- 18% growth in second quarter sales driven by 69% increase in
defense market revenue
- Gross profit of $7.2 million increased $1.9 million from the
prior year quarter, or 36%, on better mix of higher margin
projects, better pricing, and improving execution
- Achieved net income of $0.4 million; adjusted net income1
improved to $1.4 million
- Aftermarket sales to the refining and petrochemical markets
were a record $10.8 million, up 74%.
- Solid backlog of $313.3 million including 80% defense
business
- Shipped final first article units for Columbia submarine and
Ford Class carrier programs
- Refinanced lending facilities following close of quarter,
improving flexibility and reducing cost of debt
Graham Corporation (NYSE: GHM) (“GHM” or the “Company”), 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, today reported
financial results for its second quarter ended September 30, 2023
(“second quarter fiscal 2024”).
Daniel J. Thoren, President and Chief Executive Officer,
commented, “We continue to improve as an organization and are
becoming a healthier, more robust business. We are executing better
every day, identifying opportunities for further growth and margin
expansion. We remain focused on 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. Importantly, with the shipment of
the final first articles related to the Columbia submarine and Ford
Class carrier programs, we now have a higher margin profile in our
backlog and believe we are positioned to drive stronger earnings
power.”
He concluded, “We are making great progress and believe we are
on track to achieve our fiscal 2027 goals of greater than $200
million in revenue with low to mid-teen adjusted EBITDA
margins2.”
While the Company expects to continue to have first article
programs in its backlog as it wins new projects and applications,
the amount as a percentage of total backlog should be reduced
moving forward. In addition, Graham has expanded its leadership
team, improved internal communications and program management to
mature its capabilities with first article development and
manufacturing.
____________________________
1 Adjusted net income is a non-GAAP
measure. See attached tables and other information on pages 10 and
11 for important disclosures regarding Graham’s use of adjusted net
income.
2 See “Forward-looking Non-GAAP Measures"
on page 5 and attached tables and other information on pages 10 and
11 for important disclosures regarding Graham’s outlook for
adjusted EBITDA margin.
Second Quarter Fiscal 2024 Performance
Review
(All comparisons are with the same
prior-year period unless noted otherwise.)
($ in millions except per share data)
Q2 FY24
Q2 FY23
$ Change
Net sales
$
45.1
$
38.1
$
7.0
Gross profit
$
7.2
$
5.3
$
1.9
Gross margin
16.0%
13.8%
Operating income (loss)
$
0.8
$
(0.1)
$
0.9
Operating margin
1.8%
(0.1%)
Net income (loss)
$
0.4
$
(0.2)
$
0.6
Net income (loss) per diluted share
$
0.04
$
(0.02)
$
0.06
Adjusted net income (loss)*
$
1.4
$
0.3
$
1.1
Adjusted net income (loss) per diluted share*
$
0.13
$
0.03
$
0.10
Adjusted EBITDA*
$
2.7
$
1.5
$
1.2
Adjusted EBITDA margin*
6.0%
4.0%
*Graham believes that adjusted EBITDA (defined as consolidated
net income before net interest expense, income taxes, depreciation,
amortization, other acquisition related expenses (income), and
other unusual/nonrecurring expenses), and adjusted EBITDA margin
(adjusted EBITDA as a percentage of net sales), which are non-GAAP
measures, help in the understanding of its operating performance.
Moreover, Graham’s credit facility also contains ratios based on
adjusted EBITDA as defined in the lending agreement. Graham also
believes that adjusted net income (loss) and adjusted net income
(loss) per diluted share, which excludes intangible amortization,
other costs related to the acquisition, and other
unusual/nonrecurring (income) expenses, provides a better
representation of the cash earnings of the Company. See the
attached tables and other information on pages 10 and 11 for
important disclosures regarding Graham’s use of adjusted EBITDA,
adjusted EBITDA margin, adjusted net income (loss), and adjusted
net income (loss) per diluted share, as well as the reconciliation
of net income to adjusted EBITDA, adjusted net income (loss), and
adjusted net income (loss) per diluted share.
Net sales of $45.1 million increased 18.2%, or $7.0 million.
