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Text: We appreciate you joining us today to discuss Graham's fiscal 2021 third quarter results.
We have -- we also have slides associated with the commentary that we are providing here today.
If you do not have the release or the slides, you can find them on the company's website at www.
We will then open the lines for Q&A.
These documents can be found on our website or at www.
I also want to point out that during today's call, we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance.
Q3 sales were $27.2 million, up from $25.3 million in Q3 last year.
Our COVID-19 impact in the quarter was small compared to Q1, but we still lost approximately $900,000 of revenue due to employee absences related to COVID.
Strong sales in Asia supported our refining business.
Sales in the defense, the Navy market were $4.5 million in the quarter and now stand at $17.4 million year-to-date, approximately one quarter of our total sales through December.
Q3 net income of $1.1 million or $0.11 per share, up from breakeven in Q3 last year.
Cash is still strong at $69.3 million.
Orders in Q3 were in excess of $61 million, our strongest order recorded ever, driven by $52 million in defense orders.
Almost all of the defense orders will not start to convert to revenue until fiscal 2023 and beyond.
Our backlog is now nearly $150 million, 70% of which is in the defense market.
Moving on to Slide 5.
I'll discuss the sales detail in the last slide with the quarter at $27.2 million.
The sales split in the quarter was 39% domestic and 61% international.
Last year's third quarter was 53% domestic, 47% international.
The stronger international sales in the quarter were primarily driven by projects in Asia, particularly China where we had one large project, which was accounted for on a completed contract rather than a percent complete basis and a second project, which is in -- currently in process and is on -- being accounted for on a percent complete basis.
Gross profit increased to $6.2 million, up from $4 million last year primarily due to improved project mix as well as volume.
Gross margin was 22.9%, up 6 -- up 160 -- I'm sorry, up from 16% last year, which was a particularly poor quarter last year.
EBITDA margins were 6.7% up from 0.7% in last year's third quarter.
And as I mentioned earlier, net income was $1.1 million up from breakeven last year.
Looking at our year-to-date results, sales in the first nine months of fiscal 2021 was $71.8 million, up from $67.5 million last year.
This is despite our challenging Q1 when the production was at 50% of capacity due to COVID impacts.
Year-to-date sales are 52% domestic, 48% international compared with 65% and 35% respectively last year.
Gross profit year-to-date is $15.5 million, up from 13.7% last year and gross margin is up 130 basis points to 21.6%.
Year-to-date, EBITDA margins were 5.6% versus 3.1% in the first nine months of last year.
Finally, net income was $2 million or $0.20 a share, up from $1.3 million or 13% -- I'm sorry, $0.13 a share last year.
Again, the first quarter of this year had a loss due to COVID but we have more than recovered in the second and third quarter.
Cash is at $69.3 million, up $1.4 million from the end of Q2 but still down from $73 million at the end of fiscal 2020.
This is primarily due to timing of working capital.
Cash per share is $6.94.
Our quarterly dividend remains firm at $0.11 a share and we have paid out $3.3 million year-to-date.
Capital spending to-date is $1.5 million similar to last year and we expect this -- the total for the year to be between $2 million and $2.5 million in capital for the full year.
Finally, as we are continuing to work on our acquisition pipeline and activities, COVID has not had an adverse impact on our efforts as we have built some very good relationships over time and these continue, however, many are now remote rather than in-person communications.
I would ask that you refer to Slide 9.
Sales for the third quarter were $27.2 million.
Sales for the refining industry were $16.5 million up from $12.2 million.
$9.4 million of the revenue were from two projects for the Chinese refining market.
Sales to the defense industry were $4.5 million and were up slightly year-on-year.
We continue to see improved backlog conversion as we grow our naval workforce.
On prior calls, we discussed first article or first-time fabrication work.
We are largely past that now for which is currently in our backlog.
We do plan to expand and take on new first article work, however, for now that type of heavy lifting is behind us.
