Q4 2020 Graham Corp Earnings Call
Graham Corporation fourth quarter fiscal year 2020 financial results at this time all participants are in listen only mode. A question and answer session will follow the formal presentation.
He would you require operator assistance during the conference.
Please press Star zero on your telephone keypad as a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Mr., Chris Gordon Investor Relations for Graham Corporation. Thank you you may begin.
Thank you Melissa and good morning, everyone. We appreciate you joining us today to discuss grams fiscal 2024th quarter and full year results.
You should have a copy of the news release that was distributed across the wire. This morning.
We also have slides associated with the commentary we are providing here today.
If you do not have to release or the slide you can find them on the company's website www Dot Graham Gosh EM.
She dot com.
On the call today with me or Jim line.
Our president and Chief Executive Officer, Jeff like our Chief Financial Officer, and Alan Smith, Vice President and General manager of our JV, a New York facility.
Jim will start with the strategic overview of our business and provide our outlook for fiscal year 2021.
Jeff will review the financial results for the period and Alan will provide an operations overview.
Well then open the lines for Q1 day.
As you are aware, we may make some forward looking statements. During this discussion as well as during the Q and a these statements Y O y.
The future events and are subject to risks and uncertainties as well as other factors, which could cause actual results to differ materially from what it stated on the call.
These risks and uncertainties and other factors are provided in the earnings release and in the flight deck 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 Www Dot S E C Dot dot.
I also want to point out that during today's call. We will discuss some nonfinancial GAAP measures, which we believe are useful in evaluating our performance.
Should not considered the presentation of this additional information in isolation or as a substitute for the results prepared in accordance with gap.
We have provided reconciliations to comparable GAAP to non-GAAP measures and the tables accompanying today's earnings release.
With that it's my pleasure to turn the call over to Jim.
Thank you Chris.
Good morning, everyone. Thank you for joining us to review fourth quarter and your end results.
I began my prepared remarks on page four.
We took quick measures in the latter part of March to respond to cope with 19 related with [laughter] ground Misclassified central workers, because we are a critical infrastructure and defense industry supplier.
To protect our employees and to mitigate the spread on the virus that I've communities operations, where you're down to approximately 10% production capacity.
We kept such scaled back production capacity.
For several weeks and ramped back to near full production capacity at the end of May as Osha and see do you see based work procedures a recommended practices were put in place.
Production capacity will average, 50% for the first quarter and we'll be at 100% for the second quarter fiscal 2021.
While operations scaled back.
We maintained wage and benefits continuity for all ground employees.
Hi, I'm proud of the response of the management encoded returned to work teams that admirably prepared our facilities to have employees safely back on the job full time.
Please refer to slide five.
Disruptions such as cold bid along with the collapse of crude oil prices had a dramatic impact on our end markets with an exception being our U.S. Navy work.
We believe that new opportunities arise.
During downturns for companies that are equipped to capitalize on.
Dan and grab is one of those companies.
We entered this disruption with a strong balance sheet and excellent high quality backlog.
We will continue to invest in long term growth initiatives in particular investments to drive our installed our installed base.
Staffing in structuring our U.S. Navy segments to convert current backlog and expected new orders.
Acquiring opportunistically assets to strengthen U.S. rabies Navy revenue or broaden participation in energy and petrochemical end markets.
Accessing the global fabrication supply chain to expand capacity improved cost.
And change market share in previously under served end markets provides a new runway for growth.
Building out that organization to ensure a broad participation nurture the opportunities secure new orders and to control sub subcontracted fabrication in order to me quality and margin requirements as critical to the success of this initiative.
We will invest in personnel in support of this initiative.
We will also continue investing in process improvement and productivity gains.
And also in our employees.
We don't intend to take our foot off the accelerator, we will focus on the long term.
And that during this downturn to strengthen revenue growth and profitability.
This disruption wasn't due to black Swan surprise, Nonetheless, we want to capitalize on the opportunities that such events creates.
I'd now refer to slide six.
The refining end market is expected to be weaker this year than last with regard to new orders.
There is however, large project work in Asia in particular for China, and India. We're actively in the flight for those for those projects.
National and integrate it refining customers have told in Capex and MRO spending due to cash flow strain that stems from oil prices falling and the abrupt drop in end market demand for fuels.
Oil prices must recover and more importantly demand for transportation fuels needs to return to more normal levels before we anticipate that significant investment buyer customer returns.
We understand due to the global pandemic that demand for crude oil has fallen approximately 30%.
What does a bit different this time is independent refiners also are changing capex and MRO plans.
This is due to demand abruptly declining.
And the lowering of crack spreads.
Just as a reminder, crack spread is the difference between selling of refined products and the purchase cost of crude oil.
As the global economy recovers, we anticipate investment by independent refiners will recover more quickly.
Take advantage of spreads with improved demand.
Given all of this are back log for refining.
And market was negatively impacted to date approximately $4 million of backlog.
12 31.
It's been canceled.
Chemical and petrochemical markets also were impacted negatively this was particularly evident in North America.
You asked a rig count has fallen by roughly two thirds and co produced natural gas supply was adversely impacted.
