Graham (GHM) Q4 2025 Earnings Call June 09, 2025 11:00 AM ET Company Participants Tom Cook - Managing DirectorDaniel Thoren - President & CEOMatthew Malone - President & COOChristopher Thome - Chief Accounting Officer, VP of Finance, CFO & Corporate SecretaryRussell Stanley - Managing Director - Equity ResearchTony Bancroft - Portfolio Manager Conference Call Participants Richard Ryan - Vice President, Senior Research AnalystJoe Gomes - Senior Generalist AnalystChristopher Glynn - Managing Director and Seni ...

Financial Data and Key Metrics Changes - Full year revenue grew approximately 13% to $210 million, with adjusted EBITDA increasing 69% to $22.4 million, representing 10.7% of sales [6][31] - Record backlog reached $412 million as of March 31, up 7% sequentially, with a book to bill ratio of 1.1, marking the fifth consecutive year above 1.0 [7][36] - Fourth quarter net income was $4.4 million, compared to $1.3 million in the prior year, equating to $0.40 per share on a GAAP basis [31] Business Line Data and Key Metrics Changes - Defense market sales grew by $7.7 million or 28% year-over-year, driven by existing programs and improved execution [28] - Energy and process sales increased by $1.8 million, supported by higher capital equipment sales to the Middle East and Asia [28] - Aftermarket sales for energy and process and defense markets totaled $12.1 million, up 3% from the prior year [28] Market Data and Key Metrics Changes - The defense sector remains a key focus, with significant contracts awarded, including a $136.5 million contract for the Virginia class submarine program [7][8] - The energy and process market is seeing continued demand, with innovative solutions driving customer interest [9] Company Strategy and Development Direction - The company is transitioning into a growth phase, focusing on product life cycle expansion, commercialization, global reach, and digital transformation [23][26] - Investments in automation and facility expansion are aimed at enhancing operational efficiency and throughput [21][22] - The strategic plan includes a target of 8% to 10% organic revenue growth and low to mid-teens adjusted EBITDA margins by fiscal 2027 [14][42] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to capitalize on opportunities in the defense and energy sectors, supported by a robust backlog and strategic investments [14][39] - The leadership transition is expected to ensure continuity in strategic vision and operational execution [12][13] Other Important Information - The company has secured a $50 million credit facility to support future growth initiatives [22] - Capital expenditures for fiscal 2025 were $19 million, with expectations to maintain CapEx at 7% to 10% of sales in the coming years [10][38] Q&A Session Summary Question: Inquiry about guidance and gross margin outlook - Management indicated that the gross margin outlook is primarily affected by tariffs and the absence of a training grant, with process improvement initiatives in place to offset these factors [45][46] Question: Details on the investment in radiographic equipment - The new X-ray equipment will enhance the evaluation of complex welds, improving efficiency and quality in production [47][48] Question: Update on M&A opportunities - The M&A pipeline is robust, with opportunities arising from aging ownership groups, and valuations are seen as favorable for strategic acquisitions [51][52] Question: Changes in contract terms for Navy orders - Management confirmed that there are protective clauses in contracts to mitigate commodity price volatility, ensuring stability in pricing [58][59] Question: Status of welder training program and future needs - The welder training program has been successful, with a 10% increase in welders year-over-year, supporting growth in both defense and energy sectors [62][63] Question: Utilization of the cryogenic facility - The cryogenic facility is on track to be operational soon, with strong demand anticipated based on customer inquiries [67][70] Question: Progress on NextGen nozzle and potential clients - The NextGen nozzle design is complete, with ongoing discussions with existing clients for upgrades during maintenance turnarounds [75][76]

Financial Performance - Net sales for fiscal 2025 were $209,896, an increase of $24,363 or 13% compared to fiscal 2024, with $2,778 attributed to the acquisition of P3[158]. - Gross profit for fiscal 2025 was $52,861, reflecting a gross profit margin of 25.2%, which is a 330 basis point improvement over fiscal 2024[158]. - Net income for fiscal 2025 was $12,230, representing a 168% increase from $4,556 in fiscal 2024, with diluted income per share rising to $1.11 from $0.42[158]. - SG&A expenses for fiscal 2025 increased by $5,305 to $38,888, driven by investments in personnel, processes, and technology[158]. - The effective tax rate for fiscal 2025 was 21%, up from 18% in fiscal 2024, primarily due to higher pre-tax income[179]. - Net cash provided by operating activities for fiscal 2025 was $24,316 million, a decrease from $28,120 million in fiscal 2024, primarily due to lower cash from accounts receivable[187]. - As of March 31, 