Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(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. For the defense industry, our equipment is used in nuclear and non-nuclear propulsion, power, fluid transfer, and thermal management systems primarily for the U.S. Navy. For the space industry, our equipment is used in propulsion, power and energy management systems and for life support systems. Our energy and new energy markets include oil refining, cogeneration, and multiple alternative and clean power applications including hydrogen. For the chemical and petrochemical industries, our equipment is used in fertilizer, ammonia, ethylene, methanol and downstream chemical facilities.
Our brands are built upon our 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 co-located with our production facilities in Batavia, New York, where surface condensers and ejectors are designed, engineered, and manufactured. Our wholly-owned subsidiary, Barber-Nichols, LLC ("BN"), based in Arvada, Colorado, designs, develops, manufactures and sells specialty turbomachinery products for the aerospace, cryogenic, defense and energy markets (see "Acquisition" below). 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 in the People's Republic of China and management oversight throughout Southeast Asia. GIPL serves as a sales and market development office focusing on the refining, petrochemical and fertilizer markets in India and the middle east.
Our current fiscal year (which we refer to as "fiscal 2023") ends March 31, 2023.
Acquisition
We completed the acquisition of BN on June 1, 2021. Founded as a specialty turbomachinery engineering company in 1966, BN grew rapidly from programs that involve complex production and systems integration. By integrating knowledge in rotating equipment, power generation cycles, and electrical management systems, BN has successfully won the design and development of different power, fluid transfer, and propulsion systems used in underwater vehicles among many other accomplishments.
The acquisition of BN changed the composition of our end market mix. For the second quarter of fiscal 2023, sales to the defense and space industries were 50% of our business compared with approximately 25% of sales prior to the acquisition. The remaining 50% of our second quarter fiscal 2023 sales came from the refining, chemical/petrochemical and other commercial markets. These markets represented approximately 75% of our sales prior to the acquisition.
The BN transaction was accounted for as a business combination, which requires that assets acquired and liabilities assumed be recognized at their fair value as of the acquisition date. The purchase price of $72,014 was comprised of 610 shares of common stock, representing a value of $8,964 at $14.69 per share, and cash consideration of $61,150. The cash consideration was funded through cash on-hand and debt proceeds (See Note 2 to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q). The purchase agreement also included a contingent earn-out dependent upon certain financial measures of BN post-acquisition, pursuant to which the sellers were eligible to receive up to $14,000 in additional cash consideration. At June 30, 2021, a liability of $1,900 was recorded for the contingent earn-out. In the second quarter of the fiscal year ended March 31, 2022 (which we refer to as "fiscal 2022"), the earn-out agreement was terminated and the contingent liability was reversed into other operating income, net, on our Condensed Consolidated Statement of Operations. In connection with the termination of this earn-out agreement, we entered into a Performance Bonus Agreement (the "Bonus Agreement") to provide certain employees of BN with performance-based awards based on the achievement of BN performance objectives for fiscal years ending March 31, 2024, 2025, and 2026 and can range between $2,000 to $4,000 per year.
Summary
Highlights for the three months ended September 30, 2022 include:
•Net sales of $38,143 for the second quarter of fiscal 2023 increased $3,997 or 12% over the prior year period across our diversified revenue base. This increase included growth in our commercial space market which increased $3,014 and our new energy market which increased approximately $1,500 as newly awarded programs continued to ramp up. Additionally, our sales continued to benefit from strong growth in our refining and chemical/petrochemical aftermarket ("commercial
21
aftermarket"), which increased $4,672 compared to the same period in the prior year and is a strategic focus for us. These increases were partially offset by lower defense sales of $4,943 due to project timing.