As a reminder, natural gas is a primary feedstock to the petrochemical industry in the U.S.. We observed several final investment decisions for petrochemical projects in our bid pipeline gets suspended or delayed by a year or more.
On the other end the next wave of global petrochemical capacity is starting to enter the early bidding phases. This is principally for international markets, but does continue to show the decoupling of petrochemicals from the energy market.
We do have a solid pipeline of bids for the U.S. Navy that we expect will close.
In fiscal 2021.
The total amount of that pipeline has between 40 and $50 million.
Our short cycle orders are off 15% to 20%.
Due to the same reason cited previously.
We expect this recovers as the global economy gets back on its feet.
Grab as very fortunate to have a high quality large backlog that at March 31st was $112 million.
This will enable fiscal 2021 to have a sharp recovery from the first quarter results in fiscal 2021.
With our great balance sheet and terrific backlog, we're positioned well for capitalizing during this downturn.
I'll now turn the call over to Jeff to review the financial results Jeff.
Thank you Jim and good morning, everyone. If you could turn to slide eight.
Q4 revenue declined 2%, but as Jim mentioned, we had $7 million moved out of the Q4 due to covert 19 pandemic.
Net income was six cents per share and orders net orders were $12.3 million.
For fiscal 2020 revenue was $90.6 million, which is down $1.2 million from 91.8 million last year.
Net income was $1.9 million this year or 19 cents per share.
Included in fiscal 2000, <unk> net income was a loss of $900000 or nine cents per share related to the energy steel business, which we divested in June.
Orders for the year, where $80 million and our backlog at year end was $112.4 million.
As Jim mentioned, our backlog will help us rebound from what will be a lighter Q1, where we were operating at approximately half capacity.
Including Q1, we currently expect 70% to 75% of our heart and 12 million dollar year in backlog to convert in fiscal 2021.
The midpoint of this range would be just over $80 million plus additional in your bookings.
Alan will discuss this further.
If you could move to slide nine.
Sales in the fourth quarter was slightly below last year.
Included in the sales in the fourth quarter of last years numbers were $1.7 billion related to energy steel.
Gross margin was off 110 basis points and EBITDA margin was off 190 basis points covert 19 impacted gross margin in the quarter.
Net income was $600000 or six cents per share compared with a loss last year last year's loss included impairment charge, excluding the impairment charge last year had a net income of $800000 or eight cents per share.
If you could move to slide 10.
For the full year sales decreased by $1.2 million or $90 million to $90.6 million.
However, please note that there was a seven there were $7 million more sales last year compared with this year related to the energy steel business, which was divested this past June.
There was only $1.3 million in energy steel sales in fiscal 2020, compared with 8.3 million in fiscal 19, [laughter] gross margin was off 390 basis points and EBITDA margin of 440 basis points as we increased production costs for what was expected to be a strong growth in fish.
Well 2021 that obviously appears less likely now.
The sales, which pushed out of Q4 also adversely impacted margins.
Last year, they were $16.9 million for the year compared with 17.9 million last year.
Included in last year. They were 600000 in fiscal 2020, and 2 million in fiscal 2019 for our divested business.
Net income in the P.S. was 1.9 million and 97 cents per share respectively.
Fiscal 29 team they were a loss of $300000 at a loss of three cents. However included in fiscal 2019 was an after tax impairment charge of $5.3 million.
On the slide 11, our cash position in fiscal 2020 decreased by $4.8 million to $73 million or $7.39 per share.
Our changing customer deposit swung significantly in fiscal compared with fiscal 2019.
We had a swing of $10 million in fiscal 2020, we had a usage of $3.7 million from customer deposits compared with an increase in customer deposits of six point threemillion in fiscal 2019.
We paid $4.3 million in dividends and spent 2.4 million in capital spending during the year.
We expect capital spending in fiscal 2021 to be between two and $2.5 million.
During our interim call in late March when we provided an update on how we were impacted by and addressing cobot 19, I noted that we estimated a monthly cash burn of $3 million. If we were completely shut down.
Although we never completely shut down as Jim noted, we did reduce our staff to 10% for a few weeks and have steadily ramp back up from there.
As a reference point, our current cash balance at the end of May two months into the quarter.
It was $70 million, so down $3 million from March 30 Onest.
We believe we are pass any cash burn related to cope with 19 in the in Q1.
As we look forward this period of market disruption may present, M&A opportunities, which may occur due to market consolidation and contraction.
Our business development management team and board of directors continue to be focused on utilizing our strong balance sheet to grow our business.
Both short and long term.
Alan Smith will complete our presentation with a look at operations and provide more insight regarding our backlog conversion in fiscal 2021.
Alan Thank you Jeff Good morning, everyone I'd ask that you refer to slide 13.
We entered the fourth quarter with a strong their outlook that what had occurred sales for the third quarter were 23.1 million and were negatively impacted by the cobot outbreak due to production interruptions at up and take a facility as well as at our global partners in South Korea, Europe and China.
Yeah.
Unfortunately, the work stoppages caused approximately $7 million at projected third quarter revenue to push into the first and second quarters of at fly 21.
