Graham Corporation Q4 2023 Earnings Call
Speaker 2: Greetings and welcome to the Graham Corporation fourth quarter 2023 Financial Results Conference call.
Speaker 2: At this time, all participants are in a listen-only mode.
Speaker 2: A brief question and answer session will follow the formal presentation.
Speaker 2: If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad.
Speaker 2: As a reminder, this conference is being recorded.
Speaker 2: It is now my pleasure to introduce your host, Deborah Polowski, Investor Relations for Graham Corporation. Thank you. You may begin. You may begin.
Speaker 3: Thank you Christine and good morning everyone. We certainly appreciate your time today and your interest in Graham Corporation.
Speaker 3: Here with me on the call are Dan Thorn, our President and CEO , and Chris Thome, our Chief Financial Officer. Dan, thank you for being a good friend of mine. No problem, Greg.
Speaker 3: You should have a copy of the fourth quarter fiscal 23 financial results, which we released earlier this morning. If not, you can access the release on our website at ir.gramcorp.com.
Speaker 3: You will also find on our website the slides that will accompany our conversation today.
Speaker 3: Dan and Chris are going to provide their formal remarks after which we open the line for questions.
Speaker 3: But if you will turn to slide two in the deck, I'll review the Safe Harbor Statement.
Speaker 3: You should be aware that we may make some forward-looking statements during the formal discussion as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. You should be aware that we may make some forward-looking statements during the formal discussion as well as other factors that could cause actual results to differ materially
Speaker 3: These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed by the company with Securities and Exchange Commission. You can find those documents on our website or at sec.gov.
Speaker 3: During today's call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, you should not consider the presentation of this additional information in isolation or the substitute for results prepared in accordance with GAAP. We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables at a company.
Speaker 3: Our operational measures and the company's methodology for calculating these numbers does not meet the definition of a non-GAAP measure, as that term is defined by the SEC. So a quantitative reconciliation of each of these is not required or provided. You can find the disclaimer regarding our use of key performance metrics.
Speaker 3: at the back of our deck in the supplemental slides.
Speaker 3: So with that, please advance to slide three, and I'll turn the call over to Dan to begin.
Speaker 4: Thank you, Debbie. Good morning, everyone.
Speaker 4: We made excellent progress with our strategy in fiscal 2023. We stabilized our vacuum and heat transfer technology business in Batavia, expanded our turbo machinery operations in Denver, and further diversified our revenue with more defense, space, and new energy business.
Speaker 4: Importantly,
Speaker 4: Our revenue growth reflected the success we have had with diversifying our markets.
Speaker 4: Defense was 42% of total revenue, and our refining and petrochem markets combined were 31% of revenue.
Speaker 4: Space grew to 13% of revenue for the year.
Speaker 4: And our other market category, driven by new energy, was 14% of sales.
Speaker 4: We are excited about the many opportunities we see in new energy.
Speaker 4: The hydrogen market is developing quickly and we provide both turbo machinery and heat transfer equipment for these applications.
Speaker 4: Another interesting market is lithium extraction from geothermal brine.
Speaker 4: We have historically provided surface condensers for geothermal power plants, but the added value of lithium extraction to the process is driving more investment into geothermal projects.
Speaker 4: We ended the year on a strong note with orders of $50.8 million in the fourth quarter and a record $202.7 million of orders.
Speaker 4: with orders of $50.8 million in the fourth quarter and a record $202.7 million of orders for the year.
Speaker 4: Fourth quarter orders included the $23 million follow-on to provide power hardware for the Mark 48 torpedo.
Speaker 4: Booked a bill for the quarter and the year was quite healthy at 1.2 and 1.3 X respectively.
Speaker 4: We continue to strengthen our operations, improve productivity, and deliver better gross margins.
Speaker 4: A better mix of business also helped.
Speaker 4: Gross margin was 16.2% for the year compared to just 7.4% last year due to the impact of cost and labor overruns on our U.S. Navy programs.
Speaker 4: As we complete the remaining two first articles from orders received several years ago,
Speaker 4: As we have more revenue from better price contracts, we expect margins to further expand.
Speaker 4: We aren't stopping there though, as there is still much more work to be done to drive operational excellence, which I'll discuss after Chris presents our financials.
Speaker 4: One other topic I would like to address is related to a large space customer that filed for bankruptcy during the quarter.
Speaker 4: It was a disappointment to say the least. This had a net impact of about $2.5 million on our results or approximately 19 cents per diluted share.
Speaker 4: I was very pleased at the outcome for the year.
Speaker 4: as we were able to achieve our adjusted EVA dog guidance provided at the beginning of the year despite this event.
