Q4 2021 Graham Corp Earnings Call
Greetings and welcome to Graham Corporation, the acquisition of Barbara and Nickel, Inc, and fourth quarter fiscal year 'twenty 'twenty, 1 financial results.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance start of California. Please press star zero on your telephone keypad.
And as a reminder of this conference is being recorded it is now my pleasure to introduce your host Deborah Pawlowski Investor Relations for Graham Corporation. Thank you you may begin.
Thank you, Doug and good morning, everyone and we certainly appreciate you joining us today to discuss Graham's fiscal 'twenty, 'twenty, 1 and fourth quarter and full year results as well as reviewing the acquisition of Barbara and nickel thing that we announced simultaneously with earnings this morning.
You should have a copy of both of the financial results and the acquisition of announcements that were released this morning before the market opened and they're also 2 sets of flights for the financial results any acquisition that we will refer to during our conversation. This morning. If you do not have the releases or the slides you can find them on the company's website at.
W. W. W. Dot Graham hyphen M F G and dotcom.
On the call with me today are Jim lines, our Chief Executive Officer, Jeff like our Chief Financial Officer, and Dan Thornton, our newly named President and Chief operating Officer.
Jim will start with an overview of the acquisition and cover the results of the quarter and the year as well as provider of financial guidance for fiscal 2020.2.
Jeff will then review details of the transaction and we will have Dan discuss Barbara Nichols, Jim will wrap up and then we will open the lines for questions.
And you are aware, we may make some forward looking statements. During this discussion as well as during the Q&A session. 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 today.
These risks and uncertainties and other factors are provided in the releases and in the slide decks as well as with other documents filed by the company with the Securities and Exchange Commission.
These documents can be found on our website or at SEC Gov.
I also want to point out the during today's call. 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 of in isolation or as the substitute for the results prepared in accordance with GAAP.
We have provided reconciliations of comparable GAAP with non-GAAP measures to the in the tables accompanying today's earnings release.
With that it's my pleasure to turn the call over to Jim lines Jim.
Thank you Debbie for the introductions.
Morning, everyone.
We appreciate you joining grams yearend earnings call and also to join and our discussion about Barbara Nichols of $70 million transformative acquisition, we closed today.
This is truly an exciting day of Graham.
1 that benefits all stakeholders Graham shareholders and.
Ploy ease at bolt Barbara Nichols and Graham.
Customers.
Suppliers.
Our board of Colorado, and Batavia, and New York communities from which we draw work force talent and create stable well paying employment and provide the place where employees are stimulated challenged developed rewarded enabled to build long term careers.
This call will have a different format due to the significance of the growth platform and transformative aspect of Barbara Nickels acquisition.
Thus, we will go through here and results and quickly move into discussing the excitement surrounding adding Barbara nickels to Graham Corporation.
Barbara Nichols is referred to as P&I throughout our discussions this morning.
I will begin my remarks with slide 3.
Let me start by stating and I am thrilled to have completed this acquisition.
And was nearly 3 years and and the process to get this done.
Initially engaging with Barbara nickel and late summer of 2018, when Jeff first visited just immediately identified DNI.
Most of the critical criteria for what Graham strategically wanted and an acquisition.
As we have discussed in the past our process for identifying acquisition targets is to establish necessary key attributes of the target <unk>.
Such as but not limited to values and culture.
Protected products and markets served operations model and revenue range.
I must acknowledge and command Chris Johnston, our director of business development for his work and getting this deal done Chris is responsible for developing the messaging for each target.
Creating the compelling reasons as to why Graham is an ideal strategic acquirer and outlining the value of a proposed combination.
Most often the target isn't necessarily for sale, which was the case would be and I.
Fortunately dense or on the president of the P&I wasn't true by Christmas messaging and agreed to have and initial discussion.
It took time to earn trust.
Develop relationships and establish the value of contributions of both organizations through the combination and agree on terms of the transaction.
Jeff Alan Smith, Chris and I were impressed right of way by Dan and the P&I and management team.
And our remaining with us as well as <unk> culture, which represents 1 of their most important assets.
The employee engagement level of positivity passion for the company and can do approach to their business all confirmed Dan and the team have created something very special and extremely powerful.
The time it took to complete the deal permitted us to observe Dan.
And team and action and their ability to make stretch commitments and deliver on those commitments.
The first engaged with DNI.
At the time when they were wrapping up calendar 2018 at $40 million up from $30 million a year earlier.
Over the ensuing 2 years it was wonderful to observe the planning and forecasting processes and importantly, the ability to deliver forecasted results, culminating and $56 million of revenue for <unk>.
Calendar year of 2020.
This demonstrated to us the P&I has strong management capabilities and their systems, the P&I have the necessary controls and.
And that the business processes are scalable to drive future growth.
Barbara Nichols is an outstanding company.
We are fortunate to have them become part of Graham Corporation effective today.
Jeff will go through the deal rationale and detail and Dan will provide an overview of Barbara Nichols, However, what I viewed compelling about Barbara Nicols was it fulfilled our goal of diversifying into the defense market, which provides greater stability multiple year visibility and increased.
Long term asset base loading.
The wonderful aspect about P&I products and if there was no overlap with grams.
We serve the defense shipbuilders, specifically the nuclear propulsion program, while the <unk> serves offensive and defensive systems for the ships.
In addition, DNI serves the commercial space market with sophisticated and advanced technologies for rocket engine fuel systems and space life support systems.
This is expected to be on expanding long term growth market due to the internet of things growing communication networks and the ever increasing the way in which people throughout the world are interconnected.
Thus today, we had new market segment revenue within the defense industry and also bring new markets such as commercial space advanced power generation and alternative energy along with the capabilities for system integration.
And importantly, the acquisition of Barbara Nicholls as a catalyst for immediate improvement and revenue and profitability the topline expanding approximately 50% due to the addition of P&I for the 10 months and fiscal 2022 that we own them and it provides a terrific platform for follow on organic and acquisitive.
Growth.
I am very pleased and excited to have Barbara and Nicols become part of Graham.
Actually I've been remiss I've mentioned, Dan for on a couple of times.
Dan is on the call as Debbie mentioned, he and Geoff our and our BARDA, Colorado. This morning.
