UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-K

(Mark One)

For the fiscal year ended March 31, 2021

or

For the transition period from _____________ to ___________.

Commission File Number 1-8462

GRAHAM CORPORATION

(Exact name of Registrant as specified in its charter)

Registrant's telephone number, including area code 585-343-2216

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

Securities registered pursuant to Section 12(g) of the Act: Preferred Stock Purchase Rights

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒

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.

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 checkmark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☐

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐   No ☒

The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on the NYSE Stock Market on September 30, 2020, was $121,846,373.

As of May 26, 2021, the Registrant’s Common Stock outstanding was 9,949,925 shares, $0.10 par value.

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Table of Contents

GRAHAM CORPORATION

Annual Report on Form 10-K

Year Ended March 31, 2021

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PART I

(Dollar amounts in thousands except per share data)

Graham Corporation ("we," "us," "our" or the "Company") is a global business that designs, manufactures and sells critical equipment for the energy, defense and chemical/petrochemical industries.  Our energy markets include oil refining, cogeneration, and alternative power.  For the defense industry, our equipment is used in nuclear propulsion power systems for the U.S. Navy.  For the chemical and petrochemical industries, our equipment is used in fertilizer, ethylene, methanol and downstream chemical facilities.  Graham’s global brand is built upon our world-renowned engineering expertise in vacuum and heat transfer technology, responsive and flexible customer service and high quality standards.  We design and manufacture custom-engineered ejectors, vacuum pumping systems, surface condensers and vacuum systems.  Our equipment can also be found in other diverse applications such as metal refining, pulp and paper processing, water heating, refrigeration, desalination, food processing, pharmaceutical, heating, ventilating and air conditioning.

Our corporate headquarters are located in Batavia, New York.  We have production facilities located with our headquarters in Batavia.  We also have two 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.  During the fiscal year ended March 31, 2020, we sold our wholly-owned subsidiary, Energy Steel & Supply Co. ("Energy Steel"), located in Lapeer, Michigan.

On June 1, 2021, we acquired Barber-Nichols, Inc. ("BNI"), a privately-owned designer and manufacturer of turbomachinery products for the aerospace, cryogenic, defense and energy markets, located in Arvada, Colorado.  BNI has approximately 140 employees.  The acquisition includes BNI’s new, 43,000 square foot, state-of-the-art manufacturing plant which is part of their 96,000 square foot facility in Arvada, Colorado.  We believe that this acquisition will further our growth strategy through market and product diversification, broaden our offerings to the defense and energy markets and strengthen our presence in the defense sector.

We were incorporated in Delaware in 1983 and are the successor to Graham Manufacturing Co., Inc., which was incorporated in New York in 1936.  Our stock is traded on the NYSE under the ticker symbol "GHM".  

Unless indicated otherwise, dollar figures in this Annual Report on Form 10-K are reported in thousands.

Our Products, Customers and Markets

Our products are used in a wide range of industrial process applications, primarily in energy and defense markets, including:

•Power Generation /Alternative Energy

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•Other

Our principal customers include end users of our products in their manufacturing, refining and power generation processes, large engineering companies that build installations for companies in such industries, and the original equipment manufacturers who combine our products with their equipment prior to its sale to end users.  

Our products are sold by a team of sales engineers whom we employ directly as well as by independent sales representatives located worldwide.  There may be short periods of time, a fiscal year for example, where one customer may make up greater than 10% of our business.  However, if this occurs in multiple years, it is usually not the same customer or project over such a multi-year period.  Two customers each accounted for more than 10% of our revenue in the fiscal year ended March 31, 2021, which we refer to as fiscal 2021, while a different customer accounted for more than 10% of our revenue in the fiscal year ended March 31, 2020, which we refer to as fiscal 2020.

As a result of our diversification efforts to more extensively support the U.S. Navy, we have increased our domestic sales in 2021.  Over a business cycle in the energy markets, our domestic sales will generally range between 50% and 70% of total sales.  The mix of domestic and international sales can vary from year to year.  

Our backlog at March 31, 2021 was $137,567 compared with $112,389 at March 31, 2020.

Our Strengths

Our core strengths include:

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Our Strategy

We intend to strategically leverage and deploy our assets, including but not limited to, financial, technical, manufacturing and industry know-how, in order to capture expanded market share within the geographies and industries we serve, expand revenue opportunities in adjacent and countercyclical markets and continually improve our results of operations in order to:

•Generate sustainable earnings growth;

•Reduce earnings volatility;

•Improve our operating performance;

•Generate strong cash flow from operations to reinvest in our business or return to shareholders in the form of ordinary

dividends; and

•Provide an acceptable return to our shareholders.

To accomplish our objectives and maintain strategic focus, we believe that we must:

In order to effectively implement our strategy, we also believe that we must continue to invest in and leverage our unique value enhancing differentiators, including:

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COVID-19 Pandemic Impact

               The COVID-19 pandemic began affecting our business, our customers’ businesses, and the markets we serve in the fourth quarter of fiscal 2020 and has continued to rapidly evolve.  The COVID-19 pandemic impacted the already volatile oil industry and markets.  The pandemic impacted both our capital equipment sales as well as our short cycle business.

              Our proactive measures in response to the COVID-19 pandemic included approximately three weeks of limited production at our facility in Batavia, New York beginning in late March 2020.  We began bringing back our personnel early in the first quarter of fiscal 2021 and by June 2020, we had nearly all of our pre-COVID-19 pandemic headcount in our factory, subject to numerous new health and safety protocols as recommended by our federal and local authorities, including requiring appropriate personal protective equipment to be worn by everyone onsite, social distancing markers, staggered employee breaks and meetings to reduce group gatherings, expanded hygiene practices, and barriers as appropriate to separate workers based on our plant layout configuration.  We deployed numerous laptop computers to our sales, engineering, quality, supply chain, finance, and administrative personnel to facilitate remote work.  Throughout fiscal 2021, we limited external visitors to our Batavia facility and those few that were allowed were pre-approved and tested for COVID-19.  We continue to utilize certain pandemic response measures.  Our workforce safety and employee well-being continue to be top priorities and we remain committed to the service of our customers and suppliers.  For further information on the risks posed to our business from the COVID-19 pandemic, see Item 1A - Risk Factors below, and our discussion of the COVID-19 pandemic throughout this report.  Our first quarter operated at approximately 50% throughput capacity and during the third and fourth quarters at roughly 90% throughput capacity due to the measures taken to protect employees from the spread of COVID-19.

Competition

Our business is highly competitive.  The principal bases on which we compete include technology, price, performance, reputation, delivery, and quality.  Our competitors listed in alphabetical order by market include:

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Intellectual Property

Our success depends in part on our ability to protect our proprietary technologies.  We rely on a combination of patent, copyright, trademark, trade secret laws and contractual confidentiality provisions to establish and protect our proprietary rights.  We also depend heavily on the brand recognition of the Graham name in the marketplace.

Availability of Raw Materials

Historically, we have not been materially adversely impacted by the availability of raw materials.

Working Capital Practices

Our business does not require us to carry significant amounts of inventory or materials beyond what is needed for work in process.  We negotiate progress payments from our customers on our large projects to finance costs incurred.  We do not provide rights to return goods, or payment terms to customers that we consider to be extended in the context of the industries we serve.  We do provide for warranty claims.

Environmental Matters

We believe that we are in material compliance with applicable existing environmental laws and regulations.  We do not anticipate that our compliance with federal, state and local laws regulating the discharge of material in the environment or otherwise pertaining to the protection of the environment will have a material adverse effect upon our capital expenditures, earnings or competitive position.

Seasonality

No material part of our business is seasonal in nature.  However, our business is highly cyclical in nature as it depends on the willingness of our customers to invest in major capital projects.

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Research and Development Activities

During fiscal 2021, and fiscal 2020, and the fiscal year ended March 31, 2019, we spent $3,367, $3,353 and $3,538, respectively, on research and development ("R&D") activities.  The majority of our R&D is application specific to help solve our customers’ problems in order to improve efficiencies, address challenging environments or caustic materials, or redesign for form and function.  We may be engineering new products and services for our customers.  We also continually look to improve existing products and services.

Employees

As of March 31, 2021, we had 331 employees.  We believe that our relationship with our employees is good.

Available Information

We maintain a website located at www.graham-mfg.com.  On our website, we provide a link to the Securities and Exchange Commission’s (the "SEC") website that contains the reports, proxy statements and other information we file electronically.  Printed copies of all documents we file with the SEC are available free of charge for any stockholder who makes a request.  Such requests should be made to our Corporate Secretary at our corporate headquarters.  The other information found on our website is not part of this or any other report we file with, or furnish to, the SEC.

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Item 1A.       Risk Factors

Our business and operations are subject to numerous risks, many of which are described below and elsewhere in this Annual Report on Form 10-K.  If any of the events described below or elsewhere in this Annual Report on Form 10-K occur, our business and results of operations could be harmed.  Additional risks and uncertainties that are not presently known to us, or which we currently deem to be immaterial, could also harm our business and results of operations.

Risks related to the impact of the COVID-19 pandemic

Our business, financial condition and results of operations have been and may continue to be adversely affected by global public health pandemics, including the recent COVID-19 pandemic.

