Daniel Thoren: Thanks, Chris. Significant strides are being made within our organization, yet there remains a lot of work to be done. Our team is devoted to the ongoing pursuit of our strategy for sustained growth, and I am grateful for their unwavering dedication, enthusiasm and diligent efforts. Our record backlog and the acquisition of P3 add up to a bright future for Graham. Numerous opportunities lie ahead, and we anticipate that these will play a pivotal role in propelling our growth and bolstering our future earnings. With that, Darryl, you can open the call for questions.
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Theodore O’Neill with Litchfield Hills Research. Please proceed with your questions.
Theodore O’Neill: Thank you and congratulations on the good quarter.
Daniel Thoren: Thanks, Neill.
Theodore O’Neill: Okay. Great. Dan, in your prepared remarks, you mentioned that there was a pipeline of high-growth opportunities that was in part — that you got as part of the P3 acquisition. I was wondering if you could give us some more detail on that?
Daniel Thoren: Yeah. They’re mostly on the space side. And I probably won’t be able to give you a whole lot of detail there just because of NDAs. But P3 has been working in propulsion pumps, fluid management pumps for space applications. So, they’re actually an awesome complement to Barber-Nichols from that perspective and really — probably deepens our engagement with the space community. The other thing I get excited about P3 is they’re also involved in some of the new energy-waste-heat-power-gen-types of applications. And then they do cryogenic pumps, which really get into some of the medical applications that they’re trying to apply those to. And then they’ve got some very cool IP that we believe — we haven’t scratched the surface on that yet as far as how and when we would like to take that to market.
But that’s definitely something we’re pretty excited about. And one of those is what they call a multichannel diffuser, which is an efficiency enhancement that can be applied to basically any pump, pumping liquids. And so, we’re pretty excited about that and then their cryogenic pump capability really complements, again, Barber-Nichols that is mostly centrifugal types of pumps and P3 brings a positive displacement pump that complements that. So, lots of really cool things. And Phil and his team are top-notch engineers and we’re really, really excited to have them.
Theodore O’Neill: Okay. And Chris, in the press release, you say that the improved working capital was largely due to changes in payment terms related to large defense customer. Can you give us any more detail on that, what that means?
Christopher Thome: Sure. So, for the last couple of years, the team has actively been working on putting in stronger discipline with regards to capital management, basic blocking and tackling, collecting receivables sooner, pushing out payment terms where possible; and several of our large defense contracts had really unfavorable payment terms, where basically, once you got past 50% production, you couldn’t bill anymore until project completion. Well, as you know, some of these projects can go on for several years. So, that was really putting a cash restraint on our business. And over the past — I would say, three to four quarters, we were able to renegotiate some of the payment terms where we’re now billing more milestones and more on a percentage-complete basis.
So, that really provided a significant uplift to the cash generation over the last couple of quarters. Additionally, as you know, with the $123 million of orders that we had this quarter, and then a large amount of defense orders over the last year, a lot of those pay for the materials upfront. So, we’ve been able to cash — collect that cash up front, but we’ll have to pay for that inventory as it comes in. So, as we’ve discussed in the past, we fully expect our cash generation from quarter-to-quarter to be pretty lumpy. But the team has done an excellent job really improving some of the payment terms and helping that cash flow along.
Theodore O’Neill: Okay. And given the growth that you’re experiencing there, are there any potential CapEx expenditures that you’ll need to make, or have to make investments in skilled employees to keep up with it all?
Christopher Thome: Yes, definitely. As you know, we’ve guided for CapEx of $8 million to $10 million for this year, which is about 5% at the midpoint of the guidance. And we think that our CapEx spend is going to be in the 3% to 5% range over the next several years just to support that growth in the facility expansion that you just mentioned. So, yes, we certainly expect capital expenditures to remain elevated for a few years here.
Theodore O’Neill: Okay. Thanks very much.
Operator: Thank you. Our next questions come from the line of Dick Ryan with Oak Ridge Financial. Please proceed with your questions.
Richard Ryan: Thank you. Congratulations, also, on the great quarter, guys.
