Graham Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 8, 2023

There are 9 speakers on the call.

Operator

Greetings, and welcome to the Graham Corporation 4th 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Graham Corporation.

Operator

Thank you. You may begin.

Speaker 1

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 Thorne, our President and CEO and Chris Thome, our Chief Financial Officer. You should have a copy of the 4th quarter fiscal On our website at ir.gramcorp.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.

Speaker 1

If you will 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 formal discussions as well as during the Q and 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 atsec.gov.

Speaker 1

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 releases and slides. We also use key performance indicators to help gauge the progress and performance of the company.

Speaker 1

These key performance metrics are orders, backlog and book to bill. They are operational measures and the company's methodology for calculating these numbers does not meet the definition of a non GAAP measure That term is defined by the SEC. But a quantitative so 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, please advance to Slide 3, and I'll turn the call over to Dan to begin.

Speaker 2

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 $1,000,000 for the year, a 28% increase over the prior year.

Speaker 2

This included about $8,900,000 of acquired Revenue. Importantly, our revenue growth reflected the success we have 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% of sales. We are excited about the many opportunities we see in New Energy.

Speaker 2

The hydrogen market is developing quickly and we provide both turbo machinery and heat transfer equipment for these applications. Another interesting market is lithium extraction from geothermal brine. We have historically provided surface 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 $50,800,000 in the 4th quarter And a record $202,700,000 of orders for the year. 4th quarter orders included the $23,000,000 Follow on to provide power hardware for the Mark 48 torpedo.

Speaker 2

Book to bill for the Quarter and the year was quite healthy at 1.21.3x respectively. We continue to strengthen our operations, improve 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.

Speaker 2

Navy programs. As we complete the remaining 2 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 is 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.

Speaker 2

This had a net impact of about $2,500,000 on our results or Approximately $0.19 per diluted share. I was very pleased at 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 it exceeded our raised revenue guidance. With that, let me turn it to Chris to go into greater detail on the results. Chris?

Speaker 3

Thank you, Dan, and good morning, everyone. If you turn to Slide 4, You can see that we had strong organic sales growth for our Q4 fiscal 2023 with record sales of 43,000,000 This was up roughly 8% over the prior year period as well as the trailing 3rd quarter. Our space market led the way with $6,900,000 in revenue, which was up $4,600,000 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 percent to $7,100,000 or 17% of total revenue.

Speaker 3

Although aftermarket was up, refining sales were down 4,200,000 both lower capital projects in this market as well as tough comparables due to timing As last year's Q4 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 at $18,900,000 was the 2nd highest quarter for fiscal 2023. For the quarter, sales in the U. S. Were up 9% and represented 83% of our sales.

Speaker 3

International sales accounted for 17% of total sales and were 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.

Speaker 3

This more than offset the $800,000 net impact to gross profit Related to reserves for 1 of our space customers bankruptcy that Dan discussed. Selling, general and administrative expenses in the Q4 of fiscal 2023 were $7,500,000 Up $1,400,000 over the prior year. The increase was the result of $1,700,000 in reserves Related to our space customer, net of the associated performance based compensation. Excluding the impact of this bankruptcy, SG and A improved to 13.7% of revenue Compared with 15.4% in the Q4 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 For 481,000.

Speaker 3

On a non GAAP basis, which adjusts 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 in of our adjusted amounts. Adjusted EBITDA was $1,200,000 for the quarter, Which was 200% higher than last year's Q4 of $400,000 I will remind you that last year's Q4 was impacted by higher costs With the investments we made to ensure we could meet our commitments for our strategic U. S. Navy programs, which is now paying dividends.

Speaker 3

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 $157,100,000 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 percent or 15,400,000 to $21,200,000 and represented 13% of total revenue.

Speaker 3

Additionally, Aftermarket sales to the refining and petrochemical markets increased 26% to 24,900,000 Sales in the U. S. Increased 30 percent to $127,500,000 and were 81% of total sales 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.

