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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2021

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to ___________

Commission File Number 1-8462

 

GRAHAM CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

16-1194720

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

20 Florence Avenue, Batavia, New York

14020

(Address of principal executive offices)

(Zip Code)

585-343-2216

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, Par Value $0.10 Per Share

 

GHM

 

NYSE

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

  ☐

 

Accelerated filer

  ☐

Non-accelerated filer

  ☒

 

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No

As of January 31, 2022, there were outstanding 10,638,041 shares of the registrant’s common stock, par value $0.10 per share.

 

 


Graham Corporation and Subsidiaries

Index to Form 10-Q

As of December 31, 2021 and March 31, 2021 and for the three and nine months ended December 31, 2021

 

 

 

Page

Part I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Unaudited Condensed Consolidated Financial Statements

3

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 5.

Other Information

33

 

 

 

Item 6.

Exhibits

34

 

 

 

Signatures

35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


GRAHAM CORPORATION AND SUBSIDIARIES

FORM 10-Q

DECEMBER 31, 2021

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

December 31,

 

 

December 31,

 

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

 

(Amounts in thousands, except per share data)

 

 

(Amounts in thousands, except per share data)

 

 

Net sales

 

$

28,774

 

 

$

27,154

 

 

$

83,077

 

 

$

71,818

 

 

Cost of products sold

 

 

28,213

 

 

 

20,927

 

 

 

78,159

 

 

 

56,330

 

 

Gross profit

 

 

561

 

 

 

6,227

 

 

 

4,918

 

 

 

15,488

 

 

Other expenses and income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

4,729

 

 

 

4,936

 

 

 

14,534

 

 

 

13,091

 

 

Selling, general and administrative – amortization

 

 

274

 

 

 

 

 

 

639

 

 

 

 

 

Other operating income, net

 

 

140

 

 

 

 

 

 

(962

)

 

 

 

 

Operating (loss) income

 

 

(4,582

)

 

 

1,291

 

 

 

(9,293

)

 

 

2,397

 

 

Other income

 

 

(111

)

 

 

(55

)

 

 

(416

)

 

 

(164

)

 

Interest income

 

 

(12

)

 

 

(23

)

 

 

(43

)

 

 

(143

)

 

Interest expense

 

 

132

 

 

 

1

 

 

 

300

 

 

 

9

 

 

(Loss) income before benefit provision for income taxes

 

 

(4,591

)

 

 

1,368

 

 

 

(9,134

)

 

 

2,695

 

 

(Benefit) provision for income taxes

 

 

(861

)

 

 

308

 

 

 

(1,786

)

 

 

709

 

 

Net (loss) income

 

$

(3,730

)

 

$

1,060

 

 

$

(7,348

)

 

$

1,986

 

 

Per share data

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(0.35

)

 

$

0.11

 

 

$

(0.70

)

 

$

0.20

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(0.35

)

 

$

0.11

 

 

$

(0.70

)

 

$

0.20

 

 

Weighted average common shares
  outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

10,638

 

 

 

9,977

 

 

 

10,507

 

 

 

9,950

 

 

Diluted

 

 

10,638

 

 

 

9,977

 

 

 

10,507

 

 

 

9,950

 

 

Dividends declared per share

 

$

0.11

 

 

$

0.11

 

 

$

0.33

 

 

$

0.33

 

 

 

See Notes to Condensed Consolidated Financial Statements.

3


GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

December 31,

 

 

December 31,

 

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

 

(Amounts in thousands)

 

 

(Amounts in thousands)

 

 

Net (loss) income

 

$

(3,730

)

 

$

1,060

 

 

$

(7,348

)

 

$

1,986

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

108

 

 

 

261

 

 

 

201

 

 

 

416

 

 

Defined benefit pension and other postretirement plans net
 of income tax expense of $
60 and $61 for the three months
 ended December 31, 2021 and 2020, respectively, and $
182 
 and $
185 for the nine months ended December 31, 2021 and
 2020, respectively

 

 

210

 

 

 

205

 

 

 

631

 

 

 

614

 

 

Total other comprehensive income

 

 

318

 

 

 

466

 

 

 

832

 

 

 

1,030

 

 

Total comprehensive (loss) income

 

$

(3,412

)

 

$

1,526

 

 

$

(6,516

)

 

$

3,016

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4


GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

December 31, 2021

 

 

March 31, 2021

 

 

 

(Amounts in thousands, except per share data)

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,991

 

 

$

59,532

 

Investments

 

 

 

 

 

5,500

 

Trade accounts receivable, net of allowances ($176 and $29 at December 31 and
   March 31, 2021, respectively)

 

 

36,650

 

 

 

17,378

 

Unbilled revenue

 

 

24,930

 

 

 

19,994

 

Inventories

 

 

20,428

 

 

 

17,332

 

Prepaid expenses and other current assets

 

 

1,905

 

 

 

512

 

Income taxes receivable

 

 

2,670

 

 

 

 

      Total current assets

 

 

100,574

 

 

 

120,248

 

Property, plant and equipment, net

 

 

25,218

 

 

 

17,618

 

Prepaid pension asset

 

 

7,121

 

 

 

6,216

 

Operating lease assets

 

 

8,708

 

 

 

95

 

Goodwill

 

 

22,823

 

 

 

 

Customer relationships

 

 

11,456

 

 

 

 

Technology and technical know-how

 

 

9,805

 

 

 

 

Other intangible assets, net

 

 

10,173

 

 

 

 

Other assets

 

 

202

 

 

 

103

 

Total assets

 

$

196,080

 

 

$

144,280

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Short-term debt obligations

 

$

9,750

 

 

$

 

Current portion of long-term debt

 

 

2,000

 

 

 

 

Current portion of finance lease obligations

 

 

23

 

 

 

21

 

Accounts payable

 

 

14,650

 

 

 

17,972

 

Accrued compensation

 

 

7,951

 

 

 

6,106

 

Accrued expenses and other current liabilities

 

 

5,414

 

 

 

4,628

 

Customer deposits

 

 

27,665

 

 

 

14,059

 

Operating lease liabilities

 

 

1,114

 

 

 

46

 

Income taxes payable

 

 

 

 

 

741

 

Total current liabilities

 

 

68,567

 

 

 

43,573

 

Long-term debt

 

 

17,000

 

 

 

 

Finance lease obligations

 

 

17

 

 

 

34

 

Operating lease liabilities

 

 

7,702

 

 

 

37

 

Deferred income tax liability

 

 

977

 

 

 

635

 

Accrued pension and postretirement benefit liabilities

 

 

1,958

 

 

 

2,072

 

Other long-term liabilities

 

 

2,320

 

 

 

 

Total liabilities

 

 

98,541

 

 

 

46,351

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $1.00 par value, 500 shares authorized

 

 

 

 

 

 

Common stock, $0.10 par value, 25,500 shares authorized, 10,810 and 10,748 shares
     issued and
10,638 and 9,959 shares outstanding at December 31 and March 31, 2021,
     respectively

 

 

1,081

 

 

 

1,075

 

Capital in excess of par value

 

 

27,608

 

 

 

27,272

 

Retained earnings

 

 

78,500

 

 

 

89,372

 

Accumulated other comprehensive loss

 

 

(6,565

)

 

 

(7,397

)

Treasury stock (172 and 790 shares at December 31 and March 31, 2021, respectively)

 

 

(3,085

)

 

 

(12,393

)

Total stockholders’ equity

 

 

97,539

 

 

 

97,929

 

Total liabilities and stockholders’ equity

 

$

196,080

 

 

$

144,280

 

See Notes to Condensed Consolidated Financial Statements.

5


GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Nine Months Ended

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

Operating activities:

 

(Dollar amounts in thousands)

 

Net (loss) income

 

$

(7,348

)

 

$

1,986

 

Adjustments to reconcile net (loss) income to net cash (used) provided by operating
   activities:

 

 

 

 

 

 

Depreciation

 

 

2,232

 

 

 

1,458

 

Amortization

 

 

1,765

 

 

 

 

Amortization of actuarial losses

 

 

725

 

 

 

799

 

Equity-based compensation expense

 

 

599

 

 

 

821

 

Gain on disposal or sale of property, plant and equipment

 

 

22

 

 

 

3

 

Change in fair value of contingent consideration

 

 

(1,900

)

 

 

 

Deferred income taxes

 

 

152

 

 

 

776

 

(Increase) decrease in operating assets:

 

 

 

 

 

 

Accounts receivable

 

 

(10,964

)

 

 

(4,220

)

Unbilled revenue

 

 

2,186

 

 

 

(284

)

Inventories

 

 

579

 

 

 

4,999

 

Prepaid expenses and other current and non-current assets

 

 

(933

)

 

 

(76

)

Income taxes receivable

 

 

(3,423

)

 

 

(119

)

Operating lease assets

 

 

744

 

 

 

116

 

Prepaid pension asset

 

 

(905

)

 

 

(631

)

Increase (decrease) in operating liabilities:

 

 

 

 

 

 

Accounts payable

 

 

(6,058

)

 

 

1,401

 

Accrued compensation, accrued expenses and other current and non-current
   liabilities

 

 

465

 

 

 

1,754

 

Customer deposits

 

 

7,553

 

 

 

(8,092

)

Operating lease liabilities

 

 

(663

)

 

 

(116

)

Long-term portion of accrued compensation, accrued pension liability
   and accrued postretirement benefits

 

 

620

 

 

 

95

 

Net cash (used) provided by operating activities

 

 

(14,552

)

 

 

670

 

Investing activities:

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(1,909

)

 

 

(1,462

)

Proceeds from disposal of property, plant and equipment

 

 

 

 

 

6

 

Purchase of investments

 

 

 

 

 

(37,103

)

Redemption of investments at maturity

 

 

5,500

 

 

 

71,651

 

Acquisition of Barber-Nichols, LLC

 

 

(59,563

)

 

 

 

Net cash (used) provided by investing activities

 

 

(55,972

)

 

 

33,092

 

Financing activities:

 

 

 

 

 

 

Increase in short-term debt obligations

 

 

9,750

 

 

 

 

Principal repayments on long-term debt

 

 

(1,000

)

 

 

(4,599

)

Proceeds from the issuance of long-term debt

 

 

20,000

 

 

 

4,599

 

Principal repayments on finance lease obligations

 

 

(15

)

 

 

(35

)

Repayments on lease financing obligations

 

 

(157

)

 

 

 

Payment of debt issuance costs

 

 

(150

)

 

 

 

Dividends paid

 

 

(3,524

)

 

 

(3,292

)

Purchase of treasury stock

 

 

(41

)

 

 

(23

)

Net cash provided (used) by financing activities

 

 

24,863

 

 

 

(3,350

)

Effect of exchange rate changes on cash

 

 

120

 

 

 

425

 

Net (decrease) increase in cash and cash equivalents

 

 

(45,541

)

 

 

30,837

 

Cash and cash equivalents at beginning of period

 

 

59,532

 

 

 

