Graham Corporation (NYSE:GHM) Q4 2023 Earnings Call Transcript June 8, 2023
Graham Corporation reports earnings inline with expectations. Reported EPS is $-0.05 EPS, expectations were $-0.05.
Operator: Greetings, and welcome to the Graham Corporation's Fourth Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Deborah Pawlowski, Investor Relations for Graham Corporation. Thank you. You may begin.
Deborah Pawlowski: Thank you, Christine, 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. You should have a copy of the fourth quarter fiscal '23 financial results, which we released earlier this morning. And if not, you can access the release on our slides -- on our website at ir.grahamcorp.com. you will also find on our website the slides that will accompany our conversation today. Dan and Chris are going to provide their formal remarks, after which we open the line for questions. If you would turn to Slide 2 in the deck, I'll review the Safe Harbor statement.
You should be aware that we may make some forward-looking statements during the formal discussions, 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 reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and the 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. They’re operational measures and 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. But a quantitative -- for a quantitative reconciliation of each of these does not require or provided, but you can find a disclaimer regarding our use of key performance metrics at the back of our deck in the supplemental slides. So with that, please advance to Slide 3, and I'll turn the call over to Dan to begin.
Dan Thoren: Thank you, Debbie. Good morning, everyone. We made excellent progress with our strategy in fiscal 2023. We stabilized our vacuum and heat transfer technology business in Batavia, expanded our turbomachinery operations in Denver, and further diversified our revenue with more defense, space and new energy business. We had record revenue of $157 million for the year, a 28% increase over the prior year. This included about $8.9 million of acquired revenue. Importantly, our revenue growth reflected the success we’ve had with diversifying our markets. Defense was 42% of total revenue and our refining and petrochem markets combined were 31% of revenue. Space grew to 13% of revenue for the year and our other market category driven by new energy was 14% on sales.
We are excited about the many opportunities we see in new energy. The hydrogen market is developing quickly and we provide both turbomachinery and heat transfer equipment for these applications. Another interesting market is lithium extraction from geothermal brine. We have historically provided surface condensers for geothermal power plants. But the added value of lithium extraction to the process is driving more investment into geothermal projects. We ended the year on a strong note with orders of $50.8 million in the fourth quarter, and a record $202.7 million of orders for the year. Fourth quarter orders included the $23 million follow on to provide power hardware for the Mark 48 Torpedo. Book-to-bill for the quarter and the year was quite healthy at 1.2x and 1.3x, respectively.
We continue to strengthen our operations, improved productivity and deliver better gross margins, a better mix of business also helped. Gross margin was 16.2% for the year compared to just 7.4% last year due to the impact of cost and labor overruns on our U.S Navy programs. As we complete the remaining two first articles from orders received several years ago and as we have more revenue from better price contracts, we expect margins to further expand. We aren't stopping there, though, as there still much more work to be done to drive operational excellence, which I'll discuss after Chris presents our financials. One other topic I would like to address is related to a large space customer that filed for bankruptcy during the quarter. It was a disappointment to say the least.
This had a net impact of about $2.5 million on our results or approximately $0.19 per diluted share. I was very pleased that the outcome for the year as we were able to achieve our adjusted EBITDA guidance provided at the beginning of the year, despite this event, and our -- and it exceeded our raised revenue guidance. With that, let me turn it to Chris to go into greater detail on the results. Chris?
Factory, Industrial
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Chris Thome: Thank you, Dan, and good morning, everyone. If you turn to Slide 4, you could see that we had strong organic sales growth for our fourth quarter fiscal 2023 with record sales of $43 million. This was up roughly 8% over the prior year period, as well as the trailing third quarter. Our space market led the way with $6.9 million in revenue, which was up $4.6 million year-over-year. This 200% increase was due to growing demand from several key industry customers, some which have multiple programs with us in this expanding market. Aftermarket sales to the refining and petrochemical markets increased 45% to $7.1 million, or 17% of total revenue. Although aftermarket was up, refining sales were down $4.2 million. This reflects both lower capital projects in this market, as well as tough comparables due to timing as last year's fourth quarter had the benefit of a major project in India.
We continue to be encouraged regarding the opportunities in the refining market, given the continued strength in aftermarket demand and the activity with our customers. While defense sales were flat year-over-year, they were still very strong and represented 44% of our quarterly revenue and $18.9 million was the second highest quarter for fiscal 2023. For the quarter, sales in the U.S were up 9% and represented 83% of our sales. International sales accounted for 17% of total sales and were 5.5% higher than last year. Gross profit and margin improved measurably over last year given our much improved execution on our U.S Navy projects related to our vacuum and heat transfer business in Batavia. We also benefited from higher volume and pricing as well as improved mix with strong space and aftermarket sales.
