Q3 2021 Graham Corp Earnings Call
Greetings and welcome to the Graham Corporation third quarter fiscal year 2021 financial results Conference call.
At this time all participants are in a listen only mode.
And answer session will follow the presentation, if anyone should require operator assistance. During this conference. Please press star zero on your telephone keypad.
Please note that this conference is being recorded.
I will now turn the conference over to our host Chris.
Chris Gordon and Investor Relations for Graham Corporation. Thank you Sir you may begin.
Thank you Diego and good morning, everyone. We appreciate you joining us today to discuss Graham fiscal 2021 third quarter results you should have a copy of the news release that was distributed across the wire and this morning, we have.
We also have slides associated with the commentary that we are.
And here today, if you do not have the release or the slides you can find them on the company's website at www Dot Graham.
Cash and F G Dot com.
On the call with me today are Jim lines, our President and Chief Executive Officer, Jeff <unk>, Our Chief Financial Officer, and Alan Smith, Vice President and General manager of Arbor, and New York facility.
Jeff will start with the financial overview of the period Allan will then provide an overview of our operations and Jim will wrap up the prepared remarks with a strategic overview of our business and provide our outlook for the rest of fiscal year 2021.
We will then open the lines for Q&A.
As you are aware, we may make some forward looking statements during this discussion as well as during the Q&A. These.
These statements apply to future events and are subject to risks and uncertainties as well as other factors, which could cause actual results to differ materially from what is stated on the call. These risks and uncertainties and other factors are provided in the earnings release and in the slide deck as well as other documents filed with the company by the <unk>.
And with the Securities and Exchange Commission.
These documents can be found on our website or at Www Dot S E T Dot Gov I.
I also want to point out that during today's call and we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance you should not consider the presentation of this additional information and isolation or as a substitute for results prepared in accordance with GAAP. We've provided reconciliations of comparable GAAP to non-GAAP measure.
And the tables accompanying today's earnings release with that it's my pleasure to turn the call over to Jeff click.
Thank you, Chris and good morning, everyone. If you could turn to slide four.
Q3 sales were $27 2 million up from $25 3 million and Q3 last year.
Our COVID-19 impact in the quarter was small compared to Q1.
But we still lost approximately $900000 of revenue due to employee absences absences related to Covid.
Strong sales and Asia supported our refining business.
Sales and the defense, the Navy market, where four and $5 million and the quarter and now stand at $17 $4 million year to date, approximately one quarter of our total sales through December.
Q3, net income was $1 $1 million or <unk> 11 per share up from breakeven in Q3 last year.
Cash is still strong at $69 $3 million.
Orders in Q3 were in excess of $61 million, our strongest order quarter ever driven by $52 million and defense orders.
Almost all of the defense orders will not start to convert to revenue until fiscal 2023 and beyond.
Our backlog is now nearly $150 million, 70% of which is in the defense market.
Moving on to slide five and.
And discuss the sales detailed on the last slide with the quarter at $27 $2 million the sales split and in the quarter was 39% domestic and 61 per cent international.
Last year's third quarter was 53% domestic 47% international.
The stronger international sales and the quarter were primarily driven by projects in Asia, particularly China, where we had one large project, which was accounted for on a completed contract rather than a percent complete basis and a second project, which is currently in process and is on it being accounted for on a per cent complete base.
Yes.
Gross profit increased to $6 $2 million up from $4 million.
Last year excuse me, primarily due to improved project mix as well as volume.
Gross margin was 2022, 9% up six up 160, <unk> I'm, sorry up from 16% last year, which was a particularly poor quarter last year.
EBITDA margins were six 7% up from 0.7 and last year's third quarter and as I mentioned earlier net income was on $1 $1 million up from breakeven last year.
On to slide six looking at our year to date results sales and the first nine months of fiscal 2021 were $71 $8 million up from $67 5 million last year. This is despite our challenge in Q1.