Our business, financial condition and results of operations have been and may continue to be adversely affected if the COVID-19 pandemic, or another global health crisis, impacts our employees, suppliers, customers, financing sources or others’ ability to conduct business or negatively affects consumer and business confidence or the global economy. The COVID-19 health crisis has affected large segments of the global economy, including the markets we operate in. The COVID-19 pandemic began affecting our business in the fourth quarter of fiscal 2020.

The pandemic and any additional preventative or protective actions that governments or we may take in response to the COVID-19 pandemic may have a material adverse effect on our business or our suppliers, distribution channels, and customers, including business shutdowns or disruptions for an indefinite period of time, reduced operations, restrictions on shipping, fabricating or installing products, reduced consumer demand or customers’ ability to make payments.  We have and may continue to experience additional operating costs due to increased challenges with our workforce (including as a result of illness, absenteeism or government orders), implementing further precautionary measures to protect the health of our workforce, increased project cancellations or projects put on hold, access to supplies, capital, and fundamental support services (such as shipping and transportation).  Any resulting financial impact cannot be fully estimated at this time, but may materially affect our business, financial condition or results of operations.  The extent to which the COVID-19 pandemic affects our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain the pandemic or treat its impact, among others.

Due to a potential COVID-19 reduction in throughput capacity, certain contracts in our backlog may experience delayed shipment.  We accept contracts that contain provisions for a buyer to recover liquidated damages if our delivery is past contractual delivery dates, and such liquidated damages claimed by a customer could adversely affect financial performance.  The impact of the COVID-19 pandemic may also exacerbate other risks discussed in this Item 1A - Risk Factors, any of which could have a material adverse effect on us.  The situation surrounding the COVID-19 pandemic and its impact continues to change rapidly and additional impacts may arise that we are presently unaware of.

The COVID-19 pandemic may disrupt and cause delays in our supply chains, and such disruptions could adversely affect our results of operations and financial performance.

The raw materials that we source come from a wide variety of domestic and international suppliers. Global sourcing of many of the products we sell is an important factor in our financial results.  It is possible that the ongoing COVID-19 pandemic could cause a disruption in our supply chain.  If that supply chain is disrupted for an extended period of time, including due to the COVID-19 pandemic or another global health crisis, our ability to meet customer requirements and achieve our financial performance may be affected.  We cannot at this time predict the impact of the COVID-19 pandemic on our supply chain, but we are maintaining ongoing communications with our suppliers to monitor their status.  Any disruption to our supply chain could negatively impact our operations and financial performance.

Disruption to the global oil markets, including from the impact of the COVID-19 pandemic, could adversely affect our customers’ and our own results of operations and financial performance.

Our business, consolidated results of operations and financial condition, or that of our customers, may be adversely affected by significant decreases in demand for oil resulting from global restrictions on travel, work from home practices, and the significant reduction in industrial and commercial activity, or an increase in operating costs as a result of the global business disruption resulting from the COVID-19 pandemic or that may result from a future global health crisis.  Global oil markets continue to experience significant volatility and had dramatic declines in prices in fiscal 2021 due to decreased demand during the COVID-19 pandemic resulting from government-led “stay-at-home” orders and social distancing initiatives and a geopolitical imbalance of supply.  Demand for some of our products is dependent on the level of expenditures by our customers in the oil and gas industry.  Accordingly, continued volatility or downturns in the oil markets, and potential project cancellations, could materially and adversely impact our financial condition or results of operations.

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The COVID-19 pandemic may impact businesses differently across various regions.

We operate and compete globally. The response to the COVID-19 pandemic by domestic and foreign governments has been and may continue to be varied and those differences may impact our competitiveness.  Our operating subsidiaries are located in China and India, and those countries’ responses to the COVID-19 pandemic have varied from the United States’ response.  There are uncertain political climates in the regions where our subsidiaries operate, and governmental action in those regions may result in the temporary closure or limited operations of our subsidiaries.  Government assistance during a pandemic may also differ between private and public companies, which may provide an advantage to one compared with another.  This may affect our competitive position and could disrupt the market access and success of our business compared with other current or new competitors.  This impact could have a material adverse impact on our financial condition or results of operation.

COVID-19 disruption could impact our management team due to illness from the pandemic.

Our business has specialized management, technical and sales personnel who may become unavailable for an extended period or lost due to the effect of COVID-19 or another pandemic.  The COVID-19 pandemic may significantly disrupt our workforce if a significant percentage of our employees are unable to work due to illness or quarantines.  In addition, COVID-19-related illness could impact members of our Board of Directors, resulting in absenteeism from meetings of the directors or committees of directors, making it more difficult to convene the quorums of the full Board of Directors or its committees needed to conduct meetings for the management of our affairs.  Any of the loss of personnel or disruption in management as described above could have a material adverse impact on our business and results of operations.

Risks related to our business

The markets we serve include the petroleum refining and petrochemical industries. These industries are both highly cyclical in nature and dependent on the prices of crude oil and natural gas as well as on the differential between the two prices.  As a result, volatility in the prices of oil and natural gas may negatively impact our operating results.

A substantial portion of our revenue is derived from the sale of our products to companies in the chemical, petrochemical, and petroleum refining industries, or to firms that design and construct facilities for these industries.  These industries are highly cyclical and have historically experienced severe downturns.  The prices of crude oil and natural gas have historically had periods when they have been very volatile, as evidenced by the extreme volatility in oil prices over the past few years and, in particular, volatility related to the COVID-19 pandemic.  During times of significant volatility in the market for crude oil or natural gas, our customers often refrain from placing orders until the market stabilizes and future demand projections are clearer.  If our customers refrain from placing orders with us, our revenue would decline and there could be a material adverse effect on our business and results of operations.  

The ongoing slowdown in our energy and petrochemical markets that began during the latter part of fiscal 2020, and was caused primarily by an excess supply of crude oil, had a negative impact on commodity pricing which resulted in more measured investment in maintenance and capital projects within these markets.  The economic slowdown and corresponding reductions in demand for transportation fuel and petrochemical products caused by the ongoing COVID-19 pandemic further adversely affected these markets.  As a result of these combined adverse supply-side and demand-side disruptions, our commercial customers in these markets have significantly reduced their operating budgets for the types of products and services we provide.  The timing and catalyst for a recovery in these markets 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 believe that over the long-term, demand for our products will expand in the petrochemical, petroleum refining and power generating industries.  A sustained deterioration in any of the industries we serve would materially harm our business and operating results because our customers would not likely have the resources necessary to purchase our products, nor would they likely have the need to build additional facilities or improve existing facilities.  As we have seen in the recent past, a cyclical downturn can occur suddenly and result in extremely different financial performance sequentially from quarter to quarter or on an annual comparative basis due to an inability to rapidly adjust costs.

The relative costs of oil, natural gas, nuclear power, hydropower and numerous forms of alternative energy production may have a material adverse impact on our business and operating results.

Global and regional energy supply comes from many sources, including oil, natural gas, coal, hydro, nuclear, solar, wind, geothermal and biomass, among others.  A cost or supply shift among these sources could negatively impact our business opportunities going forward and the profitability of those opportunities.  A demand shift, where technological advances favor the utilization of one or a few sources of energy may also impact the demand for our products.  If demand shifts in a manner that increases energy utilization outside of our traditional customer base or expertise, our business and financial results could be materially adversely affected.  In addition, governmental policy can affect the relative importance of various forms of energy sources.  For example, non-fossil based sources may receive government tax incentives to foster investment.  If these incentives become more prominent, our business and results of operations could suffer.

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A transition toward different types of energy may have a material adverse impact on our business and operating results.

Changes in consumer demand, including some driven by governmental and political preferences, toward electric, compressed natural gas, hydrogen vehicles and other alternative energy may impact our business.  We have products which can support certain technologies, while other technologies will not require our equipment.  A significant change in demand for oil and gas based products may have a material adverse impact on our business.

Climate change and greenhouse gas regulations may affect our customers’ investment decisions.

Due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emissions.  These restrictions may affect our customers' abilities and willingness to invest in new facilities or to re-invest in current operations.  These requirements could impact the cost of our customers’ products, lengthen project implementation times, and reduce demand for hydrocarbons, as well as shift hydrocarbon demand toward lower-carbon sources.  Any of the foregoing could adversely impact the demand for our products, which in turn could have an adverse effect on our business and results of operations.

Our business is highly competitive.  If we are unable to successfully implement our business strategy and compete against entities with greater resources than us or against competitors who have a relative cost advantage, we risk losing market share to current and future competitors.

We encounter intense competition in all of our markets.  Some of our present and potential competitors may have substantially greater financial, marketing, technical or manufacturing resources.  Our competitors may also be able to respond more quickly to new technologies or processes and changes in customer demands and they may be able to devote greater resources towards the development, promotion and sale of their products.  Certain competitors may also have a cost advantage compared to us due to their geography or changes in relative currency values and may compete against us based on price.  This may affect our ability to secure new business and maintain our level of profitability.  As our markets continue to grow, and new market opportunities expand, we could see a shift in pricing as a result of facing competitors with lower production costs, which may have a material adverse impact on our results of operations and financial results.  In addition, our current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties that increase their ability to address the needs of our customers.  Moreover, customer buying patterns can change if customers become more price sensitive and accepting of lower cost suppliers.  If we cannot compete successfully against current or future competitors, our business will be materially adversely affected.