Speaker 3

International sales were also up, Increasing 18 percent to $29,600,000 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 $800,000 net impact related to our space customer. Gross profit in fiscal 2022 included an estimated $10,000,000 impact Related to labor and material cost overruns for 1st article U. S.

Speaker 3

Navy projects. In fiscal 2023, We completed 4 First Article U. S. Navy projects, which were the source of these losses and remain on schedule to complete our remaining 2 First Article projects by the end of the Q2 of fiscal 2024. SG and A expenses in the full year Of fiscal 2023 were $24,200,000 including intangible amortization of 1,100,000 An increase of $2,900,000 or 13%.

Speaker 3

The increase reflects the 1,700,000 Net impact related to our space customer and $1,400,000 incremental SG and A expense From the acquisition, given the 2 additional months of Barber Nichols operations and our current year results. Offsetting these increases were improved financial discipline as well as cost containment measures such as the reduction of outsized sales agents And delayed hiring of non critical positions as well as the elimination of $600,000 in acquisition costs incurred last year. GAAP net income and net income per diluted share were $400,000 and $0.03 respectively. On a non GAAP basis, adjusted net income and adjusted diluted net income per share were 2,500,000 And $0.24 respectively. Turning to slide 7, you can see how we are improving our balance sheet through Cash and cash equivalents on March 31, 23 were $18,300,000 up $1,000,000 compared with the end of the 3rd quarter and up $3,600,000 from the end of fiscal 2022.

Speaker 3

Cash generated from operations in the 4th quarter was $5,000,000 $13,900,000 for the year. I should point out that cash flows for the year reflect the impact of $13,000,000 of customer deposits received from 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 Q4 of fiscal 2023 were $1,400,000 and were $3,700,000 for the year Or 2.4 percent of sales. This elevated level reflects our expansion and productivity improvement initiatives, which will support our organic growth opportunities.

Speaker 3

This strong cash generation allowed us to reduce our debt by $6,600,000 during the year And our leverage ratio is as calculated in accordance with the terms of our credit facility was 2.1 times at year end. At March 31, 2023, the amount available under our revolving credit facility was approximately 10,000,000 providing us ample liquidity to support our strategic investments. If you will now turn to slide 8, I'll review our orders for the quarter the year. We had orders of $40,800,000 in the quarter, Which were up $27,200,000 or 115 percent and included the previously announced $23,000,000 follow on order Aftermarket orders for the refining and petrochemical markets were $11,500,000 in the fiscal 2023 Q4, an increase of 37%. The aftermarket business tends to be a leading indicator of future capital investments By customers in these markets.

Speaker 3

For the year, orders reached a new record of 202,700,000 Driven by our defense business that was up $53,500,000 to $116,700,000 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 in 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 40,600,000 If you turn to Slide 9, we show our backlog, which given the heavy weighting now to defense provides us compared with the end of fiscal 2022. I should point out that there are no orders in backlog related to the Space customer who filed for bankruptcy.

Speaker 3

Approximately 50% to 55% of orders currently in backlog are expected to convert to sales in fiscal 2024, giving us strong confidence in our ability to deliver on our 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 $165,000,000 to $175,000,000 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.

Speaker 3

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 $200,000,000 the target just set a year ago. From an adjusted EBITDA perspective, we expect $10,500,000 to $12,500,000 for next year, which suggests an adjusted EBITDA margin of about 6% to 7%. I should point out that these adjusted measures exclude approximately $2,000,000 to $3,000,000 related to the Barber Nichols acquisition earn out bonus as well as $500,000 to $1,000,000 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 roll out 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.

Speaker 3

With that, I will pass the call back to Dan.

Speaker 2

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 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.

Speaker 2

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 refinery's 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 Our engineering expertise in vacuum heat transfer and turbomachinery And our high compliance processes developed to create and qualify these solutions are key to our technology differentiation.

