# Graham Corp: Form 10-Q for the period ended Jun 30, 2023

- Company: [Graham Corp](/companies/ghm.md) (CIK 716314)
- Form: 10-Q
- Filed: 2023-08-07
- Accepted by EDGAR: Aug 7, 2023, 08:31 ET
- Period: 2023-06-30
- Accession: 0000950170-23-038764
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/716314/000095017023038764/ghm-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/716314/000095017023038764/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $47.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-04-01 to 2023-06-30 | $36.6m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-04-01 to 2023-06-30 | $11.0m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-04-01 to 2023-06-30 | $7.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | $3.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $185.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $766.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $2.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.25 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.25 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 10,719,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-04-01 to 2023-06-30 | $8.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-04-01 to 2023-06-30 | $1.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2023-04-01 to 2023-06-30 | $57.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-06-30 | $24.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $117.3m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $210.0m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $90.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $110.3m | us-gaap:Liabilities |
| Long-term debt | at 2023-06-30 | $12.0m | us-gaap:LongTermDebt |
| Current portion of debt | at 2023-06-30 | $2.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-06-30 | $99.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 39,070 characters.

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

### Overview

We are a global leader in the design and manufacture of mission critical fluid, power, heat transfer and vacuum technologies for the defense, space, energy and process industries. We design and manufacture custom-engineered vacuum, heat transfer, pump and turbomachinery technologies. For the defense industry, our equipment is used in nuclear and non-nuclear propulsion, power, fluid transfer, and thermal management systems. For the space industry our equipment is used in propulsion, power and energy management systems and for life support systems. We supply equipment for vacuum, heat transfer and fluid transfer applications used in energy and new energy markets including oil refining, cogeneration, and multiple alternative and clean power applications including hydrogen. For the chemical and petrochemical industries, our heat transfer equipment is used in fertilizer, ethylene, methanol and downstream chemical facilities.

Our brands are built upon engineering expertise and close customer collaboration to design, develop, and produce mission critical equipment and systems that enable our customers to meet their economic and operational objectives. Continual improvement of our processes and systems to ensure qualified and compliant equipment are hallmarks of our brand. Our early engagement with customers and support until the end of service life are values upon which our brands are built.

Our corporate headquarters is located with our production facilities in Batavia, New York, where surface condensers and ejectors are designed, engineered, and manufactured. Our wholly-owned subsidiary, Barber-Nichols, LLC ("BN"), based in Arvada, Colorado, designs, develops, manufactures and sells specialty turbomachinery products for the aerospace, cryogenic, defense and energy markets. We also have wholly-owned foreign subsidiaries, Graham Vacuum and Heat Transfer Technology 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 throughout Southeast Asia. GIPL serves as a sales and market development office focusing on the refining, petrochemical, edible oils, and fertilizer markets in India and the Middle East.

We refer to our fiscal year, which ends March 31, 2024, as fiscal 2024. Likewise, we refer to our fiscal year that ended March 31, 2023 and March 31, 2022 as fiscal 2023 and fiscal 2022, respectively.

### Summary

Highlights for the three months ended June 30, 2023 include:

- Net sales for the first quarter of fiscal 2024 were $47,569, up $11,494, or 32% compared with $36,075 for the first quarter of fiscal 2023. This increase over the prior year was primarily due to sales to the defense industry, which increased $13,017 versus the prior year period primarily due to an improved mix of higher margin defense projects, better execution, the timing of material receipts, and improved pricing. Net sales also benefitted from continued growth in commercial aftermarket of approximately $3,000 in comparison to the prior year period, which is included in our refining and chemical/petrochemical markets. Partially offsetting these increases was a $1,640 decline in space sales primarily due to the timing of projects, as well as the loss of Virgin Orbit Holdings, Inc. ("Virgin Orbit") as a customer in April 2023 due to its Chapter 11 bankruptcy. We also had lower refining industry sales of $1,008 primarily due to a decrease in revenue from our India and China subsidiaries due to the timing of projects and lower demand in China reflecting the impact of its COVID 19 shutdown.
- In connection with the acquisition of BN, we entered into a Performance Bonus Agreement to provide employees of BN with a supplemental performance-based award based on the achievement of BN performance objectives for fiscal years ending March 31, 2024, 2025, and 2026 which can range between $2,000 to $4,000 per year (the "BN Performance Bonus"). During the first quarter of fiscal 2024, we recorded $767 related to the BN Performance Bonus.
- Net income and income per diluted share for the first quarter of fiscal 2024 were $2,640 and $0.25 per share, respectively, compared with net income and income per diluted share of $676 and $0.06 per share, respectively, for the first quarter of fiscal 2023. Adjusted net income and adjusted net income per diluted share for the first quarter of fiscal 2024 were $3,574 and $0.33 per share, respectively, compared with adjusted net income and adjusted net income per diluted share of $1,329 and $0.12 per share, respectively, for the first quarter of fiscal 2023. See "Non-GAAP Measures" below for a reconciliation of adjusted net income and adjusted net income per diluted share to the comparable GAAP amount.
- In July 2023, we shipped an additional first article U.S. Navy project and are on schedule to complete the remaining first article project in the third quarter of fiscal 2024. In fiscal 2023, we completed four first article U.S. Navy projects. These projects were the source of the majority of the losses incurred in fiscal 2022.
- Orders booked in the first quarter of fiscal 2024 increased $27,625 to $67,933 compared with the first quarter of fiscal 2023. This increase included orders of $22,000 related to a strategic investment and follow-on orders from a major defense

