or net income (loss) per diluted share determined in accordance with GAAP. Adjusted EBITDA, adjusted net income (loss) and adjusted net income (loss) per diluted share are key metrics used by management and our board of directors to assess the Company’s financial and operating performance and adjusted EBITDA is a basis for a portion of management's performance-based compensation.
Adjusted EBITDA excludes charges for depreciation, amortization, interest expense, taxes, other acquisition related expenses, and other unusual/nonrecurring expenses. Adjusted net income (loss) and adjusted net income (loss) per diluted share excludes intangible amortization, other costs related to the acquisition, and other unusual/nonrecurring expenses.
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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| Three Months Ended |
| |||||
| June 30, |
| |||||
| 2022 |
|
| 2021 |
| ||
Net income (loss) | $ | 676 |
|
| $ | (3,126 | ) |
Acquisition & integration costs |
| 54 |
|
|
| 169 |
|
Debt amendment costs |
| 153 |
|
|
| - |
|
Net interest expense |
| 157 |
|
|
| 22 |
|
Income taxes |
| 215 |
|
|
| (745 | ) |
Depreciation & amortization |
| 1,475 |
|
|
| 820 |
|
Adjusted EBITDA | $ | 2,730 |
|
| $ | (2,860 | ) |
Adjusted EBITDA margin % | 7.6% |
|
|
| -14.2 | % | |
| Three Months Ended |
| |||||
| June 30, |
| |||||
| 2022 |
|
| 2021 |
| ||
Net income (loss) | $ | 676 |
|
| $ | (3,126 | ) |
Acquisition & integration costs |
| 54 |
|
|
| 169 |
|
Amortization of intangible assets |
| 619 |
|
|
| 225 |
|
Debt amendment costs |
| 153 |
|
|
| - |
|
Normalize tax rate(1) |
| (173 | ) |
|
| (75 | ) |
Adjusted net income (loss) | $ | 1,329 |
|
| $ | (2,807 | ) |
Adjusted diluted earnings (loss) per share | $ | 0.12 |
|
| $ | (0.28 | ) |
(1) Applies a normalized tax rate to non-GAAP adjustments, which are pre-tax, based upon the full fiscal year expected effective tax rate.
Liquidity and Capital Resources
The following discussion should be read in conjunction with our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows:
|
| June 30, |
|
| March 31, |
| ||
|
| 2022 |
|
| 2022 |
| ||
Cash and cash equivalents |
| $ | 12,905 |
|
| $ | 14,741 |
|
Working capital |
|
| 28,508 |
|
|
| 27,796 |
|
Working capital ratio(1) |
|
| 1.5 |
|
|
| 1.5 |
|
Working capital excluding cash and cash equivalents |
|
| 15,603 |
|
|
| 13,055 |
|
Working capital excluding cash and cash equivalents as a percent |
|
| 11.2 | % |
|
| 10.6 | % |
|
| June 30, |
|
| March 31, |
| ||
|
| 2021 |
|
| 2021 |
| ||
Cash and investments |
| $ | 19,143 |
|
| $ | 65,032 |
|
Working capital |
|
| 36,835 |
|
|
| 76,675 |
|
Working capital ratio(1) |
|
| 1.7 |
|
|
| 2.8 |
|
Working capital excluding cash and investments |
|
| 17,692 |
|
|
| 11,643 |
|
Working capital excluding cash and investments as a percent of net sales(2) |
|
| 17.5 | % |
|
| 11.9 | % |
|
|
|
|
Net cash used by operating activities for the first quarter of fiscal 20222023 was $7,076 which was comparable$689 compared with $4,373$7,076 of cash used for the first quarter of fiscal 2021.2022. The cash used by operations during the first quarter of fiscal 2023 was lower than the comparable prior year period primarily as a result of higher cash net income. Cash usage during the first quarter of fiscal 2023 was due to an increase in cash utilization was primarily dueworking capital to decreasesfund growth, in customer deposits, accrued compensation and income taxes, partly offset byparticular, the investments in inventory in a decrease in accounts receivable.supply constrained environment.
