Graham Corporation Form 10-Q Summary
Reporting period: Three months ended June 30, 2022, representing the first quarter of fiscal 2023. The request metadata identifies “2021 Q1,” but the filing is for June 30, 2022. Results are unaudited and include three months of Barber-Nichols, LLC (BN), acquired June 1, 2021, versus one month in the prior-year quarter.
Business context
Graham designs and manufactures mission-critical fluid, power, heat-transfer, vacuum and turbomachinery products for defense, space, energy, chemical and petrochemical markets. Defense and space represented 45% of first-quarter sales, compared with approximately 25% before the BN acquisition. Defense accounted for 74% of backlog at June 30, 2022.
Financial performance and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $36.075 million | $20.157 million |
| Gross profit | $6.744 million | $0.914 million |
| Gross margin | 19% | 5% |
| Operating income (loss) | $0.985 million | $(4.009) million |
| Net income (loss) | $0.676 million | $(3.126) million |
| Diluted EPS | $0.06 | $(0.31) |
| Adjusted EBITDA | $2.730 million | $(2.860) million |
| Adjusted EBITDA margin | 7.6% | (14.2)% |
| Cash flow from operations | $(0.689) million | $(7.076) million |
- Sales increased 79%, primarily from the additional BN contribution, stronger commercial aftermarket and space-market activity. Supply-chain constraints delayed some material receipts and shipments.
- Gross margin improved because of a favorable mix, including higher-margin space and aftermarket projects, improved contract execution and completion of two first-article U.S. Navy projects.
- SG&A, including amortization, rose to $5.759 million from $4.923 million, but declined to 16% of sales from 24% because sales grew faster than expenses.
- Cash and cash equivalents were $12.905 million at June 30, 2022, down from $14.741 million at March 31, 2022. Working capital was $28.508 million, with a 1.5 current ratio.
- Operating cash use reflected working-capital investment, particularly increased inventory in a supply-constrained environment. Capital expenditures were $0.284 million.
- Total debt consisted principally of an $18.000 million Bank of America term loan, net reported long-term debt of $15.065 million after debt issuance costs and the current portion. The revolving credit facility had no borrowings; availability was $10.840 million.
- Letters of credit totaled $12.688 million, including $5.079 million with Bank of America and $7.435 million with HSBC. Approximately $7.5 million of cash secured letters of credit.
- No dividend was paid in the quarter. The dividend was suspended in the fourth quarter of fiscal 2022 under the credit agreement.
Material changes versus the prior comparable period
- Orders increased to $40.300 million from $20.900 million, driven by BN, space programs, commercial aftermarket demand and international refinery activity.
- Backlog increased 2% to $260.678 million from $256.536 million at March 31, 2022. Approximately 40% to 50% is expected to convert to revenue within one year.
- Space sales increased to 18% of revenue from 4%; defense sales declined to 27% from 35% as a percentage of quarterly revenue, reflecting changes in mix rather than necessarily lower defense demand.
- Net income improved from a loss of $3.126 million to income of $0.676 million. Adjusted net income improved from a loss of $2.807 million to $1.329 million, or $0.12 adjusted diluted EPS.
- Interest expense increased because of acquisition-related borrowings and higher interest rates.
- Debt covenant requirements were amended after prior noncompliance at December 31, 2021. The company was in compliance with the amended covenants at June 30, 2022.
Guidance, outlook and risks
- Fiscal 2023 sales guidance is $135 million to $150 million, gross margin guidance is approximately 16% to 17%, SG&A is expected at 15% to 16% of sales, and adjusted EBITDA guidance is $6.5 million to $9.5 million.
- Management expects 45% to 50% of fiscal 2023 sales to come from defense and approximately 40% to 50% of backlog to convert within the next 12 months.
- Management expects the second quarter to benefit less from favorable mix and deferred expenses than the first quarter, with results expected to normalize in the second half.
- Key risks include supply-chain disruption, material-cost volatility, contract cost and labor-hour estimates, project timing, challenging commercial energy-market pricing, foreign exchange exposure and variable-rate debt.
- The company previously breached credit covenants and remains subject to amended covenant requirements, including liquidity, EBITDA and leverage thresholds. A potential $0.725 million back-end fee is payable to Bank of America upon specified events unless waived or cancelled under the amendment terms.
- The company faces asbestos-related lawsuits and other ordinary-course claims. Management cannot estimate the loss for most claims but does not expect a material adverse effect based on currently available information.
- The filing states that disclosure controls were effective and that there were no material changes in internal control over financial reporting other than the continued integration of BN.
Important facts for investors to verify
- Whether sales and margin performance remain consistent with the $135 million to $150 million fiscal 2023 guidance after the unusually strong first quarter.
- Compliance with amended debt covenants, including the September 2022 EBITDA requirement, subsequent leverage tests and liquidity thresholds.
- Conversion timing and profitability of the $260.678 million backlog, particularly the concentration in U.S. Navy programs.
- Progress in resolving supply-chain constraints and controlling material, labor and subcontractor costs.
- Cash availability after restricted cash supporting letters of credit, working-capital needs, capital expenditures and mandatory debt amortization.
- Whether the suspended dividend can be reinstated and whether the BN acquisition continues to meet performance expectations.