Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollar and share amounts in thousands, except per share data)
Overview
We are a global leader in the design and manufacture of mission critical fluid, power, heat transfer and vacuum technologies for the defense, space, energy and process industries. For the defense industry, our equipment is used in nuclear and non-nuclear propulsion, power, fluid transfer, and thermal management systems primarily for the U.S. Navy. For the space industry, our equipment is used in propulsion, power and energy management systems and for life support systems. Our energy and new energy markets include oil refining, cogeneration, and multiple alternative and clean power applications, including hydrogen. For the chemical and petrochemical industries, our equipment is used in fertilizer, ammonia, ethylene, methanol and downstream chemical facilities.
Our brands are built upon our engineering expertise and close customer collaboration to design, develop, and produce mission critical equipment and systems that enable our customers to meet their economic and operational objectives. Continual improvement of our processes and systems to ensure qualified and compliant equipment are hallmarks of our brand. Our early engagement with customers and support until the end of service life are values upon which our brands are built.
Our corporate headquarters is co-located with our production facilities in Batavia, New York, where surface condensers and ejectors are designed, engineered, and manufactured. Our wholly-owned subsidiary, Barber-Nichols, LLC ("BN"), based in Arvada, Colorado, designs, develops, manufactures and sells specialty turbomachinery products for the aerospace, cryogenic, defense and energy markets (see "Acquisition" below). We also have wholly-owned foreign subsidiaries, Graham Vacuum and Heat Transfer Technology Co., Ltd. ("GVHTT"), located in Suzhou, China and Graham India Private Limited ("GIPL"), located in Ahmedabad, India. GVHTT provides sales and engineering support for us in the People's Republic of China and management oversight throughout Southeast Asia. GIPL serves as a sales and market development office focusing on the refining, petrochemical and fertilizer markets in India and the middle east.
Our current fiscal year ends March 31, 2023 ("fiscal 2023").
Acquisition
We completed the acquisition of BN on June 1, 2021, which changed the composition of our end market mix. For the nine months ended December 31, 2022, sales to the defense and space industries were 53% of our business compared with approximately 25% of sales prior to the acquisition. The remaining 47% of our third quarter fiscal 2023 sales came from the refining, chemical/petrochemical and other commercial markets. These markets represented approximately 75% of our sales prior to the acquisition.
The BN transaction was accounted for as a business combination, which requires that assets acquired and liabilities assumed be recognized at their fair value as of the acquisition date. The purchase price of $72,014 was comprised of 610 shares of common stock, representing a value of $8,964 at $14.69 per share, and cash consideration of $61,150. The cash consideration was funded through cash on-hand and debt proceeds (See Note 2 to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q). The purchase agreement also included a contingent earn-out dependent upon certain financial measures of BN post-acquisition, pursuant to which the sellers were eligible to receive up to $14,000 in additional cash consideration. At June 30, 2021, a liability of $1,900 was recorded for the contingent earn-out. In the second quarter of the fiscal year ended March 31, 2022 ("fiscal 2022"), the earn-out agreement was terminated and the contingent liability was reversed into other operating expense (income), net, on our Condensed Consolidated Statement of Operations. In connection with the termination of this earn-out agreement, we entered into a Performance Bonus Agreement (the "Bonus Agreement") to provide certain employees of BN with performance-based awards based on the achievement of BN performance objectives for fiscal years ending March 31, 2024, 2025, and 2026 and can range between $2,000 to $4,000 per year.
Summary
Highlights for the three months ended December 31, 2022 include:
•Net sales of $39,873 for the third quarter of fiscal 2023 increased $11,099 or 39% over the prior year period across our diversified revenue base. This increase included growth in our defense market of $5,089 due to improved execution and the timing of the achievement of project milestones, growth in our commercial space market of $2,061 as newly awarded programs continued to ramp up and growth in our refining market of $2,539 due to continued strength in our commercial aftermarket.
•Net income and net income per diluted share for the third quarter of fiscal 2023 were $368 and $0.03 per share, respectively, compared with a loss of $3,730 and $0.35 per share, respectively, for the third quarter of fiscal 2022. This increase over the prior year was driven by an improved mix of sales related to higher margin projects (commercial space and aftermarket)
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and improved execution. Results for the third quarter of fiscal 2022 included the impact of first article U.S. Navy project labor and material cost overruns. In the third quarter of fiscal 2023, we completed an additional first article U.S. Navy project, and remain on schedule to complete the remaining first article projects by the end of the second quarter of our fiscal year ended March 31, 2024 ("fiscal 2024"). During the first nine months of fiscal 2023, we shipped four first article units.