A change in our end use customers, our markets, or a change in the engineering procurement and construction companies serving our markets could harm our business and negatively impact our financial results.

Although we have long-term relationships with many of our end use customers and with many engineering, procurement and construction companies, the project management requirements, pricing levels and costs to support each customer and customer type are often different.  Our customers have historically focused on the quality of the engineering and product solutions which we have provided to them.  Because our customers are unable to predict the length of the time period for the economic viability of their plants, there has been more of a focus on relative importance of cost versus quality which looks at short-term costs instead of total long-term cost of operations.

A change in the structure of our markets; the relationships between engineering and procurement companies, original equipment suppliers, others in the supply chain and any of their relationships with the end users could harm our business and negatively impact our financial results.

There are strong and long-standing relationships throughout the supply chain between the many parties involved in serving the end user of our products.  A change in the landscape between engineering and procurement companies, original equipment suppliers, others in the supply chain, including disruptions in the supply chain due to the COVID-19 pandemic, and/or with the end users could have a material adverse effect on our business and results of operations.  These changes, or others, might occur through acquisitions or other business partnerships and could have a material impact on our business and negatively impact our financial results.

The loss of, or significant reduction or delay in, purchases by our largest customers could reduce our revenue and adversely affect our results of operations.

While we may have only one or two customers represent over 10% of revenue in any one year, a small number of customers have accounted for a substantial portion of our historical net sales.  For example, sales to our top ten customers, who can vary each year, accounted for 63%, 48% and 41% of consolidated net sales in fiscal 2021, fiscal 2020 and fiscal 2019, respectively.  We expect that a limited number of customers will continue to represent a substantial portion of our sales for the foreseeable future.  The loss of any of our major customers, a decrease or delay in orders or anticipated spending by such customers, or a delay in the production of existing orders could materially adversely affect our revenues and results of operations.

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Our acquisition strategy may not be successful or may increase business risk.

The success of our acquisition strategy will depend, in part, on our ability to identify suitable companies or businesses to purchase and then successfully negotiate and close acquisition transactions.  In addition, our success depends in part on our ability to integrate acquisitions and realize the anticipated benefits from combining the acquisition with our historical business, operations and management.  We cannot provide any assurances that we will be able to complete any acquisitions and then successfully integrate the business and operations of those acquisitions without encountering difficulties, including unanticipated costs, issues or liabilities, difficulty in retaining customers and supplier or other relationships, failure to retain key employees, diversion of our management’s attention, failure to integrate information and accounting systems or establish and maintain proper internal control over financial reporting.  Moreover, as part of the integration process, we must incorporate an acquisition’s existing business culture and compensation structure with our existing business.  We also need to utilize key personnel who may be distracted from the core business.  If we are not able to efficiently integrate an acquisition’s business and operations into our organization in a timely and efficient manner, or at all, the anticipated benefits of the acquisition may not be realized, or it may take longer to realize these benefits than we currently expect, either of which could have a material adverse effect on our business or results of operations.

If we fail to successfully integrate BNI’s operations, our financial condition and results of operations could be adversely affected.

On June 1, 2021, we entered into a stock purchase agreement to acquire BNI, a privately-owned designer and manufacturer of turbomachinery products for the aerospace, cryogenic, defense and energy markets, located in Arvada, Colorado, for approximately $70,000.  We may not realize every intended benefit of the acquisition which could adversely impact our results of operations.  There are many challenges associated with integrating an acquisition such as BNI, including those associated with the integration of operations, retention of key management and other employees with historically different cultures and priorities, the diversion of management’s attention from ongoing business concerns while addressing integration matters, retaining existing business and operational relationships including customers, suppliers and others, unanticipated issues in integrating information technology, communications and other systems, as well as unforeseen expenses associated with the integration.  Further, our future results will suffer if we do not effectively manage the expanded scope of our operations as a result of our acquisition of BNI.

We may experience customer concentration risk related to strategic growth for U.S. Navy projects.

We believe our strategy to increase the penetration of U.S. Navy related opportunities may lead to U.S. Navy related projects consistently being greater than 10% of our total revenue.  While these projects are spread across multiple contractors for the U.S. Navy, the end customer for these projects is the same.  This concentration of business could add additional risk to us should there be a disruption, short or long term, in the funding for these projects or our participation in the U.S. Navy Nuclear Propulsion program.

The size of our contracts with the U.S. Navy may produce volatility over the short term financial results.

We believe our strategy to increase the penetration of U.S. Navy related opportunities, which are often much larger contracts than our commercial contracts, may impact our ability to effectively provide accurate investor guidance for our near term financial results.  These contracts can, on occasion, be delayed before or during the revenue recognition cycle.  If we are unable to reallocate the resources to other projects, we may see an increase in volatility in our near term financial results.

A significant percentage of our sales occur outside of the U.S. As a result, we are subject to the economic, political, regulatory and other risks of international operations.

For fiscal 2021, 46% of our revenue was from customers located outside of the U.S.  Moreover, through our subsidiaries, we maintain a sales office in China and a sales and market development office in India.  We believe that revenue from the sale of our products outside the U.S. will continue to account for a significant portion of our total revenue for the foreseeable future.  We intend to continue to expand our international operations to the extent that suitable opportunities become available.  Our foreign operations and sales could be adversely affected as a result of:

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The impact of potential changes in customs and trade policies and tariffs imposed by the U.S. and those imposed in response by other countries, including China, as well as rapidly changing trade relations, could materially and adversely affect our business and results of operations.

The U.S. government has made proposals that are intended to address trade imbalances, which include encouraging increased production in the United States.  These proposals could result in increased customs duties and the renegotiation of some U.S. trade agreements.  Changes in U.S. and foreign governments’ trade policies have resulted and may continue to result in tariffs on imports into, and exports from, the U.S.  Over the past few years, the U.S. imposed tariffs on imports from several countries, including China, Canada, the European Union and Mexico.  In response, China, Canada and the European Union have proposed or implemented their own tariffs on certain exports from the U.S. into those countries.  Tariffs affecting our products and product components, including raw materials we use, particularly high-end steel and steel related products, may add significant costs to us and make our products more expensive.  Potential future changes in trade policies could result in customers changing their behavior in project procurement, due to uncertainty related to timely execution and/or import and export restrictions.  As a result, our products could become less attractive to customers outside the U.S. due to U.S. import tariffs on our raw materials and our profit margins would be negatively impacted.  Accordingly, continued tariffs may weaken relationships with certain trading partners and may adversely affect our financial performance and results of operations.  When beneficial to us, we may consider alternate sourcing options, including off shore subcontracting, in order to minimize the impact of the tariffs.  Because we conduct aspects of our business in China through our subsidiary, potential reductions in trade with China and diminished relationships between China and the U.S., including as a result of the recent COVID-19 pandemic, as well as the continued escalation of tariffs, could have a material adverse effect on our business and results of operations.

Global demand growth could be led by emerging markets, which could result in lower profit margins and increased competition.

An increase in global demand could be led by emerging markets.  If this is the case, we may face increased competition from lower cost suppliers, which in turn could lead to lower profit margins on our products.  Customers in emerging markets may also place less emphasis on our high quality and brand name than do customers in the U.S. and certain other industrialized countries where we compete.  If we are forced to compete for business with customers that place less emphasis on quality and brand recognition than our current customers, our results of operations could be materially adversely affected.  

The operations of our Chinese subsidiary may be adversely affected by China’s evolving economic, political and social conditions.

We conduct our business in China primarily through our wholly-owned Chinese subsidiary.  The results of operations and future prospects of our Chinese subsidiary may be adversely affected by, among other things, changes in China's political, economic and social conditions, including as a result of the COVID-19 pandemic, changes in the relationship between China and its western trade partners, changes in policies of the Chinese government, changes in laws and regulations or in the interpretation of existing laws and regulations, changes in foreign exchange regulations, measures that may be introduced to control inflation, such as interest rate increases and changes in the rates or methods of taxation.  In addition, changes in demand could result from increased competition from local Chinese manufacturers who have cost advantages or who may be preferred suppliers for Chinese end users.  Also, Chinese commercial laws, regulations and interpretations applicable to non-Chinese owned market participants, such as us, are continually changing. These laws, regulations and interpretations could impose restrictions on our ownership or the operation of our interests in China and have a material adverse effect on our business and results of operations.  

Intellectual property rights are difficult to enforce in China and India, which could harm our business.

Chinese commercial law is relatively undeveloped compared with the commercial law in many of our other major markets and limited protection of intellectual property is available in China as a practical matter.  Similarly, proprietary information may not be afforded the same protection in India as it is in our other major markets with more comprehensive intellectual property laws.  Although we take precautions in the operations of our subsidiaries to protect our intellectual property, any local design or manufacture

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of products that we undertake could subject us to an increased risk that unauthorized parties will be able to copy or otherwise obtain or use our intellectual property, which could harm our business.  We may also have limited legal recourse in the event we encounter patent or trademark infringers, which could have a material adverse effect on our business and results of operations.