Speaker 4: And it exceeded our raised revenue guidance. With that, let me turn it to Chris to go into greater detail on the results.
Speaker 4: needed our raised revenue guidance. With that, let me turn it to Chris to go into greater detail on the results. Chris? Thank you.
Speaker 5: Thank you, Dan, and good morning, everyone.
Speaker 5: If you turn to slide 4, you can see that we had strong organic sales growth.
Speaker 5: for our fourth quarter fiscal 2023 with record sales of $43 million.
Speaker 5: This was up roughly 8% over the prior year period as well as the trailing third quarter.
Speaker 5: Our space market led the way with $6.9 million in revenue, which was up $4.6 million year-over-year.
Speaker 5: This 200% increase was due to growing demand from several key industry customers.
Speaker 5: some which have multiple programs with us in this expanding market.
Speaker 5: Aftermarket sales to the refining and petrochemical markets increased 45% to $7.1 million or 17% of total revenue. Although aftermarket was up, refining sales were down $4.2 million.
Speaker 5: This reflects both lower capital projects in this market as well as tough comparables due to timing as last year's fourth quarter had the benefit of a major project in India.
Speaker 5: We continue to be encouraged regarding the opportunities in the refining market given the continued strength and aftermarket demand and the activity with our customers. While defense sales were flat year over year they were still very strong.
Speaker 5: and represented 44% of our quarterly revenue.
Speaker 5: and at 18.9 million
Speaker 5: with the second highest quarter for fiscal 2023.
Speaker 5: For the quarter, sales in the U.S. were up 9% and represented 83% of our sales.
Speaker 5: International sales accounted for 17% of total sales and were 5% higher than last year.
Speaker 5: Gross profit and margin improved measurably over last year given our much improved execution on our US Navy projects related to our vacuum and heat transfer business in Batavia.
Speaker 5: We also benefited from higher volume and pricing, as well as improved mix with strong space in aftermarket sales.
Speaker 5: This more than offset the 800,000 net impact to gross profit related to reserves for one of our space customers' bankruptcy that Dan discussed. Selling general and administrative expenses in the fourth quarter of fiscal 2023 were $7.5 million.
Speaker 5: up 1.4 million over the prior year.
Speaker 5: The increase was the result of $1.7 million in reserves related to our space customer, net of the associated performance-based compensation.
Speaker 5: Excluding the impact of this bankruptcy, SG&A improved to 13.7% of revenue, compared with 15.4% in the fourth quarter of fiscal 2022.
Speaker 5: and reflects our improved fiscal discipline and cost containment measures.
Speaker 5: If you will turn to slide 5, you can see we had a net loss in the quarter of 5 cents per diluted share or $481,000.
Speaker 5: On a non-GAAP basis, which adjusts for amortization of intangibles,
Speaker 5: Adjusted diluted net income and net income per share will break even.
Speaker 5: The net impact related to our space customer had an approximate 19 cent per share impact on diluted earnings per share in the quarter and was not added back in the computation of our adjusted amounts.
Speaker 5: Adjusted EBITDA was $1.2 million for the quarter, which was 200% higher than last year's fourth quarter of $400,000.
Speaker 5: I will remind you that last year's fourth quarter was impacted by higher costs associated with the investments we made to ensure we could meet our commitments for our strategic US Navy programs, which is now paying dividends.
Speaker 5: Turning to slide six.
Speaker 5: I will now touch on our full year results. As Dan mentioned, fiscal 2023 sales grew by 28% to a record $157.1 million.
Speaker 5: with all markets and regions showing growth.
Speaker 5: We are extremely happy with this result as it was above the high end of our guidance that was raised last quarter.
Speaker 5: Sales to the space industry increased 269%, or 15.4 million, to 21.2 million.
Speaker 5: and represented 13% of total revenue.
Speaker 5: Additionally, aftermarket sales to the refining and petrochemical markets increased 26 percent.
Speaker 5: to $24.9 million.
Speaker 5: Sales in the US increased 30% to $127.5 million and were 81% of total sales for fiscal 2023.
Speaker 5: Given our shift over the last couple of years to become much more of a defense business, our geographic mix of revenue is now more heavily weighted in the U.S.
Speaker 5: International sales were also up, increasing 18% to 29.6 million.
Speaker 5: Year over year gross margin improved 880 basis points to 16.2 percent.
Speaker 5: This reflects an improved mix of sales related to higher margin projects such as commercial space and aftermarket.
Speaker 5: and improved execution and pricing on our defense contracts.
Speaker 5: These increases were partially offset by the 0.8 million net impact related to our space customer.
Speaker 5: Gross profit in fiscal 2022 included an estimated $10 million.
Speaker 5: impact related to labor and material cost overruns for first article US Navy projects.