32,955

 

Cash and cash equivalents at end of period

 

$

13,991

 

 

$

63,792

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6


GRAHAM CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

NINE MONTHS ENDED DECEMBER 31, 2021

(Dollar Amounts in Thousands)

 

(Unaudited)

 

 

 

Common Stock

 

 

Capital in

 

 

 

 

 

Accumulated
Other

 

 

 

 

 

Total

 

 

 

 

 

 

Par

 

 

Excess of

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

Stockholders'

 

 

 

Shares

 

 

Value

 

 

Par Value

 

 

Earnings

 

 

Loss

 

 

Stock

 

 

Equity

 

Balance at April 1, 2021

 

 

10,748

 

 

$

1,075

 

 

$

27,272

 

 

$

89,372

 

 

$

(7,397

)

 

$

(12,393

)

 

$

97,929

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(3,126

)

 

 

298

 

 

 

 

 

 

(2,828

)

Issuance of shares

 

 

135

 

 

 

13

 

 

 

(13

)

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of shares

 

 

(9

)

 

 

(1

)

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

(1,177

)

 

 

 

 

 

 

 

 

(1,177

)

Recognition of equity-based
  compensation expense

 

 

 

 

 

 

 

 

353

 

 

 

 

 

 

 

 

 

 

 

 

353

 

Issuance of treasury stock

 

 

 

 

 

 

 

 

(194

)

 

 

 

 

 

 

 

 

9,158

 

 

 

8,964

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41

)

 

 

(41

)

Balance at June 30, 2021

 

 

10,874

 

 

 

1,087

 

 

 

27,419

 

 

 

85,069

 

 

 

(7,099

)

 

 

(3,276

)

 

 

103,200

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(492

)

 

 

216

 

 

 

 

 

 

(276

)

Issuance of shares

 

 

27

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of shares

 

 

(91

)

 

 

(9

)

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

(1,177

)

 

 

 

 

 

 

 

 

(1,177

)

Recognition of equity-based
  compensation expense

 

 

 

 

 

 

 

 

(23

)

 

 

 

 

 

 

 

 

 

 

 

(23

)

Issuance of treasury stock

 

 

 

 

 

 

 

 

(63

)

 

 

 

 

 

 

 

 

191

 

 

 

128

 

Balance at September 30, 2021

 

 

10,810

 

 

 

1,081

 

 

 

27,339

 

 

 

83,400

 

 

 

(6,883

)

 

 

(3,085

)

 

 

101,852

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

(3,730

)

 

 

318

 

 

 

 

 

 

(3,412

)

Dividends

 

 

 

 

 

 

 

 

 

 

 

(1,170

)

 

 

 

 

 

 

 

 

(1,170

)

Recognition of equity-based
  compensation expense

 

 

 

 

 

 

 

 

269

 

 

 

 

 

 

 

 

 

 

 

 

269

 

Balance at December 31, 2021

 

 

10,810

 

 

$

1,081

 

 

$

27,608

 

 

$

78,500

 

 

$

(6,565

)

 

$

(3,085

)

 

$

97,539

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7


GRAHAM CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

NINE MONTHS ENDED DECEMBER 31, 2020

(Dollar Amounts in Thousands)

 

(Unaudited)

 

 

 

Common Stock

 

 

Capital in

 

 

 

 

 

Accumulated
Other

 

 

 

 

 

Total

 

 

 

 

 

 

Par

 

 

Excess of

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

Stockholders'

 

 

 

Shares

 

 

Value

 

 

Par Value

 

 

Earnings

 

 

Loss

 

 

Stock

 

 

Equity

 

Balance at April 1, 2020

 

 

10,689

 

 

$

1,069

 

 

$

26,361

 

 

$

91,389

 

 

$

(9,556

)

 

$

(12,539

)

 

$

96,724

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

(1,818

)

 

 

214

 

 

 

 

 

 

(1,604

)

Issuance of shares

 

 

113

 

 

 

11

 

 

 

(11

)

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of shares

 

 

(22

)

 

 

(2

)

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

(1,097

)

 

 

 

 

 

 

 

 

(1,097

)

Recognition of equity-based
  compensation expense

 

 

 

 

 

 

 

 

164

 

 

 

 

 

 

 

 

 

 

 

 

164

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23

)

 

 

(23

)

Balance at June 30, 2020

 

 

10,780

 

 

 

1,078

 

 

 

26,516

 

 

 

88,474

 

 

 

(9,342

)

 

 

(12,562

)

 

 

94,164

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

2,744

 

 

 

350

 

 

 

 

 

 

3,094

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

(1,098

)

 

 

 

 

 

 

 

 

(1,098

)

Recognition of equity-based
  compensation expense

 

 

 

 

 

 

 

 

330

 

 

 

 

 

 

 

 

 

 

 

 

330

 

Issuance of treasury stock

 

 

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

67

 

 

 

87

 

Balance at September 30, 2020

 

 

10,780

 

 

 

1,078

 

 

 

26,866

 

 

 

90,120

 

 

 

(8,992

)

 

 

(12,495

)

 

 

96,577

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

1,060

 

 

 

466

 

 

 

 

 

 

1,526

 

Forfeiture of shares

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

(1,097

)

 

 

 

 

 

 

 

 

(1,097

)

Recognition of equity-based
  compensation expense

 

 

 

 

 

 

 

 

327

 

 

 

 

 

 

 

 

 

 

 

 

327

 

Balance at December 31, 2020

 

 

10,779

 

 

$

1,078

 

 

$

27,193

 

 

$

90,083

 

 

$

(8,526

)

 

$

(12,495

)

 

$

97,333

 

 

 

See Notes to Condensed Consolidated Financial Statements.

8


GRAHAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except per share data)

 

NOTE 1 – BASIS OF PRESENTATION:

Graham Corporation's (the "Company's") Condensed Consolidated Financial Statements include its wholly-owned subsidiaries located in Suzhou, China and Ahmedabad, India at December 31, 2021 and March 31, 2021, and its recently acquired wholly-owned subsidiary, Barber-Nichols, LLC ("BN"), located in Arvada, Colorado at December 31, 2021 and for the period June 1, 2021 through December 31, 2021 (See Note 2). The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X, each as promulgated by the U.S. Securities and Exchange Commission. The Company's Condensed Consolidated Financial Statements do not include all information and notes required by GAAP for complete financial statements. The unaudited Condensed Consolidated Balance Sheet as of March 31, 2021 presented herein was derived from the Company’s audited Consolidated Balance Sheet as of March 31, 2021. For additional information, please refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2021 ("fiscal 2021"). In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included in the Company's Condensed Consolidated Financial Statements.

The Company's results of operations and cash flows for the three and nine months ended December 31, 2021 are not necessarily indicative of the results that may be expected for the current fiscal year, which ends March 31, 2022 ("fiscal 2022"). The three-month period ended December 31, 2021 is also referred to as “the third quarter”.

Going Concern - The accompanying condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The Company determined that as of December 31, 2021, it did not meet its financial covenants required by its loan agreement to maintain a maximum total leverage ratio of 3.25 to 1.0, nor did it maintain a minimum fixed charge coverage ratio of 1.2 to 1.0. On February 4, 2022, management obtained a waiver from Bank of America waiving their right to call the debt immediately due and payable as of December 31, 2021. As a term of receiving the waiver, until such time as Bank of America has received all required financial information with respect to the Company for the period ending on or about March 31, 2022, and such financial information confirms to the Bank of America's satisfaction that no default exists at such time, the Company will not permit the principal balance outstanding under the line of credit with Bank of America to exceed $15,000. Absent a waiver or an amendment of the loan agreement, the Company anticipates that it will not meet these covenants as of March 31, 2022, which would be an event of default. Violation of its covenants under the loan agreement provides the bank with the option to accelerate the maturity of the term loan under the loan agreement, which carries a balance of $19,000 as of December 31, 2021 and the revolving credit facility, which has a principal balance outstanding of $9,750 as of December 31, 2021. If the Company's lenders accelerate the maturity of the term loan and the revolving credit facility, the Company does not have sufficient cash to repay the outstanding debt. These conditions and events raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that these financial statements were issued.

In response to these conditions, management has begun to actively engage in negotiations with the bank regarding amendments to its term loan and its revolving credit facility and related financial covenants. However, this plan has not been finalized and is not within the Company's control, and therefore cannot be deemed probable. As a result, the Company has concluded that management's plans do not alleviate substantial doubt about the Company's ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might result from the outcome of this uncertainty.

 

NOTE 2 – ACQUISITION:

On June 1, 2021, the Company completed its acquisition of Barber-Nichols, LLC ("BN"), a privately-owned designer and manufacturer of turbomachinery products located in Arvada, Colorado that serves the defense and aerospace industry as well as the energy and cryogenic markets. The Company believes this acquisition furthers its growth strategy through market and product diversification, broadens its offerings and strengthens its presence in the defense industry, builds on its presence in the energy markets and adds capabilities in the space industry.

This transaction was accounted for as a business combination which requires that assets acquired and liabilities assumed be recognized at their fair value as of the acquisition date. The purchase price of $72,014 was comprised of 610 shares of the Company's

9


common stock, representing a value of $8,964 at a price of $14.69 per share, and cash consideration of $61,150, subject to certain potential adjustments, including a customary working capital adjustment. The cash consideration was funded through cash on-hand and debt proceeds (See Note 15). The purchase agreement included a contingent earn-out dependent upon certain financial measures of BN post-acquisition, in which the sellers were eligible to receive up to $14,000 in additional cash consideration. At June 30, 2021, a liability of $1,900 was recorded for the contingent earn-out. Subsequent to the acquisition, the earn out agreement was terminated and the contingent liability was reversed into Other operating income, net, on the Company’s Condensed Statement of Operations. Prior to the acquisition, BN and Ascent Properties Group, LLC, a related party, entered into a nine year operating lease agreement for an office and manufacturing building in Arvada, Colorado. This lease was acquired as part of the Company's acquisition of BN and has a monthly payment in the amount of $40 with a 3% yearly escalation. Acquisition related costs of $111 and $373 were expensed in the three and nine month periods ending December 31, 2021, and are included in Selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.

The cost of the acquisition was preliminarily allocated to the assets acquired and liabilities assumed based upon its estimated fair value at the date of the acquisition and the amount exceeding the fair value of $22,923 was recorded as goodwill, which is not deductible for tax purposes. During the second quarter of fiscal 2022, the preliminary valuation of backlog was increased by $100, therefore goodwill was reduced to $22,823. As the values of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained, including, but not limited to, the finalization of the valuation of intangible assets, the final reconciliation and confirmation of tangible assets. The valuation of acquisition-related intangible assets will be finalized within twelve months of the close of the acquisition. The fair value of acquisition-related intangible assets includes customer relationships, technology and technical know-how, backlog and trade name. Backlog and trade name are included in the line item "Other intangible assets, net" in the Condensed Consolidated Balance Sheet. Customer relationships were valued using an income approach, specifically the Multi Period Excess Earnings method, which incorporates assumptions regarding retention rate, new customer growth and customer related costs. Trade name and technology and technical know-how were both valued using a Relief from Royalty method, which develops a market based royalty rate used to reflect the after tax royalty savings attributable to owning the intangible asset. The fair value of backlog was determined using a net realizable value methodology, and was computed as the present value of the expected sales attributable to backlog less the remaining costs to fulfill the backlog. Changes to the preliminary valuation may result in material adjustments to the fair value of assets and liabilities acquired.

