Graham Corporation (GHM) Earnings Call Transcript & Summary

Thank you. Greetings. Welcome to the Graham Corporation Fiscal First Quarter 2027 Earnings Call. 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 during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Tom Cook, Invest Relations. Thank you, Tom. You may begin.

Thank you, Dylan. Good morning, everyone. Welcome to Graham's first quarter fiscal 2027 earnings call. With me on the call today are Matt Malone, President and CEO, and Chris Thome, Chief Financial Officer. This morning, we released our first quarter fiscal 2027 financial results. Our earnings release and accompanying presentation to today's call are available on the web. website at ir.gramcorp.com. You should be aware that we may make 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. risks and uncertainties and other factors are provided in the earnings release, as well as with other documents that are filed by the company with the Securities and Exchange Commission. You can find these documents on our website or at sec.gov. During today's call, we will also discuss non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, you should not presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and slides. We also use key performance indicators to help gauge the progress and performance of the company. These key performance metrics are ROIC, orders, backlog, and book-to-bill ratio. They are operational measures and a quantitative reconciliation of each is not required or provided. You can find a disclaimer regarding our use of KPIs at the back of today's presentation. with that if you'll please advance to slide three I'll turn the call over to Matt to begin Matt.

Thank you, Tom, and good morning, everyone. We appreciate you joining us to review our first quarter fiscal 2027 results. I'm pleased with the start to fiscal year 2027 as we continue to execute on our strategic priorities and see significant momentum across the end markets we serve. Our first quarter results demonstrate the continued growth and durability of our platform. We delivered record first quarter revenue of $71.3 million, an increase of 29%, with growth across each of our businesses. Adjusted EBITDA increased 28% to $8.8 million, totaling a total of $95.9 million and backlog increased to another $1.8 million. record of $557 million. These results reflect the strength of our diversified business model, strong demand for our mission-critical technologies, and disciplined execution across the organization. The benefits of these investments we have made over the last several years are beginning to bear fruit as well. We have expanded capacity, strengthened our engineering and manufacturing capabilities, invested in automation and advanced testing infrastructure, modernized our systems, and broadened our technology portfolio through the acquisitions of FlakTek and xDOT. Many of these investments are now operational and beginning to support higher production volumes, new program opportunities, and improved operational performance. On our fourth quarter earnings call and our investor day in June, we provided our guidance for fiscal 2027, calling for 18% revenue growth and 44% adjusted EBITDA growth. Our strong start to fiscal 2027 positions us well to achieve those targets. Additionally, we outlined how the investments are making combined with favorable demand environment and our record backlog. Positioned ground for sustained profitable growth. We introduced a three-year financial framework targeting 8% to 10% organic revenue growth and adjusted EBITDA margins of 14% to 16%. by fiscal year 2029. With our sights set on achieving top quartile performance over time, During the quarter, we continued to make significant progress towards these goals. Turning to our end markets on slide four and starting with defense, demand remains very strong. Defense revenue increased 40% during the quarter, driven by timing of project milestones, new program activity, and continued growth across existing programs. Our performance reflects the strategic importance of the platforms we support, the durability of our customer relationships, and our ability to execute on highly complex mission-critical applications. Our naval business continues to benefit from increasing activity across the Columbia and Virginia-class submarine programs, as well as the MK-48 Mod 7 heavyweight torpedo program. During the first quarter, we received approximately $61.8 million of new and follow-on defense orders supporting these programs. Also, as we announced in our release last night, we secured a new contract to provide MK-19 Mod 2 air turbine pump assemblies supporting submarine fleet spares, which when combined with the Mark 48 award in the first quarter, totaled approximately $43 million. awards are a validation of the investments we have made to increase our capacity and technical capabilities. Our new Navy and X-ray facilities in Batavia are operational, our automated welding systems have been commissioned, and our assembly and test capabilities are increasingly supporting production. These investments improve throughput, enhance quality, and position us to meet increasing production requirements across critical Navy platforms for decades to come. Beyond our traditional Navy business, we continue to see attractive opportunities in next generation defense applications, including radar and directed energy systems. thermal management, cooling, power electronics, and turbo machinery technologies provide meaningful advantages in applications where customers require greater capability in increasingly compact systems. Several of these programs are transitioning from development to production and represent attractive multi-year growth opportunities. Moving to space, momentum continues to build. Space revenue increased 86% during the quarter, reflecting new programs, the continued ramp of existing programs, and contributions from Plaquetech. Orders totaled $14.4 million, representing a book to bill of 2.3 times. Customers across both commercial and government funded programs continue to advance from development and qualification into production. That progress, that progression is increasing demand for our highly engineered turbo machinery, cryogenic systems, pumps, motor controllers, and precision components. Our investments in testing and manufacturing capabilities are strengthening our competitive position as these programs scale.

