Item 1.Unaudited Condensed Consolidated Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except per share data)
NOTE 1 – BASIS OF PRESENTATION:
Graham Corporation's (the "Company's") Condensed Consolidated Financial Statements include its wholly-owned subsidiaries located in Suzhou, China and Ahmedabad, India at September 30, 2021 and March 31, 2021, and its recently acquired wholly-owned subsidiary, Barber-Nichols, LLC ("BN"), located in Arvada, Colorado at September 30, 2021 and for the period June 1, 2021 through September 30, 2021 (See Note 2). The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X, each as promulgated by the U.S. Securities and Exchange Commission. The Company's Condensed Consolidated Financial Statements do not include all information and notes required by GAAP for complete financial statements. The unaudited Condensed Consolidated Balance Sheet as of March 31, 2021 presented herein was derived from the Company’s audited Consolidated Balance Sheet as of March 31, 2021. For additional information, please refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2021 ("fiscal 2021"). In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included in the Company's Condensed Consolidated Financial Statements.
The Company's results of operations and cash flows for the three and six months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the current fiscal year, which ends March 31, 2022 ("fiscal 2022"). The three-month period (“quarter”) ended September 30, 2021 is also referred to as “the second quarter”.
NOTE 2 – ACQUISITION:
On June 1, 2021, the Company completed its acquisition of Barber-Nichols, LLC ("BN"), a privately-owned designer and manufacturer of turbomachinery products located in Arvada, Colorado that serves the defense and aerospace industry as well as the energy and cryogenic markets. The Company believes this acquisition furthers its growth strategy through market and product diversification, broadens its offerings and strengthens its presence in the defense industry, builds on its presence in the energy markets and adds capabilities in the space industry.
This 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 the Company's common stock, representing a value of $8,964 at a price of $14.69 per share, and cash consideration of $61,150, subject to certain potential adjustments, including a customary working capital adjustment. The cash consideration was funded through cash on-hand and debt proceeds (See Note 15). The purchase agreement included a contingent earn-out dependent upon certain financial measures of BN post-acquisition, in 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. Subsequent to the acquisition, the earn out agreement was terminated and the contingent liability was reversed into Other operating income, net, on the Company’s Condensed Statement of Operations. Prior to the acquisition, Barber Nichols, Inc. and Ascent Properties Group, LLC, a related party, entered into a nine year operating lease agreement for an office and manufacturing building in Arvada, Colorado. This lease was acquired as part of the transaction and has a monthly payment in the amount of $40 with a 3% yearly escalation. Acquisition related costs of $93 and $262 were expensed in the three and six month periods ending September 30, 2021, and are included in Selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.
The cost of the acquisition was preliminarily allocated to the assets acquired and liabilities assumed based upon its estimated fair values at the date of the acquisition and the amount exceeding the fair value of $22,923 was recorded as goodwill, which is not deductible for tax purposes. During the second quarter, the preliminary valuation of backlog was increased by $100, therefore goodwill was reduced to $22,823. As the values of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained, including, but not limited to, the finalization of the valuation of intangible assets, the final reconciliation and confirmation of tangible assets. The valuation of acquisition-related intangible assets will be finalized within twelve months of the close of the acquisition. The fair value of acquisition-related intangible assets includes customer relationships, technology and technical know-how, backlog and trade name. Backlog and trade name are included in the line item "Other intangible assets, net" in the Condensed Consolidated Balance Sheet. Customer relationships were valued using an income approach, specifically the Multi Period Excess Earnings method, which incorporates assumptions regarding retention rate, new customer growth and customer related costs. Trade name and technology and technical know-how were both valued using a Relief from Royalty method, which develops a market based royalty rate used to reflect the after tax royalty savings attributable to owning the intangible asset. The fair value of backlog was determined using a net realizable value methodology, and was computed as the present value of
8
the expected sales attributable to backlog less the remaining costs to fulfill the backlog. Changes to the preliminary valuation may result in material adjustments to the fair value of assets and liabilities acquired.