•Net loss and loss per diluted share for the second quarter of fiscal 2023 were $196 and $0.02 per share, respectively, compared with a loss of $492 and $0.05 per share, respectively, for the second quarter of fiscal 2022. GAAP results for the second quarter of fiscal 2022 benefitted from the reversal of contingent earn-out of $1,900 offset by $798 of severance costs. Adjusted net income and adjusted net income per diluted share for the second quarter of fiscal 2023 were $325 and $0.03 per share, respectively, compared with an adjusted loss of $639 and $0.06 per share, respectively, for the second quarter of fiscal 2022. See "Non-GAAP Measures" below for a reconciliation of adjusted net income (loss) and adjusted net income (loss) per diluted share to the comparable GAAP amount. In the second quarter of fiscal 2023, we completed an additional first article U.S. Navy project and remain on schedule to complete the remaining first article projects.
•Orders booked in the second quarter of fiscal 2023 were $91,511 driven by repeat orders for critical U.S. Navy programs, which are included in total defense orders of $69,598. We believe these U.S. Navy orders validates the investments we made, our position as a key supplier to the defense industry and our customer’s confidence in our execution. Additionally, orders continued to be strong in the commercial aftermarket and space markets which totaled $11,211 and $3,741, respectively, during the second quarter of fiscal 2023.
•Backlog was $313,340 at September 30, 2022, compared with $260,675 at June 30, 2022. This increase was primarily driven by the orders during the second quarter. Our ratio of orders to net sales during the second quarter of fiscal 2023 was 240%. 79% of our backlog at September 30, 2022 was to the defense industry. For more information on this performance indicator see "Orders and Backlog" below.
•Cash and cash equivalents at September 30, 2022 were $14,122, compared with $12,905 at June 30, 2022. This increase was primarily due to cash provided by operating activities of $291, as well as net cash borrowed of $1,989. Cash used for capital expenditures was $892 during the second quarter of fiscal 2023.
•In the second quarter of fiscal 2023, $0 was returned to shareholders as dividends compared with $1,177 in the second quarter of fiscal 2022. In the fourth quarter of fiscal 2022, we suspended our dividend in accordance with the terms of our credit agreement with Bank of America. There can be no guarantee that we will pay dividends in the future, and any determination by our board of directors with respect to dividends will depend on a variety of factors, including our future financial performance, organic growth and acquisition opportunities, general economic conditions and other factors, many of which are beyond our control.
•At September 30, 2022, we had $2,500 outstanding on our line of credit. We believe availability under our line of credit, along with our cash balances, provide us adequate financial flexibility to meet our obligations.
Cautionary Note Regarding Forward-Looking Statements
This report 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 (the "Exchange Act"). All statements other than statements of historical fact are forward-looking statements for purposes of this report. 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," "may," "intend," "expect," "predict," "project," "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 2022 and elsewhere in this report. 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.
22
Current Market Conditions
Demand for our equipment and systems for the defense industry is expected to remain strong and continue to expand, based on our significant backlog, improved execution, long-standing relationship with the U.S. Navy, defense budget plans, the projected procurement of submarines, aircraft carriers and undersea propulsion and power systems and the solutions we provide. In addition to U.S. Navy applications, we also provide specialty pumps, turbines, compressors and controllers for various fluid and thermal management systems used in Department of Defense radar, laser, electronics and power systems. We have built a leading position, and in some instances a sole source position, for certain systems and equipment for the defense industry.
Our traditional energy markets are undergoing significant transition. While we expect that fossil fuels will continue to be an important component in the global energy industry for many years to come, there are significant changes in the priorities for capital investments by our customers and the regions in which those investments are being made. We expect that the 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. Currently, opportunities in the energy markets outside North America have been greater than opportunities inside of North America, but opportunities outside of North America are highly competitive and pricing is challenging. In those instances, we have been selective in the opportunities we have pursued in order to ensure we receive the proper return on our investment. Over the long term, we anticipate that future investment by refiners in renewable fuels (e.g., renewable diesel), in existing refineries (e.g., to expand feedstock processing flexibility and to improve conversion of oil to refined products) to gain greater throughput, or to build new capacity (e.g., integrated refineries with petrochemical products capabilities), will continue to drive demand for our products and services. The timing and catalyst for a recovery in these markets (crude oil refining and chemical/petrochemical) remain 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 year 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. As such we believe there is the possibility of a cyclical upturn in calendar year 2023 following several years of reduced capital spending in a low oil price environment. However, we do not expect the next cycle to be as robust as years past due to the factors discussed above.