The purchase price was allocated to specific intangible assets on a preliminary basis as follows:

 

 

 

Fair Value Assigned

 

 

Weighted Average Amortization Period

At December 31, 2021

 

 

 

 

 

Intangibles subject to amortization:

 

 

 

 

 

Customer relationships

 

$

11,800

 

 

20 years

Technology and technical know-how

 

 

10,100

 

 

20 years

Backlog

 

 

3,900

 

 

4 years

 

 

$

25,800

 

 

 

Intangibles not subject to amortization:

 

 

 

 

 

Tradename

 

 

7,400

 

 

Indefinite

 

 

$

7,400

 

 

 

 

Technology and technical know-how and customer relationships are amortized in selling, general and administrative expense on a straight line basis over their estimated useful lives. Backlog is amortized in cost of products sold over the projected conversion period based on management estimates at time of purchase. Intangible amortization was $756 and $1,765 for the three and nine months ended December 31, 2021. The estimated annual amortization expense is as follows:

 

 

 

Annual Amortization

 

Remainder of 2022

 

$

756

 

2023

 

 

2,476

 

2024

 

 

1,782

 

2025

 

 

1,318

 

2026

 

 

1,095

 

2027 and thereafter

 

 

16,608

 

Total intangible amortization

 

$

24,035

 

 

 

 

 

 

 

10


During the three months ended December 31, 2021, the Company made adjustments to the initial purchase price allocation of accounts receivable and accounts payable in the amount of $80.. The following table summarizes the preliminary allocation of the cost of the acquisition, as adjusted, to the assets acquired and liabilities assumed as of the close of the acquisition:

 

 

 

June 1,

 

 

 

2021

 

Assets acquired:

 

 

 

  Cash and cash equivalents

 

$

1,587

 

  Accounts receivable

 

 

8,074

 

  Unbilled revenue

 

 

7,068

 

  Inventory

 

 

3,669

 

  Other current assets

 

 

409

 

  Property, plant & equipment

 

 

8,037

 

  Operating lease asset

 

 

9,026

 

  Goodwill

 

 

22,823

 

  Backlog

 

 

3,900

 

  Customer relationships

 

 

11,800

 

  Technology and technical know-how

 

 

10,100

 

  Tradename

 

 

7,400

 

Total assets acquired

 

 

93,893

 

Liabilities assumed:

 

 

 

  Accounts payable

 

 

2,656

 

  Accrued compensation

 

 

1,341

 

  Other current liabilities

 

 

665

 

  Customer deposits

 

 

6,048

 

  Operating lease liabilities

 

 

9,066

 

  Other long term liabilities

 

 

2,103

 

Total liabilities assumed

 

 

21,879

 

Purchase price

 

$

72,014

 

 

The Condensed Consolidated Statement of Operations for the three and nine months ended December 31, 2021 includes net sales of BN of $11,968 and $31,925, respectively. The following unaudited pro forma information presents the consolidated results of operations of the Company as if the BN acquisition had occurred at the beginning of each of the fiscal periods presented:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net sales

 

$

28,774

 

 

$

40,649

 

 

$

94,890

 

 

$

117,009

 

Net (loss) income

 

 

(3,646

)

 

 

(684

)

 

 

(5,902

)

 

 

4,465

 

(Loss) earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

     Basic

 

$

(0.34

)

 

$

(0.06

)

 

$

(0.55

)

 

$

0.42

 

     Diluted

 

$

(0.34

)

 

$

(0.06

)

 

$

(0.55

)

 

$

0.42

 

 

The unaudited pro forma information presents the combined operating results of Graham Corporation and BN, with the results prior to the acquisition date adjusted to include the pro forma impact of the adjustment of depreciation of fixed assets based on the preliminary purchase price allocation, the adjustment to interest income reflecting the cash paid in connection with the acquisition, including acquisition-related expenses, at the Company’s weighted average interest income rate, interest expense and loan origination fees at the Company’s current interest rate, amortization expense related to the fair value adjustments for intangible assets, non-recurring acquisition-related costs and the impact of income taxes on the pro forma adjustments utilizing the applicable statutory tax rate.

The unaudited pro forma results are presented for illustrative purposes only. These pro forma results do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of the beginning of each of the periods presented, nor does the pro forma data intend to be a projection of results that may be obtained in the future.

11


NOTE 3 – REVENUE RECOGNITION:

The Company recognizes revenue on contracts when or as it satisfies a performance obligation by transferring control of the product to the customer. For contracts in which revenue is recognized upon shipment, control is generally transferred when products are shipped, title is transferred, significant risks of ownership have transferred, the Company has rights to payment, and rewards of ownership pass to the customer. For contracts in which revenue is recognized over time, control is generally transferred as the Company creates an asset that does not have an alternative use to the Company and the Company has an enforceable right to payment for the performance completed to date.

The following table presents the Company’s revenue disaggregated by product line and geographic area:

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

December 31,

 

 

December 31,

 

 

Product Line

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

Heat transfer equipment

 

$

6,284

 

 

$

8,165

 

 

$

21,754

 

 

$

32,145

 

 

Vacuum equipment

 

 

5,412

 

 

 

14,969

 

 

 

13,946

 

 

 

26,901

 

 

Fluid systems

 

 

6,939

 

 

 

 

 

 

15,342

 

 

 

 

 

Power systems

 

 

5,030

 

 

 

 

 

 

16,583

 

 

 

 

 

All other

 

 

5,109

 

 

 

4,020

 

 

 

15,452

 

 

 

12,772

 

 

Net sales

 

$

28,774

 

 

$

27,154

 

 

$

83,077

 

 

$

71,818

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Geographic Region

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia

 

$

1,493

 

 

$

11,211

 

 

$

10,485

 

 

$

20,903

 

 

Canada

 

 

924

 

 

 

1,874

 

 

 

3,011

 

 

 

4,804

 

 

Middle East

 

 

627

 

 

 

806

 

 

 

2,202

 

 

 

2,243

 

 

South America

 

 

242

 

 

 

2,426

 

 

 

720

 

 

 

5,238

 

 

U.S.

 

 

24,737

 

 

 

10,716

 

 

 

64,832

 

 

 

37,406

 

 

All other

 

 

751

 

 

 

121

 

 

 

1,827

 

 

 

1,224

 

 

Net sales

 

$

28,774

 

 

$

27,154

 

 

$

83,077

 

 

$

71,818

 

 

 

A performance obligation represents a promise in a contract to provide a distinct good or service to a customer. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Transaction price reflects the amount of consideration to which the Company expects to be entitled in exchange for transferred products. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized as the performance obligation is satisfied. In certain cases, the Company may separate a contract into more than one performance obligation, while in other cases, several products may be part of a fully integrated solution and are bundled into a single performance obligation. If a contract is separated into more than one performance obligation, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods underlying each performance obligation. The Company has made an accounting policy election to exclude from the measurement of the contract price all taxes assessed by government authorities that are collected by the Company from its customers. The Company does not adjust the contract price for the effects of a financing component if the Company expects, at contract inception, that the period between when a product is transferred to a customer and when the customer pays for the product will be one year or less. Shipping and handling fees billed to the customer are recorded in revenue and the related costs incurred for shipping and handling are included in cost of products sold.

Revenue on the majority of the Company’s contracts, as measured by number of contracts, is recognized upon shipment to the customer. Revenue on larger contracts, which are fewer in number but represent the majority of revenue, is recognized over time. Revenue from contracts that is recognized upon shipment accounted for approximately 25% and 40% of revenue for the three-month periods ended December 31, 2021 and 2020, respectively, and revenue from contracts that is recognized over time accounted for approximately 75% and 60% of revenue for the three-month periods ended December 31, 2021 and 2020, respectively. Revenue from contracts that is recognized upon shipment accounted for approximately 25% and 50% of revenue for the nine-month periods ended December 31, 2021 and 2020, respectively, and revenue from contracts that is recognized over time accounted for approximately 75% and 50% of revenue for the nine-month periods ended December 31, 2021 and 2020, respectively. During the nine months ended December 31, 2021, revenue recognized over time as a percentage of total revenue was higher as compared with the prior year period due to the prior year having limited production on large contracts during the first quarter of fiscal 2021 as a result of the COVID-19 pandemic, as well as the completion of two large projects in China which did not meet the criteria for recognizing revenue over time. The Company recognizes revenue over time when contract performance results in the creation of a product for which the Company does not have an alternative use and the contract includes an enforceable right to payment in an amount that corresponds directly with the

12


value of the performance completed. To measure progress towards completion on performance obligations for which revenue is recognized over time the Company utilizes an input method based upon a ratio of direct labor hours incurred to date to management’s estimate of the total labor hours to be incurred on each contract, an input method based upon a ratio of total contract costs incurred to date to management’s estimate of the total contract costs to be incurred or an output method based upon completion of operational milestones, depending upon the nature of the contract. The Company has established the systems and procedures essential to developing the estimates required to account for performance obligations over time. These procedures include monthly review by management of costs incurred, progress towards completion, identified risks and opportunities, sourcing determinations, changes in estimates of costs yet to be incurred, availability of materials, and execution by subcontractors. Sales and earnings are adjusted in current accounting periods based on revisions in the contract value due to pricing changes and estimated costs at completion. Losses on contracts are recognized immediately when evident to management.

The timing of revenue recognition, invoicing and cash collections affect trade accounts receivable, unbilled revenue (contract assets) and customer deposits (contract liabilities) on the Condensed Consolidated Balance Sheets. Unbilled revenue represents revenue on contracts that is recognized over time and exceeds the amount that has been billed to the customer. Unbilled revenue is separately presented in the Condensed Consolidated Balance Sheets. The Company may have an unconditional right to payment upon billing and prior to satisfying the performance obligations. The Company will then record a contract liability and an offsetting asset of equal amount until the deposit is collected and the performance obligations are satisfied. Customer deposits are separately presented in the Condensed Consolidated Balance Sheets. Customer deposits are not considered a significant financing component as they are generally received less than one year before the product is completed or used to procure specific material on a contract, as well as related overhead costs incurred during design and construction.