The purchase price was allocated to specific intangible assets on a preliminary basis as follows:
|
|
Fair Value Assigned
|
|
|
Weighted Average Amortization Period
|
At September 30, 2021
|
|
|
|
|
|
|
Intangibles subject to amortization:
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
11,800
|
|
|
20 years
|
Technology and technical know how
|
|
|
10,100
|
|
|
20 years
|
Backlog
|
|
|
3,900
|
|
|
4 years
|
|
|
$
|
25,800
|
|
|
|
Intangibles not subject to amortization:
|
|
|
|
|
|
|
Tradename
|
|
|
7,400
|
|
|
Indefinite
|
|
|
$
|
7,400
|
|
|
|
Technology and technical know-how and customer relationships are amortized in selling, general and administrative expense on a straight line basis over their estimated useful lives. Backlog is amortized in cost of products sold over the projected conversion period based on management estimates at time of purchase. Intangible amortization was $784 and $1,009 for the three and six months ended September 30, 2021. The estimated annual amortization expense is as follows:
|
|
Annual Amortization
|
|
Remainder of 2022
|
|
$
|
1,497
|
|
2023
|
|
|
2,462
|
|
2024
|
|
|
1,775
|
|
2025
|
|
|
1,327
|
|
2026
|
|
|
1,123
|
|
2027 and thereafter
|
|
|
16,607
|
|
Total intangible amortization
|
|
$
|
24,791
|
|
|
|
|
|
|
9
The following table summarizes the preliminary allocation of the cost of the acquisition to the assets acquired and liabilities assumed as of the close of the acquisition:
|
|
June 1,
|
|
|
|
2021
|
|
Assets acquired:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,587
|
|
Accounts receivable
|
|
|
8,154
|
|
Unbilled revenue
|
|
|
7,068
|
|
Inventory
|
|
|
3,669
|
|
Other current assets
|
|
|
409
|
|
Property, plant & equipment
|
|
|
8,037
|
|
Operating lease asset
|
|
|
9,026
|
|
Goodwill
|
|
|
22,823
|
|
Backlog
|
|
|
3,900
|
|
Customer relationships
|
|
|
11,800
|
|
Technology and technical know how
|
|
|
10,100
|
|
Tradename
|
|
|
7,400
|
|
Total assets acquired
|
|
|
93,973
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable
|
|
|
2,736
|
|
Accrued compensation
|
|
|
1,341
|
|
Other current liabilities
|
|
|
665
|
|
Customer deposits
|
|
|
6,048
|
|
Operating lease liabilities
|
|
|
9,066
|
|
Other long term liabilities
|
|
|
2,103
|
|
Total liabilities assumed
|
|
|
21,959
|
|
Purchase price
|
|
$
|
72,014
|
|
The Condensed Consolidated Statement of Operations for the three and six months ended September 30, 2021 includes net sales of BN of $16,486 and $19,957, respectively. The following unaudited pro forma information presents the consolidated results of operations of the Company as if the BN acquisition had occurred at the beginning of each of the fiscal periods presented:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net sales
|
|
$
|
34,146
|
|
|
$
|
44,174
|
|
|
$
|
69,779
|
|
|
$
|
76,360
|
|
Net (loss) income
|
|
|
(231
|
)
|
|
|
4,374
|
|
|
|
(2,256
|
)
|
|
|
5,149
|
|
(Loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.41
|
|
|
$
|
(0.21
|
)
|
|
$
|
0.49
|
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.41
|
|
|
$
|
(0.21
|
)
|
|
$
|
0.49
|
|
The unaudited pro forma information presents the combined operating results of Graham Corporation and BN, with the results prior to the acquisition date adjusted to include the pro forma impact of the adjustment of depreciation of fixed assets based on the preliminary purchase price allocation, the adjustment to interest income reflecting the cash paid in connection with the acquisition, including acquisition-related expenses, at the Company’s weighted average interest income rate, interest expense and loan origination fees at the Company’s current interest rate, amortization expense related to the fair value adjustments for intangible assets, non-recurring acquisition-related costs and the impact of income taxes on the pro forma adjustments utilizing the applicable statutory tax rate.
The unaudited pro forma results are presented for illustrative purposes only. These pro forma results do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of the beginning of each of the periods presented, nor does the pro forma data intend to be a projection of results that may be obtained in the future.
10
NOTE 3 – REVENUE RECOGNITION:
The Company recognizes revenue on contracts when or as it satisfies a performance obligation by transferring control of the product to the customer. For contracts in which revenue is recognized upon shipment, control is generally transferred when products are shipped, title is transferred, significant risks of ownership have transferred, the Company has rights to payment, and rewards of ownership pass to the customer. For contracts in which revenue is recognized over time, control is generally transferred as the Company creates an asset that does not have an alternative use to the Company and the Company has an enforceable right to payment for the performance completed to date.
The following table presents the Company’s revenue disaggregated by product line and geographic area:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Product Line
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Heat transfer equipment
|
|
$
|
8,706
|
|
|
$
|
13,307
|
|
|
$
|
15,470
|
|
|
$
|
23,980
|
|
Vacuum equipment
|
|
|
4,315
|
|
|
|
9,381
|
|
|
|
8,534
|
|
|
|
11,932
|
|
Fluid systems
|
|
|
6,595
|
|
|
|
—
|
|
|
|
8,403
|
|
|
|
—
|
|
Power systems
|
|
|
9,890
|
|
|
|
—
|
|
|
|
11,553
|
|
|
|
—
|
|
All other
|
|
|
4,640
|
|
|
|
5,266
|
|
|
|
10,343
|
|
|
|
8,752
|
|
Net sales
|
|
$
|
34,146
|
|
|
$
|
27,954
|
|
|
$
|
54,303
|
|
|
$
|
44,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
|
|
$
|
5,483
|
|
|
$
|
4,529
|
|
|
$
|
8,992
|
|
|
$
|
9,692
|
|
Canada
|
|
|
879
|
|
|
|
1,938
|
|
|
|
2,087
|
|
|
|
2,930
|
|
Middle East
|
|
|
963
|
|
|
|
988
|
|
|
|
1,575
|
|
|
|
1,437
|
|
South America
|
|
|
236
|
|
|
|
2,592
|
|
|
|
478
|
|
|
|
2,812
|
|
U.S.