Thank you. Thank you. we are experiencing a technical difficulty. Please remain on the line.

© BF-WATCH TV 2021 Hey, Tom, can you hear us? Yes, we can.

Okay. All right. Where did we stop? You said our investments in manufacturing. I don't think it ever cut off.

Okay, we'll continue. Our investments in testing and manufacturing capabilities are strengthening our competitive position as these programs scale. Our liquid nitrogen testing capabilities are operational and actively supporting customer programs. While our cryogenic testing facility in Florida expands our ability to validate increasingly complex products before delivery. These capabilities allow us to provide customers with more fully tested and integration ready solutions. helping reduce program risk while deepening Graham's role as a critical technology partner. As launch cadence increases and commercial and government space infrastructure continues to mature, we believe GRAM is well positioned to participate across launch vehicles, satellites, lunar exploration systems, and other critical space platforms. Turning to energy and process, revenue increased 5% during the quarter. Continued strength in aftermarket activity and the additional FLAC tech helped offset ongoing pushouts in large capital projects within the refining and petrochemical markets. Aftermarket revenue across energy and process and defense increased 20%, demonstrating the value of our installed base and the reoccurring demand associated with maintaining mission-critical equipment. With more than $1 billion of Graham's installed equipment around the world, we see a meaningful opportunity to expand lifecycle support, introduce new technologies into the install base, and deepen our customer relationships. Over time, growing our investment in aftermarket and reincurring revenue streams should also support a more balanced business mix and improve profitability. Within New Energy, we continue to see increasing customer engagement across small modular nuclear reactors, cryogenic applications, and other emerging energy technologies. These markets remain relatively early in their commercialization, but activity continues to build and our engineering expertise and mission-critical product portfolio position Graham to benefit as these technologies advance. Turning now to FLACTECH, integration continues to progress extremely well. FLACTECH established advanced materials processing as Graham's third core technology platform, alongside vacuum and heat transfer systems and turbo machinery. The business contributed $6.6 million of revenue and $13.3 million of orders during the quarter, representing a book-to-bill ratio of approximately two times. The strength of Flack Tech's first quarter bookings reflects healthy customer engagement and attractive growth characteristics of the business. Flack Tech brings differentiated intellectual property, reoccurring revenue, and exposure to several markets where Graham has already had deep relationships. We remain particularly excited about the commercialization potential of the Mega Platform and the opportunity to introduce FlacTech's advanced materials processing solutions across our broader customer base. Teams are working well together, and we continue to add capabilities required to support growth. Black Tech remains an excellent example of our disciplined acquisition strategy. which is acquiring differentiated, engineer-led businesses that expand our addressable markets, strengthen our technology portfolio, and create opportunities for long-term profitable growth. Turning to the operational excellence and investments beginning on slide 5. Our focus is increasingly moving from building capabilities to leveraging those capabilities. Over the last several years, we deliberately invested ahead of demand to expand capacity and capabilities, improve productivity, enhance quality, and broaden our product offerings. These investments include our Batavia Navy facility, automated welding, advanced x-ray systems, expansion, and more. assembly and testing capabilities in Colorado, cryogenic testing capabilities in Florida, and the modernization of our ERP systems. Many of these initiatives are now operational or approaching completion and are beginning tribute to performance. Going forward, our focus is on increasing utilization, shortening production cycle times, improving throughput, and driving greater operational leverage as volume increases. We're also continuing to invest in the next phase of growth, including a construction of a new 30,000 square foot manufacturing facility on our Arvada campus. This additional capacity will support increasing customer demand and further strengthen our ability to scale production across our growing portfolio of turbo machinery applications. Importantly, we evaluate these investments through a disciplined capital allocation framework and target returns above our 20% ROIC hurdle rate. believe the combination of higher volumes, improved business mix, automation, and continued operational execution provide the clear path to margin expansion outlined at our investor day. Graham's recent investments encompass manufacturing, testing, automation, and system modernization, which each evaluated against that return threshold. These investments are needed in order to fulfill our backlog, which totaled $557 million at the end of the quarter. Importantly, the quality of our backlog remains strong. Many of the programs we support are long-cycle applications tied to critical customer priorities and extendable. over multiple years. Combined with our active pipeline, expanding capabilities, and continued momentum across our markets, this backlog gives us confidence in both our fiscal year 2027 outlook and the long-term framework which we presented in June. Beyond fiscal year 2027, our priorities remain clear. We will continue expanding our participation in attractive markets, commercializing our proprietary technologies, growing aftermarket and reoccurring revenue, investing in operational excellence. and pursuing disciplined acquisitions that complement organic growth strategy. We believe Graham has entered an important new phase. The foundation has been built. Our backlog is at record levels. Our capabilities are expanding, and the investments we have made are beginning to contribute more meaningfully. With that, I'll turn the call over to Chris for a detailed review of our financial results. Chris?.

