Graham Corporation’s Gross Margin Expands 660 Basis Points on Sales of $43.8 Million in Third Quarter of Fiscal 2024

Graham Corporation (NYSE: GHM) (“GHM” or the “Company”), a global leader in the design and manufacture of mission critical fluid, power, heat transfer and vacuum technologies for the defense, space, energy, and process industries, today reported financial results for its third quarter ended December 31, 2023 (“third quarter fiscal 2024”). Results include approximately two months of operations from the P3 Technologies, LLC (“P3”) acquisition, which was completed on November 9, 2023.

“Third quarter results were strong and we believe further demonstrated the continued execution of our strategy that is centered on driving quality top-line growth with margin accretive projects in order to improve our future earnings power,” commented Daniel J. Thoren, President and Chief Executive Officer. “There were several highlights during the quarter, which included improved financial performance with expanded gross and adjusted EBITDA margins¹, strong bookings which drove record backlog of nearly $400 million, and a new lower cost, more flexible credit facility.

“Equally noteworthy was the acquisition of P3, a strategic bolt on business that is already enhancing our turbomachinery solutions and Graham’s margin profile. Importantly, our strong cash generation during the quarter enabled us to pay off nearly all the debt utilized in acquiring P3.”

Mr. Thoren concluded, “We believe our business is in a much-improved position given the strategic and necessary actions taken over the last few years. As we look forward, we are confident we can continue to execute our strategy and capitalize on the many opportunities in front of us. We are also focused on further elevating GHM by driving a collaborative spirit across our brands, leveraging best practices, and progressing employee development in support of our core capabilities.”

__________________________
¹ Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. See attached tables and other information on pages 10 and 11 for important disclosures regarding Graham’s use of these non-GAAP measures.

Third Quarter Fiscal 2024 Performance Review
(All comparisons are with the same prior-year period unless noted otherwise.)
($ in millions except per share data)		Q3 FY24			Q3 FY23			$ Change			% Change
Net sales		$	43.8		$	39.9		$	3.9		10%
Gross profit		$	9.7		$	6.2		$	3.5		56%
Gross margin			22.2%			15.6%					+660 bps
Operating income		$	0.9		$	0.7		$	0.2		36%
Operating margin			2.1%			1.7%					+40 bps
Net income		$	0.2		$	0.4		$	(0.2)		-55%
Net income per diluted share		$	0.02		$	0.03		$	(0.01)		-33%
Adjusted net income*		$	2.4		$	0.9		$	1.6		183%
Adjusted net income per diluted share*		$	0.22		$	0.08		$	0.14		176%
Adjusted EBITDA*		$	3.9		$	2.2		$	1.6		72%
Adjusted EBITDA margin*			8.8%			5.6%					+320 bps
*Graham believes that adjusted net income, adjusted net income per diluted share, adjusted EBITDA (defined as consolidated net income before net interest expense, income taxes, depreciation, amortization, other acquisition related expenses (income), and other unusual/nonrecurring expenses), and adjusted EBITDA margin (adjusted EBITDA as a percentage of net sales), which are non-GAAP measures, help in the understanding of its operating performance. Moreover, Graham’s credit facility also contains ratios based on adjusted EBITDA as defined in the lending agreement. Graham also believes that adjusted net income and adjusted net income per diluted share, which excludes intangible amortization, other costs related to the acquisition, and other unusual/nonrecurring (income) expenses, provides a better representation of the cash earnings of the Company. See the attached tables and other information on pages 10 and 11 for important disclosures regarding Graham’s use of adjusted EBITDA, adjusted EBITDA margin, adjusted net income, and adjusted net income per diluted share, as well as the reconciliation of net income to adjusted EBITDA, adjusted net income, and adjusted net income per diluted share.

Net sales of $43.8 million increased 10%, or $3.9 million, and included approximately $1.0 million of incremental sales from P3. Sales to the defense market increased $2.6 million, or 12%. Aftermarket sales to the refining and petrochemical markets were $8.6 million, up $3.2 million, or 59%. Declines in the space market reflect timing of projects and the loss of a customer in April 2023 due to bankruptcy partially offset by revenue from P3. See supplemental data for a further breakdown of sales by market and region.

Gross margin expanded 660 basis points to 22.2%, which reflected higher volume and related improved absorption, higher margin commercial aftermarket sales, P3 margin accretive sales, improved execution and better pricing on defense contracts.