|
|
|
26,201
|
|
|
|
17,252
|
|
|
|
40,095
|
|
|
|
26,690
|
|
All other
|
|
|
384
|
|
|
|
655
|
|
|
|
1,076
|
|
|
|
1,103
|
|
Net sales
|
|
$
|
34,146
|
|
|
$
|
27,954
|
|
|
$
|
54,303
|
|
|
$
|
44,664
|
|
A performance obligation represents a promise in a contract to provide a distinct good or service to a customer. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Transaction price reflects the amount of consideration to which the Company expects to be entitled in exchange for transferred products. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized as the performance obligation is satisfied. In certain cases, the Company may separate a contract into more than one performance obligation, while in other cases, several products may be part of a fully integrated solution and are bundled into a single performance obligation. If a contract is separated into more than one performance obligation, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods underlying each performance obligation. The Company has made an accounting policy election to exclude from the measurement of the contract price all taxes assessed by government authorities that are collected by the Company from its customers. The Company does not adjust the contract price for the effects of a financing component if the Company expects, at contract inception, that the period between when a product is transferred to a customer and when the customer pays for the product will be one year or less. Shipping and handling fees billed to the customer are recorded in revenue and the related costs incurred for shipping and handling are included in cost of products sold.
Revenue on the majority of the Company’s contracts, as measured by number of contracts, is recognized upon shipment to the customer. Revenue on larger contracts, which are fewer in number but represent the majority of revenue, is recognized over time. Revenue from contracts that is recognized upon shipment accounted for approximately 20% and 40% of revenue for the three-month periods ended September 30, 2021 and 2020, respectively, and revenue from contracts that is recognized over time accounted for approximately 80% and 60% of revenue for the three-month periods ended September 30, 2021 and 2020, respectively. Revenue from contracts that is recognized upon shipment accounted for approximately 25% and 50% of revenue for the six-month periods ended September 30, 2021 and 2020, respectively, and revenue from contracts that is recognized over time accounted for approximately 75% and 50% of revenue for the six-month periods ended September 30, 2021 and 2020, respectively. The Company recognizes revenue over time when contract performance results in the creation of a product for which the Company does not have an alternative use and the contract includes an enforceable right to payment in an amount that corresponds directly with the value of the performance completed. To measure progress towards completion on performance obligations for which revenue is recognized over time the Company utilizes an input method based upon a ratio of direct labor hours incurred to date to management’s estimate of the total labor
11
hours to be incurred on each contract, an input method based upon a ratio of total contract costs incurred to date to management’s estimate of the total contract costs to be incurred or an output method based upon completion of operational milestones, depending upon the nature of the contract. The Company has established the systems and procedures essential to developing the estimates required to account for performance obligations over time. These procedures include monthly review by management of costs incurred, progress towards completion, identified risks and opportunities, sourcing determinations, changes in estimates of costs yet to be incurred, availability of materials, and execution by subcontractors. Sales and earnings are adjusted in current accounting periods based on revisions in the contract value due to pricing changes and estimated costs at completion. Losses on contracts are recognized immediately when evident to management.
The timing of revenue recognition, invoicing and cash collections affect trade accounts receivable, unbilled revenue (contract assets) and customer deposits (contract liabilities) on the Condensed Consolidated Balance Sheets. Unbilled revenue represents revenue on contracts that is recognized over time and exceeds the amount that has been billed to the customer. Unbilled revenue is separately presented in the Condensed Consolidated Balance Sheets. The Company may have an unconditional right to payment upon billing and prior to satisfying the performance obligations. The Company will then record a contract liability and an offsetting asset of equal amount until the deposit is collected and the performance obligations are satisfied. Customer deposits are separately presented in the Condensed Consolidated Balance Sheets. Customer deposits are not considered a significant financing component as they are generally received less than one year before the product is completed or used to procure specific material on a contract, as well as related overhead costs incurred during design and construction.
