Graham(GHM) - 2023 Q4 - Annual Report

Part I Business Overview Graham Corporation designs and manufactures mission-critical equipment for defense, space, energy, and process industries, aiming for 8-10% revenue growth and mid-teen adjusted EBITDA margins by fiscal 2027 - The company designs and manufactures mission-critical fluid, power, heat transfer, and vacuum technologies for the defense, space, energy, and process industries[14] - On June 1, 2021, the company acquired Barber-Nichols (BN), a turbomachinery manufacturer, for $72.014 million to diversify into defense and energy markets[17] - In fiscal 2023, domestic sales comprised 81% of total sales, with the defense industry accounting for 42%, and two customers each contributing over 10% of revenue[20] Backlog Growth | Date | Backlog (in thousands) | | :--- | :--- | | March 31, 2023 | $301,734 | | March 31, 2022 | $256,536 | - The company targets 8% to 10% average annualized revenue growth and low to mid-teen adjusted EBITDA margins by fiscal year 2027[24] Research and Development Expenses (in thousands) | Fiscal Year | R&D Spending | | :--- | :--- | | 2023 | $4,144 | | 2022 | $3,845 | | 2021 | $3,367 | Risk Factors The company faces macroeconomic, supply chain, and customer concentration risks, particularly from U.S. Navy projects, alongside challenges in fixed-price contracts, international operations, and cybersecurity - Macroeconomic risks, including supply chain disruptions, rising inflation, and economic slowdowns, could increase operating costs and negatively impact financial results[42][43][44] - Significant customer concentration risk exists, with defense industry sales reaching 42% of business in fiscal 2023, creating reliance on U.S. Navy funding[51] - Fixed-price contracts expose the company to cost overruns and supplier failures, with material cost overruns experienced on defense contracts in fiscal 2022[93] - International operations, comprising 19% of fiscal 2023 revenue, face economic, political, and regulatory risks, including intellectual property enforcement challenges in China and India[75][80][81] - Cybersecurity threats to information systems could lead to financial loss, reputational damage, and theft of proprietary information[105] - The aging ERP system at the Batavia, N.Y. facility and its fiscal 2024 replacement pose risks of disruption and uncertain benefits[106] Unresolved Staff Comments Not applicable, as the company reports no unresolved staff comments - Not applicable[113] Properties The company owns its Batavia, NY headquarters and manufacturing facilities, leases a Colorado campus for Barber-Nichols, and anticipates needing more manufacturing space for future growth - The company owns its corporate headquarters and manufacturing facilities in Batavia, New York, encompassing 270,000 square feet for manufacturing, warehousing, and R&D[114] - The Barber-Nichols (BN) operation in Arvada, Colorado, leases a campus of approximately 101,000 square feet[114] - Additional manufacturing space is anticipated to support future growth at both BN and Graham Mfg locations[115] Legal Proceedings Information on legal proceedings is incorporated by reference from Note 16 to the consolidated financial statements in Item 8 - The required information is contained in Note 16 to the consolidated financial statements[116] Mine Safety Disclosures Not applicable, as the company has no mine safety disclosures to report - Not applicable[117] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "GHM", with dividends suspended in fiscal 2022 due to credit agreement terms - The company's common stock trades on the NYSE under the symbol "GHM"[119] - The dividend was suspended in fiscal 2022 per the Bank of America credit agreement, with future payments not guaranteed[120] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2023 saw a significant turnaround with 28% net sales growth to $157.1 million, a return to profitability, and strong order and backlog growth driven by defense demand and improved project execution Key Results Fiscal 2023 vs. Fiscal 2022 Performance | Metric | Fiscal 2023 | Fiscal 2022 | | :--- | :--- | :--- | | Net Sales | $157,118 thousand | $122,814 thousand | | Net Income (Loss) | $367 thousand | ($8,773) thousand | | Diluted EPS | $0.03 | ($0.83) | | Orders Booked | $202,686 thousand | $143,875 thousand | | Backlog | $301,734 thousand | $256,537 thousand | - The company recorded approximately $2.5 million in reserves for Virgin Orbit Holdings, Inc. bankruptcy and reversed