2025, stockholders' equity increased to $119,577 from $105,566 in the prior year[197]. Backlog and Orders - The company reported a funded and unfunded backlog of $412.3 million as of March 31, 2025, compared to $390.9 million as of March 31, 2024, indicating a year-over-year increase of approximately 5.5%[24]. - Backlog at March 31, 2025, was $412,335, a 5% increase from $390,868 at March 31, 2024, with approximately 83% of the backlog related to the Defense industry[158]. - Total orders for fiscal 2025 were $231,112, a decrease of 14% from $268,447 in fiscal 2024, primarily due to record orders in the previous year[201]. - The book-to-bill ratio for fiscal 2025 was 1.1x, indicating a healthy order intake relative to sales[202]. - Significant orders in fiscal 2025 included a $50,000 procurement for the U.S. Navy's Virginia Class Submarine program and a $2,200 strategic investment from a major Defense customer[203]. Market Segmentation - Domestic sales accounted for approximately 81% of total sales in fiscal 2025, with sales to the Defense industry representing 58% of total sales[23]. - In fiscal 2025, sales to the Defense industry accounted for approximately 58% of total sales, up from 25% in fiscal 2021[40]. - Sales to the Energy & Process markets represented approximately 35% of revenue in fiscal 2025, down from 75% in fiscal 2021[40]. - The Defense market accounted for 58% of net sales in fiscal 2025, with sales increasing by $22,432 or 23% compared to fiscal 2024[171]. - The Energy & Process market saw a slight increase in sales of 1%, totaling $73,287, while the Space market increased by 11% to $14,684[171]. Strategic Initiatives - The company aims for an average annualized organic revenue growth of 8% to 10% and low to mid-teen adjusted EBITDA margins by fiscal 2027[26]. - The company completed the acquisition of P3 Technologies, which is expected to diversify market and product offerings and enhance turbomachinery solutions[18]. - The company has transitioned to a diversified business model serving multiple markets, including Defense, Energy & Process, and Space, moving away from a highly cyclical Energy business[26]. - The company is expanding its Batavia, NY campus with a new 30,000 square foot manufacturing facility, funded primarily by a strategic investment from a Defense customer[117]. - The company has initiated construction of a cryogenic testing facility to enhance capabilities, scheduled for completion in Q1 fiscal 2026[145]. Risks and Challenges - Inflation and global supply chain issues have increased the cost of raw materials and labor, impacting financial results, particularly due to fixed-price contracts[36]. - The company is exposed to risks related to customer concentration, particularly with U.S. Navy projects, which could impact revenue if funding is disrupted[47]. - Fixed-price contracts represent a substantial portion of sales, which may lead to difficulties in execution and potential cost overruns[60]. - The company is susceptible to investigations and legal proceedings related to government contracts, which could adversely affect its financial position and operations[70]. - The company faces challenges from competition, as some competitors may have greater resources or cost advantages, potentially impacting market share and profitability[78]. Research and Development - Research and development (R&D) expenditures were $4,039 million in fiscal 2025, with $1,124 million not customer funded[41]. - The company expects R&D spend not funded by customers to increase to 1% to 2% of revenue in the future[41]. Environmental and Regulatory Factors - Environmental costs are not expected to have a material adverse effect on financial performance, although future liabilities cannot be assured[39]. - U.S. government contracts are subject to extensive regulations, and failure to comply may result in financial penalties or contract termination[64]. - The company is subject to export, import, and sanctions laws, and failure to comply could result in fines and regulatory actions[67]. - Climate change regulations may influence customers' investment decisions, potentially reducing demand for the company's products[73]. Workforce and Talent Management - The company maintains a highly skilled workforce and invests in employee development through various training programs[27]. - The company is dependent on a skilled workforce, facing challenges such as labor shortages and increased competition for talent, which could lead to higher operational costs[128]. - The company may experience difficulties in retaining key management and technical personnel due to intense competition in the industry[107]. Cybersecurity and Technology - Cybersecurity threats pose risks to the company's information systems, potentially leading to financial loss and reputational damage[112]. - The company has developed a comprehensive cybersecurity risk management program to protect critical systems and information, overseen by its Audit Committee[135]. - The implementation of a new enterprise resource planning (ERP) system is scheduled to go live in fiscal 2026, with potential risks including operational disruptions and inefficiencies[115].

