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. 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, ethylene, methanol and downstream chemical facilities.
Our brands are built upon 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 located in Batavia, New York. We have production facilities co-located with our headquarters in Batavia. 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.
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 first quarter of fiscal 2023, sales to the defense and space industries were 45% of our business compared with approximately 25% of sales prior to the acquisition. The remaining 55% of our first 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. BN has outperformed expectations since being acquired.
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 considering the BN business results on a stand-alone basis. The purpose of the 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 and can range between $2,000 to $4,000 per year.
Summary
Highlights for the three months ended June 30, 2022 include:
•Net sales for the first quarter of fiscal 2023 were $36,075, up $15,918 or 79% compared with $20,157 for the first quarter of the fiscal 2022. 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 fiscal 2022. Additionally, our sales continued to benefit from our diversified
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revenue base including strong growth in our energy and chemical/petrochemical aftermarket ("commercial aftermarket") and space market. These increases were partially offset by continued supply chain constraints, which caused a delay in material receipts.
•Net income and income per diluted share for the first quarter of fiscal 2023 were $676 and $0.06 per share, respectively, compared with a loss of $3,126 and $0.31 per share, respectively, for the first quarter of fiscal 2022. Adjusted net income and adjusted net income per diluted share for the first quarter of fiscal 2023 were $1,329 and $0.12 per share, respectively, compared with a loss of $2,807 and $0.28 per share, respectively, for the first quarter of fiscal 2022. In the first quarter of fiscal 2023, we completed two first article U.S. Navy projects and are on schedule to complete the remaining first article projects throughout fiscal 2023. 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.
•Orders booked in the first quarter of fiscal 2023 were $40,300, compared with $20,900 in the first quarter of fiscal 2022. This increase included $13,700 of additional orders from BN, whose results were only included for one month in the fiscal 2022 first quarter and strong orders from the space industry in the first quarter of fiscal 2023. The remaining $5,700 increase was attributable to the Graham Batavia operations which saw strong demand from its commercial aftermarket and international refinery markets.
•Backlog was $260,678 at June 30, 2022, compared with $256,536 at March 31, 2022. This increase was primarily driven by continued growth in our space, commercial aftermarket, and international refinery markets. For more information on this performance indicator see "Orders and Backlog" below.
•Cash and cash equivalents at June 30, 2022 were $12,905, compared with $14,741 at March 31, 2022. This decrease was primarily due to cash used in operating activities, primarily for working capital, of $689 and debt payments of $500 in the first quarter of fiscal 2023.
•In the first quarter of fiscal 2022, $1,177 was returned to shareholders as dividends compared with $0 in the first quarter of fiscal 2023. 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, which 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 June 30, 2022, we had $0 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.
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Current Market Conditions
Demand for our equipment and systems for the defense industry is expected to remain strong and continue to expand, based on 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 systemic 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. We also 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) remains 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 the next twelve months following several years of reduced capital spending in a low oil price environment. 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 or 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.
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 for many of the launch providers. 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 quarter of fiscal 2023, sales to the space industry represented 18% of our sales compared to 4% in the first quarter of fiscal 2022.
The chart below illustrates our strategy to increase our participation in the defense and space markets. The defense market comprised 74% of our total backlog at June 30, 2022. We believe this diversification is especially beneficial when our refining and process markets are weak, as is presently the case.
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*Note: FYE refers to fiscal year ended March 31
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 |
|
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
Net sales |
|
$ |
36,075 |
|
|
$ |
20,157 |
|
Gross profit |
|
$ |
6,744 |
|
|
$ |
914 |
|
Gross profit margin |
|
|
19 |
% |
|
|
5 |
% |
SG&A expenses (1) |
|
$ |
5,759 |
|
|
$ |
4,923 |
|
SG&A as a percent of sales |
|
|
16 |
% |
|
|
24 |
% |
Net income (loss) |
|
$ |
676 |
|
|
$ |
(3,126 |
) |
Diluted income (loss) per share |
|
$ |
0.06 |
|
|
$ |
(0.31 |
) |
Total assets |
|
$ |
184,213 |
|
|
$ |
185,366 |
|
Total assets excluding cash and cash equivalents |
|
$ |
171,308 |
|
|
$ |
166,223 |
|
(1)Selling, general and administrative expenses are referred to as "SG&A".