Speaker 2

The second pillar of our strategy is operational excellence. We have many initiatives to continually improve the processes we employ We have been consistently upgrading information systems in our turbomachinery operation And we'll initiate a long overdue ERP system upgrade for our 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. A third pillar is our people.

Speaker 2

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 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 and our shareholders to be a better business. This means strengthened relationships, improved communications and finding win win solutions.

Speaker 2

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.

Operator

Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question Our first question comes from the line of Theodore O'Neill with Litchfield Hills Research. Please proceed with your question.

Speaker 4

Thank you and congratulations on a good quarter.

Speaker 2

Thanks, Leo.

Speaker 4

Yes. You've got Remarkable growth in orders here, and I was wondering if you could give us a little more insight into your success there. Is that new products? Is it taking market share from others? Was this business just there all along and you just started asking for it?

Speaker 2

I think it starts with performance. So as our businesses can really perform for our customers, they're rewarding us with additional orders. I think both companies have an established relationship With lots of customers and those customers continue to come back as we perform. It just really points out The importance of the actions that we made a year, 1.5 years ago to invest in our businesses, To bleed a little bit to make sure that our customers were satisfied and ultimately they're coming back to us. We are seeing some expansion in certain areas.

Speaker 2

But honestly, I'd say it's mostly that Our customers are saying thank you for really helping us out and here's more work to continue to help us out. I'll expand that answer just a little bit, Theo, and give you a sense. 1.5 years ago, 2 years ago, 1.5 years ago, supply chain was a challenge and Everything was really hard to get. And we attempted to go through heroic efforts again to help our customers get the equipment that they needed in that process. The supply chain has improved some, But we are still seeing challenges in pocket areas.

Speaker 2

And in particular, where we're seeing challenges is in some of this high clients related stuff. We're not while lead times are still relatively long for For raw material and simpler components, what we see is that whenever we're asking for something that's Special above and beyond, has high compliance, high testing requirements, etcetera. The supply chain is struggling with that. And it just goes to show that if you can perform At a high level and provide some really high level service, high level equipment That is checked out extremely well before supplying to the customers, so they don't have problems once it's Deliver to them. That scene is very valuable.

Speaker 2

And so I really like our niche of this mission critical high Appliance equipment and I think the world is struggling there. So I think our customers Are starting to see how valuable that can be.

Speaker 4

You're saying that the high compliance products that you're providing your customers Is a differentiator compared to other suppliers?

Speaker 2

Absolutely. Okay.

Speaker 4

I wanted to ask about Virgin Orbit. I just did some quick look up online during the call here. It doesn't look like that's coming back. Is that correct?

Speaker 2

That is correct. They filed for Chapter 11 and but In the Chapter 11 process, they did not find a going concerned bidder. So they kind of transition to, let's, essentially, get rid of the assets and lots. And So they've liquidated the majority of their assets at this point in time and they don't appear to be Probably the good news is that some of the other launch market customers We're interested in some of their assets. So they had bidders for their buildings, their inventory, etcetera.

Speaker 2

It's not wrapped up at this point in time. It's still an ongoing bankruptcy process. But yes, they were able to sell assets to other space companies.

Speaker 4

Okay. Thanks very much.

Operator

Our next question comes from the line of Dick Ryan with Oak Ridge Financial. Please proceed with your question.

Speaker 5

Thank you. And also congrats on the good performance and guidance for the current year, Dan and Chris. Thanks, Eric. So a question on the guidance. In the slide deck, it shows virtually all the revenue you're guiding to is Already covered by what's in backlog and expected to be delivered.

Speaker 5

You have this vulnerability with Space customer that doesn't appear to be included in that. Any other vulnerable areas within your backlog? And maybe The contrary or the complementary question there would be what could happen on the turn side of the business so that Somebody could look at this and say, hey, there is upside to what you currently guided.