Net contract assets (liabilities) consisted of the following:
|
|
September 30, 2021
|
|
|
March 31, 2021
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled revenue (contract assets)
|
|
$
|
29,035
|
|
|
$
|
19,994
|
|
|
$
|
9,041
|
|
Customer deposits (contract liabilities)
|
|
|
(21,941
|
)
|
|
|
(14,059
|
)
|
|
|
(7,882
|
)
|
Net contract liabilities
|
|
$
|
7,094
|
|
|
$
|
5,935
|
|
|
$
|
1,159
|
|
Contract liabilities at September 30, and March 31, 2021 include $2,902 and $1,603, respectively, of customer deposits for which the Company has an unconditional right to collect payment. Trade accounts receivable, as presented on the Condensed Consolidated Balance Sheets, includes corresponding balances at September 30, and March 31, 2021, respectively. Revenue recognized in the three and six months ended September 30, 2021 that was included in the contract liability balance at March 31, 2021 was $13,293. Changes in the net contract liability balance during the six months ended September 30, 2020 were impacted by a $9,041 increase in contract assets, of which $19,828 was due to contract progress and the acquisition of BN’s contract assets of $7,068 offset by invoicing to customers of $17,855. In addition, contract liabilities increased $7,882 driven by revenue recognized in the current period that was included in the contract liability balance at March 31, 2021 offset by new customer deposits of $15,127 and the acquisition of BN’s contract liabilities of $6,048.
Receivables billed but not paid under retainage provisions in the Company’s customer contracts were $3,364 and $3,747 at September 30, and March 31, 2021, respectively.
Incremental costs to obtain a contract consist of sales employee and agent commissions. Commissions paid to employees and sales agents are capitalized when paid and amortized to selling, general and administrative expense when the related revenue is recognized. Capitalized costs, net of amortization, to obtain a contract were $79 and $39 at September 30, and March 31, 2021, respectively, and are included in the line item "Prepaid expenses and other current assets" in the Condensed Consolidated Balance Sheets. The related amortization expense was $24 and $89 in the three months ended September 30, 2021 and 2020, respectively, and $34 and $251 in the six months ended September 30, 2021 and 2020
The Company’s remaining unsatisfied performance obligations represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. The Company also refers to this measure as backlog. As of September 30, 2021, the Company had remaining unsatisfied performance obligations of $233,247. The Company expects to recognize revenue on approximately 45% to 50% of the remaining performance obligations within one year, 25% to 35% in one to two years and the remaining beyond two years.
NOTE 4 – INVESTMENTS:
No investments were held by the Company at September 30, 2021. Investments, if any, consist of certificates of deposits with financial institutions. All investments have original maturities of greater than three months and less than one year and are classified as
12
held-to-maturity, as the Company believes it has the intent and ability to hold the securities to maturity. Investments are stated at amortized cost which approximates fair value.
NOTE 5 – INVENTORIES:
Inventories are stated at the lower of cost or net realizable value, using the average cost method.
Major classifications of inventories are as follows:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2021
|
|
Raw materials and supplies
|
|
$
|
4,156
|
|
|
$
|
3,490
|
|
Work in process
|
|
|
11,454
|
|
|
|
12,196
|
|
Finished products
|
|
|
2,112
|
|
|
|
1,646
|
|
Total
|
|
$
|
17,722
|
|
|
$
|
17,332
|
|
NOTE 6 – EQUITY-BASED COMPENSATION:
The 2020 Graham Corporation Equity Incentive Plan (the (the "2020 Plan"), as approved by the Company’s stockholders at the Annual Meeting on August 11, 2020, provides for the issuance of 422 shares of common stock in connection with grants of incentive stock options, non-qualified stock options, restricted stock units and stock awards to officers, key employees and outside directors. The shares available for issuance include 112 remaining available shares under the Company’s prior plan, the Amended and Restated 2000 Graham Corporation Incentive Plan to Increase Shareholder Value (the"2000 Plan"). As of August 11, 2020, the effective date of the 2020 Plan, no further awards will be granted under the 2000 Plan. However, 33 stock options and 53 shares of unvested restricted stock under the 2000 Plan remains subject to the terms of such plan until the time it is no longer outstanding.
Restricted stock awards of 27 were granted in the three-month period ended September 30, 2021, 18 shares of which vest 100% on the third anniversary of the grant date subject to the satisfaction of the performance metrics for the applicable three-year period and 9 shares that vest 33⅓% per year over a three-year term. Restricted stock awards granted in the six-month periods ended September 30, 2021 and 2020 were 162 and 113, respectively. Restricted shares of 88 and 54 granted to officers in fiscal 2022 and fiscal 2021, respectively, vest 100% on the third anniversary of the grant date subject to the satisfaction of the performance metrics for the applicable three-year period. Restricted shares of 54 and 38 granted to officers and key employees in fiscal 2022 and fiscal 2021, respectively, vest 33⅓% per year over a three-year term. Restricted shares of 20 and 21 granted to directors in fiscal 2022 and fiscal 2021, respectively, vest 100% on the first year anniversary of the grant date. No stock option awards were granted in the three-month or six-month periods ended September 30, 2021 and 2020.
During the three months ended September 30, 2021 and 2020, the Company recognized equity-based compensation costs related to restricted stock awards of ($22) and $316, respectively. The income tax benefit recognized related to equity-based compensation was ($6) and $73 for the three months ended September 30, 2021 and 2020, respectively. During the six months ended September 30, 2021 and 2020, the Company recognized equity-based compensation costs related to restricted stock awards of $315 and $471, respectively. The income tax benefit recognized related to equity-based compensation was $69 and $111 for the six months ended September 30, 2021 and 2020, respectively.