customer, and a $9,100 vacuum distillation system order for a refinery in India. These increases were partially offset by a $2,668 decrease in orders to the space industry primarily due to Virgin Orbit.

- Backlog was $322,003 at June 30, 2023, compared with $301,734 at March 31, 2023. This increase was primarily driven by growth in our defense and international refinery markets. For more information on this performance indicator see "Orders and Backlog" below.
- Cash and cash equivalents at June 30, 2023 were $24,662, compared with $18,257 at March 31, 2023. This increase was primarily due to cash provided by operating activities of $8,603, partially offset by net repayment of debt of $511 and $1,499 of capital expenditures as we continue to invest in longer-term growth opportunities. Cash flow from operations during the quarter was primarily driven by cash net income and a reduction in working capital mostly as a result of a change in payment terms related to a large defense customer during the quarter.

### Cautionary Note Regarding Forward-Looking Statements

This report on Form 10-Q (the "Form 10-Q") 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. All statements other than statements of historical fact are forward-looking statements for purposes of this Form 10-K. 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. Forward-looking statements are indicated by words such as "anticipate," "believe," "continue," "could," "estimate," "can," "may," "intend," "expect," "plan," "goal," "predict," "project," "outlook," "potential," "should," "will," and similar words and expressions.

Forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause our actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements including, but not limited to, those described in the "Risk Factors" section in Item 1A of our Annual Report on Form 10-K for fiscal 2023 and elsewhere in the reports we file with the SEC. Undue reliance should not be placed on our forward-looking statements. New risks and uncertainties arise from time to time and we cannot predict these events or how they may affect us and cause actual results to differ materially from those expressed or implied by our forward-looking statements. Therefore, you should not rely on our forward-looking statements as predictions of future events. When considering these risks, uncertainties and assumptions, you should keep in mind the cautionary statements contained in this report and any documents incorporated herein by reference. You should read this document and the documents that we reference in this Quarterly Report on Form 10-Q (the "Form 10-Q") completely and with the understanding that our actual future results may be materially different from what we expect. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

All forward-looking statements included in this Form 10-Q are made only as of the date indicated or as of the date of this Form 10-Q. Except as required by law, we undertake no obligation to update or announce any revisions to forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

### Current Market Conditions

Demand for our equipment and systems for the defense industry is expected to remain strong and continue to expand, based on defense budget plans, the projected procurement of submarines, aircraft carriers and undersea propulsion and power systems and the solutions we provide. In addition to U.S. Navy applications, we also provide specialty pumps, turbines, compressors and controllers for various fluid and thermal management systems used in Department of Defense radar, laser, electronics and power systems. We have built a leading position, and in some instances, a sole source position, for certain systems and equipment for the defense industry.

Our traditional energy markets are undergoing significant transition. While we expect that fossil fuels will continue to be an important component in the global energy industry for many years to come, there are significant changes in the priorities for capital investments by our customers and the regions in which those investments are being made. We expect that the systemic changes in the energy markets, which are influenced by the increasing use by consumers of alternative fuels, will lead to demand growth for fossil-based fuels that is less than the global growth rate. We also anticipate that future investment by refiners in renewable fuels (e.g., renewable diesel), in existing refineries (e.g., to expand feedstock processing flexibility and to improve conversion of oil to refined products) to gain greater throughput, or to build new capacity (e.g., integrated refineries with petrochemical products capabilities), will continue to drive demand for our products and services. The timing and catalyst for a recovery in these markets (crude oil refining and chemical/petrochemical) remains uncertain. Accordingly, we believe that in the near term the quantity of projects available for us to compete for will remain low and that new project pricing will remain challenging.

