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

- Company: [Graham Corp](/companies/ghm.md) (CIK 716314)
- Form: 10-Q
- Filed: 2023-11-06
- Accepted by EDGAR: Nov 6, 2023, 08:30 ET
- Period: 2023-09-30
- Accession: 0000950170-23-059030
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/716314/000095017023059030/ghm-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/716314/000095017023059030/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $45.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-04-01 to 2023-09-30 | $92.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $37.9m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2023-04-01 to 2023-09-30 | $74.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $7.2m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-04-01 to 2023-09-30 | $18.2m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $6.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-04-01 to 2023-09-30 | $13.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $803.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-04-01 to 2023-09-30 | $4.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $55.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-04-01 to 2023-09-30 | $240.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $243.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-04-01 to 2023-09-30 | $1.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $411.0k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-04-01 to 2023-09-30 | $3.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-04-01 to 2023-09-30 | $0.28 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-04-01 to 2023-09-30 | $0.29 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 10,810,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-04-01 to 2023-09-30 | 10,761,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-04-01 to 2023-09-30 | $11.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-04-01 to 2023-09-30 | $3.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2023-04-01 to 2023-09-30 | $57.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $25.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $120.1m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $213.1m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $93.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $112.3m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $11.5m | us-gaap:LongTermDebt |
| Current portion of debt | at 2023-09-30 | $2.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-30 | $100.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 43,123 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 space, 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 September 30, 2023 include:

- Net sales for the second quarter of fiscal 2024 were $45,076, up $6,933, or 18% compared with $38,143 for the second quarter of fiscal 2023. This increase over the prior year was primarily due to sales to the defense industry, which increased $10,263 versus the prior year period primarily due to an improved mix of higher margin defense projects, increased direct labor, better execution, the timing of material receipts, and improved pricing. Net sales for the quarter also benefited from continued growth in commercial aftermarket sales of approximately $4,500 in comparison to the prior year period, which is included in our refining and chemical/petrochemical markets. Partially offsetting this increase were a $1,439 decline in chemical/petrochemical and a $1,531 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.
- 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 second quarter of fiscal 2024, we recorded $802 related to the BN Performance Bonus.
- Net income and income per diluted share for the second quarter of fiscal 2024 were $411 and $0.04, respectively, compared with net loss and loss per diluted share of $196 and $0.02, respectively, for the second quarter of fiscal 2023. Adjusted net income and adjusted net income per diluted share for the second quarter of fiscal 2024 were $1,371 and $0.13, respectively, compared with adjusted net income and adjusted net income per diluted share of $325 and $0.03, respectively, for the second 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 the second quarter of fiscal year 2024, we shipped the last of the first article units related to the Columbia Class submarine and Ford Class carrier programs. While we expect to continue to have first article programs in our backlog as we win new programs and applications, the amount as a percentage of total backlog should be reduced moving forward. During fiscal 2022, we chose to make significant investments to ensure we could deliver these and previous units on schedule and these investments were the main source of the losses incurred that year.
- Orders booked in the second quarter of fiscal 2024 decreased to $36,464 compared with $91,511 in the second quarter of fiscal 2023. This decrease was primarily in the defense market and is due to the timing of orders from major defense

customers. Additionally orders in the refining market were down slightly due to reduced orders from Asia due to timing and the slow recovery in China from the Covid-19 pandemic. For more information on this key performance indicator see "Orders and Backlog" below.

- Backlog was $313,343 at September 30, 2023, compared with $301,734 at March 31, 2023. This increase was primarily driven by growth in our defense and chemical/petrochemical markets. For more information on this key performance indicator see "Orders and Backlog" below.
- Cash and cash equivalents at September 30, 2023 were $25,800, compared with $18,257 at March 31, 2023. This increase was primarily due to cash provided by operating activities of $11,898, partially offset by net repayment of debt of $1,020 and $3,312 of capital expenditures as we continue to invest in longer-term growth opportunities. Cash flow from operations was primarily driven by cash net income and an increase in customer deposits from major defense customers.
- Following the end of the second quarter of fiscal 2024, on October 13, 2023, we entered into a new, five-year $50,000 revolving credit facility with Wells Fargo Bank, National Association ("Wells Fargo") of which $35,000 is immediately available. We used the proceeds from the facility and cash on hand to pay down the remaining $11,500 balance of our term loan and the $725 exit fee from our previous lending agreement amendments. The new facility will reduce current borrowing rates by approximately 25 basis points to SOFR plus 1.25%, has a maximum total leverage ratio of 3.5 to 1, and provides us greater financial flexibility to execute on our strategy for growth.
- Following the end of the second quarter of fiscal 2024, we announced that we received approximately $110 million in total orders in October 2023, which were primarily related to follow-on orders for critical U.S. Navy programs. These defense orders are expected to be recognized in revenue beginning in the fourth quarter of fiscal 2025 through early fiscal 2030.