Production was at 50 per cent of capacity to the Covid impacts.
Year to date sales of 52 per cent domestic 48 per cent international compared with 65 per cent and 35% respectively last year.
Gross profit year to day $15 $5 million up from $13 seven last year and gross margin is up 130 basis points to 21, 6%.
Year to date EBITDA margins were five 6% versus three 1% and the first nine months of last year.
Finally, net income was $2 million or 20 cents a share.
Up from $1 3 million or 13% I'm, sorry, 13 cents a share last year again, the first quarter of this year had on.
Loss due to COVID-19, but we have more than recovered and the second and third quarter.
On to slide seven cash of $69 $3 million up $1 $4 million from the end of Q2, but still down from 73 million and at the end of fiscal 'twenty and 'twenty. This is primarily due to timing of working capital cash.
Cash per share of $6 94.
Our quarterly dividend remains firm and 11 cents a share and we have paid out $3 $3 million year to date.
Capital spending today, there's one and a half million dollars similar to last year and we expect this the total for the year to be between two and $2 5 million.
And capital for the full year.
Finally, as we are continuing to work on our acquisition pipeline and activities Covid has not had an adverse impact on our efforts as we have built some very good relationships over time and these continue however, many are now remote rather than in person and communications.
Alan will continue our presentation by providing more depth on our operations and Q3, and then Jim will provide a market update and our updated guidance for fiscal 'twenty and 'twenty one.
Alan.
Thank you, Jeff and good morning, everyone I would ask that you refer to slide nine.
Sales for the third quarter were 27 2 million sales for the refining industry were $16 $5 million up from $12 $2 million.
$9 $4 million of the revenue were from two projects for the Chinese refining market sales.
Sales to the defense industry, where $4 5 million.
And it was up slightly year on year.
We continue to see and true backlog conversion as we grow our naval work force on prior calls we discussed first article or first.
Time fabrication work, we are largely past that and half of which is currently and our backlog.
We do plan to expand and take on New first article where however for now that type of heavy lifting is behind us.
Lastly, our annual guidance remains at $93 million to $97 million, which was communicated during our second quarter earnings call.
The fourth quarter and set up well for backlog conversion. However, there is always a few million dollars of in and out revenue within any quarter.
Moving to slide 10.
We experienced the second wave of COVID-19 infections and.
Western New York from November through the Middle of January and <unk>.
Companies COVID-19 protocols have been tested and has been proven to be effective and minimizing the spread of the virus within the company at the peak of the second wave and early January and production departments were operating at no less than 90 per cent of capacity.
Due to the outbreak we temporarily paused our efforts to recruit skilled workers.
As of January 19th we have lifted the pause and are actively recruiting skilled workers and.
Pleased to report that we have several candidates and our pipeline.
We continue to prioritize improving our productivity and and navy areas.
Let me answer there focused on deal flow faster welding processes.
Training and creation of jigs and fixtures and lastly, applying lessons learned.
I will now turn the presentation over to James.
Thank you Alan and thank you Jeff for your remarks.
I ask that everyone refer to slide 12, and as I begin my prepared remarks.
This chart illustrates our orders can vary considerably from quarter to quarter.
A highlight though is the order level the last two quarters from the defense industry, specifically orders for the U S Navy.
The orders for defense during the last two quarters were $65 million.
These orders can be large and value and we will have multi year conversion cycles.
We have visibility into the Navy's long term procurement plans.
That is a great help.
And lessons investment risk.
And maybe needed to support growth of associated with stronger defense segment revenue.
We are operating within challenging energy and chemical petrochemical markets.
Low oil prices due to supply and demand imbalance.
Along with demand destruction for chemical and petrochemical derived consumer products have contracted orders within our more traditional non defense end markets.
It is important to point out.
The defense strategy, where $100 million and new orders were secured the last 12 quarters.
Representing 30% of total orders has been a terrific counter balance to headwinds within our more traditional markets.