And then was president and CEO of Barbara Nickels until this past may when he moved to chair of the board.
Yeah, Dan joins Graham Corporation, as the President and Chief operating Officer and.
We'll report directly into me.
Dan will be responsible for near and long term performance of both Barbara and Nichols and grabs historic defense energy and petrochemicals businesses.
Dan will work with and that Malone, Our Vice President General manager for Barbara Nichols, Matt is the current president and CEO, Ed Barbara and Nichols.
And then also we will work with Alan Smith.
And our vice President and General manager for Graham, you're all familiar with Alan and the terrific job. He has done and as our general manager.
I'm really excited to get into the detailed discussion about Barbara Nichols and the benefit to long term shareholder return however, let's walk through the fourth quarter and year end results I will take you through the fourth quarter performance full year results and fiscal 'twenty 2 guidance.
Jeff will walk you through the strategic rationale of and deal structure, and then Dan grabs the ball to provide an overview of Barbara Nichols.
And I'm now referring to slide 4.
A key facet of our diversification strategy is to add revenue streams uncorrelated to energy.
Revenue of that is less volatile and.
And provides a long runway for growth and importantly offers high levels of multiple year asset base loading.
The acquisition of Barbara and Nichols fulfills that objective perfectly. Moreover, Graham's organic defense revenue reached 25% of consolidated sales and was in the mid $20 million range for fiscal 2020.1.
We expect modest growth and.
Fiscal 2022, and then move into the mid $40 million range by fiscal 2020.5.
Complemented by Barbara Nickels Defense revenue, we believe the combination will quickly approach $100 million and defense sales.
Our commitment to our installed base for crude oil refining and petrochemical markets will continue to bear fruit.
Everything we read here and observe supports continued investment.
And the existing assets for mature markets, and new capacity capital investment and emerging economies.
Brands shift into computing and price sensitive segments of our energy and petrochemical markets supported by innovation of our operation model operations model has changed our participation of success and these previously underserved segments. The.
The strategy has been 10% to 15% of sales last year was at a comparable level in fiscal 2020.
The team has done well to navigate the selling cycle to get us and positioned to win.
And also.
Sorry.
And also the execution side working with the global supply chain for a component of fabrication has created cost efficiencies and execution capacity for us and importantly, Alan and his team achieved margins projected.
For the orders completed thus far.
Our key business initiatives is to expand the capacity of our production work force.
Today, we need to grow our capacity within our production workforce by 20% and behavior.
That will permit backlog conversion of velocity to improve and also expand margins due to operating leverage and reduction and sub contracting.
Energy and and petrochemical markets feel different today than 6 months ago.
That is encouraging.
For the bid pipeline and has a long way to rebuild before returning to pre 2020 levels.
We are watching this closely during the next few quarters cost of measures of not been taken due to the need to have depth across the company's sales engineering quality and manufacturing and.
And other critical departments and takes a long time to build a proficient knowledge worker at Graham we continue to evaluate and near term benefit and long term implications of cost reduction measures. We elected to protect the strength of Graham during this black Swan event caused by COVID-19.
Let's move on to slide 5.
Fourth quarter sales were $25.7 million.
Defense sales were strong at $6.5 million.
There also was revenue lift from short cycle sales driven by the freeze and the U S Gulf Coast region.
Also and importantly, 15% to 20% of sales were due to our success penetrating the price sensitive segment.
The refining market.
Earnings per share was for says with net income at $400000 on March 31, cash was $65 million of which approximately $40 million was used for the acquisition of Barbara Nichols back.
Backlog on March 31 was $137.6 million with $104 million for defense.
For the defense market and acquiring Barbara Nichols, approximately $100 million of backlog was added effective today.
And nearly $240 million multiyear backlog is a valuable asset for Graham.
Please move on to slide 6.
Year over year revenue increased 11% and gross profit and 14% <unk>.
Profitability and margin were pressured due to decisions, we made not to address business cost during the pandemic and also our inability to quickly expand production personnel.
Government support during the pandemic has made it difficult to compel potential workers to join the Graham team.
This should improve in the coming quarters, but does the headwind now is we want to convert more existing backlog more quickly.
By having a larger production work force, we have the infrastructure, but not the human resources and let's move on to slide 7.
Alan Smith, and the operations team for Ford and performed remarkably and achieving full year revenue of $97.5 million.
Due to COVID-19.
Full year throughput capacity was at 85% as an average of what our production of work force could produce of unaffected by lost time due to COVID-19.
This made planning and management of backlog conversion difficult.
Alan and his team did fantastic, even though that is not apparent and the results here to profitability and margins were under pressure due.
Due to under absorption caused by 15% lower throughput and also strategic decisions to hold personnel of pre COVID-19 levels onto slide 8.
We had strong defense bookings of $69 million for the year.
Energy and petrochemicals stay admired due to demand destruction stemming from the range of implications of COVID-19.
We do have a terrific backlogs that on March 31, as I said earlier, it was $137.6 million up $25 million year over year.
And importantly, and again, Barbara and Nichols adds roughly $100 million into our backlog, bringing the combined total to just under $240 million.
$40 million of Barbara Nickels backlog is expected to contribute to fiscal 2020.2 revenue for the 10 months, we owned them, 40% to 45% of our organic backlog is expected to convert into revenue during fiscal 2022 now.
Now, let's move on to the guidance slide.
Full year revenue range is 130 million to $140 million.
With $45 million to $48 million from Barbara Nichols, and the remainder of and the remainder of being organic revenue.
Adjusted EBITDA is expected to be between 7 million and $9 million. Once we complete purchase accounting treatment of the P&I acquisition, we will and are positioned to provide gross margin and SG&A guidance.
This is an exciting start to the fiscal 2020.2.
Large elements of recent diversification strategies and come together to dramatically improve fiscal 'twenty 2 results and more importantly, reshaped graham's future with of paths to stronger total shareholder returns.
The Barbara and Nicols acquisition is transformative for Graham.
As a platform for follow on organic and M&A investments to propel growth Graham.
Graham is defense revenue was in the mid $20 million range with growth anticipated to yield more than $40 million of revenue by fiscal 2020.5 and.