### 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, accelerated ship build schedules due to geopolitical tensions, the projected build schedule 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. The timing and catalyst for a recovery in this market 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, small modular nuclear systems and geothermal power generation with lithium extraction. 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 and 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 what occurred to Virgin Orbit. Thus, future revenue and growth in 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 80% of our total backlog at September 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 September 30, 2023 | 2022 | Six Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $45,076 | $38,143 | $92,645 | $74,218 |
| Gross profit | $7,191 | $5,280 | $18,168 | $12,024 |
| Gross profit margin | 16% | 14% | 20% | 16% |
| SG&A expenses (1) | $6,388 | $5,332 | $13,681 | $11,091 |
| SG&A as a percent of sales | 14% | 14% | 15% | 15% |
| Net income (loss) | $411 | $(196) | $3,051 | $480 |
| Income (loss) per diluted share | $0.04 | $(0.02) | $0.28 | $0.05 |

(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:

### The Second Quarter and First Six Months of Fiscal 2024 Compared with the Second Quarter and First Six Months of Fiscal 2023

Net sales for the second quarter of fiscal 2024 were $45,076, up $6,933, or 18% compared with $38,143 for the second quarter of fiscal 2023. This increase over the prior year was primarily due to sales to the defense industry, which increased $10,263 versus the prior year period primarily due to an improved mix of higher margin defense projects, increased direct labor, better execution, the timing of material receipts, and improved pricing. Net sales for the quarter also benefited from continued growth in commercial aftermarket of approximately $4,500 in comparison to the prior year period, which is included in our refining and chemical/petrochemical markets. Partially offsetting this increase were a $1,439 decline in chemical/petrochemical sales and a $1,531 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.

Domestic sales as a percentage of aggregate sales were 86% in the second quarter of fiscal 2024 compared with 80% in the second quarter of fiscal 2023, reflecting the increase in our defense industry businesses, which is U.S. based. Sales in the three months ended September 30, 2023 were 56% to the defense industry compared to 39% for the comparable quarter in fiscal 2023. Fluctuation in sales among markets, products and geographic locations varies, sometimes significantly, from quarter-to-quarter based on timing and magnitude of projects but overall reflects our strategic shift towards the defense industry.

Net sales for the first six months of fiscal 2024 were $92,645, an increase of $18,427 or 25% from the first six months of fiscal 2023 and were primarily in the defense market. Additionally, our sales continued to benefit from our diversified revenue base including strong growth of approximately $7,625 in commercial aftermarket sales which is included in our refining and chemical/petrochemical markets. Partially offsetting this increase was a $3,171 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. Sales in the six months ended September 30, 2023 were

52% for the defense industry compared with 33% for the defense industry in the comparable period in fiscal 2023 and reflects our strategic shift towards the defense industry. 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 second quarter of fiscal 2024 was 16%, compared with 14% for the second quarter of fiscal 2023. Gross profit for the second quarter of fiscal 2024 increased $1,911, or 36%, compared with fiscal 2023, to $7,191. These increases reflected the increase in sales discussed above as well as an improved mix of sales related to higher margin defense and commercial aftermarket, as well as better execution and pricing on defense contracts, partially offset by higher incentive compensation in comparison with the prior year.

Gross profit margin for the first six months of fiscal 2024 was 20%, compared with 16% for the first six months of fiscal 2023. Gross profit for the first six months of fiscal 2024 increased $6,144 compared with fiscal 2023, to $18,168. These increases reflected the increase in sales discussed above as well as an improved mix of sales related to higher margin defense and commercial aftermarket sales, as well as better execution and pricing on defense contracts, partially offset by higher incentive compensation in comparison with the prior year.