Also another set of actions were implemented about two years ago to change participation success.
And execution plans within more price sensitive international markets, where we historically did not play.
That too has been executed successfully across those same 12 quarters $40 million and orders were one because of a different execution plan and different selling strategy.
Stated differently approximately 60% of orders the past 12 quarters, where from our traditional markets of our customers and 40% from strategies too broad and revenue streams.
I commend our team for a terrific effort on both strategies and.
It has really made a big difference and order level during the pullback by our historic customers.
Let's move on to slide 13.
There is not too much different from last quarter to report.
Refining is weak as an overall comment.
There are mid and large sized projects upcoming and India, China and for the mid East and North Africa, but overall refining opportunities have contracted.
And active area within U S refining markets. However is related to renewable diesel investment.
This was supported by tax policy under the renewable fuel standard and California's low carbon fuel standards. These.
And these are smaller.
Fast moving projects. However, it has created demand for our products and that.
That is important right now.
The Navy bookings pipeline remains healthy.
Orders.
We'll be intermittent and.
And likely not as strong as the past two quarters. Nonetheless, we expect to build backlog within this segment during the next year with a book to Bill above one.
And chemical sector is still contracted.
We have not seen a change in spending by this market.
Global markets need to lift up from the pandemic before we are to anticipate more typical order levels.
Short cycle and plant MRO or a plant maintenance repair and operating spending has also pulled back.
While defense orders.
Have a positive outlook order levels from our more traditional customers or markets are expected to stay sluggish.
Let's move on now to slide 14.
The two bright spots during this pandemic, our our cash position that was highlighted by Jeff.
And our backlog.
Backlog is $150 million.
With approximately $100 million for defense and $50 million and for the companies more historic markets.
The operational benefits from synergies.
Between defense and commercial markets permit effective utilization of our operating assets, while commercial markets and here I'm, referring to refining and chemicals petrochemicals are contracted.
45% to 50% of our backlog is anticipated to convert during the next 12 months.
The fourth quarter.
And all essentially set up for backlog conversion.
With as Alan said, a few million dollars, which typically comes in and out in a quarter.
We have high confidence for the full year guidance.
With that let's move on to the guidance page.
And we guide to revenue for the full year to be between 93 and $97 million.
Implying fourth quarter revenue beats.
Between 'twenty, one and $25 million.
Full year gross margin should fall between 21% to 22%.
SG&A expense.
At 17.3 to $17 8 million for the full year.
And our effective tax rate is planned to be between 22 and 24%.
It is important to highlight that the guidance reflects we do not have significant COVID-19 related disruptions or unforeseen impacts and our fourth quarter.
I will close with a quick progress review on strategic initiatives.
Let's move on to slide 16.
Yeah.
We have had an effort to reduce the volatility of our business performance with greater focus on expanding our predictable revenue streams the.
The Navy is one of those revenue streams as as revenue from our installed base.
Our progress with the Navy has been or defense has been very strong our backlog has grown.
And importantly, we've moved our position from.
Competitively bidding most opportunities.
Two sole source bidding under a larger percentage of those opportunities.
So that all is directionally very favorable.
For our installed base with the pandemic and Covid, we've had difficulty gaining access to our plant customers plant sites. However, we've been working on it and tools and data analytics to analyze different applications and different products. So we can implement programmatic processes to drive.
Proactively our installed base that's underway, but we have had a pause on on building out our installed base team.
However, there is work ongoing on the it side.
Yeah.
We are also looking at acquisitions to build stronger and more predictable revenue.
Jeff and Chris have done a really Chris Johnston have done a really fine job of bringing some high quality targets.
And to the conversation and we.
We have active dialogue with those now and we're advancing those discussions.
Another initiative and now this will be and an area of our of our project work.
So it does have variability on a cyclical nature to it. However, we have implemented some strategies to change how we participate in more price sensitive markets, which is primarily in Asia.