Our over a short cycle order for the Navy pushed from fiscal 2020 into the first half of fiscal 2021.
As of June 1st I, Batavia plan and all of our fabrication partners are operating at full capacity.
Moving on to slide 14.
As Jim mentioned in his remarks, the reduction cap acts and MSR OLV budgets as response to declining oil prices and digital disruption of coal bed 19 is causing order placement to be delayed into refining and petrochemical markets.
However, we are still experiencing strong demand for our products from the enable customers. We believe that our naval backlog will increase year on year.
As a general comment we're observing low order levels to persist in the first quarter of Aethlon 21.
I will conclude my remarks on slide 15.
Our backlog remained at a healthy level at the end of that like 20.
As pointed out by Jeff, 70% to 75% of at that level of her into sales within the next 12 months.
Using the midpoint figure that applies 81 million.
Dollars of physical 21 revenue is from backlog as of March 31st 2020.
This is of course assumes no additional cancellations of which there had to 4 million of refining and market canceled orders or no conversion delays caused by our customers.
As you May know there is a level of revenue that is booked in covered it during the fiscal year historically that range has been between 10 and $20 million.
I would anticipate with a current order environment to be and the lower end of that traditional range.
Lastly, naval project, a 50% of 52% about backlog and more importantly, all naval programs are in the revenue cycle.
Operator will you. Please open the line for questions.
Thank you at this time will be conducting a question and answer session.
To ask a question. Please press star one on your telephone keypad, a confirmation to unwilling to keep your line is in the question can you maybe start to if you'd like to remove your question from the Q for participants using speaker, maybe necessary to pick up your handset before pressing the starkey.
Our first question comes from the line of Joe Mondello with Sidoti and company. Please proceed with your question.
Good morning, guys.
Joe Hi, Joe.
So the production shutdowns was that mainly related to internal safety concerns or customer shutdowns.
Or government guidance.
Yeah. Joe This is Alan Smith, the shutdown was mainly around preparing the organization to comply with the CDC recommendations.
So that we can make sure we provide a safe work environment for our employees and that that process took us about about two weeks to complete.
And so.
It sounds like.
May was not near 100%.
Quite yet in terms that's correct.
That's correct.
Okay. So if the operations got back up and running a mid April.
Help me understand the dynamics. The fact that May was not backup in you know sort of fully running.
Sure we made a decision to bring back our employees in small groups. So that we had the opportunity trained and then on what we expected them to how they how we expected it to follow our safety protocols and then train them on the Pp EBIT player. So to me I always safely we brought people and over a three.
Three phases and that's why it took until a deal one to have everyone back at work.
Okay. So june should be close to 100%.
That's because that right that's correct.
Okay.
Is there any way you can.
Help us understand the effect of April and May to your.
You know whether your profits are margins are not sure. If there's any way you can help US you know I understand the productivity.
Inefficiencies that are related to you know rather you know essentially the shutdowns.
Well as we had indicated I Joe This is Jim as wed indicated in our prepared remarks on average for the quarter.
We would anticipate that we'll be at 50% production capacity.
And that doesn't necessarily translate proportionately to that's what the revenue level would be.
However, you know that's a decent surrogate to how to think about the run rate.
And it wasn't so much a productivity what we were amazed that as our workers returned to work.
And.
Returned to the workstations after the safety indoctrination protocols were behind us.
They were in fact, working productively and efficiently. So there really wasn't a huge dysfunction or inefficiency related to cove. It other than when the team was away.
Upon returning they they got right back to work and we saw the productivity measures and the effectiveness of the work.
Not being materially different from.
A pretty cold it if you will.
So I think you're trying to maybe frame if I can maybe asked the question differently.
Ask a question.
Trying to understand what the first quarter revenue might look like.
Oh, I mean I gather from your comments, it's gonna be.
I mean, yeah sort of I mean, it's hard to with your business. It's so lumpy on a quarter to quarter basis relative to how the backlog sort of is converted and on a on a time expectation and then you know in addition to that the margin.
Are also quite lumpy based on you know the type of work that you're working on and then you know layer in the fact that you know you had full plant shutdowns and you know the first couple of weeks them April and then you know when I was talking inefficiencies I was sort of got you know referring to the fact that you know the second half of April is not you you your employ.
Always aren't fully back and then the same with me. So all of that is you know really sort of hard to understand the near term.
A way to think about.
This is going up or going to perform.
Sure.
That's a great question, we're not we're not able to give us.
Complete.
Definition for you, but I'm not trying to frame that try to answer your question.
As we were thinking about how 2021 was was shaping up.
Pretty cold bid.
We were we were modeling something in the.
$110 million to $120 million revenue range.
That's how we were thinking how 2021 was going to shape up then of course that was materially alter but just so I can do some simple math in my head, let's just use the 120.
And.
[laughter] would equate to 30 million a quarter.
If we were running at a 50% productivity for the first.
Quarter.
Half of that $30 million is probably not a bad surrogate.
For how to think about the revenue level.
And you've heard us.
Indicate on our.
On our interim call in March.
