Graham Corporation — Form 10-Q Summary
Reporting period: Quarterly period ended December 31, 2023; fiscal year ending March 31, 2024. The supplied filing is for fiscal 2024 third quarter, not 2022 Q3 as indicated in the request metadata. Financial statements are unaudited and amounts are in thousands, except per-share data.
Business Context
Graham designs and manufactures mission-critical vacuum, heat-transfer, pump, turbomachinery, fluid-transfer and related technologies for defense, space, energy, chemical and petrochemical markets. The company is increasingly weighted toward U.S. defense programs. Defense represented 84% of backlog at December 31, 2023.
On November 9, 2023, Graham acquired P3 Technologies, LLC, a custom turbomachinery engineering and manufacturing business serving the space, new energy and medical industries. P3 is managed through Barber-Nichols.
Financial Performance
| Metric | Q3 FY2024 | Q3 FY2023 | 9M FY2024 | 9M FY2023 |
|---|---|---|---|---|
| Net sales | $43,818 | $39,873 | $136,463 | $114,091 |
| Gross profit | $9,723 | $6,227 | $27,891 | $18,251 |
| Gross margin | 22% | 16% | 20% | 16% |
| Operating income | $911 | $669 | $5,398 | $1,602 |
| Net income | $165 | $368 | $3,216 | $848 |
| Diluted EPS | $0.02 | $0.03 | $0.30 | $0.08 |
| Adjusted EBITDA | $3,852 | $2,238 | $12,161 | $6,506 |
| Adjusted EBITDA margin | 8.8% | 5.6% | 8.9% | 5.7% |
Third-quarter sales increased 10%, including $1,027 from P3; organic growth was 7%. Defense sales rose $2,643, supported by project mix, execution, labor, material availability and pricing. Commercial aftermarket sales increased approximately $3,000. Space sales declined $579 because of project timing and the loss of Virgin Orbit, partly offset by P3 revenue.
GAAP profitability was reduced by $1,264 of BN Performance Bonus expense, $744 of debt refinancing costs, $274 of P3 acquisition costs, $56 of ERP implementation costs and increased amortization. Management reported adjusted net income of $2,424, or $0.22 per diluted share, compared with $857, or $0.08, in the prior-year quarter. For the first nine months, adjusted net income was $7,369, or $0.68 per diluted share, compared with $2,511, or $0.24.
Cash Flow, Liquidity and Debt
- Cash and cash equivalents were $15,163 at December 31, 2023, compared with $18,257 at March 31, 2023.
- Operating cash flow for the first nine months was $19,483, compared with $8,946 in the prior-year period.
- Capital expenditures were $5,193 through nine months, compared with $2,394 previously. Fiscal 2024 capital expenditures are expected to be $8,000 to $10,000.
- Cash uses included $6,812 for the P3 acquisition, $5,193 of capital expenditures and $9,522 of net debt repayments.
- Working capital was $11,743, with a current ratio of 1.1 at December 31, 2023, compared with $23,904 and 1.3 at March 31, 2023.
- The company replaced its Bank of America term loan and revolving facility with a five-year Wells Fargo revolving facility. The facility provides $35,000 initially and may increase to $50,000 upon satisfaction of specified conditions.
- Borrowings were $3,000, letters of credit under the new facility were $666, and borrowing availability was $31,333, subject to covenants. Total letters of credit outstanding were $7,914.
- Graham was in compliance with its financial covenants; reported leverage was 0.6x versus a maximum total leverage ratio of 3.5x.
Material Changes and Outlook
- Orders were a record $123,267 in the quarter and $227,665 for the first nine months. The nine-month book-to-bill ratio was 1.7x.
- Backlog increased 36% to $399,244 from $293,671 at December 31, 2022. Defense backlog was $334,455, or 84% of total backlog.
- Major defense orders included approximately $103,233 related primarily to Columbia Class submarine and Ford Class carrier programs. These orders are expected to begin converting to revenue in the fourth quarter of fiscal 2025 through early fiscal 2030.
- Approximately 40% of backlog is expected to convert to revenue within one year, 25% to 30% in one to two years, and the remainder thereafter.
- Fiscal 2024 guidance remains sales of $175 million to $185 million, gross margin of approximately 20%, SG&A of approximately 16% to 17% of sales, tax rate of 22% to 23% and adjusted EBITDA of $15 million to $16 million.
- Management continues to target fiscal 2027 average annual organic revenue growth of 8% to 10% and adjusted EBITDA margins in the low-to-mid teens.
Risks, Contingencies and Unusual Items
- The company faces asbestos-related personal injury lawsuits and other ordinary-course claims. Management states that outcomes are not determinable for most claims but does not expect a material consolidated impact.
- An investigation into a whistleblower complaint involving Graham India identified misconduct totaling $150 over four years. Employees involved were terminated, controls were strengthened, and the findings were voluntarily reported to Indian authorities, the U.S. Department of Justice and the SEC. Investigation costs were approximately $750 through nine months.
- The P3 acquisition carries integration, retention, control, unknown-liability and contingent earn-out risks. The purchase price was $10,494, including $2,117 of stock and $7,098 of cash; a $2,040 contingent earn-out liability was recorded, with potential additional consideration of up to $3,000.
- Space-market demand remains uncertain, including customer financial-health risk following Virgin Orbit’s bankruptcy. Traditional energy capital spending and pricing also remain challenging.
- Variable-rate debt exposes the company to interest-rate risk. A 100-basis-point change on the $3,000 of variable-rate debt outstanding would affect fiscal 2024 interest expense by approximately $30.
- Revenue estimates depend on labor-hour, cost-to-complete and milestone assumptions for long-term contracts. Revenue recognized over time represented 77% of nine-month sales.
- Disclosure controls were deemed effective. P3 was excluded from the current internal-control assessment because the acquisition was completed within the permitted one-year period.
Investor Verification Priorities
- Verify conversion timing, funding and cancellation provisions for the large U.S. Navy orders and the $399,244 backlog.
- Assess whether the 20% gross-margin performance and fiscal 2024 adjusted EBITDA guidance remain achievable after excluding unusual items.
- Monitor P3 integration, revenue contribution, contingent earn-out exposure and inclusion in the fiscal 2025 internal-control assessment.
- Review the resolution and potential financial impact of the Graham India investigation and asbestos-related litigation.
- Evaluate liquidity after restricted cash supporting letters of credit, planned $8,000 to $10,000 capital expenditures and variable-rate borrowing costs.
- Distinguish GAAP results from management’s adjusted measures, which exclude acquisition, bonus, refinancing, ERP and other unusual costs.