Graham Reports Fiscal 2022 Fourth Quarter and Full Year Results

Source: 6/8/2022, Location: North America

• Revenue of $39.7 million in the quarter, up 55% over prior-year period; fiscal 2022 revenue increased 26% to $122.8 million
• Defense industry revenue in quarter of $18.7 million was 47% of total and was $62.2 million, or 51% of total, for the fiscal year demonstrating shift in business mix
• Yearend backlog was $256.5 million including $195 million, or 76%, related to the defense industry
• Barber-Nichols acquisition contributed 62% of orders in quarter, or $14.6 million of $23.7 million total and continued to outperform expectations
• Recorded fourth quarter net loss of $1.4 million and $0.4 million in adjusted EBITDA*; fiscal 2022 net loss of $8.8 million
• Recently shipped on schedule first article U.S. Navy project; delivery advanced efforts to reduce cost overruns
• Expect fiscal 2023 revenue to grow to $135 million to $150 million, up 16% at mid-point over fiscal 2022; expect adjusted EBITDA* to increase to $6.5 million to $9.5 million

Graham Corporation, a global leader in the design and manufacture of mission critical fluid, power, heat transfer and vacuum technologies for the defense, space, energy and process industries, reported financial results for its fourth quarter and full fiscal year ended March 31, 2022, (“fiscal 2022”). Financial results include those of Barber-Nichols, LLC (“BN” or “the acquisition”) from the date it was acquired on June 1, 2021.

Daniel J. Thoren, President and CEO, commented, “Fiscal 2022 was a challenging year, but we made good progress in the quarter and are validating our strategy to increase margins overall and in markets with strong growth drivers such as defense and space. Importantly, we are improving processes and have added talent to mitigate the challenges in our Batavia, NY defense operations. In addition, our fluid and power business is winning new contracts that provide opportunity for more growth and long-term production, and our aftermarket sales continue to be strong, which is a leading indicator for future capital investment by our customers.

"Notably, we recently shipped a first article condenser for a critical navy submarine application and are on schedule to ship additional critical U.S. Navy projects throughout fiscal 2023. As we make further progress on our production schedule and grow our welding staff, we will be able to reduce our reliance on contract welders. This is expected to help with margin improvement over the coming quarters.”

Fiscal 2023 Outlook
Mr. Thoren concluded, “The future of Graham is very positive. At the heart of the Company, we are engineering experts in complex fluid, power, heat transfer and vacuum systems. Expanding our focus to more growth-oriented markets of defense, space and alternative energy, augments our legacy energy and process businesses where we have a large global installed base. As we look out over the next five years, a new, reenergized Graham has the platform to grow in fluid and power technologies and plans to build a better heat transfer and vacuum technologies business. We believe that over time this strategy will create a stronger enterprise with materially expanded adjusted EBITDA margins in the low to mid-teens with high single-digit top-line growth as we continually improve.”

Revenue in fiscal 2023 is expected to be $135 million to $150 million with gross margins of approximately 16% to 17% and selling, general and administrative (“SG&A”) expenses to be approximately 15% to 16% of sales. The expected effective tax rate for fiscal 2023 is approximately 21% to 22%. Adjusted EBITDA for fiscal 2023 is expected to be approximately $6.5 million to $9.5 million, yielding an adjusted EBITDA margin* of approximately 5% to 6% compared with a $5.0 million loss in fiscal 2022. The Company expects the first quarter of fiscal 2023 to remain challenging and for results to improve as the year progresses.

Capital expenditures for fiscal 2023 are expected to be $4.5 million to $5.5 million.

Separately today, the Company announced its new strategic plan outlining its operating and financial goals.

Fourth Quarter Fiscal 2022 Sales Summary (All comparisons are with the same prior-year period unless noted otherwise.)
Net sales of $39.7 million increased 55%, or $14.0 million, as acquired revenue of $15.9 million and strong aftermarket sales were partially offset by declines in the organic businesses. By industry, improvements in the defense and space industry, which is new to the Company with the acquisition of BN, offset weakness in refining and chemical/petrochemical sales. See the accompanying financial tables for a further breakdown of sales by industry and region.

Compared with the prior year period, the decline in gross profit and contraction of gross margin reflected challenges with the defense business at Graham’s Batavia operations which had lower sales and higher costs relating to material and labor over runs for first article projects. Sequentially, gross margin improved 8.7 percentage points as the Company advanced these projects, improved processes, and reduced related costs.