Speaker 5: In fiscal 2023, we completed four first article U.S. Navy projects which were the source of these losses.
Speaker 5: and remain on schedule to complete our remaining two first article projects by the end of the second quarter of fiscal 2024.
Speaker 5: SG&A expenses in the full year of fiscal 2023 were $24.2 million, including intangible amortization of $1.1 million.
Speaker 5: An increase of 2.9 million or 13 percent.
Speaker 5: The increase reflects the $1.7 million net impact related to our space customer and $1.4 million incremental SG&A expense from the acquisition given the two additional months of Barber-Nichols operations and our current year results.
Speaker 5: Offsetting these increases were improved financial discipline as well as cost containment measures such as the reduction of outside sales agents and delayed hiring of non-critical positions.
Speaker 5: as well as the elimination of $0.6 million in acquisition and integration costs incurred last year.
Speaker 5: Gap net income and net income per diluted share were $0.4 million and 3 cents respectively.
Speaker 5: On a non-GAAP basis, adjusted net income and adjusted diluted net income per share were $2.5 million and $0.24 respectively.
Speaker 5: Turning to slide 7, you can see how we are improving our balance sheet through improved profitability and fiscal discipline, all while deleveraging and investing for the future.
Speaker 5: Cash and cash equivalents on March 31, 23.
Speaker 5: were 18.3 million, up 1 million compared with the end of the third quarter, and up 3.6 million from the end of fiscal 2022.
Speaker 5: Cash generated from operations in the fourth quarter was $5 million and $13.9 million for the year.
Speaker 5: I should point out that cash flows for the year reflect the impact of $13 million of customer deposits received from materials related to larger defense contracts.
Speaker 5: Going forward, we expect our cash flow to be lumpy due to the nature of these large contracts. Capital expenditures for the fourth quarter of fiscal 2023 were $1.4 million and were $3.7 million for the year, or 2.4% of sales.
Speaker 5: This elevated level reflects our expansion and productivity improvement initiatives which will support our organic growth opportunities.
Speaker 5: This strong cash generation allowed us to reduce our debt by $6.6 million during the year and our leverage ratio is as calculated in accordance with the terms of our credit facility.
Speaker 5: was 2.1 times at year end. At March 31, 2023, the amount available under our revolving credit facility was approximately 10 million, providing us ample liquidity to support our strategic investments.
Speaker 5: If you will now turn to slide 8, I will review our orders for the quarter and the year. We had orders of 40 point, sorry, we had orders of 50.8 million in the quarter which were up 27.2 million or 115 percent.
Speaker 5: and included the previously announced 23 million follow-on order for the MK48 MOD 7 heavyweight torpedo and a 5 million order for a vacuum system for geothermal and lithium power production.
Speaker 5: Aftermarket orders for the refining and petrochemical markets were $11.5 million in the fiscal 2023 fourth quarter, an increase of 37%. The aftermarket business tends to be a leading indicator of future capital investments by customers in these markets.
Speaker 5: For the year, ORDS reached a new record of 202.7 million.
Speaker 5: driven by our defense business that was up 53.5 million to 116.7 million.
Speaker 5: This represented 58% of total orders for the year.
Speaker 5: We believe these record orders validate the investments we made.
Speaker 5: our customers' confidence in our execution.
Speaker 5: and the success we are having in winning new business across our diversified markets.
Speaker 5: This is not to discount demand growth in our other markets including space and new energy, as well as aftermarket demand in our refining and petrochemical markets.
Speaker 5: which we are also excited about.
Speaker 5: Aftermarket orders were up 34% for the year to $40.6 million.
Speaker 5: If you turn to slide 9, we show our backlog.
Speaker 5: which given the heavy weighting now to defense provides us with strong visibility.
Speaker 5: Backlog at fiscal year end was up 18% to $301.7 million.
Speaker 5: could pair with the end of fiscal 2022.
Speaker 5: I should point out that there are no orders and backlog related to the space customer who filed for bankruptcy.
Speaker 5: Approximately 50 to 55 percent of orders currently in backlog are expected to convert to sales in Fiscal 2024, giving us strong confidence in our ability to deliver on revenue and margin guidance.
Speaker 5: Approximately 25% to 30% of backlog is expected to convert to sales in fiscal 2025 and primarily relate to the defense industry.
Speaker 5: Turning to slide 10, we can review our guidance for fiscal 2024.
Speaker 5: We believe revenue will be between $165 to $175 million.
Speaker 5: which suggests top-line growth over fiscal 2023 of about 8% at the midpoint of that range.
Speaker 5: This is right in line with our long-term strategy to grow revenue 8% to 10% per year.