Importantly, we are beyond the first article operations, and therefore margins should improve as well.
Just as a reminder, first article operations are first time fabrications that involved production of R&D production of jigs and fixtures.
And defining ideal build flow or order of operations once beyond the first article work productivity gains should be achieved I'm.
And I am pleased by our success and winning work and previously underserved price focused segments of the energy and petrochemicals markets that represented 15% of sales fiscal 19 through 21.
It's also worth noting $7 million of new orders were secured during the month of May.
On the crude oil refining market, we became involved in these opportunities and early 2019.
It was great the significant order releases from this end market.
Both of our from the installed base.
1 is for a U S Gulf coast refiner undertaking of revamped to enable use of lower cost lower quality feedstocks.
The other is the mid east refinery, the bottleneck debottleneck and the refinery to provide more gasoline and diesel fuels to meet local demand.
For those remarks, I want to pass of the call over to Jeff and Dan to walk through the acquisition Jeff.
Thank you Jim and good morning, everyone. If you could turn to the Barbara Nichols the acquisition deck M. If you look at slide 2 you'll see we of our safe Harbor.
Statements similar to that which was in the earnings deck and I'll allow you to review of rather than be reading through it.
And I'm moving on to slide 3.
It's great to be speaking with you from Barbara Nickels here in Denver with them for and as Jim mentioned and we've been working on Barbara and Nichols for quite a long time my first visit to the Denver facility was in August of 2018, when Dan was graciously willing to meet with me and.
Barbara and Nichols, which I may refer to as B and I. He was a great fit for Graham since it meets all of the criteria of the most of you have heard me describe over the past several years.
It is clearly a transformative acquisition for Graham.
Certainly the most exciting activity and my time of Graham and probably in the history of the company.
It will increase the size of Graham by 60% on a pro forma basis and the immediately accelerates our diversification strategy.
We expect to see 10 months of revenue in fiscal 'twenty, and 'twenty, 2 or approximately 50% growth.
B and I experience of our defense business from 24 million and physical 'twenty 'twenty, 1.2 of run rate of approximately $65 million to $70 million.
Currently since there was no overlap with our current defense business. This dramatically expands the explants and expands our platform.
Barbara and Nicols also adds of $10 million in the aerospace business, which is mostly related to the space industry.
This will be another exciting market for us.
Looking forward, we expect more than half of our business to come from defense and aerospace and this is a fantastic complement to our refining and Petro chemical platform.
Along with defense and aerospace DNI and offers us opportunities for growth and cryogenic and advanced energy.
And as Jim mentioned with the backlog of $100 million and addition to Graham's backlog of $137 million, we haven't combined backlog of nearly $240 million of which 80 per cent is in defense and aerospace this increased multiyear visibility reduced volatility of revenue and earnings and ability to.
So organically and Vienna and via M&A across multiple platforms is exciting.
We clearly see some exciting organic growth opportunities and yes to be clear once we have Graham and Barbara Nichols working well together, we intend to look for more M&A growth opportunities.
Chris Johnson and I are excited to engage with them to identify further businesses to add to be and I.
As part of the deal of the owners of Barbara Nickels wanted some skin in the game, so approximately $9 million and Graham shoes were part of the purchase consideration.
This represents 610000 shares or approximately of 6% increase in the shares outstanding and.
I have mentioned numerous times that we would use of little equity if it made sense clearly, having the b and I owners, who are remaining with US post the acquisition to ask me for a stake and Graham was another positive aspect of the deal.
The transaction is expected to bring some very nice accretion there'll be initial purchase accounting will likely put of near term damper on it.
And finally.
Barbara Nickels brings a strong management team led by Dan for and who has nearly 30 years of Barbara Nichols 24 of which as its president.
And is now of ascending to president and Chief operating officer of Graham to utilize his capabilities across all of the combined company.
Matt and Malone has taken over as the new president of B and a.
Yeah, Matt has strong leadership skills of very high energy level, which I expect will drive b and eye towards the very successful future.
The remaining leadership team would be and I assume of who are similarly top notch. This is a fantastic team that we are gaining along with the business.
On the slide for let.
Let me talk briefly about the deal structure.
The Graham paid $70 million made up of $61 million of cash and $9 million of the stock for 610000 shares.
Of the $61 million $41 million.
It was and cash from our balance sheet, and we entered into a $20 million term loan for the remainder of.
This leaves us with over $20 million of cash so on net debt position is zero, but it gives us flexibility to go after future organic and M&A investments.
Based on our projections of the initial purchase price is approximately 11 times the forward looking EBITDA.
There is an earn out provision based on fiscal 2020 for essentially the third year of the deal, which would allow up to $14 million and additional cash payments.
The earn out has a threshold, which isn't that would kick in at 8.7 and $5 million of EBITDA in fiscal 2020, 4 and provide a $7 million payout.
Is the EBITDA achieved that years of $11 million, the payout increases to a maximum level of $14 million.
Between those 2 EBITDA numbers, and you're going out would be interpolated.
This acquisition of assumed no synergies.
We believe there will be benefits for the combined organization, but not <unk>.
Meeting them to justify the deal was it was a growth great.
And with Grand Prix will Graham bring some capabilities the Barbara Nichols I believe so, but just as likely I believe Barbara Nicols will bring new capabilities to our current Graham team.
I mentioned, Dan and Matt earlier, and they will become Graham named Executive officers and our annual meeting at the end of July.
On the slide 5.
Along with the excitement of the acquisition. We also now have a far more efficient balance sheet, well, having a lot of cash was comforting that dorm and cash did not achieve of return for our shareholders.
You all know that Ive desperately wanted to utilize that cash for growth and the stronger return now with Barbara Nickels and I'm confident that it will.
We have entered into a new bank relationship with bank of America and <unk>.
The $20 million term loan, which I mentioned earlier as well as of $30 million revolver.
We also have of $10 million of accordion feature available on top of the $30 million revolver.
We do not expect to utilize the revolver much in the near term, but it provides us with more dry powder and flexibility going forward.
We continue to have a relationship with HSBC.
All of the $7.5 million dollar of cash secured facility for certain bank guarantees and geographies, where we where they have a strong presence.
Overall, our balance sheet will look much different but in my view will be far more efficient rather than overly conservative.