The alternative and clean energy opportunities for our heat transfer, power production and fluid transfer systems are expected to continue to grow. We assist in designing, developing and producing equipment for hydrogen production, distribution and fueling systems, concentrated solar power and storage, and small modular nuclear systems. We are positioning the Company to be a more significant contributor as these markets continue to develop.
We believe that chemical and petrochemical capital investment will continue to decouple from energy investment. Over the long term, we expect that population growth, an expanding global middle class, and an increasing desire for improved quality of life and access to consumer products will drive increased demand for industrial goods within the plastics and resins value chain along with fertilizers 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 over the long term.
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 to many of the key players in the industry. 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. For the first six months of fiscal 2023, sales to the space industry represented 15% of our sales compared to 0% prior to the BN acquisition.
The chart below illustrates our strategy to increase our participation in the defense market. The defense market comprised 79% of our total backlog at September 30, 2022 and generally have longer conversion times than our other markets. We believe this strategy shift provides us more stability and visibility and is especially beneficial when our refining and process markets are weak.
23
*Note: FYE refers to fiscal year ended March 31
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 associated with the impact of COVID-19. International conflicts or other geopolitical events, including the 2022 Russian invasion of Ukraine, may further contribute to increased supply chain costs due to shortages in raw materials, increased costs for transportation and energy, disruptions in supply chains, and heightened inflation. Further escalation of geopolitical tensions may also lead to changes to foreign exchange rates and financial markets, any of which may adversely affect our business and supply chain, and consequently our results of operation. While there could ultimately be a material impact on our operations and liquidity, at the time of this report, the impact could not be determined.
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 |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net sales |
|
$ |
38,143 |
|
|
$ |
34,146 |
|
|
$ |
74,218 |
|
|
$ |
54,303 |
|
Gross profit |
|
$ |
5,280 |
|
|
$ |
3,443 |
|
|
$ |
12,024 |
|
|
$ |
4,357 |
|
Gross profit margin |
|
|
14 |
% |
|
|
10 |
% |
|
|
16 |
% |
|
|
8 |
% |
SG&A expenses (1) |
|
$ |
5,332 |
|
|
$ |
5,247 |
|
|
$ |
11,091 |
|
|
$ |
10,170 |
|
SG&A as a percent of sales |
|
|
14 |
% |
|
|
15 |
% |
|
|
15 |
% |
|
|
19 |
% |
Net income (loss) |
|
$ |
(196 |
) |
|
$ |
(492 |
) |
|
$ |
480 |
|
|
$ |
(3,618 |
) |
Diluted income (loss) per share |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.05 |
|
|
$ |
(0.35 |
) |
Total assets |
|
$ |
188,905 |
|
|
$ |
191,836 |
|
|
$ |
188,905 |
|
|
$ |
191,836 |
|
Total assets excluding cash and cash equivalents |
|
$ |
174,783 |
|
|
$ |
175,373 |
|
|
$ |
174,783 |
|
|
$ |
175,373 |
|
(1)Selling, general and administrative expenses are referred to as "SG&A".
The Second Quarter and First Six Months of Fiscal 2023 Compared with the Second Quarter and First Six Months of Fiscal 2022
Net sales for the second quarter of fiscal 2023 were $38,143, an increase of 12% from the second quarter of fiscal 2022 and was across our diversified revenue base. This increase included growth in our commercial space market which increased $3,014 and our new energy market which increased approximately $1,500 as newly awarded programs continued to ramp up. Additionally, our sales
24
continued to benefit from strong growth in our commercial aftermarket, which increased $4,672. These increases were partially offset by lower defense sales of $4,943 due to project timing. Domestic sales as a percentage of aggregate sales were 80% in the second quarter of fiscal 2023 compared with 77% in the second quarter of fiscal 2022, reflecting the increase in our defense and commercial space industry businesses which are U.S. based. Sales in the three months ended September 30, 2022 were 20% to the refining industry, 15% to the chemical and petrochemical industries, 39% for the defense industry, 11% to space, and 15% to other commercial and industrial applications which includes sales to the new energy market. Sales in the three months ended September 30, 2021 were 18% to the refining industry, 10% to the chemical and petrochemical industries, 58% for the defense industry, 4% to space, and 10% to other commercial and industrial applications. Fluctuation in sales among markets, products and geographic locations varies, sometimes significantly, from quarter-to-quarter based on timing and magnitude of projects.
