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Text: We certainly appreciate your joining us today to discuss Graham's first quarter fiscal 2022 financial results.
If you do not have the releases or the slides, you can find them on the Company's website at www.
He's on the call today with us and will be making some formal remarks.
Also joining us are Jeff Glajch, our Chief Financial Officer; and Dan Thoren, our President and Chief Operating Officer, who has been named effective with Jim's retirement, our new Chief Executive Officer.
Jim will start with his overview and then cover the brief results of the quarter.
Jeff will then review details of the financial results and then we'll have Dan close out with his remarks.
These risks and uncertainties and other factors are provided in the release and in the slide, as well as with other documents filed by the Company with the Securities and Exchange Commission.
These documents can be found on our website or at sec.gov.
I'd like to point out that during today's call, we may also discuss some non-GAAP financial measures which we believe are useful in evaluating our performance.
We have provided reconciliations of comparable GAAP with non-GAAP measures in the tables accompanying today's release.
I will begin my remarks at Slide 3 and provide a brief review of the financial results, before discussing my planned retirement.
Revenue in the quarter was $20.2 million, $16.7 million was organic and $3.5 million was due to the acquisition of Barber-Nichols that closed June 1.
Defense revenue was 35% of total revenue in the quarter.
We do expect that defense revenue will approach 50% of total quarterly revenue with Barber-Nichols fully in future quarters.
This acquisition and the shift in revenue mix is a major transformation for Graham and measurably advanced our diversification strategy.
On an organic basis, revenue was similar year-over-year.
However, it was for different reasons.
You might recall that our first quarter last year operated at nominally 50% capacity due to COVID-19, thus impacting revenue and profitability due to under-absorption.
In the most recent quarter, our workforce utilization was at capacity.
However, mix was very different.
Orders from our crude oil refining and chemical/petrochemical markets were very low during the third and fourth quarters last fiscal year where non-Navy orders totaled $17.5 million for both quarters.
Consequently, greater production resources were pulled into Navy backlog, which are lower margin due to first article work and also due to contract structure for a large order in backlog.
Those headwinds work out of backlog across the next few quarters and largely behind us as we exit this current fiscal year.
Organic revenue and profitability are expected to improve across the fiscal year.
Orders in the first quarter were $20.9 million and were principally organic.
Barber-Nichols orders were $200,000 for the month of June.
Somewhat encouragingly, there were strong orders from our crude oil refining market in the quarter that totaled $11.5 million.
We did have a significant win in the quarter for a domestic refinery revamping their facility to improve crude oil feedstock processing flexibility.
That particular win was gratifying for me.
I still remember losing the original order to a domestic competitor in the mid-1990s.
And now, 25 years later, we won back the installation and replaced the original supplier with our own vacuum systems.
Consolidated backlog at June 30 was $236 million, of which 80% is for defense.
Importantly, as we work through the more challenging margin backlog, that impacts the current fiscal year.
Margin potential for our defense backlog improves measurably.
Barber-Nichols acquisition provides additional market diversity to our profile as it also adds backlog for new markets including space and advanced energy industries.
While we put considerable cash toward acquiring Barber-Nichols to strengthen and diversify revenue along with earnings, our balance sheet remains strong and our opportunity to drive our return on assets improves.
As announced earlier today and as Debbie had mentioned, I'm very pleased to confirm that I will retire effective August 31 at the end of this month and Dan Thoren will succeed me as President and CEO of the corporation.
He also will join our Board of Directors at that time.
It has been a tremendous honor and great privilege for me to serve Graham shareholders and the corporation as its Principal Executive Officer since 2006.
I believe I am departing on a high note as this is an incredibly exciting time for the Company, considering first the strength of our organic defense strategy having advanced to preferred supplier status for many of the products the Company provides to the US Navy, and in some cases, we are now bidding on a sole-source basis.
The credit goes to Alan Smith and his team for executing well our defense strategy.
Secondly, the progress we have had innovating execution to become successful in price-focused international crude oil refining and petrochemical markets.
The sales team has proven we can take market share, and also the operations team has shown we're able to realize or beat target margins.
Thirdly, the investments we've made in IT tools, systems and resources to leverage our installed base and the expected benefit that will provide.
I believe crude oil refining and chemical/petrochemical customers will invest in existing facilities, with greater throughput before investing in new capacity.
I feel we are ahead of competitors regarding commitment to the installed base.
Lastly, the transformational acquisition of Barber-Nichols creates a new strong growth platform for both organic and M&A expansion.
I've had the opportunity to work with Dan through the acquisition process for over nearly three years and most recently, the last two months as he onboarded with the Graham team.
I believe that Dan is well equipped to lead Graham and has a terrific and broad vision for the next phase of growth for the Company.
I'm thrilled this acquisition has proved to be as transforming as we had envisioned.
And part of that transformation is building out the bench strength of our leadership team.