The Company has an Employee Stock Purchase Plan (the "ESPP"), which allows eligible employees to purchase shares of the Company's common stock at a discount of up to 15% of its fair market value on the (1) last, (2) first or (3) lower of the last or first day of the six-month offering period. A total of 200 shares of common stock may be purchased under the ESPP. During the three months ended September 30, 2021 and 2020, the Company recognized equity-based compensation costs of $(1) and $14, respectively, related to the ESPP and $0 and $3, respectively, of related tax benefits. During the six-months ended September 30, 2021 and 2020, the Company recognized equity-based compensation costs of $15 and $23, respectively, related to the ESPP and $4 and $5, respectively, of related tax benefits.
NOTE 7 – (LOSS) INCOME PER SHARE:
Basic (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding for the period. Diluted (loss) income per share is calculated by dividing net (loss) income by the weighted average number
13
of common shares outstanding and, when applicable, potential common shares outstanding during the period. A reconciliation of the numerators and denominators of basic and diluted (loss) income per share is presented below:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Basic (loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(492
|
)
|
|
$
|
2,744
|
|
|
$
|
(3,618
|
)
|
|
$
|
926
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
|
10,681
|
|
|
|
9,977
|
|
|
|
10,442
|
|
|
|
9,936
|
|
Basic (loss) income per share
|
|
$
|
(0.05
|
)
|
|
$
|
0.27
|
|
|
$
|
(0.35
|
)
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(492
|
)
|
|
$
|
2,744
|
|
|
$
|
(3,618
|
)
|
|
$
|
926
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
|
10,681
|
|
|
|
9,977
|
|
|
|
10,442
|
|
|
|
9,936
|
|
Stock options outstanding
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average common and
potential common shares
outstanding
|
|
|
10,681
|
|
|
|
9,977
|
|
|
|
10,442
|
|
|
|
9,936
|
|
Diluted loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
0.27
|
|
|
$
|
(0.35
|
)
|
|
$
|
0.09
|
|
None of the options to purchase 33 shares of common stock at September 30, 2021 were included in the computation of diluted income per share as the affect would be anti-dilutive due to the net losses in the quarters. None of the options to purchase 37 shares of common stock at September 30, 2020 were included in the above computation of diluted income per share given their exercise prices as they would not be dilutive upon issuance.
NOTE 8 – PRODUCT WARRANTY LIABILITY:
The reconciliation of the changes in the product warranty liability is as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Balance at beginning of period
|
|
$
|
522
|
|
|
$
|
305
|
|
|
$
|
626
|
|
|
$
|
359
|
|
BNI warranty accrual acquired
|
|
|
—
|
|
|
|
—
|
|
|
|
169
|
|
|
|
—
|
|
(Income) expense for product warranties
|
|
|
(5
|
)
|
|
|
14
|
|
|
|
(21
|
)
|
|
|
(5
|
)
|
Product warranty claims paid
|
|
|
(68
|
)
|
|
|
(11
|
)
|
|
|
(325
|
)
|
|
|
(46
|
)
|
Balance at end of period
|
|
$
|
449
|
|
|
$
|
308
|
|
|
$
|
449
|
|
|
$
|
308
|
|
Income of $5 for product warranties in the three months ended September30, 2021 and income of $21 and $5 for product warranties in the six months ended September 30, 2021 and 2020, respectively, resulted from the reversal of provisions made that were no longer required due to lower claims experience.
The product warranty liability is included in the line item "Accrued expenses and other current liabilities" in the Condensed Consolidated Balance Sheets.
NOTE 9 – CASH FLOW STATEMENT:
Interest paid was $135 and $8 in the six-month periods ended September 30, 2021 and 2020, respectively. Income taxes paid (refunded) for the six months ended September 30, 2021 and 2020 were $1,318 and $(93), respectively.
At September 30, 2021 and 2020, there were $39 and $86, respectively, of capital purchases that were recorded in accounts payable and are not included in the caption "Purchase of property, plant and equipment" in the Condensed Consolidated Statements of Cash Flows.
14
The cash utilized for the acquisition of BN of $59,563 included the cash consideration of $61,150, net of cash acquired of $1,587. In the six months ended September 30, 2021, non-cash activities included the issuance of 610 treasury shares valued at $8,964, included as part of the consideration for the acquisition of BN.
In the second quarter, non-cash activities included pension adjustments, net of income tax, of $68.
NOTE 10 – EMPLOYEE BENEFIT PLANS:
The components of pension cost are as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Service cost
|
|
$
|
94
|
|
|
$
|
115
|
|
|
$
|
187
|
|
|
$
|
231
|
|
Interest cost
|
|
|
298
|
|
|
|
303
|
|
|
|
598
|
|
|
|
606
|
|
Expected return on assets
|
|
|
(682
|
)
|
|
|
(628
|
)
|
|
|
(1,364
|
)
|
|
|
(1,257
|
)
|
Amortization of actuarial loss
|
|
|
229
|
|
|
|
260
|
|
|
|
442
|
|
|
|
520
|
|
Net pension cost
|
|
$
|
(61
|
)
|
|
$
|
50
|
|
|
$
|
(137
|
)
|
|
$
|
100
|
|
The Company made no contributions to its defined benefit pension plan during the six months ended September 30, 2021 and does not expect to make any contributions to the plan for the balance of fiscal 2022.