Net sales for the first six months of fiscal 2023 were $74,218, an increase of $19,915 or 37% from the first six months of fiscal 2022 and was across our diversified revenue base. Approximately $8,900 of this increase was due to having three months of BN results in the first quarter of fiscal 2023 compared to one month in the first quarter of fiscal 2022. Additionally, our sales continued to benefit from our diversified revenue base including strong growth in commercial aftermarket of approximately $7,000, commercial space market of $3,014 and our new energy market which increased approximately $1,500. These increases were partially offset by lower defense sales of $2,222 due to project timing. Domestic sales as a percentage of aggregate sales were 79% in the first six months of fiscal 2023 compared with 74% in the first six months of fiscal 2022, reflecting the increase in our defense and space industry businesses which are U.S. based. Sales in the six months ended September 30, 2022 were 21% to the refining industry, 16% to the chemical and petrochemical industries, 33% for the defense industry, 15% to space, and 15% to other commercial and industrial applications. Sales in the six months ended September 30, 2021 were 20% to the refining industry, 15% to the chemical and petrochemical industries, 49% for the defense industry, 4% to space, and 12% to other commercial and industrial applications. 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 2023 was 14%, compared with 10% for the second quarter of fiscal 2022. Gross profit for the second quarter of fiscal 2023 increased compared with fiscal 2022, to $5,280 from $3,443. These increases were primarily due to an improved mix of sales related to higher margin projects (space and commercial aftermarket) and improved execution and pricing on defense contracts, partially offset by higher incentive compensation. In the second quarter of fiscal 2023, we shipped an additional first article U.S. Navy project and are on schedule to complete the remaining significant first article projects by the end of the first quarter of fiscal 2024.
Gross profit margin for the first six months of fiscal 2023 was 16%, compared with 8% for the first six months of fiscal 2022. Gross profit for the first six months of fiscal 2023 increased compared with fiscal 2022, to $12,024 from $4,357. These increases were primarily due to an improved mix of sales related to higher margin projects (space and commercial aftermarket) and improved execution and pricing on defense contracts, partially offset by higher incentive compensation. In the first six months of fiscal 2023, we completed three first article U.S. Navy projects. In addition to the above, the first six months of fiscal 2023 includes two additional months of operations from BN compared to the first six months of fiscal 2022.
SG&A expense including amortization for the second quarter of fiscal 2023 was $5,332 compared to $5,247 for the second quarter of fiscal 2022. This increase was due to higher incentive compensation, partially offset by cost savings and deferral initiatives. These efforts included reducing the use of outside sales agents, cost management, and delayed hiring of non-critical positions. As a result, SG&A expense as a percentage of sales in the second quarter of fiscal 2023 was 14% of sales compared with 15% of sales in the comparable period in fiscal 2022.
SG&A expense including amortization for the first six months of fiscal 2023 was $11,091 up $921 compared with $10,170 for the first six months of fiscal 2022. Approximately $1,400 of this increase was due to having two additional months of BN results in the first six months of fiscal 2023 compared to the prior year period, as well as higher incentive compensation. These increases were partially offset by cost savings and deferral initiatives which included reducing the use of outside sales agents, cost management and delayed hiring of non-critical positions. As a result, SG&A expense as a percentage of sales in the first six months of fiscal 2023 was 15% of sales compared with 19% of sales in the comparable period in fiscal 2022.