Speaker 3

Yes, Dick. Very good observation on your part. Like other companies, We're still seeing pressures, as Dan just talked about a little bit on the supply chain side as well as the labor side. Although we have seen these conditions improve, they're still not where they were pre COVID. So Really, as you point out, we have the backlog.

Speaker 3

It just comes down to execution. So it really just Comes to our team continuing to perform and risks outside our control such as supply chain and Labor.

Speaker 5

Okay. Chris, as a follow on, looking at the year, You've got some delivery on the remaining 2 first articles during Q1 and Q2. But how should we look at the Kind of the top line, how should the revenue line flow as we look at fiscal 2024? Any other seasonality or as you look at projects, how should we kind of model the revenue growth for 2024?

Speaker 3

Sure. As you know, Dick, we really don't have a lot of seasonality in our business. Our 4th quarter does At times tend to be a little bit higher as our teams are working to hit the goals for the year. So we don't see a lot of seasonality built into our guidance.

Speaker 5

Okay. Say, Dan, on the aftermarket and the refining and TETRA CHEM side, your large installed base kind of drives that aftermarket business, but you indicate You said that, that could be a leading indicator down the road. What does new projects And the refining and petrochem space look like either domestically or you've had some interest in expansion in China and India?

Speaker 2

Yes. So domestically, it is picking up. We are seeing inquiry rates And opportunities domestically continue to grow. So it has been just horribly slow coming back domestically, But we're certainly seeing that coming back. As you noted earlier, We've kind of got our year already booked and Chris indicated that it's all up to us to execute it.

Speaker 2

So if it doesn't come back as strongly as our pipeline has indicated, we've got plenty of work domestically for our crew here. What we're seeing internationally is China has opened up level of request to quote on different programs and we are quoting on those. How Fast it comes back, not entirely clear. But as it comes back, we'll start to see more orders in the second half of the year That then starts to build into our fiscal 2025. India, We've got several different bids that are out there that are close to being Announced, and so we're hopeful that we can continue our India presence.

Speaker 2

And then India looks like it kind of flattens out for a year or maybe 2 as they go through their election process. And then we fully expect that it kind of comes back on. So it's really interesting to kind of follow All of these different markets, they're all in kind of different places. And so the ability to be flexible And be able to move with the market is something that the diversification that Ram has really been able to build over the last 2 years, provides a ton of value. So we're able to kind of move from one market to the other, use our backlog to fill holes and provide a lot more stability.

Speaker 2

And so we're in a much better place Than we have been in prior years. Dick, you followed us for a long time and you watch the cycles. And so we're in a much better place.

Speaker 5

Sure. Thanks for that. One last one on capital allocation. When you look back, Graham had a nominal dividend that was eliminated during the tough couple of years you had. Now that you're back in compliance, Does the dividend come back up in a discussion format at the Board level?

Speaker 5

Or how should we look at your capital allocation Priorities over the next few years.

Speaker 3

Yes, Dick. As Dan and I laid out Last year when we released our long term strategic plan, our capital allocation starts with organic Growth, right? We feel we have an abundance of capital organic growth opportunities to take advantage of. From there, if we have excess capital, we'll use it to pay down debt. And then hopefully, within the next few years, We can start looking at M and A again.

Speaker 3

And then after that, we would look to returning that back to shareholders. So we're comfortable with the capital allocation strategy that we have.

Speaker 5

Okay, great. Again, great job in the execution guys. Thanks. Thank

Speaker 2

you,

Operator

Eric. Our next question comes from the line of Brett Kearney with Gabelli. Please proceed with your question.

Speaker 6

Hi, guys. Good morning and congrats on the continued momentum.

Speaker 2

Hey, thanks Brett. Good morning Brett.

Speaker 6

And Dan absolutely agree with your assessment of the landscape in U. S, I guess potentially even global manufacturing the ability for differentiation through reliability and performance. I guess, can you talk about the opportunities you're seeing, You're seeing some of the investments you're making, the ERP system, you noted some digital and automated tools to kind of cement. I guess that vision for differentiation you see across the platforms?

