- Third quarter sales increased 39%, or $11.1 million, to $39.9
million over prior-year period reflecting solid execution on strong
demand from defense, refining aftermarket and space markets
- Shipped fourth first article unit to U.S. Navy and remain on
schedule to deliver remaining first article units by the end of the
second quarter of fiscal 2024
- Achieved net income of $368 thousand, or $0.03 on a per diluted
share basis
- Strong cash generation in quarter of $9 million included
customer deposits received for materials on large defense
projects
- Reduced debt by $5 million; bank leverage ratio down to 2.5x
debt to adjusted EBITDA*
- Raising fiscal 2023 revenue guidance to $145 million to $155
million and tightening adjusted EBITDA* range to between $7.5
million and $8.5 million
- Remain on track to reach strategic goals of $200 million in
revenue and 10% to 15% adjusted EBITDA* in 2027
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 third quarter and nine-month period ended
December 31, 2022 (“third quarter fiscal 2023”).
Daniel J. Thoren, President and CEO, commented, “Our third
quarter results reflect solid execution and demonstrate continual
steady progress as we increase our sales and improve profitability.
We have built a strong backlog of defense business, as we
strengthen our position in commercial aftermarket and increase our
presence in the growing space industry. We believe we are also now
better prepared to take advantage of a rebound in demand from our
commercial refining and petrochemical markets. Importantly, our
operations are finding a rhythm to deliver to plan while we expand
in areas where we expect more growth.”
He added, “While orders in the quarter of $20 million were soft,
we believe it is primarily due to timing and a reflection of the
general ebb and flow of large projects being released. The trailing
twelve-month orders of $175.5 million and 114% book-to-bill ratio
are a better representation of our growth and future potential.
This is especially true given the large value of repeat orders we
have received for critical U.S. Navy projects which we believe
validates our position as a key supplier for the defense
industry.”
Third Quarter Fiscal 2023 Financial
Results Review
(All comparisons are with the same
prior-year period unless noted otherwise.)
($ in millions except per share data)
Q3 FY23 Q3
FY22 $ Change Net sales
$
39.9
$
28.8
$
11.1
Gross profit
$
6.2
$
0.6
$
5.6
Gross margin
15.6%
1.9%
Operating income
$
0.7
$
(4.6)
$
5.3
Operating margin
1.7%
(15.9%)
Net income (loss)
$
0.4
$
(3.7)
$
4.1
Diluted earnings (loss) per share
$
0.03
$
(0.35)
$
0.38
Adjusted net income (loss)*
$
0.9
$
(2.9)
$
3.8
Adjusted diluted earnings (loss) per share*
$
0.08
$
(0.27)
$
0.35
Adjusted EBITDA*
$
2.2
$
(2.6)
$
4.8
Adjusted EBITDA margin*
5.6%
(9.0%)
*Graham Corporation believes that adjusted EBITDA (defined as
consolidated net income (loss) 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, GHM’s credit facility also
contains ratios based on adjusted EBITDA as defined in the lending
agreement. GHM also believes that adjusted diluted earnings (loss)
per 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 GHM’s use of adjusted
EBITDA, adjusted EBITDA margin and adjusted diluted earnings (loss)
per share, as well as the reconciliation of net income (loss) to
adjusted EBITDA and diluted earnings (loss) per share.
Sales (see supplemental financial information for detail
of sales by industry and region)
- Overall year-over-year growth in the quarter of $11.1 million
represents a 39% increase over the prior-year period. Revenue in
last year’s third quarter was impacted by challenges with execution
on first article U.S. Navy projects.
- Defense revenue grew $5.1 million reflecting achievement of
project milestones, as well as improved execution on large
contracts.
- Refining revenue was up $2.5 million driven by higher
aftermarket sales as the Company proactively works to drive
demand.
- Space revenue grew $2.1 million from increased demand.
Profits and Margins
- Gross profit and margin improved significantly over the
prior-year period which had been impacted by higher-than-expected
costs related to execution challenges with first article U.S. Navy
projects and related labor and material cost overruns in GHM’s heat
transfer business. Year-over-year profit and margin expansion was
the result of an improved mix of sales related to higher margin
projects, as well as better execution and pricing on defense
contracts. Sequentially, gross profit improved 18% on a 5% increase
in revenue as a result of continued improvement in execution, mix,
and better overhead absorption with higher volume. Margin continues
to reflect lower margin orders received several years ago from the
U.S. Navy that are expected to be completed by the end of the
second quarter of fiscal 2024.
- Selling, general and administrative (“SG&A”) expense,
excluding intangible amortization, was $5.3 million, up 12% or
approximately $555,000. SG&A expense as a percentage of sales
improved to 13.3% compared with 16.4% in the comparable period in
fiscal 2022.