Sales to the defense market increased $10.3 million, or 69%,
reflecting more direct labor, better execution, the timing of
material receipts, and improved pricing. Record sales in the
commercial aftermarket helped to offset slow-to-recover capital
projects in the refining and petrochemical industries. Aftermarket
sales to the refining and petrochemical markets were $10.8 million,
up $4.6 million, or 74%. Declines in the space market reflect
timing of projects and the loss of a customer in April 2023 to
bankruptcy. See supplemental data for a further breakdown of sales
by market and region.
Compared with the prior year period, the 36% increase in gross
profit and 220 basis point expansion of gross margin reflected
higher volume and related improved absorption, a healthy mix of
higher margin commercial aftermarket sales, better execution and
better pricing on defense contracts.
Selling, general and administrative expense (“SG&A”),
excluding amortization, was $6.1 million, or 14% of sales, up $1.1
million. Approximately $0.8 million of the increase was
attributable to the supplemental performance bonus for
Barber-Nichols employees (the “BN performance bonus”) in connection
with the 2021 acquisition of Barber-Nichols LLC. Other increases
included inflation of personnel costs, as well as increased
professional fees of approximately $0.2 million driven by
increasing complexity in the business associated with growth and
our international operations.
Net income was $0.4 million, or $0.04 per diluted share. On a
non-GAAP basis, adjusted net income3 and adjusted net income per
diluted share3 were $1.4 million and $0.13, respectively, compared
with adjusted net income3 and adjusted net income per diluted
share3 of $0.3 million and $0.03 during the same period a year
ago.
____________________________
3 Adjusted net income and adjusted net
income per diluted share are non-GAAP measures. See attached tables
and other information on pages 10 and 11 for important disclosures
regarding Graham’s use of adjusted net income and adjusted net
income per diluted share.
Cash Management and Balance Sheet
Cash generated from operations for the three months ended
September 30, 2023 was $3.3 million, up from $0.3 million for the
same period last year. Capital expenditures for the second quarter
of fiscal 2024 were $1.8 million. Cash and cash equivalents on
September 30, 2023, were $25.8 million up from $18.3 million on
March 31, 2023.
Debt at quarter end was down $0.9 million to $10.9 million
compared with March 31, 2023.
Following the end of the quarter, the Company announced it had
closed on a new, five-year $50 million senior secured revolving
credit facility of which $35 million is currently available. Graham
used the proceeds from the facility and cash on hand to pay down
the remaining $11.5 million balance of its term loan and the $725
thousand exit fee from its previous lending agreement amendments.
The new facility will reduce current borrowing rates by
approximately 25 basis points to SOFR plus 1.25%.
Christopher J. Thome, Chief Financial Officer, commented, “The
refinancing of our debt with the new credit facility provides
expanded financial flexibility to support our growth strategy with
lower borrowing costs. Following the close of the new credit
facility, we used the $35 million provided and cash on hand to pay
down our outstanding debt so that at this time we have no debt
outstanding. The new revolver provides the flexibility to support
our working capital and capital expenditure requirements which can
diverge from timing of cash receipts.”
Orders and Backlog
(See supplemental data filed with the Securities and Exchange
Commission on Form 8-K and provided on the Company’s website for a
further breakdown of orders and backlog by market)
($ in millions)
Q1 23 Q2 23 Q3 23 Q4 23 FY23
Q1 24 Q2 24 YTD FY24 Orders
$
40.3
$
91.5
$
20.0
$
50.9
$
202.7
$
67.9
$
36.5
$
104.4
Backlog
$
260.7
$
313.3
$
293.7
$
301.7
$
301.7
$
322.0
$
313.3
$
313.3
Orders for the three-month period ended September 30, 2023, were
$36.5 million compared with a record $91.5 million for the same
period of fiscal 2023. Last year’s second quarter included a large
multi-year order for supporting the U.S. Navy’s Naval Nuclear
Propulsion Program.
Aftermarket orders for the refining and petrochemical markets
continued to be strong and were $11.4 million in the second
quarter, up 2% over the same period last year and up 45%
sequentially.