Thanks, Matt, and good morning, everyone. Apologies for the slight technical difficulties earlier, but it appears we're back on track. I'll begin my formal remarks on slide six. We are off to a strong start for fiscal 2027, delivering record first quarter revenue while continuing to execute against our long-term growth strategy. Our results reflect broad-based demand across our diversified end markets, disciplined execution, and initial contributions from our strategic investments. First quarter revenue increased 29% to a record $71.3 million. On an organic basis, revenue was up an impressive 17%. This growth reflects the strength of our diversified revenue base, including continued momentum across our defense and space businesses, as well as contributions from FLACTECH, which added $6.6 million of revenue during the quarter. Defense revenue increased 40% year-over-year, primarily driven by the timing of project milestones, new program awards, and continued growth across existing programs. Space revenue increased 86% year-over-year, benefiting from new programs, the continued ramp of existing programs, and contributions from Black Tech. Within energy and process, revenue increased 5% from the prior year period. as continued strength in aftermarket demand and the addition of FLAC tech helped offset ongoing pushouts in large capital project activity. Aftermarket sales across the energy and process and defense markets remain strong, increasing 20% year over year. Similar to our sales, our gross profit for the quarter increased 21% to $17.8 million. However, as a percentage of sales, our gross profit margin decreased to 25% compared with 26.5% in the prior year period. The year-over-year decline in gross margin primarily reflects the mix of sales during the quarter, which included a higher level of defense revenue and material receipts, which carry lower margin characteristics than many of our other businesses. and the tough comparable versus the prior year first quarter. It is noteworthy that versus the sequential fourth quarter of fiscal 2026, our gross margin percentage increased 230 basis points. Moving to slide eight. Selling general and administrative expenses increased $3.2 million during the quarter, primarily due to acquisition and integration activities, incremental costs associated with Slack Tech, and our continued investments in people, processes, and technology. Note that these incremental investments are being made in order to enable our future growth and accelerate the commercialization of Graham products and technologies. and are expected to amount to approximately $2.5 million in fiscal 2027. These increases were partially offset by lower costs associated with the Barbara Nichols performance bonus, which was no longer in effect during fiscal 2027. Net income for the first quarter was $3.9 million or $0.33 per diluted share, compared with $4.6 million or $0.42 per diluted share in the prior year period. However, on an adjusted basis, adjusted net income for the quarter increased to $5.7 million or $0.49 per diluted share, compared with $4.9 million or $0.45 per diluted share in the prior year, up 16% and 9% respectively. Similarly, adjusted EBITDA for the first quarter increased 28% to $8.8 million, representing an adjusted EBITDA margin of 12.3%, which was consistent with the prior year period. Overall, we believe these results demonstrate the resiliency of our business model and the effectiveness of our long-term strategy. We continue to successfully balance investments for future growth while maintaining disciplined execution and positioning the company to capitalize on significant opportunities ahead. Moving to slide 9, orders remain strong during the quarter and continue to reinforce the favorable demand environment across our core markets. First quarter orders were 96 million, resulting in a book-to-bill ratio of 1.3 times. This demonstrates the continued momentum we are seeing in our end markets and builds upon the 1.5 times book to bill ratio for fiscal 2026. Border activity continued to reflect strong demand across our defense business, including 61.8 million of new and follow-on orders supporting the U.S. Navy's Columbia and Virginia-class submarine programs, as well as the next option year for mission-critical hardware for the MK-48 Mod 7 heavyweight torpedo. Space orders continued their strong momentum from the prior year, totaling $14.4 million for the quarter, representing a 2.3 times book-to-bill