Uncertainties with respect to the Chinese legal system may adversely affect the operations of our Chinese subsidiary.

Our Chinese subsidiary is subject to laws and regulations applicable to foreign investment in China.  There are uncertainties regarding the interpretation and enforcement of laws, rules and policies in China.  The Chinese legal system is based on written statutes, and prior court decisions have limited precedential value.  Because many laws and regulations are relatively new and the Chinese legal system is still evolving, the interpretations of many laws, regulations and rules are not always uniform.  Moreover, the relative inexperience of China's judiciary in many cases creates additional uncertainty as to the outcome of any litigation, and the interpretation of statutes and regulations may be subject to government policies reflecting domestic political agendas.  Finally, enforcement of existing laws or contracts based on existing law may be uncertain and sporadic.  For the preceding reasons, it may be difficult for us to obtain timely or equitable enforcement of laws ostensibly designed to protect companies like ours, which could have a material adverse effect on our business and results of operations.  

Regulation of foreign investment in India may adversely affect the operations of our Indian subsidiary.

Our subsidiary in India is subject to laws and regulations applicable to foreign investment in India.  India regulates ownership of Indian companies by foreign entities.  These regulations may apply to our funding of our Indian operating subsidiary.  For example, the government of India has set out criteria for foreign investments in India, including requirements with respect to downstream investments by Indian companies owned or controlled by foreign entities and the transfer of ownership or control of Indian companies in certain industries.  These requirements may adversely affect our ability to operate our Indian subsidiary. There can be no assurance that we will be able to obtain any required approvals for future acquisitions, investments or operations in India, or that we will be able to obtain such approvals on satisfactory terms.

Changes in U.S. and foreign energy policy regulations could adversely affect our business.

Energy policy in the U.S. and in the other countries where we sell our products is evolving rapidly and we anticipate that energy policy will continue to be an important legislative priority in the jurisdictions where we sell our products. It is difficult, if not impossible, to predict the changes in energy policy that could occur, as they may be related to changes in political administration, public policy or other factors.  The elimination of, or a change in, any of the current rules and regulations in any of our markets could create a regulatory environment that makes our end users less likely to purchase our products, which could have a material adverse effect on our business.  Government subsidies or taxes, which favor or disfavor certain energy sources compared with others, could have a material adverse effect on our business and operating results.

Efforts to reduce large U.S. federal budget deficits could result in government cutbacks or shifts in focus in defense spending or in reduced incentives to pursue alternative energy projects, resulting in reduced demand for our products, which could harm our business and results of operations.

Our business strategy calls for us to continue to pursue defense-related projects as well as projects for end users in the alternative energy markets in the U.S.  In recent years, the U.S. federal government has incurred large budget deficits. In the event that U.S. federal government defense spending is reduced or alternative energy related incentives are reduced or eliminated in an effort to reduce federal budget deficits, projects related to defense or alternative energy may become less plentiful.  The impact of such reductions could have a material adverse effect on our business and results of operations, as well as our growth opportunities.

U.S. Navy orders are subject to annual government funding.  A disruption in funding could adversely impact our business.

One of our growth strategies is to increase our penetration of U.S. Navy-related opportunities.  Projects for the U.S. Navy and its contractors generally have a much longer order-to-shipment time period than our commercial orders.  The time between the awarding of an order to the completion of shipment can take three to seven years.  Annual government funding is required to continue the production of this equipment.  Disruption of government funding, short or long term, could impact the ability for us to continue our production activity on these orders.  For example, the emergency spending bills related to the COVID-19 pandemic could compound the uncertainty already present in government funded programs.  Since this business is expected to increase as a percentage of our overall business, such a disruption, should it occur, could adversely impact the sales and profitability of our business.

Changes in the competitive environment for U.S. Navy procurement could adversely impact our ability to grow this portion of our business.

Over the past few years, we have expanded our business and the opportunities where we bid related to U.S. Navy projects.  This has increased our market share and caused an adverse share position for some of our competitors for these products.  Competitor response to our market penetration is possible.  Our customers may also raise concerns about their supplier concentration issues and the risk exposure related to this concentration.  As the U.S. Navy is looking to expand its fleet, there is also a risk that their facilities,

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their supply chain or our supply chain for raw materials, may not be able to support this expansion.  This could adversely impact our ability to grow this portion of our business.

Contract liabilities for large U.S. Navy contracts may be beyond our normal insurance coverage and a claim could have an adverse impact on our financial results.

We are diligent at managing ongoing risks related to projects and the requirements of our customers.  Our history at managing risk provides significant evidence that our exposure and risk are minimal.  In addition, we secure business insurance coverage to minimize the impact of a major failure or liability related to our customers.  Due to certain U.S. government procurement policies, we may take on the risk of a liability for large U.S. Navy projects in excess of our insurance coverage and at a level which is higher than our commercial projects.  A claim related to one of these projects could have an adverse impact on our financial results.

New technology used by the ships for the U.S. Navy may delay projects and may impact our ability to grow this portion of our business.

Certain U.S. Navy vessels are implementing new technologies, unrelated to any of the equipment that we provide.  If there is a complication or delay to any ship caused by this new technology, it may delay the procurement and fabrication of future vessels, which could have a negative impact on our business.

Lapses in U.S. government appropriations have occurred, and any future lapses could disrupt U.S. export processing and related procedures and, as a result, may materially and adversely affect our revenue, results of operations and business.

The U.S. has previously experienced lapses in federal appropriations, which had, in the past, a short-term effect on our business.  Any such future lapse (each, a "Government Shutdown") could negatively affect our ability to ship finished products to customers.  We rely on federal government personnel, who are not able to perform their duties during a Government Shutdown, to conduct routine business processes related to the inspection and delivery of our products, process export licenses for us and perform other services for us that, when disrupted, may prevent us from timely shipping products outside the U.S.  If we are unable to timely ship our products outside the U.S., there could be a material adverse impact on our results of operations and business.  Moreover, our inability to ship products, or the perception by customers that we might not be able to timely ship our products in the future, may cause such customers to look to foreign competitors to fulfill their demand.  If our customers look to foreign competitors to source equipment of the type we manufacture, there could be a material adverse impact on our results of operations and business.

Near-term income statement impact from competitive contracts could adversely affect our operating results.

During weaker market periods, we may choose to be more aggressive in pricing certain competitive projects to protect or gain market share or to increase the utilization of our facilities.  In these situations, it is possible that an incrementally profitable order, while increasing contribution, may be unprofitable from an accounting perspective when including fixed manufacturing costs.  In these situations, we are required to recognize the financial loss at the time of order acceptance, or as soon as our cost estimates are updated, whichever occurs first.  It is possible we may accumulate losses either on a large project or more than one project such that, in a short time period, for example, a reporting quarter, these losses may have a meaningful impact on the earnings of the period.

Our operating results could be adversely affected by customer contract cancellations and delays.

Adverse economic or specific project conditions can lead to a project being placed on hold or cancelled by our customers.  While in fiscal 2021 we had no projects cancelled, in fiscal 2020 we had two projects cancelled.  Similarly, while at March 31, 2021 we had no projects on hold, at March 31, 2020 we had two projects on hold.  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.  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.

The value of our backlog as of March 31, 2021 was $137,567.  Our backlog can be significantly affected by the timing of large orders.  The amount of our backlog at March 31, 2021 is not necessarily indicative of future backlog levels or the rate at which our backlog will be recognized as sales.  Although historically the amount of modifications and terminations of our orders has not been material compared with our total contract volume, customers can, and sometimes do, terminate or modify their orders.  This generally occurs more often in times of end market or capital market turmoil.  We cannot predict whether cancellations will occur or accelerate in the future, and the ongoing COVID-19 pandemic may increase the risk of such cancellations.  Although certain of our contracts in backlog may contain provisions allowing for us to assess cancellation charges to our customers to compensate us for costs incurred on cancelled contracts, cancellations of purchase orders or modifications made to existing contracts could substantially and materially reduce our backlog and, consequently, our future sales and results of operations.  Moreover, delay of contract execution by our customers can result in volatility in our operating results.

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Our current backlog contains a number of large orders from the U.S. Navy.  In addition, we are continuing to pursue business in this end market which offers large multi-year projects which have an added risk profile beyond that of our historic customer base.  A delay, long-term extension or cancellation of any of these projects could have a material adverse effect on our business and results of operations.

Further, certain defense contracts we secure may be designated a program of highest national priority requiring production preference over commercial orders which could impact our commercial backlog and result in production delays.  As a result, commercial customers could seek damages, including liquidated damages, as performance penalties and there may be a negative impact to the willingness of customers to place future orders with us due to a concern that orders may be subordinated to such contracts.

An extended downturn could adversely impact the financial stability of our customers and increase the risk of uncollectable accounts receivables.

