Graham - Q1 2024
August 7, 2023
Transcript
Chris Thome (CFO)
Approximately $900,000 of the increase was attributable to higher performance-based compensation expense, including $800,000 related to the supplemental performance bonus payout to Barber-Nichols employees in connection with the 2021 acquisition. If you turn to slide 5, you can see we had net income in the quarter of $0.25 per diluted share, or $2.6 million, a notable increase over last year. On a non-GAAP basis, adjusted net income and net income per diluted share were $3.6 million and $0.33, respectively, measurably improved over $1.3 million and $0.12, respectively, for the same period a year ago.
Adjusted EBITDA grew to $5.6 million, or 11.8% of sales, also reflecting the improvements in our business compared with last year's Q1 of Adjusted EBITDA of $2.7 million or 7.6% of sales. Turning to slide 6, you can see how we are strengthening our balance sheet. Cash and cash equivalents as of June 30, 2023, increased 35% or $6.4 to $24.7 million, compared with the end of the Q4. Our cash generation is improving with better operating performance, but is expected to be lumpy due to the timing of receipt of customer deposits and the corresponding material purchases associated with those deposits. Cash generated from operations in the Q1 was $8.6 million. Debt during the quarter was down $400,000 to $11.3 million.
As of June 30, 2023, the company was in compliance with its lending agreement, with a leverage ratio of just 1.6 times. On June 30, 2023, the amount available under our revolving credit facility was approximately $26 million and provides adequate liquidity to fund our strategic growth initiatives. Capital expenditures for the Q1 of fiscal 2024 were $1.5 million. We have updated our expectation for CapEx in fiscal 2024 to range between $12 and $13.5 million. The $6.5 million increase is primarily related to the strategic investment we received from our defense customer and our planned spending to expand our capabilities in our Batavia operation to meet the Navy's shipbuilding schedule. If you'll now turn to slide 7, I'll review our orders for the quarter.
During the quarter, we had orders of $67.9 million, which were up $27.6 million or 69% over the prior year and resulted in a book-to-bill ratio of 1.4 times. Included in orders and backlog is the $13.5 million strategic investment from a major defense customer we have been talking about, which we announced separately today. The investment is expected to flow through revenue over the next 8-10 years and will be associated with potential future orders and delivering on the $8.5 million of follow-on orders we received from that customer during the quarter.
Space orders were $4.6 million in the Q1 of fiscal 2024, down from the historically high $7.3 million in the Q1 of fiscal 2023. Higher than the $2.5 million in orders received in the Q4 of fiscal 2023. Space continues to be a strategic focus for us and a meaningful part of our business. Turning to slide 8, we show our backlog. You can see that it is up 24% over a year ago and 7% sequentially, to a record $322 million. The defense backlog is up $60 million or 31% over last year and includes that strategic investment from the major defense customer I just mentioned.
Approximately 50% of orders currently in the backlog are expected to be converted to sales in the next 12 months, and another 25%-30% is expected to convert to sales over the following year. The majority of orders expected to convert beyond 12 months are for the defense industry, specifically the U.S. Navy. Turning to slide 9, we can review our updated guidance for fiscal 2024. We are increasing our revenue projection to $170-$180 million, up $5 million from our previous guidance on the lower and top end. Our new guidance suggests top-line growth over fiscal 2023 of about 11% at the midpoint of that range.
This is right in line with our strategy to grow in the mid to high single digits annually in order to achieve our fiscal 2027 goal of greater than $200 million in revenue. It also captures the better-than-expected performance in the Q1, which we expect will normalize for the remainder of the year. From a margin perspective, we are updating the gross margin guidance to 18%-19%, which is an additional 100 basis points over our previous guidance on the top and bottom end.
Our guidance remains the same for SG&A % as well as for our effective tax rate. Similar to revenue, we have increased our adjusted EBITDA guidance by $1 million at the top and bottom of the range to $11.5-$13.5 million, which suggests an adjusted EBITDA margin of about 7% at the midpoint of the range. These increases to our guidance reflect our better-than-expected start to the year and incorporates more normalized performance for the remainder of the year. As we start to work on our better price contracts employing our much improved processes, we expect margins to improve steadily each year in order to achieve our low to mid-teen adjusted EBITDA margin goal in 2027. With that, I will pass the call back to Dan for concluding remarks.