Backlog for the quarter was $313.3 million, which was unchanged
compared with the prior-year period. Approximately 50% of orders
currently in backlog are expected to be converted to sales in the
next twelve months and another 25% to 30% is expected to convert to
sales over the following twelve months. The majority of orders
expected to convert beyond twelve months are for the defense
industry, specifically the U.S. Navy.
Maintaining Fiscal 2024 Outlook
The Company guidance for fiscal 2024 remains unchanged from
previous guidance.
(as of November 6, 2023)
Fiscal 2024 Guidance
Net Sales:
$170 million to $180 million
Gross Margin:
18% to 19% of sales
SG&A expense(1)
15% to 16% of sales
Adjusted EBITDA(2)
$11.5 million to $13.5
million
Effective Tax Rate
22% to 23%
CapEx
$12.0 million to $13.5
million
(1)
Includes approximately $2.5 million to $4 million of BN
performance bonus and ERP conversion costs included in SG&A
expense.
(2)
Excludes approximately $2.5 million to $4 million of BN
performance bonus and ERP conversion costs included in SG&A
expense and approximately $0.7 million of debt extinguishment
charges.
Webcast and Conference Call
GHM’s management will host a conference call and live webcast
today at 11:00 a.m. Eastern Time (“ET”) to review its financial
condition and operating results, as well as its strategy and
outlook. The review will be accompanied by a slide presentation,
which will be made available immediately prior to the conference
call on GHM’s investor relations website.
A question-and-answer session will follow the formal
presentation. GHM’s conference call can be accessed by calling
(201) 689-8560. Alternatively, the webcast can be monitored from
the events section of GHM’s investor relations website.
A telephonic replay will be available from 3:00 p.m. ET on the
day of the teleconference through Monday, November 13, 2023, at
11:59 p.m. ET. To listen to the archived call, dial (412) 317-6671
and enter conference ID number 13741263 or access the webcast
replay via the Company’s website at ir.grahamcorp.com, where a
transcript will also be posted once available.
About Graham Corporation
GHM is 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. The Graham
Manufacturing and Barber-Nichols’ global brands are built upon
world-renowned engineering expertise in vacuum and heat transfer,
cryogenic pumps, and turbomachinery technologies, as well as its
responsive and flexible service and the unsurpassed quality
customers have come to expect from the Company’s products and
systems. Graham Corporation routinely posts news and other
important information on its website, grahamcorp.com, where
additional information on Graham Corporation and its businesses can
be found.
Safe Harbor Regarding Forward Looking Statements
This news release contains 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.
Forward-looking statements are subject to risks, uncertainties
and assumptions and are identified by words such as “expects,”
“outlook,” “anticipates,” “believes,” “could,” “guidance,”
“should,” ”may”, “will,” “goals,” “plan” and other similar words.
All statements addressing operating performance, events, or
developments that Graham Corporation expects or anticipates will
occur in the future, including but not limited to, profitability of
future projects and the business, its ability to deliver to plan,
its ability to meet customers’ shipment and delivery expectations,
its ability to continue to strengthen relationships with customers
in the defense industry, its ability to secure future projects and
applications, expected expansion and growth opportunities,
anticipated sales, revenues, adjusted EBITDA, adjusted EBITDA
margins, capital expenditures and SG&A expenses, the timing of
conversion of backlog to sales, orders, market presence, profit
margins, tax rates, foreign sales operations, customer preferences,
changes in market conditions in the industries in which it
operates, changes in general economic conditions and customer
behavior, forecasts regarding the timing and scope of the economic
recovery in its markets, and its acquisition and growth strategy,
are forward-looking statements. Because they are forward-looking,
they should be evaluated in light of important risk factors and
uncertainties. These risk factors and uncertainties are more fully
described in Graham Corporation’s most recent Annual Report filed
with the Securities and Exchange Commission (the “SEC”), included
under the heading entitled “Risk Factors”, and in other reports
filed with the SEC.
Should one or more of these risks or uncertainties materialize
or should any of Graham Corporation’s underlying assumptions prove
incorrect, actual results may vary materially from those currently
anticipated. In addition, undue reliance should not be placed on
Graham Corporation’s forward-looking statements. Except as required
by law, Graham Corporation disclaims any obligation to update or
publicly announce any revisions to any of the forward-looking
statements contained in this news release.