Net contract assets (liabilities) consisted of the following:

 

 

 

December 31, 2021

 

 

March 31, 2021

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

Unbilled revenue (contract assets)

 

$

24,930

 

 

$

19,994

 

 

$

4,936

 

Customer deposits (contract liabilities)

 

 

(27,665

)

 

 

(14,059

)

 

 

(13,606

)

      Net contract liabilities

 

$

(2,735

)

 

$

5,935

 

 

$

(8,670

)

Contract liabilities at December 31, and March 31, 2021 include $6,468 and $1,603, respectively, of customer deposits for which the Company has an unconditional right to collect payment. Trade accounts receivable, as presented on the Condensed Consolidated Balance Sheets, includes corresponding balances at December 31, and March 31, 2021, respectively. Revenue recognized in the three and nine months ended December 31, 2021 that was included in the contract liability balance at March 31, 2021 and the contract liability balance acquired on June 1, 2021 of $6,048, was $5,659 and $18,951, respectively. Changes in the net contract liability balance during the nine months ended December 31, 2021 were impacted by a $4,936 increase in contract assets, of which $36,141 was due to contract progress and the acquisition of BN’s contract assets of $7,068 offset by invoicing to customers of $38,273. In addition, contract liabilities increased $13,606 driven new customer deposits of $26,509 offset by revenue recognized in the current period that was included in the contract liability balance at March 31, 2021, and the acquisition of BN’s contract liabilities of $6,048.

Receivables billed but not paid under retainage provisions in the Company’s customer contracts were $2,786 and $3,747 at December 31, and March 31, 2021, respectively.

 

Incremental costs to obtain a contract consist of sales employee and agent commissions. Commissions paid to employees and sales agents are capitalized when paid and amortized to selling, general and administrative expense when the related revenue is recognized. Capitalized costs, net of amortization, to obtain a contract were $149 and $39 at December 31, and March 31, 2021, respectively, and are included in the line item "Prepaid expenses and other current assets" in the Condensed Consolidated Balance Sheets. The related amortization expense was $12 and $309 in the three months ended December 31, 2021 and 2020, respectively, and $46 and $561 in the nine months ended December 31, 2021 and 2020

The Company’s remaining unsatisfied performance obligations represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. The Company also refers to this measure as backlog. As of December 31, 2021, the Company had remaining unsatisfied performance obligations of $272,599. The Company expects to recognize revenue on approximately 40% to 50% of the remaining performance obligations within one year, 25% to 35% in one to two years and the remaining beyond two years.

 

NOTE 4 – INVENTORIES:

Inventories are stated at the lower of cost or net realizable value, using the average cost method.

13


Major classifications of inventories are as follows:

 

 

 

 

December 31,

 

 

March 31,

 

 

 

2021

 

 

2021

 

Raw materials and supplies

 

$

3,951

 

 

$

3,490

 

Work in process

 

 

14,997

 

 

 

12,196

 

Finished products

 

 

1,480

 

 

 

1,646

 

Total

 

$

20,428

 

 

$

17,332

 

 

NOTE 5 – EQUITY-BASED COMPENSATION:

The 2020 Graham Corporation Equity Incentive Plan (the "2020 Plan"), as approved by the Company’s stockholders at the Annual Meeting on August 11, 2020, provides for the issuance of 422 shares of common stock in connection with grants of incentive stock options, non-qualified stock options, restricted stock units and stock awards to officers, key employees and outside directors. The shares available for issuance include 112 shares that remain available under the Company’s prior plan, the Amended and Restated 2000 Graham Corporation Incentive Plan to Increase Shareholder Value (the"2000 Plan"). As of August 11, 2020, the effective date of the 2020 Plan, no further awards will be granted under the 2000 Plan. However, stock options for 33 shares and 53 shares of unvested restricted stock under the 2000 Plan remains subject to the terms of such plan until the time such options expire or are exercised and such shares of restricted stock vest or are forfeited.

No restricted stock awards were granted in the three-month periods ended December 31, 2021 and 2020. 162 and 113 restricted stock awards were granted in the nine-month periods ended December 31, 2021 and 2020, respectively. 88 restricted shares and 54 restricted shares were granted to officers in fiscal 2022 and fiscal 2021, respectively, that vest 100% on the third anniversary of the grant date subject to the satisfaction of the performance metrics for the applicable three-year period. 54 restricted shares and 38 restricted shares granted to officers and key employees in fiscal 2022 and fiscal 2021, respectively, vest 33⅓% per year over a three-year term. 20 restricted shares and 21 restricted shares granted to directors in fiscal 2022 and fiscal 2021, respectively, vest 100% on the first year anniversary of the grant date. No stock option awards were granted in the nine-month periods ended December 31, 2021 and 2020.

During the three months ended December 31, 2021 and 2020, the Company recognized equity-based compensation costs related to restricted stock awards of $260 and $312, respectively. The income tax benefit recognized related to equity-based compensation was $58 and $72 for the three months ended December 31, 2021 and 2020, respectively. During the nine months ended December 31, 2021 and 2020, the Company recognized equity-based compensation costs related to restricted stock awards of $575 and $783, respectively. The income tax benefit recognized related to equity-based compensation was $127 and $183 for the nine months ended December 31, 2021 and 2020, respectively.

The Company has an Employee Stock Purchase Plan (the "ESPP"), which allows eligible employees to purchase shares of the Company's common stock at a discount of up to 15% of its fair market value on the (1) last, (2) first or (3) lower of the last or first day of the six-month offering period. A total of 200 shares of common stock may be purchased under the ESPP. During the three months ended December 31, 2021 and 2020, the Company recognized equity-based compensation costs of $9 and $15, respectively, related to the ESPP and $1 and $4, respectively, of related tax benefits. During the nine-months ended December 31, 2021 and 2020, the Company recognized equity-based compensation costs of $24 and $38, respectively, related to the ESPP and $5 and $9, respectively, of related tax benefits.

 

NOTE 6 – (LOSS) INCOME PER SHARE:

Basic (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding for the period. Diluted (loss) income per share is calculated by dividing net (loss) income by the weighted average number

14


of common shares outstanding and, when applicable, potential common shares outstanding during the period. A reconciliation of the numerators and denominators of basic and diluted (loss) income per share is presented below:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

December 31,

 

 

December 31,

 

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

Basic (loss) income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(3,730

)

 

$

1,060

 

 

$

(7,348

)

 

$

1,986

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares
   outstanding

 

 

10,638

 

 

 

9,977

 

 

 

10,507

 

 

 

9,950

 

 

Basic (loss) income per share

 

$

(0.35

)

 

$

0.11

 

 

$

(0.70

)

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(3,730

)

 

$

1,060

 

 

$

(7,348

)

 

$

1,986

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares
   outstanding

 

 

10,638

 

 

 

9,977

 

 

 

10,507

 

 

 

9,950

 

 

Stock options outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common and
   potential common shares
   outstanding

 

 

10,638

 

 

 

9,977

 

 

 

10,507

 

 

 

9,950

 

 

Diluted (loss) income per share

 

$

(0.35

)

 

$

0.11

 

 

$

(0.70

)

 

$

0.20

 

 

None of the options to purchase 33 shares of common stock at December 31, 2021 were included in the computation of diluted income per share as the affect would be anti-dilutive due to the net losses in the quarters. None of the options to purchase 37 shares of common stock at December 31, 2020 were included in the above computation of diluted income per share given their exercise prices as they would not be dilutive upon issuance.

 

NOTE 7 – PRODUCT WARRANTY LIABILITY:

The reconciliation of the changes in the product warranty liability is as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

December 31,

 

 

December 31,

 

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

Balance at beginning of period

 

$

449

 

 

$

308

 

 

$

626

 

 

$

359

 

 

BNI warranty accrual acquired

 

 

 

 

 

 

 

 

169

 

 

 

 

 

Expense (income) for product warranties

 

 

19

 

 

 

28

 

 

 

(2

)

 

 

23

 

 

Product warranty claims paid

 

 

(35

)

 

 

(21

)

 

 

(360

)

 

 

(67

)

 

Balance at end of period

 

$

433

 

 

$

315

 

 

$

433

 

 

$

315

 

 

 

 

Income of $2 for product warranties in the nine months ended December 31, 2021 resulted from the reversal of provisions made that were no longer required due to lower claims experience.

 

The product warranty liability is included in the line item "Accrued expenses and other current liabilities" in the Condensed Consolidated Balance Sheets.

 

NOTE 8 – CASH FLOW STATEMENT:

Interest paid was $263 and $9 in the nine-month periods ended December 31, 2021 and 2020, respectively. Income taxes paid for the nine months ended December 31, 2021 and 2020 were $1,388 and $51, respectively.

At December 31, 2021 and 2020, there were $80 and $37, respectively, of capital purchases that were recorded in accounts payable and are not included in the caption "Purchase of property, plant and equipment" in the Condensed Consolidated Statements of Cash Flows.

15


The cash utilized for the acquisition of BN of $59,563 included the cash consideration of $61,150, net of cash acquired of $1,587. In the nine months ended December 31, 2021, non-cash activities included the issuance of 610 treasury shares valued at $8,964, included as part of the consideration for the acquisition of BN.

In the second quarter ended September 30, 2021, non-cash activities included pension adjustments, net of income tax, of $68.

 

NOTE 9 – EMPLOYEE BENEFIT PLANS:

The components of pension cost are as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Service cost

 

$

93

 

 

$

115

 

 

$

280

 

 

$

346

 

Interest cost

 

 

296

 

 

 

303

 

 

 

894

 

 

 

909

 

Expected return on assets

 

 

(681

)

 

 

(628

)

 

 

(2,045

)

 

 

(1,885

)

Amortization of actuarial loss

 

 

265

 

 

 

259

 

 

 

707

 

 

 

779

 

Net pension cost

 

$

(27

)

 

$

49

 

 

$

(164

)

 

$

149

 

 

The Company made no contributions to its defined benefit pension plan during the nine months ended December 31, 2021 and does not expect to make any contributions to the plan for the balance of fiscal 2022.

 

During the second quarter ended September 30, 2021, the Company remeasured the projected benefit obligation to the supplemental executive retirement plan due to the retirement of the Company’s chief executive officer, who was the only active participant in the plan. Recognition of an actuarial gain, net of tax, of $68 was included in other comprehensive (loss) income.

The components of the postretirement benefit cost are as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Interest cost

 

$

3

 

 

$

4

 

 

$

10

 

 

$

13

 

Amortization of actuarial loss

 

 

6

 

 

 

7

 

 

 

18

 

 

 

20

 

Net postretirement benefit cost

 

$

9

 

 

$

11

 

 

$

28

 

 

$

33

 

 

The Company paid no benefits related to its postretirement benefit plan during the nine months ended December 31, 2021. The Company expects to pay benefits of approximately $72 for the balance of fiscal 2022.

 

The components of net periodic benefit cost other than service cost are included in the line item "Other income" in the Condensed Consolidated Statements of Operations.

The Company self-funds the medical insurance coverage it provides to its U.S. based employees in certain locations. The Company maintains a stop loss insurance policy in order to limit its exposure to claims. The liability of $133 and $184 on December 31, 2021 and March 31, 2021, respectively, related to the self-insured medical plan is primarily based upon claim history and is included in the caption "Accrued compensation" as a current liability in the Condensed Consolidated Balance Sheets.