Lastly, our annual guidance remains at $93 million to $97 million, which was communicated during our second quarter earnings call.
The fourth quarter is set up well for backlog conversion, however, there is always a few million dollars of in and out revenue within any quarter.
Moving to Slide 10.
We experienced the second wave of COVID-19 infections in Western New York from November through the middle of January.
The company's COVID-19 protocols have been tested and have been proven to be effective in minimizing the spread of the virus within the company.
At the peak of the second wave in early January, the production departments were operating at no less than 90% capacity.
Due to the outbreak, we temporarily paused our efforts to recruit skilled workers.
As of January 19th, we have lifted the pause and are actively recruiting skilled workers.
I am pleased to report that we have several candidates in our pipeline.
We continue to prioritize improving our productivity in the Navy areas.
Productivity enhancements are focused on build flows, faster welding processes, employee training, the creation of jigs and fixtures and lastly, applying lessons learned.
This chart illustrates how orders can vary considerably from quarter-to-quarter.
A highlight though is the order level of the last two quarters from the defense industry, specifically orders for the U.S. Navy.
The orders for defense during the last two quarters were $65 million.
These orders can be large in value and will have multi-year conversion cycles.
We have visibility into the Navy's long term procurement plans.
That is a great help and lessens investment risk that may be needed to support growth associated with stronger defense segment revenue.
We are operating within challenging energy and chemical/petrochemical markets.
Low oil prices due to supply and demand imbalance along with demand destruction for chemical and petrochemical derived consumer products have contracted orders within our more traditional non-defense end markets.
It is important to point out the defense strategy where $100 million of new orders were secured in the last 12 quarters, representing 30% of total orders has been a terrific counter balance to headwinds within our more traditional markets.
Also another set of actions were implemented about two years ago to change participation, success and execution plans within more price-sensitive international markets where we historically did not play.
That too has been executed successfully.
Across those same 12 quarters, $40 million in orders were won because of a different execution plan and different selling strategy.
Stated differently, approximately 60% of orders in the past 12 quarters were from our traditional markets or customers and 40% from strategies to broaden revenue streams.
I commend our team for terrific effort on both strategies, it has really made a big difference in order level during the -- this pull back by our historic customers.
Let's move on to Slide 13.
There is not too much different from last quarter to report.
Refining is weak as an overall comment.
There are mid and large sized projects upcoming in India, China and for the Mid East and North Africa but overall, refining opportunities have contracted.
An active area within U.S. refining markets, however, is related to renewable diesel investment.
This is supported by tax policy under the Renewable Fuels Standard and California's Low Carbon Fuel Standards.
These are smaller, fast-moving projects, however, it has created demand for our products and that is important right now.
The Navy bookings pipeline remains healthy.
Orders, they will be intermittent and likely not as strong as the past two quarters.
Nonetheless, we expect to build backlog within this segment during the next year with a book-to-bill above 1.
The chemical sector is still contracted.
We have not seen a change in spending by this market.
Global markets need to lift up from the pandemic before we are to anticipate more typical order levels.
Short cycle and plant MRO or plant maintenance, repair and operating spending is also pulled back.
While defense orders have a positive outlook, order levels from our more traditional customers or markets are expected to stay sluggish.
Let's move on now to Slide 14.
The two bright spots during this pandemic are our cash position that was highlighted by Jeff and our backlog.
Backlog is $150 million with approximately $100 million for defense and $50 million for the company's more historic markets.
The operational benefits or synergies between defense and commercial markets permit effective utilization of our operating assets, while commercial markets and here I'm referring to, refining and chemicals/petrochemicals are contracted.
45% to 50% of our backlog is anticipated to convert during the next 12 months.
The fourth quarter is now essentially set up for backlog conversion with, as Alan said, a few million dollars, which typically comes in and out in a quarter, thus we have high confidence for the full-year guidance.
With that, let's move on to the guidance page.
