Graham Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2023, fiscal 2024. The request metadata identifies “2022 Q2,” but the supplied filing is the September 30, 2023 Form 10-Q and compares results with September 30, 2022.
Business Context
Graham designs and manufactures mission-critical fluid, power, heat-transfer, vacuum, pump, turbomachinery and related technologies for defense, space, energy and process markets. The company is increasing its exposure to defense, particularly U.S. Navy programs, while traditional refining and petrochemical markets remain cyclical and commercial space demand remains uncertain.
Defense represented 56% of second-quarter sales, 52% of first-half sales and 80% of backlog at September 30, 2023.
Financial Performance and Position
| Metric | Three months ended September 30, 2023 | Three months ended September 30, 2022 | Six months ended September 30, 2023 | Six months ended September 30, 2022 |
|---|---|---|---|---|
| Net sales | $45.1 million | $38.1 million | $92.6 million | $74.2 million |
| Gross profit | $7.2 million | $5.3 million | $18.2 million | $12.0 million |
| Gross margin | 16% | 14% | 20% | 16% |
| Operating income (loss) | $0.8 million | $(0.1) million | $4.5 million | $0.9 million |
| Net income (loss) | $0.4 million | $(0.2) million | $3.1 million | $0.5 million |
| Diluted EPS | $0.04 | $(0.02) | $0.28 | $0.05 |
| Adjusted EBITDA | $2.7 million | $1.5 million | $8.3 million | $4.3 million |
| Adjusted EBITDA margin | 6.0% | 4.0% | 9.0% | 5.8% |
Liquidity and capital: Cash and equivalents were $25.8 million at September 30, 2023, versus $18.3 million at March 31, 2023. Working capital was $26.3 million, with a 1.3 current ratio. Operating cash flow was $11.9 million for the first six months, compared with cash used of $0.4 million in the prior-year period. Capital expenditures were $3.3 million; full-year fiscal 2024 capital expenditures are expected at approximately $12.0 million to $13.5 million.
Debt and availability: At September 30, 2023, the Bank of America term loan had $11.5 million of principal outstanding, with $2.0 million classified as current. No revolver borrowings were outstanding, and $27.6 million was available under the prior revolving facility, subject to covenants. Total letters of credit outstanding were $10.6 million.
Contract position: Backlog was $313.3 million at September 30, 2023. Management expects approximately 50% of backlog to convert to revenue within one year, 25% to 30% in one to two years, and the remainder thereafter. Net contract liabilities were $24.6 million, primarily reflecting customer deposits.
Material Changes Versus Prior Comparable Period
- Second-quarter sales increased 18%, and first-half sales increased 25%, primarily from higher defense sales and stronger commercial aftermarket activity.
- Defense sales increased $10.3 million in the second quarter, supported by project mix, direct labor, execution, material timing and pricing.
- Gross margin improved to 16% in the quarter and 20% for the first half, compared with 14% and 16%, respectively, due primarily to higher-margin defense and aftermarket work.
- Results included $0.8 million of BN Performance Bonus expense in the quarter and $1.6 million for the first six months. SG&A increased 20% in the quarter and 23% in the first half, while remaining 14% and 15% of sales, respectively.
- Quarterly orders declined to $36.5 million from $91.5 million, primarily because of the timing of large defense orders. First-half orders were $104.4 million, producing a 1.1x book-to-bill ratio.
- Space sales and backlog declined, partly due to the April 2023 Chapter 11 bankruptcy of Virgin Orbit. Space backlog was $7.3 million, down 45% from the prior-year period.
Guidance, Outlook and Unusual Items
- Fiscal 2024 guidance: sales of $170 million to $180 million; gross margin of 18% to 19%; SG&A of 15% to 16% of sales; effective tax rate of 22% to 23%; and adjusted EBITDA of $11.5 million to $13.5 million.
- Guided adjusted EBITDA excludes approximately $2.5 million to $4.0 million of BN Performance Bonus and ERP conversion costs and approximately $0.7 million of debt extinguishment charges.
- On October 13, 2023, the company repaid the $11.5 million term loan, terminated its Bank of America facilities and entered into a new five-year Wells Fargo revolving facility. The facility provides $35 million immediately, expandable to $50 million upon specified conditions, and carries a maximum total leverage ratio of 3.50 to 1.00.
- The refinancing resulted in repayment of a $0.725 million exit fee and an approximately $0.650 million debt extinguishment charge.
- Management announced approximately $110 million of October 2023 orders, primarily follow-on U.S. Navy orders, expected to begin converting to revenue in the fourth quarter of fiscal 2025 through early fiscal 2030.
- Management expects fiscal 2027 revenue above $200 million and adjusted EBITDA margins in the low-to-mid teens, subject to capacity, supply-chain, subcontractor and market assumptions.
Risks and Contingencies
- Revenue recognition on larger contracts depends on estimates of labor hours, total costs and operational milestones; revisions can affect current-period revenue and earnings.
- Defense concentration and long conversion cycles create customer, program timing and execution risks.
- Traditional energy markets face uncertain recovery and challenging pricing, while space customers may lack funding or profitability.
- The company remains exposed to inflation, supply-chain disruption, geopolitical events, foreign exchange movements and variable interest rates.
- The company is defending asbestos-related personal injury lawsuits and other ordinary-course claims. Management cannot estimate potential losses for most claims but does not currently expect a material adverse effect.
- Approximately $7 million of cash was used to secure letters of credit, and approximately $2.1 million was held by foreign subsidiaries at September 30, 2023.
Investor Verification Points
- Reconcile reported GAAP earnings with adjusted earnings, particularly the BN Performance Bonus, intangible amortization and debt-related charges.
- Monitor conversion of the $313.3 million backlog and the timing and profitability of the approximately $110 million of October defense orders.
- Verify compliance with the Wells Fargo facility’s leverage and fixed-charge coverage covenants and the conditions for expanding availability to $50 million.
- Assess customer deposits, unbilled revenue, contract estimates and operating cash flow sustainability.
- Track defense concentration, Virgin Orbit-related space exposure, commercial aftermarket trends and the company’s ability to achieve fiscal 2024 guidance.
- Review the pending litigation, letters of credit, customer cancellation provisions and supply-chain and geopolitical exposures.