Graham(GHM) - 2022 Q1 - Quarterly Report

Part I. FINANCIAL INFORMATION Unaudited Condensed Consolidated Financial Statements The company reported a $3.1 million net loss, with total assets growing to $185.4 million due to the BN acquisition, which also increased total debt to $22.5 million Condensed Consolidated Statements of Operations (Unaudited) | Metric | Three Months Ended June 30, 2021 (in USD) | Three Months Ended June 30, 2020 (in USD) | | :--- | :--- | :--- | | Net sales | $20,157,000 | $16,710,000 | | Gross profit | $914,000 | $1,568,000 | | Loss before benefit for income taxes | ($3,871,000) | ($2,190,000) | | Net loss | ($3,126,000) | ($1,818,000) | | Net loss per share (Basic & Diluted) | ($0.31) | ($0.18) | Condensed Consolidated Balance Sheets Highlights (Unaudited) | Metric | June 30, 2021 (in USD) | March 31, 2021 (in USD) | | :--- | :--- | :--- | | Cash and cash equivalents | $19,143,000 | $59,532,000 | | Goodwill | $22,923,000 | $0 | | Total assets | $185,366,000 | $144,280,000 | | Total debt (Short-term & Long-term) | $22,500,000 | $0 | | Total liabilities | $82,166,000 | $46,351,000 | | Total stockholders' equity | $103,200,000 | $97,929,000 | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | Metric | Three Months Ended June 30, 2021 (in USD) | Three Months Ended June 30, 2020 (in USD) | | :--- | :--- | :--- | | Net cash used by operating activities | ($7,076,000) | ($4,373,000) | | Net cash (used) provided by investing activities | ($54,509,000) | $13,613,000 | | Acquisition of Barber-Nichols, LLC | ($59,563,000) | $0 | | Net cash provided (used) by financing activities | $21,101,000 | ($1,132,000) | | Net (decrease) increase in cash | ($40,389,000) | $8,114,000 | Note 2 – Acquisition On June 1, 2021, the company acquired Barber-Nichols, LLC (BN) for $72.0 million, comprising $61.2 million cash and $9.0 million stock, resulting in $22.9 million goodwill and significant intangibles - Completed the acquisition of Barber-Nichols, LLC (BN) on June 1, 2021, to diversify into defense, aerospace, energy, and cryogenic markets[25] Acquisition Purchase Price Allocation | Component | Value (in thousands) | | :--- | :--- | | Cash Consideration | $61,150 | | Stock Consideration (610k shares) | $8,964 | | Total Purchase Price | $72,014 | | Goodwill Recorded | $22,923 | | Contingent Earn-out Liability | $1,900 (up to $14,000 payable in FY2025) | - For the one month of ownership in the quarter, BN contributed $3.47 million to net sales[30] Note 3 – Revenue Recognition Revenue recognition varies by contract type, with 65% recognized over time; net sales increased to $20.2 million, and backlog reached $235.9 million, with 45-50% expected within one year Revenue by Product Line (in thousands) | Product Line | Q1 FY2022 (in thousands USD) | Q1 FY2021 (in thousands USD) | | :--- | :--- | :--- | | Heat transfer equipment | $6,764 | $10,673 | | Vacuum equipment | $4,219 | $2,551 | | Fluid systems | $1,808 | — | | Power systems | $1,663 | — | | All other | $5,703 | $3,486 | | Net sales | $20,157 | $16,710 | Revenue by Geographic Region (in thousands) | Geographic Region | Q1 FY2022 (in thousands USD) | Q1 FY2021 (in thousands USD) | | :--- | :--- | :--- | | U.S. | $13,894 | $9,438 | | Asia | $3,509 | $5,163 | | Canada | $1,208 | $992 | | Middle East | $612 | $449 | | South America | $242 | $220 | | All other | $692 | $448 | | Net sales | $20,157 | $16,710 | - Remaining unsatisfied performance obligations (backlog) were $235.9 million at June 30, 2021, with 45% to 50% expected to be recognized within one year[41] Note 15 – Debt To fund the BN acquisition, the company secured new credit facilities, including a $20.0 million term loan and $30.0 million revolving credit, with $22.5 million drawn and $8.7 million in letters of credit outstanding - On June 1, 2021, the company entered into a $20 million five-year term loan and a $30 million revolving credit facility with Bank of America to fund the BN acquisition[71] - As of June 30, 2021, the company had $20 million outstanding on the term loan and $2.5 million outstanding on the line of credit[71] - Total letters of credit outstanding were $8.7 million as of June 30, 2021, down from $11.6 million at March 31, 2021[73] Note 17 – Subsequent Events Daniel J. Thoren was appointed President and CEO, effective August 31, 2021, succeeding James R. Lines, with a one-time separation charge expected in Q2 FY2022 - Daniel J. Thoren was appointed President and CEO, effective August 31, 2021, succeeding the retiring James R. Lines[77] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the BN acquisition's impact, shifting market mix to 45-50% U.S. Navy, with Q1 sales up 21% to $20.2 million, gross margin down to 5%, backlog surging 72% to $235.9 million, and FY2022 revenue projected at $130-$140 million Acquisition The BN acquisition on June 1, 2021, strategically diversifies the company's market mix, projecting 45-50% U.S. Navy business, funded by $72.0 million in cash and debt - The acquisition of BN is expected to change the company's end market mix, with the U.S. Navy projected to be 45%-50% of business for the remainder of fiscal 2022[84] Current Market Conditions The company anticipates strong defense demand, particularly from the U.S. Navy, while energy and petrochemical markets remain weak due to the pandemic, with long-term growth opportunities in alternative energy and commercial space - Demand from the defense industry is expected to remain strong and expand, with consolidated revenue for the U.S. Navy projected at $60 million to $70 million in fiscal 2022[92] - Energy and petrochemical markets continue to