Of note, over the last few years we have experienced an increase in our energy and chemical aftermarket orders, primarily from the domestic market. Aftermarket orders have historically been a leading indicator of future capital investment by our customers in their facilities for upgrades and expansions. However, if a capital investment upturn were to occur, we do not expect the next cycle to be as robust as years past due to the factors discussed above.

The alternative and clean energy opportunities for our heat transfer, power production and fluid transfer systems are expected to continue to grow. We assist in designing, developing and producing equipment for hydrogen production, distribution and fueling systems, concentrated solar power and storage, and small modular nuclear systems. We are positioning the Company to be a more significant contributor as these markets continue to develop.

We believe that chemical and petrochemical capital investment will continue to decouple from energy investment. Over the long term, we expect that population growth, an expanding global middle class and an increasing desire for improved quality of life and access to consumer products will drive increased demand for industrial goods within the plastics and resins value chain along with fertilizers or related products. As such, we expect investment in new global chemical and petrochemical capacity will improve and drive growth in demand for our products and services.

Our turbomachinery, pumps and cryogenic products and market access provide revenue and growth potential in the commercial space/aerospace markets. The commercial space market has grown and evolved rapidly, and we provide rocket engine turbo pump systems and components for many of the launch providers for satellites. We expect that in the long term extended space exploration will become more prevalent, and we anticipate that our thermal/fluid management and environmental control and life support system turbomachinery will play important roles. We are also participating in future aerospace power and propulsion system development through supply of fluid and thermal management systems components. Small power dense systems are imperative for these applications and we believe our technology and expertise will enable us to achieve sales growth in this market as well. Sales and orders to the space industry are variable in nature and many of our customers, who are key players in the industry, have yet to achieve profitability and may be unable to continue operations without additional funding similar to Virgin Orbit. Thus, future revenue and growth to this market can be uncertain and may negatively impact our business.

As illustrated below, we have succeeded over the last several years with our strategy to increase our participation in the defense market as opportunities in our legacy refining and petrochemical markets diminished. The defense market comprised 79% of our total backlog at June 30, 2023.

\*Note: "FYE" refers to fiscal year ended March 31

### Results of Operations

To better understand the significant factors that influenced our performance during the periods presented, the following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the notes to our Condensed Consolidated Financial Statements included in Part I, Item 1, of this Form 10-Q.

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

|  | Three Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net sales | $47,569 | $36,075 |
| Gross profit | $10,977 | $6,744 |
| Gross profit margin | 23% | 19% |
| SG&A expenses (1) | $7,293 | $5,759 |
| SG&A as a percent of sales | 15% | 16% |
| Net income | $2,640 | $676 |
| Diluted income per share | $0.25 | $0.06 |

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

The following tables provide our net sales by product line and geographic region including the percentage of total and change in comparison to the prior year for each category and period presented:

|  | Three Months Ended June 30, |  | Change |
| --- | ---: | ---: | ---: |
| Market | **2023%** | **2022%** | **$%** |
| Refining | $6,867 14% | $7,875 22% | $(1,008) -13% |
| Chemical/Petrochemical | 6,041 13% | 5,875 16% | 166 3% |
| Space | 4,822 10% | 6,462 18% | (1,640) -25% |
| Defense | 22,817 48% | 9,800 27% | 13,017 133% |
| Other | 7,022 15% | 6,063 17% | 959 16% |
| Net sales | $47,569 100% | $36,075 100% | $11,494 32% |
| Geographic Region |  |  |  |
| United States | $38,141 80% | $28,169 78% | $9,972 35% |
| International | 9,428 20% | 7,906 22% | 1,522 19% |
| Net sales | $47,569 100% | $36,075 100% | $11,494 32% |

Net sales for the first quarter of fiscal 2024 were $47,569, up $11,494 or 32% compared with $36,075 for the first quarter of fiscal 2023. This increase over the prior year was primarily due to sales to the defense industry, which increased $13,017 versus the prior year period primarily due to an improved mix of higher margin defense projects, better execution, the timing of material receipts, and improved pricing. Net sales also benefitted from continued growth in commercial aftermarket of approximately $3,000 in comparison to the prior year period, which is included in our refining and chemical/petrochemical markets. Partially offsetting these increases was a $1,640 decline in space sales primarily due to the timing of projects, as well as the loss of Virgin Orbit as a customer in April 2023 due to its Chapter 11 bankruptcy. We also had lower refining industry sales of $1,008 primarily due to a decrease in revenue from our India and China subsidiaries due to the timing of projects and lower demand in China reflecting the impact of its COVID 19 shutdown.