Dividend payments and capital expenditures in the first quarter of fiscal 20222023 were $0 and $284, respectively, compared with $1,177 and $446, respectively, compared with $1,097 and $338, respectively, for the first quarter of fiscal 2021. 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 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 20222023 are expected to be approximately $3,500$4,500 to $4,000.$5,500. Approximately 35% of our fiscal 2023 capital expenditures are expected to be for machinery and equipment, 50% for buildings and leasehold improvements to fund our growth initiatives and with the remaining amounts expected to be used for other items. The majority of our planned capital expenditures are discretionary.
24
Cash and investmentscash equivalents were $19,143 on$12,905 at June 30, 20212022 compared with $65,032 on$14,741 at March 31, 2021,2022, down $45,889,$1,836 primarily due to the BN acquisition.
We invest net cash generated fromused in operations, in excess of cash held for near-term needs in short-term, or less than 365 days, certificates of deposit, money market accounts or U.S. government instruments, generally with maturity periods of up to 180 days.
24
Our money market account is used to securitize our outstanding letters of credit, which reduces our cost on those letters of credit. Approximately 70%capital expenditures, and debt repayments. At June 30, 2022, approximately $7,500 of our cash and investments arecash equivalents is used to secure our letters of credit and $2,206 of our cash is held in the U.S. The remaining 30% is invested inby our China and India operations.
On June 1, 2021, we entered into a $20,000 five-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. The BSBY rate at June 30, 2021 was 0.0558%. In addition, on
On June 1, 2021, we terminated our revolving credit facility agreement with JPMorgan Chase Bank, N.A. and entered into a five-year revolving credit facility with Bank of America that providesprovided a $30,000 line of credit, including letters of credit and bank guarantees, expandable at our option and the bank’sbank's approval at any time up to $40,000. The agreement has a five-year term.As of June 30, 2022, there was no amount 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 June 30, 2022, the BSBY rate was 0.881430%. 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 0.6%0.60% of each commercial letter of credit that is secured by cash, subject to a 0.00% floor. Outstanding letters of credit under the agreement are subject to a fee of 1.50%. The upfront fee for both the term loan and revolving credit facility was 0.20% of the committed facilities and amountscash. Amounts available for borrowing under the revolving credit facility are subject to an unused commitment fee of 0.25%. As of June 30, 2022, there was $5,079 letters of credit outstanding with Bank of America.
Under the original term loan agreement and revolving credit facility, we covenantcovenanted to maintain a maximum total leverage ratio, as defined in such agreements, of 3.0 to 1.0, andwith 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, we covenanted to maintain a minimum fixed charge coverage ratio, as defined in such agreements, of 1.201.2 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 bank agreement covenants and were granted a waiver for noncompliance by Bank of America.
On March 31, 2022 and June 1, 2021,7, 2022, we entered into an agreement to amend and restate our letteramendment agreements with Bank of credit facility agreement with HSBC Bank USA, N.A. and decreased our line of credit from $15,000 to $7,500.America. Under the amended agreements, we are 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 we incur an annual facility fee of $5 and outstanding letters of credit are subject to a fee of between 0.75% and 0.85%, depending onfor 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.
Letters of credit outstanding on June 30,periods ending December 31, 2021 and March 31, 2021 were $8,711June 30 and $11,567, respectively.September 30, 2022. The principal balance outstanding on the line of credit may not exceed $15,000, unless letters of credit exceed $11,500, in which case the limit is $17,000, until the compliance date. The compliance date is defined as the date on which Bank of America has received all required financial information with respect to us for the fiscal year ending March 31, 2023 and no event of default exists. In addition, on or before September 1, 2022 and at all times thereafter, all of our deposit accounts, except certain foreign subsidiary accounts, will be either subject to a deposit account control agreement or maintained with Bank of America. We covenant 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 June 30, 2022, we were in compliance with the amended financial covenants of our loan agreement. At June 30, 2022, the amount available under the revolving credit facility was $10,840.