•Adjusted net income and adjusted net income per diluted share for the third quarter of fiscal 2023 were $857 and $0.08 per share, respectively, compared with an adjusted loss and adjusted loss per diluted share of $2,903 and $0.27 per share, respectively, for the third 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.
•Orders booked in the third quarter of fiscal 2023 were $20,044 compared to $67,964 in the third quarter of fiscal 2022. This decrease was primarily due to project timing and the variable order patterns for our larger energy, space and defense customers. For the first nine months of fiscal 2023, orders were $151,863 and our ratio of orders to net sales was 133%. We believe the repeat U.S. Navy orders received during the year validates the investments we made, our position as a key supplier to the defense industry, and our customer’s confidence in our execution. Additionally, orders continued to be strong in the commercial aftermarket which increased 6% during the third quarter of fiscal 2023. For additional information on this performance indicator, see "Orders and Backlog" below.
•Backlog was $293,671 at December 31, 2022, compared with $313,340 at September 30, 2022. This decrease was primarily due to the lower amount of orders during the third quarter of fiscal 2023. 80% of our backlog at December 31, 2022 was to the defense industry, which we believe provides stability and visibility to our business. For additional information on this performance indicator see "Orders and Backlog" below.
•Cash and cash equivalents at December 31, 2022 was $17,215, compared with $14,122 at September 30, 2022. This increase was primarily due to cash provided by operating activities of $9,344, partially offset by repayments of debt of $5,000 and $1,200 of capital expenditures as we invest in longer-term growth opportunities. Cash provided by operating activities includes a $7,750 customer deposit received for material purchases on a long-term defense contract that will be paid over the next twelve months as materials are received.
•In the third quarter of fiscal 2023, we did not pay dividends to shareholders compared with $1,170 of dividends issued in the third quarter of fiscal 2022. In the fourth quarter of fiscal 2022, we suspended our dividend in accordance with the terms of our credit agreement with Bank of America. There can be no guarantee that we will pay dividends in the future, and any determination by our board of directors with respect to dividends will depend on a variety of factors, including our future financial performance, organic growth and acquisition opportunities, general economic conditions and other factors, many of which are beyond our control.
•At December 31, 2022, we had $0 outstanding on our line of credit. We believe cash flow from operations, availability under our line of credit, along with our cash balances, provide us adequate financial flexibility to meet our obligations. As of December 31, 2022, our bank leverage ratio calculated in accordance with our amended credit agreement was 2.5 and we were in compliance with all financial covenants of that agreement. For additional information see "Liquidity and Capital Resources" below.
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," "outlook," "plan," "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 the reports we file with the SEC. 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.
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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.
Current Market Conditions
Demand for our equipment and systems for the defense industry is expected to remain strong and continue to expand, based on our significant backlog, improved execution, long-standing relationship with the U.S. Navy, the projected procurement of submarines, aircraft carriers and undersea propulsion and power systems and the solutions we provide. In addition to U.S. Navy applications, we also provide specialty pumps, turbines, compressors and controllers for various fluid and thermal management systems used in Department of Defense radar, laser, electronics and power systems. We have built a leading position, and in some instances a sole source position, for certain systems and equipment for the defense industry.
Our traditional energy markets are undergoing significant transition. While we expect that fossil fuels will continue to be an important component in the global energy industry for many years to come, there are significant changes in the priorities for capital investments by our customers and the regions in which those investments are being made. We expect that the changes in the energy markets, which are influenced by conservation and the increasing use of alternative fuels, will lead to demand growth for fossil-based fuels that is less than the global growth rate. Currently, opportunities in the energy markets outside North America have been greater than opportunities inside of North America, but opportunities outside of North America are highly competitive and pricing is challenging. In those instances, we have been selective in the opportunities we have pursued in order to ensure we receive the proper returns. Over the long term, we anticipate that future investment by refiners in renewable fuels (e.g., renewable diesel), in existing refineries (e.g., to expand feedstock processing flexibility and to improve conversion of oil to refined products) to gain greater throughput, or to build new capacity (e.g., integrated refineries with petrochemical products capabilities), will continue to drive demand for our products and services. The timing and catalyst for a recovery in these markets (crude oil refining and chemical/petrochemical) remain uncertain. Accordingly, we believe that in the near term the quantity of projects available for us to compete for will remain low and that new project pricing will remain challenging.