Fourth Quarter & Full-Year Fiscal 2025 Financial Results JUNE 9, 2025 GRAHAM CORPORATION 1 © 2025 GRAHAM CORPORATION, ALL RIGHTS RESERVED Safe Harbor Statement Safe Harbor Regarding Forward Looking Statements This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks, uncertainties and assumptions and are identified by wor ...

Financial Performance - Fourth quarter revenue increased by 21% to $59.3 million, driven by strong performance across all markets[6] - Fiscal 2025 net income was $12.2 million, a significant increase from $4.6 million in the prior fiscal year, representing a 168% growth[14] - Adjusted EBITDA for fiscal 2025 was $22.4 million, up 69% from $13.3 million in fiscal 2024, with an adjusted EBITDA margin of 10.7%[14] - For the fourth quarter of fiscal 2025, net sales increased by 21% year-over-year to $59.3 million, while full-year sales rose by 13% to $209.9 million[45] - Gross profit for the fourth quarter was $16.0 million, reflecting a 26% increase compared to the same quarter last year, with a gross margin of 27.0%[45] - Operating profit surged by 262% year-over-year to $5.5 million in the fourth quarter, with an operating margin of 9.3%[45] - Net income for the fourth quarter reached $4.4 million, a 228% increase from the previous year, resulting in a diluted net income per share of $0.40[45] - Net income for the year ended March 31, 2025, was $12,230 million, a significant increase of 168.5% compared to $4,556 million in 2024[49] - Adjusted EBITDA for the year ended March 31, 2025, reached $22,429 million, up 68.9% from $13,285 million in 2024[51] - Net sales for the year ended March 31, 2025, were $209,896 million, up 13.1% from $185,533 million in 2024[51] - The net income margin improved to 5.8% in 2025 from 2.5% in 2024[51] Guidance and Projections - Fiscal 2026 guidance projects revenue between $225 million and $235 million, reflecting a 10% increase at the midpoint compared to fiscal 2025[6] - Fiscal 2026 guidance for net sales is projected between $225 million and $235 million, with a gross margin of 24.5% to 25.5%[26] - Adjusted EBITDA is expected to range from $22 million to $28 million, with capital expenditures estimated at $15 million to $18 million[26] Backlog and Orders - The company reported a record backlog of $412.3 million as of March 31, 2025, a 5% increase year-over-year[24] - Orders for fiscal 2025 totaled $231.1 million, resulting in a book-to-bill ratio of 1.1x[22] - The company emphasizes the importance of tracking orders and backlog as leading indicators of future performance[40] - The book-to-bill ratio is used to assess growth prospects, calculated as net orders divided by net sales[41] Cash Flow and Investments - Cash provided by operating activities for the year was $24.3 million, with cash and cash equivalents increasing to $21.6 million[18] - Capital expenditures for fiscal 2025 were $19.0 million, focused on capacity expansion and productivity improvements[19] - Cash and cash equivalents at the end of the year increased to $21,577 million from $16,939 million, marking a rise of 27.5%[49] - Customer deposits rose to $84,062 million in 2025, an increase of 16.8% from $71,987 million in 2024[47] - The company plans to invest in key organic and inorganic growth opportunities to enhance long-term profitability[3] Margins and Expenses - Gross margin for the fourth quarter expanded by 110 basis points to 27.0%, while fiscal 2025 gross margin increased by 330 basis points to 25.2%[6] - SG&A expenses, including amortization, are projected to be 17.5% to 18.5% of sales, with additional costs related to performance bonuses and ERP conversion included[26][28] Assets and Liabilities - Total assets increased to $264,110 million in 2025 from $233,879 million in 2024, representing a growth of 13.0%[47] - Total liabilities increased to $144,533 million in 2025 from $128,313 million in 2024, reflecting a growth of 12.7%[47] - The company reported a net cash provided by operating activities of $24,316 million for the year, down from $28,120 million in 2024[49] - Adjusted net income for the year ended March 31, 2025, was $13,716 million, compared to $6,796 million in 2024, an increase of 102.5%[53]