And we've been expanding and modifying our.
Execution paths there.
I'd say, that's gone remarkably well as we as we jumped into that segment of the sandbox and a different way the last couple of years.
15% of our total orders.
Since late in fiscal 2019.
Have come from this strategy.
We have had to be more measured and how we're evolving our organization and our structure to go. After this work as we think about of.
The upcoming income statement.
Two the pandemic. However, this strategy has been executed well and has had an impact.
You may have recalled you might recall that we did wins too.
Two very large projects in India.
And the recent past and we're queuing up two or three other projects that we're focused on that we're going to pursue aggressively and hopefully windows over the next.
Three to six quarters.
Yeah.
And then ultimately all of this rolls up into strengthening Graham's financial performance.
One of the key levers is.
And as operational throughput and expanding our revenue conversion here in Batavia.
That translates into building out our welding.
Machining and production workforce as Alan said, we did place that on pause.
That additional Oh.
Team member build out and the last couple of months due to Covid. However, we have that back opened up we have 20 positions that we are hoping to fill over the next two years that would allow us to expand our backlog conversion and drive revenue growth. That's that's a very important parameter.
And we have.
Very good program for accessing the direct labor and bringing them on board, putting them through our Weld School and training labs and then.
And then proficient and productive and a short period of time.
I did mentioned earlier and another way to financial or improve our financial strength is the naval strategy.
And the evolution of competitively bid toward a higher percentage and sole source bidding.
That has two benefits one it increases the predictability of future orders and asset base loading.
And lessens the risk we would have around any capital investments to support the revenue growth.
And then secondarily, but not always it can provide a stronger margin profile for that work.
Also on Enel and as mentioned this as we get past the first article fabrications.
We now can move into Repetitively repetitive builds.
And then optimize our production workflows to drive productivity and.
And shortened cycle times, and that will lead to margin enhancement as well.
Obviously, our energy markets and petrochemical markets are and a rough spot. So we will balance our investments.
To benefit us long term with the realities of short term income and income statement pressure.
And ideally we have this fantastic balance sheet with an incredible amount of cash that we've had for quite some time.
And our focus the focus of our board is to put that capital to use with.
With an investment and a new revenue streams.
And with that I'd like to open the call up Diego.
Four questions would you please open the lines.
Thank you.
At this time and will be conducting our question and answer session.
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Our first question comes from.
On your door O'neil with Litchfield Hills. Please go ahead with your question.
Thanks very much on my first question is about the naval business.
The AR on the general dynamics call yesterday, it said that work on the Columbia submarines, which I understand and they're working on the first two will expand significantly how much of the submarine work is driving your growth and the naval business and do you think it will also be a long term driver of growth as they do.
Yeah.
I'll take this one deal and thanks for the question.
The submarine programs, which.
Historically throughout our 80 or.
And history up until the last five years, we werent and the submarine programs.
However, because of our execution on the carrier program, we did get the door opened and we have grown into both.
The Virginia and Columbia class programs are.
Our naval growth.
And is driven off of.
Driving into deeply on the submarine programs the call from our electric boat and and the narrative from their conference call was very bullish.
On the submarine programs and and and the cash generation from that and we believe we will be a benefactor of that based on our participation and our strength and those two programs.
Okay. My next question is about the renewable diesel.
Valero Energy said this morning that its board had approved a new 470 million gallon a year renewable diesel plant and Port Arthur Texas is that the sort of opportunity that is there an opportunity there for Graham and is that sort of thing you'd be looking at.
Absolutely.
Valero in particular.
They entered renewable diesel and about a 2011 2012.
And at that first site, we were a participant with our equipment and and that our first installation, which has been replicated three times at that location and now they're expanding into port Arthur with yet.
Another renewable diesel project and partnership with Darling and it's called Diamond Green diesel and.
And those two projects or those projects involve our equipment on both the pre.