SG&A expenses in the fourth quarter of fiscal 2022 were $6.1 million, up $1.7 million over the prior-year period including $0.3 million of intangible amortization. The acquisition added $1.7 million in incremental SG&A expenses in the quarter and there was an additional $0.2 million related to CFO transition costs and $0.3 million of costs in connection with a credit agreement amendment and waiver.

Net loss and loss per diluted share were $1.4 million and $0.13, respectively. On a non-GAAP basis, which excludes intangible amortization, other costs related to the acquisition, and other unusual/nonrecurring (income) expenses, adjusted diluted loss per share* was $0.02.

Net sales for the full fiscal year of 2022 were $122.8 million, up $25.3 million, or 26%, driven by sales of $47.9 million from the BN acquisition and higher aftermarket sales. Sales to the defense industry increased 160%, or $38.2 million, to $62.2 million, representing 51% of total revenue. The expansion in defense was partially offset by declines in the commercial refining and chemical markets, primarily in Asia.

Sales in the U.S. increased $44.9 million, or 85%, to $97.6 million and was 80% of total sales in the full year of fiscal 2022, as revenue from the acquisition is primarily in the U.S. International sales, which accounted for 20% of total sales, decreased by $19.6 million, or 44%, to $25.2 million.

Gross profit and margin were down compared with the prior-year period due to the same factors which impacted the quarter. The Company elected to over-resource certain critical defense orders in its Batavia operation, which included increasing the use of contract welders to meet delivery schedules and redirecting resources away from commercial business. Combined with cost overruns, Graham estimates that these factors were an impact of over $10 million to gross profit in fiscal 2022. The BN acquisition and strong aftermarket sales helped to offset those losses. The impact of the low margin defense projects and related cost overruns in the Batavia operations are expected to lessen over the coming quarters and are expected to be completed before the end of fiscal 2023.

SG&A expenses in the full year of fiscal 2022 were $21.3 million, including intangible amortization of $0.9 million, an increase of $3.8 million, compared with SG&A expenses of $17.5 million in the full year of fiscal 2021. The increase was primarily due to the addition of the BN business which added $4.8 million in incremental expenses as well as costs associated with the acquisition, executive management transition and financing. Offsetting these increases was reduced incentive compensation.

Net loss and loss per diluted share were $8.8 million and $0.83, respectively. On a non-GAAP basis, which excludes intangible amortization, other costs related to the acquisition, and other unusual/nonrecurring (income) expenses, adjusted diluted loss per share* was $0.62.

Cash Management and Balance Sheet
Cash generated from operations in the quarter was $12.3 million. Cash, cash equivalents and investments at March 31, 2022, were $14.7 million compared with $14.0 million at December 31, 2021, and $65.0 million at the end of fiscal 2021, which was prior to the BN acquisition. Capital expenditures in the quarter were $0.4 million and for fiscal 2022 were $2.3 million.

Debt at the end of the fourth quarter was reduced by $10.4 million to $18.4 million compared with the end of the fiscal 2022 third quarter. Graham executed a waiver and amendments to its credit agreement, which expanded availability for letters of credit and changed the minimum EBITDA requirements. The Company is in compliance with all financial covenants of that agreement.

Orders for the three-month period ended March 31, 2022, were up $10.3 million, or 77%, to $23.7 million compared with $13.4 million for the same period of fiscal 2021. Orders related to the acquisition were $14.6 million for the fiscal 2022 fourth quarter.

Coming off strong orders in the third quarter of fiscal 2022, defense industry orders in the fourth quarter were $2.8 million, reflecting the timing of project releases. Space orders had a solid sequential increase of 86% to $5.4 million. In the energy business, refining was down 57% sequentially from the third quarter, but was up 50% compared with the prior-year period. Orders from the chemical and petrochemical market stabilized with a comparable level of orders over the past three fiscal quarters.

Aftermarket and small parts orders for the refining and chemical/petrochemical markets improved in the fourth quarter. This business tends to be a leading indicator of future capital investments by customers in this market.

Backlog at March 31, 2022, was $256.5 million, compared with $272.6 million at December 31, 2021, and $137.6 million at March 31, 2021. The 6% sequential decrease primarily reflects backlog being released for delivery. The acquisition added $117.8 million to fiscal 2022 yearend backlog. Approximately 40% to 50% of orders currently in our backlog are expected to be converted to sales within one year. Most of the orders that are expected to convert beyond twelve months are for the defense industry, specifically the U.S. Navy.

Backlog by industry at March 31, 2022, was approximately:
• 76% for defense projects
• 10% for refinery projects
• 5% for chemical/petrochemical projects
• 4% for space projects
• 5% for other industrial applications

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