Domestic sales as a percentage of net sales increased to 80% in the first quarter of fiscal 2024 compared with 78% in the first quarter of fiscal 2023. These sales were primarily to the U.S. defense market, which represented 48% of net sales for the first quarter of fiscal 2024. Fluctuation in sales among markets, products and geographic locations varies, sometimes significantly, from quarter-to-quarter based on timing and magnitude of projects. See also "Current Market Conditions," above. For additional information on anticipated future sales and our markets, see "Orders and Backlog" below.

Gross profit margin for the first quarter of fiscal 2024 was 23%, compared with 19% for the first quarter of fiscal 2023. This increase reflected an improved mix of sales related to higher margin defense projects and commercial aftermarket, as well as better execution and pricing on defense contracts, partially offset by higher overall incentive-based compensation in comparison with the prior year. Gross profit for the first quarter of fiscal 2024 increased $4,233, or 63%, compared with fiscal 2023, to $10,977. This increase was primarily due to the increase in net sales and gross profit margin discussed above.

SG&A expense including amortization for the first quarter of fiscal 2024 was $7,293, up $1,534 compared with the first quarter of fiscal 2023. Approximately $900 of this increase was due to increased performance-based compensation expense, which includes $767 related to the BN Performance Bonus. The remainder of the increase in SG&A expense primarily relates to cost increases due to inflation, as well as increased professional services of approximately $200 due to growth in our complexity. As a percentage of net sales, SG&A expense in the first quarter of fiscal 2024 improved to 15% compared with 16% in the comparable fiscal 2023 period as we were able to leverage our existing infrastructure and grow revenue faster than our SG&A expenses.

Net interest expense for the first quarter of fiscal 2024 was $185 compared with $157 in the first quarter of fiscal 2023 primarily due to increased interest rates since the first quarter of 2023, which was partially offset by the repayment of $6,000 of debt since the first quarter of fiscal 2023.

Our effective tax rate in the first quarter of fiscal 2024 was 22.5%, compared with 24.1% in the first quarter of fiscal 2023. This decrease was primarily due to discrete tax expense recognized in the first quarter of fiscal 2023 compared with a discrete benefit in the first quarter of fiscal 2024 related to the vesting of restricted stock awards. Our expected effective tax rate for fiscal 2024 is 22% to 23% as the impact of these discrete tax items on our effective tax rate lessens over the course of fiscal 2023.

Net income and income per diluted share for the first quarter of fiscal 2024 were $2,640 and $0.25 per share, respectively, compared with $676 and $0.06 per share, respectively, for the first quarter of fiscal 2023. Adjusted net income and adjusted net income per diluted share for the first quarter of fiscal 2024 were $3,574 and $0.33 per share, respectively, compared with $1,329 and $0.12 per share, respectively, for the first quarter of fiscal 2023. See "Non-GAAP Measures" below for a reconciliation of adjusted net income and adjusted net income per diluted share to the comparable GAAP amount.

### Non-GAAP Measures

Adjusted earnings before net interest expense, income taxes, depreciation and amortization ("EBITDA"), adjusted net income, and adjusted net income per diluted share are provided for information purposes only and are not measures of financial performance under accounting principles generally accepted in the U.S. ("GAAP"). Management believes the presentation of these financial measures reflecting non-GAAP adjustments provides important supplemental information to investors and other users of our financial statements in evaluating the operating results of the Company. In particular, those charges and credits that are not directly related to operating performance, and that are not a helpful measure of the performance of our underlying business particularly in light of their unpredictable nature. These non-GAAP disclosures have limitations as analytical tools, should not be viewed as a substitute for net income or net income per diluted share determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. In addition, supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to net income or net income per diluted share determined in accordance with GAAP. Adjusted EBITDA, adjusted net income and adjusted net income per diluted share are key metrics used by management and our board of directors to assess the Company’s financial and operating performance and adjusted EBITDA is a basis for a portion of management's performance-based compensation.

