NOTE 2 – ACQUISITION:

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

This transaction was accounted for as a business combination which requires that assets acquired and liabilities assumed be recognized at their fair value as of the acquisition date.  The purchase price of $72,014 was comprised of 610 shares of the Company's common stock, representing a value of $8,964 at a price of $14.69 per share, and cash consideration of $61,150, subject to certain potential adjustments, including a customary working capital adjustment.  The cash consideration was funded through cash on-hand and debt proceeds (See Note 15).  The purchase agreement also includes a contingent earn-out dependent upon certain financial measures of BN post-acquisition, in which the sellers are eligible to receive up to $14,000 in additional cash consideration.  As of June 30, 2021, a liability of $1,900 was recorded for the contingent earn-out.  If achieved, the earn-out will be payable in fiscal year 2025 and will be treated as additional purchase price.  The fair value of the contingent consideration liability was based on an option pricing model using a Monte Carlo simulation and is estimated by discounting contingent payments expected to be made, and may increase or decrease based on changes in earnings before income tax, depreciation and amortization estimates and discount rates.  This is considered a Level 3 liability in the fair value hierarchy.  In addition, BN and Ascent Properties Group, LLC, a related party, entered into a nine year operating lease agreement for an office and manufacturing building in Arvada, Colorado.  This lease has a monthly payment in the amount of $40 with a 3% yearly escalation.  Acquisition related costs of $169 were expensed in the first quarter of fiscal 2022 and are included in Selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.

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

methodology, and was computed as the present value of the expected sales attributable to backlog less the remaining costs to fulfill the backlog.  Changes to the preliminary valuation may result in material adjustments to the fair value of assets and liabilities acquired.  

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

Technology and technical know-how and customer relationships are amortized in selling, general and administrative expense on a straight line basis over their estimated useful lives.  Backlog is amortized in cost of products sold over the projected conversion period based on management estimates at time of purchase.  Intangible amortization was $225 for the three months ended June 30, 2021.  The estimated annual amortization expense is as follows:

The following table summarizes the preliminary allocation of the cost of the acquisition to the assets acquired and liabilities assumed as of the close of the acquisition:

The Condensed Consolidated Statement of Operations for the three months ended June 30, 2021 includes net sales from BN of $3,471.  The following unaudited pro forma information presents the consolidated results of operations of the Company as if the BN acquisition had occurred at the beginning of each of the fiscal periods presented:

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

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