 

NOTE 10 – COMMITMENTS AND CONTINGENCIES:

The Company has been named as a defendant in lawsuits alleging personal injury from exposure to asbestos allegedly contained in, or accompanying, products made by the Company. The Company is a co-defendant with numerous other defendants in these lawsuits and intends to vigorously defend itself against these claims. The claims in the Company’s current lawsuits are similar to those made in previous asbestos-related suits that named the Company as a defendant, which either were dismissed when it was shown that the Company had not supplied products to the plaintiffs’ places of work or were settled for immaterial amounts. The Company cannot provide any assurances that any pending or future matters will be resolved in the same manner as previous lawsuits.

As of December 31, 2021, the Company was subject to the claims noted above, as well as other legal proceedings and potential claims that have arisen in the ordinary course of business.

16


Although the outcome of the lawsuits, legal proceedings or potential claims to which the Company is, or may become, a party to cannot be determined and an estimate of the reasonably possible loss or range of loss cannot be made for the majority of the claims, management does not believe that the outcomes, either individually or in the aggregate, will have a material adverse effect on the Company’s results of operations, financial position or cash flows.

 

NOTE 11 – INCOME TAXES:

The Company files federal and state income tax returns in several domestic and international jurisdictions. In most tax jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed. The Company is subject to U.S. federal examination for the tax years 2017 through 2020 and examination in state tax jurisdictions for the tax years 2016 through 2020. The Company is subject to examination in the People’s Republic of China for tax years 2017 through 2020 and in India for tax year 2019 through 2020.

There was no liability for unrecognized tax benefits at either December 31, 2021 or March 31, 2021.

NOTE 12 – CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS:

The changes in accumulated other comprehensive loss by component for the nine months ended December 31, 2021 and 2020 are as follows:

 

 

 

Pension and
Other
Postretirement
Benefit Items

 

 

Foreign
Currency
Items

 

 

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
   loss

 

 

563

 

 

 

 

 

 

563

 

Net current-period other comprehensive income

 

 

631

 

 

 

201

 

 

 

832

 

Balance at December 31, 2021

 

$

(7,067

)

 

$

502

 

 

$

(6,565

)

 

 

 

Pension and
Other
Postretirement
Benefit Items

 

 

Foreign
Currency
Items

 

 

Total

 

Balance at April 1, 2020

 

$

(9,472

)

 

$

(84

)

 

$

(9,556

)

Other comprehensive loss before reclassifications

 

 

 

 

 

416

 

 

 

416

 

Amounts reclassified from accumulated other comprehensive
   loss

 

 

614

 

 

 

 

 

 

614

 

Net current-period other comprehensive income

 

 

614

 

 

 

416

 

 

 

1,030

 

Balance at December 31, 2020

 

$

(8,858

)

 

$

332

 

 

$

(8,526

)

 

The reclassifications out of accumulated other comprehensive loss by component for the three and nine months ended December 31, 2021 and 2020 are as follows:

 

Details about Accumulated Other
 Comprehensive Loss Components

 

Amount Reclassified from
 Accumulated Other
Comprehensive Loss

 

 

 

Affected Line Item in the Condensed
Consolidated Statements of Income

 

 

Three Months Ended

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

2021

 

 

 

2020

 

 

 

 

Pension and other postretirement benefit items:

 

 

 

 

 

 

 

 

 

 

Amortization of actuarial loss

 

$

(270

)

(1)

 

$

(266

)

(1)

 

Loss before benefit for income taxes

 

 

 

(60

)

 

 

 

(61

)

 

 

Benefit for income taxes

 

 

$

(210

)

 

 

$

(205

)

 

 

Net loss

 

17


 

Details about Accumulated Other
 Comprehensive Loss Components

 

Amount Reclassified from
 Accumulated Other
Comprehensive Loss

 

 

 

Affected Line Item in the Condensed
Consolidated Statements of Income

 

 

Nine Months Ended

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

2021

 

 

 

2020

 

 

 

 

Pension and other postretirement benefit items:

 

 

 

 

 

 

 

 

 

 

Amortization of actuarial loss

 

$

(725

)

(1)

 

$

(799

)

(1)

 

Loss before benefit for income taxes

 

 

 

(162

)

 

 

 

(185

)

 

 

Benefit for income taxes

 

 

$

(563

)

 

 

$

(614

)

 

 

Net loss

 

(1)
These accumulated other comprehensive loss components are included within the computation of pension and other postretirement benefit costs. See Note 9. 

 

NOTE 13 – 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 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 December 31, 2021, 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 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:

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Finance Leases

 

 

 

 

 

 

Weighted-average remaining lease term in years

 

 

1.67

 

 

 

2.63

 

Weighted-average discount rate

 

 

10.67

%

 

 

10.77

%

 

 

 

 

 

 

 

Operating Leases

 

 

 

 

 

 

Weighted-average remaining lease term in years

 

 

7.72

 

 

 

1.67

 

Weighted-average discount rate

 

 

3.27

%

 

 

5.49

%

 

 

18


 

The components of lease expense are as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

  Amortization of right-of-use assets

 

$

5

 

 

$

5

 

 

$

15

 

 

$

15

 

  Interest on lease liabilities

 

 

1

 

 

 

2

 

 

 

4

 

 

 

6

 

Operating lease cost

 

 

384

 

 

 

41

 

 

 

924

 

 

 

122

 

Short-term lease cost

 

 

3

 

 

 

1

 

 

 

18

 

 

 

7

 

Total lease cost

 

$

393

 

 

$

49

 

 

$

961

 

 

$

150

 

 

Operating lease costs during the nine months ended December 31, 2021 and 2020 were included within cost of sales and selling, general and administrative expenses.

As of December 31, 2021, future minimum payments required under non-cancelable leases are:

 

 

 

Operating
Leases

 

 

Finance
Leases

 

Remainder of 2022

 

$

342

 

 

$

7

 

2023

 

 

1,325

 

 

 

26

 

2024

 

 

1,183

 

 

 

11

 

2025

 

 

1,164

 

 

 

 

2026

 

 

1,169

 

 

 

 

2027 and thereafter

 

 

4,856

 

 

 

 

Total lease payments

 

 

10,039

 

 

 

44

 

 

 

 

 

 

 

 

Less – amount representing interest

 

 

1,223

 

 

 

4

 

Present value of net minimum lease payments

 

$

8,816

 

 

$

40

 

 

NOTE 14 – DEBT:

On June 1, 2021, the Company 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. In addition, on June 1, 2021, the Company terminated its revolving credit facility agreement with JPMorgan Chase Bank, N.A. and entered into a revolving credit facility with Bank of America that provides 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, 2021, the Company had $9,750 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%, subject to a 0.00% floor. As of December 31, 2021, the BSBY rate was 0.0558%. Outstanding letters of credit under the 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% 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 amounts available for borrowing under the revolving credit facility are subject to an unused commitment fee of 0.25%. Under the term loan agreement and revolving credit facility, the Company covenants to maintain a maximum total leverage ratio, as defined in such agreements, of 3.0 to 1.0, which may be increased 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 covenants 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 bank agreement covenants and were granted a waiver for noncompliance by Bank of America, N.A. (See Note 1). As part of the waiver, until such time as Bank of America has received all required financial information with respect to the Company for the period ending on or about March 31, 2022, and such financial information confirms to the Bank of America's satisfaction that no default exists at such time, the Company will not permit the principal balance outstanding under the line of credit with Bank of America to exceed $15,000.

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

19


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, 2021, there was $7,215 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, 2021 and March 31, 2021 were $8,399 and $11,567, respectively.

 

NOTE 15 – 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 16 – OTHER OPERATING INCOME, NET:

On November 29, 2021, the Company and Jeffrey 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 agree. Mr. Glajch agreed to provide certain transition-related services to the Company for a period of 18 months following the date of resignation. The Agreement also provides that the Company will pay Mr. Glajch a severance payment in an amount equal to 18 months of Mr. Glajch's base salary commencing on January 1, 2023 as well as health care premiums. As a result, each month expense of $70 is recognized and included in Other operating income, net on the Condensed Consolidated Statements of Operations. At December 31, 2021, the related liability of $140 is included in Other long-term liabilities in the Condensed Consolidated Balance Sheet.

On August 9, 2021, the Company and James R. Lines entered into a Severance and Transition Agreement (the "Transaction Agreement") pursuant to which Mr. Lines resigned from his position as the Company’s Chief Executive Officer and as a member of the Board of Directors, and from positions he holds with all Company subsidiaries and affiliates, effective as of the close of business on August 31, 2021. The Transition Agreement provides that for a period of 18 months following the separation date, Mr. Lines is paid his base salary as well as health care premiums. As a result, a liability was recorded in the amount of $798 in Accrued Compensation on the Company’s Condensed Consolidated Balance Sheets and recognized against Other operating income, net on the 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 was included in Other operating income, net on the Company’s Condensed Consolidated Statement of Operations.

 

20


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollar and share amounts in thousands, except per share data)

 

Overview

We are a global business that designs, manufactures and sells critical equipment for the defense/space, energy/new energy and chemical/petrochemical industries. For the defense and space industry, our equipment is used in nuclear propulsion power systems, for undersea and space propulsion, power and energy management systems and for life support systems in space. Our energy and new energy markets include oil refining, cogeneration, and alternative power to produce hydrogen. For the chemical and petrochemical industries, our equipment is used in fertilizer, ethylene, methanol and downstream chemical facilities.

 

Our brands are 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 brands are built.

 

Our corporate headquarters are located in Batavia, New York. We have production facilities co-located with our headquarters in Batavia. Our wholly-owned subsidiary, Barber-Nichols, LLC ("BN"), based in Arvada, Colorado, 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.

 

Our current fiscal year (which we refer to as "fiscal 2022") ends March 31, 2022.

 

Acquisition

We completed the acquisition of BN on June 1, 2021. Founded as a specialty turbomachinery engineering company in 1966, BN has grown rapidly from programs that involve complex production and systems integration. By integrating knowledge in rotating equipment, power generation cycles, and electrical management systems, BN has successfully won the design and development of different power and propulsion systems used in underwater vehicles among many other accomplishments.

 

The acquisition of BN has changed the composition of the Company’s end market mix. Year-to-date, sales to the defense industry were 52% of our business compared with just 25% of sales to the defense industry in all of fiscal 2021. Space industry sales represent 4% of our year-to-date business, compared with 0% in all of fiscal 2021. The remaining 44% of our year-to-date sales came from the refining, chemical/petrochemical and other commercial markets. These markets represented 75% of our fiscal 2021 sales. 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. The cash consideration was funded through cash on-hand and debt proceeds (See Note 15 to the Condensed Consolidated Financial Statements included in Item 1 in this Quarterly Report on Form 10-Q). The purchase agreement with respect to the acquisition 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. Subsequent to the acquisition, the earn out agreement was terminated. Acquisition related costs of $373 were expensed in the first nine months of fiscal 2022 and are included in Selling, general and administrative expenses for the nine months ended December 31, 2021 in the Condensed Consolidated Statement of Operations. As of October 26, 2021, the Company 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.