During the second quarter ended September 30, 2021, the Company remeasured the projected benefit obligation to the supplemental executive retirement plan due to the retirement of the Company’s chief executive officer, who was the only active participant in the plan. Recognition of an actuarial gain, net of tax, of $68 was included in other comprehensive (loss) income.
The components of the postretirement benefit cost are as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Interest cost
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
7
|
|
|
$
|
9
|
|
Amortization of actuarial loss
|
|
|
6
|
|
|
|
7
|
|
|
|
12
|
|
|
|
13
|
|
Net postretirement benefit cost
|
|
$
|
10
|
|
|
$
|
11
|
|
|
$
|
19
|
|
|
$
|
22
|
|
The Company paid no benefits related to its postretirement benefit plan during the six months ended September 30, 2021. The Company expects to pay benefits of approximately $72 for the balance of fiscal 2022.
The components of net periodic benefit cost other than service cost are included in the line item "Other income" in the Condensed Consolidated Statements of Operations.
The Company self-funds the medical insurance coverage it provides to its U.S. based employees in certain locations. The Company maintains a stop loss insurance policy in order to limit its exposure to claims. The liability of $164 and $184 on September 30, 2021 and March 31, 2021, respectively, related to the self-insured medical plan is primarily based upon claim history and is included in the caption "Accrued compensation" as a current liability in the Condensed Consolidated Balance Sheets.
NOTE 11 – COMMITMENTS AND CONTINGENCIES:
The Company has been named as a defendant in lawsuits alleging personal injury from exposure to asbestos allegedly contained in, or accompanying, products made by the Company. The Company is a co-defendant with numerous other defendants in these lawsuits and intends to vigorously defend itself against these claims. The claims in the Company’s current lawsuits are similar to those made in previous asbestos-related suits that named the Company as a defendant, which either were dismissed when it was shown that the Company had not supplied products to the plaintiffs’ places of work or were settled for immaterial amounts. The Company cannot provide any assurances that any pending or future matters will be resolved in the same manner as previous lawsuits.
As of September 30, 2021, the Company was subject to the claims noted above, as well as other legal proceedings and potential claims that have arisen in the ordinary course of business.
15
Although the outcome of the lawsuits, legal proceedings or potential claims to which the Company is, or may become, a party to cannot be determined and an estimate of the reasonably possible loss or range of loss cannot be made for the majority of the claims, management does not believe that the outcomes, either individually or in the aggregate, will have a material adverse effect on the Company’s results of operations, financial position or cash flows.
NOTE 12 – INCOME TAXES:
The Company files federal and state income tax returns in several domestic and international jurisdictions. In most tax jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed. The Company is subject to U.S. federal examination for the tax years 2017 through 2020 and examination in state tax jurisdictions for the tax years 2016 through 2020. The Company is subject to examination in the People’s Republic of China for tax years 2017 through 2020 and in India for tax year 2019 through 2020.
There was no liability for unrecognized tax benefits at either September 30, 2021 or March 31, 2021.
NOTE 13 – CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS:
The changes in accumulated other comprehensive loss by component for the six months ended September 30, 2021 and 2020 are as follows:
|
|
Pension and
Other
Postretirement
Benefit Items
|
|
|
Foreign
Currency
Items
|
|
|
Total
|
|
Balance at April 1, 2021
|
|
$
|
(7,698
|
)
|
|
$
|
301
|
|
|
$
|
(7,397
|
)
|
Other comprehensive income before reclassifications
|
|
|
68
|
|
|
|
93
|
|
|
|
161
|
|
Amounts reclassified from accumulated other comprehensive
loss
|
|
|
353
|
|
|
|
—
|
|
|
|
353
|
|
Net current-period other comprehensive income
|
|
|
421
|
|
|
|
93
|
|
|
|
514
|
|
Balance at September 30, 2021
|
|
$
|
(7,277
|
)
|
|
$
|
394
|
|
|
$
|
(6,883
|
)
|
|
|
Pension and
Other
Postretirement
Benefit Items
|
|
|
Foreign
Currency
Items
|
|
|
Total
|
|
Balance at April 1, 2020
|
|
$
|
(9,472
|
)
|
|
$
|
(84
|
)
|
|
$
|
(9,556
|
)
|
Other comprehensive loss before reclassifications
|
|
|
—
|
|
|
|
155
|
|
|
|
155
|
|
Amounts reclassified from accumulated other comprehensive
loss
|
|
|
409
|
|
|
|
—
|
|
|
|
409
|
|
Net current-period other comprehensive income (loss)
|
|
|
409
|
|
|
|
155
|
|
|
|
564
|
|
Balance at September 30, 2020
|
|
$
|
(9,063
|
)
|
|
$
|
71
|
|
|
$
|
(8,992
|
)
|
The reclassifications out of accumulated other comprehensive loss by component for the three and six months ended September 30, 2021 and 2020 are as follows:
Details about Accumulated Other
Comprehensive Loss Components
|
|
Amount Reclassified from
Accumulated Other
Comprehensive Loss
|
|
|
|
Affected Line Item in the Condensed
Consolidated Statements of Income
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
|
Pension and other postretirement benefit items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial loss
|
|
$
|
(236
|
)
|
(1)
|
|
$
|
(267
|
)
|
(1)
|
|
Loss before benefit for income taxes
|
|
|
|
(53
|
)
|
|
|
|
(63
|
)
|
|
|
Benefit for income taxes
|
|
|
$
|
(183
|
)
|
|
|
$
|
(204
|
)
|
|
|
Net loss
|
16
Details about Accumulated Other
Comprehensive Loss Components
|
|
Amount Reclassified from
Accumulated Other
Comprehensive Loss
|
|
|
|
Affected Line Item in the Condensed
Consolidated Statements of Income
|
|
|
Six Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
|
Pension and other postretirement benefit items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial loss
|
|
$
|
(455
|
)
|
(1)
|
|
$
|
(533
|
)
|
(1)
|
|
Loss before benefit for income taxes
|
|
|
|
(102
|
)
|
|
|
|
(124
|
)
|
|
|
Benefit for income taxes
|
|
|
$
|
(353
|
)
|
|
|
$
|
(409
|
)
|
|
|
Net loss
|
(1)
|
These accumulated other comprehensive loss components are included within the computation of pension and other postretirement benefit costs. See Note 10.
|
NOTE 14 – LEASES:
The Company leases certain manufacturing facilities, office space, machinery and office equipment. An arrangement is considered to contain a lease if it conveys the right to use and control an identified asset for a period of time in exchange for consideration. If it is determined that an arrangement contains a lease, then a classification of a lease as operating or finance is determined by evaluating the five criteria outlined in the lease accounting guidance at inception. Leases generally have remaining terms of one year to five years, whereas leases with an initial term of twelve months or less are not recorded on the Condensed Consolidated Balance Sheets. The depreciable life of leased assets related to finance leases is limited by the expected term of the lease, unless there is a transfer of title or purchase option that the Company believes is reasonably certain of exercise. Certain leases include options to renew or terminate. Renewal options are exercisable per the discretion of the Company and vary based on the nature of each lease. The term of the lease includes renewal periods only if the Company is reasonably certain that it will exercise the renewal option. When determining if a renewal option is reasonably certain of being exercised, the Company considers several factors, including but not limited to, the cost of moving to another location, the cost of disrupting operations, whether the purpose or location of the leased asset is unique and the contractual terms associated with extending the lease. The Company’s lease agreements do not contain any residual value guarantees or any material restrictive covenants and the Company does not sublease to any third parties. As of September 30, 2021, the Company did not have any material leases that have been signed but not commenced.
Right-of-use (“ROU”) lease assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make payments in exchange for that right of use. Finance lease ROU assets and operating lease ROU assets are included in the line items “Property, plant and equipment, net” and “Operating lease assets”, respectively, in the Condensed Consolidated Balance Sheets. The current portion and non-current portion of finance and operating lease liabilities are all presented separately in the Condensed Consolidated Balance Sheets.
The discount rate implicit within the Company’s leases is generally not readily determinable, and therefore, the Company uses an incremental borrowing rate in determining the present value of lease payments based on rates available at commencement.
The weighted average remaining lease term and discount rate for finance and operating leases are as follows:
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Finance Leases
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term in years
|
|
|
1.91
|
|
|
|
2.69
|
|
Weighted-average discount rate
|
|
|
10.72
|
%
|
|
|
10.45
|
%
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term in years
|
|
|
7.91
|
|
|
|
1.69
|
|
Weighted-average discount rate
|
|
|
3.26
|
%
|
|
|
5.49
|
%
|
17
The components of lease expense are as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
10
|
|
|
$
|
10
|
|
Interest on lease liabilities
|
|
|
2
|
|
|
|
2
|
|
|
|
3
|
|
|
|
4
|
|
Operating lease cost
|
|
|
384
|
|
|
|
41
|
|
|
|
540
|
|
|
|
81
|
|
Short-term lease cost
|
|
|
10
|
|
|
|
3
|
|
|
|
15
|
|
|
|
6
|
|
Total lease cost
|
|
$
|
401
|
|
|
$
|
51
|
|
|
$
|
568
|
|
|
$
|
101
|
|
Operating lease costs during the six months ended September 30, 2021 and 2020 were included within cost of sales and selling, general and administrative expenses.