Pretreatment side, the feedstock side and then on the refining side.
Now to be clear these are smaller opportunities.
They don't compare to a large classic refining opportunity for us These are and the range of probably 250002 $750000 per.
Per item and there was a couple of items and these opportunities. So they are smaller they move fast.
And not only was valero, but with marathon with Phillips 66, and Holly frontier. There's a host of renewable green diesel projects that are underway driven off of tax policy and also California's low carbon fuel standards and we are we are a participant and we're focused on it.
Great. Thanks very much.
And welcome.
Our next question comes from John Friends, Rub with Sidoti and company. Please state your question.
Good morning, guys and nice quarter.
I wanted to start with the.
Hence business.
And you put on a nice number and your orders bookings this quarter.
Almost exceeding or certainly seem to be exceeding what your initial expectations were at three months ago and you also alluded to the fact that you expect the book to Bill to me and about one point out so I guess two questions.
Firstly is that where does that you've that you booked and the December quarter was there something unusual that that's what is being pulled forward and then we go on and secondly, when you think about the book to Bill into next year is that largely weighted towards the Virginia class or the Columbia class or do you expect maybe a adil.
No other work that you're not getting involved.
I'll take that one as well.
The modeling that we had a few quarters back.
Did not consider that the.
The enterprise.
Rise program.
Would buy another Columbia vessel from US now however that did arrive and and we were able to secure that and our and our quarter that we just recently reported we were only modeling.
So on Virginia class work and the carrier program work, but Fortunately, we were able to be a benefactor of stepped up cadence for the Columbia program as we look at the next 12 months.
Order slate is principally from the two submarine programs.
And some of it is repeat work.
And some of it is hopefully breaking into new programs within those two classes of submarine.
We don't have those orders yet, but our team is focused on and certainly breaking into the new program.
And also holding our order pattern for those are components that we have built several times now.
Got it got it.
Second question Interestingly I heard something last week.
And I'll cover that suggested that maintenance work and the energy market has been flat and actually seeing some orders being pulled forward into the first quarter that normally be second calendar quarter, and some being pushed back into the third quarter that would normally be second calendar quarter type of maintenance work.
Seeing anything like that I'm curious.
And something that's happening and history of its standalone for them.
And as an overall remark what we have observed is MRO spending maintenance repair.
Routine spending that's in and the operating budget has moved to the right has been pushed out.
As as the.
Refiners and also the petrochemical companies focused on and your cash preservation.
With the dramatic change in demand, we honestly haven't seen any material change and that and that decision making.
Moving things to the right pushing and pushing those spends out.
On refining customers are saying to us they had to get into 'twenty and 'twenty one before they could.
Make.
And those types of spends however, we're only three weeks into 'twenty and 'twenty, one and all I can comment upon is our sales team on a market facing teams aren't seeing any change and that behavior by those two markets.
Got it and regarding the balance sheet and M&A can you remind us what you think optical targets would be for acquisitions and size and markets.
Maybe given you know what you think the kind of products and they might produce beef that's fit for you.
Sure.
John This is Jeff.
First off and if I Miss one of your questions. Please remind me with regard to the.
Markets were looking to improve our predictable business are predictable base business. So how do we do that we do that really one of a couple of ways. One of his from looking at opportunities and in the Navy defense markets, which as we've shown here certainly this last quarter the ability to get large orders and that ultra.
But really to have them.
Fabricate over a number of years is very very helpful Baseload and predictability to our business.
And then secondly, perhaps looking at things and the and the commercial markets more on the aftermarket or MRO side is another area, we would consider but I would say of the two the defense on the Navy side is much more.
Interesting to us right now and much more in front of us right now.
With regard to size, we've pretty consistently talked about looking at business is somewhere between 20 and and $60 million of revenue purchase price is probably in a similar range, perhaps a little bit higher if they are higher margin or profit level businesses and the companies that we've looked at over the last number of quarters.
