Q2 2025 Graham Corp Earnings Call
Underscoring the resilience of our aftermarket business.
U S sales made up 85% of our total revenue highlighting the scale and importance of our domestic defense business.
Turning to slide seven.
Our gross margin expanded by 790 basis points to 23, 9%.
This improvement was driven by higher sales volume, a favorable project mix enhanced pricing and strong operational execution.
Our gross profit for the quarter also benefited point 4 million or roughly 80 basis points from the Blue Forge Alliance Grant.
This $2 1 million grant, which we announced in July supports our defense, while their training program in Batavia and funds related equipment.
The grant will continue to contribute to our gross margin over the next two quarters at similar levels aligning with our commitment to workforce development and securing skilled labor for future growth.
As a reminder, the blue forge alliances a nonprofit that supports the U S. Navy submarine industrial base and we are grateful for this partnership as we expand our capabilities and talent pipeline.
On slide eight.
We see how our strong performance is boosting our bottom line.
GAAP net income for the second quarter reached $3 3 million.
A significant increase from the point 4 million in the same period of fiscal 'twenty 'twenty four.
Leading to 30 cents per diluted share.
This quarter's results include point $6 million, a point 6 million reversal of a previously accrued earn out liability for P. Three.
This adjustment was not due to any lost orders, but rather the timing of projects, which extend beyond the earn out period.
Excluding this item among others are adjusted net income grew by 353% to $3 4 million or 31 cents per diluted share.
While our effective tax rate can fluctuate quarterly based on factors like projected income levels. The mix. It foreign derived income and discrete items. This year's tax rate reflects the benefit from the vesting of restricted stock awards in the first quarter, bringing.
Bringing our year to date effective tax rate to approximately 18%.
Speaker Change: And was that a more normalized level in Q2 at 23, 6%.
Speaker Change: For the full fiscal year, we continue to expect our effective tax rate to be between 20% and 22%.
Speaker Change: Slide nine highlights our adjusted EBITDA, which totaled $5 6 million for the second quarter, reflecting a 10.5% margin and.
Speaker Change: An expansion of 550 basis points over the prior year.
Speaker Change: While our SG&A expenses increased this quarter by $2 8 million over the prior year. This rise was primarily attributed to our strategic investments and operations personnel and technology.
Speaker Change: Specifically.
Speaker Change: We incurred <unk> 4 million and additional costs related to the P. Three acquisition.
Along with a point $3 million increase in our supplemental performance bonus from the Barbara Nickels acquisition.
Speaker Change: We also recorded <unk> 2 million in expenses for the ERP conversion and are at Batavia facility.
Speaker Change: And another point 2 million and increased investment in R&D.
Speaker Change: The remainder of the SG&A increase reflects costs associated with our overall growth inflation and various ongoing initiatives.
Speaker Change: Overall, these investments position us well for future growth and support our long term objectives.
Speaker Change: I should point out that the supplemental performance bonus from the Barbara Nickels acquisition was $1 1 million during the quarter or approximately 200 basis points of revenue and will be completed at the end of fiscal 2026.
Speaker Change: Turning to slide 10, we continue to demonstrate robust cash generation reporting $13 9 million of cash flow from operations for the quarter.
Speaker Change: Our balance sheet remains strong with $32 3 million in cash and no outstanding debt.
Speaker Change: Additionally, we have 43 million available on our revolving credit facility as of September 30th providing us with significant financial flexibility to pursue our strategic growth initiatives.
Speaker Change: For the quarter, our capital expenditures totaled $3 5 million and our focused on capacity expansion and productivity enhancements, including investments in automated welding equipment and new machining centers.
Additionally, approximately $1 5 million of this capex plan is related to the customer supported expansion of our Batavia facility.
Which is essential for accommodating and accelerated shipbuilding schedule for the U S Navy.
Speaker Change: Given our recent land acquisition in Arvada, Colorado and plans to construct a cryogenic testing facility in Florida that Matt discussed we have increased our fiscal 2025 capital expenditure expectations to a range of 13 million to $18 million.
Speaker Change: Up from the previous 10 million to $15 million.