Speaker 2

Yes. Let me hit it generally and then I'll give you some specific examples. This continual improvement, continual investment in our business is in our minds extremely important. It's kind of like compounding and investing. When we're investing capital continually and wisely in our business, It becomes incrementally stronger, kind of like your bank account does as you continue to put money in there and compound.

Speaker 2

So we love the notion of continuing to invest in ourselves and building a better company in the process. If we don't, it's there's an engineering term called entropy, that basically means everything So your processes drift. You don't have as well trained employees And ultimately, you have lower performance. In investing, inflation is that entropy. If you're not continuing to invest, The value of your investment starts to become less.

Speaker 2

So They kind of go hand in hand, which is really kind of interesting. So we are continuing to invest in Just last year, we put some significant money into Barber Nichols to expand Their capacity to support the Mark 48 program. And that Facility, our GM, Matt Malone in Denver has told me that, that facility is within a week of going live. The Navy is excited about it. Our customer, our direct customer SAIC is really excited about it.

Speaker 2

And essentially that kind of foresight of investing in that Is going to serve the Navy well as geopolitical tensions continue to rise and we've all read more and more about that. So that was one investment that we've made. Another one is on this automated welding Equipment and as we've got more and more manufacturing expertise within Graham to review our process review our product and kind of look at areas to expand. We've identified in these really Tough wells that are hard for a person to actually follow a very complex weld And be very, very consistent. We think that the automated welder welding equipment And so this investment where it makes the most sense, where you can get good payback By investing in equipment like that is extremely important.

Speaker 2

The ERP And as we can automate this more and more, and be working with the same information Throughout the value add process, the quicker it goes and the less mistakes there are. And so we're really excited about being able to upgrade the ERP system in Batavia. We think that It's going to have a significant improvement on the flow of product through our factory as well as reduce Some of the mistakes or process reworks essentially that we have seen. So that whole information realm is getting tougher and tougher As our customers are wanting high compliance equipment and they want the proof To back it up that it is high compliance. And so there's a ton of information that goes along with our hardware And making it available and tractable and findable and communicable within a A digital platform is really important.

Speaker 2

And so we continue to think about people and process And systems and investments in those. And then we've got our business unit saying And product, don't forget about the product because we have some really cool opportunities. And so to Chris' point, there are a ton Of organic growth opportunities in front of us that we believe that we can Give stockholders a really nice return on investment as we allocate that capital appropriately.

Speaker 6

Excellent. And actually the follow-up I had was on this new opportunity or I guess expanded opportunity you guys are seeing with the geothermal Lithium, curious what the potential funnel or kind of magnitude of market opportunity, you guys are seeing there. And then I guess broadly with all the Developments in new energy and potentially the traditional energy markets coming back. Yes, I guess how you're thinking about resources prioritization, Both capacity and personnel across the organization?

Speaker 2

Yes, it's a great question. As you Show the world that you're more and more capable, people want more out of you. And it does come down to prioritization and choosing The best programs to go after, the ones that have Strategic importance, the ones that you can price higher for the benefit of higher returns for our shareholders, Those are the ones that we're kind of focusing on right now. Again, you kind of point out some really cool opportunities So that hydrogen, the geothermal power has been around for a long, long time, but coupling it with This lithium extraction all of a sudden makes that a lot better for investors in those processes because There's additional yield other than the power that comes out of that process. Being able to be flexible, work with your customers to develop new equipment that's better suited These new applications that come out, including hydrogen, are ultimately, what we are trying to do As a business is make sure that we have that really strong capability, the ability to work with our customers to develop new product, modify existing product, and follow them into some of these awesome opportunities.

Speaker 2

So it's Lot of opportunity and it comes down to prioritization and picking the right opportunities that benefit us long term, I. E. Strategic As well as the highly profitable ones that benefit our stockholders.