This more than offset the 800,000 net impact to gross profit related to reserves for one of our space customers bankruptcy that Dan discussed. Selling, general and administrative expenses in the fourth quarter of fiscal 2023 were $7.5 million, up $1.4 million over the prior year. The increase was the result of $1.7 million in reserves related to our space customer, net of the associated performance based compensation. Excluding the impact of this bankruptcy, SG&A improved to 13.7% of revenue, compared with 15.4% in the fourth quarter of fiscal 2022 and reflects our improved fiscal discipline and cost containment measures. If you will turn to Slide 5, you can see we had a net loss in the quarter of $0.05 per diluted share, or 481,000. On a non-GAAP basis, which adjust for amortization of intangibles, adjusted diluted net income and net income per share were breakeven.
The net impact related to our space customer had an approximate $0.19 per share impact on diluted earnings per share in the quarter and was not added back into computation of our adjusted amount. Adjusted EBITDA was $1.2 million for the quarter, which was 200% higher than last year's fourth quarter of $400,000. I will remind you that last year's fourth quarter was impacted by higher cost associated with the investments we made to ensure we could meet our commitments for our strategic U.S Navy programs, which is now paying dividends. Turning to Slide 6, I will now touch on our full year results. As Dan mentioned, fiscal 2023 sales grew by 28% to a record $157.1 million with all markets and regions showing growth. We are extremely happy with this result, as it was above the high-end of our guidance that was raised last quarter.
Sales to the space industry increased 269% or $15.4 million to $21.2 million and represented 13% of total revenue. Additionally, aftermarket sales to the refining and petrochemical market increased 26% to $24.9 million. Sales in the U.S increased 30% to $127.5 million and were 81% of total sales for fiscal 2023. Given our shift over the last couple of years to become much more of a defense business, our geographic mix of revenue is now more heavily weighted in the U.S. International sales were also up increasing 18% to $29.6 million. Year-over-year, gross margin improved 880 basis points to 16.2%. This reflects an improved mix of sales related to higher margin projects, such as commercial space and aftermarket and improved execution and pricing on our defense contracts.
These increases were partially offset by the $0.8 million net impact related to our space customer. Gross profit in fiscal 2022 included an estimated $10 million impact related to labor and material cost overruns for first article U.S Navy projects. In fiscal 2023, we completed four first article U.S Navy projects, which were the source of these losses and remain on scheduled to complete our remaining two first article projects by the end of the second quarter of fiscal 2024. SG&A expenses in the full year of fiscal 2023 were $24.2 million, including intangible amortization of $1.1 million, an increase of $2.9 million or 13%. The increase reflects the $1.7 million net impact related to our space customer and $1.4 million incremental SG&A expense from the acquisition, given the two additional months of Barber-Nichols operations in our current year results.
Offsetting these increases were improved financial discipline, as well as cost containment measures, such as the reduction of outside sales agents and delayed hiring of non-critical positions, as well as the elimination of $0.6 million in acquisition and integration costs incurred last year. GAAP net income and net income per diluted share were $0.4 million and $0.03, respectively. On a non-GAAP basis, adjusted net income and adjusted diluted net income per share were $2.5 million and $0.24, respectively. Turning to Slide 7, you can see how we are improving our balance sheet through improved profitability and fiscal discipline, all while deleveraging and investing for the future. Cash and cash equivalents on March 31, '23 were $18.3 million, up $1 million compared with the end of the third quarter and up $3.6 million from the end of fiscal 2022.
Cash generated from operations in the fourth quarter was $5 million and $13.9 million for the year. I should point out that cash flows for the year reflect the impact of $13 million of customer deposits received for materials related to larger defense contracts. Going forward, we expect our cash flow to be lumpy due to the nature of these large contracts. Capital expenditures for the fourth quarter of fiscal 2023 were $1.4 million, and were $3.7 million for the year, or 2.4% of sales. This elevated level reflects our expansion and productivity improvement initiatives, which will support our organic growth opportunities. This strong cash generation allowed us to reduce our debt by $6.6 million during the year and our leverage ratio is as calculated in accordance with the terms of our credit facility was 2.1x at year-end.
At March 31, 2023, the amount available under our revolving credit facility was approximately $10 million, providing us ample liquidity to support our strategic investments. If you will now turn to Slide 8, our view our orders for the quarter and the year. We had orders of 40 -- sorry, we had orders of $50.8 million in the quarter which were up $27.2 million or 115% and included the previously announced $23 million follow on order for the MK48 Mod 7 Heavyweight Torpedo and a $5 million order for a vacuum system for geothermal and lithium power production. After market orders for the refining and petrochemical markets were $11.5 million in the fiscal 2023 fourth quarter, an increase of 37%. The aftermarket business tends to be a leading indicator of future capital investments by customers in these markets.