be negatively impacted by the COVID-19 pandemic, with customers reducing MRO spending and scaling back growth investments[93] - The acquisition of BN provides new revenue and growth potential in the commercial space and aerospace markets, particularly in rocket engine turbopump systems[98] Results of Operations Q1 sales increased 21% to $20.2 million due to BN acquisition, but gross profit margin declined to 5% from 9%, and SG&A expenses rose by $1.0 million due to acquisition-related costs - Q1 FY2022 sales increased 21% to $20.2 million, with the BN acquisition contributing $3.5 million for one month of ownership[86][102] - Gross profit margin decreased to 5% from 9% year-over-year due to project mix, COVID-19 related liquidated damages, and timing of expenses[105] - SG&A expenses increased by $1.0 million to $4.9 million, with the BN acquisition (including purchase price amortization) accounting for $587,000 of the increase[106] Liquidity and Capital Resources Cash and investments decreased to $19.1 million due to the BN acquisition, with $7.1 million net cash used in operations, while liquidity is supported by new credit facilities with $28.0 million available - Cash and investments fell to $19.1 million from $65.0 million at March 31, 2021, primarily due to the BN acquisition[112] - Net cash used by operating activities was $7.1 million for the quarter[110] - Capital expenditures for fiscal 2022 are projected to be between $3.5 million and $4.0 million[112] Orders and Backlog Q1 orders increased to $20.9 million, and backlog surged 72% to $235.9 million, primarily due to the BN acquisition adding $94.4 million, shifting 80% of backlog to U.S. Navy projects Orders and Backlog Comparison | Metric | Q1 FY2022 (in USD) | Q1 FY2021 (in USD) | | :--- | :--- | :--- | | Orders | $20,867,000 | $11,468,000 | | Metric | June 30, 2021 (in USD) | March 31, 2021 (in USD) | | Backlog | $235,938,000 | $137,567,000 | - The acquisition of BN added $94.4 million to the backlog[118] - At June 30, 2021, 80% of the company's backlog was for U.S. Navy projects[118] Outlook For fiscal 2022, the company projects revenue of $130-$140 million, gross profit margins of 17-18%, SG&A at 15-16% of sales, and Adjusted EBITDA between $7-9 million, including $2.7 million in acquisition costs Fiscal 2022 Outlook | Metric | Expected Range (in USD/%) | | :--- | :--- | | Revenue | $130.0M - $140.0M | | Gross Profit Margin | 17% - 18% | | SG&A as % of Sales | 15% - 16% | | Adjusted EBITDA | $7.0M - $9.0M | | Expected Tax Rate | 24% - 25% | - The fiscal 2022 outlook includes $45 million to $48 million in revenue from BN for the ten-month period of ownership[125] - The company expects to recognize approximately $2.7 million of acquisition-related purchase price accounting costs in fiscal 2022, primarily intangible asset amortization[125] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations, price volatility due to competition and material costs, and project cancellation, with international sales at 31% and no projects currently on hold - International sales were 31% of total sales in Q1 FY2022, down from 44% in the prior year period, exposing the company to foreign currency risk[133] - The company faces price risk from global competitors with lower production costs and from volatility in the cost of metals and other materials[135] - Project cancellation risk is managed through contract structuring with progress payments; at the end of the quarter, the company had no projects on hold[136] Controls and Procedures Management deemed disclosure controls effective as of June 30, 2021, but excluded the recently acquired BN from internal control assessment, with integration expected by fiscal year ending March 31, 2023 - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the quarter[137] - The assessment of internal control over financial reporting does not include the recently acquired Barber-Nichols, LLC, as the acquisition was completed on June 1, 2021[139] Part II. OTHER INFORMATION Risk Factors New material risks from the BN acquisition include integration difficulties, potential loss of customers/employees, failure to realize expected revenue/income, and exposure to unknown past liabilities - A new risk factor is the potential failure to successfully integrate the operations of Barber-Nichols, LLC, which could adversely affect financial condition and results[143] - The company may not realize the expected revenue and net income from the BN acquisition and may incur costs in excess of what was anticipated[144] - The acquisition subjects the company to potential unknown and unforeseen liabilities from Barber-Nichols, LLC's past activities, such as product liability or tax liability[145] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 3,000 shares at $14.60 for tax purposes on vested restricted stock and reported no other unregistered equity sales during the quarter, excluding BN acquisition-related issuances - During the quarter, the company withheld 3,000 shares at an average price of $14.60 per share for tax withholding purposes on vested restricted stock awards[146] - No unregistered securities were sold during the quarter, other than those issued in connection with the Barber-Nichols acquisition, which were previously disclosed[147] Exhibits This section lists Form 10-Q exhibits, including agreements for the Barber-Nichols acquisition, a new Loan Agreement, and required officer certifications and XBRL data - Exhibits filed include the Unit Purchase Agreement for the Barber-Nichols acquisition, a new Loan Agreement with Bank of America, and required CEO/CFO certifications[150][152]