Dan Thoren (President and CEO)
Thank you, Chris. I am on slide 10. I have covered the pillars of our strategy on slide 10 previously. I would just like to reemphasize that it takes a team that understands our customer's critical challenges to help them find solutions, which drives our success. We are doing this on many fronts, which is also driving our diversification. We have much going on in space, new energy, cryogenics, refining and petrochem, as well as defense. We are well on our way to achieve our growth and profitability goals for fiscal 2027. Even beyond that, I believe our long-term outlook is very encouraging, and I hope you share in that excitement. With that, Christine, we can open the call for questions.
Operator (participant)
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Theodore O'Neill with Litchfield Hills Research. Please proceed with your question.
Theodore O'Neill (CEO and Senior Equity Analyst)
Thank you very much, and congratulations on the great quarter.
Dan Thoren (President and CEO)
Thanks, Theo.
Chris Thome (CFO)
Thanks, Theo.
Theodore O'Neill (CEO and Senior Equity Analyst)
Chris, I was wondering if you can clarify the strategic investment, which sounds to me like this is for spending on CapEx, yet in your prepared remarks, you included in orders and backlog and say it'll be drawn down over the next 8 years, which sounds like advanced deposits?
Chris Thome (CFO)
Yeah, I, I... Thanks for the question, Theo. I realize that this can be a little bit confusing. We received a $13.5 million towards strategic CapEx purchases and an $8.5 million of follow-on orders related to the strategic program, which these investments relate to. You are correct. We are including those in our balance sheet as customer deposits, like, like a prepayment. However, when we spend the money on the CapEx, it's going to go through as capital expenditures. It, it's going to cause some lumpiness in our cash flow statement over the next several years here. Under the terms of the agreement, we're not allowed to charge our customer for the depreciation on this equipment, and it is related to specific orders for this strategic program.
We determined that it is really revenue, so it's going to be flowing through revenue, as we work on the current orders as well as potential future orders over the next 8-10 years.
Theodore O'Neill (CEO and Senior Equity Analyst)
Will this, will this have a sort of a one-time use for this particular customer and application, or is there other usefulness to this?
Chris Thome (CFO)
We do have to provide our customer strategic program priority while we're using that machinery and equipment, but if there is excess capacity, we can certainly use it on other revenue-generating operations. The equipment is all in our name at the end of the day.
Theodore O'Neill (CEO and Senior Equity Analyst)
Okay. Can you give us an update on your CapEx plans for some of the long lead time items, and also update us on how it's going to grow your welding capacity?
Dan Thoren (President and CEO)
Yeah. As, as, as Chris said in his remarks, I, I think there was, like, $6.5 million that'll be charged to the, the, the CapEx this year, right?
Chris Thome (CFO)
An increase of 6.5. Yeah.
Dan Thoren (President and CEO)
Yeah. In that, in that strategic investment, there's everything from, building additions to, machine tools for drilling holes and, and turning, different, raw materials, so, so turning and milling machines. There's welding machines associated with that. There's, there's, all kinds of different, rolling machines, and so it's a wide variety of things. As you, as you kind of look at all the machines that are needed to, to kind of process, those particular heat exchangers for our customer, they're basically helping us get tooled up to, to really push those through, quicker than, than we would be able to on our own. Yeah, there's, there's definitely welding machines in there, but there's, there's everything else too.
Theodore O'Neill (CEO and Senior Equity Analyst)
Okay. Thanks very much.
Dan Thoren (President and CEO)
Yep. You're welcome, Theo.
Chris Thome (CFO)
Thanks, Theo.
Operator (participant)
Our next question comes from the line of Gary Schwab with Valley Forge Capital Management. Please proceed with your question.
Gary Schwab (President)
Yeah. Hi, Dan. Hi, Chris. I think you surprised a lot of people with this release. Good work.
Dan Thoren (President and CEO)
Thank you, Gary.
Chris Thome (CFO)
Thanks, Gary.
Gary Schwab (President)
Anyway, it's been a year since you delivered your first 2 steam condensers. The next 2 should be very close to delivery, or have you delivered them already? Can you comment on that?
Chris Thome (CFO)
Yep. We did deliver 1 more at the beginning of July, and we have 1 more that's scheduled to go in the Q3 of this year.