ratio. while FlacTech generated 13.2 million of orders during the quarter, representing a two times book to bill ratio. As a result, backlog increased to another record 557 million, up 15% from the prior year period. and is the sixth consecutive quarter of record backlog. We continue to expect approximately 35 to 40% of backlog to convert into revenue over the next 12 months and another 20% to 25% the following year. demonstrating the high visibility and stability of our business. Turning to slide 10, our balance sheet remains exceptionally strong and provides significant flexibility to continue executing our strategic priorities. During the quarter, we strengthened our balance sheet through the previously announced $50 million strategic investment from accounts advised by T. Rowe Price and utilized approximately $13 million of the proceeds to repay our outstanding debt. Net cash used by operating activities during the quarter was $12.7 million. primarily reflects the timing of billing and collections on accounts receivable, unbilled revenue and customer deposits, and the payment of fiscal 2026 bonuses during the quarter, which included the Barbara Nichols performance bonus. Capital expenditures during the quarter totaled $2.6 million and remain focused on capacity expansion, expanding capabilities, and productivity improvements. As a result, we ended the quarter with $27 million of cash on hand, no outstanding debt and approximately 75 million of available capacity under our revolving credit facility. which provides us significant flexibility to execute our strategic, and inorganic growth plans. Turning to guidance, Slide 11 outlines our outlook for fiscal 2027, which remains unchanged from last quarter. We continue to expect revenue to be in the range of $285 million to $295 million supported by our record backlog, favorable demand environment, a full year contribution from FLAC Tech, and continued execution across our businesses. We continue to expect gross margin to be between 24.5% and 25.5%, reflecting the benefits of operational improvements automation investments, productivity initiatives, integration efforts, and an improved sales mix versus fiscal 2026. SG&A expenses expected to be between 16.5% and 17.5% of sales, and as mentioned earlier, includes approximately $2.5 million of incremental investments in people, processes, and technology to support our commercialization initiatives and future growth. Embedded within our outlook are approximately $5.5 million to $6.5 million of equity-based compensation acquisition and integration costs, and ERP conversion costs. Based on these assumptions, we continue to expect adjusted EBITDA to be between $35 million and $40 million, representing an increase of 44% at the midpoint of that range and unchanged from last quarter. We also continue to expect our capital expenditures to be between $18 million and $22 million as we continue investing in strategic growth initiatives, expanded operational capabilities, and productivity-enhancing projects, including construction of a new 30,000-square-foot manufacturing facility in Arvada. Before I conclude, I'd like to briefly revisit the long-term financial framework we introduced at our Investor Day in June, shown on slide 12. As we discussed then, our confidence in the outlook extends well beyond fiscal 2027, supported by our record backlog, strong demand across our defense, space, and energy and process markets, and the investments we have made over the past several years. We continue to expect organic revenue growth of approximately 8 to 10% annually over the next several years. At the same time, we believe we have a clear path to continued margin expansion through a combination of higher production volumes, a more balanced business mix, ongoing operational improvement initiatives, and continued leverage from our manufacturing and automation investments. expect adjusted EBITDA margins to expand into the 14 to 16 percent range by fiscal 2029. Importantly, we do not view fiscal 2029 as the finish line. Our objective remains to build a best-in-class industrial technology company capable of delivering top quartile financial performance over time. Overall, we are pleased with our strong start to fiscal 2027. A record backlog, healthy demand across our end markets, disciplined execution, and strong balance sheet position us well to deliver another year of profitable growth while continuing to invest in long-term opportunities ahead.