Speaker Change: We expect this elevated level of capital spend of around 7% to 10% of sales to continue for the next several years in order to meet our long term growth objectives, I should point out that nearly all of our large capital projects have a return on investment greater than 20% and then our main.
Speaker Change: <unk> Capex is approximately $2 million.
Turning to slide 11, we reported orders of $63 7 million for the quarter, resulting in a book to Bill ratio of 1.2 times.
Speaker Change: Notably approximately half of these orders were for the defense sector sector.
Speaker Change: Including the award for the MTA 19 air turbine pump using the torpedo ejection system of the Columbia class submarine that we announced in August.
Speaker Change: In addition, we saw an increase in orders for the space sector, which totaled $13 5 million in the quarter.
Speaker Change: This included a key contract for our cryogenic recirculation pump for one of our large space customers.
Speaker Change: Furthermore, our refining orders totaled $10 6 million for the quarter driven by ongoing strength in aftermarket orders.
Speaker Change: Aftermarket orders to the refining and chemical petrochemical market totaled $13 million for the quarter.
Speaker Change: Up 11% over the prior year.
Slide 12 highlights our backlog, which reached a record 407 million at September 30th.
Speaker Change: Due to our consistent order demand and strong market position.
Speaker Change: This robust backlog not only provides us with excellent visibility into the future, but also ensures a high degree of operational stability.
Overall, our backlog has grown by 30% year over year with the defense backlog, increasing by 31% or nearly $77 million.
Speaker Change: Our space backlog has surged by 150% up almost $11 million, while our chemical and petrochemical backlog has risen by 58% or approximately $8 million. It's.
It's nice to see our backlog growing across all of our Mark all of our diversified markets.
We expect approximately 35% to 45% of our backlog to convert to sales within the next 12 months.
With an additional 30% to 40% projected for conversion over the following 12 months.
It is important to note that the majority of the orders anticipated to convert beyond 12 months are from the defense sector, primarily for the U S. Navy.
Speaker Change: On slide 13, we are updating our guidance for fiscal 'twenty twenty-five from what we provided last quarter.
Speaker Change: We continue to anticipate revenue between $200 million and $210 million.
Speaker Change: Which reflects a projected topline growth of 11% over fiscal 2024 at the midpoint of this range.
Speaker Change: Based upon the results to date are better than.
Speaker Change: <unk> gross margins and expectations for the remainder of the year, we are raising our adjusted EBITDA guidance by $1.5 million on the top and bottom end of the range to 18 million to 21 million, implying a 47% increase at the midpoint.
Speaker Change: This range also suggests an adjusted EBITDA margin of approximately nine 5% at the midpoint.
Speaker Change: Presenting a 230 basis point improvement over fiscal 2024.
Speaker Change: I should point out that we have taken into account the seasonal cadence in our projections, noting historically lighter third quarter revenue due to the holidays and direct labor vacations.
Speaker Change: On slide 14, we emphasize our strategic and operational priorities that are essential for achieving our long term goals.
Speaker Change: We are making steady progress in meeting our targets and strategically positioning ourselves for sustained growth.
Speaker Change: This momentum coupled with our recent adjustment to the EBIT guidance keeps us on track to achieve our goal of low to mid teen adjusted EBIT margins by fiscal 2027.
Speaker Change: Just two short years away.
Speaker Change: Importantly, an additional component that will help bridge our progress toward this long range goal is the completion of the Barbara nickel supplemental bonus expense at the end of fiscal 2026.
This will contribute approximately 200 basis points to our adjusted EBITDA margin in fiscal 2027.
Speaker Change: With that we can now open the call for questions.
Speaker Change: Thank you.
Speaker Change: We'll now be conducting a question and answer session.
Speaker Change: I feel like the ask a question today. Please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue.
Speaker Change: You May press star two if he like to throw yourself from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys, one moment. Please while we poll for questions. Thank you.
Okay.
Speaker Change: Our first question today is from the line of Joe Gomes with Noble capital markets. Please proceed with your question.
Joe Gomes: Good morning, Thanks for taking my question.