Gary Schwab (President)
Okay, great. You know, this is... I, I wanted to ask you about this. You know, my daughter just moved into a new house, and she bought a pair of 6 drawer dressers from IKEA that she asked me to assemble. I spent about half the time building the second dresser than it took me to build the first one, but I don't think I'd save much more time on a third one. Now, you mentioned how your teams are questioning and challenging each other. Were there significant new practices or innovations developed, where you saw, like, a real step change in savings and productivity on your second articles? How much more do you think there'll be in labor innovation that you can squeeze out of a third article?
Dan Thoren (President and CEO)
What you're, what you're describing is a learning curve. Essentially, you know, you learn by building the first one, and you can apply those lessons learned to the second one. You don't have to, you know, improve your processes, improve your tools, anything, and you actually get some benefit, you know, just from the, the learning of, of how to do things and in what sequence, et cetera. If you start to look at your process and look at how you can reduce time or make processes go in parallel or things like that, you can start to get even further down that learning curve.
In industry, the manufacturing industry, you'll see learning curves that are very steep at the very beginning, you know, for small quantities. As you increase quantities or, or basically put, you know, accumulate builds, you'll start to see that learning curve flatten. Each one of those learning curves really is, is product and process specific. I, I wouldn't even attempt to, to start to, to name savings, you know, from first article to second, to third, to fourth, to fifth, just because they, they are so dependent upon you know, the process and the product, and, and then ultimately the people.
But, but we are very active in looking at those processes, mapping those processes, helping our, our, our folks with, you know, with better tools and better supervision and timely receipt of materials and, gosh, all of that. It's, it's, it's the nature of a manufacturing business that, that, that, that if you have one, you live it and you really enjoy the improvements that you can make in your process and your people over time.
Gary Schwab (President)
you think you can squeeze a lot more margin out of the 3rd articles that you'll be building over the 2nd?
Dan Thoren (President and CEO)
Yeah, as you, as you, you know, build more of them, the, the improvements or, or the, the reduction in time starts to decrease for each one, and that's, that's what they kind of, call moving down the learning curve. So you'll save probably the most between the first and the second, a little bit less between the second and third. You'll save a little bit less, between the third and the fourth, et cetera.
Gary Schwab (President)
Okay, it's still there. There's still, still savings.
Dan Thoren (President and CEO)
Oh, yeah, absolutely still there. It just flattens.
Gary Schwab (President)
Right. As far as what you were expecting, in, in efficiency and productivity on the second article, did it, did it meet what you were expecting, you know, when you first started on the first article and, and thought about the second, or did you surpass what you thought you would get to?
Dan Thoren (President and CEO)
Good question that I don't know the answer to, actually. There was definitely the savings did, did our guys and gals, you know, really predict or not? I couldn't tell you.
Gary Schwab (President)
Oh, okay. I didn't know if you figured predicted a margin that you thought you would save or an additional margin you would make or shorten your labor time on the second one over the first.
Dan Thoren (President and CEO)
Yeah.
Gary Schwab (President)
How you-
Dan Thoren (President and CEO)
I'm sure they have, Gary, but I couldn't quote it to you.
Gary Schwab (President)
Okay.
Chris Thome (CFO)
It's different for every program. As you know, we have multiple programs in the, in the backlog.
Gary Schwab (President)
Right. Right, of course. All right, well, thanks very much and great job. Thank you.
Dan Thoren (President and CEO)
Thanks, Gary.
Chris Thome (CFO)
Thanks, Gary.
Operator (participant)
Our next question comes from the line of Brett Kearney with Gabelli Funds. Please proceed with your question.
Brett Kearney (Portfolio Manager and Research Analyst)
Hi, guys. Good morning. Congrats on the continued momentum.
Dan Thoren (President and CEO)
Hey, thanks, Brett.
Chris Thome (CFO)
Thanks, Brett.
Brett Kearney (Portfolio Manager and Research Analyst)
Just following up on the strategic investment, this is for, I guess, to get yourself aligned with your customer for new work you all will be bidding on with the U.S. Navy going forward?
Chris Thome (CFO)
Correct. We already did have a few orders in our backlog. Right after we received the PO for the strategic investment, we received another order for several more units. Then we will have the opportunity down the road to bid on other jobs, and other units as they, as they come up for bid.
Brett Kearney (Portfolio Manager and Research Analyst)
Okay, excellent. Then, it sounds like incorporated in this, in your plans is some, you know, more advanced, machine equipment. How are you guys thinking about, you know, the labor needs to meet the ramp on these new lines?