 

Summary

Highlights for the three and nine months ended December 31, 2021 include:

Barber-Nichols has outperformed our expectations during the first seven months of ownership. Sales at BN were ahead of those expectations and its profit margins have expanded further.

21


Orders booked in the third quarter of fiscal 2022 of $67,964 increased 10% compared with $61,753 of orders booked in the third quarter of fiscal 2021. Orders booked in the first nine months of fiscal 2022 were up 11% to $120,217, compared with the first nine months of fiscal 2021 when orders booked were $108,195. The BN contributed $37,251 and $53,301 in orders in the quarter and year-to-date period, respectively. For more information on this performance indicator see "Orders and Backlog" below.
Backlog reached a record $272,599 at December 31, 2021, with BN contributing $119,096 to that backlog. Backlog was $233,247 at September 30, 2021. For more information on this performance indicator see "Orders and Backlog" below.
Net sales for the third quarter of fiscal 2022 were $28,774, up 6% , or $1,590, compared with $27,154 for the third quarter of the fiscal year ended March 31, 2021 (which we refer to as "fiscal 2021"). Sales in the quarter include $11,968 related to the BN acquisition which more than offsets declines of $10,378 in the organic business. Net sales for the first nine months of fiscal 2022 were $83,077, up 16%, or $12,259, from $71,818 in the first nine months of fiscal 2021. Sales in the first nine months of fiscal 2022 include $31,925 from the BN acquisition, more than offsetting a reduction of $20,666 in the organic business.
Gross profit margin and operating margin for the third quarter of fiscal 2022 were 2% and (16%), respectively, compared with 23% and 5%, respectively, for the third quarter of fiscal 2021. Gross profit margin and operating margin for the first nine months of fiscal 2022 were 6% and (11%), respectively, compared with 22% and 3%, respectively, for the first nine months of fiscal 2022.
Net loss and loss per diluted share for the third quarter of fiscal 2022 were $3,730 and $0.35, respectively, compared with net income and income per diluted share of $1,060 and $0.11, respectively, for the third quarter of fiscal 2021. Net loss and loss per diluted share for the first nine months of fiscal 2022 were $7,348 and $0.70, respectively, compared with net income of $1,986 and income per diluted share of $0.20 for the first nine months of fiscal 2021. The net losses incurred in the first three and nine-month periods of fiscal 2022 were primarily due to Navy project labor and material cost overruns related to defense contracts at our Batavia facility. The losses at our Batavia facility were partly offset by over achievement at our BN subsidiary.
Cash and short-term investments at December 31, 2021 were $13,991, compared with $16,463 at September 30, 2021.
We have suspended our dividend due to missing two bank covenants in the third quarter of fiscal 2022. We have obtained a waiver of financial covenants and are working with the bank to amend our credit facility in the fourth quarter.

 

Forward-Looking Statements

This report and other documents we file with the Securities and Exchange Commission include "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 (the "Exchange Act").

 

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. Such factors include, but are not limited to, the risks and uncertainties identified by us under the headline "Risk Factors" in Item 1A of our Annual Report on Form 10-K for fiscal 2021 and included under Item 1A, "Risk Factors", in this Quarterly Report on Form 10-Q.

 

Forward-looking statements may also include, but are not limited to, statements about:

the ability to execute historic U.S. Navy projects to estimates;
our ability to amend our loan agreement for out term loan and revolving credit facility;
the continuing impacts of, and risks caused by, the COVID-19 pandemic on our business operations, our customers and our markets;
the current and future economic environments, including the volatility associated with the COVID-19 pandemic, affecting us and the markets we serve;
the impact of potential government COVID-19 vaccine mandates on our ability to attract and retain employees and on our business and results of operations;
our ability to successfully integrate and operate BN;
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;

22


plans for future products and services and for enhancements to existing products and services;
our operations in foreign countries, including among other things, the impact of nationalization in certain countries of suppliers for the markets we serve;
political instability in regions in which our customers are located;
tariffs and trade relations between the United States and its trading partners;
our ability to affect our growth and acquisition strategy;
our ability to maintain or expand work for the U.S. Navy;
our ability to maintain or expand work for the commercial space market;
our ability to successfully execute our existing contracts;
estimates regarding our liquidity and capital requirements;
timing of conversion of backlog to sales;
production preferences directed toward Navy orders with priority ratings;
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," "contemplate," "continue," "could," "estimate," "may," "might," "intend," "interest," "appear," "expect," "suggest," "plan," "predict," "project," "encourage," "potential," "should," "view," "will," and similar expressions. Actual results could differ materially from historical results or those implied by the forward-looking statements contained in this report.

 

Undue reliance should not be placed on our forward-looking statements. 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

Demand for our equipment and systems for the defense industry is expected to remain strong and continue to expand, based on the planned procurement of submarines, aircraft carriers and undersea propulsion and power systems. Based on defense budget plans and the solutions we provide, we anticipate demand for our equipment and systems will continue to increase in coming years. With the addition of revenue from the BN acquisition, consolidated revenue to the U.S. Navy for the nine-month period was $43.5 million sales, or 52% of total, and is expected to be $60 million to $65 million in fiscal 2022. 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 DoD radar, laser, electronics and power systems. We have built a leading position, and in some instances, a sole source position, for certain systems and equipment for the defense/space industry and others.

 

Our traditional energy markets are undergoing significant transition. While we expect that fossil fuels will continue to be an important component in the 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 systemic changes in the energy markets, which are influenced by the increasing use by consumers of alternative fuels, will lead to demand growth for fossil-based fuels that is less than the global GDP growth rate. Accordingly, we expect that crude oil refiners will focus new investments toward the installed base, 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. The timing and catalyst for a recovery in these markets (crude oil refining and chemical/petrochemical) remains uncertain. Accordingly, we believe that in the near term the quantity of projects available for us to compete for will be fewer and that the pricing environment will remain challenging. We also expect that new capacity investment will occur within new or emerging markets over the next several years. Given the growing awareness of supply chain and distribution challenges, these markets are expected to require additional local refining capacity to meet local demand for petroleum products. Therefore, we expect Asia will lead the recovery with new capacity rebuilding there over the next 12-18 months.

 

23


Of note, we have experienced a noticeable increase in our short cycle and aftermarket orders in the second and third quarters of fiscal 2022, 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. Industry analysts have pointed to expectations of increased investment by our customers to address the shortages in supply of refined petrochemical products resulting from the downturn in production following the economic lockdowns which have occurred since the global pandemic, and the subsequent strong global economic recovery.

 

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 believe that we are positioning the Company to be a more significant contributor as these markets continue to develop.

 

We believe in the near and medium-term 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, we expect investment in new global chemical and petrochemical capacity will resume and that such investments will in turn drive growth in demand for our products and services.

 

BN 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 BN has provided rocket engine turbo pump systems and components for many of the launch providers. We expect that in the long term extended space exploration will become more prevalent, and we anticipate that our thermal/fluid management and environmental control and life support system turbomachinery will play important roles. BN is 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 enable us to achieve sales in this market as well.

 

The chart below shows our strategy to increase our participation in the defense market. The defense market comprised 77% of our total backlog at December 31, 2021. We believe this diversification is especially beneficial when our commercial markets are weak, as is presently the case.

img99650493_0.jpg 

 

*Note: FYE refers to fiscal year ended March 31

24


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. Results for the three-month and nine-month periods in 2021 include the results of BN which was acquired on June 1, 2021.

 

The following table summarizes our results of operations for the periods indicated:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net sales

 

$

28,774

 

 

$

27,154

 

 

$

83,077

 

 

$

71,818

 

Gross profit

 

$

561

 

 

$

6,227

 

 

$

4,918

 

 

$

15,488

 

Gross profit margin

 

 

2

%

 

 

23

%

 

 

6

%

 

 

22

%

SG&A expenses (1)

 

$

5,003

 

 

$

4,936

 

 

$

15,173

 

 

$

13,091

 

SG&A as a percent of sales

 

 

17

%

 

 

18

%

 

 

18

%

 

 

18

%

Net (loss) income

 

$

(3,730

)

 

$

1,060

 

 

$

(7,348

)

 

$

1,986

 

Diluted (loss) income per share

 

$

(0.35

)

 

$

0.11

 

 

$

(0.70

)

 

$

0.20

 

Total assets

 

$

196,080

 

 

$

144,986

 

 

$

196,080

 

 

$

144,986

 

Total assets excluding cash, cash equivalents and investments

 

$

182,089

 

 

$

75,694

 

 

$

182,089

 

 

$

75,694

 

 

(1)
Selling, general and administrative expenses are referred to as "SG&A".

 

The Third Quarter and First Nine Months of Fiscal 2022 Compared With the Third Quarter and First Nine Months of Fiscal 2021

 

Sales for the third quarter of fiscal 2022 were $28,774, a 6% increase from sales of $27,154 for the third quarter of fiscal 2021. Sales from the acquisition in the quarter were $11,968. Our domestic sales, as a percentage of aggregate sales, were 86% in the third quarter of fiscal 2022 compared with 39% in the third quarter of fiscal 2021. Domestic sales increased $14,020 in the third quarter of fiscal 2022, or 131% year-over-year, reflecting the contribution of the acquisition which helped to offset lower international refining sales. International sales decreased $12,400, or 75%, in the third quarter of fiscal 2022 compared with the third quarter of fiscal 2021, primarily due to significant China refining sales which occurred in the prior year period. Sales in the three months ended December 31, 2021 were 58% for the defense (U.S. Navy) industry, 14% to the refining industry, 11% to the chemical and petrochemical industries, 5% to space, and 12% to other commercial and industrial applications. Sales in the three months ended December 31, 2020 were 17% for the defense (U.S. Navy) industry, 60% to the refining industry, 18% to the chemical and petrochemical industries, and 5% to other commercial and industrial applications. 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.

 

Sales for the first nine months of fiscal 2022 were $83,077, an increase of $11,259, or 16% compared with $71,818 for the first nine months of fiscal 2021. Sales from the acquisition in the first nine months of fiscal 2022 were $31,925. Our domestic sales, as a percentage of aggregate product sales, were 78% in the first nine months of fiscal 2022 compared with 52% in the same period in fiscal 2021. Domestic sales increased $27,426, or 73%, while international sales decreased by $16,167, or 47%, as compared with the same prior year period. The reduction in international sales is related to the refining and petrochemical markets. International sales accounted for 22% and 48% of total sales for the first nine months of fiscal 2022 and fiscal 2021, respectively. Sales in the nine months ended December 31, 2021 were 52% for the defense industry (U.S. Navy), 18% to the refining industry, 13% to the chemical and petrochemical industries, 4% to space and 13% to other commercial and industrial applications. Sales in the nine months ended December 31, 2020 were 24% for the defense (U.S. Navy) industry, 41% to the refining industry, 26% to the chemical and petrochemical industries, and 9% to other commercial and industrial applications.