Net Income and Adjusted EBITDA
- Net Income was $368 thousand in the quarter, or $0.03 per
diluted share.
- Adjusted EBITDA of $2.2 million in the quarter grew $4.8
million versus the loss in the prior-year period. The improvement
was driven by increased sales, improved execution, and strong cost
discipline. The Company is strategically focused on expanding its
EBITDA margins with a 2027 goal of 10% to 15%.
Cash Management and Balance Sheet
- Capital expenditures were $1.2 million in the quarter and $2.4
million for the nine-month period. The Company continues to expect
capital expenditures to be approximately $3 million to $4 million
for fiscal 2023.
- Cash flow from operations during the fiscal 2023 third quarter
were $9.3 million and reflects $8.0 million of customer deposits
for materials required for defense contracts.
- Total debt at the end of the quarter was $14.2 million, down
from $18.4 million at March 31, 2022 and $19.1 million at September
30, 2022.
Christopher J. Thome, Vice President-Finance and CFO, noted, “We
are focused on generating cash to reduce debt and invest in organic
growth opportunities. In fact, we further strengthened our balance
sheet and enhanced our financial flexibility in the quarter with a
$5 million reduction in debt.”
Orders and Backlog (See supplemental information filed
with the Securities and Exchange Commission on Form 8-K and
provided on the Company’s website for a further breakdown of orders
and backlog by industry.)
($ in millions)
Q1 22 Q2 22 Q3 22
Q4 22 FY22 Q1 23 Q2
23 Q3 23 Orders
$ 20.9
$ 31.4
$ 68.0
$ 23.7
$ 143.9
$ 40.3
$ 91.5
$ 20.0
Backlog
$ 235.9
$ 233.2
$ 272.6
$ 256.5
$ 256.5
$ 260.7
$ 313.3
$ 293.7
Orders for the fiscal 2023 third quarter were down $48.0
million, or 71%, to $20.0 million primarily as a result of timing
related to large value contracts. For the nine-month period, orders
were $151.9 million and the book-to-bill ratio was 133%.
- Defense industry orders of $7.8 million were down due to
variability in timing of large contracts. Defense backlog was
$234.5 million at the end of the third quarter and is expected to
ship over the next three to four years.
- While total refining orders of $3.8 million declined $4.6
million year-over-year, commercial aftermarket demand was up 6%.
The Company believes commercial aftermarket demand is a leading
indicator of demand and potential future capital market investments
by its customers.
- Space orders of $1.6 million declined $1.3 million
year-over-year as a result of variability in timing of project
orders.
Backlog of $293.7 million increased 8% compared with the
prior-year period. Approximately 40% to 50% of this backlog is
expected to convert to sales over the next twelve months and
another 20% to 30% is expected to convert in the following twelve
months. The remaining backlog is expected to convert beyond the
next two years and is for the defense industry, specifically the
U.S. Navy.
Backlog by industry on December 31, 2022, was as follows:
- 80% for defense projects
- 9% for refinery projects
- 4% for chemical/petrochemical projects
- 4% for space projects
- 3% for other industrial applications
Fiscal 2023 Outlook
GHM updated its guidance for fiscal 2023 as follows:
(as of February 6, 2023)
Updated Guidance
Previous Guidance
Revenue
$145 million to $155 million
$135 million to $150 million
Gross margin
~16%
16% to 17%
SG&A expense(1)
~15% of sales
15% to 16% of sales
Adjusted EBITDA(2)
$7.5 million to $8.5 million
$6.5 million to $9.5 million
Effective tax rate
~23%
21% to 22%
Capital expenditures
$3 million - $4 million
$3 million - $4 million
(1) SG&A expense as a % of sales includes amortization
expense (2) See “Forward-Looking Non-GAAP Measures” below for
additional information about this non-GAAP measure.
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 for the third quarter fiscal 2023,
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 2:00 p.m. ET on the
day of the teleconference through Monday, February 13, 2023 at
11:59 p.m. ET. To listen to the archived call, dial (412) 317-6671
and enter conference ID number 13735007 or access the webcast
replay via the Company’s website at https://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, www.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,” “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,
the future impact of low margin defense projects and related cost
overruns, expected expansion and growth opportunities within its
domestic and international markets, anticipated sales, revenues,
adjusted EBITDA, adjusted EBITDA margins, capital expenditures and
SG&A expenses, the timing of conversion of backlog to sales,
market presence, profit margins, tax rates, foreign sales
operations, its ability to improve cost competitiveness and
productivity, customer preferences, changes in market conditions in
the industries in which it operates, the effect on its business of
volatility in commodities prices, including, but not limited to,
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 2023 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.
FINANCIAL TABLES FOLLOW.