Of note, over the last year we have experienced an increase in our energy and chemical aftermarket orders, primarily from the domestic market. Aftermarket orders have historically been a leading indicator of future capital investment by our customers in their facilities for upgrades and expansions. As such, we believe there is the possibility of a cyclical upturn following several years of reduced capital spending in a low oil price environment. Additionally, the financial performance of some of our larger energy customers has improved as of late, which may provide funding for capital spending. However, we do not expect the next cycle to be as robust as years past due to the factors discussed above.
The alternative and clean energy opportunities for our heat transfer, power production and fluid transfer systems are expected to continue to grow. We assist in designing, developing and producing equipment for hydrogen production, distribution and fueling systems, concentrated solar power and storage, and small modular nuclear systems. We are positioning the Company to be a more significant contributor as these markets continue to develop.
We believe that chemical and petrochemical capital investment will continue to decouple from energy investment. Over the long term, we expect that population growth, an expanding global middle class, and an increasing desire for improved quality of life and access to consumer products will drive increased demand for industrial goods within the plastics and resins value chain along with fertilizers and related products. As such, we expect investment in new global chemical and petrochemical capacity will improve and drive growth in demand for our products and services over the long term.
Our turbomachinery, pumps, and cryogenic products and market access provide revenue and growth potential in the commercial space/aerospace markets. The commercial space market has grown and evolved rapidly, and we provide rocket engine turbo pump systems and components to many of the key players in the industry. We expect that in the long term, extended space exploration will become more prevalent, and we anticipate that our thermal/fluid management and environmental control and life support system turbomachinery will play important roles. We are also participating in future aerospace power and propulsion system development through supply of fluid and thermal management systems components. Small power dense systems are imperative for these applications, and we believe our technology and expertise will enable us to achieve sales growth in this market as well. For the first nine months of fiscal 2023, sales to the space industry represented 12.5% of our sales compared to 0% prior to the BN acquisition. However, sales and orders to the space industry are variable in nature and many of our customers, who are key players in the industry, have yet to achieve profitability and may be unable to continue operations without additional funding. Thus, future revenue and growth to this market can be uncertain and may negatively impact our business.
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The chart below illustrates our strategy to increase our participation in the defense market. The defense market comprised 80% of our total backlog at December 31, 2022 and generally have longer conversion times than our other markets. We believe this strategy shift provides us more stability and visibility and is especially beneficial when our refining and process markets are weak.
*Note: FYE refers to fiscal year ended March 31
We have faced, and may continue to face, significant cost inflation, specifically in labor costs, raw materials, and other supply chain costs, due to increased demand for raw materials and resources caused by the broad disruption of the global supply chain associated with the impact of COVID-19. International conflicts or other geopolitical events, including the ongoing war between Russia and the Ukraine, may further contribute to increased supply chain costs due to shortages in raw materials, increased costs for transportation and energy, disruptions in supply chains, and heightened inflation. Further escalation of geopolitical tensions may also lead to changes to foreign exchange rates and financial markets, any of which may adversely affect our business and supply chain, and consequently our results of operations. In addition, the U.S. federal debt ceiling crisis and central bank monetary policies could result in an economic recession and impact our results of operations. While there could ultimately be a material impact on our operations and liquidity from these events, at the time of this report, the impact could not be determined.
Results of Operations
To better understand the significant factors that influenced our performance during the periods presented, the following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the notes to our Condensed Consolidated Financial Statements included in Part I, Item 1, of this Form 10-Q.