We are now using our balance sheet for growth today and more so going forward.
On the slide 6.
And when our business development team that would be Chris and I talked about and ideal fit for Graham we could not have picked a better matching of DNI.
Before I continue I would like to recognize Chris Johnston again.
He has been working behind the scenes most of you who have not met him, but as I've told many of you who does a fantastic job for both M&A and as well as organic opportunities for us He's a great partner and the great leader on our team.
Now I'd like to speak briefly about Barbara Nichols, and then we'll pass over to Dan to provide far more depth on the business.
Barbara and Nichols is based and in Nevada, and Colorado, a suburb of Denver.
And they have a 55 year history of engineering development and innovation and.
The former engineer myself, they have some real cool capabilities here.
They have over 150 employees.
Which is double what they had just 4 of 5 years ago.
And we're looking forward and adding more employees and of similarly rapid pace to support Barbara nickels and future growth.
The recently completed the construction of a 40000.43000 square foot the state of the art manufacturing and plan. This is nearly double the facility size.
And I cannot wait to bring some of you through the facility for tour it looks fantastic.
The leadership team of DNI is outstanding and most importantly, the entire workforce is tremendously skilled continuing enhancing continually enhancing the training and extremely engaged.
Now that I've set the bar high I'll pass over to Dan Thor and Grahams, New President and Chief operating officer, who will provide more much more depth about Barbara Nichols.
Dan.
Thank you Jeff and thank.
Thank you Jim for your kind and support of introduction of Barbara and Nichols. Good morning, everyone I'm happy to be with you and provide more background on me and I will just kind of hang out on the slide 6 here and I'll tell you more about us and.
Barbara Nicholls has a team of them for 150 engineers machinists inspectors technicians and support personnel the engineer and build specialty pump turbine and compressor systems that are used and the highly sophisticated applications like <unk>.
Submarines.
Rockets.
Physics research facilities.
The advanced power plants and thermal management systems.
We've talked a lot about numbers, so far but it's our people and the work environment that we nurture that make the numbers happen.
We have an amazing team.
Many of US came from large aerospace defense and industrial companies.
I came from a large aerospace company with 5000 employees and my location.
I walked in the P&I when it had 35 people.
And I was amazed that these 35 people were doing what my company was doing with 5000 and.
Albeit at a much smaller scale.
I was sold on BMI, and I decided I had to work there.
Many of US who came for much larger companies found the can do continual learning relationship driven culture, and B and I invigorating.
While it's been tough during Covid and we do spend a lot of time, helping our people understand the importance of 1 of our customers are trying to do.
We excel when we were part of our customers' team.
We are fully engaged during the development of our equipment and their systems.
And we share of our customers anticipation during the first launch.
1 last comment before we move to slide 7.
The <unk> leaders and employees like to have skin in the game, Jeff talked about this.
1 of the alluring aspects of this transaction was the ability to have meaningful ownership and of micro cap company like Graham.
Most of the P&I stockholders took stock and many employees will navigate to buy stock in their company that is a powerful incentive when you know your daily efforts will benefit you and your fellow investors.
Now, let's move to slide 7.
Most department of Nichols business comes from defense and Aerospace and the U S. Navy is the large customer for submarine torpedo of injection systems and.
And torpedo power systems, as well as aftermarket parts and overhaul.
Thermal management systems are used and a variety of power dense and electronics and.
And the other power applications.
For aerospace our involvement is broader.
And with thermal management systems fluid management systems propulsion, and power systems, and support vehicles and satellites and environmental control and life support systems for our heroes.
Slide 8 is next.
When Tim Nicholls, and Bob Barber's started b and I.
Our first customer was the U S Navy.
For whom they designed high speed of turbines.
Another near founder Jim Dillard.
Got us involved and a prototype of air turbine pump used for torpedo injection systems and U S Navy submarines.
Using the special manufacturing process called electrochemical machining.
This initial engineered product development focus has been leveraged into production manufacturing on several navy programs. We are now seeing full lifecycle with spare parts and overhaul of the systems.
Please turn to page 9.
Yeah.
NASA has been of fund customer over the years.
And we designed and built several cryogenic pumps for them and our early years My first job with NASA was on the ground based trainer for.
For the space shuttle manipulated the arm.
NASA also gave us our first opportunity to design and build of rocket engine and turbopump, using our cryogenic pump and hot gas turbine knowledge.
That early experience and 1997 through 2000 and set us up well for the new space companies that had been busy developing and commercial space launch services over the last 10 years.
And now moving on slide 10.
The BMI works across many markets and that ability has served us well over the years as all markets go through cycles.
When we are able to move from 1 market and decline to another on its way up we can manage our business and much better.
And the Physics research Arena DNI is known worldwide as the specialty cryogenic pump supplier.
We also work with all of the air separation Giants, the separate oxygen and nitrogen and the argon and other gases into industrial gases.
B and ice cryogenic blowers are installed in North American LNG import terminals.
And satellite test chambers around the world.
Since day 1.
<unk> been involved and advanced energy systems building and commissioning geothermal power plants and concentrated solar power systems.
More recently, we have been involved and fuel cell power plants, making anode and cathode blowers.
The new administration plans to spend more money on alternative energy storage and power Gen and we see opportunity and specialty pumps for hydrogen fueling systems.
On to slide 11.
[laughter].
Slide 11 gives another view of DNI and from a product perspective.
1 thing that jumps out that hasn't been apparent on the earlier slides is the motor generator controller product area.
When I first joined the P&I, we use generation 1 variable frequency drives.
The pushed 3600, RPM motors to 5000 of RPM.
The higher speed provides.
And more power dense turbo machine.
Since then we have driven pumps to 30000 of RPM and compressors to over 100000 RPM.
We are now designing and building the electronic boxes that drive our motors and condition of the power from our generators, sometimes doing both and the same machine.
As you can tell I'm passionate about our people our customers and our technologies.
I'm also very excited to learn about the employees of Graham.
Their families and their dreams.
And their customers and their products.
Together I believe we will do some amazing things.
Jim I think we're back to you on my math.
Well, Thank you Dan and thank you Jeff for your detailed review of DNI.
And the work down of the acquisition.