Graham Corporation
Consolidated Statements of
Operations - Unaudited
(Amounts in thousands, except per
share data)
Three Months Ended Nine Months Ended
December 31, December 31,
2022
2021
% Change
2022
2021
% Change
Net sales
$
39,873
$
28,774
39%
$
114,091
$
83,077
37%
Cost of products sold
33,646
28,213
19%
95,840
78,159
23%
Gross profit
6,227
561
NA
18,251
4,918
NA
Gross margin
15.6
%
1.9
%
16.0
%
5.9
%
Other expenses and income:
Selling, general and administrative
5,284
4,729
12%
15,828
14,534
9%
Selling, general and administrative – amortization
274
274
0%
821
639
28%
Other operating expense (income), net
-
140
(100%)
-
(962
)
(100%)
Operating profit (loss)
669
(4,582
)
NA
1,602
(9,293
)
NA
Operating margin
1.7
%
(15.9
%)
1.4
%
-11.2
%
Other income, net
(63
)
(111
)
(43%)
(188
)
(416
)
(55%)
Interest income
(39
)
(12
)
225%
(71
)
(43
)
65%
Interest expense
333
132
152%
768
300
156%
Income (loss) before provision (benefit) for income taxes
438
(4,591
)
NA
1,093
(9,134
)
NA
Provision (benefit) for income taxes
70
(861
)
NA
245
(1,786
)
NA
Net income (loss)
$
368
$
(3,730
)
NA
$
848
$
(7,348
)
NA
Per share data:
Basic:
Net income (loss)
$
0.03
$
(0.35
)
NA
$
0.08
$
(0.70
)
NA
Diluted:
Net income (loss)
$
0.03
$
(0.35
)
NA
$
0.08
$
(0.70
)
NA
Weighted average common shares outstanding: Basic
10,611
10,638
10,613
10,507
Diluted
10,660
10,638
10,632
10,507
Dividends declared per share
$
-
$
0.11
$
-
$
0.33
N/A: Not Applicable
Graham Corporation
Consolidated Balance
Sheets
(Amounts in thousands, except per
share data)
(unaudited)
December 31,
March 31,
2022
2022
Assets Current assets: Cash and cash equivalents
$
17,215
$
14,741
Trade accounts receivable, net of allowances ($71 and $87 at
December 31 and March 31, 2022, respectively)
35,019
27,645
Unbilled revenue
33,509
25,570
Inventories
24,077
17,414
Prepaid expenses and other current assets
1,899
1,391
Income taxes receivable
590
459
Total current assets
112,309
87,220
Property, plant and equipment, net
25,248
24,884
Prepaid pension asset
7,547
7,058
Operating lease assets
8,530
8,394
Goodwill
23,523
23,523
Customer relationships, net
10,866
11,308
Technology and technical know-how, net
9,300
9,679
Other intangible assets, net
7,955
8,990
Deferred income tax asset
2,212
2,441
Other assets
167
194
Total assets
$
207,657
$
183,691
Liabilities and stockholders’ equity Current
liabilities: Current portion of long-term debt
$
2,000
$
2,000
Current portion of finance lease obligations
17
23
Accounts payable
22,532
16,662
Accrued compensation
10,823
7,991
Accrued expenses and other current liabilities
5,204
6,047
Customer deposits
44,300
25,644
Operating lease liabilities
1,008
1,057
Income taxes payable
27
-
Total current liabilities
85,911
59,424
Long-term debt
12,184
16,378
Finance lease obligations
-
11
Operating lease liabilities
7,759
7,460
Deferred income tax liability
127
62
Accrued pension and postretirement benefit liabilities
1,665
1,666
Other long-term liabilities
2,115
2,196
Total liabilities
109,761
87,197
Stockholders’ equity: Preferred stock, $1.00 par
value, 500 shares authorized
-
-
Common stock, $0.10 par value, 25,500 shares authorized, 10,758 and
10,801 shares issued and 10,611 and 10,636 shares outstanding at
December 31 and March 31, 2022, respectively
1,076
1,080
Capital in excess of par value
28,119
27,770
Retained earnings
77,924
77,076
Accumulated other comprehensive loss
(6,597
)
(6,471
)
Treasury stock (147 and 164 shares at December 31 and March 31,
2022, respectively)
(2,626
)
(2,961
)
Total stockholders’ equity
97,896
96,494
Total liabilities and stockholders’ equity
$
207,657
$
183,691
Graham Corporation
Consolidated Statements of
Cash Flows – Unaudited
(Amounts in thousands)
Nine Months Ended
December 31,
2022
2021
Operating activities: Net income (loss)
$
848
$
(7,348
)
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities: Depreciation
2,611
2,232
Amortization
1,857
1,765
Amortization of actuarial losses
504
725
Amortization of debt issuance costs
153
-
Equity-based compensation expense
582
599
Gain on disposal or sale of property, plant and equipment
-
22
Change in fair value of contingent consideration
-
(1,900
)
Deferred income taxes
232
152
(Increase) decrease in operating assets: Accounts receivable
(7,755
)
(10,964
)
Unbilled revenue
(8,082
)
2,186
Inventories
(6,801
)
579
Prepaid expenses and other current and non-current assets
(500
)
(933
)
Income taxes receivable
(137
)
(3,423
)
Operating lease assets
913
744
Prepaid pension asset
(488
)
(905
)
Increase (decrease) in operating liabilities: Accounts payable
5,511
(6,058
)
Accrued compensation, accrued expenses and other current and
non-current liabilities
2,116
465
Customer deposits
18,776
7,553
Operating lease liabilities
(802
)
(663
)
Long-term portion of accrued compensation, accrued pension
liability and accrued postretirement benefits
(592
)
620
Net cash provided (used) by operating activities
8,946
(14,552
)
Investing activities: Purchase of property, plant and
equipment
(2,394
)
(1,909
)
Redemption of investments at maturity
-
5,500
Acquisition of Barber-Nichols, LLC
-
(59,563
)
Net cash used by investing activities
(2,394
)
(55,972
)
Financing activities: Borrowings of short-term debt
obligations
5,000
9,750
Principal repayments on debt
(8,517
)
(1,015
)
Proceeds from the issuance of debt
-
20,000
Repayments on lease financing obligations
(205
)
(157
)
Payment of debt issuance costs
(122
)
(150
)
Dividends paid
-
(3,524
)
Purchase of treasury stock
(22
)
(41
)
Net cash (used) provided by financing activities
(3,866
)
24,863
Effect of exchange rate changes on cash
(212
)
120
Net increase (decrease) in cash and cash equivalents
2,474
(45,541
)
Cash and cash equivalents at beginning of period
14,741
59,532
Cash and cash equivalents at end of period
$
17,215
$
13,991
Graham Corporation
Adjusted EBITDA Reconciliation
- Unaudited
($ in thousands)
Three Months Ended
Nine Months Ended
December 31,
December 31,
2022
2021
2022
2021
Net income (loss)
$
368
$
(3,730)
$
848
$
(7,348)
Acquisition related inventory step-up expense
-
27
-
68
Acquisition & integration costs
-
111
54
373
Change in fair value of contingent consideration
-
-
-
(1,900)
CEO and CFO transition costs
-
140
-
938
Debt amendment costs
-
-
194
-
Net interest expense
294
120
697
257
Income taxes
70
(861)
245
(1,786)
Depreciation & amortization
1,506
1,589
4,468
3,997
Adjusted EBITDA
$
2,238
$
(2,604)
$
6,506
$
(5,401)
Adjusted EBITDA margin %
5.6%
(9.0%)
5.7%
(6.5%)
Adjusted Net Income (Loss) and
Adjusted Diluted Earnings (Loss) per Share
Reconciliation -
Unaudited
($ in thousands, except per share
amounts)
Three Months Ended
Nine Months Ended
December 31,
December 31,
2022
2021
2022
2021
Net income (loss)
$
368
$
(3,730)
$
848
$
(7,348)
Acquisition related inventory step-up expense
-
27
-
68
Acquisition & integration costs
-
111
54
373
Amortization of intangible assets
619
756
1,857
1,765
Change in fair value of contingent consideration
-
-
-
(1,900)
CEO and CFO transition costs
-
140
-
938
Debt amendment costs
-
-
194
-
Normalize tax rate(1)
(130)
(207)
(442)
(249)
Adjusted net income (loss)
$
857
$
(2,903)
$
2,511
$
(6,353)
GAAP diluted earnings (loss) per share
$
0.03
$
(0.35)
$
0.08
$
(0.70)
Adjusted diluted earnings (loss) per share
$
0.08
$
(0.27)
$
0.24
$
(0.60)
Diluted weighted average common shares outstanding
10,660
10,638
10,632
10,507
(1) Applies a normalized tax rate to non-GAAP adjustments,
which are pre-tax, based upon the full year expected effective 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 Corporation believes
that providing non-GAAP information, such as Adjusted EBITDA and
Adjusted EBITDA margin, is important for investors and other
readers of GHM's financial statements, as it is used as an
analytical indicator by Graham's management to better understand
operating performance. Moreover, GHM’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 diluted earnings (loss)
per 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
diluted earnings (loss) per share are not measures determined in
accordance with GAAP and may not be comparable with the measures
used by other companies. Nevertheless, GHM believes that providing
non-GAAP information, such as adjusted net income and adjusted
diluted earnings (loss) per 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 diluted earnings (loss) per
share to the historical periods' net income (loss) and diluted
earnings (loss) per share. GHM also believes that adjusted earnings
(loss) per 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/20230206005159/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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