SG&A expense including amortization for the second quarter of fiscal 2024 was $6,388 compared to $5,332 for the second quarter of fiscal 2023. Approximately $800 of this increase was due 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 increasing complexity in our business associated with growth and our international operations. As a percentage of net sales, SG&A expense in the second quarter of fiscal 2024 remained consistent at 14% compared with the same period of fiscal 2023.

SG&A expense including amortization for the first six months of fiscal 2024 was $13,681, up $2,590 compared with $11,091 for the first six months of fiscal 2023. Approximately $1,600 of this increase was due 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 $350 due to increasing complexity in our business associated with growth and our international operations. As a percentage of net sales, SG&A expense in the first six months of fiscal 2024 remained consistent at 15% compared with the same period of fiscal 2023.

Net interest expense for the second quarter of fiscal 2024 was $55 compared to $246 in the second quarter of fiscal 2023. This decrease was due to lower net debt levels, partially offset by an increase in interest rates since the second quarter of fiscal 2023.

Net interest expense for the first six months of fiscal 2024 was $240 compared to $403 in the first six months of fiscal 2023. This decrease was due to lower net debt levels, partially offset by an increase in interest rates since the second quarter of fiscal 2023.

Our effective tax rate in the second quarter of fiscal 2024 was 37%, compared with 17% in the second quarter of fiscal 2023. Our effective tax rate for the first six months of fiscal 2024 was 25%, compared with 27% for the first six months of fiscal 2023. Our effective tax rate can vary significantly from period to period depending on the level of pre-tax income, the amount of income derived from our higher tax rate foreign subsidiaries, as well as the timing of discrete tax items, primarily related to the vesting of restricted stock awards. For fiscal 2024 we expect our full year effective tax rate to be 22% to 23%.

The net result of the above is that net income and income per diluted share for the second quarter of fiscal 2024 were $411 and $0.04, respectively, compared with a loss of $196 and $0.02, respectively, for the second quarter of fiscal 2023. Adjusted net income and adjusted net income per diluted share for the second quarter of fiscal 2024 were $1,371 and $0.13, respectively, compared with net income of $325 and $0.03, respectively, for the second quarter of fiscal 2023.

Net income and income per diluted share for the first six months of fiscal 2024 were $3,051 and $0.28, respectively, compared with net income of $480 and $0.05, respectively, for the first six months of fiscal 2023. Adjusted net income and adjusted net income per diluted share for the first six months of fiscal 2024 were $4,945 and $0.46, respectively, compared with net income of $1,654 and $0.16, respectively, for the first six months 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 and adjusted net income 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 and adjusted net income per diluted share to net income (loss) in accordance with GAAP is as follows:

|  | Three Months Ended September 30, 2023 | 2022 | Six Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| **Net income (loss)** | **$411** | **$(196)** | **$3,051** | **$480** |
| Acquisition & integration costs | - | - | - | 54 |
| BN Performance Bonus | 802 | - | 1,569 | - |
| Debt amendment costs | - | 41 | - | 194 |
| Net interest expense | 55 | 246 | 240 | 403 |
| Income taxes | 243 | (40) | 1,009 | 175 |
| Depreciation & amortization | 1,201 | 1,487 | 2,440 | 2,962 |
| **Adjusted EBITDA** | **$2,712** | **$1,538** | **$8,309** | **$4,268** |
| Adjusted EBITDA as a % of revenue | 6.0% | 4.0% | 9.0% | 5.8% |

|  | Three Months Ended September 30, 2023 | 2022 | Six Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| **Net income (loss)** | **$411** | **$(196)** | **$3,051** | **$480** |
| Acquisition & integration costs | - | - | - | 54 |
| Amortization of intangible assets | 445 | 619 | 891 | 1,238 |
| BN Performance Bonus | 802 | - | 1,569 | - |
| Debt amendment costs | - | 41 | - | 194 |
| Normalize tax rate(1) | (287) | (139) | (566) | (312) |
| **Adjusted net income** | **$1,371** | **$325** | **$4,945** | **$1,654** |
| **GAAP net income (loss) per diluted share** | **$0.04** | **$(0.02)** | **$0.28** | **$0.05** |
| **Adjusted net income per diluted share** | **$0.13** | **$0.03** | **$0.46** | **$0.16** |
| Diluted weighted average common shares outstanding | 10,810 | 10,617 | 10,761 | 10,618 |
| (1) Applies a normalized tax rate to non-GAAP adjustments, which are pre-tax, based upon the statutory tax rate of 23%. |  |  |  |  |

