Graham Corporation Form 10-Q Summary
Reporting period: Three months ended June 30, 2023, the first quarter of fiscal 2024. The filing compares results with the three months ended June 30, 2022. The supplied metadata references “2022 Q1,” but the filing itself covers 2023 Q1.
Business Context
Graham designs and manufactures mission-critical vacuum, heat-transfer, pump, turbomachinery, power, and fluid-management technologies for defense, space, energy, refining, chemical and petrochemical markets. Operations include facilities in Batavia, New York; Barber-Nichols in Colorado; and subsidiaries in China and India. Defense represented 48% of quarterly sales and 79% of backlog.
Financial Performance
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $47.6 million | $36.1 million | Up 32% |
| Gross profit | $11.0 million | $6.7 million | Up 63% |
| Gross margin | 23% | 19% | Up 4 points |
| Operating income | $3.7 million | $1.0 million | Up $2.7 million |
| Net income | $2.6 million | $0.7 million | Up $2.0 million |
| Diluted EPS | $0.25 | $0.06 | Up $0.19 |
| Adjusted EBITDA | $5.6 million | $2.7 million | Up 105% |
| Adjusted EBITDA margin | 11.8% | 7.6% | Up 4.2 points |
Defense sales increased $13.0 million, supported by higher-margin project mix, improved execution, material timing and pricing. Commercial aftermarket sales increased approximately $3.0 million. These gains were partly offset by a $1.6 million decline in space sales, including the loss of Virgin Orbit following its Chapter 11 bankruptcy, and a $1.0 million decline in refining sales.
SG&A, including amortization, increased to $7.3 million from $5.8 million, primarily because of higher performance-based compensation, including a $0.8 million BN Performance Bonus, inflation and professional services. SG&A declined to 15% of sales from 16%.
Cash Flow, Liquidity and Debt
- Cash provided by operating activities was $8.6 million, compared with cash used of $0.7 million in the prior-year quarter.
- Cash and cash equivalents increased to $24.7 million at June 30, 2023 from $18.3 million at March 31, 2023.
- Capital expenditures were $1.5 million, compared with $0.3 million in the prior-year quarter.
- Working capital was $27.0 million, and the current ratio was 1.3.
- Total debt consisted of a $12.0 million Bank of America term loan, net of $0.7 million of unamortized issuance costs; $2.0 million was classified as current.
- No borrowings were outstanding under the revolving credit facility. Availability was $25.9 million, subject to covenant restrictions.
- Total letters of credit outstanding were $12.6 million, including $5.6 million under the Bank of America facility and $6.6 million under the HSBC facility.
- The Company was in compliance with its debt covenants, including a reported leverage ratio of 1.6x and a minimum liquidity requirement of $20.0 million.
Material Changes Versus Prior Comparable Period
- Sales increased 32%, led by a 133% increase in defense sales to $22.8 million.
- Gross margin expanded from 19% to 23%, primarily due to defense and aftermarket mix, execution and pricing.
- Net income increased from $0.7 million to $2.6 million, while diluted EPS increased from $0.06 to $0.25.
- Orders increased 69% to $67.9 million, producing a 1.4x book-to-bill ratio versus 1.1x.
- Backlog increased to $322.0 million from $260.7 million at June 30, 2022 and from $301.7 million at March 31, 2023. Approximately 50% is expected to convert to revenue within one year.
- Revenue recognized over time increased to 81% from 65%, increasing the importance of cost-to-complete and progress estimates.
- Customer deposits increased to $56.0 million from $46.0 million at March 31, 2023, while unbilled revenue declined to $34.5 million from $39.7 million.
Guidance, Outlook and Risks
- Fiscal 2024 guidance is $170 million to $180 million of sales, gross margin of 18% to 19%, SG&A of 15% to 16% of sales, a tax rate of 22% to 23%, and adjusted EBITDA of $11.5 million to $13.5 million.
- Guidance includes approximately $2 million to $3 million of BN Performance Bonus expense and $0.5 million to $1.0 million of ERP conversion costs; adjusted EBITDA excludes these items.
- Management continues to target more than $200 million of revenue and low- to mid-teens adjusted EBITDA margins by fiscal 2027.
- Management expects strong defense demand and continued growth in alternative and clean energy opportunities, but considers refining and chemical project timing and pricing challenging.
- Space-market revenue remains uncertain because customers may lack funding; Virgin Orbit’s bankruptcy already affected sales and orders.
- Supply-chain disruption, labor and material inflation, geopolitical conflict, foreign exchange movements and interest rates could affect margins, liquidity and execution. A 100-basis-point change in BSBY would affect annual interest expense by approximately $0.1 million on the reported variable-rate debt.
- Asbestos-related lawsuits and other ordinary-course claims remain pending. Management believes they are unlikely to have a material adverse effect, but the filing states that losses cannot be estimated for most claims.
- The Company expects to amend its credit facility in fiscal 2024 to support longer-term strategic growth initiatives.
- The Company does not currently pay a cash dividend.
Important Facts for Investors to Verify
- Whether defense orders and backlog convert on schedule and at the expected margins, particularly the long-cycle U.S. Navy programs.
- Whether quarterly gross-margin improvement is sustainable after mix, project timing and incentive compensation normalize.
- The effect of the $2 million to $3 million BN Performance Bonus and ERP conversion costs on reported and adjusted results.
- Whether the $322.0 million backlog and 1.4x book-to-bill ratio translate into the fiscal 2024 sales guidance.
- Customer concentration, contract cancellation provisions and the ability to collect customer deposits and unbilled revenue.
- The timing and terms of any credit-facility amendment, debt maturities and compliance with liquidity and leverage covenants.
- Potential effects of Virgin Orbit’s bankruptcy, space-market customer funding constraints and continued energy-market weakness.
- Exposure to asbestos litigation, supply-chain disruptions, inflation, geopolitical events and variable interest rates.