Speaker 5: These expectations, as well as the results for fiscal 2023, allow us to raise our fiscal 2027 revenue goal, which is now expected to exceed $200 million.
Speaker 5: the target just said a year ago.
Speaker 5: From an adjusted EBITDA perspective, we expect $10.5 million to $12.5 million for next year.
Speaker 5: which suggests an adjusted EBITDA margin of about 6 to 7 percent.
Speaker 5: I should point out that these adjusted measures exclude approximately $2 to $3 million related to the Barbara Nichols acquisition earn-out bonus.
Speaker 5: as well as $0.5 million to $1 million of planned ERP implementation costs for our vacuum system and heat transfer operations in Batavia. We will still be impacted in the year by the first article in lower margin projects that we entered into several years ago.
Speaker 5: As those roll out and we start to work on our better price contracts, employing our improved processes, we expect margins to expand more meaningfully in fiscal 2025 and beyond, to achieve our low to mid-teen adjusted EBITDA margin goal.
Speaker 5: As those roll out and we start to work on our better price contracts, employing our improved processes, we expect margins to expand more meaningfully in fiscal 2025 and beyond to achieve our low to mid-teen adjusted EBITDA margin goal. With that, I will pass the call back to Dan.
Speaker 4: Thank you, Chris. Let's turn to slide 11. We continue to evolve our strategy as we advance the organization through steady growth and stronger profitability.
Speaker 4: Our vision is to build an exceptional company that provides mission-critical high-compliance products to diverse markets.
Speaker 4: We believe we can succeed with our highly skilled workforce that is fully engaged because of our open culture, that challenges each of us to do our best and align with our customers engineering expertise, responsive service, and timely deliveries.
Speaker 4: Our focus is on serving markets where technology is critical to the success of our customer's process or application.
Speaker 4: This is how we have succeeded over time with our vacuum and heat transfer technology as well as our turbo machinery equipment.
Speaker 4: Think about the critical nature of our vacuum system on a refinery's distillation column.
Speaker 4: If it doesn't work, the output of the refinery is severely compromised.
Speaker 4: Similarly, failure of a torpedo propulsion system in an ocean conflict could be catastrophic.
Speaker 4: Space communication satellites quit working if our thermal management pumps fail.
Speaker 4: Our engineering expertise in vacuum heat transfer and turbo machinery and our high compliance processes developed to create and qualify these solutions are key to our technology differentiation.
Speaker 4: A second pillar of our strategy is operational excellence.
Speaker 4: We have many initiatives to continually improve the processes we employ in our operations.
Speaker 4: We have been consistently upgrading information systems in our turbo machinery operation.
Speaker 4: and will initiate a long overdue ERP system upgrade for a vacuum system heat transfer operation. We are making more investments in equipment like automated welding that eliminates rework and provides quick payback.
Speaker 4: Finally, expanding our shared services to gain economic advantage will continue.
Speaker 4: A third pillar is our people. Our people are our most valuable asset and we are committed to grow and develop them to maintain a competitive advantage. We have had good success using engagement surveys to identify gaps in engagement.
Speaker 4: We then follow through with initiatives such as improved instruction, tools, communication, development programs, and other resources to fill the identified gaps.
Speaker 4: Leadership development is actually quite advanced for a company of our size.
Speaker 4: and we have expanded skilled trades training through in-house weld schools, partnerships with community and academic resources, and initiating a machinist apprenticeship program.
Speaker 4: Finally, we will leverage our external stakeholders, including our communities, our suppliers, our lenders, and our shareholders to be a better business.
Speaker 4: This means strengthened relationships, improved communications, and finding win-win solutions.
Speaker 4: We are making steady progress against our plan and we are quite excited about the opportunities in front of us and encouraged with our stakeholder support of our journey of building better companies.
Speaker 2: With that, Christine, we can open the call for questions. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad.
Speaker 2: A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker 2: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker 2: One moment please while we poll for questions. Thank you. Our first question comes from the line of Theodore O'Neill with Witchfield Hills Research. Please proceed with your question.
Speaker 6: Thank you and congratulations on a good quarter.
Speaker 6: Thanks, Leo. Yeah, you've got some remarkable growth in orders here, and I was wondering if you could give us a little more insight into your success there. Is that new products? Is it taking market share from others? Was this business just there all along and you just started asking for it? I think it starts with performance.
Speaker 4: points out the importance of the actions that we made a year, year and a half ago to invest in our businesses.
Speaker 4: to bleed a little bit to make sure that our customers were satisfied. And ultimately they're coming back to us. We are seeing some expansion in certain areas, but honestly I'd say it's mostly that our customers are saying thank you.