Speaker 3

And Brett, just to address your comment about resources, right? We really have a top notch human resources function Within Graham at both, our Vada and our Batavia locations, since last year, we increased our total workforce by 10% and we increased our welding workforce by 25%, All that in a very difficult market. So we're going to continue to look for different ways to such as our welder training program and some of the other apprenticeship programs that we have in place and working With our local community colleges and trade schools and we're really excited about some of the opportunities That we have in front of us and that's going to allow us to achieve this growth.

Speaker 6

Excellent. Thanks so much, Chris and Dan.

Speaker 3

Yes. Thanks, Brett.

Operator

Our next question comes from the line of Bill Baldwin with Baldwin Anthony Securities. Please proceed with your question.

Speaker 7

Thank you very much. I've got a couple of areas here I'd like to focus on, if I could, Dan and Chris. On the aftermarket business, primarily almost entirely a domestic business for Graham In the refining and petrochemical area?

Speaker 6

Yes. Yes.

Speaker 7

And Is that heavily weighted towards the refining side? Would that comprise the majority of the aftermarket would be on Petroleum Refining?

Speaker 3

And petrochemical, yes.

Speaker 7

So how would that break out between petrochemicals and petroleum Refinery roughly just half and half or?

Speaker 2

It's going to be heavier towards the refinery bill. You're exactly right. I don't know that we have that Breakdown between the Yes. Yes. Yes.

Speaker 7

Well, I'm just trying to get a feel for how the business breaks out. Is most of your inquiries as far as Aftermarket Bendis going forward, is that primarily weighted to petroleum refineries? Is that where the heavy inquiries are? And where you would expect the Every year capital projects that eventually unfold would be on the refinery side.

Speaker 2

Yes. Historically, the majority of our equipment Has been on the refinery side and we would expect that the aftermarket inquiry follows that, because that's the source, the installed base is the source.

Speaker 7

Right, Right. Yes, absolutely. With your very strong order picture there in aftermarket, How are you performing on the execution side, would you say, Dan and Chris? Are you pretty much on time with your deliveries and so forth on that? Or is that a Here again, as raw material and labor shortage is impacting the ability to handle that business as efficiently as you'd like to.

Speaker 3

Yes, you hit the nail right on the head, Bill. Our on time delivery isn't where we'd like it to be because of Labor and the long lead times. However, we're firing on all cylinders with regards to aftermarket. In the current quarter, we had $7,100,000 of aftermarket sales, which is a record for us. So the team continues to execute and is just really firing on all cylinders at right now.

Speaker 3

And we're looking forward to what they can do Once maybe some of these external forces free up and we get some of these process improvement and productivity initiatives in place.

Speaker 7

So you think compared to your competition now, would you say that You're definitely competitive and you're likely not to lose any potential business going forward because of These issues are on delivery right now.

Speaker 2

Yes. I think everybody is struggling in some areas with supply chain. And So some of the forgings that a lot of the forging houses are struggling quite a bit right now. Right. You end up kind of seeing some weirdness around some of the specialty materials like baskets For instance, and so specialty fastener companies are struggling quite a bit.

Speaker 2

They end up being High tolerance, high in some cases, high strength, High compliance types of components and people are struggling with those. And so it's Kind of weird, Bill. We see raw material, the pricing being a whole lot more stable, a little bit longer in Can't buy that and can't get that in house for 6 months. And people's Inventory is not built up very well yet. And so we're still running into challenges in supply chain and

Speaker 3

But as you know, Bill, none of these challenges are unique to us. It's everyone that's experienced.

Speaker 7

Right, right. Regarding the lumpiness of your cash flow, it looked like your unbilled revenues were pretty large. But that as you collect on those revenues, won't that offset quite a bit your customer deposit Situation, I mean, customer deposits were a big source of revenues, but unbilled revenues were kind of a drain on you.

Speaker 3

Yes, absolutely.