Chris Thome (CFO)
Yeah, that, that's a great question, Brett. You know, unlike just like everyone else, you know, we're not immune to the difficult labor market that's out there. You know, I will say that, you know, overall, our human resources team has done a fabulous job. Our labor is actually up 44 people since this time last year, which is about a 9% increase. Then within our budget, we still expect to increase our labor force another 8%. We've done a great job till now, but as you can imagine, to grow your revenue 8%-10% a year, you need to build your, your workforce equivalently.
We've been able to manage through it so far, and our H- HR team is doing great with the, the, you know, programs that they have with the local, local community colleges, the Arc and Flame Welding Program that we've partnered with the local community colleges with, and other, you know, other programs that are out there. They've done a really great job being able to keep up with our growth to this point.
Brett Kearney (Portfolio Manager and Research Analyst)
Definitely. Thanks so much, Chris.
Chris Thome (CFO)
Thank you.
Dan Thoren (President and CEO)
Thanks.
Operator (participant)
Our next question comes from the line of Rick Ryan with Oak Ridge Financial. Please proceed with your question.
Rick Ryan (Vice President and Senior Research Analyst)
Thank you, and also congratulations on a strong report, guys.
Chris Thome (CFO)
Thank you.
Rick Ryan (Vice President and Senior Research Analyst)
Say, Chris, I think you, I think you mentioned better pricing and backlog. Is that more mix, the end market composition there, or actually, are you seeing better pricing? If you are, what markets would that be occurring in?
Chris Thome (CFO)
Yeah. We are seeing better pricing, and that's on the in several different areas, right? We've, we've been able to, because of the demand, we've been able to increase pricing in aftermarket several times over the last year. That's part of it. As you know, after you get done with your first article programs, when you're bidding on the next articles, it's based on the hours that you spent on the first, I'll call it, inefficient unit, right? You, you get a natural bump in price, because it's based on the first article hours. At the same time, then you, you do get, you know, as Dan has just been talking about, more efficient on producing those, so that'll help expand the margin as well.
The mix is coming from, again, higher priced second and third article units, as well as, as I mentioned, the aftermarket.
Dan Thoren (President and CEO)
I think, I think I'd add to that, that we're, we're able to, to get a little bit better pricing, even on the commercial side, the refinery petrochem. We are seeing that heat up a little bit. Certainly, the aftermarket has been busy for, for the last year and a half. We're seeing some capital projects starting to come through. The pricing on those, we're able to, to get a little bit better pricing than we have in the past, even on the commercial side. It's improving, I would say, across several different markets.
Chris Thome (CFO)
I, I guess, Rick, I would just add to that, you know, we've also, been putting and, and stressing to the team about going back, you know, where our customers caused a delay or they, they caused an, you know, the cost to go up, you know, for either more engineering that they request or, if there was a delay in the order and material prices go up, right? We've been encouraging the team to go back, and we've been successful, in going back and negotiating, you know, change orders and, you know, increase to PO prices, to compensate us for that. That's also being built into some of the pricing that you're seeing as well.
Rick Ryan (Vice President and Senior Research Analyst)
Okay. Yeah, 'cause I know you're-- I thought you were gonna be putting more emphasis going after some of that aftermarket business, so it's, it's good to see that that's bearing some fruit. Dan, you briefly mentioned, seeing some pickup on the, the, the energy side. Is that domestic? What are you seeing in your interna-- India and, and China, operations from an energy standpoint?
Dan Thoren (President and CEO)
Yeah. So we, we have seen an uptick domestically. We, we won a, a big order in India, and China has been really slow coming out of, out of COVID. You know, the... Our, our pipeline domestically really cleared out a little bit here this last quarter, where we, where we got several different orders. We just haven't seen the China market come back as, as quickly as we thought that we would at this point.
Rick Ryan (Vice President and Senior Research Analyst)
What was the size of the India award?
Chris Thome (CFO)
Yeah, it was about $9 million.
Rick Ryan (Vice President and Senior Research Analyst)
What's the delivery timeframe on that?
Chris Thome (CFO)
I'd say over the next year and a half.
Rick Ryan (Vice President and Senior Research Analyst)
Okay. Okay, great! Congratulations, and it's good to see that all your efforts from fiscal 2022, the hard decisions are starting to pay off. Thank you.
Dan Thoren (President and CEO)
Yeah. Thanks, Rick. Thanks, Rick.