A couple of years have been in that range, but we've also looked outside of that range. We've looked above that range and we've looked below that range. So we're not limiting ourselves necessarily to that range, but it's kind of a sweet spot for us if we could find somewhere in there did I answer all your questions did I Miss something.
No I guess everything would be would you kind of stick to.
And general kind of products, what you make me like maybe something next to the Jack do you like the silencer or are we just would you actually think about equipment that is really maybe step on to beyond your core.
Technology.
I think we would look at both.
Particularly if we're looking at similar customers that we have the ability to get a larger share of that customer's wallet, even if it's not a tangential product.
And as is something we would consider also.
Okay. Thank you and I appreciate you taking my questions.
Thank you our next question comes from.
Net Kearney with Gabelli funds. Please state your question.
Hi, guys. Good morning, Thanks for taking my question and Brett Good morning, Brett.
Good morning, I noticed the press release and then also your slide deck you have.
And kind of know on opportunities potential involvement for Graham in kind of the broader energy transition I guess, we touched on this or you touched on it a little bit already on the call are just wondering what areas kind of stand out.
And for potential opportunities for Graham anything and kind of carbon capture or in the newer kind of fuel sources that.
Folks are talking about or governments are putting money towards.
A great question.
We are.
Yeah.
And we play in the renewable diesel and I spoke about that.
A moment ago as it pertains to.
The refining or the.
And the use of a bio based feedstock for producing diesel.
But outside of that and.
And the energy transition.
We're in the early phases, where we're trying to make sure we're and the conversation where we're a supplier to these.
The markets, we are also and.
And the hydrogen.
Fuel cell electric vehicle market.
And and there we serve that market with.
<unk> three types of customers.
We are we are working with the industrial gas companies that provide the hydrogen if you will.
The hydrogen application for fueling sales is very high pressure.
And for vehicle, it's at 10000 Psa.
Or mass transportation and that's at about 5000 Psi.
The gas has to be compressed to those high pressures.
We work with compressor Oems for our equipment that supports their compression equipment.
And then we also work with integrators that take the components and put them into a fueling system.
And there on the back end of the system the hydrogen.
Dispensed into a vehicle that needs to be at about minus 40 degrees C and minus 40 degrees F. We provide heat.
And exchanges that provide that cooling and deliver the hydrogen to the vehicle at the right temperature and.
These are a smallish applications, there and average selling price for us is.
10000 to $50000.
Its important that were and where there. This is a long term play these would be highly engineered standard products.
Which would be different from our Eto type large project work.
Similarly, and the compressed natural gas value chain, which can also be for fuels can also be for natural gas just free distribution and remote areas.
Where we play and a similar matter those distribution systems are at about 5000 P. S. I G for compressed natural gas.
And so compressor OEM or a system integrator that we're working with.
So those are a couple of examples of how we're.
And the conversation, taking our products into those markets and making sure we are participating in the evolving energy market.
As it moves from using fossils fossil fuel to other complementary alternative fuels.
Renewable diesel.
Also renewable chemicals, we do play in that and we've been playing and that for.
But we are over a.
Cade.
Those are very very intermittent type projects, but we do play there as well and.
And then of course that says renewable diesel or Butler, biodiesel, which is different and we.
And those projects for about a decade as well along with one and ethanol took off we.
We played there as well, but today I'd say the big movers are renewable diesel.
The hydrogen economy.
And the natural gas value chain.
Yeah.
Terrific. Thank you so much guys.
Youre welcome.
And just a reminder to the audience if you'd like to queue up for a question. Please press star one on your telephone keypad.
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Our next question comes from Tom Spiro with Spiro capital. Please state your question.
Tom Spiro Spiro capital good morning, gentlemen.
Good morning.
First my congratulations on the strong bookings quarter and year to date and they really validate T. A diversification strategy and have been implemented from last few years and and validate your decision earlier this year to hang in there with the employment and.