Our customers participate in cyclical markets, such as petroleum refining, petrochemicals and alternate energy.  The financial strength of our customers can be impacted by a severe or lengthy downturn in these markets, including any downturn related to the COVID-19 pandemic.  This could lead to additional risk in our ability to collect outstanding accounts receivables.  We attempt to mitigate this risk with the utilization of progress payments for many projects, but certain industries, end markets and geographies are not as willing to make progress payments.  Certain projects require a small portion of the total payments to be held until the customer's facility is fully operational, which can be in excess of one year beyond our delivery of equipment to them.  This additional time may add risk to our ability to collect on the outstanding accounts receivables.

Our exposure to fixed-price contracts and the timely completion of such contracts could negatively impact our results of operations.

A substantial portion of our sales is derived from fixed-price contracts, which may involve long-term fixed price commitments by us to our customers.  While we believe our contract management processes are strong, we nevertheless could experience difficulties in executing large contracts, including but not limited to, estimating errors, cost overruns, supplier failures and customer disputes.  To the extent that any of our fixed-price contracts are delayed, our subcontractors fail to perform, contract counterparties successfully assert claims against us, the original cost estimates in these or other contracts prove to be inaccurate or the contracts do not permit us to pass increased costs on to our customers, our profitability may decrease or losses may be incurred which, in turn, could have a material adverse effect on our business and results of operations.  For our U.S. Navy projects, these fixed priced contracts have order to shipment periods which can exceed five years.  This additional time-based risk, which we believe is manageable, nevertheless increases the likelihood of cost fluctuation, which could have a material adverse effect on our business and results of operation.

Given our size and specialization of our business, if we lose any member of our management team and we experience difficulty in finding a qualified replacement, our business could be harmed.

Competition for qualified management and key technical and sales personnel in our industry is intense.  Moreover, our technology is highly specialized, and it may be difficult to replace the loss of any of our key technical and sales personnel.  Many of the companies with which we compete for management and key technical and sales personnel have greater financial and other resources than we do or are located in geographic areas which may be considered by some to be more desirable places to live.  If we are not able to retain any of our key management, technical or sales personnel, it could have a material adverse effect on our business and results of operations.  

During certain high demand periods, there can be a shortage of skilled production workers, especially those with high-end welding capabilities.  We could experience difficulty hiring or replacing those individuals, which could adversely affect our business.

Our fabrication processes require highly skilled production workers, especially welders.  Welding has not been an educational field that has been popular over the past few decades as manufacturing has moved overseas.  While we have an in-house weld training program, if we are unable to retain, hire or train an adequate number of individuals with high-end welding capability, this could adversely impact our ability to achieve our financial objectives.  In addition, if demand for highly skilled production workers were to significantly outstrip supply, wages for these skilled workers could dramatically increase in our and related industries and that could affect our financial performance.  Furthermore, should we not be able to expand our production workforce, we would expect to increase the amount of outsourced fabrication which is likely to result in higher costs and lower margins.  

If we become subject to product liability, warranty or other claims, our results of operations and financial condition could be adversely affected.

The manufacture and sale of our products exposes us to potential product liability claims, including those that may arise from failure to meet product specifications, misuse or malfunction of our products, design flaws in our products, or use of our products with systems not manufactured or sold by us.  For example, our equipment is installed in facilities that operate dangerous processes and the

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misapplication, improper installation or failure of our equipment may result in exposure to potentially hazardous substances, personal injury or property damage.

Provisions contained in our contracts with customers that attempt to limit our damages may not be enforceable or may fail to protect us from liability for damages and we may not negotiate such contractual limitations of liability in certain circumstances.  Our insurance may not cover all liabilities and our historical experience may not reflect liabilities we may face in the future.  Our risk of liability may increase as we manufacture more complex or larger projects.  We also may not be able to continue to maintain such insurance at a reasonable cost or on reasonable terms, or at all.  Any material liability not covered by provisions in our contracts or by insurance could have a material adverse effect on our business and financial condition.

Furthermore, if a customer suffers damage as a result of an event related to one of our products, even if we are not at fault, they may reduce their business with us.  We may also incur significant warranty claims which are not covered by insurance.  In the event a customer ceases doing business with us as a result of a product malfunction or defect, perceived or actual, or if we incur significant warranty costs in the future, there could be a material adverse effect on our business and results of operations.  

If third parties infringe upon our intellectual property or if we were to infringe upon the intellectual property of third parties, we may expend significant resources enforcing or defending our rights or suffer competitive injury.

Our success depends in part on our proprietary technology.  We rely on a combination of patent, copyright, trademark, trade secret laws and confidentiality provisions to establish and protect our proprietary rights.  If we fail to successfully enforce our intellectual property rights, our competitive position could suffer.  We may also be required to spend significant resources to monitor and police our intellectual property rights.  Similarly, if we were found to have infringed upon the intellectual property rights of others, our competitive position could suffer.  Furthermore, other companies may develop technologies that are similar or superior to our technologies, duplicate or reverse engineer our technologies or design around our proprietary technologies. Any of the foregoing could have a material adverse effect on our business and results of operations.

In some instances, litigation may be necessary to enforce our intellectual property rights and protect our proprietary information, or to defend against claims by third parties that our products infringe upon their intellectual property rights.  Any litigation or claims brought by or against us, whether with or without merit, could result in substantial costs to us and divert the attention of our management, which could materially harm our business and results of operations.  In addition, any intellectual property litigation or claims against us could result in the loss or compromise of our intellectual property and proprietary rights, subject us to significant liabilities, require us to seek licenses on unfavorable terms, prevent us from manufacturing or selling certain products or require us to redesign certain products, any of which could have a material adverse effect on our business and results of operations.  

We are subject to foreign currency fluctuations which may adversely affect our operating results.

We are exposed to the risk of currency fluctuations between the U.S. dollar and the currencies of the countries in which we sell our products to the extent that such sales are not based on U.S. dollars, and volatility in foreign currency exchange rates has generally increased in connection with the COVID-19 pandemic.  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.  Strength of the U.S. dollar compared with the Euro or Asian currencies may put us in a less competitive position.  At the outset of the COVID-19 pandemic, the U.S. dollar saw relative strengthening in relation to the Euro and Asian currencies, however, as the pandemic has continued, the relative strength of the U.S. dollar has increased in volatility.  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.  While we may enter into currency exchange rate hedges from time to time to mitigate these types of fluctuations, we cannot remove all fluctuations or hedge all exposures and our earnings are impacted by changes in currency exchange rates.  In addition, if the counter-parties to such exchange contracts do not fulfill their obligations to deliver the contractual foreign currencies, we could be at risk for fluctuations, if any, required to settle the obligation.  Any of the foregoing could adversely affect our business and results of operations.  At March 31, 2021, we held no forward foreign currency exchange contracts.

Security threats and other sophisticated computer intrusions could harm our information systems, which in turn could harm our business and financial results.

We utilize information systems and computer technology throughout our business.  We store sensitive data, proprietary information and perform engineering designs and calculations on these systems.  Threats to these systems, and the laws and regulations governing security of data, including personal data, on information systems and otherwise held by companies is evolving and adding layers of complexity in the form of new requirements and increasing costs of attempting to protect information systems and data and complying with new cybersecurity regulations.  Information systems are subject to numerous and evolving cybersecurity threats and sophisticated computer crimes, which pose a risk to the stability and security of our information systems, computer technology, and business.  Global cybersecurity threats can range from uncoordinated individual attempts to gain unauthorized access to our information systems and computer technology to sophisticated and targeted measures known as advanced persistent threats.  

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The techniques used in these attacks change frequently and may be difficult to detect for periods of time and we may face difficulties in anticipating and implementing adequate preventative measures.  A failure or breach in security could expose our company as well as our customers and suppliers to risks of misuse of information, compromising confidential information and technology, destruction of data, production disruptions and other business risks which could damage our reputation, competitive position and financial results of our operations.  Further, our technology resources may be strained due to the increase in the number of remote users in response to the COVID-19 pandemic.  In addition, defending ourselves against these threats may increase costs or slow operational efficiencies of our business.  If any of the foregoing were to occur, it could have a material adverse effect on our business and results of operations.

We face potential liability from asbestos exposure and similar claims that could result in substantial costs to us as well as divert attention of our management, which could have a material adverse effect on our business and results of operations.

We are a defendant in a number of lawsuits alleging illnesses from exposure to asbestos or asbestos-containing products and seeking unspecified compensatory and punitive damages.  We cannot predict with certainty the outcome of these lawsuits or whether we could become subject to any similar, related or additional lawsuits in the future.  In addition, because some of our products are used in systems that handle toxic or hazardous substances, any failure or alleged failure of our products in the future could result in litigation against us.  For example, a claim could be made under various regulations for the adverse consequences of environmental contamination.  Any litigation brought against us, whether with or without merit, could result in substantial costs to us as well as divert the attention of our management, which could have a material adverse effect on our business and results of operations.

Many of our large international customers are nationalized or state-owned businesses.  Any failure to comply with the United States Foreign Corrupt Practices Act could adversely impact our competitive position and subject us to penalties and other adverse consequences, which could harm our business and results of operations.

