Graham(GHM) - 2023 Q3 - Quarterly Report

FINANCIAL INFORMATION Unaudited Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements for Graham Corporation for the three and nine months ended December 31, 2022, including Statements of Operations, Comprehensive Income (Loss), Balance Sheets, Cash Flows, and Changes in Stockholders' Equity, with notes detailing basis of presentation, the Barber-Nichols acquisition, revenue recognition, and debt structure Condensed Consolidated Statements of Operations The company reported a net income of $0.37 million for Q3 FY2023, a significant turnaround from a net loss of $3.73 million in Q3 FY2022, driven by a 38.6% increase in net sales to $39.87 million and a substantial rise in gross profit from $0.56 million to $6.23 million | | Three Months Ended Dec 31, | | Nine Months Ended Dec 31, | | | :--- | :--- | :--- | :--- | :--- | | (In thousands, except per share data) | 2022 | 2021 | 2022 | 2021 | | Net sales | $39,873 | $28,774 | $114,091 | $83,077 | | Gross profit | $6,227 | $561 | $18,251 | $4,918 | | Operating income (loss) | $669 | $(4,582) | $1,602 | $(9,293) | | Net income (loss) | $368 | $(3,730) | $848 | $(7,348) | | Diluted net income (loss) per share | $0.03 | $(0.35) | $0.08 | $(0.70) | Condensed Consolidated Balance Sheets Total assets increased to $207.7 million as of December 31, 2022, from $183.7 million at March 31, 2022, primarily fueled by increases in unbilled revenue, inventories, and customer deposits, reflecting higher business activity, while total liabilities also rose to $109.8 million from $87.2 million | | Dec 31, 2022 | Mar 31, 2022 | | :--- | :--- | :--- | | (In thousands) | | | | Assets | | | | Total current assets | $112,309 | $87,220 | | Total assets | $207,657 | $183,691 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $85,911 | $59,424 | | Total liabilities | $109,761 | $87,197 | | Total stockholders' equity | $97,896 | $96,494 | Condensed Consolidated Statements of Cash Flows For the nine months ended December 31, 2022, net cash provided by operating activities was $8.9 million, a major reversal from the $14.6 million used in the prior-year period, mainly due to higher net income and favorable changes in working capital, particularly a large increase in customer deposits | | Nine Months Ended Dec 31, | | | :--- | :--- | :--- | | (In thousands) | 2022 | 2021 | | Net cash provided (used) by operating activities | $8,946 | $(14,552) | | Net cash used by investing activities | $(2,394) | $(55,972) | | Net cash (used) provided by financing activities | $(3,866) | $24,863 | | Net increase (decrease) in cash and cash equivalents | $2,474 | $(45,541) | Note 2 – Acquisition This note details the June 1, 2021 acquisition of Barber-Nichols, LLC (BN) for a purchase price of $72.0 million, a strategic move to diversify into the defense, aerospace, and cryogenic markets, resulting in $23.5 million of goodwill and $32.5 million of intangible assets - On June 1, 2021, the company acquired Barber-Nichols, LLC (BN) to further its growth strategy through market diversification, particularly strengthening its presence in the defense, aerospace, energy, and cryogenic markets[24] | Purchase Price Allocation | Amount (in thousands) | | :--- | :--- | | Total assets acquired | $93,121 | | Total liabilities assumed | $21,107 | | Purchase price | $72,014 | | Goodwill | $23,523 | | Customer relationships | $11,800 | | Technology and technical know-how | $10,100 | Note 3 – Revenue Recognition Revenue is primarily recognized over time for large, long-term contracts, accounting for 73% of revenue for the nine months ended Dec 31, 2022, with the remaining recognized upon shipment; the company's backlog stood at $293.7 million as of December 31, 2022, with 40-50% expected to be recognized within one year | Revenue Recognition Method | Nine Months Ended Dec 31, 2022 | | :--- | :--- | | Revenue recognized over time | 73% | | Revenue recognized at shipment | 27% | - As of December 31, 2022, the company's backlog (remaining unsatisfied performance obligations) was $293,671. It expects to recognize 40% to 50% of this within one year, 20% to 30% in one to two years, and the remainder beyond two years[39] Note 13 – Debt As of December 31, 2022, the company had a $15.0 million term loan and a $30.0 million revolving credit facility with Bank of America, with no amount outstanding on the revolver, and was in compliance with all amended financial covenants after receiving a waiver for prior non-compliance - The company has a $20.0 million five-year term loan and a $30.0 million five-year revolving credit