Forward-Looking Non-GAAP Measures
Forward-looking adjusted EBITDA and adjusted EBITDA margin are
non-GAAP measures. The Company is unable to present a quantitative
reconciliation of these forward-looking non-GAAP financial measures
to their most directly comparable forward-looking GAAP financial
measures because such information is not available, and management
cannot reliably predict the necessary components of such GAAP
measures without unreasonable effort largely because forecasting or
predicting our future operating results is subject to many factors
out of our control or not readily predictable. In addition, the
Company believes that such reconciliations would imply a degree of
precision that would be confusing or misleading to investors. The
unavailable information could have a significant impact on the
Company’s fiscal 2024 financial results. These non-GAAP financial
measures are preliminary estimates and are subject to risks and
uncertainties, including, among others, changes in connection with
purchase accounting, quarter-end, and year-end adjustments. Any
variation between the Company’s actual results and preliminary
financial estimates set forth above may be material.
Key Performance Indicators
In addition to the foregoing non-GAAP measures, management uses
the following key performance metrics to analyze and measure the
Company’s financial performance and results of operations: orders,
and backlog. Management uses orders and backlog as measures of
current and future business and financial performance, and these
may not be comparable with measures provided by other companies.
Orders represent written communications received from customers
requesting the Company to provide products and/or services. Backlog
is defined as the total dollar value of net orders received for
which revenue has not yet been recognized. Management believes
tracking orders and backlog are useful as it often times is a
leading indicator of future performance. In accordance with
industry practice, contracts may include provisions for
cancellation, termination, or suspension at the discretion of the
customer.
Given that each of orders and backlog are operational measures
and that the Company's methodology for calculating orders and
backlog does not meet the definition of a non-GAAP measure, as that
term is defined by the U.S. Securities and Exchange Commission, a
quantitative reconciliation for each is not required or
provided.
FINANCIAL TABLES FOLLOW.
Graham Corporation
Consolidated Statements of
Operations - Unaudited
(Amounts in thousands, except per
share data)
Three Months Ended Six Months Ended
September 30, September 30,
2023
2022
% Change
2023
2022
% Change
Net sales
$
45,076
$
38,143
18%
$
92,645
$
74,218
25%
Cost of products sold
37,885
32,863
15%
74,477
62,194
20%
Gross profit
7,191
5,280
36%
18,168
12,024
51%
Gross margin
16.0
%
13.8
%
19.6
%
16.2
%
Other expenses and income:
Selling, general and administrative
6,115
5,059
21%
13,134
10,544
25%
Selling, general and administrative – amortization
273
273
0%
547
547
0%
Operating profit (loss)
803
(52
)
NA
4,487
933
381%
Operating margin
1.8
%
(0.1
%)
4.8
%
1.3
%
Other (income) expense, net
94
(62
)
NA
187
(125
)
(250%)
Interest expense, net
55
246
(78%)
240
403
(40%)
Income (loss) before provision (benefit) for income taxes
654
(236
)
NA
4,060
655
520%
Provision (benefit) for income taxes
243
(40
)
NA
1,009
175
477%
Net income (loss)
$
411
$
(196
)
NA
$
3,051
$
480
536%
Per share data:
Basic:
Net income (loss)
$
0.04
$
(0.02
)
NA
$
0.29
$
0.05
480%
Diluted:
Net income (loss)
$
0.04
$
(0.02
)
NA
$
0.28
$
0.05
460%
Weighted average common shares outstanding: Basic
10,699
10,617
10,675
10,614
Diluted
10,810
10,617
10,761
10,618
N/A: Not Applicable
Graham Corporation
Consolidated Balance Sheets –
Unaudited
(Amounts in thousands, except per
share data)
September 30,
March 31,
2023
2023
Assets Current assets: Cash and cash equivalents
$
25,800
$
18,257