We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or making other prohibited payments to foreign officials for the purpose of obtaining or retaining business.  Many foreign companies, including some of our competitors, are not subject to these prohibitions.  Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in certain of the jurisdictions in which we may operate or sell our products.  While we strictly prohibit our employees and agents from engaging in such conduct and have established procedures, controls and training to prevent such conduct from occurring, it is possible that our employees or agents will engage in such conduct and that we might be held responsible.  If our employees or other agents are alleged or are found to have engaged in such practices, we could incur significant costs and suffer severe penalties or other consequences that may have a material adverse effect on our business, financial condition and results of operations.

Provisions contained in our certificate of incorporation and bylaws could impair or delay stockholders' ability to change our management and could discourage takeover transactions that some stockholders might consider to be in their best interests.

Provisions of our certificate of incorporation and bylaws could impede attempts by our stockholders to remove or replace our management and could discourage others from initiating a potential merger, takeover or other change of control transaction, including a potential transaction at a premium over the market price of our common stock, that our stockholders might consider to be in their best interests.  Such provisions include:

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Not applicable.

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Our corporate headquarters, located at 20 Florence Avenue, Batavia, New York, consists of a 45,000 square foot building.  Our manufacturing facilities, also located in Batavia, consist of approximately 42 acres and contain about 260,000 square feet in several buildings, including 206,000 square feet in manufacturing facilities, 48,000 square feet for warehousing and a 6,000 square-foot building for product research and development.  Additionally, we lease an approximately 1,500 square foot U.S. sales office in Houston, Texas and GVHTT leases an approximately 4,900 square foot sales and engineering office in Suzhou, China.  GIPL, located in Ahmedabad, India, serves as a sales and market development office focusing on the refining, petrochemical and fertilizer markets.  We lease a sales and marketing office of approximately 777 square feet in Ahmedabad, India.

We believe that our properties are generally in good condition, are well maintained, and are suitable and adequate to carry on our business.

Item 3.    Legal Proceedings

The information required by this Item 3 is contained in Note 17 to our consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K and is incorporated herein by reference.

Item 4.    Mine Safety Disclosures

Not applicable.  

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PART II

(Amounts in thousands, except per share data)

Our common stock is traded on the NYSE exchange under the symbol "GHM".  As of May 26, 2021, there were 9,950 shares of our common stock outstanding that were held by approximately 128 stockholders of record.

Subject to the rights of any preferred stock we may then have outstanding, the holders of our common stock are entitled to receive dividends as may be declared from time to time by our Board of Directors out of funds legally available for the payment of dividends.  Our Board of Directors declared dividends per share of $0.11 for each of the four quarters of fiscal 2021.  While we anticipate that we will continue to pay quarterly cash dividends in the future, there can be no assurance that we will pay such dividends in any future period or that the level of cash dividends paid by us will remain constant.

Our senior credit facility contains provisions pertaining to the maintenance of a maximum funded debt to earnings before interest expense, income taxes, depreciation and amortization, or EBITDA, ratio and a minimum earnings before interest expense and income taxes to interest ratio as well as restrictions on the payment of dividends to stockholders.  The facility limits the payment of dividends to stockholders to 25% of net income if our funded debt to EBITDA ratio is greater than 2.0 to 1.  As of March 31, 2021 and May 31, 2021 we did not have any funded debt outstanding.  More information regarding our senior credit facility can be found in Note 9 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.

Item 6.Reserved

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                                                         (Amounts in thousands, except per share data)

Overview

We are a global business that designs, manufactures and sells critical equipment for the energy, defense and chemical/petrochemical industries.  Our energy markets include oil refining, cogeneration, and alternative power.  For the defense industry, our equipment is used in nuclear propulsion power systems for the U.S. Navy.  For the chemical and petrochemical industries, our equipment is used in fertilizer, ethylene, methanol and downstream chemical facilities.

Graham's global brand is built upon our world-renowned engineering expertise in vacuum and heat transfer technology, responsive and flexible service and high quality standards.  We design and manufacture custom-engineered ejectors, vacuum pumping systems, surface condensers and vacuum systems.  Our equipment can also be found in other diverse applications such as metal refining, pulp and paper processing, water heating, refrigeration, desalination, food processing, pharmaceutical, and heating, ventilating and air conditioning.

Our corporate headquarters are located in Batavia, New York.  We have production facilities co-located with our headquarters in Batavia.  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.

On June 1, 2021, we entered into a stock purchase agreement to acquire Barber-Nichols, Inc. ("BNI"), a privately-owned designer and manufacturer of turbomachinery products for the aerospace, cryogenic, defense and energy markets, located in Arvada, Colorado.  We believe that this acquisition will further our growth strategy through market and product diversification, broaden our offerings to the defense and energy markets and strengthen our presence in the defense sector.

This management's discussion and analysis of financial condition and results of operations for the fiscal year ended March 31, 2021 omits a comparative discussion regarding the fiscal year ended March 31, 2019.  Such information is located in Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.  

Key Results

Key results for our fiscal year ended March 31, 2021, which we refer to as "fiscal 2021" include:

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Forward-Looking Statements

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

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 heading "Risk Factors" in Item 1A of Part I and elsewhere in this Annual Report on Form 10-K.  

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

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.  All forward-looking statements included in this Form 10-K are made only as of the date indicated or as of the date of this Form 10-K. 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. New risks and uncertainties arise from time to time and we cannot predict these events or how they may affect us and cause actual results to differ materially from those expressed or implied by our forward-looking statements. Therefore, you should not rely on our forward-looking statements as predictions of future events. When considering these risks, uncertainties and assumptions, you should keep in mind the cautionary statements contained in this report and any documents incorporated herein by reference. You should read this document and the documents that we reference in this Form 10-K completely and with the

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understanding that our actual future results may be materially different from what we expect. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

Current Market Conditions  

The ongoing slowdown in our energy and petrochemical markets (which we refer to as our "commercial markets") began during the latter part of fiscal 2020 and was caused primarily by an excess supply of crude oil, which had a negative impact on commodity pricing.  This caused more measured investment in maintenance and capital projects within our commercial markets.  The economic slowdown and corresponding reductions in demand for transportation fuel and petrochemical products caused by the ongoing COVID-19 global pandemic further adversely affected our commercial markets.  As a result of these combined adverse supply-side and demand-side disruptions, our commercial customers have significantly reduced their operating budgets for the types of products and services we provide.  The timing and catalyst for a recovery in our commercial markets 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 believe 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 drive growth in demand for our products and services.  

Energy markets, in particular crude oil refining, simultaneous with the above-described slowdown, are undergoing a more fundamental evolution.  We believe that systemic changes in the energy markets are occurring and that such changes are being driven, in part, by the increasing use by consumers of alternative fuels in lieu of fossil fuels.  As a result, we anticipate demand growth for fossil-based fuels will be less than the global GDP growth rate.  Accordingly, we expect that crude oil refiners will focus new investments toward the installed base, and that inefficient refineries will close and new refining capacity will be co-located where fuels and petrochemicals are produced.  We also anticipate that future investment by refiners in renewable fuels (e.g., renewable diesel), in existing refineries (e.g., to expand feedstock processing flexibility and to improve conversion of oil to refined products), to gain greater throughput, or to build new capacity (e.g., integrated refineries with petrochemical products capabilities) will continue to drive demand for our products and services.

Demand for our products in the defense industry is related to the naval nuclear propulsion market which is tied to aircraft carrier and submarine vessel construction schedules of the primary shipyards contracted by the U.S. Navy.  We expect growth in our naval nuclear propulsion business will result from our strategic actions to increase our market share, our successful performance, and expected demand increases.  The economic slowdown caused by the COVID-19 pandemic has not adversely affected demand for our products or services in the defense market.

The chart below shows the impact of our successful diversification strategy into multiple U.S. Navy defense platforms.  Our U.S. Navy defense business began with our entry into the nuclear carrier program.  We subsequently expanded into both the Virginia and Columbia class nuclear submarine programs.  The defense market made up 76% of our total backlog at March 31, 2021.  Each vessel platform has made up at least 10% of our total backlog for the past three years.  We believe this diversification is especially beneficial when our commercial markets are weak, as is presently the case.

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Results of Operations

For an understanding of the significant factors that influenced our performance, the following discussion should be read in conjunction with our consolidated financial statements and the notes to our consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K.  

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

Fiscal 2021 Compared with Fiscal 2020

Sales for fiscal 2021 were $97,489, up 8% as compared with sales of $90,604 for fiscal 2021.  Domestic sales were $52,724 or 54% of total sales, down from $58,042 or 64% of total sales in fiscal 2020.  Domestic sales decreased $5,318, or 9%, compared with fiscal year 2020.  International sales accounted for $44,765, or 46% of total sales, for fiscal 2021, up from $32,562 or 36% of total sales in fiscal 2020.  International sales increased $12,203, or 37% compared with fiscal 2020.  By market, sales for fiscal 2021 were 41% to the refining industry (up from 37% in fiscal 2020), 24% to the chemical and petrochemical industries (down from 34% in fiscal 2020), 25% from the defense industry (U.S. Navy) (up from 16% in fiscal 2020), and 10% to other commercial and industrial markets (down from 13% in fiscal 2020).  

