Quarterly report pursuant to Section 13 or 15(d)

Acquisition

v3.22.0.1
Acquisition
9 Months Ended
Dec. 31, 2021
Business Combinations [Abstract]  
Acquisition

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 included a contingent earn-out dependent upon certain financial measures of BN post-acquisition, in which the sellers were eligible to receive up to $14,000 in additional cash consideration. At June 30, 2021, a liability of $1,900 was recorded for the contingent earn-out. Subsequent to the acquisition, the earn out agreement was terminated and the contingent liability was reversed into Other operating income, net, on the Company’s Condensed Statement of Operations. Prior to the acquisition, BN and Ascent Properties Group, LLC, a related party, entered into a nine year operating lease agreement for an office and manufacturing building in Arvada, Colorado. This lease was acquired as part of the Company's acquisition of BN and has a monthly payment in the amount of $40 with a 3% yearly escalation. Acquisition related costs of $111 and $373 were expensed in the three and nine month periods ending December 31, 2021, and are included in Selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.

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

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

 

 

 

Fair Value Assigned

 

 

Weighted Average Amortization Period

At December 31, 2021

 

 

 

 

 

Intangibles subject to amortization:

 

 

 

 

 

Customer relationships

 

$

11,800

 

 

20 years

Technology and technical know-how

 

 

10,100

 

 

20 years

Backlog

 

 

3,900

 

 

4 years

 

 

$

25,800

 

 

 

Intangibles not subject to amortization:

 

 

 

 

 

Tradename

 

 

7,400

 

 

Indefinite

 

 

$

7,400

 

 

 

 

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

 

 

 

Annual Amortization

 

Remainder of 2022

 

$

756

 

2023

 

 

2,476

 

2024

 

 

1,782

 

2025

 

 

1,318

 

2026

 

 

1,095

 

2027 and thereafter

 

 

16,608

 

Total intangible amortization

 

$

24,035

 

 

 

 

 

 

 

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

 

 

 

June 1,

 

 

 

2021

 

Assets acquired:

 

 

 

  Cash and cash equivalents

 

$

1,587

 

  Accounts receivable

 

 

8,074

 

  Unbilled revenue

 

 

7,068

 

  Inventory

 

 

3,669

 

  Other current assets

 

 

409

 

  Property, plant & equipment

 

 

8,037

 

  Operating lease asset

 

 

9,026

 

  Goodwill

 

 

22,823

 

  Backlog

 

 

3,900

 

  Customer relationships

 

 

11,800

 

  Technology and technical know-how

 

 

10,100

 

  Tradename

 

 

7,400

 

Total assets acquired

 

 

93,893

 

Liabilities assumed:

 

 

 

  Accounts payable

 

 

2,656

 

  Accrued compensation

 

 

1,341

 

  Other current liabilities

 

 

665

 

  Customer deposits

 

 

6,048

 

  Operating lease liabilities

 

 

9,066

 

  Other long term liabilities

 

 

2,103

 

Total liabilities assumed

 

 

21,879

 

Purchase price

 

$

72,014

 

 

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net sales

 

$

28,774

 

 

$

40,649

 

 

$

94,890

 

 

$

117,009

 

Net (loss) income

 

 

(3,646

)

 

 

(684

)

 

 

(5,902

)

 

 

4,465

 

(Loss) earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

     Basic

 

$

(0.34

)

 

$

(0.06

)

 

$

(0.55

)

 

$

0.42

 

     Diluted

 

$

(0.34

)

 

$

(0.06

)

 

$

(0.55

)

 

$

0.42

 

 

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

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