As you heard Dan speak and.
As Jeff and I, when we first met and came away with an initial impression.
What a fine company what of Fine leader what of Fine team. That's been built at P&I with incredible passion for their products the people customers and.
And I felt that came through and Dan's prepared remarks. So thanks, so much for that Dan Youre on.
Doozy Azzam shined once again.
I am now referring to slide 12.
On the integration side and the operating models between B and I and Graham are different.
Graham produces large complex welded fabrications to very tight tolerances.
And P&I produces very tight tolerance of highly machined fabrications.
The asset bases are different and our border for P&I and and Batavia for Graham.
Also.
The markets or segments of the markets.
Served by B, and I and Graham are different the.
The transaction value as Jeff had outlined.
It's not predicated on realizing synergies.
Of course, there may be some however, arvada and Batavia will run as independent operating businesses under 1 umbrella.
The initial integration is related to benefit plans.
Our accounting and finance systems, and public company compliance and.
T J capital investment governance.
They're our BMI systems and program management processes, and Dan and Matt Our board of business can share with Alan's defense team on.
Also there our Batavia of constraint management processes and performance improvement techniques, Alan's, but TV team can share with Matt's team and Arvada and.
Working together to share best practices.
We believe margin gains can be realized and both businesses.
With Dan Thornton.
And the Chief operating officer role working with both Matt and Allen.
The talent pool is now nearly a 500 person combined organization that is deep and very strong.
And then of course knows Barbara Nickels deeply.
And much has been shared with Dan about Graham and in the coming quarters, Dan we'll learn more about Graham.
It's the people.
Our culture.
Our markets, our customers and our competitors and the passion that every Graham employee has for ensuring our customers are successful and that Graham is successful.
I will be thrilled to continue to work directly with Dan and driving both businesses.
Let's move on to slide 13.
Yeah.
This graphic projects the transformation of the P&I acquisition provides.
For fiscal 2020, 1 Graham was approximately $100 million of revenue with an end market breakdown of 41% to refining 25% to defense industries, 24% to chemical and petrochemical markets and 10% to various other end markets.
Pro forma projection of fiscal 2020.2 following the P&I acquisition is for.
For revenue to be between 130, and $140 million comprised of 45% for defense and <unk>.
6% for refining and 16% for chemical and petrochemical and markets.
6% to aerospace and 7% to other end markets served by the combined entity.
Sightedly there is further growth and defense by entering new programs.
Accelerating backlog conversion and from additional mergers and acquisitions.
Refining and markets also provide growth simply from a recovery from the pandemic.
Also from strategies enacted the shift position and underserved price sensitive segments and our continued focus on the installed base for.
For chemicals, and petrochemicals like refining have the same growth options with strategic actions already enacted.
Aerospace and commercial space market is expected to grow.
And I with the scratch and I think and Triple pump technology is an important supplier to this market.
There was much growth runway and this end market.
With the addition of P&I growth prospects for Graham.
Graham, it's becoming an outstanding industrial.
I will conclude with slide 14.
The acquisition of being deployed.
<unk> deployed capital to expand our presence and diversify revenue from the defense industry and also provide access to and expanding aerospace market.
And importantly, it adds significantly to our less cyclical revenue streams that reduced financial results volatility.
Defense and aerospace valuation multiples are stronger now than those and energy and chemicals due to and market fundamentals and visibility into future orders.
We continue to grow defense and aerospace revenue, we anticipate that will enhance graham as valuation multiple.
Our catalyst was needed to break out of the revenue range Graham was in B.
P&I provides debt catalyst and that fiscal 2020.2 revenue is expected to be approximately 50% of stronger than without Barber Nichols.
Beyond 2022, with the addition of DNI. It creates follow on acquisition opportunities along with organic growth that is meaningful.
Once graham's traditional refining and chemical markets get back be up get beyond the pandemic that will provide further revenue and margin improvement.
We structured our balance sheet to take on low cost debt and provide flexibility to invest and additional acquisition growth.
Our substantial organic investment that may be necessary as new defense aerospace programs are secured.
I Trust you share the excitement that Jeff and I have about adding P&I to Graham and then having Dan join our leadership team.
Fiscal 2022 is an exciting new chapter for Graham.
We've talked a lot thus far and let US open the line now for Q&A. Thank you.
Thank you well now be conducting a question and answer session. If you'd like to ask the question you May Press star 1 on your telephone keypad confirmation total, indicating your lines isn't the question to you of any price start to if you would like to remove your questions on the Q4 of participants using speaker equipment and made the necessary to pick up your handset.
Before pressing the star key our first question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.
Thank you and congratulations for all for closing the acquisition.
All of the work and just.
And just jumping and first for B and I and and you gave some detail on your defense exposure at 73% of 'twenty revenue is most is most of that Navy and is most of that related to the torpedo systems. Please if you can provide some context.
Sure I'll take that and you can follow on if you wish so it's primarily for.
Offensive and defensive weapon systems.
And the support the vessel programs of the U S Navy.
Okay. Okay. Thank you. Thank you and then.
With the your physical the year 2022 guidance incorporating eni.
Does it imply for 22 of lower refining and chemical revenue and is that related to your comments earlier about needing to ramp up your workforce or was that for your navy business on the Graham side. Please.
Sure Tate.
It does the.
Chemical and petrochemical markets have been it's.
It's been quite challenging.
To the.
Volatility and crude oil prices and then the pandemic on top of it if you look at our orders from those traditional markets.
Our grams, non defense markets, and 'twenty or in 'twenty 'twenty, 1 and.
And 'twenty, our non defense orders were $70 million plus or minus and.
And in 2021, they were $53 million and as a consequence of our backlog entering the fiscal 'twenty 2 for non defense not counting DNI and.
As low of $30 million, that's a pretty low watermark.
Which foretells that it'll be a low energy and petrochemical revenue cycle and fiscal 'twenty 2 for us.
Alan has a substantial naval backlog and with additional production resources, we could accelerate backlog conversion to mitigate that risk and that's the rationale for trying to grow our production and workforce.
Uh-hum growing the excuse me for growing up and 1 follow up growing your production work force is mostly on the defense side than the debt correct.
