Graham Corporation (NYSE:GHM) Q3 2024 Earnings Call Transcript

Graham Corporation (NYSE:GHM) Q3 2024 Earnings Call Transcript February 5, 2024

Graham Corporation beats earnings expectations. Reported EPS is $0.02, expectations were $-0.04. Graham Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the Graham Corporation Third Quarter Fiscal Year 2024 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Deborah Pawlowski, Investor Relations for Graham Corporation. Thank you. You may begin.

Deborah Pawlowski: Thank you, Darryl, and good morning, everyone. We certainly appreciate your time today and your interest in Graham Corporation. Here with me on the call are Dan Thoren, our President and CEO; and Chris Thome, our Chief Financial Officer. Dan and Chris are going to provide their formal remarks, after which we will open the line for questions. You should have a copy of the third quarter fiscal 2024 financial results that were released this morning. And if not, you can access the release on our website at ir.grahamcorp.com. You’ll also find there the slides that will accompany today’s discussion. If you will turn to Slide 2 on that deck, I will review the Safe Harbor statement. You should be aware that we may make some forward-looking statements during the formal discussion as well as during the Q&A session.

These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission. You can find those documents on our website or at sec.gov. During today’s call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today’s release and slides.

We also use key performance indicators to help gauge the progress and performance of the company. These key performance metrics are orders, backlog, and book-to-bill ratio. They are operational measures in the company’s methodology for calculating these numbers does not meet the definition of a non-GAAP measure as that term is defined by the SEC. So, as a result, a quantitative reconciliation of each of these is not required or provided. But you can find the disclaimer regarding our use of key performance metrics at the back of our deck in the supplemental slides. So, with that, if you would please advance to Slide 3, I will turn it over to Dan to begin. Dan?

Daniel Thoren: Thanks, Debbie, and good morning, everyone. Reflecting on the past few years, we firmly believe that our business is now in a significantly improved position due to the strategic actions that we’ve taken. This has been a great team effort, and I would like to thank our customers, our employees, and our service providers for their contribution to our turnaround. In the third quarter, our performance demonstrated robust strength underscoring the consistent execution of our strategic approach aimed at cultivating high-quality top line growth, along with margin accretive initiatives to enhance our future earnings potential. Notable highlights from the quarter include gross and adjusted EBITDA margin expansion, a substantial increase in bookings that led to a record backlog of nearly $400 million, and we refinanced our debt with a lower cost and more flexible credit facility, further solidifying our financial framework.

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Q&A Session

Our bottom line was muted, however, given some atypical expenses that Chris will talk to, but on an adjusted basis, net income was up over 180% to $2.4 million. We generated strong cash from operations during the quarter given recent working capital initiatives, along with stronger financial discipline. This enabled significant debt paydown during the quarter and strategic investments, both organic and inorganic. We highlight on Slide 4 a significant investment made during the quarter, which was the acquisition of P3 Technologies. This was a great bolt on business, which brings highly complementary technology that enhances and expands our turbomachinery solutions, engineering, and development team. Their patented technologies deepen our reach into existing space and new energy markets and create greater diversification with the addition of medical markets.

From a financial perspective, P3 brings about $6 million of annual revenue, accretive gross and adjusted EBITDA margins and approximately $6 million of backlog. They also have what we feel is a lot of high-growth pipeline opportunities that are highly complementary to our Barber-Nichols turbomachinery business. In fact, in the short period that they have been with us, that business has already proven instrumental in fortifying some of our solution offerings and has amplified our financial profile, including being accretive to earnings in the third quarter. It is important to note that given this quarter’s robust cash generation, we were able to repay nearly all of the debt associated with the acquisition during the third quarter. Together, we believe we have a bright future as we aim to create opportunities for product and technology integration to provide more effective solutions across multiple markets.

As we look forward, we are focused on advancing Graham by building a collaborative culture across our brands, leveraging best practices, and advancing employee development to reinforce our core capabilities of precision machining, of critical turbomachinery components, and specialty welding for fabrication of critical equipment for large heat transfer and vacuum applications. Our confidence remains high in our ability to consistently execute our strategy and leverage the multitude of opportunities before us. With that, let me turn it over to Chris for the financial details. Chris?

Christopher Thome: Thank you, Dan, and good morning, everyone. As Dan highlighted, our results for the quarter include approximately two months of operation from P3, which was acquired on November 9, 2023. On Slide 5, you can see that we had a strong growth for our third quarter of fiscal 2024 with sales of $43.8 million. This was up 10% or $3.9 million over the prior year and included approximately $1 million of incremental sales from P3. Strong sales in the commercial aftermarket continued to help offset the cautious spending on capital projects in the refining and petrochemical industries. Aftermarket sales were $8.6 million in the quarter, up $3.2 million or 59% over the third quarter of last year. Defense revenue was also solid with an increase of $2.6 million or 12%, reflecting higher price contracts as well as increased capacity in direct labor hours.