During the second quarter of fiscal 2022, we terminated the BN contingent earn-out agreement and the contingent liability of $1,900 was reversed into other operating income, net, on our Condensed Consolidated Statement of Operations. In connection with the termination of this earn-out agreement, we entered into a Bonus Agreement to provide certain employees of BN with performance-based awards based on results of BN for fiscal years ending March 31, 2024, 2025, and 2026. Additionally, in the second quarter of fiscal 2022 we incurred $798 of severance costs related to the departure of our Chief Executive Officer, which was also recorded into other operating income, net.
Net interest expense for the second quarter of fiscal 2023 was $246 compared to $115 in the second quarter of fiscal 2022 due to an increase in interest rates since the second quarter of fiscal 2022, partially offset by lower debt levels of $4,375 due to repayments made since the second quarter of fiscal 2022.
25
Net interest expense for the first six months of fiscal 2023 was $403 compared to $137 in the first six months of fiscal 2022 primarily due to increased borrowings related to the BN acquisition, as well as increased interest rates since the first quarter of fiscal 2022.
Our effective tax rate in the second quarter of fiscal 2023 was 17%, compared with 27% in the second quarter of fiscal 2022. Our effective tax rate for the first six months of fiscal 2023 was 27%, compared with 20% for the first six months of fiscal 2022. This increase was primarily due to discrete tax expense recognized in the first quarter of fiscal 2023 related to the vesting of restricted stock awards. Our expected effective tax rate for fiscal 2023 is 21% to 22% as the impact of these discrete tax items on our effective tax rate lessens over the course of fiscal 2023.
The net result of the above is that net loss and loss per diluted share for the second quarter of fiscal 2023 were $196 and $0.02 per share, respectively, compared with a loss of $492 and $0.05 per share, respectively, for the second quarter of fiscal 2022. Adjusted net income and adjusted net income per diluted share for the second quarter of fiscal 2023 were $325 and $0.03 per share, respectively, compared with a loss of $639 and $0.06 per share, respectively, for the second quarter of fiscal 2022. Net income and income per diluted share for the first six months of fiscal 2023 were $480 and $0.05 per share, respectively, compared with a loss of $3,618 and $0.35 per share, respectively, for the first six months of fiscal 2022. Adjusted net income and adjusted net income per diluted share for the first six months of fiscal 2023 were $1,654 and $0.16 per share, respectively, compared with a loss of $3,450 and $0.33 per share, respectively, for the first six months of fiscal 2022. See "Non-GAAP Measures" below for a reconciliation of adjusted net income (loss) and adjusted net income (loss) per diluted share to the comparable GAAP amount.
Non-GAAP Measures
Adjusted earnings (loss) before net interest expense, income taxes, depreciation and amortization ("EBITDA"), adjusted net income (loss), and adjusted net income (loss) 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 (loss) or net income (loss) 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 is it 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 (loss) or net income (loss) per diluted share determined in accordance with GAAP. Adjusted EBITDA, adjusted net income (loss) and adjusted net income (loss) 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, net interest expense, taxes, acquisition related expenses, and other unusual/nonrecurring expenses. Adjusted net income (loss) and adjusted net income (loss) per diluted share excludes intangible amortization, acquisition related expenses, other unusual/nonrecurring expenses and the related tax impacts of those adjustments.