22

### 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:

|  | September 30, 2023 | March 31, 2023 |
| --- | ---: | ---: |
| Cash and cash equivalents | $25,800 | $18,257 |
| Working capital (1) | 26,275 | 23,904 |
| Working capital ratio(1) | 1.3 | 1.3 |

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

Net cash provided by operating activities for the first six months of fiscal 2024 was $11,898 compared with $398 of cash used for the first six months of fiscal 2023. The cash provided by operations during the first six months 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 and increased customer deposits.

Capital expenditures for fiscal 2024 are expected to be approximately $12,000 to $13,500 and include 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 $25,800 at September 30, 2023 compared with $18,257 at March 31, 2023, up $7,543 primarily due to cash provided by operations, offset by capital expenditures and debt repayments. At September 30, 2023, approximately $7,000 of our cash and cash equivalents was used to secure our letters of credit and approximately $2,100 of our cash was held by foreign subsidiaries.

On October 13, 2023, we terminated the revolving credit facility and repaid our term loan with Bank of America, and entered into a new five-year revolving credit facility with Wells Fargo that provides a $35,000 line of credit, including letters of credit and bank guarantees, expandable up to $50,000 upon our satisfying specified covenants (the "New Revolving Credit Facility"). The additional $15,000 will automatically be available upon (i) our achieving a minimum consolidated EBITDA, as defined in the agreement, of $15,000, computed on a trailing twelve month basis, for three consecutive quarters and (ii) a minimum liquidity (consisting of cash and borrowing availability under the New Revolving Credit Facility) of at least $7,500. In addition to the $25,000 letters of credit available to be issued pursuant to the New Revolving Credit Facility, we may request the issuance of cash secured letters of credit in an aggregate amount of up to $7,500.

The New Revolving Credit Facility contains customary terms and conditions, including representations and warranties and affirmative and negative covenants, as well as financial covenants for the benefit of Wells Fargo, which require us to maintain (i) a consolidated total leverage ratio not to exceed 3.50:1.00 and (ii) a consolidated fixed charge coverage ratio of at least 1.20:1.00, in both cases computed in accordance with the definitions and requirements specified in the New Revolving Credit Facility.

Borrowings under the New Revolving Credit Facility bear interest at a rate equal to, at our option, either (i) a forward-looking term rate based on the secured overnight financing rate ("SOFR") for the applicable interest period, subject to a floor of 0.0% per annum or (ii) a base rate determined by reference to the highest of (a) the rate of interest per annum publicly announced by Wells Fargo as its prime rate, (b) the federal funds rate plus 0.50% per annum and (c) one-month term SOFR plus 1.00% per annum, subject to a floor of 1.00% per annum, plus, in each case, an applicable margin. The applicable margins range between (i) 1.25% per annum and 2.50% per annum in the case of any term SOFR loan and (ii) 0.25% per annum and 1.50% per annum in the case of any base rate loan, in each case based upon our then-current consolidated total leverage ratio; provided, however, for a period of one year following the closing date, the applicable margin shall be set at 1.25% per annum in the case of any term SOFR loan and 0.25% per annum in the case of any base rate loan.

We will incur a quarterly commitment fee on the unused portion of the New Revolving Credit Facility during the applicable quarter at a per annum rate also determined by reference to our then-current consolidated total leverage ratio, which fee ranges between 0.10% per annum and 0.20% per annum; provided, however, for a period of one year following the closing date, the quarterly commitment fee will be set at 0.10% per annum. Any outstanding letters of credit that are cash secured will bear a fee equal to the daily amount available to be drawn under such letters of credit multiplied by 0.65% per annum. Any outstanding letters of credit issued under the New Revolving Credit Facility will bear a fee equal to the daily amount drawn under such letters of credit multiplied by the applicable margin for term SOFR loans.