Selling, general and administrative expense (“SG&A”), excluding amortization, was $8.4 million, or 19% of sales, for the third quarter of fiscal 2024 compared with $5.3 million, or 13% of sales for the comparable prior-year period. The increase reflects higher performance-based compensation including supplemental performance bonus for Barber-Nichols employees (the “BN performance bonus”) in connection with the 2021 acquisition of Barber-Nichols LLC. Also contributing to the increase in SG&A was P3 acquisition-related costs, increased professional fees and initial enterprise resource planning (“ERP”) conversion costs.

Third quarter results reflected approximately $0.7 million of debt amendment costs.

Cash Management and Balance Sheet

Cash provided by operating activities was $19.5 million for the year-to-date period compared with $8.9 million in the prior-year period. The increase reflected higher net income along with improved working capital which was largely due to changes in payment terms related to large defense customers and stronger financial discipline.

Capital expenditures of $5.2 million year-to-date were focused on capacity expansion, productivity improvements and the start of the ERP implementation. The Company has adjusted its expected fiscal 2024 capital expenditures to be in the range of $8.0 million to $10.0 million from its previous expectations of $12.0 million to $13.5 million due to updated projected timing of cash outflows.

The Company acquired P3 on November 9, 2023 with a combination of cash, stock and contingent earn-out based upon the future performance of P3.

During the third quarter of fiscal 2024, the Company refinanced its debt with a new, five-year $50 million senior secured revolving credit facility. The new facility provides expanded flexibility with reduced borrowing costs. Total debt at quarter-end was $3.0 million, down from $11.7 million at year-end fiscal 2023. Subsequent to quarter-end, in January 2024, the remaining $3.0 million of debt was paid off.

Orders and Backlog
(See supplemental data filed with the Securities and Exchange Commission on Form 8-K and provided on the Company’s website for a further breakdown of orders and backlog by market)

($ in millions)
		Q1 23			Q2 23			Q3 23			Q4 23			FY23			Q1 24			Q2 24			Q3 24			YTD FY24
Orders		$	40.3		$	91.5		$	20.0		$	50.9		$	202.7		$	67.9		$	36.5		$	123.3		$	227.7
Backlog		$	260.7		$	313.3		$	293.7		$	301.7		$	301.7		$	322.0		$	313.3		$	399.2		$	399.2

Orders for the three-month period ended December 31, 2023, were a record $123.3 million. This included orders received in October primarily related to follow-on orders for critical U.S. Navy programs. These defense orders are expected to be recognized in revenue beginning in the fourth quarter of fiscal 2025 through early fiscal 2030. Aftermarket orders for the refining and petrochemical markets continued to be strong and were $7.8 million in the third quarter.

Backlog reached a record $399.2 million and was up 36% over the prior-year period and 27% sequentially. P3 added approximately $6 million to the backlog level. Approximately 40% of orders currently in backlog are expected to be converted to sales in the next twelve months and another 25% to 30% is expected to convert to sales over the following twelve months. The majority of orders expected to convert beyond twelve months are for the defense industry, specifically the U.S. Navy.

Fiscal 2024 Outlook Increased

The Company increased guidance for fiscal 2024 as follows:

(as of February 5, 2024)	Updated Fiscal 2024 Guidance	Previous Guidance
Net Sales:	$175 million to $185 million	$170 million to $180 million
Gross Margin:	Approx. 20% of sales	18% to 19% of sales
SG&A expense(1)	16% to 17% of sales	15% to 16% of sales
Adjusted EBITDA(2)	$15.0 million to $16.0 million	$11.5 million to $13.5 million
Effective Tax Rate	22% to 23%	22% to 23%
CapEx	$8.0 million to $10.0 million	$12.0 million to $13.5 million

(1)		Includes approximately $4.5 million to $5 million of BN Performance Bonus, P3 acquisition and integration, and ERP conversion costs included in SG&A expense.
(2)		Excludes approximately $4.5 million to $5 million of BN performance bonus, P3 acquisition and integration, and ERP conversion costs included in SG&A expense and approximately $0.7 million of debt extinguishment charges.