As of September 30, 2021, future minimum payments required under non-cancelable leases are:
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
Remainder of 2022
|
|
$
|
688
|
|
|
$
|
13
|
|
2023
|
|
|
1,325
|
|
|
|
26
|
|
2024
|
|
|
1,183
|
|
|
|
11
|
|
2025
|
|
|
1,164
|
|
|
|
—
|
|
2026
|
|
|
1,169
|
|
|
|
—
|
|
2027 and thereafter
|
|
|
4,856
|
|
|
|
—
|
|
Total lease payments
|
|
|
10,385
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Less – amount representing interest
|
|
|
1,296
|
|
|
|
5
|
|
Present value of net minimum lease payments
|
|
$
|
9,089
|
|
|
$
|
45
|
|
NOTE 15 – DEBT:
On June 1, 2021, the Company entered into a $20,000 five-year term 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. In addition, on June 1, 2021, the Company terminated its revolving credit facility agreement with JPMorgan Chase Bank, N.A. and entered into a revolving credit facility with Bank of America that provides a $30,000 line of credit, including letters of credit and bank guarantees, expandable at the Company’s option and the bank’s approval at any time up to $40,000. As of September 30, 2021, the Company had $4,000 outstanding on the line of credit. The agreement has a five-year term. 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, 2021, the BSBY rate was 0.0558%. Outstanding letters of credit under the agreement are subject to a fee of 1.50% per annum of the outstanding undrawn amount of each letter of credit that is not secured by cash and 0.6% of each letter of credit that is secured by cash. The upfront fee for both the term loan and revolving credit facility was 0.20% of the committed facilities and amounts available for borrowing under the revolving credit facility are subject to an unused commitment fee of 0.25%. Under the term loan agreement and revolving credit facility, the Company covenants to maintain a maximum total leverage ratio, as defined in such agreements, of 3.0 to 1.0, which may be increased to 3.25 to 1.0 following an acquisition for a period of twelve months following the closing of the acquisition. In addition, the Company covenants 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.
On June, 1, 2021, the Company entered into an agreement to amend its letter of credit facility agreement with HSBC Bank USA, N.A. and decreased the Company’s line of credit from $15,000 to $7,500. Under the amended agreement, the Company incurs an annual facility fee of $5 and outstanding letters of credit are subject to a fee of between 0.75% and 0.85%, depending on the term of the letter of credit. Interest is payable on the principal amounts of unreimbursed letter of credit draws under the facility at a rate of 3% plus the bank’s prime rate. The agreement is subject to an annual renewal by the bank on July 31 of each year.
18
Letters of credit outstanding as of September 30, 2021 and March 31, 2021 were $8,133 and $11,567, respectively.
NOTE 16 – ACCOUNTING AND REPORTING CHANGES:
In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board ("FASB"), the Securities and Exchange Commission, the Emerging Issues Task Force, the American Institute of Certified Public Accountants or any other authoritative accounting body to determine the potential impact they may have on the Company's consolidated financial statements.
In December 2019, the FASB issued Accounting Standards Update ("ASU") No. 2019-12, “Simplifying the Accounting for Income Taxes.” The amended guidance simplifies the accounting for income taxes, eliminating certain exceptions to the general income tax principles, in an effort to reduce the cost and complexity of application. The amended guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The guidance requires application on either a prospective, retrospective or modified retrospective basis, contingent on the income tax exception being applied. The Company adopted the new guidance, on a prospective basis, on April 1, 2021. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
Management does not expect any other recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company's consolidated financial statements.
NOTE 17 – OTHER OPERATING INCOME, NET:
On August 9, 2021, the Company and James R. Lines entered into a Severance and Transition Agreement (the “Transaction Agreement”) pursuant to which Mr. Lines resigned from his position as the Company’s Chief Executive Officer and as a member of the Board of Directors, and from positions he holds with all Company subsidiaries and affiliates, effective as of the close of business on August 31, 2021. The Transition Agreement provides that for a period of 18 months following the separation date, Mr. Lines is paid his base salary as well as health care premiums. As a result, a liability was recorded in the amount of $798 in Accrued Compensation on the Company’s Condensed Consolidated Balance Sheets and recognized against Other operating income, net on the Condensed Consolidated Statements of Operations.
During the second quarter ended September 30, 2021, the Company terminated the earn out agreement related to the acquisition of BN (see Note 2), therefore the Company recognized a change in fair value of the contingent liability in the amount of $1,900, which was included in Other operating income, net on the Company’s Condensed Consolidated Statement of Operations.
NOTE 18: SUBSEQUENT EVENTS:
On October 26, 2021, the Company entered into a Performance Bonus Agreement (the “Bonus Agreement”) to provide certain employees of BN with performance-based awards considering the BN business results on a stand-alone basis. The purpose of the new bonus arrangement is to align a broader number of the BN leadership team with the achievement of BN performance objectives. The Bonus Agreement provides for payments to be made for certain performance-based results of BN for fiscal years ending March 31, 2024, 2025 and 2026.
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