 

Gross profit margin and operating margin for the third quarter of fiscal 2022 were 2% and (16%), respectively, compared with 23% and 5%, respectively, for the third quarter of fiscal 2021. Gross profit for the third quarter of fiscal 2022 decreased compared with fiscal 2021, to $561 from $6,227. The decline in gross profit margin was the result of continued cost and schedule issues related to our defense business at our Batavia operation. We have chosen, in the near term, to over-resource certain critical defense orders to ensure we meet delivery expectations of our customers. We have continued to be challenged by labor shortages in our local market and to meet delivery schedule we increased our use of external contract welders, at a much higher cost. Redirecting resources to defense contracts at our Batavia operation has also impacted our commercial market orders which we had to outsource. In addition, we identified the

25


requirement for more production hours and material costs for certain large orders, primarily defense projects, in our Batavia operation. The positive contribution from the BN acquisition in the quarter was not sufficient to offset the combination of execution-related challenges which impacted gross margin in the quarter.

 

Gross profit margin for the first nine months of fiscal 2022 was 6% compared with 22% for the first nine months of fiscal 2021. Gross profit for the first nine months of fiscal 2022 compared with the first nine months of fiscal 2021, decreased to $4,918 from $15,488. Gross profit and margin declined due to the same factors which impacted the third quarter as described above. The flow of low margin defense projects and cost overruns for those projects through the Batavia operation was more heavily weighted in the first nine months of fiscal 2022 and are expected to be nearing completion in fiscal 2022. The BN acquisition contribution to gross profit helped to offset the losses from the Batavia defense projects and other cost overruns.

 

SG&A expenses as a percent of sales for both the three-month periods ended December 31, 2021 and 2020 was 17% and 18%, respectively. SG&A expenses in the third quarter of fiscal 2022 were $5,003, an increase of $67 compared with the third quarter of fiscal 2021 SG&A expenses of $4,936. SG&A expenses included intangible amortization of $274. SG&A expenses in the first nine months of fiscal 2022 were $15,173, an increase of $2,082, compared with SG&A expenses of $13,091 in the first nine months of fiscal 2021. The increase was due to the addition of BN, including $639 of intangible amortization.

 

Interest income for the three-month period and nine-month ended December 31, 2021 were $12 and $43, respectively, compared with $23 and $143, respectively, for the same periods ended December 31, 2020. The decrease in interest income was due to less cash and investments after the BN acquisition.

 

Interest expense for the three and nine-month periods ended December 31, 2021 was $132 and $300, respectively, compared with $1 and $9, respectively, for the same periods ended December 31, 2020. The increase was due to increased borrowings related to the BN acquisition.

 

Our effective tax rate for the three and nine-month periods ended December 31, 2021 was 19% and 20%, respectively. The effective tax rate for the three and nine-month periods ended December 31, 2020 was 23% and 26%, respectively.

 

Net loss and loss per diluted share for the third quarter of fiscal 2022 were $3,730 and $0.35, respectively, compared with net income and income per diluted share of $1,060 and $0.11, respectively, in the third quarter of fiscal 2021. Net loss and loss per diluted share for the first nine months of fiscal 2022 were $7,348 and $0.70, respectively, compared with net income of $1,986 and income per diluted share of $0.20 for the first nine months of fiscal 2021.

 

Liquidity and Capital Resources

The following discussion should be read in conjunction with our Condensed Consolidated Balance Sheets and Statements of Cash Flows:

 

 

 

December 31,

 

 

March 31,

 

 

 

2021

 

 

2021

 

Cash and investments

 

$

13,991

 

 

$

65,032

 

Working capital

 

 

32,007

 

 

 

76,675

 

Working capital ratio(1)

 

 

1.5

 

 

 

2.8

 

Working capital excluding cash and investments

 

 

18,016

 

 

 

11,643

 

Working capital excluding cash and investments as a percent
   of net sales
(2)

 

 

13.5

%

 

 

11.9

%

 

(1)
Working capital ratio equals current assets divided by current liabilities.
(2)
Working capital excluding cash and investments as a percent of net sales is based upon trailing twelve month sales, including BN pre-acquisition sales.

 

Net cash used by operating activities for the first nine months of fiscal 2022 was $14,552 compared with $670 of cash generated for the first nine months of fiscal 2021. The increase in cash used was primarily due to operating earnings and changes in accounts receivable, income taxes and accounts payable, partly offset by a decrease in unbilled revenue and increased customer deposits.

 

Capital expenditures were $1,909 for the nine-month period and are expected to be approximately $2,500 to $3,000 for fiscal 2022. Dividend payments in the first nine months of fiscal 2022 were $3,524 compared with $3,292 in the same period of fiscal 2021.

 

26


Cash and investments were $13,991 at December 31, 2021 compared with $16,463 on September 30, 2021, down $2,472, and down from $65,032, on March 31, 2021.

 

We invest net cash generated from 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. Approximately 70% of our cash and investments are held in the U.S. The remaining 30% is held by 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 December 31, 2021 was 0.0558%. In addition, on June 1, 2021, we terminated our revolving credit facility agreement with JPMorgan Chase Bank, N.A. and entered into a revolving credit facility with Bank of America that provides a $30,000 line of credit, including letters of credit and bank guarantees, expandable at our option and the bank’s approval at any time up to $40,000. The agreement has a five-year term. Amounts outstanding under the facility agreement bear interest at a rate equal to BSBY plus 1.50% per annum of the outstanding undrawn amount of each letter of credit that is not secured by cash and 0.6% 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 amounts available for borrowing under the revolving credit facility are subject to an unused commitment fee of 0.25%. Under the term loan agreement and revolving credit facility, we covenant to maintain a maximum total leverage ratio, as defined in such agreements, of 3.0 to 1.0, which may be increased to 3.25 to 1.0 following an acquisition for a period of twelve months following the close of the acquisition. In addition, we covenant 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.

 

We determined that as of December 31, 2021, we did not meet the financial covenants required by our loan agreement to maintain a maximum total leverage ratio of 3.25 to 1.0, nor did we maintain a minimum fixed charge coverage ratio of 1.2 to 1.0. On February 4, 2022, we obtained a waiver from Bank of America waiving their right to call the debt immediately due and payable as of December 31, 2021. As a term of receiving the waiver, until such time as Bank of America has received all required financial information with respect to the Company for the period ending on or about March 31, 2022, and such financial information confirms to the Bank of America's satisfaction that no default exists at such time, The Company will not permit the principal balance outstanding under the line of credit with Bank of America to exceed $15,000. Absent a waiver or amendment of the loan agreement, we anticipate that we will not meet these covenants as of March 31, 2022, which would be an event of default. Violation of the covenants under the loan agreement provides the bank with the option to accelerate the maturity of the term loan, which carries a balance of $19,000 as of December 31, 2021 and the revolving credit facility, which has a principal balance outstanding of $9,750 as of December 31, 2021. If our lenders accelerate the maturity of the term loan and the revolving credit facility, we do not have sufficient cash to repay the outstanding debt. These conditions and events raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements were issued.

 

In response to these conditions, we have begun to actively engage in negotiations with the bank regarding amendments to our term loan and our revolving credit facility and related financial covenants. However, this plan has not been finalized and is not within our control, and therefore cannot be deemed probable. As a result, we have concluded that our plans do not alleviate substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might result from the outcome of this uncertainty.

 

On June, 1, 2021, we entered into an agreement to amend and restate our letter of credit facility agreement with HSBC Bank USA, N.A. and decreased our line of credit from $15,000 to $7,500. Under the amended 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 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.

 

Letters of credit outstanding on December 31, 2021 and March 31, 2021 were $8,399 and $11,567, respectively. The outstanding letters of credit as of December 31, 2021 were issued by Bank of America, HSBC and residual items from our prior agreement with JP Morgan. There was $9,750 outstanding on our Bank of America revolving credit facilities at December 31, 2021. Availability under the Bank of America line of credit and HSBC secured line of credit on December 31, 2021 was $19,608. We believe that cash generated from operations, combined with our investments and available financing capacity under our credit facility, will be adequate to meet our cash needs for the immediate future and to support our growth strategies.

 

Dividend payments in the first nine months of fiscal 2022 were $3,524 and $1,909, respectively, compared with $3,292 and $1,462, respectively, for the first nine months of fiscal 2021. Graham has suspended its dividend as a condition to the waiver of financial covenants and is working with the bank to amend its loan agreement in the fourth quarter.

Orders and Backlog

27


 

Management uses orders and backlog as measures of our current and future business and financial performance. Orders for the three-month period ended December 31, 2021 were $67,964, an increase of $6,211, or 10%, and were driven by the acquisition which contributed $37,251 of orders in the quarter. This compared with $61,753 for the same period of fiscal 2021. Orders represent written communications received from customers requesting us to supply products and/or services. Domestic orders were 89% of total orders, or $60,655, and international orders were 11% of total orders, or $7,309, in the third quarter of fiscal 2022 compared with the third quarter of fiscal 2021 when domestic orders were 94%, or $58,110, of total orders, and international orders were 6%, or $3,643, of total orders.

 

During the first nine months of fiscal 2022, orders grew 11%, or $12,022, to $120,217, compared with $108,195 for the same period of fiscal 2021. The acquisition was the primary driver of the growth and contributed $53,301 in orders for the nine-month period. Domestic orders were 84% of total orders, or $101,022, and international orders were 16% of total orders, or $19,195, in the first nine months of fiscal 2022 compared with the same period of fiscal 2021 when domestic orders were 72%, or $77,459, of total orders, and international orders were 28%, or $30,736, of total orders.

 

Backlog was $272,599 at December 31, 2021, up 17% compared with $233,247 at September 30, 2021 and nearly double from $137,567 at March 31, 2021. Included in backlog at December 31, 2021 was $119,096 from BN. Backlog is defined as the total dollar value of orders received for which revenue has not yet been recognized. Approximately 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 December 31, 2021, 77% of our backlog was attributable to U.S. Navy projects, 11% for refinery project work, 5% for chemical and petrochemical projects, 3% for space projects and 4% for other industrial applications. At September 30, 2021, 78% of our backlog was attributable to U.S. Navy projects, 11% was for refinery project work, 4% for chemical and petrochemical projects, 3% for space projects and 4% for other industrial applications. At December 31, 2021, we had no projects on hold.

Outlook

 

Our defense business continues to be strong. With the acquisition of BN, 77% of our $272,599 backlog is in defense. While much of the defense backlog includes projects with order to shipment of up to five years, we expect 45% to 50% of our sales in fiscal 2022 to be from the defense market. Defense spending, specifically for the U.S. Navy, is expected to remain steady over the foreseeable future.