facility with Bank of America, entered into on June 1, 2021. As of December 31, 2022, $15.0 million was outstanding on the term loan and $0 was outstanding on the line of credit[67][69] - The company was out of compliance with its original bank covenants at December 31, 2021, but was granted a waiver. Under amended agreements, the company was in compliance with all financial covenants as of December 31, 2022[70][71] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operational results, highlighting a 39% year-over-year revenue increase in Q3 FY2023 to $39.9 million, driven by growth in defense, space, and refining markets, and a return to profitability with a net income of $0.4 million, covering strategic impact, market conditions, operational results, liquidity, capital resources, and future outlook Summary In Q3 FY2023, net sales grew 39% year-over-year to $39.9 million, driven by improved execution in defense, ramp-up of new programs in commercial space, and strength in refining aftermarket, leading to a net income of $0.4 million, a significant turnaround from a $3.7 million loss in the prior-year quarter, with backlog at $293.7 million, 80% from defense | Q3 FY2023 Highlights | Value | Change (YoY) | | :--- | :--- | :--- | | Net Sales | $39.9M | +39% | | Net Income | $0.4M | from -$3.7M loss | | Diluted EPS | $0.03 | from -$0.35 | | Orders | $20.0M | -71% | | Backlog | $293.7M | -6% (QoQ) | Current Market Conditions Management expects continued strong demand from the defense industry, supported by a significant backlog, while traditional energy markets face low near-term capital project opportunities despite increasing aftermarket orders, and the commercial space market offers long-term growth potential but carries uncertainty due to customer financial status - Demand from the defense industry is expected to remain strong and expand, based on significant backlog and long-standing relationships with the U.S. Navy[89] - Traditional energy markets (refining, chemical/petrochemical) are expected to have low near-term project availability and challenging pricing, although an increase in aftermarket orders may signal a future cyclical upturn[90][91] - The commercial space market provides significant growth potential, representing 12.5% of sales in the first nine months of FY2023, but is considered variable and uncertain due to the financial dependency of its key players[94] Results of Operations Q3 FY2023 net sales rose 39% to $39.9 million, with defense sales up 31% and space sales up 142%, while gross margin dramatically improved to 16% from 2% year-over-year due to a better sales mix and improved execution on defense contracts, and SG&A as a percentage of sales decreased to 14% from 17% | Net Sales by Product Line (Q3 FY2023) | Amount (in thousands) | % of Total | Change (YoY) | | :--- | :--- | :--- | :--- | | Defense | $21,687 | 54% | +31% | | Refining | $6,497 | 16% | +64% | | Chemical/Petrochemical | $3,927 | 10% | +29% | | Space | $3,510 | 9% | +142% | | Other Commercial | $4,252 | 11% | +14% | | Total Net Sales | $39,873 | 100% | +39% | - Gross profit margin for Q3 FY2023 increased to 16% from 2% in the prior-year quarter. This was due to an improved sales mix of higher-margin projects (commercial space and aftermarket) and better execution, contrasting with the prior year's results which were impacted by cost overruns on first-article U.S. Navy projects[101] Non-GAAP Measures The company utilizes non-GAAP measures like Adjusted EBITDA and Adjusted Net Income to provide supplemental insight into operating performance, with Q3 FY2023 Adjusted EBITDA at $2.2 million, a significant improvement from a $2.6 million loss, and Adjusted net income at $0.9 million ($0.08 per share), reversing a $2.9 million loss (-$0.27 per share) in Q3 FY2022 | Non-GAAP Reconciliation (in thousands) | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $368 | $(3,730) | $848 | $(7,348) | | Adjusted EBITDA | $2,238 | $(2,604) | $6,506 | $(5,401) | | Adjusted net income (loss) | $857 | $(2,903) | $2,511 | $(6,353) | Liquidity and Capital Resources As of December 31, 2022, the company held $17.2 million in cash and cash equivalents, with net cash from operations for the first nine months of FY2023 at a positive $8.9 million, a stark contrast to the $14.6 million used in the prior-year period, largely due to higher net income and a $7.75 million customer deposit, while maintaining compliance with all debt covenants and suspending dividends per the credit agreement - Net cash provided by operating activities for the first nine months of fiscal 2023 was $8,946, a significant improvement from $14,552 of cash used in the prior year period, primarily due to higher cash net income and lower net working capital levels[115] - The company suspended its dividend in Q4 fiscal 2022 in accordance with its credit agreement with Bank of America[116] - As of December 31, 2022, the company was in compliance with its amended credit facility covenants, with a calculated bank leverage ratio of 2.5. The available amount under the revolving credit facility was $9,926[122] Orders and Backlog Q3 FY2023 orders were $20.0 million, a significant decrease from $68.0 million in the prior-year quarter due to variable timing of large projects, though for the first nine months of FY2023, orders were up 26% to $151.9 million, with total backlog at $293.7 million as of December 31, 2022, an increase of 14% from March 31, 2022, with 80% from the defense market | Orders by Product Line (Nine Months) | FY2023 (in thousands) | FY2022 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Defense | $88,703 | $60,369 | +47% | | Space | $12,647 | $5,250 | +141% | | Refining | $23,978 | $24,794 | -3% | | Chemical/Petrochemical | $12,464 | $15,583 | -20% | | Total Orders | $151,863 | $120,215 | +26% | | Backlog Trend | Dec 31, 2021 | Mar 31, 2022 | Dec 31, 2022 | | :--- | :--- | :--- | :--- | | Total Backlog (in thousands) | $272,600 | $256,537 | $293,671 | | Defense % of Backlog | 77% | 76% | 80% | Outlook The company reaffirmed its full-year fiscal 2023 guidance, expecting revenue between $145 million and $155 million, a gross margin of approximately 16%, and Adjusted EBITDA of $7.5 million to $8.5 million, while noting that lower-margin, first-article U.S. Navy projects will continue to negatively impact results through the second quarter of fiscal 2024 | Fiscal 2023 Guidance | Expected Range | | :--- | :--- | | Revenue | $145 million to $155 million | | Gross Profit | ~16% of sales | | SG&A Expenses | ~15% of sales | | Tax Rate | ~23% | | Adjusted EBITDA | $7.5 million to $8.5 million | Quantitative and Qualitative Disclosures About Market Risk The company identifies its principal market risks as foreign currency exchange rates, price risk, and interest rate risk, with international sales constituting 20% of total sales for the first nine months of fiscal 2023, and a hypothetical 1% rate change on its $15 million term loan estimated to impact annual interest expense by approximately $150,000 - The company's principal market risks are identified as foreign currency exchange rates, price risk, and interest rate risk[135] - International sales accounted for 20% of total sales in the first nine months of fiscal 2023. The company has limited exposure to foreign currency purchases, representing about 9% of cost of products sold[137][138] - A hypothetical one percentage point (100 basis points) change in the BSBY interest rate on the $15,000 of variable rate debt outstanding would impact annual interest expense by approximately $150[141] Controls and Procedures The CEO and CFO evaluated and concluded that the company's disclosure controls and procedures were effective as of December 31, 2022, with the assessment of internal control over financial reporting excluding the recently acquired Barber-Nichols, LLC, as permitted by SEC guidance, which will be included in the annual assessment for the fiscal year ending March 31, 2023 - The President and Chief Executive Officer and the Vice President - Finance & Administration and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period[142] - The scope of the assessment of internal control over financial reporting does not include the recently acquired Barber-Nichols, LLC, which will be included in the assessment for the fiscal year ending March 31, 2023[144] OTHER INFORMATION Risk Factors The company states that there have been no material changes from the risk factors that were previously disclosed in Part I, Item 1A of its Annual Report on Form 10-K for the fiscal year ended March 31, 2022 - There have been no material changes from the risk factors previously disclosed in the Company's Form 10-K for the fiscal year ended March 31, 2022[145] Exhibits This section provides an index of the exhibits filed with the Form 10-Q, including the certifications of the Principal Executive Officer and Principal Financial Officer as required by Rule 13a-14(a)/15d-14(a) and Section 1350, as well as the Interactive Data Files (Inline XBRL) - The exhibits filed with the report include CEO and CFO certifications (Rule 13a-14(a)/15d-14(a) and Section 1350) and Interactive Data Files (Inline XBRL)[148]