Speaker Change: Hey, Joe Good morning, Joe.
Speaker Change: So I wanted to start off on the the the space segment, a really nice job there.
You're asking.
It was on a couple of calls people are talking about you know they've seen this space segment slowed down some.
Speaker Change: Basically driven by the eight the Oems there, but it doesn't seem to be impacting your guys.
Speaker Change: I was just wondering maybe you could talk little bit about your space business in and how you got that.
Speaker Change: Pardon me of building up that backlog.
That we're seeing here.
Speaker Change: Matt you want to take that one yeah.
Speaker Change: Yeah, well this is Matt Maloney Barbara Nichols, so specifically on the space side, we continue to see a lot of opportunity. There are there certainly is a lot of consolidation of the launch market, which is at this point sort of consolidated down to the top few main providers on that being said large satellite deployment as well as.
Speaker Change: You know microsatellite, it's kind of all in Leo are are still very prominent and I think what we're starting to see is a transition from exploration and scientific experimentation to really value added space assets and so where we're seeing the continued growth is in the value added space asset so satellite cooling.
Speaker Change: Very specifically around.
Speaker Change: Advanced propulsion technology for these different assets and so that's where we're seeing the growth what I will say is that it still remains at a stable and growing part of our business.
Speaker Change: And the future's bright on it.
Speaker Change: Thanks for that insight.
Speaker Change: Obviously, you know we had a.
Speaker Change: Election on Tuesday, and Theres been a lot of for lack of a better term hear that Trump trades and I think you guys have benefited somewhat from that.
Speaker Change:
Speaker Change: As Youre looking out and you know knowing maybe what you know or have heard or from.
Speaker Change: From your contacts.
Speaker Change: What kind of potential.
Speaker Change: Additional growth do you think you could see.
Speaker Change: Because of the change in administration do you think that theres going to be a bigger emphasis on on specific areas that you're in or do you think hey, with the programs we're on it.
Speaker Change: No. It doesn't matter, who is really president where where those programs are going to be growing any thoughts on color on that would be appreciated.
Speaker Change: Yeah happy to take that one Joe.
Speaker Change: So it's always hard to tell the future. So I'll start I'll start with that.
Speaker Change: But.
Speaker Change: But I really like.
Speaker Change: Where we're starting from let's say with a nicely diversified.
Speaker Change: Base of business.
Speaker Change: And <unk>.
Quite a bit of backlog and strategic Navy programs.
Speaker Change: If I look at.
Speaker Change: The future I think that I see.
Speaker Change: Some pretty stable, maybe even growing a little bad defense budgets are in yen.
Specifically the strategic programs that we're on I see those as very safe.
Speaker Change: When when I look at and.
Speaker Change: Energy.
Speaker Change: It there is likely some changes coming on the energy side.
Speaker Change: So when when Trump was in office before he opens up a lot of the public lands for exploration.
And we saw quite a bit of pressure on.
Speaker Change: Prices for oil and gas.
Speaker Change: Theres benefit for for the general economy when that happens.
Speaker Change: Lower priced fuel.
I think that there's there's.
Speaker Change: On the refinery side, it probably hurts the refineries a little bit because their margins start to to reduce.
Speaker Change: On the petrochemical side, so it's a low cost feedstock in the natural gas.
Speaker Change: So that benefits so we see some some pluses and minuses.
Speaker Change: And the legacy.
Energy markets that we serve.
Speaker Change: And then you know probably for the new energy side I E that probably becomes less of a focus for the new administration.
Speaker Change: But but the beauty of the company that we've built is that again are really nicely diversified.
Speaker Change: Market mix, such that as one goes up and the other one is probably coming down and we're able to move between up so so generally I'm, okay, with where we're at and what the future looks like.
Thank you.
The next question is from the line of <expletive> Ryan with Oakridge. Please proceed with your question.
Speaker Change: Thank you and good job on another quarter of strong execution, Dan Yes.
Nick: Yes, thanks, Nick.
Nick: Question.
Speaker Change: It was good to hear your comments on any potential build rate impacts with the supply chain you mentioned, there could be a potential to capture additional work.