Adjusted EBITDA excludes charges for depreciation, amortization, interest expense, taxes, other acquisition related expenses, the BN Performance Bonus, and other unusual/nonrecurring expenses. Adjusted net income (loss) and adjusted net income (loss) per diluted share excludes intangible amortization, the BN Performance Bonus, other costs related to the acquisition, and other unusual/nonrecurring expenses.

A reconciliation of adjusted EBITDA, adjusted net income (loss), and adjusted net income (loss) per diluted share to net income (loss) in accordance with GAAP is as follows:

|  | Three Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| **Net income** | **$2,640** | **$676** |
| Acquisition & integration costs | - | 54 |
| BN Performance Bonus | 767 | - |
| Debt amendment costs | - | 153 |
| Net interest expense | 185 | 157 |
| Income taxes | 766 | 215 |
| Depreciation & amortization | 1,239 | 1,475 |
| **Adjusted EBITDA** | **$5,597** | **$2,730** |
| Adjusted EBITDA as a % of revenue | 11.8% | 7.6% |

20

|  | Three Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| **Net income** | **$2,640** | **$676** |
| Acquisition & integration costs | - | 54 |
| Amortization of intangible assets | 446 | 619 |
| BN Performance Bonus | 767 | - |
| Debt amendment costs | - | 153 |
| Normalize tax rate(1) | (279) | (173) |
| **Adjusted net income** | **$3,574** | **$1,329** |
| **GAAP diluted net income per share** | **$0.25** | **$0.06** |
| **Adjusted diluted net income per share** | **$0.33** | **$0.12** |
| Diluted weighted average common shares outstanding | 10,719 | 10,630 |
| (1) Applies a normalized tax rate to non-GAAP adjustments, which are pre-tax, based upon the statutory tax rate of 23%. |  |  |

### Liquidity and Capital Resources

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

|  | June 30, 2023 | March 31, 2023 |
| --- | ---: | ---: |
| Cash and cash equivalents | $24,662 | $18,257 |
| Working capital (1) | 27,004 | 23,904 |
| Working capital ratio(1) | 1.3 | 1.3 |

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

(2) Working capital excluding cash and cash equivalents as a percent of net sales is based upon trailing twelve month sales.

Net cash provided by operating activities for the first quarter of fiscal 2024 was $8,603 compared with cash used by operating activities of $689 for the first quarter of fiscal 2023. The cash provided by operations during the first quarter of fiscal 2024 was higher than the comparable prior year period primarily as a result of higher cash net income and a reduction in working capital as a result of the change in payment terms related to a large defense customer during the quarter.

Capital expenditures for fiscal 2023 are expected to be approximately $12,000 to $13,500 and includes approximately $5,500 related to the expansion of production capabilities at our Batavia facility, which is being funded by one of our defense customers. Fiscal 2024 capital expenditures are expected to be primarily for machinery and equipment, as well as for buildings and leasehold improvements to fund our growth and productivity improvement initiatives. The majority of our planned capital expenditures are discretionary. We estimate that our maintenance capital spend is approximately $2,000 per year.

Cash and cash equivalents were $24,662 at June 30, 2023 compared with $18,257 at March 31, 2023, up $6,405 primarily due to cash provided by operations, offset by capital expenditures, and debt repayments. At June 30, 2023, approximately $7,000 of our cash and cash equivalents is used to secure our letters of credit and $2,514 of our cash is held by our China and India operations.

On June 1, 2021, we entered into a $20,000 five-year term loan with Bank of America (the "Term Loan"). The Term Loan requires monthly principal payments of $167 through June 1, 2026, with the remaining principal amount plus all interest due on the maturity date. The interest rate on the Term Loan is the applicable Bloomberg Short-Term Bank Yield Index ("BSBY"), plus 1.50%, subject to a 0.00% floor.

On June 1, 2021, we entered into a five-year revolving credit facility with Bank of America (the "Revolving Credit Facility") that provided 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. As of June 30, 2023 and March 31, 2022, there was $0 outstanding on the Revolving Credit Facility. Amounts outstanding under the Revolving Credit Facility bear interest at a rate equal to BSBY plus 1.50%, subject to a 0.00% floor. As of June 30, 2023, the BSBY rate was 5.10279%. As of June 30, 2023, there was $5,594 letters of credit outstanding with Bank of America.