We did see a decline in the space market, which had a lot to do with project timing as we had strong order growth during the quarter that I will talk to in a few slides. We are still seeing the impact of the Virgin Orbit bankruptcy last year but should finally cycle through that once we finish out fiscal 2024. P3 helped offset some of this decline, and we expect further lift from that acquisition within this industry mix as well as a robust pipeline of other opportunities in the new energy, defense and medical markets. U.S. sales for the quarter were 84% of total revenue and continue to reflect the size and growth of our defense business. Looking to the chart on the right, gross profit was another positive story with an increase of $3.5 million or 56% to $9.7 million in the third quarter.

The 660 basis point expansion of gross margin reflected higher volume and the related improved absorption. Mix also played a role with higher-margin commercial aftermarket sales as well as the margin accretive sales from P3. And lastly, we are benefiting from improved execution and pricing on defense contracts. Turning to Slide 6, you can see our bottom line and adjusted EBITDA results. As Dan mentioned, net income was impacted by a number of items this past quarter. SG&A, excluding amortization, was $8.4 million or 19% of sales, up from 13% of sales during last year’s period. The increase reflects higher performance-based compensation, including a $1.3 million supplemental performance bonus for Barber-Nichols employees in connection with the 2021 acquisition.

Also contributing to the increase in SG&A was P3 acquisition-related costs, increased professional fees, largely related to our international operations and initial ERP conversion costs. Separately, on the income statement, you will also see a line item for our costs associated with the debt extinguishment during the quarter, which amounted to $0.7 million. When excluding many of these atypical costs on a non-GAAP basis, adjusted net income was $2.4 million or $0.22 per diluted share, up 183% from a year ago. Similarly, you could see the improvements in adjusted EBITDA, which grew 72% to $3.9 million or 8.8% of sales, up 320 basis points. Turning to Slide 7, you can see how a strong quarter of cash generation enabled us to further improve our balance sheet while still making strategic investments.

At the beginning of the quarter, we refinanced all of our outstanding debt with a new five year $50 million revolving credit facility that matures in 2028. This facility provides us with reduced borrowing costs and greater flexibility to fund our long-term strategic growth goals. Cash generated from operations in the third quarter was $7.6 million and $19.5 million for the year-to-date period of fiscal 2024. We utilized some of this cash to reduce our debt balance by $7.9 million to $3 million at quarter end. P3 was acquired with a combination of cash, stock and contingent earn-out based upon the future performance of P3. As Dan highlighted, most of the debt associated with the acquisition was paid off during the quarter. However, in January 2024, after the quarter ended, we paid off the remaining $3 million of debt currently leaving us debt-free.

Capital expenditures of $1.9 million in the quarter, and $5.2 million year-to-date, were focused on capacity expansion, productivity improvements, and the start of the ERP implementation at our Batavia facility. In total, we expect the ERP product to cost approximately $2 million in capital and $1 million in expense with an anticipated go-live date of about a year from now. We decreased our expected fiscal 2024 capital expenditures to now be in the range of $8 million to $10 million, primarily due to the projected timing of cash flows. All projects continue to move forward at a steady and thoughtful pace. If you turn to Slide 8. During the quarter, we had a record orders of over $123 million, which were up 6 times over the prior year and resulted in a book-to-bill ratio of 2.8. These were largely follow-on orders for critical U.S. Navy programs, although aftermarket orders for the refining and petrochemical markets remained strong at $7.8 million.

We also saw a nice order flow from our space customers of $6.1 million, which was up $4.5 million year-over-year and double the sequential quarter and remains a key growth driver in our diversified portfolio. Turning to Slide 9. You’ll see that our backlog is nearly $400 million, also a record level, which provides several years of visibility given the long lead times of some of our defense contracts. The P3 acquisition added $6 million to our backlog. Approximately 40% of our backlog is expected to convert to sales in the next 12 months, and another 25% to 30% is expected to convert to sales over the next one to two years. The majority of our orders that convert beyond 12 months are for the defense industry, specifically the U.S. Navy. Turning to Slide 10, we can review our guidance for fiscal 2024.

Given our strong performance year-to-date and the addition of P3, we have raised our revenue expectations to be between $175 million and $185 million for fiscal 2024, up $5 million at the bottom and top end. This implies top line growth over fiscal 2023 of 15% at the midpoint of that range. From a margin perspective, our gross margin guidance is approximately 20%, up from the 18% to 19% we guided last quarter. Additionally, our expectations for SG&A, including amortization, to be between 16% to 17% of sales, up 1 percentage point over our previous guidance. This includes costs associated with the supplemental performance bonus for our Barber-Nichols employees, the P3 acquisition costs, as well as ERP implementation expenses at our Batavia facility.

We also raised our adjusted EBITDA guidance for fiscal 2024 to range between $15 million to $16 million, up from our previous guidance of $11.5 million to $13.5 million. The new range implies an adjusted EBITDA margin of about 9% at the midpoint. I should point out that our adjusted EBITDA guidance excludes the SG&A items I just mentioned, and approximately $0.7 million of debt extinguishment charges. We are delivering continuous improvement and are on track to achieve our fiscal 2027 goals. We continue to expect 8% to 10% annualized organic growth per year, which implies $225 million to $240 million in revenue for fiscal 2027, and with margins improving steadily, we are on target to achieve our low to mid-teen adjusted EBITDA margin goal. With that, I will pass the call back to Dan.