Speaker Change: Can you elaborate a little bit what what does that mean, what's your confidence level in that occurring.
Speaker Change: Yeah.
Speaker Change: So again this is a.
A little bit of hearsay, but as we listen to our customers and kind of understand what they're seeing and what's going on there.
Speaker Change: The Navy is really really active and in supporting the supply chain, making investments et cetera.
Speaker Change: And so that's that's wonderful they're also navies also talking to.
Speaker Change: The the shipbuilders about what are the opportunities to accelerate and what what can you reallocate to two high performing.
Supply chain partners like Graham Corporation.
So we're getting some of those enquiries that traditionally have been held within the within the Navy yards.
Speaker Change: And I think that the Navy is also talking about you know what is it that we can do relative to extending life of the assets that we have in the field. So.
Its good problem solving across across the board.
Where where everybody's looking at okay. We do have challenges in the supply chain, what can we do to improve and as I look at it I just see opportunity for Graham.
Speaker Change: Okay.
Speaker Change: And kind of related you know you've had very strong support for the Batavia expansion land and building the 13 million ish investments and now the Blue forge for the welding programs are there additional pods to go after for Batavia business, and then maybe for Matt with the Barbara Nichols.
Speaker Change: Expansion are there grant opportunities to help you expand your Colorado campus.
Speaker Change: Yes, <expletive> so all we can really say about that right. Now is that we are in constant communication with our customers as to how we can accelerate our ship build schedule.
And you know what we need to help improve our volume flow and we have you know constant communications with our customers and Blue Forge and we see opportunities on both the Barbara Nichols and Graham side for future opportunities such as the ones, We just announced nothing.
Speaker Change: We can really talk to today.
Speaker Change: But we just think it validates the fact that you know.
Speaker Change: We are a strategic supplier to the U S Navy and have a lot of opportunity in front of us that Dan just talked about.
Speaker Change: The next question comes from the line of Russell Stanley with Beacon Securities. Please proceed with your questions.
Speaker Change: Good morning, and.
Speaker Change: That's on the quarter.
Speaker Change: With respect to the <unk>.
Speaker Change: Most margin then in the guidance left a great number.
Speaker Change: This quarter following on almost 25% last quarter I'm, just looking at the left and I guess it implies a bit of compression in H. Two are there any specific headwinds that you'd call out there would that would drive that beyond the holidays and the impact in Q3 or.
Does this just reflect a bit of conservatism on your end.
Speaker Change: It's really just reflective of our typically seasonally lower Q3 right year to date, we're at about 24% margin.
Speaker Change: And the guidance is 23 to 24. So you know that's the range, we feel comfortable with given the slowdown in the third quarter.
Speaker Change: Got it and just following up on an earlier question around <unk>.
The election, and I'm wondering what its implications might be for you on the on the.
Speaker Change: The acquisition side does it change your criteria or what your what you might be focusing on giving given what we know so far.
Speaker Change: That's an extra next Kevin thanks.
Speaker Change: Yeah. So Ross as you know acquisitions are part of our long term strategic plan.
Speaker Change: The nice thing is that you know when youre growing 8% to 10% organically per year.
Speaker Change:
Have to do acquisitions, just for the sake of doing acquisitions to get growth. So you know as we framed in the past we feel we're going to be more opportunistic with regards to acquisitions, there's nothing really imminent today as we sit sit here today, but we do have a <unk>.
Speaker Change: <unk> is all the time with potential.
Speaker Change: Targets and we don't see any change in the you know in the current administration.
Speaker Change: <unk> changing that.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Frank Friendship with first Eagle investment. Please proceed with your question.
Speaker Change: Dan, Chris, Matt and Deb, great quarter. Thanks for taking my question.
Speaker Change: I wish I wish all my companies reported like this.
Speaker Change: Anyway I was I was wondering if you could give a little bit more scoping around the nextgen novel stuff.
$50 million opportunity 510 years Youre actively marketing. It is is that something that's just the easy stuff that you see already.