The First Quarter of Fiscal 2023 Compared with the First Quarter of Fiscal 2022
Sales for the first quarter of fiscal 2023 were $36,075, an increase of $15,918 or 79% from sales of $20,157 for the first quarter of fiscal 2022. 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 fiscal 2022. Additionally, our sales continued to benefit from our diversified revenue base including strong growth in commercial aftermarket and the space market. These increases were partially offset by continued supply chain constraints, which caused a delay in material receipts and related shipments. Domestic sales as a percentage of aggregate sales were 78% in the first quarter of fiscal 2023 compared with 69% in the first quarter of fiscal 2022 reflecting the increase in our defense and space industry businesses which is all U.S. based. Sales in the three months ended June 30, 2022 were 22% to the refining industry, 16% to the chemical and petrochemical industries, 27% for the defense (U.S. Navy) industry, 18% to space, and 17% to other commercial and industrial applications. Sales in the three months ended June 30, 2021 were 23% to the refining industry, 23% to the chemical and petrochemical industries, 35% for the defense (U.S. Navy) industry, 4% to space, and 15% 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. See also "Current Market Conditions," above. For additional information on anticipated future sales and our markets, see "Orders and Backlog" below.
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Gross profit margin for the first quarter of fiscal 2023 was 19%, compared with 5% for the first quarter of fiscal 2022. Gross profit for the first quarter of fiscal 2023 increased compared with fiscal 2022, to $6,744 from $914. These increases were primarily due to an improved mix of sales related to higher margin projects (space and commercial aftermarket) and improved execution on completed contracts, partially offset by higher incentive compensation. In the first quarter of fiscal 2023, we completed and shipped two first article U.S. Navy projects and are on schedule to complete the remaining first article projects throughout fiscal 2023. In addition to the above, first quarter fiscal 2023 includes three months of operations from BN compared to one month in the first quarter of fiscal 2022.
SG&A expense including amortization for the first quarter of fiscal 2023 was $5,759, up 17%, or $836, compared with $4,923 for the first quarter of fiscal 2022. Approximately $1,400 of this increase was due to having three months of BN results in the first quarter of fiscal 2023 compared to one month in fiscal 2022, partially offset by cost savings and deferral initiatives. These efforts included reducing the use of outside sales agents and delayed hiring. As a result, SG&A expense as a percentage of sales in the first quarter of fiscal 2023 was 16% of sales compared with 24% of sales in the comparable period in fiscal 2022.
Net interest expense for the first quarter of fiscal 2023 was $157 compared to $22 in the first quarter of fiscal 2022 primarily due to increased borrowings related to the BN acquisition, as well as increased interest rates since the first quarter of 2022.
Our effective tax rate in the first quarter of fiscal 2023 was 24%, compared with 19% in the first quarter 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.
Net income and income per diluted share for the first quarter of fiscal 2023 were $676 and $0.06 per share, respectively, compared with a loss of $3,126 and $0.31 per share, respectively, for the first quarter of fiscal 2022. Adjusted net income and adjusted net income per diluted share for the first quarter of fiscal 2023 were $1,329 and $0.12 per share, respectively, compared with a loss of $2,807 and $0.28 per share, respectively, for the first 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.
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, interest expense, taxes, other acquisition related expenses, and other unusual/nonrecurring expenses. Adjusted net income (loss) and adjusted net income (loss) per diluted share excludes intangible amortization, other costs related to the acquisition, and other unusual/nonrecurring expenses.
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 |
|
|
June 30, |
|
|
2022 |
|
|
2021 |
|
Net income (loss) |
$ |
676 |
|
|
$ |
(3,126 |
) |
Acquisition & integration costs |
|
54 |
|
|
|
169 |
|
Debt amendment costs |
|
153 |
|
|
|
- |
|
Net interest expense |
|
157 |
|
|
|
22 |
|
Income taxes |
|
215 |
|
|
|
(745 |
) |
Depreciation & amortization |
|
1,475 |
|
|
|
820 |
|
Adjusted EBITDA |
$ |
2,730 |
|
|
$ |
(2,860 |
) |
Adjusted EBITDA margin % |
7.6% |
|
|
|
-14.2 |
% |
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, |
|
|
2022 |
|
|
2021 |
|
Net income (loss) |
$ |
676 |
|
|
$ |
(3,126 |
) |
Acquisition & integration costs |
|
54 |
|
|
|
169 |
|
Amortization of intangible assets |
|
619 |
|
|
|
225 |
|
Debt amendment costs |
|
153 |
|
|
|
- |
|
Normalize tax rate(1) |
|
(173 |
) |
|
|
(75 |
) |
Adjusted net income (loss) |
$ |
1,329 |
|
|
$ |
(2,807 |
) |
Adjusted diluted earnings (loss) per share |
$ |
0.12 |
|
|
$ |
(0.28 |
) |
(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:
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|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2022 |
|
|
2022 |
|
Cash and cash equivalents |
|
$ |
12,905 |
|
|
$ |
14,741 |
|
Working capital |
|
|
28,508 |
|
|
|
27,796 |
|
Working capital ratio(1) |
|
|
1.5 |
|
|
|
1.5 |
|
Working capital excluding cash and cash equivalents |
|
|
15,603 |
|
|
|
13,055 |
|
Working capital excluding cash and cash equivalents as a percent of net sales(2) |
|
|
11.2 |
% |
|
|
10.6 |
% |
(1)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 quarter of fiscal 2023 was $689 compared with $7,076 of cash used for the first quarter of fiscal 2022. The cash used by operations during the first quarter of fiscal 2023 was lower than the comparable prior year period primarily as a result of higher cash net income. Cash usage during the first quarter of fiscal 2023 was due to an increase in working capital to fund growth, in particular, the investments in inventory in a supply constrained environment.