At this point, because that's where we have the large backlog it would be accelerating backlog velocity and conversion of velocity. Okay. And then also having capability of that when refining and chemicals pick up and they will.
And 1 is the execution of horsepower to push that worked through and minimize the amount of sub contracting that we might otherwise have to do which is the margin headwind.
Okay. Thank you all.
Well I can take.
Our next question comes from the line of theater or New with Litchfield Hills Research. Please proceed with your question. Yes. Good morning can you just discuss the approach the bidding process between Graham and Barbara.
It's different at all or similar.
Dan do you want to discuss the of the bidding process on the P&I side.
Sure I'd be happy to.
Yeah. So so we cover a bunch of different markets of the bidding process is very different across all of them for.
And for the D O D.
The government NASA kinds of of.
Uh huh.
Solicitations it's on.
Often competitively bid.
And it's Oh, you put together a form of proposal and put it in for for consideration.
We do have some contracts.
Contracts that are sole sourced and win their sole source of the government has the ability to come in and audit.
And your entire bid are getting down into cost justification for everything.
On the commercial side.
And it ends up being probably more competitive, but potentially some opportunity to leverage relationships.
On the commercial side and so so it's not necessarily the lowest cost it's often the best value for pretty much everything that we bid a bulk.
Both government and commercial.
And thank you Dan.
On the of.
On the Graham side seal.
It's pretty similar to Barbara Nichols and that there is a long selling cycle and the earlier.
B and I or Graham is involved and and nurturing and opportunity.
The higher the likelihood is there is for success and also improve margin. So what's nice about Barbara Nichols from from what we've observed is they have a long sales cycle of chance to nurture the opportunity build the relationships demonstrates the value of working with Barbara Nichols and of similar way and which Graham does on its energy and Ken.
Michael side.
And as you might recall Graham has 4 distinct phases of the sales cycle. There's a project concept very early phase. There's nothing is going to be bought for 1 or 2 years the.
And then there is something called feed the front end engineering design, where we're working to more precisely define the equipment scope utilities Roth capital cost then there's a phase 3 which is EPC bid 1 of the large contractors is bidding.
The revamp of a refinery or the retrofit of a refinery or new capacity, new capacity and refinery, we might be 2 or 3 or 4 of those EPC is what ultimately gets it.
And then the issue an RFP to buy something.
We've always found and the same holds true for Barbara and Nichols, the longer you and net sales child longer and nurturing that opportunity and Dan's team has good visibility into early concept work just as Graham does the more on nurturing and the higher the capture rate.
We will be and also the margin profile of that work will be as I see it rather similar although somewhat different but it's similar and that is a long sales cycle, which dance team does extraordinarily well on the graph.
M team does very well as well.
Okay. Thank you.
Youre welcome.
Our next question comes from the line of Brett Kearney with Gabelli funds. Please proceed with your question.
Hi, guys. Good morning, and congratulations on all of it sounds like M. A very terrific combination for all of them.
Thank you Brad good morning. Thanks.
So obviously.
Completely and I understand no synergies at all contemplated upfront and.
You all will continue to kind of.
On the integration.
<unk>.
And I.
And I guess, the combined organization, but I guess at this at the outset could you discuss maybe some of the.
The commercial and organizational.
Opportunities. The have you most excited about Graham and Barbara Nichols coming together and longer term.
Yeah.
Debt and you want to take that you want me to take it.
Go ahead, Jim take the first cut on it.
Okay.
Well what has US most excited is as the addition of a.
The diversification of revenue stream within a diversification effort that we had around defense.
So dan's team and serving the defense industry, but and a very different segment of the defense industry.
Round offensive and defensive systems for the vessels and as.
And I've said Graham is on the the the shipbuilding side of the.
Of those programs so that provides us with the <unk>.
Suddenly.
Very clear visibility and multi year outlook not only from a backlog conversion point of view.
The procurement or future orders or future backlog build and that enables us to.
To have credibility around organic investments, we may need to make to realize the full growth potential of the combination of a little bit more difficult and the energy space, where those orders are more transactional.
And the defense area, we really like the long visibility of that that industry provides which gives us confidence when we're deploying capital.
And with an acquisition of Barbara and Nichols for around organic investment.
'cause there's more predictability of the more of the visibility and that provides us with the higher confidence when we're making very significant capital investments, which is very exciting because it takes a great deal of the risk away.
Mhm and then.
For.
And for me on my side.
Jim and I have talked a little bit about this.
Through the months that we've been talking but.
Barbara and Nichols has a really strong engineering group and.
And as we think about more sophisticated systems the <unk>.
System engineering that can go with those of the vertical type of integration that we can start to think about between Graham and DNI and and the other acquisitions.
That that piece of it really gets me excited.
So and so I like to think probably more system engineering and vertical integration and and tried to take the strength of each of the organizations along with.
The other other partners that we can line up and and really go after.
And more higher and.
Opportunities and and offerings to the various markets that we serve.
Terrific and then maybe just 1 quick follow up I, you know I think you all structure, the transaction and very thoughtful well aligned manner and I guess given 1 of the initial integration priorities kind of employee benefit side is there a thought to.
And a broad based kind of employee share ownership plan across the combined organizations.
Hey, Brad and Jeff Jeff.
Sure we have a couple of things on the employee benefit side.
Just to clarify we are.
Initially, leaving the benefits of alone of both organizations and will look at them thoughtfully going forward to see if there's anything that makes sense to do with regard to of share ownership program, we have and employee stock purchase plan in place, which we've had in place and Graham for I believe 8 or 9 years now debt.
Will be expanded to Barbara Nichols.
Shortly and then of the employees of the Barbara and Nicola will have the ability to buy.
And Graham stock through the plan. So that is absolutely something that the the Dan and his team of very interested in and we will bring over to Barbara Nicholls as soon as its feasible.
Terrific. That's great. Thank you guys again and congratulations to all.
Thank you and thanks again, Brad and thank you Brett.
Our next question comes from the line of John di for where the political capital amount and its been please proceed with your question.
Good morning, everyone and thanks for taking my call.
I was just curious you've been talking since I guess August of 2018 and eyes.
Clearly of quality.
That's it.
Were there any other bidders for the property.