Speaker Change: In the Capex structure from there from your clients and how difficult is it for the nozzle to fit onto other non Graham Ah Ah refiners or Petro Chem places out there.
Speaker Change: Yeah, Great question Frank So.
Speaker Change: What we've identified right now is the the.
Speaker Change: The easy Pickings, I guess I would say so.
Speaker Change: So we've got a bunch of steam.
Speaker Change: Steam injector is out there that are that we know that.
Speaker Change: This technology will provide a.
Speaker Change: And improvements on.
Speaker Change: Now within the R&D.
Speaker Change: But what we're doing is looking to expand that to to other types of nozzles that we have produced here over the years.
Speaker Change: So we would expect that that that that kind of $50 million ballpark.
Speaker Change: Our addressable market starts to grow.
Speaker Change: But but we really wanted to get this one out.
Speaker Change: Two the market just so that we can start to get some some experience in the field and.
Speaker Change: Show the improvement that we're making with the RMT investments that we're putting into place.
Speaker Change: You know Frank I would I would just add to that.
Speaker Change: That we all as you know our installed base is global and a lot of other countries aren't as fortunate as the U S to have such affordable.
Speaker Change: Utility costs right. So in other countries, where the utility costs are much higher this is a lot more valuable to them and were.
Introducing this you know through our India, and our China subsidiaries and Theyre very excited about this technology.
And then to follow up on your other question about is this usable for our competitors nozzles. It isn't it isn't.
Speaker Change: A replacement option for them.
Speaker Change: It would it would have to be the entire steam injector is replaced with.
Speaker Change: With the Gram injector for for this to work.
Speaker Change: Great. Thank you and just.
Speaker Change: Just a little bit more of a strategic question Dan.
Speaker Change: We keep talking about Barbara Nickels, we talk about behaviour, we talk about Florida, how much of the.
Speaker Change: Guess, my mind mine transfer or employee transfer or how much sharing is actually going on behind the scenes that are.
Maybe youre seeing either accelerating or better than expected in the kind of sharing going across those those three locations.
Speaker Change: Another really great question Frank.
Speaker Change: So we have been pretty active.
Speaker Change: We've been we've been sharing best practices on the HR side on the I T side.
Speaker Change: More recently.
Speaker Change: On the engineering side. So so <unk> technologies is really strong and computational fluid dynamics.
And they've been.
Speaker Change: Coming up to Batavia, and working hand in hand, with our R&D group on some new technology that.
Speaker Change: We're not ready to talk about yet.
Speaker Change: But there is there are some nice collaboration that's going on and I think that that we're really leveraging the.
Speaker Change: The subject matter experts in each of our business units to help the other ones. So honestly it has a ton of fun.
Speaker Change: And.
Speaker Change: I think that where we're really building a cohesive group as we're able to to kind of introduce the business units to each other and the people within those business units.
To each other it's.
Speaker Change: It's a ton of fun.
Speaker Change: Thank you.
Under ask question you May press Star one.
Speaker Change: Next questions are from the line of Gary Schwab with Valley Forge Capital Management. Please proceed.
Gary Schwab: Hi, guys, a fantastic job in sales and margins this quarter.
Speaker Change: Hi, Jeff.
Speaker Change: I have a question about you.
Speaker Change: You mentioned navy yards can.
Speaker Change: Can you add some color to the.
Announcement made by <unk> in September.
Speaker Change: What is $450 million for the <unk> shipyard in mobile to build a state of the yard expansion facility that specifically for the non nuclear modules.
Of the Virginia and Columbia.
Speaker Change: How is that going to business.
Speaker Change: Yeah, we don't think that it affects us per se.
I'm not that familiar with with that specific.
Speaker Change: <unk> action, but I think it just goes to show that the Navy is.
Speaker Change: Is really questioning the current approach and understand.
Speaker Change: And open to it and supporting.
Speaker Change: Different approaches to a.
Speaker Change: To really accelerate our shipbuilding.
Speaker Change: <unk>.
Speaker Change: <unk>.
Speaker Change: The shipyards don't give up that stuff very easily.
Speaker Change: I am sure that theres been a little bit of arm twisting.