Core Viewpoint - The article highlights Graham (GHM) as a promising growth stock, emphasizing its strong earnings growth, efficient asset utilization, and positive earnings estimate revisions, making it a solid choice for growth investors [2][10]. Earnings Growth - Graham has a historical EPS growth rate of 23.6%, with projected EPS growth of 154.8% this year, significantly outperforming the industry average of 10.7% [5]. Asset Utilization Ratio - The company has an asset utilization ratio (sales-to-total-assets ratio) of 0.81, indicating it generates $0.81 in sales for every dollar in assets, which is higher than the industry average of 0.75, showcasing better efficiency [6]. Sales Growth - Graham's sales are expected to grow by 11.8% this year, compared to the industry average of 3.2%, indicating strong sales growth potential [7]. Earnings Estimate Revisions - There has been a positive trend in earnings estimate revisions for Graham, with the Zacks Consensus Estimate for the current year increasing by 3.9% over the past month, suggesting favorable near-term stock price movements [8]. Overall Assessment - Graham has achieved a Growth Score of A and a Zacks Rank 1 (Strong Buy), indicating it is a potential outperformer and a strong candidate for growth investors [10].

Safe Harbor Statement Safe Harbor Regarding Forward Looking Statements G r a h a m C o r p o r a t i o n Third Quarter FY25 Teleconference February 7, 2025 Daniel J. Thoren, Chief Executive Officer Matthew J. Malone, President and Chief Operating Officer Christopher J. Thome, Vice President - Finance and Chief Financial Officer www.GrahamCorp.com This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securitie ...

Financial Data and Key Metrics Changes - Sales for the quarter totaled $47 million, a 7.3% increase over the prior year [22] - Gross margin improved by 260 basis points to 24.8% of sales, driven by higher sales volume and better execution [25] - Adjusted EBITDA increased 36% over the prior year, totaling $4 million, with an adjusted EBITDA margin of 8.6% [29][40] Business Line Data and Key Metrics Changes - The defense sector saw notable growth, with an 11% increase contributing to overall performance [8] - Aftermarket revenue increased by 2.4% over record levels from the previous year, indicating strong demand [23] - The company reported a significant backlog of $385 million, with 80% attributed to the defense business [38] Market Data and Key Metrics Changes - Orders for the quarter declined to $24.8 million, but the nine-month period saw orders totaling $144.2 million, maintaining a book-to-bill ratio of one [35][36] - The space backlog increased by 59% over the previous year, reflecting growing opportunities in that sector [39] Company Strategy and Development Direction - The company is focused on expanding its manufacturing capabilities, including a new facility in Batavia, expected to enhance naval defense work [19] - Strategic investments in R&D and operational excellence are prioritized to drive long-term growth [18][44] - The leadership transition plan aims to ensure continuity and leverage internal talent for future growth opportunities [11][12] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the long-term demand environment, emphasizing the company's ability to capture additional opportunities [10] - The company is optimistic about ongoing discussions with customers regarding new programs and expansions, despite challenges in the shipbuilding market [54] - Management highlighted the importance of maintaining strong customer relationships and operational excellence to navigate market dynamics [18] Other Important Information - The effective tax rate for the quarter was 29%, with expectations for the full year to be between 20% and 22% [31] - Capital expenditures for the quarter totaled $7.3 million, with projections for the full year now expected to be between $15 million and $19 million [33][34] Q&A Session Summary Question: Challenges in the shipbuilding market and potential opportunities - Management indicated that customers are focused on maintaining production schedules and are not experiencing slowdowns, leading to positive discussions about future opportunities [52][54] Question: Strength in aftermarket revenue - The aftermarket growth is primarily driven by energy and chemical sectors, with increasing inquiries from international customers for new technology [56][58] Question: Ideal book-to-bill ratio - The company aims for a book-to-bill