The COVID-19 pandemic impacted our financial results in fiscal 2021.  We estimated that revenue was adversely impacted by COVID-19 by approximately $5,500.  This included the benefit of approximately $5,000 which moved into fiscal 2021 from fiscal 2020 related to a project fabricated in China which was delayed in late fiscal 2020.  Across fiscal 2021, especially in the first quarter, we had production capacity impacted at our Batavia, New York facility.  In the first quarter of fiscal 2021, we limited production at our production facility in Batavia, New York and averaged approximately 50% of capacity during that quarter.  We had additional impacts across all quarters, although not to the extent we saw in the first quarter.  We are committed to diligently protecting our workforce while endeavoring to minimize any unfavorable impact to our business and our customers.  

Our gross margin for fiscal 2021 was 21.0% compared with 20.0% for fiscal 2020.  The increase in gross margin was primarily due to lower production costs.  Gross profit for fiscal 2021 increased $2,321, or 13%, compared with fiscal 2020 on higher volume and higher gross margin as noted above, compared with fiscal 2020.

SG&A expense for fiscal 2021 was $17,471, up 4%, or $592, compared with $16,879 in fiscal 2020.  SG&A as a percentage of sales in fiscal 2021 was 17.9% of sales compared with 18.6% of sales in fiscal 2020.  SG&A increases were primarily due to increased variable compensation and outside sales agent commissions, partly offset by lower selling overhead expenses and internal sales agent commission costs.

Interest income for fiscal 2021 was $167, down from $1,324 in fiscal 2020.  Interest expense in fiscal 2021 was $11 compared with $12 in fiscal 2020.

Our effective tax rate in fiscal 2021 was 27% compared with 19% in fiscal 2020.  The increase in tax rate was primarily due to the mix of earnings by geography, which were in higher tax cost areas as compared with the prior year.

Net income and income per diluted share for fiscal 2021, were $2,374 and $0.24, respectively, compared with net income and income per diluted share of $1,872 and $0.19, respectively, for fiscal 2020.  

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Liquidity and Capital Resources

The following discussion should be read in conjunction with our consolidated statements of cash flows and consolidated balance sheets appearing in Item 8 of Part II of this Annual Report on Form 10-K:

⁽¹⁾  Working capital equals current assets minus current liabilities.  

⁽²⁾  Working capital ratio equals current assets divided by current liabilities.

We use the above ratios to assess our liquidity and overall financial strength.

Net cash used by operating activities for fiscal 2021 was $1,722, compared with cash generated of $1,239 for fiscal 2020.  The $2,961 decrease in cash generated was due to a large cash usage from customer deposits.  These were partly offset by cash generations for inventory and accrued compensation.

Capital spending in fiscal 2021 was $2,158, compared with $2,417 in fiscal 2020.  Capital expenditures in each of fiscal 2021 and fiscal 2020 were approximately 80% for facilities along with machinery and equipment and the remaining 20% for all other items.

Dividend payments were $4,391 in fiscal 2021, compared with $4,250 in fiscal 2020.  

Cash and investments were $65,032 at March 31, 2021, compared with $73,003 at March 31, 2020, down $7,971 or 11%.

We invest net cash generated from operations in excess of cash held for near-term needs in short-term, less than 365 days, certificates of deposit, money market accounts or U.S. government instruments, generally with maturity periods of up to 180 days.  Our certificates of deposit are used to securitize our outstanding letters of credit, which reduces our cost on those letters of credit.  Approximately 90% of our cash and investments are held in the U.S.  The remaining 10% is invested in our China operations.

Capital expenditures for the fiscal year ending March 31, 2022, which we refer to as "fiscal 2022," are expected to be between approximately $2,800 and $3,000.  Approximately 90% of our fiscal 2022 capital expenditures are expected to be for machinery and equipment, with the remaining amounts expected to be used for other items.

Our revolving credit facility with JP Morgan Chase, N.A. ("JP Morgan Chase") provides us with a line of credit of $22,000, which includes a separate line of $7,000 for letters of credit and bank guarantees.  In addition, our JP Morgan Chase agreement allows us to increase the line of credit, at our discretion, up to another $15,000, for total availability of $37,000.  Borrowings under this credit facility are secured by all of our assets.  We also had a $15,000 letter of credit facility with HSBC, N.A. ("HSBC") at March 31, 2021 secured by certain of our deposit accounts with HSBC.  Letters of credit outstanding on March 31, 2021 and March 31, 2020 were $11,567 and $13,328, respectively.  The outstanding letters of credit as of March 31, 2021 were issued by JP Morgan Chase and HSBC.  There were no other amounts outstanding on our credit facilities at March 31, 2021 and March 31, 2020.  The borrowing rate under our JP Morgan Chase facility as of March 31, 2021 was the bank’s prime rate, or 3.25%.  Availability under the JP Morgan Chase and HSBC lines of credit was $25,433 and $21,672 at March 31, 2021 and March 31, 2020, respectively.

We did not have any off-balance sheet arrangements as of March 31, 2021 and 2020, other than letters of credit incurred in the ordinary course of business.

We believe that cash generated from operations, combined with the liquidity provided by our investments and available financing capacity under our credit facility, will be adequate both to meet our cash needs for the immediate future and to support our growth strategies.

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Stockholders' Equity

The following discussion should be read in conjunction with our consolidated statements of changes in stockholders' equity that can be found in Item 8 of Part II of this Annual Report on Form 10-K.  The following table shows the balance of stockholders' equity on the dates indicated:

Fiscal 2021 Compared with Fiscal 2020

Stockholders' equity increased $1,205 or 1%, at March 31, 2021 compared with March 31, 2020.  

On March 31, 2021, our net book value per share was $9.83, up from $9.79 at March 31, 2020.

Contractual Obligations

As of March 31, 2021, our contractual and commercial obligations for the next five fiscal years ending March 31 and thereafter were as follows:

⁽²⁾ Amounts represent anticipated contributions during fiscal 2022 to our postretirement medical benefit plan, which provides healthcare benefits for eligible retirees and eligible survivors of retirees.  On February 4, 2003, we terminated postretirement healthcare benefits for our U.S. employees.  Benefits payable to retirees of record on April 1, 2003 remained unchanged.  We expect to be required to make cash contributions in connection with these plans beyond one year, but such amounts cannot be estimated.  No contributions are expected to be made to our defined benefit pension plans for fiscal 2022.

Orders and Backlog

Management uses orders and backlog as measures of our current and future business and financial performance.  Orders in fiscal 2021 increased 52% to $121,619 from $80,034 in fiscal 2020.  Orders represent communications received from customers requesting us to supply products and services.  Revenue is recognized on orders received in accordance with our revenue recognition policy described in Notes 1 and 2 to the consolidated financial statements contained in Item 8 of Part II of this Annual Report on Form 10-K.

Domestic orders were 73%, or $89,283, and international orders were 27%, or $32,336, of our total orders in fiscal 2021.  This compared with domestic orders of $43,045, or 54% of total orders, and international orders of $36,989, or 46% of our total orders in fiscal 2020.  Domestic orders increased by $46,238, or 107%.  This increase was due to a large increase in defense (U.S. Navy) orders, partly offset by lower domestic commercial orders.  Net international orders decreased by $4,653, or 13% in fiscal 2021.

Backlog was $137,567 at March 31, 2021, up 22% compared with $112,389 at March 31, 2020.  Backlog is defined by us as the total dollar value of orders received for which revenue has not yet been recognized.  All orders in backlog represent orders from our traditional markets in established product lines.  We had no projects cancelled in fiscal 2021.  Approximately 40% to 45% of orders currently in our backlog are expected to be converted to sales within one year.  At March 31, 2021, approximately 16% of our backlog was attributed to equipment for refinery project work, 6% for chemical and petrochemical projects, 76% for U.S. Navy projects and 2% for other industrial or commercial applications.  At March 31, 2020, approximately 27% of our backlog was attributed to equipment for refinery project work, 17% for chemical and petrochemical projects, 52% for U.S. Navy projects and 4% for other commercial nuclear energy, other industrial or commercial applications.  At March 31, 2021, we had no projects on hold.  At March 31, 2020, we had two projects totaling $562 on hold.

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Recent Developments

On June 1, 2021, we acquired Barber-Nichols, Inc. ("BNI"), a privately-owned designer and manufacturer of turbomachinery products for the aerospace, cryogenic, defense and energy markets and is located in Arvada, Colorado.  We believe that this acquisition furthers our growth strategy through market and product diversification, broadens its offerings to the defense and energy markets and strengthens its presence in the defense sector.

Under the terms of the stock purchase agreement, the purchase price of $70,113 is comprised of 610 shares of our common stock, representing a value of approximately $8,963, and cash consideration of $61,150, subject to certain potential adjustments, including a customary working capital adjustment.  The stock purchase agreement also includes a contingent earn-out dependent upon certain financial measures of BNI post-acquisition, in which the sellers are eligible to receive up to $14,000 in additional cash consideration.  

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 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, we 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 will bear interest at a rate equal to BSBY plus 1.50%, 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 each of the term loan and revolving credit facility is .20% of the committed facilities and amounts available for borrowing under the revolving credit facility are subject to an unused commitment fee of .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, a minimum fixed charge coverage ratio, as defined in such agreements, of 1.20 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.  

On June, 1, 2021, we entered into an agreement to amend the 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 .75% and .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.