A reconciliation of adjusted EBITDA, adjusted net income (loss), and adjusted net income (loss) per diluted share to net income (loss) in accordance with GAAP is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
September 30, |
|
|
September 30, |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net income (loss) |
$ |
(196 |
) |
|
$ |
(492 |
) |
|
$ |
480 |
|
|
$ |
(3,618 |
) |
Acquisition related inventory step-up expense |
|
- |
|
|
|
41 |
|
|
|
- |
|
|
|
41 |
|
Acquisition & integration costs |
|
- |
|
|
|
93 |
|
|
|
54 |
|
|
|
262 |
|
Change in fair value of contingent consideration |
|
- |
|
|
|
(1,900 |
) |
|
|
- |
|
|
|
(1,900 |
) |
CEO and CFO transition costs |
|
- |
|
|
|
798 |
|
|
|
- |
|
|
|
798 |
|
Debt amendment costs |
|
41 |
|
|
|
- |
|
|
|
194 |
|
|
|
- |
|
Net interest expense |
|
246 |
|
|
|
115 |
|
|
|
403 |
|
|
|
137 |
|
Income taxes |
|
(40 |
) |
|
|
(180 |
) |
|
|
175 |
|
|
|
(925 |
) |
Depreciation & amortization |
|
1,487 |
|
|
|
1,588 |
|
|
|
2,962 |
|
|
|
2,408 |
|
Adjusted EBITDA |
$ |
1,538 |
|
|
$ |
63 |
|
|
$ |
4,268 |
|
|
$ |
(2,797 |
) |
Adjusted EBITDA margin % |
|
4.0 |
% |
|
|
0.2 |
% |
|
|
5.8 |
% |
|
|
-5.2 |
% |
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
September 30, |
|
|
September 30, |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
|
2021 |
|
Net income (loss) |
$ |
(196 |
) |
|
$ |
(492 |
) |
|
$ |
480 |
|
|
|
$ |
(3,618 |
) |
Acquisition related inventory step-up expense |
|
- |
|
|
|
41 |
|
|
|
- |
|
|
- |
|
|
41 |
|
Acquisition & integration costs |
|
- |
|
|
|
93 |
|
|
|
54 |
|
|
- |
|
|
262 |
|
Amortization of intangible assets |
|
619 |
|
|
|
784 |
|
|
|
1,238 |
|
|
|
|
1,009 |
|
Change in fair value of contingent consideration |
|
- |
|
|
|
(1,900 |
) |
|
|
- |
|
|
|
|
(1,900 |
) |
CEO and CFO transition costs |
|
- |
|
|
|
798 |
|
|
|
- |
|
|
|
|
798 |
|
Debt amendment costs |
|
41 |
|
|
|
- |
|
|
|
194 |
|
|
|
|
- |
|
Normalize tax rate(1) |
|
(139 |
) |
|
|
37 |
|
|
|
(312 |
) |
|
|
|
(42 |
) |
Adjusted net income (loss) |
$ |
325 |
|
|
$ |
(639 |
) |
|
$ |
1,654 |
|
|
|
$ |
(3,450 |
) |
Adjusted diluted earnings (loss) per share |
$ |
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
0.16 |
|
|
|
$ |
(0.33 |
) |
(1) Applies a normalized tax rate to non-GAAP adjustments, which are pre-tax, based upon the full fiscal year expected effective tax rate.
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, |
|
|
March 31, |
|
|
|
2022 |
|
|
2022 |
|
Cash and cash equivalents |
|
$ |
14,122 |
|
|
$ |
14,741 |
|
Working capital (1) |
|
|
28,297 |
|
|
|
27,796 |
|
Working capital ratio(1) |
|
|
1.4 |
|
|
|
1.5 |
|
Working capital excluding cash and cash equivalents |
|
|
14,175 |
|
|
|
13,055 |
|
Working capital excluding cash and cash equivalents as a percent of net sales(2) |
|
|
9.9 |
% |
|
|
10.6 |
% |
(1)Working capital equals current assets minus current liabilities. Working capital ratio equals current assets divided by current liabilities.
(2)Working capital excluding cash and cash equivalents as a percent of net sales is based upon trailing twelve-month sales, including BN pre-acquisition sales.
Net cash used by operating activities for the first six months of fiscal 2023 was $398 compared with $8,702 of cash used for the first six months of fiscal 2022. This decrease in cash used by operations was primarily due to higher cash net income during the first six months of fiscal 2023 than the comparable prior year period, lower working capital build, and the timing of payments and receipts.