With that, operator, we are now ready 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. 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. participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Robert Brooks with Northland Capital. Please go ahead.

Hey, good morning team and thank you for taking my question. And just one of the things I wanted to unpack, the robust strength in the space segment sales up 86% year over year, orders even stronger, 2.3 booked a bill, I believe. So that would suggest to me that this is more than maybe just a timeline. benefit and something more structural occurring. Is my logic fair there? And just any color on specific drivers on the strength and expectations going forward?.

Yes, thanks, Bobby. You know, the structural change, you know, began last year, and you can see it through the strong order volume last year, you know, as well as the first quarter this year. Our space business, just like our other businesses, the orders can be very lumpy. So we don't expect this level every quarter. But the current run rate of revenue for the quarter is the new norm. So you could expect that going forward.

That's great to hear. And then just like specific projects or is it just as simple as like more things getting shot up into space that opens up more opportunities for you? Just what maybe end market wise is driving that higher floor going forward?.

Yes, as we've said for the last several quarters, it's just that some of the development programs that we've been on for the last year or so have started to hit production volumes and are ramping up. So that's really just the continuation of those programs.

programs. Got it. And one of my key takeaways from the investor day in June. was a much deeper appreciation for FlacTech's technology. And I even had the FlacTech face myself as Matt showed me the demonstration for me. So I just wanted to ask, eight months into your ownership, any specific wins you'd call out that came about from either you introducing a legacy gram customer to FlacTech tech tech or just from broadly having the infrastructure benefit of being under a larger company like Graham.

just color there. Yes, I mean, you can see from our book to bill at Black Tech, field of support of Graham and what I'll say is the integration has gone extremely well. The leader of that business, Matt Gross, has done a great job and the staff has really stepped up and become, you know, really engaged in the path forward. With that being said, I can talk high level on a few examples. They happen to be at Barbara Nichols as we speak right now because there's quite a few applications that are directly applicable. we're seeing a lot of opportunity on, I'll say advanced space applications, specifically adhesives for critical components that provide reentry and other sort of examples. The short of it is, they really are changing the game versus versus bladed mixing. So you got to see it in person at the investor day, I recall, and we're seeing that across a bunch of different end markets. I would say aerospace and defense and space specifically are where we're seeing the most opportunity right now.

Appreciate the call and congrats on another terrific quarter.

Thanks, Bobby. Thanks, Bobby. Our next question comes from Russell Stanley with Beacon Securities. Please go ahead.

Good morning and congrats on the quarter and another strong quarter for orders. You noted obviously the contributions from the submarine programs to orders in the quarter week. Last week, we saw the big awards go to General Dynamics and Huntington Ingalls. I'm just wondering to what extent those orders from last week were only in your backlog or what the implications are for those orders for the pipeline for additional orders out of those programs for you?.

Yes, so, Russell, obviously, it's a mix of all the above, some of them in, some of them not. The reality for us is it's just more of a confirmation of how strategic these programs are in long term. We continue to feel the tailwinds and the desire to accelerate submarine production, and we think we're going to do that. well positioned. So with that, our investments that we put in place have been well received, and we continue to see not only the need for us to execute our backlog, but also the pipeline remains strong. So... keep it high level there. Understood.

I want to follow up on one of your remarks, I think from the June call, Matt, you talked a bit about munitions. We're seeing, honestly, a lot of headlines around shortages on that front. Wondering if you can talk about what you're seeing seeing now and the opportunities out there and how much retail and that might be for Grant.