Under the Term Loan and Revolving Credit Facility, as amended (the "Credit Facility"), we covenanted to maintain a maximum total leverage ratio, as defined in the Credit Facility, of 3.0 to 1.0, with an allowable increase to 3.25 to 1.0 following an acquisition for a period of twelve months following the closing of the acquisition. In addition, we covenanted to maintain a minimum fixed charge coverage ratio, as defined in the Credit Facility, of 1.2 to 1.0 and minimum margined assets, as defined in such agreements, of 100% of total amounts outstanding on the Revolving Credit Facility, including letters of credit. In addition, on or before September 1, 2023 and at all times thereafter, all of our deposit accounts, except certain accounts, will be either subject to a deposit account control agreement or maintained with Bank of America. We also covenanted to maintain liquidity, as defined in the Credit Facility, of at least $20,000. As of June 30, 2023, we were in compliance with the financial covenants of our loan agreement and our leverage ratio as calculated in accordance with the terms of the Credit Facility was 1.6x. At June 30, 2023, the amount available under the Revolving Credit Facility was $25,905, subject to the above liquidity and leverage covenants.

In connection with the amendments to the Credit Facility, we are required to pay a back-end fee of $725 to Bank of America payable upon the earliest to occur of (i) any default or event of default, (ii) the last date of availability under the Revolving Credit Facility, and (iii) repayment in full of all principal, interest, fees and other obligations, which may be waived or cancelled if certain criteria are met.

We did not have any off-balance sheet arrangements as of June 30, 2023 and 2022, 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 available financing capacity under our credit facility, will be adequate to meet our cash needs for the immediate future. However, we expect to amend our credit facility in fiscal 2024 in order to provide funding for our long-term strategic growth initiatives.

### Orders and Backlog

In addition to the non-GAAP measures discussed above, management uses the following key performance metrics to analyze and measure the Company's financial performance and results of operations: orders, backlog, and book-to-bill ratio. Management uses orders and backlog as measures of current and future business and financial performance and these may not be comparable with measures provided by other companies. Orders represent written communications received from customers requesting us to provide products and/or services. Backlog is defined as the total dollar value of net orders received for which revenue has not yet been recognized. Management believes tracking orders and backlog are useful as it often times is a leading indicator of future performance. In accordance with industry practice, contracts may include provisions for cancellation, termination, or suspension at the discretion of the customer.

The book-to-bill ratio is an operational measure that management uses to track the growth prospects of the Company. The Company calculates the book-to-bill ratio for a given period as net orders divided by net sales.

Given that each of orders, backlog and book-to-bill ratio is an operational measure and that the Company's methodology for calculating these measures does not meet the definition of a non-GAAP measure, as that term is defined by the SEC, a quantitative reconciliation for each is not required or provided.

The following tables provides our orders by market and geographic region including the percentage of total and change in comparison to the prior year for each category and period presented:

|  | Three Months Ended June 30, |  | Change |
| --- | ---: | ---: | ---: |
| Market | **2023%** | **2022%** | **$%** |
| Refining | $14,321 21% | $11,491 29% | $2,830 25% |
| Chemical/Petrochemical | 10,863 16% | 5,543 14% | 5,320 96% |
| Space | 4,606 7% | 7,274 18% | (2,668) -37% |
| Defense | 32,958 49% | 11,317 28% | 21,641 191% |
| Other | 5,185 8% | 4,683 12% | 502 11% |
| Total orders | $67,933 100% | $40,308 100% | $27,625 69% |
| Geographic Region |  |  |  |
| United States | $52,115 77% | $29,697 74% | $22,418 75% |
| International | 15,818 23% | 10,611 26% | 5,207 49% |
| Total orders | $67,933 100% | $40,308 100% | $27,625 69% |

Orders booked for the three-month period ended June 30, 2023 were $67,933, an increase of $27,625 over the comparable period of fiscal 2023. This increase was primarily driven by growth in defense, refining and petrochemical aftermarket, offset by reductions in the space market. Noteworthy variances related to orders during the first quarter of 2024 included the following:

- $7,907 for commercial aftermarket
- $9,100 for a vacuum distillation system for a refinery in India
- $22,000 related to a strategic investment and follow-on orders from a major defense customer. These orders include $13,500 to expand and enhance our Batavia, N.Y. production capabilities, primarily for machinery and equipment, in order to support the U.S. Navy's shipbuilding schedule.
- $2,668 decrease in orders to the space industry primarily due to the Virgin Orbit bankruptcy

For the three-month period ended June 30, 2023, our book-to-bill ratio was 1.4x compared with 1.1x for the same period last year. We believe the continuation of repeat U.S. Navy orders and strategic investment received during the quarter validates the investments we made, our position as a key supplier to the defense industry and our customer's confidence in our execution. Additionally, we believe the strong aftermarket orders are significant because they historically have been a leading indicator of a cyclical upturn in capital project orders. However, we do not expect the next cycle to be as robust as years past due to the factors discussed above under "Current Market Conditions."