And also here today, we haven't taken actions to adjust our cost. So therefore, we have the costs that were reflective of that prepared us for that higher revenue level.
Putting that altogether.
We're not we're not trying to to be opaque here.
First quarter is going to be rough.
And we took action or chose to maintain our kit capabilities and capacity because we feel we're going to have a sharp recovery.
Revenue in productivity and backlog burn once we get passed as rough quarter and it didn't make sense too.
I tried to adjust costs.
For an event that would be in our rear view mirror relatively quickly.
Okay I really appreciate that.
Is extremely helpful helps give a much clearer picture so I appreciate that along so.
You know related to the cost side of the business and you know your comments at the end there.
Your <unk> I mean your orders in the first quarter I'm. We're obviously you know not.
Not surprisingly you know relatively pretty low considering you know compared to the trend that you're you know the business, it's been running out and it's not a surprise given what's going on and I would imagine you would expect and correct me if I'm wrong that orders are gonna be quite light for the next at least.
Quarter or too.
Given that.
How do you manage the business on a cost structure perspective, knowing that you know going for and probably from today for the next handful among.
Our business is gonna be running at pretty good rate.
Given the backlog, but then you know looking now you know orders are going to be like and then at the same time, you know <unk> related to the same question in your Ass DNA. If you know business is not really is sort of slow out there.
How are you adjusting <unk> if at all considering that Theres, just not a lot of business I know that the long question, but Oh no no. It's a it's a it's inappropriate question.
And it gets.
Gets to a our management philosophy.
And you've heard of speak to this previously is.
We're not so hyper focused on maximizing given quarter or a couple of quarters performance.
You are correct Q4 bookings were were light.
As our slide 14 shows around $12 million you are you heard Alan Smith indicate in his prepared remarks that we're seeing.
Order levels in our first quarter of fiscal 21, thus far.
Persist at that softer level. However, when we look at our bid pipeline, we look at our.
Activity from the defense sector that we have set up for hopefully to close and hopefully we are successful.
No it suggests to us that.
Let's get in Lids flight, let's fight hard for these orders that are available recognize we may have a tough Q1.
We're going to be focused on how do we build backlog in the exit 2021 with a with a back with backlog for a book to Bill above one if you will.
And we think there's ample opportunity to do that and as you use listen to management to speak previously.
We are an Ito business, we are custom fabrication business.
And the learning curve for the strength of our organization our people.
Take some time so as we get these these teammates to levels of productivity, we're always very reticent to quickly strip those out in response to.
What you've just cited we are mindful of it we recognize we we often manage our business profitably.
But we've we've chosen and our past and we're choosing to do it again not to necessarily try to fix a quarter.
At harm the long term.
Okay and last question for me and I'll hop back in queue.
Relative to your comments just there in that answer so essentially a follow up to that.
The pipeline a business that you have or the opportunity that you have for your bookings bookings this year.
I would imagine the pipeline and again correct me, if I'm wrong, but the overall pipeline would be smaller than it than a year ago, but is there a case in point, where maybe your hit rate could your win rate could be higher given the specific projects in your sort of maybe van.
Good point for those projects is that sort of what's happening or you don't give me a sense of pipeline and hit rate win rate opportunities.
Sure Joe there's really two dimensions to it.
One is the end market mix of the pipeline.
Yeah, when our prepared remarks, we've indicated that there was.
40, or $50 million of defense work in our pipeline.
There's no assurance that we win any of it but historically, we have a very good success level there.
And so we're expecting to book that and then secondarily.
Specked into book, a good amount of that and then secondarily. There's project size that comes into the equation. So I'm going to answer. Your question. This way there are definitely fewer opportunities in the pipeline.
And there are some relatively a significant projects and our bid pipeline that we know are going to close.
I'm, sorry, we feel very strongly that they're going to close.
And and you know these are we can have oh on our project side or large did work orders that could be a million dollars orders that could be $5 million or orders that could be $10 million.
And each of those leverage our engineering organization differently and their leverage our production assets. Similarly.
Depending upon if we're using a shirt or our global fabrication supply chain or having that work done to Batavia, but as we look at this into tele to.
It didn't seem to us that the course that this business should take.
In light of the near term trauma, what's happening in our end markets was to strip a bunch of cost out of here that really affects negatively.
Our capacity and our capability.
When opportunities arise and they will arise and we want to be ready and we want to be the supplier that can capitalize on that while others that don't have a that same sentiment don't have that same conviction don't have that same management philosophy will be unable to do so.
Okay, well thanks, a lot thanks for taking my question.
You're welcome Joel.
Good questions.
Thank you Sir our next question comes from the line Theodore O'neill with Litchfield Hills. Please proceed with your question.
Thank you just two questions. Jim you said in your prepared remarks that you're expecting a V shaped recovery and I'm wondering if there's sort of the assumptions behind that is that are there some assumptions beyond that like the price of oil or is that.
Or you are you hearing that from your customers basically you know if that's what you're going to get experience.
Good question. Thanks for having me clarify that it's actually a low hanging fruit question for for us because of our backlog the context of that remark is because of our backlog after we get through the first quarter event.