John This is the Jeff again.
Part of our process around acquisitions is that we we interact.
And interact with companies and.
And we build the relationship and then over time we are.
We tried it for them into more of a an exclusive relationship.
With regard to Barbara Nichols, we've had this relationship for about a little over 2 and a half years and really the intent was for it to be.
On off market individual transaction. So we really didn't have any bidders there really wasn't a bidding process per se it was really a and exclusive.
And the relationship and that's 1 of the benefits for both sides and it allows us to get to know them, then we get to know us and ultimately.
And both sides and think it makes sense and eliminate some of those other what I would view as the distraction.
Okay. So new.
No no other bidders.
Hum.
And can be and EIS website.
Under the leadership of section and there are about 8 key employees.
List it there I'm curious how many of those 8 employees.
And employment contracts.
Going forward.
Sure John we don't want to get into the quite that level of detail, but we have had some of the key employees sign of employment contracts.
Some of them, but all of those employees are remaining with the organization.
Okay.
Alright fair enough and congratulations.
Thank you.
Thank you.
Our next question comes from the line of John Bair with ascend wealth Advisors. Please proceed with your question.
Oh, Thank you and congratulations of a longtime shareholder.
And I'm very pleased to see the.
And finally got.
Something that looks very exciting and and.
Kind of pet assault.
And let's say good things come to those who wait and I have a couple of questions.
I was wondering if Graham and B and I had any kind of actual business interaction of these past 3 years.
The other words working together on a particular project or components.
This is Jim.
And we didn't have any let's.
Well, it's a commercial collaboration on the products offered to the market.
Although the managements of both teams have spent considerable time talking about how we approach the markets that we will collectively serve and <unk>.
As Dan said around system integration the.
The thermal fluid flow capabilities of the Barber nickels complemented by the thermal and fluid flow capabilities of Graham and our heat transfer of components and Dan and system integration capabilities as a fine complement so we have had.
Some detailed conversations about.
The benefit of the combination and how we can expand our offering to the marketplace.
Okay and then the next question is kind of a split question.
And I'm wondering if there was any debt of.
Of course assumed by Graham the BN.
And I might have had and then the second part of the question is.
On the term loan what is the effective interest rate now.
As part of that interest rate is.
The tied to this Bloomberg short term credit index and.
And wondering how often that index is reset and the rate could conceivably change on that.
John Barbara and to the the acquisition did not assume any debt from Barbara and Nichols, who is the debt free cash free acquisition and the only reason it would be any cash as of the working capital our.
Target was off so with regard to debt there was none there with regard to the term loan of you're right, we use and the busy right and it's based on the 1 month is the right.
Plus the 150 basis points I believe the 1 month Visby rate is just under 10 basis points. So right now of the variable rate is about 100 and about 1.6% of 160 basis points.
We have the opportunity to perhaps.
And it's set up of derivative of some sort of to lock in the rate.
For the term of the alone and that's something we are considering given that we entered into the agreement. This morning, we havent done that yet, but it's certainly something that I'm is high on my thought process to lock and the rate.
M, which would obviously be above the current 160 variable rate, but would be at a rate that we would be comfortable with across the term of the loan just to provide a little more depth on the the loan itself.
5 year alone with a 10 year amortization. So obviously half of the principal would remain at the end of the 5 years shoot it still be in place.
Okay. So am I hearing then that the cause.
The rate would adjust.
On a monthly basis is that right the the correct.
And yet.
Okay. Okay. Current currently currently of wood, unless we were to again to enter into a swap.
Swap to the lock it down and there's more of a fixed rate loan and we are looking at.
Right.
The no debt assumption fits very very well with the Graham lasting so congratulations again.
Best of luck going forward. Thank you.
Thanks, John and John.
Our next question comes from the line of Andrew Shapiro with.
Well on Damn capital. Please proceed with your question.
Thank you a few if I could just flush out the.
The acquisition.
[noise] impacts here and and and such on the shares that were issued what restrictions if any are attached to them and they're flowing out onto the market.
Sure Andrew there's a sort of restriction on <unk>.
Both on the shares of a minimum of 6 months that they cannot be resold.
Okay, and then out of that.
And the then theyre subject to a <unk> 70 for yeah.
Right. It would be then subject to $1.40 for right because they're not registered yes.
With respect to the dividend policy I don't know if you if the board had previously established.
And our payout rate of such obviously, you've been running with a lot of cash and no debt for a long time and now we're going to have a little bit of debt and the hold of the less cash and of course, a lot more cash flow.
Okay.
What is the guidance or or color you can provide as to the.
Policy thoughts regarding the company's the dividends going forward.
Sure the the the dividend there isn't an explicit the dividend policy per se.
However, as we as the board has the.
Looked at the dividend and increase the Dover.
The number of years the intent was that it would utilize a portion of our kind of normalized cash flow net.
Not a high percentage, but rather a lower percentage of on normalized cash flow and.
And then ultimately.
Ideally grow and so that it would not it would not a M.
Caused the problem or cause the conflict with organic or M&A investment.
The board will be looking at this at the dividend going forward certainly they obviously looked at the last week and are at the board meeting and approved keeping the debit dividend where it was at currently so.
And that's basically where we're at right now we will obviously be monitoring our cash flow of monitoring our our our balance sheet position and and going forward. While there is no intent to adjust the dividend and it.
Any significant way that can always.
Could could change your feed of the cash flow is different or we had significant investment activities.
Well and above what the.
As needed to keep the dividend steady and we're growing share and on the debt there is.
And there is no prepayment penalty at all.
That's correct.
Okay, and last but not least and that's because I'm fairly new to the.
Company and the nature of.
And the grants contracts, but also would like to get the feel for the nature of the contracts that DNI enters into are these primarily.
Fixed price contracts, where you build in a cushion in the event of Overages or are they more cost plus.
What is the.
And then the bulk of the nature of the your contracts to understand contracting our risks and.
You know.
I guess the.
Cost accounting and if there was a.
Oh lose their contract.
Dan why don't you spend a moment just outlining the of 3 or 4 different types of contracts on the.
On your program sides that you typically get involved and.
Yeah.
Yeah. So so we do firm fixed price contracts and those are the majority of contracts that we have.