approximately $4 million of associated purchase orders[129] - Fiscal 2022 results were negatively impacted by over $10 million in cost overruns on U.S. Navy projects, with execution significantly improving in fiscal 2023[129] - Cash from operating activities was $13.914 million, a significant improvement driven by higher income and approximately $13 million in customer deposits from a long-term U.S. Navy contract[129] Results of Operations Net Sales by Market (in thousands) | Market | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Refining | $27,270 | $24,406 | 12% | | Chemical/Petrochemical | $21,950 | $15,955 | 38% | | Space | $21,180 | $5,744 | 269% | | Defense | $65,327 | $62,189 | 5% | | Other | $21,391 | $14,520 | 47% | | Total Net Sales | $157,118 | $122,814 | 28% | - Gross margin improved to 16.2% in fiscal 2023 from 7.4% in fiscal 2022, driven by better sales mix, improved pricing, defense contract execution, and the absence of over $10 million in prior-year cost overruns[143] - SG&A expense increased to $24.447 million from $21.299 million, primarily due to the full-year BN acquisition impact, Virgin Orbit reserves, and higher incentive compensation, though decreasing to 15.4% of sales from 17.3%[144][145] Liquidity and Capital Resources - Net cash provided by operating activities was $13.914 million in fiscal 2023, a significant improvement from $2.219 million used in fiscal 2022, driven by higher net income and customer deposits[155] - The company ended fiscal 2023 with $18.257 million in cash and cash equivalents, an increase from $14.741 million at the end of fiscal 2022[158] - As of March 31, 2023, the company complied with all financial covenants of its Bank of America loan agreement, maintaining a calculated bank leverage ratio of 2.1x[130][162] - Capital expenditures for fiscal 2024 are projected between $5.5 million and $7 million, primarily for machinery, equipment, and facility improvements to support growth[157] Orders and Backlog Orders by Market (in thousands) | Market | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Refining | $29,276 | $28,411 | 3% | | Chemical/Petrochemical | $15,306 | $22,241 | -31% | | Space | $15,160 | $10,733 | 41% | | Defense | $116,714 | $63,215 | 85% | | Other | $26,230 | $19,275 | 36% | | Total Orders | $202,686 | $143,875 | 41% | - The book-to-bill ratio for fiscal 2023 was 1.3x, indicating strong future revenue potential[170] Backlog by Market (in thousands) | Market | March 31, 2023 | March 31, 2022 | % Change | | :--- | :--- | :--- | :--- | | Refining | $26,142 | $25,402 | 3% | | Chemical/Petrochemical | $7,842 | $13,647 | -43% | | Space | $8,242 | $11,283 | -27% | | Defense | $243,628 | $194,758 | 25% | | Other | $15,880 | $11,447 | 39% | | Total Backlog | $301,734 | $256,537 | 18% | - Approximately 50% to 55% of the current backlog is expected to convert to sales within one year, with most longer-term orders for the U.S. Navy[172] Outlook Fiscal 2024 Outlook | Metric | Guidance | | :--- | :--- | | Net Sales | $165 million to $175 million | | Gross Profit Margin | 17% to 18% | | SG&A Expenses | 15% to 16% of sales | | Adjusted EBITDA | $10.5 million to $12.5 million | - The company has raised its fiscal 2027 targets, now expecting to achieve greater than $200 million in revenue with adjusted EBITDA margins in the low to mid-teens[174] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include foreign currency exchange rates, price risk from competition and inflation, and interest rate risk on variable-rate debt - The company is exposed to foreign currency risk, with international sales comprising 19% of total sales in fiscal 2023, where a strengthening U.S. dollar can negatively impact competitiveness[199] - Price risk is driven by competition from global manufacturers with lower production costs and significant cost inflation in labor and raw materials[201] - The company faces interest rate risk from its variable-rate term loan, with a $12.5 million balance as of March 31, 2023, where a 1% BSBY rate change would impact annual interest expense by approximately $0.125 million[202][203] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for fiscal years 2021-2023, including the auditor's unqualified opinion and detailed notes on accounting policies, acquisitions, and debt Consolidated Statements of Operations Key Financial Results (in thousands) | Metric | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Net Sales | $157,118 | $122,814 | $97,489 | | Gross Profit | $25,408 | $9,129 | $20,469 | | Operating Income (Loss) | $1,250 | ($11,343) | $2,998 | | Net Income (Loss) | $367 | ($8,773) | $2,374 | | Diluted EPS | $0.03 | ($0.83) | $0.24 | Consolidated Balance Sheets Key Balance Sheet Items (in thousands) | Account | March 31, 2023 | March 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $18,257 | $14,741 | | Total Current Assets | $110,070 | $87,220 | | Total Assets | $203,918 | $183,691 | | Total Current Liabilities | $86,166 | $59,424 | | Total Liabilities | $106,985 | $87,197 | | Total Stockholders' Equity | $96,933 | $96,494 | Consolidated Statements of Cash Flows Cash Flow Summary (in thousands) | Cash Flow Category | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Net cash provided (used) by operating activities | $13,914 | ($2,219) | ($1,722) | | Net cash (used) provided by investing activities | ($3,749) | ($57,106) | $32,397 | | Net cash (used) provided by financing activities | ($6,441) | $14,419 | ($4,454) | Notes to Consolidated Financial Statements The notes provide detailed financial statement support, covering the Barber-Nichols acquisition, revenue recognition, debt structure, pension plans, and contingencies like asbestos litigation and Virgin Orbit bankruptcy reserves - The Barber-Nichols (BN) acquisition on June 1, 2021, for $72.014 million, resulted in $23.523 million in goodwill and $32.5 million in identifiable intangible assets[263][264][189] - In fiscal 2023, 74% of revenue was recognized over time, primarily via an input method, while 26% was recognized at shipment[270] - The company's remaining unsatisfied performance obligations (backlog) totaled $301.734 million as of March 31, 2023[276] - As of March 31, 2023, the company complied with the amended financial covenants of its Bank of America loan agreement[287] - The company recorded $3.05 million in reserves for accounts receivable and inventory related to Virgin Orbit's Chapter 11 bankruptcy during fiscal 2023[330] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable, as the company reports no changes in or disagreements with its accountants - Not applicable[335] Controls and Procedures As of March 31, 2023, management and Deloitte & Touche LLP affirmed the effectiveness of the company's disclosure controls and internal control over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2023[336] - Management concluded that the company's internal control over financial reporting was effective as of March 31, 2023, based on the COSO framework[338] - Deloitte & Touche LLP issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of March 31, 2023[339][341] Other Information Not applicable - Not applicable[347] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections Not applicable - Not applicable[348] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 proxy statement, and the company has a Code of Business Conduct and Ethics - Required information is incorporated by reference from the proxy statement for the 2023 Annual Meeting of Stockholders[350] - The company has adopted a Code of Business Conduct and Ethics applicable to all directors and employees, available on its website[351] Executive Compensation Information on executive and director compensation is incorporated by reference from the 2023 proxy statement - Required information is incorporated by reference from the proxy statement for the 2023 Annual Meeting of Stockholders[352] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management is incorporated by reference from the 2023 proxy statement - Required information is incorporated by reference from the proxy statement for the 2023 Annual Meeting of Stockholders[353] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2023 proxy statement - Required information is incorporated by reference from the proxy statement for the 2023 Annual Meeting of Stockholders[354] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2023 proxy statement - Required information is incorporated by reference from the proxy statement for the 2023 Annual Meeting of Stockholders[355] Part IV Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the Form 10-K, including Consolidated Financial Statements from Item 8 and an index of all exhibits - The Consolidated Financial Statements are filed in Part II, Item 8[357] - The financial statement schedule "Schedule II - Valuation and Qualifying Accounts" is filed as part of this item[357] - An index to all exhibits filed with the report is provided[358] Form 10-K Summary No Form 10-K summary is provided - None[366]