We guide to revenue for the full year to be between $93 million and $97 million, implying fourth quarter revenue between $21 million and $25 million.
Full year gross margin should fall between 21% to 22%.
SG&A expense at $17.3 million to $17.8 million for the full year and our effective tax rate is planned to be between 22% and 24%.
It is important to highlight that the guidance reflects, we do not have significant COVID-19 related disruptions or unforeseen impacts in our fourth quarter.
I will close with a quick progress review on strategic initiatives.
Let's move on to Slide 16.
We have had an effort to reduce the volatility of our business performance with greater focus on expanding our predictable revenue streams.
The Navy is one of those revenue streams as is revenue from our installed base.
Our progress with the Navy has been -- or defense has been very strong.
Our backlog has grown and importantly, we've moved our position from competitively bidding most opportunities to sole-source bidding under a larger percentage of those opportunities.
So that all is directionally very favorable.
For our installed base, with the pandemic and COVID, we've had difficulty gaining access to our plant -- customers' plant sites.
However, we've been working on IT tools and data analytics to analyze different applications and different products so we can implement programmatic processes to drive proactively our installed base.
That's under way, but we have had a pause on building out our installed base team, however, there is work ongoing on the IT side.
We are also looking at acquisitions to build stronger, more predictable revenue.
Jeff and Chris have done a really -- Chris Johnston, have done a really fine job of bringing us some high-quality targets into the conversation and we have active dialog with those now and we're advancing those discussions.
Another initiative, and now this will be in an area of our project work.
So it does have variability, a cyclical nature to it, however, we have implemented some strategies to change how we participate in more price-sensitive markets, which is primarily in Asia.
We've been expanding and modifying our execution path there.
I'd say that's gone remarkably well as we jumped into that segment of the sandbox in a different way the last couple of years.
15% of our total orders since late in fiscal 2019 have come from this strategy.
We have had to be more measured in how we're evolving our organization and our structure to go after this work as we think about the upcoming income statement tied to the pandemic.
However, this strategy has been executed well and has had an impact.
You may have recalled -- you might recall that we did win two very large projects in India in the recent past and we are queuing up two or three other projects that we're focused on, that we're going to pursue aggressively, and hopefully win those over the next three to six quarters.
And then, ultimately, all of this rolls up into strengthening Graham's financial performance.
One of the key levers is operational throughput and expanding our revenue conversion here in Batavia.
That translates into building out our welding, machining and production workforce.
As Alan said, we did place that on pause, that additional team member build out in the last couple of months due to COVID, however, we have that back opened up.
We have 20 positions that we are hoping to fill over the next two years that would allow us to expand our backlog conversion and drive revenue growth.
That's a very important parameter and we have a very good program for accessing the direct labor and bringing them on board, putting them through our weld school and training labs and then, having them proficient and productive in a short period of time.
I did mention earlier, another way to financial our -- improve our financial strength is the naval strategy and the evolution of competitively bid toward a higher percentage in sole-source bidding.
That has two benefits, one, it increases the predictability of future orders and asset-based loading and lessens the risk we would have around any capital investments to support the revenue growth.
And then, secondarily, but not always, it can provide a stronger margin profile for that work.
Also, and Alan has mentioned this, as we get past the first article fabrications, we now can move into repetitively -- repetitive builds and then optimize our production workflows to drive productivity and shorten cycle times and that will lead to margin enhancement as well.
Obviously, our energy markets and petrochemical markets are in a rough spot.
So we will balance our investments to benefit us long term with realities of short term income statement pressure.
And ideally, we have this fantastic balance sheet with an incredible amount of cash that we've had for quite some time and our focus -- the focus of our Board is to put that capital to use with an investment in new revenue streams.
Would you please open the line?

user
q3 earnings per share $0.11.
sees fy revenue $93 million to $97 million.
as of december 31, 2020, graham had no debt.

assistant