Graham Corporation (NYSE:GHM) Q1 2024 Earnings Call Transcript

Graham Corporation (NYSE:GHM) Q1 2024 Earnings Call Transcript August 7, 2023

Operator: Greetings, and welcome to the Graham Corporation First Quarter Fiscal Year 2024 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Debbie 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 first quarter fiscal 2024 financial results as well as the strategic investment release that we put out this morning over the wires. If you don't, you can access both releases and our slides on our website at ir.grahamcorp.com. The slides on the website will accompany our conversation today. Dan and Chris are going to provide their formal remarks, after which we will open the line for questions. But if you will turn to Slide 2, 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 reconciliation 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. Their 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 so as a result, a quantitative reconciliation of each of these is not required to provide, which 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'll turn it over to Dan to begin.

Dan?

Daniel Thoren: Thanks, Debbie, and good morning, everyone. We reported better-than-expected results for our first quarter of fiscal '24, giving us a strong start to the year. Revenue grew 32% to a quarterly record of $47.6 million, gross margin expanded to 23% and earnings per diluted share increased over 4x to $0.25. We had a few benefits to the quarter that were working in our favor. We had very favorable mix as a result of better priced projects and project timing. We also are seeing the impacts of improving execution, the expanded capacity we have created through productivity and increased direct labor and better pricing in our backlog. Aside from our strong results, we also announced a major strategic investment by a defense customer to expand our capabilities in our Batavia operations in support of naval nuclear propulsion program.

The investment will be used to ensure we can support the U.S. Navy's shipbuilding plan. Chris will talk more about the investment and how we expect to recognize it through revenue over many years. We believe this investment validates the tough decisions we had to make in fiscal 2022. That year, we chose to make significant investments in order to deliver quality products in a timely manner to our customer. Back then, those decisions had a major negative impact on our earnings. As I noted in the release, there is a lot to be excited about here at Graham. We have made measurable progress, and we are seeing it in our results. But what is not as visible to the outside is the advancements we are making as an organization. We have quite a bit of ground yet to cover, but I'm very encouraged by the development of a culture of openness, challenge and growth that I am seeing in the team.

We are in the third or maybe fourth evolution of Graham since its inception in 1936 and IPO in 1968. Our history is important in a demonstration of the sustainability and resilience of the business, but our future is what drives us. And while we still have much work to do, I am proud of what our team has accomplished and their openness to change and advancement. With that, let me turn it over to Chris for the financial details. Chris?

Christopher Thome: Thank you, Dan, and good morning, everyone. If you turn to Slide 4, you can see that we had a strong sales growth for our first quarter of fiscal 2024, with record sales of $47.6 million. This was up 32% over the prior year period as well as up 11% from the trailing fourth quarter. As Dan mentioned, the quarter was better than expected and benefited from an improved mix of higher-margin defense projects as well as the timing of material receipts and the completion of some contract projects, which we originally expected in the second quarter of this year. Higher sales were also driven by better execution and improved pricing. Defense led the way with $22.8 million in revenue, which was up $13 million over the prior year, a 133% increase.

Commercial aftermarket sales to the refining and petrochemical markets continue to be strong and were $9.2 million, up 49%. These improvements in defense and aftermarket more than offset softness in the refining industries and declines in the space market. U.S. sales were 80% of total revenue, up 35% year-over-year, primarily driven by our growth in defense. Gross profit and margin improved measurably. Gross profit was $11 million and gross margin was 23.1%, up $4.2 million and 440 basis points, respectively. This reflects a favorable mix as a result of better priced projects and timing due to build schedules. We're also seeing the positive impacts on margin from improving execution, the expanded capacity we have created through productivity and increased direct labor and better pricing in our backlog.

Pixabay/Public Domain

SG&A inclusive of amortization in the first quarter of fiscal 2024 was $7.3 million or 15% of sales, up $1.5 million over the prior year period. Approximately $900,000 of the increase was attributable to higher performance-based compensation expense, including $800,000 related to the supplemental performance bonus payout to Barbara Nichols employees in connection with the 2021 acquisition. If you turn to Slide 5, you can see we had net income in the quarter of $0.25 per diluted share or $2.6 million, a notable increase over last year. On a non-GAAP basis, adjusted net income and net income per diluted share were $3.6 million and $0.33, respectively, measurably improved over $1.3 million and over the $1.3 million and $0.12, respectively, for the same period a year ago.