We have such a great backlog it will appear as though from a revenue and profitability.
We're back.
The question question really arises.
How does the order book build while we're going through that backlog, which then manifest and how does 2022 shape up.
So the comment in the context was around backlog conversion near term revenue.
And the benefit benefit the Graham has because of a long cycle business are long conversion cycle business is we have several quarters of cover.
Typically when something like this happens because of the strength of our backlog.
Again that comment was around the backlog not end market.
Okay, Great and and Jeff you mentioned about M&A activity or are you seeing any more opportunities. There can you give us a little color on.
And the level of activity.
Yes feel we're we're we're certainly keeping our focus on what's going on in.
Our markets and we are.
Hearing about some possibilities of companies, who who may be looking to offload a portion of their business for strategic reasons. So there's a little more activity right now, but again, it's fairly early says certainly says a co bid.
19, his hit our markets, but we think that we'll continue to pick up.
Okay. Thanks, very much welcomed thanks deal.
Thank you. Our next question comes from the line obtained Sullivan with Maxim Group. Please proceed with your question.
Hi, Thank you Alan a follow up question for you if I may on your great. Good comments on detail on expected Rep backlog conversion. This year I missed one element you mentioned 81 million revenue from backlog in fiscal year 21 provided no more cancellations and then you there was another cat.
Gory that you discussed what was that please share you know we didnt.
There's there's another component, which is revenue derived from jobs booked with in a financial year and whatever share was that historically that range has been between 10 to 20 million.
And the thought now with the current environment. We're in we would be towards the lower range of lower ended that range.
Thank you I thought okay, maybe some something else after the cancellation, maybe just potential change orders.
And then following up earlier comments and I understand keeping employees in the skilled employees.
And your company, but did you mentioned can you convert employees that were working on refining orders to what you can do for the Navy or did you mention having higher at new types of workers.
Workers with different skills for Navy work in the future.
Sure I both in our production area then in our engineering areas, we are able to little staff from higher our commercial work to our Navy work and to the extent that we can take those actually well.
Okay. Thank you very much.
Thank you. Our next question comes online game Berg with Rosada capital. Please proceed with your question.
Hi, guys, how you doing.
Good gave how're you.
It's been a while.
While Gabe.
Well I wanted to ask you a couple of different questions. The first one you mentioned several times during the conference call.
To capitalize on the current downturn.
I think I would like to hearing you expand on exactly what that means.
A little more it sounds like M&A, but.
Anything anything else in it than that.
Certainly Oh gave that is one of the elements with our balance sheet and opportunities that we envision could arise.
Through this pandemic and the consequence other pandemic.
And also the the opportunities that we've been nurturing through our M&A activities.
We definitely are tending and want to put our capital to work.
And then external growth strategy, so that that is one.
And that's clearly focused on bye bye, Justin Chris Johnston, our board and myself.
To to take that type of action during this.
So this opportunity that might arise.
And then secondarily.
There are projects that are in our bid pipeline.
That that.
Feel strongly that will close.
And we want to be able to use our balance sheet with respect you were saying sorry, one of the I didn't I didnt sets up.
One other things we see right now is cash flow strain.
With our customers not necessarily we would define it as credit risk.
But how they're being affected by demand changes for the price of crude oil.
They're asking for more where there might be asking for more customer oriented cash flow terms.
With our balance sheet strength that creates an opportunity for us that others without the financial firepower that we have are unable to do so so we think that creates an advantage and then the last one is.
As these projects that can arise sometimes very quickly in our pipeline.
A spare part a large spare part news can be a million dollars $2 million or a rebound.
It's so imperative that we retain our capacity in our capabilities to execute those.
Because even in a tough downturn like we likely will be in for a period of time.
Those bluebirds do arise and if you take actions to strip out your capabilities.
You actually drive of self fulfilling prophecy of how far you can push revenue or how you might be able to capitalize on those opportunities we've chosen to be.
Prepared with the dry powder to capitalize on those rather than try to governor down our costs to more aligned with near term revenue.
Corresponds to the bookings it just didn't make sense to us.
You know what's you have.
As a perhaps a benefit as a management team.
I wish I didn't have to have these experiences, but we're now at our fourth.
The downturn going back.
For the late Ninetys and we understand all these plays out play out we understand customer behavior.
Thing or customer care as little about.
As you know what we've chosen to do to respond to the downturn like a care about those can we stand up can we support them when they need us they need us a lot during a downturn with engineering support to be ready for that Bluebird handle a crisis situation. When you lose a customer because if you're getting prepared for that support.
And I've lived the consequences of being able prepared.
And we're very reticent to be ill prepared now.
Yeah enough.
And thank you for that.
Just wanted to ask I mean, I know, but putting that of the stock and the markets yet, but you have but.
You know, 54% or the market cap is in cash <unk> multi I.
Going back 12, 15 year loads of equity given the environment.
Do you guys try to balance M&A versus your own company stock.
And that equation.
Got it gave us we certainly have that discussion frequently.
At this time, we believe that there's a good amount of opportunity, particularly in the this downturn in the M&A pipeline that who want to keep as much dry powder is as we can.