Orders to the U.S. represented 77% of total orders for the first quarter of fiscal 2024 compared to 73% in the first quarter of the prior year. These orders were primarily to the defense market which represented 49% of orders and are U.S. based.

The following table provides our backlog by market, including the percentage of total backlog, for each category and period presented:

|  | June 30, | June 30, | Change |
| --- | ---: | ---: | ---: |
| Market | **2023%** | **2022%** | **$%** |
| Refining | $33,264 10% | $27,939 11% | $5,325 19% |
| Chemical/Petrochemical | 12,794 4% | 13,853 5% | (1,059) -8% |
| Space | 8,675 3% | 15,143 6% | (6,468) -43% |
| Defense | 253,358 79% | 193,195 74% | 60,163 31% |
| Other | 13,912 4% | 10,545 4% | 3,367 32% |
| Total backlog | $322,003 100% | $260,675 100% | $61,328 24% |

Backlog was $322,003 at June 30, 2023, a 24% increase over the prior year period. We expect to recognize revenue on approximately 50% of the backlog within one year, 25% to 30% in one to two years and the remaining beyond two years. The majority of the orders that are expected to convert beyond twenty-four months are for the defense industry, specifically the U.S. Navy that have a long conversion cycle (up to six years). Early in the second quarter of fiscal 2024, we shipped the fifth of six units of first article U.S. Navy projects and are on schedule to complete the remaining first article unit in the third quarter of fiscal 2024. In fiscal 2023, we completed four first article U.S. Navy units. These projects were the source of the majority of the losses incurred in fiscal 2022. There are additional first article programs in our backlog but none as significant as the projects impacting fiscal 2022 and are expected to comprise a lower percentage of revenue going forward.

### Outlook

We are providing the following fiscal 2024 outlook:

|  |  |
| --- | --- |
| Net Sales | $170 million to $180 million |
| Gross Profit | 18% to 19% of sales |
| SG&A Expenses(1) | 15% to 16% of sales |
| Tax Rate | 22% to 23% |
| Adjusted EBITDA(2) | $11.5 million to $13.5 million |
| (1) Includes approximately $2 million to $3 million of BN performance bonus and approximately $0.5 million to $1.0 million of ERP conversion costs. |  |
| (2) Excludes approximately $2 million to $3 million of BN performance bonus and approximately $0.5 million to $1.0 million of ERP conversion costs. |  |

See "Cautionary Note Regarding Forward-Looking Statement" and "Non-GAAP Measures" above for additional information about forward-looking statements and non-GAAP measures. We have not reconciled non-GAAP forward-looking Adjusted EBITDA to its most directly comparable GAAP measure, as permitted by Item 10(e)(1)(i)(B) of Regulation S-K. Such reconciliation would require unreasonable efforts to estimate and quantify various necessary GAAP components largely because forecasting or predicting our future operating results is subject to many factors out of our control or not readily predictable.

We have made significant progress with the advancements in our business, which puts us on schedule in achieving our fiscal 2027 goals. As a result, we continue to believe we can achieve greater than $200,000 in revenue (8% to 10% average annualized revenue growth) and Adjusted EBITDA margins in the low to mid-teens by fiscal 2027.

Our expectations for sales and profitability assume that we will be able to operate our production facilities at planned capacity, have access to our global supply chain including our subcontractors, do not experience significant global health related disruptions, and assumes no further impact from Virgin Orbit or any other unforeseen events.

### Contingencies and Commitments

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

As of June 30, 2023, we are subject to the claims noted above, as well as other legal proceedings and potential claims that have arisen in the ordinary course of business. Although the outcome of the lawsuits, legal proceedings or potential claims to which we are or may become a party cannot be determined and an estimate of the reasonably possible loss or range of loss cannot be made for the majority of the claims, we do not believe that the outcomes, either individually or in the aggregate, will have a material adverse effect on our results of operations, financial position or cash flows.