So congratulations Thats most depression.
Thank you Tom and I just.
A couple of question and Jim.
With respect to our new and.
Business in India, and China, we have more exposure and outdoor products and foreign partners. I was wondering whether you have any concerns that the pandemic, which napery brought under control here and the U S.
And I think it could be a much bigger problem over there and then our foreign partners may have difficulty performing.
A great question and and the Asian economies, we are seeing the pandemic and where COVID-19.
Be more.
Pervasive and a larger problem and certain and South East Asian countries.
And want to cite them, but we've seen and southeast Asia that.
For about three or four months projects have just stopped.
And we're not executing any projects and southeast Asia with our fabrication partner.
Have done it and northern Asia, and and we do it and China and also in India, where it thus far.
Covid has not created execution delays of any magnitude.
However, we are watching that and we have localized our quality inspection services Graham personnel, we've hired individuals' and China.
We've hired individuals and India to surveil and support our local fabrication partners.
While being complement and when we can buy our fabrication experts here and in the U S. So it is a.
Potentially challenging situation, but right now in China and in India.
Those are the two areas, where we have projects ongoing now large projects, we haven't had a COVID-19 led problem.
And that's helpful. Thanks, Yeah, and Jeff do you have a preliminary capex budget for the next fiscal year.
Tom at this point, we do not we do not okay. Do you would you expect it to vary dramatically from your historical numbers is there anything on kind of unusual coming up when you think about nothing out of the ordinary I see okay, and lastly on the acquisition subject cash stock market tie and he got the stacks out there trying to buy everything lots of money floating around and I was curious whether.
And that acquisition possibilities that you folks who are reviewing and you're.
And you're seeing on pricing.
Shrinks and and at multiples going up and it's becoming more challenging to find and.
Opportunities that fall within your price range.
Given where we're looking and I and I spoke earlier on on earlier question on what we're focused on the defense market and the.
And to a lesser extent on the aftermarket and the commercial markets. Both of those are markets, particularly the defense, which have had a pretty pretty high multiples to begin with so.
So we haven't necessarily seen that move to get worse, but that is certainly a headwind for us and something that we.
And I have to work through but now that the availability of cash is while it's it's.
<unk>, the pricing and the markets really the specific markets and we're focusing on are such good markets that they already were.
At pretty high multiples and so we'll just work our way through it and that's part of our process.
Well, thanks, very much and good luck.
Thank you Tom.
Okay.
Yeah.
Our next question comes from John Day share with Pinnacle Capital Management. Please state your question.
Good morning, everyone.
I was just curious.
When you talk about the Navy business and you're moving beyond first article cost structure or to standardize defense manufacturing processes.
Could you remind us exactly what you're talking about there.
And then we'll take this yes this is Alan.
Well, we're doing our first first article builds there's a lot of testing that needs to be done on the material and specialized jigs and fixtures that needs to be developed because these are our new new builds haven't existed and we have to prep our manufacturing process.
And that effort and it's fairly.
Fairly involved and in the remarks.
And to indicate that we are past that day.
We we have the materials approved.
Sales all of the first to Graham our equipment.
Equipment, and and fabrication processes and now it's becoming more ROE as we take on a subsequent work from the Navy.
Okay on the island.
And as a first time build and industry shock testing.
So yeah, so for our book.
What gives you a free too for the Columbia class because its a brand new a brand new ship for the Navy.
And it's important that the equipment and can withstand.
Attacks from from the enemy so when we build our equipment. We also built a prototype unit.
Which is actually a subjective to depth charges to make sure that the equipment can withstand the shock and survive it and still work properly.
Okay. So the so the infrastructure is in place have you actually bought raw materials, yet for those navy contracts.
Yes for the contracts in our backlog, we have the material and we've.
Actually moved into production so not only do we have the material. We are actually actively fabricating those jobs and our backlog, okay and youre doing all of that in house, you're not outsourcing it to anyone else correct.