Speaker 7

So does that kind of balance out over time, in terms of your cash

Speaker 3

flow? Yes, we think we have some Upside on the unbilled levels as you astutely pointed out, that's been one of the areas of focus Mine as well as the team ever since I started and we think that's going to start to free up over the course of this year and will definitely be a positive cash As far as our cash flows though, given the size of these contracts and these customer deposits and Changes in the unbilled revenue, we do expect our cash flows to be very lumpy. But over time, I think if you take a look at our EBITDA levels, that's More reflective of the cash that we're generating. It just is very lumpy in nature. Over time, we'll be improving and increasing.

Speaker 7

And lastly, can you wrap any potential Numbers around the earn out liability post 2024. Sure. Is there a cap on that? I know you announced something on that quite

Speaker 3

a while back. No, it's publicly released, so we can certainly talk about it. Right.

Speaker 7

I couldn't locate it, so

Speaker 3

I'm asking

Speaker 7

you all the courage.

Speaker 3

Yes, no problem. Let me walk you through it. So it's a 3 year program starting in our fiscal 2024. So fiscal 2024, 2025, 2025, 2026. The threshold level is $2,000,000 and up to a max of $4,000,000 each year.

Speaker 3

So over the 3 year period, A max $6,000,000 to $12,000,000 in potential additional payouts, in addition to the Normal employee bonuses and this was all negotiated shortly after the acquisition is all related Right.

Speaker 7

I remember that. Remember that. Yes. I just couldn't find the details on it.

Speaker 3

There's a growing EBITDA target. So for fiscal 2024, The target is $8,750,000 and then that goes up to $9,500,000 for fiscal 2025 And $10,500,000 for fiscal 2026. So even though it is going to be a higher expense, We're going to get it we're going to see a higher EBITDA level that goes along with it. So it's all performance based.

Speaker 7

Okay. That's what I was looking for. Well, you fellows and your team are doing a heck of a job in building the company here. So Congratulations and best of success.

Speaker 3

Thank you, Bill. Thanks, Bill.

Operator

Our next Question comes from the line of Gary Schwab with Valley Forge Capital Management. Please proceed with your question.

Speaker 8

Yes. Hi, Dan, Chris. Great job, Like everybody has said, a question about the lithium on the direct lithium extraction. Are you there's a number of companies that are involved with this. Are you talking with any other companies in the U.

Speaker 8

S. Or overseas?

Speaker 2

So in general, I would say that we talk to a lot of different companies that need answers for their power cycle. So yes, we do end up talking to quite a few of those folks. The Salton Sea application is unique. It's really kind of exciting. So this is the first one that we're providing equipment for.

Speaker 2

And when it's successful, I know that our Customer wants to repeat it, and they've talked about that in the press. So I think that there's this ongoing opportunity to continue to Again, geothermal power is a low margin endeavor. It is tough To make money in geothermal power, coupling this lithium extraction with that process It's really kind of nice from an economic perspective, but the process itself is a lot cleaner and more efficient Then the standard, put it all out into a lake bed and start to evaporate water. So it's pretty cool, and it's fun to be connected with that for a lot of different reasons.

Speaker 8

Okay. You mentioned hydrogen, I think, 3 times in the presentation, but you really didn't expand on that. Can you what kind of projects are you working on in hydrogen? Yes.

Speaker 2

So hydrogen, as you know, It can be pretty challenging. First of all, it's cold in It's liquid form. And then from a material perspective, there's a limited Types of material that you can use in hydrogen. And so it ends up being some pretty specialty equipment that is used in Hydrogen operations. So Barber Nichols is a turbo machinery house and they have built cryogenic pumps for gosh Over 40 years.

Speaker 2

And so Barbara Nichols has been involved in providing cryogenic pumps, liquid, Oregon, hydrogen, helium, all types of stuff. And with the major air products players have supplied Turbomachinery to those major air products types of players. And so we see opportunities from them and I can't name anything specific, but we see opportunities with them to provide Turbomachinery. And then Graham has some unique heat exchange capability with the HeLaFlo Heat exchanger that can handle some really extreme temperature ranges. And it's very applicable to hydrogen And so, again, we have been supplying these heat exchangers to various companies That are involved in the production, the transportation, the distribution, fueling side The hydrogen economy and everybody is kind of working on their best solution to enabling the hydrogen economy.