Trade accounts receivable, net of allowances ($1,887 and $1,841 at
September 30 and March 31, 2023, respectively)
28,710
24,000
Unbilled revenue
34,975
39,684
Inventories
27,009
26,293
Prepaid expenses and other current assets
2,850
1,534
Income taxes receivable
774
302
Total current assets
120,118
110,070
Property, plant and equipment, net
27,122
25,523
Prepaid pension asset
6,251
6,107
Operating lease assets
7,775
8,237
Goodwill
23,523
23,523
Customer relationships, net
10,423
10,718
Technology and technical know-how, net
8,922
9,174
Other intangible assets, net
7,266
7,610
Deferred income tax asset
1,489
2,798
Other assets
239
158
Total assets
$
213,128
$
203,918
Liabilities and stockholders’ equity Current
liabilities: Current portion of long-term debt
$
2,000
$
2,000
Current portion of finance lease obligations
19
29
Accounts payable
13,554
20,222
Accrued compensation
11,357
10,401
Accrued expenses and other current liabilities
6,262
6,434
Customer deposits
59,526
46,042
Operating lease liabilities
1,125
1,022
Income taxes payable
-
16
Total current liabilities
93,843
86,166
Long-term debt
8,863
9,744
Finance lease obligations
76
85
Operating lease liabilities
6,993
7,498
Deferred income tax liability
48
108
Accrued pension and postretirement benefit liabilities
1,341
1,342
Other long-term liabilities
1,169
2,042
Total liabilities
112,333
106,985
Stockholders’ equity: Preferred stock, $1.00 par
value, 500 shares authorized
-
-
Common stock, $0.10 par value, 25,500 shares authorized, 10,846 and
10,774 shares issued and 10,703 and 10,635 shares outstanding at
September 30, 2023 and March 31, 2023, respectively
1,084
1,075
Capital in excess of par value
29,196
28,061
Retained earnings
80,494
77,443
Accumulated other comprehensive loss
(7,445
)
(7,463
)
Treasury stock (143 and 138 shares at September 30 and March 31,
2023, respectively)
(2,534
)
(2,183
)
Total stockholders’ equity
100,795
96,933
Total liabilities and stockholders’ equity
$
213,128
$
203,918
Graham Corporation
Consolidated Statements of
Cash Flows – Unaudited
(Amounts in thousands)
Six Months Ended September 30,
2023
2022
Operating activities: Net income
$
3,051
$
480
Adjustments to reconcile net income to net cash provided (used) by
operating activities: Depreciation
1,549
1,724
Amortization
891
1,238
Amortization of actuarial losses
421
336
Amortization of debt issuance costs
119
93
Equity-based compensation expense
625
312
Deferred income taxes
1,162
174
(Increase) decrease in operating assets: Accounts receivable
(4,947
)
38
Unbilled revenue
4,620
(5,283
)
Inventories
(734
)
(2,560
)
Prepaid expenses and other current and non-current assets
(1,343
)
(782
)
Income taxes receivable
(489
)
(136
)
Operating lease assets
589
901
Prepaid pension asset
(144
)
(325
)
Increase (decrease) in operating liabilities: Accounts payable
(6,451
)
3,730
Accrued compensation, accrued expenses and other current and
non-current liabilities
5
553
Customer deposits
13,503
544
Operating lease liabilities
(529
)
(840
)
Long-term portion of accrued compensation, accrued pension
liability and accrued postretirement benefits
-
(595
)
Net cash provided (used) by operating activities
11,898
(398
)
Investing activities: Purchase of property, plant and
equipment
(3,312
)
(1,176
)
Proceeds from disposal of property, plant and equipment
38
-
Net cash used by investing activities
(3,274
)
(1,176
)
Financing activities: Principal repayments on debt
(1,020
)
(3,511
)
Proceeds from the issuance of debt
-
5,000
Principal repayments on finance lease obligations
(147
)
(136
)
Issuance of common stock
225
-
Payment of debt issuance costs
-
(122
)
Purchase of treasury stock
(57
)
(22
)
Net cash provided (used) by financing activities
(999
)
1,209
Effect of exchange rate changes on cash
(82
)
(254
)
Net increase (decrease) in cash and cash equivalents
7,543
(619
)
Cash and cash equivalents at beginning of period
18,257
14,741
Cash and cash equivalents at end of period
$
25,800
$
14,122