The following table summarizes our results of operations for the periods indicated:
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Three Months Ended |
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Nine Months Ended |
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December 31, |
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December 31, |
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|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net sales |
|
$ |
39,873 |
|
|
$ |
28,774 |
|
|
$ |
114,091 |
|
|
$ |
83,077 |
|
Gross profit |
|
$ |
6,227 |
|
|
$ |
561 |
|
|
$ |
18,251 |
|
|
$ |
4,918 |
|
Gross profit margin |
|
|
16 |
% |
|
|
2 |
% |
|
|
16 |
% |
|
|
6 |
% |
SG&A expenses (1) |
|
$ |
5,558 |
|
|
$ |
5,003 |
|
|
$ |
16,649 |
|
|
$ |
15,173 |
|
SG&A as a percent of sales |
|
|
14 |
% |
|
|
17 |
% |
|
|
15 |
% |
|
|
18 |
% |
Net income (loss) |
|
$ |
368 |
|
|
$ |
(3,730 |
) |
|
$ |
848 |
|
|
$ |
(7,348 |
) |
Diluted income (loss) per share |
|
$ |
0.03 |
|
|
$ |
(0.35 |
) |
|
$ |
0.08 |
|
|
$ |
(0.70 |
) |
Total assets |
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$ |
207,657 |
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|
$ |
196,080 |
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|
$ |
207,657 |
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|
$ |
196,080 |
|
Total assets excluding cash and cash equivalents |
|
$ |
190,442 |
|
|
$ |
182,089 |
|
|
$ |
190,442 |
|
|
$ |
182,089 |
|
(1)Selling, general and administrative expenses are referred to as "SG&A".
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The following tables provides our net sales by product line and geographic region including the percentage of total and change in comparison to the prior year for each category and period presented:
Net sales for the third quarter of fiscal 2023 were $39,873, an increase of 39% from the third quarter of fiscal 2022 and was across our diversified revenue base. The growth in our defense market was due to improved execution and the timing of the achievement of project milestones, while the growth in our commercial space market was driven by newly awarded programs, which continue to ramp up. Growth in our refining market was primarily due to strength in our commercial aftermarket as customers continue to maintain their facilities without making significant capital investments. Domestic sales as a percentage of net sales remained relatively consistent with the prior year at 83% for the third quarter of fiscal 2023 and were primarily to the defense and space markets, which represented 54% and 9% of net sales, respectively, for the third quarter of fiscal 2023 and are U.S. based. Fluctuation in sales among markets, products and geographic locations varies, sometimes significantly, from quarter-to-quarter based on timing and magnitude of projects.
Net sales for the first nine months of fiscal 2023 were $114,091, an increase of 37% from the first nine months of fiscal 2022 and was across our diversified revenue base. Approximately $8,900 of this increase was due to having three months of BN results in the first quarter of fiscal 2023 compared to one month in the first quarter of fiscal 2022. Additionally, net sales benefitted from strong growth in commercial aftermarket sales of approximately $10,000 in comparison to the prior year, which is included in our refining and chemical/petrochemical markets, and growth in our commercial space market which was driven by newly awarded programs. See also "Current Market Conditions," above. For additional information on anticipated future sales and our markets, see "Orders and Backlog" below.
Gross profit margin for the third quarter of fiscal 2023 was 16%, compared with 2% for the third quarter of fiscal 2022. This increase was primarily due to an improved mix of sales related to higher margin projects (commercial space and aftermarket) and improved execution and pricing on defense contracts, partially offset by higher incentive based compensation. Results for the third quarter of fiscal 2022 included the impact of first article Navy project labor and material cost overruns. In the third quarter of fiscal 2023, we completed an additional first article U.S. Navy project, and remain on schedule to complete the remaining first article projects by the end of the second quarter of fiscal 2024.
Gross profit margin for the first nine months of fiscal 2023 was 16%, compared with 6% for the first nine months of fiscal 2022. This increase was primarily driven by the same factors impacting the quarter results discussed above. In the first nine months of fiscal 2023, we completed four first article U.S. Navy projects. In addition to the above, the first nine months of fiscal 2023 includes two additional months of operations from BN compared to the first nine months of fiscal 2022.
SG&A expense including amortization for the third quarter of fiscal 2023 was $5,558 compared to $5,003 for the third quarter of fiscal 2022. This increase was due to higher incentive compensation, partially offset by cost savings and deferred initiatives. These efforts included reducing the use of outside sales agents, cost management, and delayed hiring of non-critical positions. Additionally, the third quarter of fiscal 2022 included $111 of acquisition and integration costs incurred in connection with the BN acquisition. As a result, SG&A expense as a percentage of sales in the third quarter of fiscal 2023 was 14% of sales compared with 17% of sales in the prior year period.