### Critical Accounting Policies, Estimates, and Judgments

Our unaudited condensed consolidated financial statements are based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make significant assumptions. We believe that the most critical accounting estimates used in the preparation of our condensed consolidated financial statements relate to labor hour estimates, total cost, 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, accounting for business combinations and intangible assets, and accounting for pensions and other postretirement benefits. For further information, refer to Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8 "Financial Statements and Supplementary Data" included in our Annual Report on Form 10-K for the year ended March 31, 2023.

## Market risk

As filed, 4,846 characters.

The principal market risks (i.e., the risk of loss arising from market changes) to which we are exposed are foreign currency exchange rates, price risk, and interest rate risk.

The assumptions applied in preparing the following qualitative and quantitative disclosures regarding foreign currency exchange rate, price risk and interest rate risk are based upon volatility ranges experienced by us in relevant historical periods, our current knowledge of the marketplace, and our judgment of the probability of future volatility based upon the historical trends and economic conditions of the markets in which we operate.

### Foreign Currency

International consolidated sales for the first three months of fiscal 2024 were 20% of total sales. Operating in markets throughout the world exposes us to movements in currency exchange rates. Currency movements can affect sales in several ways, the foremost being our ability to compete for orders against foreign competitors that base their prices on relatively weaker currencies. Business lost due to competition for orders against competitors using a relatively weaker currency cannot be quantified. In addition, cash can be adversely impacted by the conversion of sales made by us in a foreign currency to U.S. dollars. In each of the first three months of fiscal 2024 and fiscal 2023, substantially all sales by us and our wholly-owned subsidiaries, for which we were paid, were denominated in the local currency of the respective subsidiary (U.S. dollars, Chinese RMB or India INR).

We have limited exposure to foreign currency purchases. In the first three months of fiscal 2024, our purchases in foreign currencies represented approximately 4% 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 the periods being reported in this Form 10-Q and as of June 30, 2023 and March 31, 2023, 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, engineering experience, and customer service, 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. Additionally, we have faced, and may continue to face, significant cost inflation, specifically in labor costs, raw materials, and other supply chain costs due to increased demand for raw materials and resources caused by the broad disruption of the global supply chain, including as a result of the impact of

COVID-19. International conflicts or other geopolitical events, including the ongoing war between Russia and Ukraine, may further contribute to increased supply chain costs due to shortages in raw materials, increased costs for transportation and energy, disruptions in supply chains, and heightened inflation. Further escalation of geopolitical tensions may also lead to changes to foreign exchange rates and financial markets, any of which may adversely affect our business and supply chain, and consequently our results of operation. While there could ultimately be a material impact on our operations and liquidity, at the time of this report, the impact could not be determined.

### Interest Rate Risk

In connection with the BN acquisition, we entered into a $20,000 Term Loan and Revolving Credit Facility with Bank of America. The Term Loan and Revolving Credit Facility bear interest rates that are tied to BSBY, plus 1.50%, subject to a 0.00% floor. As part of our risk management activities, we evaluate the use of interest rate derivatives to add stability to interest expense and to manage our exposure to interest rate movements. As of June 30, 2023, we had $12,000 outstanding on our Term Loan, $0 outstanding on our Revolving Credit Facility and no interest rate derivatives outstanding. See ''Debt'' in Note 12 to the Unaudited Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information about our outstanding debt. A hypothetical one percentage point (100 basis points) change in the BSBY rate on the $12,000 of variable rate debt outstanding at June 30, 2023 would have an impact of approximately $120 on our interest expense for fiscal 2024.

## Controls and procedures

As filed, 1,122 characters.

#### Conclusion regarding the effectiveness of disclosure controls and procedures

Our President and Chief Executive Officer (our principal executive officer) and Vice President - Finance and Chief Financial Officer (our principal financial officer) each have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, and as of such date, our President and Chief Executive Officer and Vice President - Finance and Chief Financial Officer concluded that our disclosure controls and procedures were effective in all material respects.

#### Changes in internal control over financial reporting

There has been no change to our internal control over financial reporting during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting.

## Risk factors

As filed, 167 characters.

There have been no material changes from the risk factors previously disclosed in Part 1 – Item 1A of the Company’s Form 10-K for the fiscal year ended March 31, 2023.

Filed Aug 7, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-038764. Last ingested by Listed: Oct 27, 2026, 09:59 ET. No prices; not investment advice.