Daniel Thoren: Thanks, Dick.
Christopher Thome: Thanks, Dick.
Richard Ryan: Chris, looking at the OpEx, your leverage gets a little obscured with all the puts and takes in this quarter. You still guide to that 16% – 17%-ish range for this year. I know you’re not providing guidance for ’25 yet, but is there any reason to think that kind of the SG&A level at this percent of sales changes materially with your aspirational goals going into ’27 or will we start seeing the leverage kind of kick in over the next few quarters?
Christopher Thome: Sure. Well, thanks for the question, Dick. As I outlined in my comments today, we had some unusual items in the quarter with regards to SG&A. We’ve been recording the Barber-Nichols earnout bonus for the last several quarters. We also had some elevated acquisition costs as a result of the P3 acquisition. Professional fees were a little bit elevated related to our foreign subsidiaries. And then as you know, we’ve kicked off the ERP implementation. So, talking to those items, the Barber-Nichols performance bonus is going to be with us for several years. As we’ve discussed on other calls, it’s a three-year program for fiscal ’24, ’25 and ’26. So that’s going to be around for a while here. The ERP implement really just kicked off in the current quarter in earnest.
So, as I mentioned in my prepared remarks today, we expect that to be about $1 million of expense over the next year. So, I would expect SG&A to be a little bit elevated for the next year here as we work through these things. But then, yes, you’re certainly right. The leverage should kick in. And by the time we get to 2027, it should allow us to get to those low to mid-teen EBITDA margin percentages.
Richard Ryan: Okay. Thank you. So, Dan, the strength you’ve seen in the aftermarket over the last few quarters, is that still kind of a potential precursor of what you might see on capital budgets in refining and petrochemical — or what’s your view of those end markets?
Daniel Thoren: Yes. So, I guess, first of all, the aftermarket is remaining strong. So, we’re still seeing that elevated order level continuing on. We are seeing and hearing about some nice capital projects that our customers are planning for this year and we’re starting to bid on. So, we’re encouraged. But again, it will not be the big boom, I think, like Graham has seen in the past. So, we’re encouraged. We’re happy that the aftermarket continues on strong, and we’re getting ready to — if there is a significant uptick, we’ve been working pretty hard as far as training new employees at our businesses and the supply chain challenges are starting to work out and less of an issue there. So, I think that we’re going to be in a pretty decent position if and when that does take off.
Richard Ryan: I think Chris mentioned some increased professional fees in your international operations. Does that reflect — you said maybe some of these early capital project discussions? Or is that something else?
Christopher Thome: Yes, I could take that one, Dick. As we disclosed in our 10-Q today, earlier in the year, our audit committee received a whistleblower complaint from our India subsidiary. And as a result of that, they launched an investigation, which included hiring outside legal counsel and some forensic professionals. That investigation did confirm the whistleblower complaint, which led to a broader investigation where other misconduct was identified — mostly with regards to improper expense reimbursements. As we disclosed in the 10-Q, the impact was relatively minor. It was about $150,000 in total over four years, but that did result in an increase in professional services fees, probably about $750,000 year-to-date that we’ve incurred in that investigation.
Richard Ryan: Okay. So, Dan, one of the arguments for P3 was Graham can bring this scope to really expand the potential of both companies. You talked a lot about entering some new market opportunities with P3. When you talk — bringing scale to the story, is that broadening the end markets? Or is there a potential to get deeper into the space business, let’s say, when you guys are combining efforts?
Daniel Thoren: Yes. We see it as both, Dick. So P3 has connections to markets that Barber-Nichols doesn’t necessarily have. And they’ve — they’re a really strong engineering group. And so they’re actually bringing some strength on the engineering side to Barber-Nichols also. So, we see — probably some breadth that comes with P3. P3 doesn’t necessarily have the production capabilities that Barbara Nichols has. So, we’re actually going to be able to satisfy P3’s customers on the production side also going forward. So, I see it as a real win-win, in that it is broadening and it’s a deepening with some of the technology that P3 brings to the table.