SG&A expense including amortization for the first nine months of fiscal 2023 was $16,649 up $1,476 compared with $15,173 for the first nine months of fiscal 2022. Approximately $1,400 of this increase was due to having two additional months of BN results in the first nine months of fiscal 2023 compared to the prior year period, as well as higher incentive compensation. These increases were partially offset by cost savings and deferred initiatives, which included reducing the use of outside sales agents, cost management and delayed hiring of non-critical positions. Additionally, SG&A expense for the first nine months of fiscal 2022 included $373 of acquisition and integration costs incurred in connection with the BN acquisition. As a result, SG&A expense as a percentage of sales in the first nine months of fiscal 2023 was 15% of sales compared with 18% of sales in the prior year period.
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During the second quarter of fiscal 2022, we terminated the BN contingent earn-out agreement and the contingent liability of $1,900 was reversed into other operating expense (income), net, on our Condensed Consolidated Statement of Operations. In connection with the termination of this earn-out agreement, we entered into a Bonus Agreement to provide certain employees of BN with performance-based awards based on results of BN for fiscal years ending March 31, 2024, 2025, and 2026. Additionally, in the second and third quarters of fiscal 2022 we incurred $798 and $140, respectively, of severance costs related to the departure of our former Chief Executive Officer and former Chief Financial Officer, which was also recorded into other operating expense (income), net.
Net interest expense for the third quarter of fiscal 2023 was $294 compared to $120 in the third quarter of fiscal 2022 due to an increase in interest rates since the third quarter of fiscal 2022, partially offset by lower debt levels of $14,566 due to repayments made since the third quarter of fiscal 2022.
Net interest expense for the first nine months of fiscal 2023 was $697 compared to $257 in the first nine months of fiscal 2022 primarily due to the borrowings related to the BN acquisition, as well as increased interest rates since the time of the acquisition.
Our effective tax rate in the third quarter of fiscal 2023 was 16%, compared with 19% in the third quarter of fiscal 2022. Our effective tax rate for the first nine months of fiscal 2023 was 22%, compared with 20% for the first nine months of fiscal 2022. This increase was primarily due to discrete tax expense recognized in the first quarter of fiscal 2023 related to the vesting of restricted stock awards. Our expected effective tax rate for fiscal 2023 is approximately 23% due to an expected higher mix of income in higher tax rate jurisdictions.
The net result of the above is that net income and earnings per diluted share for the third quarter of fiscal 2023 were $368 and $0.03 per share, respectively, compared with a loss of $3,730 and $0.35 per share, respectively, for the third quarter of fiscal 2022. Adjusted net income and adjusted net income per diluted share for the third quarter of fiscal 2023 were $857 and $0.08 per share, respectively, compared with a loss of $2,903 and $0.27 per share, respectively, for the third 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.
Net income and net income per diluted share for the first nine months of fiscal 2023 were $848 and $0.08 per share, respectively, compared with a loss of $7,348 and $0.70 per share, respectively, for the first nine months of fiscal 2022. Adjusted net income and adjusted net income per diluted share for the first nine months of fiscal 2023 were $2,511 and $0.24 per share, respectively, compared with a loss of $6,353 and $0.60 per share, respectively, for the first nine months of fiscal 2022. See "Non-GAAP Measures" below for a reconciliation of adjusted net income (loss) and adjusted net income (loss) per diluted share to the comparable GAAP amount.
Non-GAAP Measures
Adjusted earnings (loss) before net interest expense, income taxes, depreciation and amortization ("EBITDA"), adjusted net income (loss), and adjusted net income (loss) per diluted share are provided for information purposes only and are not measures of financial performance under accounting principles generally accepted in the U.S. ("GAAP"). Management believes the presentation of these financial measures reflecting non-GAAP adjustments provides important supplemental information to investors and other users of our financial statements in evaluating the operating results of the Company. In particular, those charges and credits that are not directly related to operating performance, and that are not a helpful measure of the performance of our underlying business particularly in light of their unpredictable nature. These non-GAAP disclosures have limitations as analytical tools, should not be viewed as a substitute for net income (loss) or net income (loss) per diluted share determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. In addition, supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to net income (loss) or net income (loss) per diluted share determined in accordance with GAAP. Adjusted EBITDA, adjusted net income (loss) and adjusted net income (loss) per diluted share are key metrics used by management and our board of directors to assess the Company’s financial and operating performance and adjusted EBITDA is a basis for a portion of management's performance-based compensation.