Dividend payments and capital expenditures in the first six months of fiscal 2023 were $0 and $1,176, respectively, compared with $2,353 and $1,227, respectively, for the first six months of fiscal 2022. In the fourth quarter of fiscal 2022, we suspended our dividend in accordance with the terms of our credit agreement with Bank of America. There can be no guarantee that we will pay dividends in the future and any determination by our board of directors with respect to dividends will depend on a variety of factors, including our future financial performance, organic growth and acquisition opportunities, general economic conditions and other factors, many of which are beyond our control. Capital expenditures for fiscal 2023 are expected to be approximately $3,000 to $4,000. Our fiscal 2023 capital expenditures are expected to be primarily for machinery and equipment, as well as for buildings and leasehold improvements to fund our growth and cost improvement initiatives. The majority of our planned capital expenditures are discretionary.
Cash and cash equivalents were $14,122 at September 30, 2022 compared with $14,741 at March 31, 2022, as cash used by operating activities and for capital expenditures were funded with amounts borrowed under our credit facility. At September 30, 2022, approximately $6,400 of our cash and cash equivalents was used to secure our letters of credit and $1,802 of our cash was held by our China and India operations.
On June 1, 2021, we entered into a $20,000 five-year loan with Bank of America. The term loan requires monthly principal payments of $167 through June 1, 2026, with the remaining principal amount plus all interest due on the maturity date. The interest rate on the term loan is the applicable Bloomberg Short-Term Bank Yield Index ("BSBY"), plus 1.50%, subject to a 0.00% floor.
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On June 1, 2021, we entered into a five-year revolving credit facility with Bank of America that provided a $30,000 line of credit, including letters of credit and bank guarantees, expandable at our option and the bank's approval at any time up to $40,000. As of September 30, 2022, there was $2,500 outstanding on the line of credit. Amounts outstanding under the facility agreement bear interest at a rate equal to BSBY plus 1.50%, subject to a 0.00% floor. As of September 30, 2022, the BSBY rate was 3.9509%. As of September 30, 2022, there was $5,706 letters of credit outstanding with Bank of America.
Under the original term loan agreement and revolving credit facility, we covenanted to maintain a maximum total leverage ratio, as defined in such agreements, of 3.0 to 1.0, with an allowable increase to 3.25 to 1.0 for a period of twelve months following the closing of an acquisition. In addition, we covenanted to maintain a minimum fixed charge coverage ratio, as defined in such agreements, of 1.2 to 1.0 and minimum margined assets, as defined in such agreements, of 100% of total amounts outstanding on the revolving credit facility, including letters of credit. At December 31, 2021, we were out of compliance with our bank agreement covenants and were granted a waiver for noncompliance by Bank of America.
We entered into amendment agreements with Bank of America since origination. Under the amended agreements, we are not required to comply with the maximum total leverage ratio and the minimum fixed charge coverage ratio covenants contained in the original term loan agreement for the periods ending December 31, 2021 and March 31, June 30 and September 30, 2022. The principal balance outstanding on the line of credit may not exceed $15,000, unless letters of credit exceed $11,500, in which case the limit is $17,000, until the compliance date. The compliance date is defined as the date on which Bank of America has received all required financial information with respect to us for the fiscal year ending March 31, 2023 and no event of default exists. In addition, on or before September 1, 2023 and at all times thereafter, all of our deposit accounts, except certain accounts, will be either subject to a deposit account control agreement or maintained with Bank of America. We covenant to maintain EBITDA, as defined in such amendment, of at least ($700) for the twelve-month period ending June 30, 2022 and $1,800 for the twelve-month period ending September 30, 2022; maintain a total maximum leverage ratio of 4.0 to 1.0 for the twelve-month period ending December 31, 2022 and 3.0 to 1.0 for the period ending March 31, 2023; and maintain liquidity, as defined in such amendment, of at least $10,000 prior to the occurrence of the compliance date and $20,000 from and after the occurrence of the compliance date. As of September 30, 2022, we were in compliance with the amended financial covenants of our loan agreement. At September 30, 2022, the amount available under the revolving credit facility was $7,657 subject to the above liquidity and leverage covenants.