Speaker Change: But but but generally you know for our specialized equipment.
Speaker Change: It doesn't affect us at all.
Speaker Change: A competitive perspective.
Speaker Change: It probably helps accelerate the shipbuilding, which you.
Speaker Change: We're going to be able to to support so.
Speaker Change: And in total I would say that it's a it's a very positive thing for our country.
Speaker Change: Thank you. Our next question is from the line of Tony Bancroft with Gabelli funds. Please proceed with your question.
Speaker Change: Good morning, gentlemen, congratulations on the great quarter.
Speaker Change: No.
My question, maybe just more longer term in five years, you guys have performed so well.
Speaker Change: Doing acquisitions.
Where do you where do you see yourself as sort of five years from now you're looking to do something more.
Speaker Change: So something more transfer date informational to your company or do you look that someone would want to come in acquire you sort of I'm just trying to see this company has a lot of growth. There's a lot of opportunity and I'm, just trying to sort of see where your next sort of long term movies.
Speaker Change: Yeah, we.
Speaker Change: No.
We really are enjoying what we're doing right now.
Speaker Change: We see a really nice road ahead of us as far as the ability to both grow organically and inorganically.
I think that.
Speaker Change: The megatrend of baby Boomers retiring.
Speaker Change: It gives us some opportunity to potentially acquire and grow organically in.
Capture some some really pretty interesting business.
Speaker Change: At this point in time, where we're.
Speaker Change: We're component suppliers, if you will.
Speaker Change: And then the next logical move us towards <unk>.
Speaker Change: Sub systems and systems integration.
So I could I could see that in the next five to 10 years, but.
But cash were so small right now is a little micro cap public company that I think that there's a lot of room for additional growth organically and inorganically.
Love that that were you know.
Speaker Change: Very diversified in a bunch of different markets.
Speaker Change: Sure.
Able to use our strengths to help.
Speaker Change: Ourselves in each of the different markets apply the lessons learned and in the new technology too.
Speaker Change: The new markets that it may have not seen it before so.
Speaker Change: So I honestly, Tony I, just I just see it as you know nice.
Controlled growth.
That.
Speaker Change: It was a part of Barbara Nickels before the acquisition and now Graham Corporation after the acquisition.
Speaker Change: Great job, thank you well done.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Question is a follow up from Gary Schwab at Valley Forge capital. Please proceed with your question, Yes, Hi, guys I had a follow up on the next gen.
Speaker Change: Nozzle.
Speaker Change: <unk> introduced.
Speaker Change: From what I understand almost all of your aftermarket sales that you've been getting are coming from that are coming from the huge installed base and refinery and Petro had been initiated by your customers rather than U S. Solicitation, because you said, it's still hard.
Speaker Change: Getting the needed contact information, Matt had also mentioned that he'd like to set up a condition based monitoring program as a subscription service fee.
Speaker Change: Theory refineries and petrochemical tumors.
Speaker Change: Can you say because you got these orders coming in from the customers what percentage of that user base you already have the names.
Speaker Change: And the contact numbers. So you can start selling both the injectors and possibly.
Subscription service.
Speaker Change: Oh boy.
Speaker Change: I, probably couldn't tell you that that number Gary.
Speaker Change: It's something that that debt.
Speaker Change: I don't know off the top of my head.
Speaker Change: Thank you.
Speaker Change: At this time I would like to turn the floor back to Dan for further comments.
Dan Yes: Thanks, Rob.
Thank you all for joining US today, if you would like an opportunity to speak with us in more detail, we will be participating in two upcoming conferences. The southwest ideas conference on November 21st in Dallas.
Dan Yes: And the noble emerging growth equity conference in Boca Raton on December 4th.
Dan Yes: As always these presentations will be available on our website or please feel free to reach out to us at anytime.
Dan Yes: We look forward to talking with you all again after our third quarter fiscal 'twenty twenty-five results.
Dan Yes: Enjoy your day.
Speaker Change: Thank you. This does conclude today's teleconference. We thank you for your participation you may now disconnect. Your lines at this time and have a wonderful day.