Yes, yes, okay.
And when do you anticipate.
Invoicing the Navy for this product and I would guess, there's milestones and have to be met but what's your best guess as to when you're going to start invoicing.
On the customer.
We have been and placing the navy for some time now our work is as a mix of milestone based and as well as a percent complete so.
So on a percent complete as we as we input labor, we are invoicing and a customer each month.
Hey.
On the presentation, what percentage of and revenues for Navy.
And this and the December quarter and the this is Jeff and the quarter was about four and a half approximately $4 $5 million and year to date is a little over $17 million.
17 million and what do you anticipate it to be for the full physical and you don't want a true portfolio. We have communicated that we expect it to be about a quarter of our revenue, which is where it is year to date through through December I think we're at about 24 plus percent of our total revenue, we expect to be somewhere around a quarter of our total revenue.
Which which given the guidance that Jim spoke to would be somewhere around 23% and $24 million, okay, and so and for the next fiscal year fiscal 'twenty two.
How does it ramp from there or do you think.
And we haven't we haven't given explicit guidance here other than we've suggested that over the next number of years that that number will be between 20 and $30 million.
And the opportunity to perhaps growth beyond that the upper limit hum somewhere in that and that window, but we've not given explicit guidance on when we expect that to be next year yet.
Okay. So 20 to 30 million per year correct, Okay. Good and I guess finally do you have a credit line.
And place I know, you've got a lot of cash, but sometimes vs.
Government contracts can be a little lumpy in terms of money going out, but no money coming in is there a credit line and place to support the cash yes. There is.
Credit lines, we have in place right now we have a $15 million revolver as well as we have two lines for letters of credit of $107 million with the with J P. Morgan Chase whoever our $15 million revolver with and we also have a $15 million letter of credit line with HSBC.
And those two letter of credit lines are really helpful for our international business, Jim mentioned about the work, we're doing and the India and China.
As well as other international locations.
This letter of credit lines are really important to support that and to protect us.
<unk> forward.
And then I wanted to follow on to Alan's answer or to your question regarding our payments from the Navy, we do and and the Navy is very similar to our commercial business and that we structure, our payments and our invoicing and our payment and two to try to mimic.
Our expected cash outflows, so that our need for working capital to support. These projects is relatively small book if you look back historically on our net working capital and I'll define net working capital is.
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Our net working capital, excluding cash and it's typically somewhere between zero and 10% of sales I think right now it might be towards the higher end of that range, but our working capital needed to support our business is relatively small because of the way we structure our contracts and our larger projects are funded by the customers who were doing.
The work force. So the Navy for example is funding the project as we're doing the work so we don't get too out of sync.
With regard to cash there are times actually we ended up with a little bit of we have never had a little bit on <unk>.
Some of those but that's usually a short term thing as we get cash and were typically using a fairly quickly for inventory purchases. So we try to we try and manage our cash two ways one is through the customer.
On payments and then secondly.
You know when we when we do need to.
Utilize our cash where we're pretty careful about that so we're not we're not out on cash on projects at any point in time.
Okay, and I guess finally is the profitability of the baby business.
To greater than or less and the non navy business on on and operating.
I'm sure it's in a similar range and and operating level.
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It does it does have a lot of labor so it did.
We certainly have a lot of cost.
Travel with that but it's in a similar range okay great.
That's very helpful. Thank you.
Thank you and final reminder, if you'd like to ask a question at this time. Please press star one on your telephone keypad will pause for a few moments, while we poll for questions.
There appears to be no additional requests for questions I'll turn it back to management for closing remarks. Thank you.
Thank you Diego and thank you everyone for your <unk>.
Attention and your thoughtful questions. This morning, we appreciate the engagement and we look forward to updating you.
And the coming call.
Stay safe.
Goodbye.
Thank you. This concludes today's conference all parties may disconnect have a good day.