Graham Corporation
Adjusted EBITDA
Reconciliation
(Unaudited, $ in thousands,
except per share amounts)
Three Months Ended
Six Months Ended
September 30,
September 30,
2023
2022
2023
2022
Net income (loss)
$
411
$
(196
)
$
3,051
$
480
Acquisition & integration costs
-
-
-
54
Barber-Nichols performance bonus
802
-
1,569
-
Debt amendment costs
-
41
-
194
Net interest expense
55
246
240
403
Income taxes
243
(40
)
1,009
175
Depreciation & amortization
1,201
1,487
2,440
2,962
Adjusted EBITDA
$
2,712
$
1,538
$
8,309
$
4,268
Adjusted EBITDA margin %
6.0
%
4.0
%
9.0
%
5.8
%
Adjusted Net Income (Loss)
and
Adjusted Net Income Per
Diluted Share Reconciliation
(Unaudited, $ in thousands,
except per share amounts)
Three Months Ended
Six Months Ended
September 30,
September 30,
2023
2022
2023
2022
Net income (loss)
$
411
$
(196
)
$
3,051
$
480
Acquisition & integration costs
-
-
-
54
Amortization of intangible assets
445
619
891
1,238
Barber-Nichols performance bonus
802
-
1,569
-
Debt amendment costs
-
41
-
194
Normalize tax rate(1)
(287
)
(139
)
(566
)
(312
)
Adjusted net income
$
1,371
$
325
$
4,945
$
1,654
GAAP net income (loss) per diluted share
$
0.04
$
(0.02
)
$
0.28
$
0.05
Adjusted net income per diluted share
$
0.13
$
0.03
$
0.46
$
0.16
Diluted weighted average common shares outstanding
10,810
10,617
10,761
10,618
(1) Applies a normalized tax rate
to non-GAAP adjustments, which are pre-tax, based upon the
statutory tax rate.
Non-GAAP Financial Measures
Adjusted EBITDA is defined as consolidated net income (loss)
before net interest expense, income taxes, depreciation,
amortization, other acquisition related expenses, and other
unusual/nonrecurring expenses. Adjusted EBITDA margin is defined as
Adjusted EBITDA as a percentage of sales. Adjusted EBITDA and
Adjusted EBITDA margin are not measures determined in accordance
with generally accepted accounting principles in the United States,
commonly known as GAAP. Nevertheless, Graham believes that
providing non-GAAP information, such as Adjusted EBITDA and
Adjusted EBITDA margin, is important for investors and other
readers of Graham's financial statements, as it is used as an
analytical indicator by Graham's management to better understand
operating performance. Moreover, Graham’s credit facility also
contains ratios based on EBITDA. Because Adjusted EBITDA and
Adjusted EBITDA margin are non-GAAP measures and are thus
susceptible to varying calculations, Adjusted EBITDA, and Adjusted
EBITDA margin, as presented, may not be directly comparable to
other similarly titled measures used by other companies.
Adjusted net income (loss) and adjusted net income (loss) per
diluted share are defined as net income (loss) and diluted earnings
(loss) per share as reported, adjusted for certain items and at a
normalized tax rate. Adjusted net income (loss) and adjusted net
income (loss) per diluted share are not measures determined in
accordance with GAAP and may not be comparable with the measures
used by other companies. Nevertheless, Graham believes that
providing non-GAAP information, such as adjusted net income (loss)
and adjusted net income (loss) per diluted share, is important for
investors and other readers of the Company’s financial statements
and assists in understanding the comparison of the current
quarter’s and current fiscal year's net income (loss) and net
income (loss) per diluted share to the historical periods' net
income (loss) and net income (loss) per diluted share. Graham also
believes that adjusted net income (loss) per diluted share, which
adds back intangible amortization expense related to acquisitions,
provides a better representation of the cash earnings of the
Company.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20231106821428/en/
Christopher J. Thome Vice President - Finance and CFO Phone:
(585) 343-2216
Deborah K. Pawlowski Kei Advisors LLC Phone: (716) 843-3908
dpawlowski@keiadvisors.com
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