Dividend payments and capital expenditures in the first quarter of fiscal 2023 were $0 and $284, respectively, compared with $1,177 and $446, respectively, for the first 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 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 $4,500 to $5,500. Approximately 35% of our fiscal 2023 capital expenditures are expected to be for machinery and equipment, 50% for buildings and leasehold improvements to fund our growth initiatives and with the remaining amounts expected to be used for other items. The majority of our planned capital expenditures are discretionary.
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Cash and cash equivalents were $12,905 at June 30, 2022 compared with $14,741 at March 31, 2022, down $1,836 primarily due to cash used in operations, capital expenditures, and debt repayments. At June 30, 2022, approximately $7,500 of our cash and cash equivalents is used to secure our letters of credit and $2,206 of our cash is 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.
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 June 30, 2022, there was no amount 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 June 30, 2022, the BSBY rate was 0.881430%. Outstanding letters of credit under this 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 0.60% of each letter of credit that is secured by cash. Amounts available for borrowing under the revolving credit facility are subject to an unused commitment fee of 0.25%. As of June 30, 2022, there was $5,079 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 following an acquisition for a period of twelve months following the closing of the 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.
On March 31, 2022 and June 7, 2022, we entered into amendment agreements with Bank of America. 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, 2022 and at all times thereafter, all of our deposit accounts, except certain foreign subsidiary 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 June 30, 2022, we were in compliance with the amended financial covenants of our loan agreement. At June 30, 2022, the amount available under the revolving credit facility was $10,840.
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 June 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 for the three-month period ended June 30, 2022 were $40,300 compared with $20,900 for the same period last year, an increase of $19,400. This increase included $13,700 of additional orders from BN, whose results were only included for one month in the fiscal 2022 first quarter and strong orders from the space industry in the first quarter of fiscal 2023. The remaining $5,700 increase is attributable to the Graham Batavia operations which saw strong demand from its commercial aftermarket and international refinery markets.
The composition of our order book is broad-based and includes noteworthy orders across our Graham Batavia business and Barber-Nichols. Within the $40.3 million of total orders are the following:
25
•$10.0 million for commercial aftermarket
•$7.3 million of combined pump/turbo pump orders to multiple customers in the space industry
•$7.0 million for vacuum distillation system for a refinery in India
•$5.6 million of combined orders for critical U.S. Navy submarine and carrier programs
Orders represent written communications received from customers requesting us to supply products and/or services. Domestic orders were 73% of total orders, or $29,300 compared with the first quarter of fiscal 2022 when domestic orders were 74%, or $15,400, of total orders.
Backlog was $260,678 at June 30, 2022, compared with $256,536 at March 31, 2022, a 2% increase or $4,142. Backlog is defined as the total dollar value of orders received for which revenue has not yet been recognized. Approximately 40% to 50% of orders currently in our backlog are expected to be converted to sales within one year. The majority of the orders that are expected to convert beyond twelve months are for the defense industry, specifically the U.S. Navy. At June 30, 2022, 74% of our backlog was attributable to U.S. Navy projects, 11% for refinery project work, 5% for chemical and petrochemical projects, 6% for space projects and 4% for other industrial applications. At March 31, 2022, 76% of our backlog was attributable to U.S. Navy 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 knowhow and depth of application experience to identify more opportunities for our products and technologies in our targeted markets.
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 project that approximately 40% to 50% of backlog will convert to sales over the next 12 months. We expect the remaining backlog will convert beyond fiscal 2023, which includes a combination of U.S. Navy orders that have a long conversion cycle (up to six years) as well as certain commercial orders, the conversion of which has been extended by our customers. We expect 45% to 50% of our sales in fiscal 2023 to be from the defense market. Defense spending, specifically for the U.S. Navy, is expected to remain steady over the foreseeable future.
Sales in fiscal 2023 are expected to be in the range of $135,000 to $150,000. We expect gross profit margins for the 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. We do believe our second quarter of fiscal 2023 will not benefit as well as the first quarter on mix and deferred expenses, but the second half should normalize to achieve our guidance. 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.
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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 June 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.