For the year, orders reached a new record of $202.7 million, driven by our defense business that was up $53.5 million to $116.7 million. This represented 58% of total orders for the year. We believe these record orders validates the investments we made, our customers confidence in our execution and the success we are having and winning new business across our diversified markets. This is not to discount demand growth in our other markets including space and new energy, as well as aftermarket demand in our refining and petrochemical markets, which we are also excited about. Aftermarket orders were up 34% for the year to $40.6 million. If you turn to Slide 9, we show our backlog which given the heavy weighting now to defense provides us with strong visibility.
Backlog at fiscal year-end was up 18% to $301.7 million compared with the end of fiscal 2022. I should point out that there are no orders and backlog related to the space customer who filed for bankruptcy. Approximately 50% to 55% of orders currently in backlog are expected to convert to sales in fiscal 2024, giving a strong confidence in our ability to deliver on a revenue and margin guidance. Approximately 25% to 30% of backlog is expected to convert to sales in fiscal 2025 and primarily relate to the defense industry. Turning to Slide 10, we can review our guidance for fiscal 2024. We believe revenue will be between $165 million to $175 million, which suggests top line growth over fiscal 2023 of about 8% at the midpoint of that range. This is right in line with our long-term strategy to grow revenue 8% to 10% per year.
These expectations as well as the results for fiscal 2023 allow us to raise our fiscal 2027 revenue goal, which is now expected to exceed $200 million, the target just said a year-ago. From an adjusted EBITDA perspective, we expect $10.5 million to $12.5 million for next year, which suggests an adjusted EBITDA margin of about 6% to 7%. I should point out that these adjusted measures exclude approximately $2 million to $3 million related to the Barber-Nichols acquisition earn out bonus, as well as $0.5 million to a $1 million of planned ERP implementation costs for our vacuum system and heat transfer operations in Batavia. We will still be impacted in the year by the first article lower margin projects that we entered into several years ago as those rollout and we start to work on our better price contracts, employing our improved processes, we expect margins to expand more meaningfully in fiscal 2025 and beyond to achieve our low to mid teen adjusted EBITDA margin goal.
With that, I will pass the call back to Dan.
Dan Thoren: Thank you, Chris. Let's turn to Slide 11. We continue to evolve our strategy as we advance the organization through steady growth and stronger profitability. Our vision is to build an exceptional company that provides mission-critical high compliance products to diverse markets. We believe we can succeed with our highly skilled workforce that is fully engaged because of our open culture that challenges each of us to do our best and aligned with our customers engineering expertise, responsive service and timely deliveries. Our focus is on serving markets where our technology is critical to the success of our customers process or application. This is how we have exceeded -- succeeded over time with our vacuum and heat transfer technology as well as our turbomachinery equipment.
Think about the critical nature of our vacuum system on a refineries distillation column. If it doesn't work, the output of the refinery is severely compromised. Similarly, failure of a torpedo propulsion system in an ocean conflict could be catastrophic. Space communication satellites quit working if our thermal management pumps fail. Our engineering expertise and vacuum heat transfer and turbo machinery and our high compliance processes developed to create and qualify these solutions are key to our technology differentiation. A second pillar of our strategy is operational excellence. We have many initiatives to continually improve the processes we employ in our operations. We have been consistently upgrading information systems in our turbomachinery operation, and will initiate a long overdue ERP system upgrade for a vacuum system heat transfer operation.
We are making more investments in equipment like automated welding that eliminates rework and provides quick payback. Finally, expanding our shared services to gain economic advantage will continue. The third pillar is our people. Our people are our most valuable asset and we are committed to grow and develop them to maintain a competitive advantage. We have had good success using engagement surveys to identify gaps in engagement. We then follow through with initiatives such as improved instruction, tools, communication, development programs and other resources to fill the identified gaps. Leadership development is actually quite advanced for a company of our size. And we have expanded trade -- skilled trades training through in-house weld schools, partnerships with community and academic resources and initiating a machinist apprenticeship program.
Finally, we will leverage our external stakeholders including our communities, our suppliers, our lenders, In our shareholders to be a better business. This means strengthened relationships, improved communications, and finding win-win solutions. We are making steady progress against our plan. And we're quite excited about the opportunities in front of us and encouraged with our stakeholders support of our journey of building better companies. With that, Christine, we can open the call for questions.