Speaker 2

As you've seen, there's a lot of chatter in this market and people are spending some big dollars to invest in it and develop the capability to support it. And so we're in there And we're participating, still too early to say what will come out of it. But again, a great place to be At this point in time.

Speaker 8

Okay, great. Let me just ask a couple of bookkeeping questions. On the Kay, you said there remains approximately $1,000,000 to $2,000,000 in potential additional exposure. We're talking about Virgin Orbit related to the space customer. Depending on the outcome of these proceedings and the asset sales, depending on the outcome of these proceedings and the asset sale, it says, however, at this time, the company does not So does that mean that the $1,000,000 to $2,000,000 could be recaptured?

Speaker 3

Yes. I know it's a little bit confusing, Gary. So let me walk you So during the quarter, we reserved $3,100,000 for inventory and accounts receivable related to Virgin Orbit. That $3,000,000 charge resulted in a $600,000 reduction in performance based compensation Since all our bonus programs are performance based. So the net impact to the quarter and the year was 2,500,000 As you know, bankruptcy proceedings are complicated and they take some time to work themselves out.

Speaker 3

So we still have a little bit of exposure left on our balance sheet, which we feel very comfortable with what we reserved during the quarter. But again, these proceedings and us being able to capture value from what we have left on our balance sheet It is uncertain, but we feel very comfortable with where we're reserved at the end of the quarter and don't see any more impact For 2024, but never say never. So we wanted to at least put that qualifier out there.

Speaker 8

Okay. So there's no recapture, you just don't expect any more reserve?

Speaker 3

Yes. So let's say the team is 100% focused on this. And if there is an ability to recapture, we're going to recapture, we're going to try to go after it, we're going to get it recaptured, but it's just too soon to tell and we wanted to make sure that we are adequately reserved.

Speaker 8

Okay. And then one last thing, in the Q3, you were talking about your backlog and you said that of that backlog 40% to 50% should be converted in 12 months. Now this quarter, you're saying that you want going from 40% to 50% to 50% to 55%. What sped up the delivery schedule?

Speaker 3

It's just the mix of the contracts that we have out there. As you recall, in the Q3, We had some larger defense programs that we received, which we're not going to work on until like fiscal 24 through fiscal 2026, so that extended it out a little bit. But then in the current quarter, we received The Mark 48 modification, so that brought it back in a little bit. So, those numbers typically won't Shift too much over time, but can vary a little bit. But typically, we see around that 50% level that's going to convert

Speaker 8

Okay. And actually, there is one other thing. In the Artemis, they've been talking about the Artemis Moon program, Scheduled for 24 and then 25. Is Barbara Nichols involved in that in any way?

Speaker 2

You stumped me on that one. I don't think so, but I don't know that for sure.

Speaker 8

Okay. All right. Well, that's all I have. Thanks very much.

Speaker 2

Thanks, Gary.

Operator

We have no further questions at this time. I would like to turn the floor back over to management for closing comments.

Speaker 2

Thank you. Thank you everybody for your time. I just want to reiterate the 3 key themes we hope you take away from our call. First, we are delivering on our promises and while we have several years to achieve our fiscal 2027 goals, We are demonstrating our ability to get there. 2nd one is we have successfully diversified the business and have expanded our customer base.

Speaker 2

Even with the event, with our 1 space customer, we're able to absorb that and still deliver for the year. 3rd is, we have a large opportunity set in front of us, and we have the strategy and team to continue to drive growth and improve profitability. I hope you all enjoy the rest of your day. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today's teleconference.

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Earnings Conference Call
Graham Q4 2023
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