Adjusted EBITDA excludes charges for depreciation, amortization, net interest expense, taxes, acquisition related expenses, and other unusual/nonrecurring expenses. Adjusted net income (loss) and adjusted net income (loss) per diluted share excludes intangible amortization, acquisition related expenses, other unusual/nonrecurring expenses and the related tax impacts of those adjustments.
A reconciliation of adjusted EBITDA, adjusted net income (loss), and adjusted net income (loss) per diluted share to net income (loss) in accordance with GAAP is as follows:
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Liquidity and Capital Resources
The following discussion should be read in conjunction with our Condensed Consolidated Balance Sheets and Statements of Cash Flows:
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December 31, |
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March 31, |
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2022 |
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2022 |
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Cash and cash equivalents |
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$ |
17,215 |
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|
$ |
14,741 |
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Working capital (1) |
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|
26,398 |
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|
27,796 |
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Working capital ratio(1) |
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1.3 |
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|
1.5 |
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Working capital excluding cash and cash equivalents |
|
|
9,183 |
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|
|
13,055 |
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Working capital excluding cash and cash equivalents as a percent
of net sales(2) |
|
|
6.0 |
% |
|
|
10.6 |
% |
(1)Working capital equals current assets minus current liabilities. Working capital ratio equals current assets divided by current liabilities.
(2)Working capital excluding cash and investments as a percent of net sales is based upon trailing twelve month sales, including BN pre-acquisition sales.
Net cash provided by operating activities for the first nine months of fiscal 2023 was $8,946 compared with $14,552 of cash used by operating activities for the first nine months of fiscal 2022. This increase was primarily due to higher cash net income during the first nine months of fiscal 2023 than the comparable prior year period, as well as lower net working capital levels. In the third quarter of fiscal 2023 we collected a $7,750 customer deposit related to material purchases for a large U.S. Navy order that will be paid over the next twelve months as materials are received. Net repayment of debt for the first nine months of fiscal 2023 was $3,517 compared to a net borrowing of $28,735 for the comparable period in fiscal 2022 primarily due to the cash used for the acquisition of BN of $59,563.
Dividend payments and capital expenditures in the first nine months of fiscal 2023 were $0 and $2,394, respectively, compared with $3,524 and $1,909, respectively, for the first nine months of fiscal 2022. In the fourth quarter of fiscal 2022, we suspended our dividend in accordance with the terms of our credit agreement with Bank of America. There can be no guarantee that we will pay dividends in the future and any determination by our board of directors with respect to dividends will depend on a variety of factors, including our future financial performance, organic growth and acquisition opportunities, general economic conditions and other factors, many of which are beyond our control. Capital expenditures for fiscal 2023 are expected to be approximately $3,000 to $4,000. Our fiscal 2023 capital expenditures are expected to be primarily for machinery and equipment, as well as for buildings and leasehold improvements to fund our growth and cost improvement initiatives. The majority of our planned capital expenditures are discretionary.
Cash and cash equivalents were $17,215 at December 31, 2022 compared with $14,741 at March 31, 2022, as cash provided by operating activities was used to fund capital expenditures and repayment of debt. At December 31, 2022, approximately $6,625 of our cash and cash equivalents was used to secure our letters of credit and $3,028 of our cash was held by our China and India subsidiaries.
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 December 31, 2022, there was $0 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 December 31, 2022, the BSBY rate was 3.95916%. As of December 31, 2022, there was $5,954 letters of credit outstanding with Bank of America.
Under the original term loan agreement and revolving credit facility, we covenanted to maintain a maximum total leverage ratio, as defined in such agreements, of 3.0 to 1.0, with an allowable increase to 3.25 to 1.0 for a period of twelve months following the closing of an acquisition. In addition, we covenanted to maintain a minimum fixed charge coverage ratio, as defined in such agreements, of 1.2 to 1.0 and minimum margined assets, as defined in such agreements, of 100% of total amounts outstanding on the revolving credit facility, including letters of credit. At December 31, 2021, we were out of compliance with our bank agreement covenants and were granted a waiver for noncompliance by Bank of America.