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 June 30, 2021 were issued by Bank of America, HSBC2022 and residual items from our prior agreement with JP Morgan. There was $2,500 outstanding on our Bank of America revolving credit facilities at June 30, 2021. There were no amounts outstanding on our facilities on March 31, 2021, other than letters of credit. Availability undercredit incurred in the Bankordinary course of America and HSBC lines of credit on June 30, 2021 was $28,039. Availability under the JP Morgan and HSBC lines of credit on March 31, 2021 was $25,433. business.
We believe that cash generated from operations, combined with our investments andthe liquidity provided by available financing capacity under our credit facility, will be adequate both to meet our cash needs for the immediate future and to support our growth strategies. future.
Orders and Backlog
Management uses orders and backlog as measures of our current and future business and financial performance. Orders for the three-month period ended June 30, 20212022 were $20,867$40,300 compared with $11,468$20,900 for the same period last year, an increase of $9,399. $19,400. This increase included $13,700 of additional orders from BN, whose results were only included for one month in the fiscal 2022 first quarter and strong orders from the space industry in the first quarter of fiscal 2023. The remaining $5,700 increase is attributable to the Graham Batavia operations which saw strong demand from its commercial aftermarket and international refinery markets.
The composition of our order book is broad-based and includes noteworthy orders across our Graham Batavia business and Barber-Nichols. Within the $40.3 million of total orders are the following:
25
Orders represent written communications received from customers requesting us to supply products and/or services. Domestic orders were 74%73% of total orders, or $15,402, and international orders were 26% of total orders, or $5,465, in the first quarter of fiscal 2022$29,300 compared with the first quarter of fiscal 20212022 when domestic orders were 28%74%, or $3,232, of total orders, and international orders were 72%, or $8,236,$15,400, of total orders. Orders from BN for the one month that we owned BN during the quarter were $206.
Backlog was $235,938$260,678 at June 30, 2021,2022, compared with $137,567$256,536 at March 31, 2021,2022, a 72%2% increase or $98,371. Of the increase, $94,414 was due to our acquisition of BN.$4,142. Backlog is defined as the total dollar value of orders received for which revenue has not yet been recognized. Approximately 45%40% to 50% of orders currently in our backlog are expected to be converted to sales within one year. The majority of the orders that are expected to convert beyond twelve months are for the defense industry, specifically the U.S. Navy. At June 30, 2021, 80%2022, 74% of our backlog was attributable to U.S. Navy projects, 12%11% for refinery project work, 3%5% for chemical and petrochemical projects, 2%6% for space projects and 3%4% for other industrial applications. At March 31, 2021,2022, 76% for U.S. Navy projects, 16% of our backlog was attributable to equipmentU.S. Navy projects, 10% for refinery project work, 6%5% for chemical and petrochemical projects, 4% for space projects and 2%5% for other industrial applications. At June 30, 2021, we had no projects on hold.
Outlook
Our defense business continues to be strong. With the acquisition of BN, 80% of our $235,938 backlog is in defense. While much of the defense backlog includes projects with order to shipment of up to five years, we are expecting 45% to 50% of our sales in fiscal 2022 to be from the defense market.
Capital spending in the commercial markets we serve began to decrease during the second half of fiscal 2020 and the pace of activity further materially contracted as COVID-19 became a global pandemic in the fourth quarter of fiscal 2020. Our weak commercial markets continued into fiscal 2021 and we are not seeing a recovery as we enter fiscal 2022. This is particularly evident
25
in North America. As a result, our overall bidding activity has slowed, and this was clearly evident in fiscal 2021 and impacted our first quarter of fiscal 2022 results. There has also been a shift toward more opportunities in emerging markets.
Outlook
Near term opportunities in the global energy
Our objective is to leverage our engineering knowhow and petrochemical markets have slowed significantly duedepth of application experience to the combined impact of the COVID-19 pandemic and the geopolitical imbalance of supply, as previously discussed. Although we do not know when the COVID-19 pandemic will end or when the supply imbalance will subside, we expect our energy markets to improve. In addition, we believe the petrochemical markets provide long-term growthidentify more opportunities for our products and services. technologies in our targeted markets.