In connection with the waiver and amendments discussed above, we are required to pay a back-end fee of $725 to Bank of America payable upon the earliest to occur of (i) any default or event of default, (ii) the last date of availability under the revolving credit facility, and (iii) repayment in full of all principal, interest, fees and other obligations, which may be waived or cancelled if certain criteria are met.
We did not have any off-balance sheet arrangements as of September 30, 2022 and 2021, other than letters of credit incurred in the ordinary course of business.
We believe that cash generated from operations, combined with the liquidity provided by available financing capacity under our credit facility, will be adequate to meet our cash needs for the immediate future.
Orders and Backlog
Management uses orders and backlog as measures of our current and future business and financial performance. Orders represent written communications received from customers requesting us to supply products and/or services. Orders for the three-month period ended September 30, 2022 were $91,511 compared with $31,386 for the same period last year. This increase is attributable to strong demand across all of our diversified revenue base. More specifically, the second quarter of fiscal 2023 order level was driven by:
•$69,598 from the defense industry driven by repeat orders for critical U.S. Navy programs. Revenue from second quarter fiscal 2023 defense orders is expected to be recognized from fiscal 2024 through fiscal 2026;
•$8,723 for refining, primarily related to the commercial aftermarket;
•$3,742 of orders for highly engineered pumps and turbo pumps for a variety of applications and customers in the commercial space industry;
•Increased orders to the new energy market including hydrogen and solar.
Domestic orders in the second quarter of fiscal 2023 were 93% of total orders compared with the second quarter of fiscal 2022 when domestic orders were 80% of total orders. Our ratio of orders to net sales during the second quarter of fiscal 2023 was 2.4.
28
During the first six months of fiscal 2023, orders were $131,819, compared with $52,253 for the same period of fiscal 2022. Domestic orders were 87% of total orders in the first six months of fiscal 2023 compared with 77% for the same period of fiscal 2022. Our ratio of orders to net sales for the first six months of fiscal 2023 was 1.78.
Backlog was $313,340 at September 30, 2022, an increase of 22% compared with $256,536 at March 31, 2022. Backlog is defined as the total dollar value of orders received for which revenue has not yet been recognized. Approximately 40% to 45% of orders currently in our backlog are expected to be converted to sales within one year and 25% to 30% after one year but within two years. The majority of the orders that are expected to convert beyond twelve months are for the defense industry, specifically the U.S. Navy that have a long conversion cycle (up to six years). At September 30, 2022, 79% of our backlog was attributable to defense projects, 9% for refinery project work, 4% for chemical and petrochemical projects, 4% for space projects and 4% for other industrial applications. At March 31, 2022, 76% of our backlog was attributable to defense projects, 10% for refinery project work, 5% for chemical and petrochemical projects, 4% for space projects and 5% for other industrial applications.
Outlook
Our objective is to leverage our engineering know-how and depth of application experience to identify more opportunities for our products and technologies in our targeted markets.
Sales in fiscal 2023 are expected to be in the range of $135,000 to $150,000. We expect gross profit margins for the fiscal year to be approximately 16% to 17% of sales and SG&A expenses to be 15% to 16% of sales. Adjusted EBITDA is expected to be $6,500 to $9,500 for fiscal 2023. Our results for the first half of fiscal 2023 were in-line with our expectations and give us confidence we will be able to achieve our full year guidance. Fiscal 2022 and year-to-date fiscal 2023 results were impacted by our large, lower margin, first article U.S. Navy projects and we believe this negative impact will continue through the first quarter of 2024 when the last of these larger first article projects is completed. We expect repeat orders for these larger U.S. Navy projects will be at higher margins through increased pricing and better execution. It is also important to note that the Company's third quarter is typically impacted by lower labor hours due to the holidays.
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, and do not experience significant COVID-19-related disruptions or any other unforeseen events. 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.
29
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, 2022, 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, 2022.