We entered into amendment agreements with Bank of America since origination. Under the amended agreements, we were 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
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balance outstanding on the line of credit may not exceed $15,000, unless letters of credit exceed $11,500, in which case the limit is $17,000, until the compliance date. The compliance date is defined as the date on which Bank of America has received all required financial information with respect to us for the fiscal year ending March 31, 2023 and no event of default exists. In addition, on or before September 1, 2023 and at all times thereafter, all of our deposit accounts, except certain accounts, will be either subject to a deposit account control agreement or maintained with Bank of America. We covenant to maintain EBITDA, as defined in such amendment, of at least ($700) for the twelve-month period ending June 30, 2022 and $1,800 for the twelve-month period ending September 30, 2022; maintain a total maximum leverage ratio of 4.0 to 1.0 for the twelve-month period ending December 31, 2022 and 3.0 to 1.0 for the period ending March 31, 2023; and maintain liquidity, as defined in such amendment, of at least $10,000 prior to the occurrence of the compliance date and $20,000 from and after the occurrence of the compliance date. As of December 31, 2022, we were in compliance with the amended financial covenants of our loan agreement and our leverage ratio as calculated in accordance with the terms of the credit facility was 2.5. At December 31, 2022, the amount available under the revolving credit facility was $9,926 subject to the above liquidity and leverage covenants.
In connection with the waiver and amendments discussed above, we are required to pay a back-end fee of $725 to Bank of America payable upon the earliest to occur of (i) any default or event of default, (ii) the last date of availability under the revolving credit facility, and (iii) repayment in full of all principal, interest, fees and other obligations, which may be waived or cancelled if certain criteria are met.
We did not have any off-balance sheet arrangements as of December 31, 2022 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
The following tables provides our orders by product line and geographic region including the percentage of total and change in comparison to the prior year for each category and period presented:
Management uses orders and backlog as measures of our current and future business and financial performance. Orders represent written communications received from customers requesting us to provide products and/or services. Orders booked in the third quarter of fiscal 2023 were $20,044 compared to $67,964 in the third quarter of fiscal 2022. This decrease was primarily due to project timing and the variable nature of order patterns for our larger energy, space and defense customers.
For the first nine months of fiscal 2023, orders were $151,863 compared to $120,215 for the first nine months of fiscal 2022. Our ratio of orders to net sales for the first nine months of fiscal 2023 was 133%. We believe the increased level of repeat U.S. Navy orders received during the year validates the investments we made, our position as a key supplier to the defense industry and our customer’s confidence in our execution. Additionally, orders continued to be strong in the commercial aftermarket, which increased approximately $7,300 during the first nine months of fiscal 2023 compared to the prior year and is included in the refining and chemical/petrochemical markets above. This increase was offset by a lower level of larger capital projects as our energy and chemical customers continue to defer such investment to future periods. We believe there is the possibility of a cyclical upturn in energy and chemical capital project orders following several years of reduced capital spending. However, we do not expect the next cycle to be as robust as years past due to the factors discussed above under "Current Market Conditions." The increase in space orders for the first nine months of fiscal 2023 over the comparable prior year period was due to newly awarded programs as well as having an additional two months of BN operations included in the results for the first nine months of fiscal 2023.
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Orders to the United States represented 81% of total orders for the first nine months of fiscal 2023 and is relatively consistent with the prior year. These orders were primarily to the defense and space markets, which represented 58% and 8% of orders, respectively, and are U.S. based.
The following table provides our backlog by product line, including the percentage of total, for each category and period presented:
Backlog was $293,671 at December 31, 2022, an increase of 14% compared with $256,537 at March 31, 2022. Backlog is defined as the total dollar value of orders received for which revenue has not yet been recognized. Approximately 40% to 50% of orders currently in our backlog are expected to be converted to sales within one year and 20% to 30% after one year but within two years. The majority of the orders that are expected to convert beyond twelve months are for the defense industry, specifically the U.S. Navy that have a long conversion cycle (up to six years).
Outlook
Our objective is to leverage our engineering know-how and depth of application experience to identify more opportunities for our products and technologies in our targeted markets. The following is our expectations for fiscal 2023:
See “Cautionary Note Regarding Forward-Looking Statements” and "Non-GAAP Measures" above for additional information about forward-looking statements and non-GAAP measures. 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.
Our results for the first nine months of fiscal 2023 were in-line with our expectations and give us confidence we will be able to achieve our full year guidance. Fiscal 2022 and year-to-date fiscal 2023 results were impacted by our large, lower margin, first article U.S. Navy projects and we believe this negative impact will continue through the end of the second quarter of 2024 when the last of these larger first article projects is completed. We expect repeat orders for these larger U.S. Navy projects will be at higher margins through increased pricing and better execution.
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.
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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 December 31, 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.