Operator (participant)
As a reminder, if you would like to ask a question, press star one on your telephone keypad. One moment please, while we re-poll for any additional questions. Thank you. Our next question comes from the line of Bill Baldwin with Baldwin Anthony Securities. Please proceed with your question.
Bill Baldwin (Partner and Financial Professional)
Hey, good morning, Dan and Chris.
Dan Thoren (President and CEO)
Hey, Bill.
Chris Thome (CFO)
Morning, Bill.
Bill Baldwin (Partner and Financial Professional)
I would just like to hear your comments and insights on what you're seeing right now in terms of activity, or what kind of project you're kind of aiming for in terms of potential future activity regarding your new energy initiatives and your cryogenic initiatives that, that, I know you're involved with.
Dan Thoren (President and CEO)
Yeah.
Bill Baldwin (Partner and Financial Professional)
Can you, can you provide a little color there as to what types of projects you're working on or looking at?
Dan Thoren (President and CEO)
Yeah, we can. I, I would say that, that the hydrogen inquiries have increased. There's, there's a lot of these, Air Products types, the industrial gas types of companies, that are, that are looking at hydrogen and, and, and see a, a real opportunity, to start to serve that market in the future. I actually went to a, hydrogen conference in Houston last month, and kind of learned what was going on there. Lots of technology development, lots of investment in infrastructure, for hydrogen production, distribution of hydrogen, fueling of, of hydrogen vehicles, et cetera. Went to the, National Renewable Energy Laboratory to kind of understand what, what they're doing. Quite a bit of activity on the hydrogen side there also.
I, I would say that, you know, the biggest thing that we're seeing is, is really, probably on the hydrogen side. People are interested in all phases, you know, from production all the way through fueling, using hydrogen. It's, it's, you know... The future is anybody's guess as to how it really unfolds, but it's, it's kind of interesting to, to compare it to you know, the space environment, you know, that we saw a decade ago, where, you know, it was all government, and, and, and now we're starting to see, you know, quite a few commercial companies starting to put their own money into it. Pretty interesting.
Small modular nuclear, we continue to see just the, a steady push to develop technology there. There are several different companies that are working in different technology areas, and we're, we're trying to support as many as we can. That's, that's a much longer effort, I think. I, I would suspect that the hydrogen effort, if it, if, if the hydrogen economy really goes, will, will pay dividends sooner than the small modular nuclear. Those are the two biggest areas that, that we're involved with right now. Now, Graham is, is also supporting some of the biodiesel, sustainable aircraft fuel. Those are more on the, the, the process side.
The, some of the heat exchanger vacuum equipment that, that Graham has made for a long time is being used in, in those plants also. We're, we're, we're covering quite a bit of the new energy space. We'll, we'll see which one really takes off here.
Bill Baldwin (Partner and Financial Professional)
Thank you, Dan. Any specific comments on the cryogenic projects or types of activities going on there?
Dan Thoren (President and CEO)
Yeah. So cryogenic.
Bill Baldwin (Partner and Financial Professional)
Is that any, or is that part of hydrogen or part of?
Dan Thoren (President and CEO)
That's hydrogen.
Bill Baldwin (Partner and Financial Professional)
Hydrogen.
Dan Thoren (President and CEO)
Yeah.
Bill Baldwin (Partner and Financial Professional)
Yeah.
Dan Thoren (President and CEO)
They're using gas, hydrogen gas, and they're also looking at liquid hydrogen for, for fuel and, and transport, as well as some, some of the other carrier-type fluids like, like ammonia. All of that is being discussed, about the, you know, in the, in the distribution, transportation of hydrogen.
Bill Baldwin (Partner and Financial Professional)
Right. Okay.
Dan Thoren (President and CEO)
Yeah, that's, that's where the cryogenic pumps come in, for the liquid hydrogen.
Bill Baldwin (Partner and Financial Professional)
Okay. Thank you very much.
Dan Thoren (President and CEO)
Yep. Good talking to you, Bill.
Bill Baldwin (Partner and Financial Professional)
Absolutely.
Operator (participant)
Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.
Dan Thoren (President and CEO)
Thank you for joining us today. We continue to demonstrate progress with our plan, and we are putting proof points on the board. We have lots of opportunity to continue to grow and diversify. I look forward to updating you further with our Q2. Enjoy your day.
Operator (participant)
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.