ratio of 1.1 to support 8% to 10% organic revenue growth, despite current lumpiness in order flow [67][68] Question: Supply chain and labor challenges - Management is optimistic about continued government funding for supplier development, which will support capacity expansion [72][73] Question: Exposure to potential supplemental defense budgets - The company is involved in strategic programs that may benefit from increased defense spending, but the impact of a continuing resolution is uncertain [81][82] Question: M&A activity - The company is actively pursuing M&A opportunities, focusing on engineered products with strong IP and technology moats [101]

Financial Performance - Net sales for Q3 fiscal 2025 were $47,037, up 7% compared to Q3 fiscal 2024, with an 11% increase in defense industry sales and a 64% increase in chemical/petrochemical market sales[76] - Gross profit for Q3 fiscal 2025 was $11,686, with a gross profit margin of 24.8%, reflecting a 260 basis point improvement over the same period in fiscal 2024[76] - Net income for Q3 fiscal 2025 was $1,588, or $0.14 per diluted share, compared to net income of $165, or $0.02 per diluted share, in Q3 fiscal 2024[76] - For the first nine months of fiscal 2025, net sales increased by $14,088 million, or 10%, compared to the same period in fiscal 2024[93] - Net income for the three months ended December 31, 2024, was $1,588 million, representing a significant increase from $165 million in the same period of 2023[106] - Adjusted net income for the first nine months of fiscal 2025 was $8,965 million, up from $5,188 million in the first nine months of fiscal 2024[107] Orders and Backlog - Orders booked in Q3 fiscal 2025 decreased to $24,786 from $123,267 in Q3 fiscal 2024, primarily due to a record level of orders in the prior year[76] - Backlog was $384,701 at December 31, 2024, down from $390,868 at March 31, 2024, mainly due to the timing of orders in the defense market[76] - Total orders for the third quarter of fiscal 2025 decreased to $24,786 million, down 80% from $123,267 million in the prior year[121] - The backlog as of December 31, 2024, was $384,701 million, a decrease of 4% from $399,244 million in the prior year[123] - The company expects to recognize revenue on approximately 45% to 50% of the backlog within one year and 35% to 40% in one to two years[123] - Orders to the U.S. represented 76% of total orders for the first nine months of fiscal 2025, down from 88% in the prior year[122] Cash and Capital Expenditures - Cash and cash equivalents increased to $30,046 at December 31, 2024, compared to $16,939 at March 31, 2024, driven by cash provided by operating activities of $27,873[76] - Capital expenditures for the first nine months of fiscal 2025 were $13,800 million, significantly higher than $5,193 million in the comparable period of fiscal 2024[111] - The company expects fiscal 2025 capital expenditures to be in the range of $15,000 to $19,000 million, up from previous expectations of $10,000 to $15,000 million[111] - Capital expenditures for fiscal 2025 are projected to be between $15,000 to $19,000 million, up from previous guidance of $13,000 to $18,000 million[124] Market Outlook - The company expects strong demand for defense equipment due to defense budget plans and increased geopolitical tensions[82] - The company anticipates continued growth in alternative and clean energy markets, particularly in hydrogen production and geothermal power generation[87] - The NextGen steam ejector nozzle is projected to have a market opportunity exceeding $50 million over the next 5 to 10 years[85] - The company anticipates achieving 8% to 10% average annualized organic revenue growth by fiscal 2027[125] Expenses and Financial Ratios - SG&A expenses increased by $884 million in the third quarter of fiscal 2025 compared to the same quarter in fiscal 2024, driven by higher personnel costs and research and development investments[96] - Net interest income for the first nine months of fiscal 2025 was $442 million, compared to net interest expense of $277 million in the same period of fiscal 2024[98] - The effective tax rate for the first nine months of fiscal 2025 was 20%, a decrease from 22% in the same period of fiscal 2024[99] - The book-to-bill ratio is used to track growth prospects, calculated as net orders divided by net sales[119] Risk