We intend to continue to look for organic growth opportunities as well as acquisitions or other business combinations that we believe will allow us to expand our presence in both our existing and ancillary markets.
Our expectations for sales and profitability assume that we arewill be able to operate our production facilities in Batavia, New Yorkat planned capacity, have access to our global supply chain including our subcontractors, and Arvada, Colorado atdo not experience significant COVID-19-related disruptions or near "normal" (pre-COVID-19) capacity throughout fiscal 2022.any other unforeseen events. We project that approximately 35%40% to 40%50% of our $235,938 June 30, 2021 backlog will convert to sales in the last nine months of fiscal 2022 and 45% to 50% will convert to sales over the next 12 months. We expect the remaining backlog will convert beyond fiscal 2022,2023, which includes a combination of U.S. Navy orders that have a long conversion cycle (up to fivesix years) as well as certain commercial orders, the conversion of which has been extended by our customers.
RevenueWe expect 45% to 50% of our sales in fiscal 20222023 to be from the defense market. Defense spending, specifically for the U.S. Navy, is expected to be $130,000remain steady over the foreseeable future.
Sales in fiscal 2023 are expected to $140,000, inclusive of $45,000 to $48,000 related to BN for the ten-month period we will own the businessbe in the current fiscal year.range of $135,000 to $150,000. We expect to have approximately $2,700 of acquisition related purchase price accounting costs, including intangible asset amortization, to be recognized in fiscal 2022, which will primarily be amortization of intangible assets. Approximately $1,600 will be charged to cost of goods sold and the remaining $1,100 to SG&A. Inclusive of the purchase accounting costs, we expect gross profit margins for the year to be 17%approximately 16% to 18%17% of sales and SG&A expenses to be 15% to 16% of sales. Our expected tax rate is 24% to 25%. Adjusted earnings before net interest expense, income taxes, depreciation and amortization for the combined businessEBITDA is expected to be approximately $7,000$6,500 to $9,000. All$9,500 for fiscal 2023. We do believe our second quarter of the above expectations are inclusive of BN for the ten-month period wefiscal 2023 will own it during the current fiscal year.
Although cash flow was negative innot benefit as well as the first quarter on mix and deferred expenses, but the second half should normalize to achieve our guidance. 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 fiscal 2022, we expect positive cash flow from operations for the remaining nine monthsRegulation 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 fiscal 2022.our control or not readily predictable.
26
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 June 30, 2021,2022, 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 andestimates, total cost, estimates and establishment of operational milestones which are used to recognize revenue under the overtime recognition model,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, 2021.2022.
Off Balance Sheet Arrangements
We did not have any off balance sheet arrangements as of June 30, 2021 or March 31, 2021, other than 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, project cancellation risk and trade policy.interest 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
InternationalAs a result of the BN acquisition, international consolidated sales for the first three months of fiscal 20222023 were 31%22% of total sales compared with 44%31% for the same period of fiscal 2021.2022. 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 months of fiscal 20222023 and fiscal 2021,2022, 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).
We have limited exposure to foreign currency purchases. In the first three months of fiscal 2022 and 2021,2023, our purchases in foreign currencies represented approximately 1% and 2%7% of the cost of products sold, respectively.sold. 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 in this Quarterly Report on Form 10-Q and as of June 30, 20212022 and March 31, 2021,2022, 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 responsive and flexible service, and engineering experience and excellence, 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. TheIn extreme market downturns, such as we recently experienced, we typically see depressed price levels. Moreover, the cost of metals and other
27
materials used in our products can experiencehave experienced significant volatility. Such factors, in addition to the global effects of the recent volatility and as such, can impactdisruption of the capital and credit markets, have resulted in downward demand and pricing pressure on our abilityproducts.