 

Near term opportunities in the global energy and petrochemical markets have slowed significantly due to the combined impact of the COVID-19 pandemic and the supply and demand imbalance. However, the recent improvements in our aftermarket and short cycle business in North America is encouraging. We believe when our energy markets do recover, it will be more muted and not to historical levels of strength. Strategically, we are implementing efforts to capture more aftermarket opportunity less oriented to capital projects.

 

Our objective is to leverage our engineering knowhow and depth of application experience to identify more opportunities for our products and technologies in our targeted markets.

 

All of the below expectations are inclusive of BN for the ten-month period we will own it during fiscal 2022.

 

Our expectations for sales and profitability assume that we are able to operate our production facilities in Batavia, New York and Arvada, Colorado at or near "normal" (pre-COVID-19 pandemic) capacity throughout fiscal 2022. We project that approximately 40% to 50% of backlog will convert to sales over the next 12 months. We expect the remaining backlog will convert beyond fiscal 2022, which includes a combination of U.S. Navy orders that have a long conversion cycle (up to six years) as well as certain commercial orders, the conversion of which has been extended by our customers.

 

Revenue in fiscal 2022 is expected to be $120,000 to $125,000, inclusive of $45,000 to $48,000 related to BN for the ten-month period we will own the business in fiscal 2022. We expect to have approximately $2,700 of acquisition related purchase price accounting costs to be recognized in fiscal 2022, which primarily will be amortization of intangible assets. Approximately $1,600 are expected to 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 to be 8% to 10% of sales and SG&A to be 16% to 17% of sales. Our expected effective tax rate for fiscal 2022 is 18% to 20%. Adjusted earnings before net interest expense, income taxes, depreciation and amortization for the combined business is expected to be a loss of approximately $5,0001.

 

Although cash flow was negative in the first three quarters of fiscal 2022, we expect positive cash flow from operations for the remaining three months of fiscal 2022. While we paid a dividend in the first nine months of fiscal 2022, we have suspended the dividend.

 

28


1 We have not reconciled non-GAAP forward-looking adjusted earnings before net interest expense, income taxes, depreciation and amortization for the combined business 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 control or not readily predictable.

 

 

29


Contingencies and Commitments

 

We have been named as a defendant in lawsuits alleging personal injury from exposure to asbestos allegedly contained in or accompanying our products. We are a co-defendant with numerous other defendants in these lawsuits and intend to vigorously defend ourselves against these claims. The claims in our current lawsuits are similar to those made in previous asbestos lawsuits that named us as a defendant. Such previous lawsuits either were dismissed when it was shown that we had not supplied products to the plaintiffs’ places of work, or were settled by us for immaterial amounts.

 

As of December 31, 2021, 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 and total cost estimates and establishment of operational milestones which are used to recognize revenue under the overtime recognition model, 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, 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.

In addition to the critical accounting policies noted above, the Company has one additional critical accounting policy as follows:

Business Combinations and Intangible Assets. Assets and liabilities acquired in a business combination are recorded at their estimated fair values at the acquisition date. The fair value of identifiable intangible assets is based upon detailed valuations that use various assumptions made by management. Goodwill is recorded when the purchase price exceeds the estimated fair value of the net identifiable tangible and intangible assets acquired. Definite lived intangible assets are amortized over their estimated useful lives and are assessed for impairment if certain indicators are present. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to impairment testing annually or earlier if an event or change in circumstances indicates that the fair value of a reporting unit may have been reduced below its carrying value.

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.

 

The assumptions applied in preparing the following qualitative and quantitative disclosures regarding foreign currency exchange rate, price risk and project cancellation 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 third quarter and first nine months of fiscal 2022 were 14% and 22% of total sales, respectively, compared with 61% and 48% for the same periods of fiscal 2021, respectively. 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 nine months of fiscal 2022 and fiscal 2021, all sales by us and our wholly-owned subsidiaries, for which we were paid, were denominated in the local currency of the respective business (U.S. dollars, Chinese RMB or India INR).

 

We have limited exposure to foreign currency purchases. In each of the first nine months of fiscal 2022 and fiscal 2021, our purchases in foreign currencies represented approximately 1% and 0% of the cost of products sold, respectively. In the three months ended December 31, 2021 and 2020, our purchases in foreign currencies represented 0%. 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

30


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 December 31, 2021 and March 31, 2021, 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. The cost of metals and other materials used in our products can also experience significant volatility, and as such, can impact our ability to reflect this volatility in our pricing.

Project Cancellation 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 by our customer, it is removed from our backlog. We attempt to mitigate the risk of cancellation by structuring contracts with our customers to maximize the likelihood that progress payments made to us for individual projects cover the costs we have incurred. As a result, we do not believe we have a significant cash exposure to projects which may be cancelled. At December 31, 2021, we had no projects on hold.

Item 4. Controls and Procedures

 

Conclusion regarding the effectiveness of disclosure controls and procedures

 

Our President and Chief Executive Officer (our principal executive officer) and Vice President - Finance & Administration and Chief Financial Officer (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 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 form 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 are in the process of implementing our internal control structure over the Barber-Nichols, LLC acquisition and we expect that this effort will be completed during the fiscal year ending March 31, 2023.

 

31


PART II - OTHER INFORMATION

 

 

Item 1A. Risk Factors

 

Except as stated below, 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.

 

We may be unsuccessful in amending our loan agreement for out term loan and revolving credit facility prior to March 31, 2022. The failure to amend the loan agreement, or otherwise to obtain a waiver, may lead to an event of default under our term loan and revolving credit facility, which would have a material adverse effect on our financial condition and which gives rise to substantial doubt about our ability to continue as a going concern.

 

As of December 31, 2021, we did not meet the financial covenants required by our loan agreement with Bank of America. On February 4, 2022, management obtained a waiver from Bank of America waiving its right to call the debt immediately due and payable as of December 31, 2021. In addition, the waiver provides that, until such time as Bank of America has received all required financial information with respect to the Company for the period ending on or about March 31, 2022, and such financial information confirms to Bank of America's satisfaction that no default exists at such time, we will not permit the principal balance outstanding under the line of credit with Bank of America to exceed $15,000. Further, we have suspended our dividend in connection with the non-compliance of the lending covenants. We anticipate that we will not be in compliance with the covenants as of March 31, 2022, which would be an event of default. Violation of our covenants under the loan agreement provides the bank with the option to accelerate the maturity of the term loan extended under the loan agreement, which carried a balance of $19,000 as of December 31, 2021, and our revolving credit facility under the loan agreement, which had a principal balance outstanding of $9,750 as of December 31, 2021. We do not expect to have adequate cash on hand or available liquidity to repay the outstanding debt if the bank requires immediate repayment.

 

Management's primary mitigation plan to avoid a default under the term loan and revolving credit facility is to amend the loan agreement to amend the financial covenants. However, this plan has not been finalized and is not within the Company's control, and therefore there can be no assurances that we will be able to amend the loan agreement in a timely manner, or on acceptable terms, if at all. The failure to amend the loan agreement, or otherwise obtain an additional waiver from the bank or repay the debt, could lead to an event of default which would have a material adverse effect on our financial condition and which gives rise to substantial doubt about our ability to continue as a going concern.

 

Potential government imposed COVID-19 vaccine mandates could adversely affect our ability to attract and retain employees which could have a material adverse impact on our business and results of operations.

 

As required by executive order, employers with covered U.S. government contracts may be required to ensure that their U.S. based employees, contractors and subcontractors, that work on or in support of the U.S. government contracts, are fully vaccinated against COVID-19. The executive order includes on-site and remote U.S. based employees, contractors and subcontractors and provides for limited medical and religious exceptions. While the enforceability of the order is not known with certainty, if enforceable, this is expected to apply to federal contractors and subcontractors, such as the Company. Any requirement to mandate COVID-19 vaccination of our workforce could result in employee attrition and difficulty securing future labor needs, and may have an adverse effect on our future revenues, costs, and results of operations.

 

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.

32


 

Barber-Nichols, LLC may have unknown and unforeseen 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 5. Other Information

 

On February 4, 2022, the Company, BN, GHM Acquisition Corp., and Graham Acquisition I, LLC, entered into the Amendment to Loan Agreement and Waiver (the "Amendment and Waiver") with Bank of America, N.A. The Amendment and Waiver provides a limited waiver of certain defaults and events of default under the Loan Agreement, dated as of June 1, 2021, as amended (the "Loan Agreement"), that have occurred and are continuing as a result of the Company’s failure to comply with the covenants with respect to the funded debt to EBITDA ratio and the basic fixed charge coverage ratio for the period ended December 31, 2021.

 

The Amendment and Waiver also provides that, until such time as Bank of America has received all required financial information with respect to the Company for the period ending on or about March 31, 2022, and such financial information confirms to the Bank of America’s satisfaction that no default exists at such time, the Company will not permit the principal balance outstanding under the line of credit with Bank of America to exceed $15.0 million and, except as otherwise provided, the Company will not declare or pay any dividends.

 

In addition, the Amendment and Waiver includes certain clarifications and corrections to the Loan Agreement. In connection with the Amendment and Waiver, the Company agreed to pay to Bank of America a non-refundable fee of $250,000, of which $25,000 was paid on the effective date of the Amendment and Waiver and the remainder of which is payable upon the earliest to occur of (i) any default or event of default under the Loan Agreement, (ii) the last date of availability under the revolving credit facility, and (iii) repayment in full of all principal, interest, fees and other obligations under the Loan Agreement and the other loan documents.

 

The foregoing description of the Amendment and Waiver does not purport to be complete and is qualified in its entirety by reference to the Amendment and Waiver, which is filed as an exhibit to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

 

 

 

33


Item 6. Exhibits

INDEX OF EXHIBITS

 

   (10)

 

Material Contracts

 

 

 

 

 

+

 

10.1

Termination Agreement dated as of October 26, 2021 by and between Graham Acquisition I, LLC and BNI Holdco, LLC.

 

 

 

 

#

 

10.2

Severance and Transition Agreement dated as of November 29, 2021 between Graham Corporation and Jeffrey F. Glajch is incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 29, 2021.

 

 

 

 

+

 

10.3

Amendment to Loan Agreement and Waiver dated February 4, 2022 by and among Graham Corporation, Bank of America, N.A., GHM Acquisition Corp., Graham Acquisition I, LLC, and Barber-Nichols, LLC.

 

   (31)

 

Rule 13a-14(a)/15d-14(a) Certifications

 

 

 

 

 

+

 

31.1

Certification of Principal Executive Officer

 

 

 

 

 

++

 

31.2

Certification of Principal Financial Officer

 

 

 

 

 

   (32)

 

Section 1350 Certification

 

 

 

 

 

+

 

32.1

Section 1350 Certifications

 

 

 

 

 

(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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34


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:

 

 

/s/ Jeffrey Glajch

 

 

 

Jeffrey Glajch

 

 

 

Vice President-Finance & Administration and

 

 

 

Chief Financial Officer

 

 

 

(On behalf of the Registrant and as Principal Financial Officer)

 

Date: February 8, 2022

 

35