Ultimately, over the last couple of months, it became more clear to me that this has provided for my succession plan as well.
I'm thrilled that the Board saw the same potential in Dan that I had seen.
As a Graham shareholder, I'm looking forward to benefiting from the value of Dan's strategic direction.
You have my full support, not only through this transition, but well into the future.
I have enjoyed our many conversations all these years and have very much appreciated your ongoing support.
If you can move to Slide 4.
As Jim mentioned, we had a very rough first quarter.
As I discuss that first quarter, I would like you to keep in mind that our full year guidance is unchanged.
Therefore, we expect to see improvements as the year goes on and we expect sequential quarterly improvement across each quarter for the rest of fiscal 2022.
Sales in the quarter improved by $3.5 million, which was due to the one month that we owned Barber-Nichols.
The comparable quarter last year was early on during the COVID pandemic.
And as Jim mentioned, we ran the Company at half capacity during that quarter.
However, in that quarter, we did have a $5 million project which was recognized on a completed contract basis and because of COVID had shifted from fiscal 2020 into Q1 of 2021.
Gross profit and earnings per share were dramatically affected by a very poor mix of projects and some timing and some cost items.
Namely, we had some liquidated damages due to COVID in the quarter and some timing of expenses which were pulled into Q1.
We also had a small amount of acquisition expenses, about $169,000 pre-tax, and the first month of purchase price accounting related costs for Barber-Nichols.
To clarify the latter, the purchase accounting amortization costs were $225,000 before taxes in June.
Before we move on, I want to mention that we expect approximately $2.7 million pre-tax and $2.15 million after-tax related to acquisition purchase accounting.
90% of this is amortization costs, with the rest being a step-up in depreciation and inventory.
We will be filing an 8-K later this week with much more detail on the purchase accounting and pro forma income statements.
We expect the amount of amortization will be similar in fiscal 2023 as fiscal 2022 since we will have 12 rather than 10 months of amortization in fiscal 2023.
It will decrease in future years and level off at approximately $1.1 million pre-tax.
On to slide 5.
With the acquisition of Barber-Nichols, we have moved from a very inefficient to a much more efficient balance sheet.
We have added $20 million of low-cost term debt as part of the acquisition and we have access to a much larger revolving line of credit.
This term loan and the line of credit will provide ongoing flexibility.
We expect the acquisition of Barber-Nichols to be accretive in fiscal 2022, even with the $2.15 million or approximately $0.20 a share in added amortization costs.
We will continue to look for both organic and M&A-related growth opportunities and believe we have the financial strength to invest in both areas.
With the addition of Barber-Nichols, we believe there are some excellent opportunities in both arenas.
On to slide 6.
Orders in the commercial markets picked up in Q1 off a very low base in the previous two quarters.
With a $236 million backlog, we are well positioned for long-term growth.
80% of that backlog is in the defense market, which provides an excellent baseline for our business, not just this year, but in upcoming years as well.
Before I pass it over to Dan, I would be remiss if I didn't recognize Jim for his 37 years of service at Graham, the last 15 years being as leader.
He has transitioned Graham from a company which has -- which was capacity limited and had minimal growth engines to a much broader organization with strong footprints in defense and the Asian energy markets to couple with our long history in the United States and Middle East.
Look nearly anywhere in the world and you will see Graham equipment in many world-class refining and petrochemical facilities.
You will also see Graham equipment playing a key role on US Navy vessels which support our country's national defense.
I've known Dan for the past three years, including negotiating the acquisition with or perhaps against him during part of that time.
Dan is a very high character leader with a great history at Barber-Nichols and I expect him to do the same at Graham.
Over the past many months when the Board members have asked for my view as Dan as a potential CEO, I was and continue to be unequivocal in my belief that Dan is the right CEO to take Graham forward.
Now that I've set the bar high, Dan, I'll pass the call over to you.
Very kind words, very kind introduction.
I've spent two and a half years getting to know Graham, their leadership and at a high level their business.
Indirectly, I've learned a little about their culture, their people, their customers and their Board.
Over the last two months, I've met with the executive team, managers, employees, customers and the Board to understand the Company in more depth.
These interactions have helped me understand the proud engineering and manufacturing heritage at Graham, the importance of the Company in the community of Batavia, New York and how they have become a trusted partner to their customers across the world in the critical process industries that they serve.
As I go through my slides, I'll give you an idea of how we are developing our strategy to build upon our strong legacies while leveraging our opportunities in the defense and space industries.
Specifically, we'll be working to generate sustainable earnings growth, reduce that earnings volatility, improve operating performance, generate strong cash flows to reinvest in our business and provide a dividend to stockholders.
The ultimate goals are to provide an acceptable return to our stockholders and provide benefit to all of our stakeholders.
Now let's focus on slide 7.