Speaker 4: for really helping us out and here's more work to continue to help us out. I'll expand that answer just a little bit, Theo, and give you a sense. You know, a year and a half ago, two years ago, a year and a half ago, supply chain was a challenge.
Speaker 4: But we are still seeing challenges in pocket areas. And in particular where we're seeing challenges is in some of this high compliance related stuff. We're not, you know, lead times are still relatively long for...
Speaker 4: for raw material and simpler components. What we see is that whenever we're asking for something that's special above and beyond, has high compliance, high testing requirements, etc., the supply chain is struggling with that.
Speaker 4: And it just goes to show that if you can perform at a high level and provide some really high level service, high level equipment that is checked out extremely well before supplying to the customer so they don't have problems once it's...
Speaker 4: starting to see how valuable that can be.
Speaker 6: You're saying that the high compliance products that you're providing your customers is a differentiator compared to other suppliers? Absolutely.
Speaker 6: I wanted to ask about Virgin Orbit. I just did some quick look up online during the call here. It doesn't look like that's coming back, is that correct?
Speaker 4: That is correct. They filed for Chapter 11 and but in the in the Chapter 11 process they did not find a going concern bidder.
Speaker 4: So they kind of transition to let's essentially get rid of the assets and lots and so they've liquidated the majority of their assets at this point in time.
Speaker 4: and they don't appear to be coming back. Probably the good news is that some of the other launch market customers were interested in some of their assets, so they had bidders for their buildings, their inventory, et cetera. It's not wrapped up at this point.
Speaker 2: question comes from the line of <expletive> Ryan with Oak Ridge Financial. Please proceed with your question.
Speaker 4: Thank you and also congrats on the good performance and guidance for the current year Dan and Chris.
Speaker 4: Thank you, Dr. King. A question on the guidance. You know, in the slide deck, it shows virtually all the revenue you're guiding to is already covered by what's in backlog and expected to be delivered. You know, you have this vulnerability with space customer. That doesn't appear to be included in that. Any other vulnerable areas within your bank?
Speaker 5: Yeah, <expletive> , you know, very good observation on your part. You know, like other companies, you know, we're still seeing pressures as Dan just talked about a little bit on the supply chain side, as well as the labor side. Although we have seen these conditions improve, they're still not where they were.
Speaker 5: you know, where we were pre-COVID. So really, you know, as you point out, we have the backlog, it just comes down to execution. So it really just comes to our team continuing to perform and
Speaker 5: we were pre-COVID. So really, you know, as you point out, we have the backlog. It just comes down to execution. So it really just comes to our team continuing to perform and, you know,
Speaker 5: risks outside our control, such as supply chain and labor. Okay. Chris, as a follow-on, looking at the year, you've got some delivery on the remaining two first articles during Q1 and Q2, but how should we look at the...
Speaker 5: you know, kind of the top line, how should the revenue line slow as we look at fiscal 24? Any other seasonality or as you look at projects, how should we kind of model the revenue growth for 24?
Speaker 5: Sure, as you know, <expletive> , we really don't have a lot of seasonality in our business. Our fourth quarter does at times tend to be...
Speaker 5: A little bit higher as our teams are working to hit the goals for the year. We don't see a lot of seasonality.
Speaker 5: built into our guidance. Okay. Say Dan on the aftermarket and the refining and...
Speaker 5: petrochem side, your large install base kind of drives that aftermarket business, but you said that that could be a leading indicator down the road.
Speaker 5: You know, your large install base, you know, kind of drives that aftermarket business, but you indicate or you said that that could be a leading indicator down the road. What are those new projects?
in the refining and petrochem space look like either domestically or you know you've had some interest in expansion in China and India.
the refining and petrochem space look like either domestically or you know you've had some interest in expansion in China and India.
Domestically, it is picking up. We are seeing inquiry rates and opportunities domestically continue to grow. So it has been just horribly slow coming back domestically, but we're certainly seeing that coming back. As you noted earlier.
for our crew here. What we're seeing internationally is you know China has has opened up after their COVID shutdown but it's a slow reopening. So we are seeing an increased level of requests to quotes on different programs.
And we are quoting on those how fast it comes back, not entirely clear. But as it comes back, we'll start to see more orders in the second half of the year that tends to build into our fiscal 2025.
India, we've got several different bids that are out there that are close to being announced, and so we're hopeful that we can continue our India presence.
And then India looks like it kind of flattens out for a year or maybe two as they go through their election process.
And then we fully expect that it kind of comes back on. So it's really interesting to kind of follow all of these different markets. They're all in kind of different places. And so the ability to be flexible and be able to move with the market is something that...
you know, the diversification that Graham has, has really been able to build over the last two years, provides a ton of value. So we're able to kind of move from one market to the other, you know, use our backlog to fill holes.
and provide a lot more stability. And so we're in a much better place than we have been in prior years. <expletive> , you followed us for a long time and you watched the cycles. And so we're in a much better place. Sure, thanks for that. One last one on capital allocation. You know, when you look back, Graham had a number.