Factors - The company is facing significant cost inflation in labor, raw materials, tariffs, and supply chain costs due to increased demand and global supply chain disruptions[139] - Geopolitical events, including the Russia-Ukraine war and the Israel-Hamas conflict, may further increase supply chain costs and affect business operations[139] - Foreign currency exchange rate fluctuations decreased cash balances by $39 million primarily due to the strengthening of the U.S. dollar[135] Dividends and Debt - The company did not pay any dividends during the first nine months of fiscal 2025 and has no intention to pay dividends for the foreseeable future[115] - The company had no borrowings on its new $50,000 million revolving credit facility as of December 31, 2024, with $7,202 million in letters of credit outstanding[113] - As of December 31, 2024, the company had no variable rate debt outstanding on its New Revolving Credit Facility[140] - The company evaluates the use of interest rate derivatives to manage exposure to interest rate movements as part of its risk management activities[140]

Revenue and Sales Performance - Revenue increased by 7.3% to $47.0 million, driven by strong demand in key end-markets[5] - Net sales for the three months ended December 31, 2024, were $47,037,000, representing a 7% increase compared to $43,818,000 for the same period in 2023[35] - The company reported a 10% increase in net sales for the nine months ended December 31, 2024, totaling $150,551,000 compared to $136,463,000 in the prior year[35] - Net sales for Q3 2024 were $47,037 million, an increase of 7% from $43,818 million in Q3 2023[41] Profitability and Margins - Gross profit margin improved by 260 basis points to 24.8% of sales, with net margin increasing by 300 basis points to 3.4% of sales[5] - Gross profit increased by 20% to $11,686,000 for the three months ended December 31, 2024, compared to $9,723,000 in the prior year[35] - Operating profit for the three months ended December 31, 2024, was $2,210,000, a significant increase of 143% from $911,000 in the same period last year[35] - Adjusted EBITDA for Q3 2024 reached $4,027 million, up 36% from $2,965 million in Q3 2023, with an adjusted EBITDA margin of 8.6% compared to 6.8% last year[41] Net Income and Earnings Per Share - Net income per diluted share increased by 600% to $0.14, while adjusted net income per diluted share rose by 38% to $0.18[5] - Net income for the three months ended December 31, 2024, was $1,588,000, an increase of 862% compared to $165,000 in the prior year[35] - Adjusted net income for Q3 2024 was $1,966 million, compared to $1,451 million in Q3 2023, reflecting a growth of 36%[43] - GAAP net income per diluted share for Q3 2024 was $0.14, up from $0.02 in Q3 2023[43] Orders and Backlog - Orders totaled $24.8 million, with a year-to-date book-to-bill ratio of 1.0x and a backlog of $385 million[5] - Backlog at quarter end was $384.7 million, down 3.6% year-over-year, with 45% to 50% expected to convert to sales in the next twelve months[17] - The book-to-bill ratio is used to track growth prospects, calculated as net orders divided by net sales[31] - The company believes tracking orders and backlog are useful as they often serve as leading indicators of future performance[30] Cash and Capital Expenditures - Cash and cash equivalents were $30.0 million, up from $16.9 million at the end of fiscal 2024[12] - Cash and cash equivalents increased to $30,046,000 as of December 31, 2024, from $16,939,000 at the end of March 2024[37] - Capital expenditures for the first nine months of fiscal 2025 were $13.8 million, with an increase in expected capital expenditures to $15.0 million to $19.0 million[13] Operating Expenses - SG&A expenses totaled $9.7 million, or 20.6% of sales, reflecting continued investments in people, processes, and technology[10] - Operating expenses increased by 24% for the nine months ended December 31, 2024, totaling $26,821,000 compared to $21,563,000 in the previous year[35] Guidance and Future Outlook - The company reiterated full-year guidance for net sales between $200 million to $210 million and adjusted EBITDA between $18 million to $21 million[19] - The company plans to complete the Barber-Nichols performance bonus expense by the end of fiscal year 2026, with expenses of $0.8 million for Q3 2025[44]