We also have the cost plus fixed fee contracts and we also have time and materials contracts and and we essentially line of the the contract type with the amount of.
Risk that's associated with these jobs since we bedroom. So when we first get and inquiry we understand.
How much risk is involved and then propose.
M a different type of contract and if the customer is not proposing the contract that we believe is appropriate.
So, but the majority of them and the majority of the dollars relative to revenue or a firm fixed price.
And they're pretty well defined and <unk>.
Manufacturing types of of jobs that we feel relatively comfortable with.
On firm fixed price contracts, where there are longer term and.
And we're worried about our raw material costs for instance will often propose that we buy all of the material upfront. So we minimize the risk associated with commodity price and.
Yes.
Yes, it's a mix and and and we carefully choose and propose the the contract approach of different and what the customer is proposing and ER and then negotiate around that and certainly the.
The.
Higher development types of jobs are aware of the scope of isn't really well defined the the likelihood of success is a little bit lower than the normal will definitely push for.
And the materials or cost plus the types of contracts.
And and.
Historically over the last 5 years, how often are ahead of any of these contracts resulted in a developing into a loss contract.
Oh, certainly some due because of.
We run into issues here and there.
And in other in other instances will will make more than we had projected so all in all of the kind of comes down to the bottom line and and.
Overall, we ended up.
Jim and Jeff and advertise the low teens kind of an EBITDA number and and other.
And that's typically where we will land even with some losers in that mix.
Okay, and when you're bidding for these things.
Are you running into the same competitors and and.
Are they tend to be larger than you and and and the.
You know more.
Adapting the absorbing these things and can you gain some of the main competitors that you run into on these bids that Graham now will run into.
Yeah, I, probably won't name of them today, but certainly we have.
Competitors that can be much larger than us.
Theres not any of that are smaller than us theres not a.
There's not many people who have the capabilities and you know of 150 person the company.
So and so typically they are larger than us typically they can absorb more loss are typically the more expensive there are overheads and operating costs and more expensive and so typically we will have a cost advantage against them and so.
What that allows you to do is build a little bit more margin into and toward beds and and take into consideration and that additional risk that are that we may have and it's a smaller company. So yeah, we've been doing it for a while we've kind of figured it out and.
M. We feel like we've got a good handle on development type contracts and production side of the contracts that are that we can bid appropriately.
Okay, great. Thank you.
Okay.
Our next question comes on the line of David Wright with Henry Investment Trust. Please proceed with your question.
Hi, congratulations on the.
Transaction and great to see you, putting the balance sheet to work.
The.
The the comment Okay 11 times forward EBITDA was with what Youre paying for me and I can you define for wood EBITDA.
Sure This is Jeff.
The forward EBITDA would be our expected EBITDA EBITDA over the first 12 months post the acquisition. So most of that will fall into fiscal 2020.2.
Got.
And there's 2 months of fiscal 2023, technically and there. So okay. Jeff that's 12 forward months, so that'll be $6.4 million something of that and yes, okay and and so if the transaction is debt free and cash free what what are you buying you're buying the business are you buying the new facility as well is that within the company.
No the the other facilities, all here and Barbara Nickels and our leased so we're buying the business obviously by some working capital of the business buying some fixed buying the majority of the fixed assets that are within the buildings, but not the buildings themselves and.
Are those leased from third parties were from.
For me and I people.
They are related what I'll call them related individuals some of them are.
Or still would be and I, but the.
There are also some of them on a retired b and I are form of P&I employees.
And that's the total of how many facilities Jeff.
Well, there's the main for the new facility that we that I mentioned earlier and then on the on the campus here they're there.
And that's just the about 43000 of roughly 96 to 97000 square foot.
<unk> facilities on the side here, there's a number of buildings, but there's 1 big 1 and then there's a bunch of smaller and medium sized ones.
Okay, and there's no. There's it's 1 it's 1 campus the the leases are.
And it's not just spread out over.
The multiple campuses.
Are these existing leases or have you entered into new leases coincident with the transaction.
Sure they were existing leases.
Many of them, where the certainly the the new building was of new lease and and the other leases were and <unk>.
It had been existing they were recently they were expiring recently and in the discussions with the.
Around the leases, we would do we myself and Chris Johnson would directly involved and the lease negotiations. So this was not a scenario where Barbara Nichols alone did the lease negotiations we were part of those discussions and we're very satisfied with the the.
The leases themselves, Okay, well will we get and 8-K with the with the acquisition agreement.
Yes.
And then pro forma in the period thereafter.
So that'll take a little while obviously, but the month and a couple of months, but yeah, you'll have those also great.
Great. Thanks for taking my questions again congratulations.
Thank you David.
Our next question comes from the line of Gary Schwab with Valley for Capital Management. Please proceed with your question.
Yeah, Hi, guys.
I was just wondering does the b and I combination have any sharing effect on enhancing like your current the capacity constrained and Graham.
This is Jim the.
The the asset base that are bought off and the newly expanded facility. They are flowing into that very well with the backlog on the conversion of that backlog.
However, actually the the facilities the plant and equipment.
Is it well suited for the large weldment that alan's operation would build.
Okay.
And so.
Okay and the second question.
The fact that you're too small companies as Graham and B and I have any overlap and material procurement.
That could give the overall materials of volume purchase breakpoint, a lot and you know for better of course, the good margins.
So certainly we would look to create and <unk>.
Apply chain efficiencies through the combination however, the materials the types of materials.
Or rather different so.
So I would not expect to see and the classic sense of vol.
Volume based improvement because they're just similar types of materials.
Gotcha, Okay alright. Thanks.
And there are no further questions and I'd like to hand, the call back to Mr lines for closing remarks.
Well, thank you Doug and thank you everyone for your time today again.
And again, where we're so very pleased and excited about the Barbara Nickels acquisition and the benefit of it provides all stakeholders of Graham and particular to the shareholders and the employees and the combined entity. This is an exciting new chapter for Graham.
We look forward to updating you in July on the progress and the integration of P&I into ground. Thanks. So much for your time today, Dan and Jeff. Thank you for Nevada.
Thanks, and thanks, everyone and thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
You may disconnect your lines at this time and have a wonderful day.
Okay.