In the immediate term.
Well I get that I'm, just wondering if it does come into the equation.
So we really discuss it.
Off to every board meeting it is a topic of discussion with management and the board.
It is any of the cash restricted.
Very very small amount or a couple million dollars is restricted to about 2 million of ours is roughly 73 million at year end or 70 million at the end of May.
Yeah.
And and almost all of it isn't because almost all of us in the United States is about.
Three and a half million at about 5% of it is outside of the United States.
Yeah, and and that they can't really well actually we seen you guys. My active on the M&A. During this downturn isn't it its a caution on yelp oil or is it caution on the seller point given the environment. They think twice the lower assemble look what would be the hold up at this point on potential M&A given your.
No you're you're fairly cash flow, you're going to have a you know you're not as strong like your we're gonna be but I mean, you got 100%, but pretty much revenue. So what we're looking for it looks like you're gonna be.
Slightly positive on the airplanes coming either standpoint.
Well what would be that what would be that they triggers to get asked we see an M&A on yelp standpoint.
I I mean, you they do you need to parties to a two covered agreement or if you want to buy someone but there's really nothing that that's how we'll hold us up as long as we can find that right.
The company that fits this not just today or tomorrow, but for the long term that that's in line with our our strategic.
Growth areas, if we could find that right company, we'd certainly move forward.
Quickly.
But it sounds like there's a there's a potential pipeline of deals that you're looking out absolutely. There's always a pipeline of deals. It's just a matter of where things are in the pipeline what part of our process Gabe.
It is too to build a relationship with a potential company that we're looking to acquire and those are things that typically happen over a couple of months or a quarter or too. They often can take many quarters are quite frankly, a couple of years.
And as we're going through this process.
You know there there are companies that we may have been talking to a year or two three years ago that maybe weren't ready at that time to be acquired but might be more interested now. So we're we're looking back at at not just companies that we spoke with recently, but also companies we spoke with over the past few years and yeah hopefully between.
And us we've built some some <unk> trust and some open communication and we'll we'll continue to pursue a ah things that are there, but we always have a pipeline of.
Of opportunities, it's just a matter of where companies are in that pipeline and where we are in that relative to them and gave just an add on to to further what Jeff said said.
Where are these up.
Broken down.
When we've been in the of the pursuit of trying to get a deal done has been a valuation gap.
And.
We're focused on not an accretive.
Type of deal.
Oh, we're focused on an equity based return.
Deal structure and.
It's getting the owner and us to be aligned with.
Your one year two years, three and perhaps your for revenue projections.
And we found very often the on owners are are far more ambitious.
And the outlook that we think the reality of the market is and that's translating into a valuation gap.
And that we're not keen on let's figure out how to close that gap through creative synergies because [noise].
So difficult to actually.
Manifest in the end. So we have been very focused on us we'd have had a number of deals that have nurtured through the process that have unwound and the end Jeff you can confirm this business really come down to a valuation gap and how.
Our process evaluates revenue growth and result in profitability of of the combined entity versus your orders effective and that's really been typically a valuation gap, we had some very nice strategic fits.
However, we weren't able to convince ourselves moving forward would return appropriately what was necessary to us and our shareholders and caused it feels to unwind. We're not we know we've received that process.
Well, let me quickly there more on the last deal was 2010 right was that NRG yield supply was that the last one.
That's correct game, but I can assure you as Jim has mentioned that there were a quite a number in the interim that Unfortunately, we decided to pass on even though we had gone far down a path.
With them, but we as we got closer to the M., we decided to pass and and while we.
Run it was we were disappointed that they didn't move forward in retrospect, a understanding how those companies performed subsequent to us moving forward and moving on we're happy we passed on.
Yeah, I I understand there Todd I get it but just it just seems like the odds of ideal getting done that.
It is gonna be difficult. It always says and you always off that buyback that was in place from 2015 18 million.
What is shares it is still technically active but we've not bought back shares a in quite a few years.
Well the reason I mean, I know you want the business Battle that makes total sense cash is king right now we fully understand that but any reason why I mean, it sounds like business is starting to stabilize your back almost 100% on utilization of your workforce.
And yet the healthy backlog any reason why you wouldn't accelerate that down here with you over 10 year low in equity.
Again, we're focused on using our cash to a two to grow a inorganically.
Yeah, I think we've had this conversation many times over the years and it seems like somebody the same conversation so I'm not enough guys I appreciate the insight.
Thanksgiving I suspect the again like you get likewise.
Thank you. Our next question comes from line of Ross Taylor with Nomura. Please proceed with your question.
Yes, Thank you gentlemen for the chance to.
Talk to you guys I'm curious on you guys, giving us more background into how you see the navy business shaping up is it developing as you expected it to earlier this year and how do you see the cycle playing out you know it seems like we're probably in a fairly early stage that cycle and I'd love to get more color.
From you on how you see that.
[laughter] the naval end market has.
Shaped up strategically with what we wanted to do.
We entered the strategy pretty narrowly in one program, which which was the carrier program.