As Dan and I laid out last year when we released our long-term strategic plan, our capital allocation... and Galerins in the Watts CountyUG program again on Moving cards and Brian Ji, and the l adjusting to the
starts with organic growth, right? We feel we have an abundance of capital, organic growth opportunities, you know, to take advantage of. You know, from there, if we have excess capital, we'll use it to pay down debt, and then hopefully within the next few years, you know, we can start looking at M&A again.
And then after that we would look to returning that back to shareholders. So we're comfortable with the capital allocation strategy that we have.
Okay, great. Again, great job on the execution guys. Thanks. Thank you.
As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. Our next question comes from the line of Brett Carney with Gavelli. Please proceed with your question.
Hi guys, good morning and congrats on the continued momentum. Hey, thanks Brett. Morning Brett. And Dan, I absolutely agree with your assessment of the landscape in the US, potentially even global manufacturing, the ability for differentiation through reliability and performance.
I guess, can you talk about the opportunities you're seeing, some of the investments you're making, the ERP system, you noted some digital and automated tools to kind of cement, I guess, that vision for differentiation you see across the platforms? Yeah, let me hit it generally and then...
and investing.
When we're investing capital continually and wisely in our business, it becomes incrementally stronger, kind of like your bank account does as you continue to put money in there and compound.
So we loved the notion of continuing to invest in ourselves and building a better company in the process. So that's why I love the notion of continuing to invest in ourselves and building a better company in the process.
If we don't, there's an engineering term called entropy that basically means everything starts to come apart. So your processes drift, you don't have as well trained employees.
and ultimately you have lower performance. In investing, inflation is that entropy. If you're not continuing to invest, the value of your investment starts to...
become less. So you know they kind of go hand in hand which is which is really kind of interesting. So we are continuing to invest in our businesses. Just last year we put some significant money into Barbara Nichols to expand.
their capacity to support the the Mark 48 program. And in that facility our GM Matt Malone in Denver has told me that that facility is is within a week of going live. The Navy is excited about it. Our customer...
tensions continue to rise and we've all read more and more about that. So that was one investment that we made. Another one is on this automated welding equipment. And you know as
We've got more and more manufacturing expertise within Graham to review our processes and review our product and kind of look at areas to expand. We've identified in these really tough welds that are hard for a person to actually...
follow a very complex weld path and be very, very consistent. We think that the automated welding equipment will enable us to have less defects. It'll go faster.
ultimately better quality in these really challenging welds. And so this investment where it makes the most sense, where you can get good payback by investing in equipment like that is extremely important.
The ERP upgrade that you had had asked about. You know in any business, especially a manufacturing business, the flow in the business is extremely important.
And if there's lots of handoffs between people, there's lots of opportunities for confusion or mistakes or whatever. And as we can automate this more and more and be working with the same information throughout the value add.
significant improvement on the flow of product through our factory as well as reduce
some of the mistakes or process reworks, essentially, that we have seen. So that whole information,
realm is getting tougher and tougher as our customers are wanting high compliance equipment and they want the proof to back it up that it is high compliance and so there's a ton of information that goes along with our hardware and in making it available and trackable and findable and
and product, don't forget about the product because we have some really cool opportunities. And so, you know, to Chris's point, there are a ton of, you know, organic growth opportunities in front of us that we believe that we can give stockholders a really nice opportunity.
return on investment as we allocate that capital appropriately. Excellent. And actually the follow-up I had was on this new opportunity or I guess expanded opportunity you guys are seeing with the geothermal lithium that curious you know
what the potential funnel or kind of magnitude of market opportunity you guys are seeing there. And then I guess broadly with all the developments and new energy and potentially the traditional energy markets coming back, yeah, I guess how you're thinking about resources, prioritization, both capacity and personnel across the organization.
Yeah, it's a great question. You know, as you show the world that you're more and more capable, people want more out of you. And it does come down to prioritization and choosing the best programs to go after. The ones that have strategic importance.
in you know the geothermal power has been around for a long long time but but coupling it with this lithium extraction all of a sudden makes that a lot better for investors in those processes because there's additional yield other than the power that comes out of that out of that
out of that process. So you know being able to be flexible, work with your customers to develop new equipment that's better suited for these new applications that come out including hydrogen are you know ultimately what we are trying to do as a business is make sure that we have that really strong capability.
term i.e. strategic as well as
the highly profitable ones that benefit our stockholders. And just to address your comment about resources, right? We really have a top-notch human resources function within Graham at both our Arvada and our Batavia locations, you know.
