Graham Corporation — Fiscal 2022 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2022. The request metadata references “2020 Q4,” but the supplied filing is Graham Corporation’s fiscal 2022 Annual Report on Form 10-K, filed June 9, 2022.
Business Context
Graham designs and manufactures mission-critical fluid, power, heat-transfer, vacuum and turbomachinery technologies for defense, space, energy, chemical and petrochemical markets. The Company operates primarily in Batavia, New York, with subsidiaries in Colorado, China and India.
On June 1, 2021, Graham acquired Barber-Nichols, LLC (“BN”), a turbomachinery designer and manufacturer serving aerospace, cryogenic, defense and energy markets. The acquisition materially increased Graham’s defense and space exposure.
Financial Performance and Position
| Metric | Fiscal 2022 | Fiscal 2021 |
|---|---|---|
| Net sales | $122.8 million | $97.5 million |
| Gross profit | $9.1 million | $20.5 million |
| Gross margin | 7.4% | 21.0% |
| Operating income (loss) | $(11.3) million | $3.0 million |
| Net income (loss) | $(8.8) million | $2.4 million |
| Diluted EPS | $(0.83) | $0.24 |
| Adjusted EBITDA | $(5.0) million | $5.1 million |
| Cash flow from operations | $(2.2) million | $(1.7) million |
| Cash and investments | $14.7 million | $65.0 million |
| Working capital | $27.8 million | $76.7 million |
| Backlog | $256.5 million | $137.6 million |
BN contributed $47.9 million of fiscal 2022 sales. The legacy business declined by approximately $22.5 million. Domestic sales increased to $97.6 million, or 80% of total sales, from $52.7 million, or 54%, in fiscal 2021. Defense sales represented 51% of fiscal 2022 revenue, compared with 25% in fiscal 2021; refining sales declined to 20% from 41%.
Fiscal 2022 profitability was materially affected by cost overruns, labor shortages, COVID-19-related delays and increased use of expensive contract welders on first-article U.S. Navy projects at the Batavia facility. Management estimated the combined impact, including material cost increases, exceeded $10 million.
Liquidity, Debt and Capital Allocation
- Cash and investments declined by $50.3 million, primarily because $60.3 million of cash was used to fund the BN acquisition.
- Term debt was $18.5 million at March 31, 2022, with $2.0 million classified as current. The debt bears interest at BSBY plus 1.50%.
- No borrowings were outstanding under the $30.0 million revolving credit facility; $4.75 million of letters of credit were outstanding under that facility. Total letters of credit were $12.2 million.
- The Company breached bank covenants at December 31, 2021 and received a waiver. Amendments dated March 31 and June 7, 2022 imposed additional liquidity, EBITDA, leverage and borrowing restrictions and increased borrowing costs.
- The Company suspended its dividend during fiscal 2022. Dividends paid were $3.5 million, compared with $4.4 million in fiscal 2021.
- Fiscal 2023 capital expenditures were expected to be approximately $4.5 million to $5.5 million.
Material Changes Versus the Prior Period
- Revenue increased 26%, principally because of the BN acquisition, but the Company shifted from a $2.4 million profit to an $8.8 million net loss.
- Gross margin fell from 21.0% to 7.4%, and operating margin declined from 3.1% to negative 9.2%.
- Orders increased 18% to $143.9 million, while backlog increased 86% to $256.5 million. BN contributed $117.8 million of backlog.
- Defense concentration increased significantly: defense represented 51% of sales and approximately 76% of backlog at March 31, 2022.
- International sales declined 44% to $25.2 million, representing 20% of total sales.
- SG&A increased 22% to $21.3 million, reflecting ten months of BN ownership, amortization, acquisition costs and bank waiver and amendment fees.
- Total assets increased to $183.7 million from $144.3 million, including $23.5 million of goodwill and $29.0 million of net acquired identifiable intangible assets related to BN.
Outlook, Risks and Unusual Items
Management forecast fiscal 2023 sales of $135 million to $150 million, gross margin of 16% to 17%, SG&A of 15% to 16% of sales, an effective tax rate of 21% to 22% and adjusted EBITDA of $6.5 million to $9.5 million. Management expected 40% to 50% of backlog to convert to sales within twelve months and anticipated defense sales would represent approximately 45% to 50% of fiscal 2023 revenue.
Management expects lower contract-welder usage, completion of first-article Navy projects and improved production execution to support margin recovery. Energy and petrochemical capital-project demand remained weak, although increased aftermarket activity suggested the possibility of a cyclical upturn over the following twelve to eighteen months.
- Significant customer and end-market concentration exists, including two customers representing 12% and 10% of fiscal 2022 sales and substantial exposure to the U.S. Navy.
- Fixed-price, long-cycle defense contracts expose Graham to labor, material, supplier, schedule and cost-estimation risk.
- Supply-chain disruption, inflation, labor shortages and COVID-19 effects could adversely affect production and margins.
- Government funding, appropriations, contract modifications or terminations could affect Navy-related revenue and backlog conversion.
- The Company previously raised substantial doubt about going-concern status because of anticipated covenant noncompliance; management stated that the March 31 and June 7, 2022 amendments resolved that substantial doubt.
- Asbestos-related lawsuits and other ordinary-course claims remain pending, but management does not believe they will have a material adverse effect. The filing does not provide a clear reasonably possible loss range for most claims.
- The BN acquisition generated unusual items, including $562 thousand of acquisition and integration costs, $1.9 million of income from reversal of contingent consideration, and $1.2 million of CEO and CFO transition costs.
- Approximately 75% of fiscal 2022 revenue was recognized over time, making estimates of total labor hours, costs and contract milestones significant to reported results.
Investor Verification Priorities
- Verify progress toward fiscal 2023 sales, margin and adjusted EBITDA guidance, including the expected recovery from Batavia contract overruns.
- Track covenant compliance, minimum liquidity requirements, borrowing restrictions and the potential $725 thousand back-end bank fee described in the amendments.
- Assess the conversion timing, profitability and cancellation risk of the $256.5 million backlog, particularly the large U.S. Navy component.
- Evaluate whether BN integration benefits and growth justify the acquisition-related debt, goodwill and intangible assets.
- Monitor customer concentration, U.S. Navy funding and the effects of defense-sector exposure on earnings volatility.
- Review contract estimates and cumulative catch-up adjustments because most revenue is recognized over time.
- Confirm whether dividends remain suspended and whether operating cash flow improves sufficiently to support debt service and planned capital expenditures.