And then we shortly thereafter, we're able to enter and an additional program, which are company had never been in before which was the submarine program.
And then following that we entered into another submarine program.
And how it's about diversifying components within those programs. So we're quite pleased while it's been of a long process, but that's the nature of the defense market.
We like it for us in the stable revenue.
Predict the predictability of it.
And our bid pipeline as Ellen had cited.
It was $40 million to $50 million of opportunities.
That are expected to closing 2021.
We won't have that level of revenue burn and 2021 soon so therefore, we're expecting our naval backlog to continue to expand.
If we compare entering 2021 to exiting 2021.
So we're quite thrilled.
And you know an area that I'm going to go back to the other other color I mean to do that on your on your call here, but it's important.
An area of focus for us is that more predictable stable revenue end market for M&A and defense provides that which is different from the energy market, which has been highly cyclical highly unpredictable and getting a deal done and the <unk> relations or more.
Good and getting the projections of revenue and valuation correct I've been extraordinarily challenging we're finding that to be less challenging and the defense sector because the ability of the revenue.
And what we're looking at how do we do deals and more stable end markets.
So historically the Navy submarine program said pad.
Runs that went in decades.
So how do you see is you're winning business and its size. If you you are thought to submarine programs I would imply you got the Columbia class SSP and then the Virginia class attack submarine.
Both of which I believe the Columbia classes, just moving into basically revenue generating writing here, maybe this year and the Virginia block five that's what I assume you're talking about so that also is a roll out.
Just starting this year I'm talking about the you've you've indicated these are stable.
This is my read of the space that you know basically you're getting in someplace, where you're going to see production runs that are going to go on for a decade to two decades I think the Los Angeles class attack submarine has an over two decades build cycle.
Youre all your perspective.
Is accurate there there are some components where.
Say a block five orders placed which covers 10 submarines and you have that level of predictability <unk>.
The way our components are being awarded we're not getting a a block of 10 subs, but we're getting an annual release of components by by year.
And the Columbia class, we don't see that as a blocked by like Virginia is Oh, I'm, sorry about block block five was 10 subs.
For <unk> or Virginia.
And.
Again, where we are with our prime contractor work, we're getting more of an annual award for components for <unk> sake, <unk> block sub six and seven seven or eight and nine.
On an annual basis.
So we don't have that classic predictability, but we have predictability and that we know the timing of those orders.
We feel good about our position would those components, although they can be competitively bid.
And it provides us with a level of confidence and predictability that goes beyond our current backlog with how we see the procurement patterns.
Of the defense contractors, the primes four carriers for Colombia, and for Virginia, It's a great business unit for us because it has high levels of predictability, even though we may not have that classic 10 year production run of a block five for Virginia that some companies out.
We don't have that.
Well it and that's because of the nature of how they order or that's and generally although they could recompete apart I got my assumption would be the unless you want to end up like the German Army in World War. Two you don't want to have a lot of different products inside your boats overtime you want to.
The quality is good you want to be able to keep in retain that quality I would think.
Is that [noise].
Thank you see.
Sure quality is Paramount on time performance is Paramount predictability is Paramount this was the customer feedback to us.
And management's focus to get back on track if something arises.
What happened with these projects.
So when we do our blocking and tackling correctly and I feel we do that we do that well.
We deliver strong values to our customer and.
Someone could always displaced us, but I don't believe it would be due to performance.
Okay, Great well you guys it sounds like you've got.
Really you have you see I see your businesses to different industries and the like and when you look at that you've got one on the early stage, if a ramp up and how do you see the energy space playing out versus the defense oriented business.
Well, we are we think about it in a kinda comparable way.
We serve the energy markets, we're going to continue to serve the energy markets, we're going to look to grow organically and underserved segments of the energy market that we didn't do as well in the past and we have thoughts strategies in place and how to capitalize and.
In those underserved markets.
And then I think you heard me say you heard us say, where intent on growing our more predictable revenue streams.
And of course, that's defense that could also we are focused on the installed base.
I also commented that we're looking at M&A in the defense and then say aerospace market because of the predictability there.
The countries that are there so once you're in.
You don't have to necessarily you never can rest on your laurels, but you don't have the.
International low cost price leaders to to contend with the defense area.
So because of the barrier of entry.
The nature of that fabrication.
But.
Some of the energy sectors.
Right.
Figures.
Ken being in the bid process.
Yeah, and I think it I want to congratulate you on what looks like an excellent job transitioning and working through this whole carbon situation. It looks like it out to be honest ciba's I'm surprised by the strength that you guys have shown and Oh nimbleness that you've shown and think it states to your ability to manage your business long run congratulation.
Thank you very much.
Thank you thanks sort of change [laughter] challenge.
Thank you. Our next question comes from one time, you're always barrel capital. Please proceed with your question.
In spite of aspire capital good morning.
Good morning job good different.
Yes, Indeed, yeah I came I imagine you and your competitors are going to be quite hungry for business over the next several quarters.
I wondered if that implied that if we win over the next several quarters will have.
We want margins.
[noise] Euro stewed you you recognize what what's happening in the marketplace.
We are seeing.
Some recklessness on price management by by others.