Interest Rate Risk
In connection with the BN acquisition, we entered into a $20,000 five-year term loan and a five-year revolving credit facility with Bank of America. The term loan and revolving credit facility bear interest rates that are tied to reflect this volatility inBSBY, plus 1.50%, subject to a 0.00% floor. As part of our pricing.
Project Cancellationrisk management activities, we evaluate the use of interest rate derivatives to add stability to interest expense and Project Continuation Risk
Open orders are reviewed continuously through communications with customers. If it becomes evident to us that a project is delayed well beyond its original shipment date, management will move the project into "placed on hold" (i.e. suspended) category. Furthermore, if a project is cancelled bymanage 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 June 30, 2021,2022, we had noprojects$18,000 outstanding on hold.our term loan, $0 outstanding on our revolving credit facility and no interest rate derivatives outstanding. See ''Debt'' in Note 14 to the Unaudited Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on 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 $18,000 of variable rate debt outstanding at June 30, 2022 would have an impact of approximately $180 on our interest expense for fiscal 2023.
Item 4.Controls Controls and Procedures
Conclusion regarding the effectiveness of disclosure controls and procedures
Our President and Chief Executive Officer (principal(our principal executive officer) and Vice President - Finance & 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 - 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
Other 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.
Barber-Nichols Acquisition
On June 1, 2021, we acquired Barber-Nichols, LLC, a privately-owned designer and manufacturer of turbomachinery products for the aerospace, cryogenic, defense and energy markets, located in Arvada, Colorado. For additional information regarding the acquisition, refer to Note 2 to the Unaudited Condensed Consolidated Financial Statements included in Item 1 in this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 2 in this Quarterly Report on Form 10-Q. Based on the recent completion of this acquisition and, pursuant to the Securities and Exchange Commission’s guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment for a period not to exceed one year formfrom 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 reportyear ended March 31, 2022 does not include Barber-Nichols, LLC.
We are in the process of implementing our internal control structure over thewill include Barber-Nichols, LLC acquisition and we expect that this effort will be completed duringin our annual assessment for the fiscal year ending March 31, 2023.
GRAHAM CORPORATION AND SUBSIDIARIES28
FORM 10-Q
JUNE 30, 2021
PART II - OTHER INFORMATION
Item 1A.Risk Factors
Except as stated below, there
There have been no material changes from the risk factors previously disclosed in Part 1 – Item 1A of the Company’s Form 10-K for the fiscal year ended March 31, 2021.2022.
If we fail to successfully integrate the operations of Barber-Nichols, LLC, our financial condition and results of operations could be adversely affected.
On June 1, 2021, we acquired Barber-Nichols, LLC, which provides products to the aerospace, cryogenic and defense and energy markets. We cannot provide any assurances that we will be able to integrate the operations of Barber-Nichols, LLC without encountering difficulties, including unanticipated costs, difficulty in retaining customers and supplier or other relationships, failure to retain key employees, diversion of management’s attention, failure to integrate our information and accounting systems or establish and maintain proper internal control over financial reporting, any of which would harm our business and results of operations.
Furthermore, we may not realize the revenue and net income that we expect to achieve or that would justify our investment in Barber-Nichols, LLC, and we may incur costs in excess of what we anticipate. To effectively manage our expected future growth, we must continue to successfully manage our integration of Barber-Nichols, LLC and continue to improve our operational systems, internal procedures, accounts receivable and management, financial and operational controls. If we fail in any of these areas, our business and results of operations could be harmed.
Our acquisition of Barber-Nichols, LLC might subject us to unknown and unforeseen liabilities.
Barber-Nichols, LLC may have unknown liabilities, including, but not limited to, product liability, workers’ compensation liability, tax liability and liability for improper business practices. Although we are entitled to indemnification from the seller of Barber-Nichols, LLC for these and other matters, we could experience difficulty enforcing those obligations or we could incur material liabilities for the past activities of Barber-Nichols, LLC. Such liabilities and related legal or other costs could harm our business or results of operations.