Adjusted EBITDA grew to $5.6 million or 11.8% of sales, also reflecting the improvements in our business compared with last year's first quarter of adjusted EBITDA of $2.7 million or 7.6% of sales. Turning to Slide 6. You can see how we are strengthening our balance sheet. Cash and cash equivalents as of June 30, 2023, increased 35% or $6.4 million to $24.7 million compared with the end of the fourth quarter. Our cash generation is improving with better operating performance but is expected to be lumpy due to the timing of receipt of customer deposits and the corresponding material purchases associated with those deposits. Cash generated from operations in the first quarter was $8.6 million. Debt during the quarter was down $400,000 to $11.3 million.

As of June 30, 2023, the company was in compliance with this lending agreement with a leverage ratio of just 1.6x. On June 30, 2023, the amount available under our revolving credit facility was approximately $26 million and provides adequate liquidity to fund our strategic growth initiatives. Capital expenditures for the first quarter of fiscal 2024 were $1.5 million. We have updated our expectation for CapEx in fiscal 2024 to range between $12 million and $13.5 million. The $6.5 million increase is primarily related to the strategic investment we received from our defense customer and our planned spending to expand our capabilities in our Batavia operation, to meet the Navy's shipbuilding schedule. If you will now turn to Slide 7, I'll review our orders for the quarter.

During the quarter, we had orders of $67.9 million, which were up $27.6 million or 69% over the prior year and resulted in a book-to-bill ratio of 1.4x. Included in orders and backlog is the $13.5 million strategic investment from a major defense customer we have been talking about, which we announced separately today. The investment is expected to flow through revenue over the next 8 to 10 years and will be associated with potential future orders and delivering on the $8.5 million of follow-on orders we received from that customer during the quarter. Space orders were $4.6 million in the first quarter of fiscal 2024, down from the historically high $7.3 million in the first quarter of fiscal 2023, but higher than the $2.5 million in orders received in the fourth quarter of fiscal 2023.

Space continues to be a strategic focus for us and a meaningful part of our business. Turning to Slide 8, we show our backlog. You could see that it is up 24% over a year ago and 7% sequentially to a record $322 million. The defense backlog is up $60 million or 31% over last year and includes that strategic investment from the major defense customer I just mentioned. Approximately 50% of orders currently in the backlog are expected to be converted to sales in the next 12 months and another 25% to 30% is expected to convert to sales over the following year. The majority of orders expected to convert beyond 12 months are for the defense industry, specifically the U.S. Navy. Turning to Slide 9. We can review our updated guidance for fiscal 2024.

We are increasing our revenue projection to $170 million to $180 million, up $5 million from our previous guidance on the lower and top end. Our new guidance suggests top line growth over fiscal 2023 of about 11% at the midpoint of that range. This is right in line with our strategy to grow in the mid- to high single digits annually in order to achieve our fiscal 2027 goal of greater than $200 million in revenue. It also captures the better-than-expected performance in the first quarter, which we expect will normalize for the remainder of the year. From a margin perspective, we are updating the gross margin guidance to 18% to 19%, which is an additional 100 basis points over our previous guidance on the top and bottom end. Our guidance remains the same for SG&A percentage as well as for our effective tax rate.

Similar to revenue, we have increased our adjusted EBITDA guidance by $1 million at the top and bottom of the range to $11.5 million to $13.5 million, which suggests an adjusted EBITDA margin of about 7% at the midpoint of the range. These increases to our guidance reflect our better-than-expected start to the year and incorporates more normalized performance for the remainder of the year. As we start to work on our better price contracts, employing our much improved processes, we expect margins to improve steadily each year in order to achieve our low to mid-teen adjusted EBITDA margin goal in 2027. With that, I will pass the call back to for concluding remarks.

Daniel Thoren: Thank you, Chris. I am on Slide 10. I have covered the pillars of our strategy on Slide 10 previously. I would just like to reemphasize that it takes a team that understands our customers' critical challenges to help them find solutions, which drives our success. We are doing this on many fronts, which is also driving our diversification. We have much going on in space, new energy, cryogenics, refining and petrochem as well as defense. We are well on our way to achieve our growth and profitability goals for fiscal 2027. And even beyond that, I believe our long-term outlook is very encouraging, and I hope you share in that excitement. With that, Christine, we can open the call for questions.

See also 15 Deadliest Cancers in the U.S. and Lone Pine Capital: Portfolio, Team, AUM.

To continue reading the Q&A session, please click here.