Since last year we increased our total workforce by 10 percent.
and we increased our welding workforce by 25%. All that in a very difficult market. So we're gonna continue to look for different ways to improve such as our welder training program and some of the other apprenticeship programs that we have in place and work.
Thanks, Brett.
Our next question comes from the line of Bill Baldwin with Baldwin Anthony Securities. Please proceed with your questions.
Thank you very much. I have a couple areas here I would like to focus on if I could, Dan and Chris.
the aftermarket business primarily almost entirely a domestic business for Graham
in the refining and petrochemical area? Yes, yeah.
Is that heavily weighted towards the refining side? Would that comprise the majority of the aftermarket would be on the petroleum refining? And petrochemical, yes. So how would that break out between petrochemicals and petroleum refinery roughly? Just half and half or?
It's going to be heavier towards the refinery, Bill. You're exactly right. I don't know that we have that breakdown. Yeah, well I'm just trying to get a feel for how the business breaks out. Is most of your inquiries as far as aftermarket business going forward, is that primarily weighted to petroleum refineries? Is that where the heavy inquiries are and where you would expect the...
heavier capital projects that eventually unfold would be on the refinery side? Yeah, you know, historically the majority of our equipment has been on the refinery side, and we would expect that the aftermarket inquiry follows that because that's the source, the installed base is the source. Right, right. Yeah, absolutely.
with your very strong order picture there in aftermarket.
How are you performing on the execution side, would you say, Dan and Chris? Are you pretty much on time with your deliveries and so forth on that, or is that a
here again is raw material and labor shortages impacting the ability to handle that business as officially as you'd like to. Yeah you hit the nail right on the head Bill. You know our on-time delivery isn't where we'd like it to be because of the labor and you know the long lead times. However, you know we're firing on all.
we're looking forward to what they can do once maybe some of these external forces free up and we get some of these process improvement and productivity initiatives in place. So you think compared to your competition though would you say that you're
forward to what they can do once maybe some of these external forces free up and you know we get some of these process improvement and productivity initiatives in place. So you think compared to your competition though would you say that you're definitely competitive and you're likely not to lose any.
potential business going forward because of these issues on delivery right now? Yeah, I think everybody's struggling in some areas with supply chain. And so, you know, some of the forging that.
a lot of the forging houses are struggling quite a bit right now. You end up kind of seeing some weirdness around some of the specialty materials like baskets for instance. Specialty fastener companies are struggling quite a bit. They end up being...
You know, the pricing being a whole lot more stable, a little bit longer in lead times, but then you get into components that we're trying to buy. And every once in a while you just run into something and it's like, okay, can't buy that, you know, and can't get that in house for six months.
and people's inventory is not built up very well yet. And so we're still running into challenges in supply chain and deliveries. But as you know Bill, none of these challenges are unique to us, it's everyone that's experienced it. Right, right, right.
Regarding the lumpiness of your cash flow, it looked like your un-billed revenues were pretty large. As you clicked on those revenues, with that offset quite a bit, your customer deposit...
you know, situation. I mean customer deposits were a big source of revenues, but unbuilt revenues were kind of a drain on you. Yeah, absolutely. Does that kind of balance out over time?
to your cash flow? We think we have some upside on the on-build levels, as you astutely pointed out. That's been one of the areas of focus of mine, as well as the team's ever since I started. And we think that's going to start to free up over the course of this year, and will definitely be a positive thing for us.
EBITDA levels that's more reflective of the cash that we're generating. It just is very lumpy in nature. Over time we'll be improving and increasing.
And lastly, can you wrap any potential numbers around the urnout liability post 2024?
Is there a cap on that? I know you announced something on that a while back. It's all publicly released so we can certainly talk about it. I couldn't locate it so I'm asking you on the coach. No problem, let me walk you through it. So it's a three-year program starting in our fiscal 24, so fiscal 24, 25, 26. The threshold level is 2 million.
and up to a max of $4 million each year. So over the three-year period, you know, a max of $6 to $12 million in potential additional payouts in addition to the normal employee bonuses. And this was all negotiated shortly after the acquisition. It's all related. Right. I remember that. I remember that. Yeah. I just couldn't find the details.
expense, we're going to see a higher EBITDA level that goes along with it. So it's all performance based.
we're going to see a higher EBITDA level that goes along with it. So it's all performance based. That's what I was looking for.
You fellows and your team are doing a heck of a job in building a company here. So congratulations and best of success. Thank you Bill. Our next question comes from the line of Gary Schwab with Valley Forge Capital Management. Please proceed with your question. Yeah, hi Dan Criss. Great job. Like everybody has said. Thanks for listening.