With Graham Corporation acquired Barber-Nichols, we recognize that the two businesses have individual strengths, serving their respective markets that we do not want to disrupt.
Our strategy is to leverage the strengths of each as platforms that provide potential for both organic and inorganic growth.
As such, Graham operations and BN operations both operate under the Graham Corporation umbrella.
As we consider future capital investments, our plan is to add new companies and technologies with related engineered product that can stand alone yet collaborate to win bigger business.
Leverage best practices between subject matter experts in the companies, share services across the organizations and provide career paths for key employees.
When we do these things, each member company can remain focused and agile while accomplishing more than they could alone.
As you look at slide 7, this depicts our two platforms for expansion.
Barber-Nichols is currently in space and defense predominantly.
Graham manufacturing is currently in Defense, Energy and Petrochemical.
For the space industry, we believe there are acquisition opportunities in this expanding market as it gains more interest in private investment.
We will be looking for small acquisitions that we can tuck in as well as medium acquisitions that can stand on their own and are complementary to our current businesses.
We are also focused on internal investments to develop new products and technologies in that space industry.
Both Graham and Barber-Nichols are well engaged in the defense industries.
We'll be looking for new areas to provide value as well as internal investments and acquisitions that can help us grow into new and more sophisticated product.
Graham has been a world leader in vacuum and heat transfer products for energy and chemical/petrochemical applications.
As Jim and Jeff had discussed over many years, the domestic market is flat and the international markets have room for growth.
We intend to focus on our domestic installed base and provide customers the support they need to keep those plants running at an optimized level.
We'll continue to invest in international markets and grow our presence around the world through our successful shared margin strategy.
More recently, both companies are seeing opportunities to engage in the alternative and clean energy markets through turbomachinery and heat transfer products.
Clean energy is actually an area where synergy between companies is possible.
Strategically, we plan to both service and grow our legacy business while having the engineering and new product capability to participate in these new alternative and clean energy markets.
Now each one of these markets that have gone over have their own risk and reward profiles.
Having teams focused in each area is paramount and we are well along with the organizational changes needed to successfully execute our strategies in each of the markets.
Let's move to slide 8.
As Jim and Jeff discussed earlier, we look at fiscal '22 as a transition year, with a tough start, getting better sequentially by quarter.
Meanwhile, we are seeing a stronger pipeline with more inquiries and new orders in the second quarter.
Graham manufacturing second quarter orders are $9.5 million to date, while Barber-Nichols has booked $9.1 million.
Based on the timing of customers' projects, we are holding our revenue guidance at $130 million to $140 million of which Barber-Nichols is expected to contribute between $45 million and $48 million.
Combined, the Defense segment is expected to account for almost half of the revenue and EBITDA is expected to be in the $7 million to $9 million range.
Capital expenditures are planned to be in the $3.5 million to $4 million range, including the Barber-Nichols capital expenditure.
Let's go to slide 9.
As alluded to in my initial remarks, we are transforming Graham Corporation.
Barber-Nichols was the initial transformational acquisition.
We will be looking to solidify the Barber-Nichols investment through further investment on its platform to enable growth in the defense and space industries as well as other industries as opportunities arise.
Coincident with the acquisition, we believe we are at or near the bottom of the energy and petrochem cycle.
We have been preparing for an up-cycle expansion that we believe will start in FY 2023.
Our welder training program has been very successful in refilling our pipeline of future employees.
We are qualifying additions to our supply base to enable additional capacity with the expectation of a potential up cycle.
Our plans include expanding our international offices with sales, quality and project management personnel.
Both Barber-Nichols and Graham have leading market positions and strong brand recognition.
We believe that strong engineering, working hand-in-hand with customers on challenging applications and delivering high-quality products on time will enable us to maintain those brand strength and market leadership positions.
As we advance our transformation, we will be improving our market presence with linked and updated websites and social media.
We believe that this will expand our exposure to a broader audience that doesn't yet recognize our growth and earnings potential.
Personally, I have a strong interest in being a great corporate citizen and working with all of our stakeholders to build a better stronger business for us all.
With the BN acquisition, Graham puts its large cash reserves to work and created a more efficient balance sheet.
As we continue to improve our business and further our strong cash-generating capabilities, we'll intend to make smart choices to allocate that capital for further growth with a keen focus on returns.
We are very optimistic about this new combination and the future it presents for all of us.
When you have a talented team of people that can see problems for your customers, work with them to design and build solutions to those problems and then shift when the markets change, you will be successful.
At Graham Corporation, we have that ability and we will be looking to add more.

user
q1 revenue $20.2 million versus refinitiv ibes estimate of $23.8 million.
fiscal 2022 guidance remains unchanged.
expects about 35% to 40% of backlog will convert to revenue in last nine months of fiscal 2022.
about $25 million to $27 million of backlog related to defense industry is expected to convert to sales in fiscal 2022.

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