In connection with the termination of our prior revolving credit facility, we repaid the $725 exit fee and recognized an extinguishment charge of approximately $650 from our previous lending agreement amendments.

We did not have any off-balance sheet arrangements as of September 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 our New Revolving Credit Facility will be adequate to meet our cash needs and fund our long-term strategic growth objectives.

### 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:

Orders booked for the three-month period ended September 30, 2023 were $36,464, a decrease of $55,047 over the comparable period of fiscal 2023. Orders booked for the six-month period ended September 30, 2023 were $104,397, a decrease of $27,422 over the comparable period of fiscal 2023. These decreases were primarily due to the timing of our large defense orders and orders to the refining market. For the six-month period ended September 30, 2023, our book-to-bill ratio was 1.1x. Orders during the first six months of 2024 included the following:

- $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.
- $19,300 of aftermarket orders to the refining and chemical/petrochemical markets.
- $3,361 decrease in orders to the space industry primarily due to the Virgin Orbit bankruptcy.

We believe the repeat U.S. Navy orders and strategic investment received 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 88% of total orders for the second quarter of fiscal 2024 compared to 93% in the second quarter of the prior year. These orders were primarily to the defense market which represented 57% of orders and are U.S. based.

Following the end of the second quarter of fiscal 2024, we announced that we received approximately $110 million in total orders in October 2023, which were primarily related to follow-on orders for critical U.S. Navy programs. These defense orders are expected to be recognized in revenue beginning in the fourth quarter of fiscal 2025 through early fiscal 2030.

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

|  | September 30, | September 30, | Change |
| --- | ---: | ---: | ---: |
| Market | **2023%** | **2022%** | **$%** |
| Refining | $29,116 9% | $28,502 9% | $614 2% |
| Chemical/Petrochemical | 13,705 5% | 12,549 5% | 1,156 9% |
| Space | 7,263 2% | 13,210 4% | (5,947) -45% |
| Defense | 250,732 80% | 248,672 79% | 2,060 1% |
| Other | 12,527 4% | 10,407 3% | 2,120 20% |
| Total backlog | $313,343 100% | $313,340 100% | $3 0% |

Backlog was $313,343 at September 30, 2023, which is consistent with 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 (generally up to six years). During the second quarter of fiscal 2024, we shipped the last of the first article units related to the Columbia Class submarine and Ford Class carrier programs. While we expect to continue to have first article programs in our backlog as we win new programs and applications, the amount as a percentage of total backlog should be reduced moving forward. During fiscal 2022, we chose to make significant investments to ensure we could deliver these and previous units on schedule and these investments were the main source of the losses incurred that year.

### Outlook

We are providing the following fiscal 2024 outlook reflecting our current expectations:

|  |  |
| --- | --- |
| 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 $2.5 million to $4 million of BN Performance Bonus and ERP conversion costs included in SG&A expense. |  |
| (2) Excludes approximately $2.5 million to $4 million of BN Performance Bonus and ERP conversion costs included in SG&A expense and approximately $0.7 million of debt extinguishment charges. |  |

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 we believe puts us on schedule in achieving our fiscal 2027 goals of greater than $200,000 in revenue (8% to 10% average annualized revenue growth) and Adjusted EBITDA margins in the low to mid-teens.

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 September 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, 5,021 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 six months of fiscal 2024 were 17% of total sales compared with 21% for the same period of fiscal 2023. 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 six 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). For the first six months of fiscal 2024, foreign currency exchange rate fluctuations reduced our cash balances by $82 primarily due to the strengthening of the U.S. dollar.

We have limited exposure to foreign currency purchases. In the first six months of fiscal 2024, our purchases in foreign currencies represented approximately 3% 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 September 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 those associated with the impact of COVID-19. International conflicts or other geopolitical events, including the 2022 Russian invasion of Ukraine and the Israel-Hamas war, 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

As a result of the BN acquisition and in order to fund our strategic growth objectives we borrow funds under our various credit agreements that bear interest at a variable rate. 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 September 30, 2023, we had $11,500 of variable rate debt 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 $11,500 of variable rate debt outstanding at September 30, 2023 would have an impact of approximately $115 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 Nov 6, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-059030. Last ingested by Listed: Oct 27, 2026, 09:59 ET. No prices; not investment advice.