A question about the lithium on the direct lithium extraction. Are you, there's a number of companies that are involved with this. Are you talking with any other companies?
question about the lithium on the direct lithium extraction are you there's a number of companies that are involved with this are you talking with any other companies in the US or overseas
So, in general, I would say that we talk to a lot of different companies that need surface condensers for their power cycles. So, yeah, we do end up talking to quite a few of those folks. The Salton Sea application is unique. It's really kind of exciting. So this is something that can begin to evolve so there's plenty of ways that bigger companies kind of have more capacity
is a low margin endeavor. It is tough to make money in geothermal power. Coupling this lithium extraction with that process is really kind of nice from an economic perspective. But,
But the process itself is a lot cleaner and more efficient than the standard, you know, put it all out into a lake bed and start to evaporate water. So it's pretty cool and it's fun to be connected with that for a lot of different reasons.
Okay, you mentioned hydrogen, I think three times in the presentation, but you really didn't expand on that. What kind of projects are you working on in hydrogen? So hydrogen, as you know, can be pretty challenging.
First of all, it's cold in its liquid form. Then, from a material perspective, there's a limited types of material that you can use in hydrogen. There's a lot of material that you can use in hydrogen.
40 years. And so, Barbara Nichols has been involved in providing cryogenic pumps, liquid, argon, hydrogen, helium, you know, all types of stuff. And with the major air products players have supplied.
turbo machinery to those major air products types of players. So we see opportunities from them, and I can't name anything specific, but we see opportunities with them to provide turbo machinery. And Graham has some unique heat exchange.
to various companies that are involved in the production, the transportation, the distribution, the fueling side of the hydrogen economy. And everybody's kind of working on their best solution to enabling the hydrogen economy.
And so we're in there and we're participating still too early to say what will come out of it. But again, a great place to be at this point in time. Okay, great. Let me just ask a couple of bookkeeping questions.
On the case, there remains approximately $1 to $2 million in potential additional exposure. We're talking about Virgin Orbit related to the space customer. Depending on the outcome of these proceedings and the asset sales, depending on the outcome of these proceedings and the asset sale.
It says, however, at this time, the company does not expect any further impact in 24 or beyond. So, does that mean that the $1 to $2 million could be recaptured? Yeah, I know it's a little bit confusing, Gary, so let me walk you through it. So during the quarter, we reserve $3.1 million for inventory.
As you know, bankruptcy proceedings are complicated and they take some time to work themselves out. You know, so we still have a little bit of exposure left on our balance sheet, which we feel very comfortable with what we reserve during the quarter. But again, you know, these proceedings and...
us being able to capture value from what we have left on our balance sheet, you know, is uncertain, but we feel very comfortable with where we're reserved at at the end of the quarter and don't see any more impact for 2024. But, you know, never say never. So we wanted to at least put that qualifier out there.
Okay, so there's no recapture, you just don't expect any more reserve. Yeah, so let's say the team is 100% focused on this and you know if there is an ability to recapture we're going to try to go after it and we're going to get it recaptured but it's just too soon to tell and you know we wanted to make sure that we are adequately reserved. Okay, and then one last thing. In the third quarter…
you know you were talking about your backlog and you said that of that backlog 40 to 50 percent should be converted in 12 months now this quarter you're saying that you want going from 40 to 50 percent to 50 to 55 percent what's sped up the delivery schedule you know it's just the mix of you know the contracts that we have out there as you recall in the third quarter you know we had some larger defense programs that we received which we're not going to work on until like
fiscal 24 through fiscal 26, so that extended it out a little bit. But then in the current quarter we received the Mark 48 modification, so that brought it back in a little bit. Those numbers typically won't shift too much over time, but can vary a little bit. But typically we see around that 50 percent level that's going to convert.
Yeah, okay here. Okay. Oh and and actually there is one other thing the in the Artemis, you know They've been talking about the Artemis moon program Scheduled for 24 and then 25 is Barbara Nichols involved in that in any way You stumped me on that one
I don't think so, but I don't know that for sure. Okay. All right. Well, that's all I have. Thanks very much. Thanks, Gary. We have no further questions at this time. I would like to turn the floor back over to management for closing comments. Thank you. Thank you everybody for your time. I just want to reiterate the three key themes.
We hope you take away from our call. First, we are delivering on our promises. And while we have several years to achieve our fiscal 2027 goals, we are demonstrating our ability to get there.
Second one is we have successfully diversified the business and have expanded our customer base. Even with the event, with our one space customer, we were able to absorb that and still deliver for the year. Third is we have a large opportunity set in front of us.
and we have the strategy and team to continue to drive growth and improve profitability. I hope you all enjoy the rest of your day. Thank you very much.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.