We don't try to break our disciplined.
Well, we will look to defend our position or defer or or make sure. We have we spend our market share, but we are seeing some very unusual behaviors that that.
We don't think our enduring, but obviously it might speak to the.
Their appetite to get whatever's available at whatever price they can't.
And.
I think there's enough out there that we don't necessarily have to.
Race to the bottom with them.
But I can attest to your there's likely you're going to be some skinnier projects that come into our backlog.
Oh, that's helpful. Jim Thanks, and just one other question on China, and moving away from television shifting over to China, I tensions between China, and our country seem to be growing rapidly I was curious whether you think that will affect your ability to win business in China to will work with their supply partners in China generally how do you think it will affect.
Our activity in China at all.
You know we had we had discussions at the leadership level about that potential risk.
At this point, we haven't seen it manifest in any way and an adverse matter with respect to our ability to win one some work recently for for China.
That was our typical type of work refining work happened in this in this current quarter.
Rather sizable refining Petrochem project, and so that that didn't feel indifferent to us we haven't seen a change in sentiment at <unk>.
Seller to buyer level.
And your ability to work with the partners over there I think you may have a supply partners over there that's it that's.
Thank you.
That is unchanged I see okay and that one no kinda project. It was delayed I think your press release mentioned to four or 5 million dollar John It was delayed do you think that was delayed for economic reasons or perhaps in reaction to say these growing pensions.
It was delayed solely because of coded and all that province shut down it's it's a workforce.
That was teed up to be completed we were at the 15 yard line.
And we couldn't get the ball across the 15 yard line until May jobs done.
It's a 100% complete.
It was just a.
Seven or eight weeks stoppage of work.
Tied to shutdown of an industry in China, nothing to do with anything other than how they manage told it.
Well, thanks, much Jim and good luck to you in the whole game.
Sure John good to hear from your again.
Thank you Hi next question comes from the line a bill Baldwin with Baldwin Anthony Securities. Please proceed with your question.
Oh, Thank you for your time this morning gentlemen.
I'll make a brief since I know, it's running long but.
Yeah, I'm just looking for an update as they had the initiatives that you've had in place I guess now for a year or two on the <unk>.
The engineers out the closer working with the end use your customer.
To generate a no against a lot of the MRO business and also revamped business.
Can you kind of bring us up to date as to how that's progressing and.
How many are those jobs you now have a.
Having effect and what the plan is for 2020.
For those positions [noise].
Bill that's a great question.
It's.
It has been hit what would the headwind to near term.
Because of co bid and our customers shutdown access to their plans.
Our folks werent permitted to go into the sites.
Of the customers customers controls if you will.
Right they need us to him they need us to help help them unlock capacity <unk>.
Improved performance reliability.
Strategy is a long term strategy, we're continuing continuing to invest in.
Adding resources to that strategy relocating people to densely.
Populated installation areas.
And it's the right strategy for us, especially if we think about.
The reshaping of the of the refining demand curve over the next couple of decades.
It's going to be ever increasing focus on getting the most of what they currently have.
Getting the most I'm sorry, the refinery getting the most out of what they currently have same is true of a pet chem.
Operator, and that's what the installed base strategy really is focusing on its helping some leverage those assets. They currently have.
And not have an unscheduled shutdown or not have some form of a woman's calamity they need us to help do that it's a great long term strategy, but to be candid the last three or four months.
Well in co bid it changed our ability to help customer intimacy and the matter that we want but that will change the that will that will shift right well get behind well all get through this.
Well being a rear view mirror that hopefully not not too long right.
And that business there.
Let me Jim I would assume that business there are probably.
Come back a quicker perhaps in the bigger project goodness in refinery area.
You know from our from our historical perspective that isn't Pete what happens.
It takes a a fair amount of calendar time to gear up on a strategic investment say new capacity or a large revamp, but EM, our ROE and quick turn work.
That comes back first.
And Jim or is that business like that is that less price sensitive than the big project.
[noise] it has a different margin potential that that's more favorable.
Okay.
Is there any less competition out there for that business based on what you're doing going directly to the end user.
Oh.
Typically if you're able to provide equipment for your original installed.
Component.
It creates a an advantage.
Because you're providing a part or reconfiguration of your system perhaps.
That doesn't mean competition doesn't find their way in somehow but it's less competitive.
Right.
Okay, well best of luck on that program I think they'll pay big dividends long term. So we're excited by it it's great. It's really glad to see your continue to devote resources there [noise].
And.
I'll.
That told the previous the Gentleman's comments regarding your management through this difficult periods.
Well. Thank you we we appreciate that.
And so much.
Thank you, ladies and gentlemen that concludes our question and answer session. All 10 of my back to management for any final comment.
Well. Thank you for your time. This morning, we had we had some really good queuing day.
The delved into more deeply then we ordinarily would so we appreciate the thoughtfulness with what you question to Alan Johnson myself [noise].
And we look forward to updating you sometime mid August or.
Our next.
<unk> mid July late July late July that that quick.
So we look forward to updating you and again thanks for your time today and your ongoing interest in Graham.
Good day.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.