Outlook

Capital spending in the commercial markets we serve began to decrease during the second half of fiscal 2020 and the pace of activity further materially contracted as COVID-19 became a global pandemic in the fourth quarter of fiscal 2020.  Our weak commercial markets continued into fiscal 2021 and we are not seeing a recovery as we enter fiscal 2022.  This is particularly evident in North America.  As a result, our overall bidding activity has slowed.  There has also been a shift toward more opportunities in emerging markets.  Our strong order level from the defense industry (U.S. Navy) increased our backlog for defense projects to $104,127 on March 31, 2021 from $58,843 on March 31, 2020.  At March 31, 2021, 76% of our backlog was for the defense industry, specifically the U.S. Navy.  Defense programs in backlog are planned to deliver $25,000 to $30,000 of revenue in fiscal 2022.  The sales to the defense industry were $23,939 in fiscal 2021.  We expect that our successful acquisition of BNI will increase and diversify our market presence, including enhancing our concentration on the defense markets, and will be accretive to our financial results in fiscal 2022.

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 geopolitical imbalance of supply, as previously discussed.  Although we do not know when the COVID-19 pandemic will end or when the supply imbalance will subside, we continue to believe the energy markets will improve.  In addition, we believe the petrochemical markets provide long-term growth opportunities for our products and services.  Coupled with our diversification strategy into the defense industry, we remain confident in our ability to achieve the long-term goal of significantly growing our business.  We have invested in capacity to serve our customers in our commercial markets as well as to expand the work we do for the U.S. Navy, including through our acquisition of BNI.  We intend to continue to look for organic growth opportunities as well as acquisitions or other business combinations that we believe will allow us to expand our presence in both our existing and ancillary markets.

Our expectations for sales and profitability assume that we are able to operate our production facility in Batavia, New York at or near normal ("pre-COVID-19") capacity throughout fiscal 2022.  We project that approximately 40% to 45% of our $137,567 March 31, 2021 backlog will convert to sales in fiscal 2022.  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 five years) as well as certain commercial orders, the conversion of which has been extended by our customers.  We had no projects cancelled in fiscal 2021.  At March 31, 2021, we had no projects put on hold by our customers.  

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Revenue in fiscal 2022 is expected to be $130,000 to $140,000, inclusive of BNI’s revenue for the ten-month period which is expected to be $45,000 to $48,000.  Adjusted earnings before net interest income, income taxes, depreciation and amortization for the combined business is expected to be approximately $7,000 to $9,000.

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 are similar to 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.  We cannot provide any assurances that any pending or future matters will be resolved in the same manner as previous lawsuits.

As of March 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 to which we are, 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 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

The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements and the notes to consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the U.S.

Critical accounting policies are defined as those that reflect significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions.

Revenue Recognition.  The Company accounts for revenue in accordance with Accounting Standard Codification 606, "Revenue from Contracts with Customers" ("ASC 606").

We recognize revenue on all contracts when control of the product is transferred to the customer.  Control is generally transferred when products are shipped, title is transferred, significant risks of ownership have transferred, we have rights to payment, and rewards of ownership pass to the customer.  Customer acceptance may also be a factor in determining whether control of the product has transferred.  Although revenue on the majority of our contracts, as measured by number of contracts, is recognized upon shipment to the customer, revenue on larger contracts, which are fewer in number but generally represent the majority of revenue, is recognized over time as these contracts meet specific criteria in ASC 606.  Revenue from contracts that is recognized upon shipment accounted for approximately 40% of revenue in fiscal 2021.  Revenue from contracts that is recognized over time accounted for approximately 60% of revenue in fiscal 2021.  We recognize revenue over time when contract performance results in the creation of a product for which we do not have an alternative use and the contract includes an enforceable right to payment in an amount that corresponds directly with the value of the performance completed.  To measure progress towards completion on performance obligations for which revenue is recognized over time we utilize 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 or an output method based upon completion of operational milestones, depending upon the nature of the contract.

Pension and Postretirement Benefits.  Defined benefit pension and other postretirement benefit costs and obligations are dependent on actuarial assumptions used in calculating such amounts.  These assumptions are reviewed annually and include the discount rate, long-term expected rate of return on plan assets, salary growth, healthcare cost trend rate and other economic and demographic factors.  We base the discount rate assumption for our plans on the FTSE Pension Liability Above-Median AA-Index.  The long-term expected rate of return on plan assets is based on the plan’s asset allocation, historical returns and expectations as to future returns that are expected to be realized over the estimated remaining life of the plan liabilities that will be funded with the plan assets.  The salary growth assumptions are determined based on long-term actual experience and future and near-term outlook.  The healthcare cost trend rate assumptions are based on historical cost and payment data, the near-term outlook, and an assessment of likely long-term trends.

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Critical Accounting Estimates and Judgments

We have evaluated the accounting policies used in the preparation of the consolidated financial statements and the notes to consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K and believe those policies to be reasonable and appropriate.

We believe that the most critical accounting estimates used in the preparation of our consolidated financial statements relate to labor hour estimates and establishment of operational milestones which are used to recognize revenue over time, accounting for contingencies, under which we accrue a loss when it is probable that a liability has been incurred and the amount can be reasonably estimated, and accounting for pensions and other postretirement benefits.

As discussed above under the heading "Critical Accounting Policies," we recognize a majority of our revenue using an over-time recognition method.  The key estimate for the over-time recognition model is total labor to be incurred on each contract and to the extent that this estimate changes, it may significantly impact revenue recognized in each period.

Contingencies, by their nature, relate to uncertainties that require us to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss.  For more information on these matters, see the notes to consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K.

Accounting for pensions and other postretirement benefits involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works.  To accomplish this, extensive use is made of assumptions about inflation, investment returns, mortality, turnover, medical costs and discount rates.  These assumptions are reviewed annually.

The discount rate used in accounting for pensions and other postretirement benefits expense (income) is determined in conjunction with our actuary by reference to a current yield curve and by considering the timing and amount of projected future benefit payments.  The discount rate assumption for fiscal 2021 was 3.44% for our defined benefit pension plans and 3.01% for our other postretirement benefit plan.  A reduction in the discount rate of 50 basis points, with all other assumptions held constant, would have increased fiscal 2021 net periodic benefit expense for our defined benefit pension plans and other postretirement benefit plan by approximately $352 and $0, respectively.

The expected return on plan assets assumption of 6.5% used in accounting for our pension plan is determined by evaluating the mix of investments that comprise plan assets and external forecasts of future long-term investment returns.  A reduction in the rate of return of 50 basis points, with other assumptions held constant, would have increased fiscal 2021 net periodic pension expense by approximately $193.

During fiscal 2021 and fiscal 2020, the pension plan released liabilities for vested benefits of certain participants through the purchase of nonparticipating annuity contracts with a third-party insurance company.  As a result of these transactions, in fiscal 2021 and fiscal 2020, the projected benefit obligation and plan assets each decreased $1,477 and $1,420, respectively.  

As part of our ongoing financial reporting process, a collaborative effort is undertaken involving our managers with functional responsibilities for financial, credit, tax, engineering, manufacturing and benefit matters, and outside advisors such as lawyers, consultants and actuaries.  We believe that the results of this effort provide management with the necessary information on which to base their judgments and to develop the estimates and assumptions used to prepare the financial statements.

We believe that the amounts recorded in the consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K related to revenue, contingencies, pensions, other postretirement benefits and other matters requiring the use of estimates and judgments are reasonable, although actual outcomes could differ materially from our estimates.

New Accounting Pronouncements

In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board, the SEC, 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 our consolidated financial statements.  For discussion of the newly issued accounting pronouncements see ''Accounting and reporting changes'' in Note 1 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.

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Item 7A.   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 and price risk.

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 fiscal 2021 were 46% of total sales, up from 36% of sales in fiscal 2020.  Operating in markets throughout the world exposes us to movements in currency exchange rates, including the recent increased volatility in foreign currency exchange rates resulting from the COVID-19 pandemic.  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 fiscal 2021, substantially all sales by us and our wholly owned subsidiaries, for which we were paid, were denominated in the local currency of the respective subsidiary (U.S. dollars or Chinese RMB).

We have limited exposure to foreign currency purchases.  In fiscal 2021, our purchases in foreign currencies represented 1% of the cost of products sold.  At certain times, we may enter into forward foreign currency exchange agreements to hedge our exposure against potential unfavorable changes in foreign currency values on significant sales and purchase contracts negotiated in foreign currencies.  Forward foreign currency exchange contracts were not used in fiscal 2021 and as of 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 and engineering experience and excellence, among other things, such lower production costs and more favorable economic conditions mean that our competitors are able to offer products similar to ours at lower prices.  In extreme market downturns, such as we recently experienced, we typically see depressed price levels.  Moreover, the cost of metals and other materials used in our products have experienced significant volatility.  Such factors, in addition to the global effects of the recent volatility and disruption of the capital and credit markets, have resulted in downward demand and pricing pressure on our products.

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INDEX TO FINANCIAL STATEMENTS

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CONSOLIDATED STATEMENTS OF OPERATIONS

See Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

See Notes to Consolidated Financial Statements.

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CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS