Graham Corporation — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2023. The supplied metadata references “2021 Q4,” but the filing is Graham Corporation’s fiscal 2023 annual report, filed June 8, 2023. Dollar amounts are in thousands except per-share data.
Business Context
Graham designs and manufactures mission-critical fluid, power, heat-transfer, vacuum and turbomachinery products for defense, space, energy, chemical and petrochemical markets. Its principal operations are in Batavia, New York, and through Barber-Nichols, LLC (“BN”) in Colorado. The company also maintains sales and engineering subsidiaries in China and India.
The June 2021 BN acquisition expanded Graham’s aerospace, space, cryogenic and defense capabilities. Fiscal 2023 sales were 42% defense, 13% space, 17% refining, 14% chemical/petrochemical and 14% other markets. U.S. sales represented 81% of revenue and international sales 19%.
Financial Performance and Key Metrics
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Net sales | $157.1 million | $122.8 million | Up 28% |
| Gross profit | $25.4 million | $9.1 million | Up $16.3 million |
| Gross margin | 16.2% | 7.4% | Up 8.8 points |
| Operating income (loss) | $1.3 million | $(11.3) million | Improved |
| Net income (loss) | $0.4 million | $(8.8) million | Improved |
| Diluted earnings (loss) per share | $0.03 | $(0.83) | Improved |
| Adjusted EBITDA | $7.7 million | $(5.0) million | Improved |
| Adjusted EBITDA margin | 4.9% | (4.1%) | Up 9.0 points |
| Orders | $202.7 million | $143.9 million | Up 41% |
| Backlog | $301.7 million | $256.5 million | Up 18% |
Revenue growth reflected the additional two months of BN results included in fiscal 2023, stronger commercial-space and refining/petrochemical aftermarket sales, improved defense execution and pricing, and favorable mix. Approximately 74% of revenue was recognized over time and 26% at shipment.
Net cash provided by operating activities was $13.9 million, compared with $2.2 million of cash used in fiscal 2022. Cash and cash equivalents increased to $18.3 million from $14.7 million. Working capital was $23.9 million, with a 1.3 current ratio. Cash flow included approximately $13 million of customer deposits for a long-term U.S. Navy contract and was partly offset by increases in unbilled revenue and inventory.
Capital expenditures were $3.7 million, versus $2.3 million in fiscal 2022. Fiscal 2024 capital expenditures are expected to be approximately $5.5 million to $7.0 million. No dividends were paid in fiscal 2023; the dividend was suspended in fiscal 2022 under the credit agreement.
Debt and Liquidity
At March 31, 2023, the company had $12.5 million of term-loan principal outstanding, $0 drawn on its revolving credit facility, and $10.0 million of stated revolver availability subject to covenants. The term loan bears interest at BSBY plus 1.50%; BSBY was 4.92% at year-end. Letters of credit totaled $12.8 million, including $5.9 million with Bank of America and $6.8 million with HSBC.
Graham reported a 2.1x bank leverage ratio and compliance with its amended financial covenants at year-end. The company previously breached certain covenants in December 2021 and obtained a waiver and subsequent amendments. The credit agreement includes restrictive covenants and a potential $0.7 million back-end fee, subject to specified conditions.
Material Changes Versus Fiscal 2022
- Sales increased 28%, led by space, chemical/petrochemical and other commercial markets, while defense sales increased 5%.
- Gross margin improved to 16.2% from 7.4%, primarily due to higher-margin commercial-space and aftermarket work and improved execution on U.S. Navy programs.
- Fiscal 2022 included more than $10 million of estimated labor and material overruns on first-article Navy projects. Four such projects were completed in fiscal 2023, with two remaining projects expected to be completed by the end of fiscal 2024’s second quarter.
- Orders increased 41%, principally from an $53.5 million increase in defense orders, including repeat U.S. Navy programs. The fiscal 2023 book-to-bill ratio was 1.3x.
- Defense represented 81% of backlog at March 31, 2023, compared with 76% at the prior year-end. Approximately 50% to 55% of backlog is expected to convert to revenue within one year.
- Accounts receivable reserves increased materially, partly because of Virgin Orbit’s Chapter 11 filing after year-end. Graham recorded approximately $3.1 million of related reserves in fiscal 2023 and reversed approximately $4.0 million of purchase orders.
Guidance, Outlook and Unusual Items
| Fiscal 2024 outlook | Management range |
|---|---|
| Net sales | $165 million to $175 million |
| Gross margin | 17% to 18% |
| SG&A as a percentage of sales | 15% to 16% |
| Tax rate | 22% to 23% |
| Adjusted EBITDA | $10.5 million to $12.5 million |
Fiscal 2024 SG&A guidance includes approximately $2 million to $3 million of BN performance bonuses and $0.5 million to $1.0 million of ERP conversion costs; the adjusted EBITDA outlook excludes those items. Management now expects fiscal 2027 revenue above $200 million and adjusted EBITDA margins in the low to mid-teens, subject to production capacity, supply-chain access, limited health-related disruption and no further material Virgin Orbit impact.
Key risks include dependence on U.S. Navy funding and a concentrated defense customer base, long-cycle fixed-price contracts, cost inflation and supply-chain disruption, customer concentration, cyclicality in refining and petrochemical markets, uncertainty among commercial-space customers, higher variable-rate interest expense, foreign operations and currency exposure, ERP implementation risk, cybersecurity, product liability, and asbestos-related litigation.
Management estimated an additional $1 million to $2 million of Virgin Orbit exposure at March 31, 2023, but did not expect a material fiscal 2024 impact. Asbestos and other legal proceedings were disclosed, but management did not believe the outcomes would materially affect financial position, results of operations or cash flows. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Revenue recognition using estimates of total contract labor and costs was identified as the critical audit matter.
Investor Verification Priorities
- Verify conversion timing, cancellation provisions and profitability of the $301.7 million backlog, particularly the 81% defense concentration.
- Assess execution and remaining cost risk on the two unfinished first-article Navy projects and other long-term fixed-price contracts.
- Compare fiscal 2024 results with the $165 million to $175 million sales and $10.5 million to $12.5 million adjusted EBITDA guidance, including the treatment of BN bonuses and ERP costs.
- Monitor liquidity, covenant compliance, variable-rate debt costs, revolver availability and the $12.8 million of outstanding letters of credit.
- Evaluate collectability of receivables, inventory exposure and any additional losses arising from the Virgin Orbit bankruptcy.
- Review customer concentration, including two customers representing 15% and 12% of fiscal 2023 revenue, and the impact of U.S. Navy funding decisions.
- Reconcile adjusted EBITDA and adjusted net income to GAAP results and distinguish recurring operating performance from unusual items.