Item 2.2: Unregistered Sales of Equity Securities and Use of Proceeds
Purchase of Equity Securities by the Issuer
During the first quarter of fiscal 2021,2023, we directly withheld shares for tax withholding purposes from restricted stock awarded to officers that vested during the period. Common stock repurchases in the quarter ended June 30, 20212022 were as follows:
Period |
|
Total Number of Shares Purchased |
|
Average Price Paid Per Share |
|
Total Number of Shares Purchased as Part of Publicly Announced Program |
|
Maximum Number of Shares That May Yet Be Purchased Under the Program |
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|
|
4/01/2020 – 4/30/2020 |
| -- |
| -- |
| -- |
| -- |
5/01/2020 – 5/31/2020 |
| 2 |
| $14.85 |
| -- |
| -- |
6/01/2020 – 6/30/2020 |
| 1 |
| $14.17 |
| -- |
| -- |
Total |
| 3 |
| $14.60 |
| -- |
| -- |
Unregistered Sales of Equity Securities
Other than the issuance of securities previously disclosed in the Company’s Form 8-K filed with the Securities and Exchange Commission on June 3, 2021, we did not sell any securities during the first quarter ended June 30, 2021 that were not registered under the Securities Act of 1933, as amended.
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid Per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Program |
|
| Maximum Number of Shares That May Yet Be Purchased Under the Program |
| ||||
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| ||||
4/01/2022-4/30/2022 |
|
| — |
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| — |
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| — |
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| — |
|
5/01/2022-5/31/2022 |
| 1 |
|
| $ | 7.32 |
|
|
| — |
|
|
| — |
| |
6/01/2022-6/30/2022 |
| 2 |
|
| $ | 8.22 |
|
|
| — |
|
|
| — |
| |
|
| 3 |
|
| $ | 7.98 |
|
|
| — |
|
|
| — |
| |
Item 5.Other InformationDividend Policy
Termination ofWe do not currently pay a Material Definitive Agreement
On June 1, 2021, in connection with the Company entering into a revolvingcash 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 Company terminated its revolvingterms of the credit facility agreement, with JPMorgan Chase Bank, N.A. ("JPMorgan") dated as of December 2, 2020, that had provided a $22,000 line of credit, expandable at the Company’s optionorganic growth and upon JPMorgan’s approval at any time up to $37,000, including a $7,000 commitment for letters of creditacquisition opportunities, future financial performance, general economic conditions and bank guarantees. The agreement with JPMorgan had a one-year term. There were no early termination penaltiesfinancial, competitive, regulatory, and there were letters of credit outstanding of $1,750, the lastother factors, many of which expires on August 31, 2022.are beyond our control. There can be no guarantee that we will pay dividends in the future.
29
Item 6. ExhibitsExhibits
INDEX OF EXHIBITS
(10) |
| Material Contracts |
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# |
| 10.1 | |||
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# | 10.2 | ||||
+# | 10.3 | ||||
+# | 10.4 | Form of Employee Performance Vesting Restricted Stock Unit Agreement | |||
+# | 10.5 | Form of Employee Time Vesting Restricted Stock Unit Agreement | |||
(31) |
| Rule 13a-14(a)/15d-14(a) Certifications | ||
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+ |
| 31.1 | ||
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++ |
| 31.2 | ||
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(32) |
| Section 1350 Certification | ||
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+ |
| 32.1 | ||
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(101) |
| Interactive Data File | ||
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+ |
| 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. | |
|
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+ |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
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+ |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
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+ |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
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+ |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
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+ |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
|
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(104) |
|
| Cover Page Interactive Data File embedded within the Inline XBRL document
| |
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| + ++ # | Exhibit filed with this report Exhibit furnished with this report Management contract or compensation plan | |
30
SIGNATURES
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: |
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| /s/ |
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| Vice President-Finance |
|
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| Chief Financial Officer |
|
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| (On behalf of the Registrant and as Principal Financial Officer) |
Date: August 12, 20211, 2022
31
33