Webcast and Conference Call

GHM’s management will host a conference call and live webcast today at 11:00 a.m. Eastern Time (“ET”) to review its financial condition and operating results, as well as its strategy and outlook. The review will be accompanied by a slide presentation, which will be made available immediately prior to the conference call on GHM’s investor relations website.

A question-and-answer session will follow the formal presentation. GHM’s conference call can be accessed by calling [phone]. Alternatively, the webcast can be monitored from the events section of GHM’s investor relations website.

A telephonic replay will be available from 3:00 p.m. ET on the day of the teleconference through Monday, February 12, 2024. To listen to the archived call, dial [phone] and enter conference ID number 13743383 or access the webcast replay via the Company’s website at ir.grahamcorp.com, where a transcript will also be posted once available.

About Graham Corporation
GHM is a global leader in the design and manufacture of mission critical fluid, power, heat transfer and vacuum technologies for the defense, space, energy, and process industries. The Graham Manufacturing and Barber-Nichols’ global brands are built upon world-renowned engineering expertise in vacuum and heat transfer, cryogenic pumps, and turbomachinery technologies, as well as its responsive and flexible service and the unsurpassed quality customers have come to expect from the Company’s products and systems. Graham Corporation routinely posts news and other important information on its website, grahamcorp.com, where additional information on Graham Corporation and its businesses can be found.

Safe Harbor Regarding Forward Looking Statements
This news release 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 words such as “expects,” “outlook,” “anticipates,” “believes,” “could,” “guidance,” “should,” ”may”, “will,” “plan” and other similar words. All statements addressing operating performance, events, or developments that Graham Corporation expects or anticipates will occur in the future, including but not limited to, profitability of future projects and the business, its ability to deliver to plan, its ability to continue to strengthen relationships with customers in the defense industry, its ability to secure future projects and applications, expected expansion and growth opportunities, anticipated sales, revenues, adjusted EBITDA, adjusted EBITDA margins, capital expenditures and SG&A expenses, the timing of conversion of backlog to sales, orders, market presence, profit margins, tax rates, foreign sales operations, customer preferences, changes in market conditions in the industries in which it operates, changes in general economic conditions and customer behavior, forecasts regarding the timing and scope of the economic recovery in its markets, and its acquisition and growth strategy, are forward-looking statements. Because they are forward-looking, they should be evaluated in light of important risk factors and uncertainties. These risk factors and uncertainties are more fully described in Graham Corporation’s most recent Annual Report filed with the Securities and Exchange Commission (the “SEC”), included under the heading entitled “Risk Factors”, and in other reports filed with the SEC.

Should one or more of these risks or uncertainties materialize or should any of Graham Corporation’s underlying assumptions prove incorrect, actual results may vary materially from those currently anticipated. In addition, undue reliance should not be placed on Graham Corporation’s forward-looking statements. Except as required by law, Graham Corporation disclaims any obligation to update or publicly announce any revisions to any of the forward-looking statements contained in this news release.

Forward-Looking Non-GAAP Measures
Forward-looking adjusted EBITDA and adjusted EBITDA margin are non-GAAP measures. The Company is unable to present a quantitative reconciliation of these forward-looking non-GAAP financial measures to their most directly comparable forward-looking GAAP financial measures because such information is not available, and management cannot reliably predict the necessary components of such GAAP measures without unreasonable effort largely because forecasting or predicting our future operating results is subject to many factors out of our control or not readily predictable. In addition, the Company believes that such reconciliations would imply a degree of precision that would be confusing or misleading to investors. The unavailable information could have a significant impact on the Company’s fiscal 2024 financial results. These non-GAAP financial measures are preliminary estimates and are subject to risks and uncertainties, including, among others, changes in connection with purchase accounting, quarter-end, and year-end adjustments. Any variation between the Company’s actual results and preliminary financial estimates set forth above may be material.

Key Performance Indicators
In addition to the foregoing non-GAAP measures, management uses the following key performance metrics to analyze and measure the Company’s financial performance and results of operations: orders, and backlog. Management uses orders and backlog as measures of current and future business and financial performance, and these may not be comparable with measures provided by other companies. Orders represent written communications received from customers requesting the Company to provide products and/or services. Backlog is defined as the total dollar value of net orders received for which revenue has not yet been recognized. Management believes tracking orders and backlog are useful as it often times is a leading indicator of future performance. In accordance with industry practice, contracts may include provisions for cancellation, termination, or suspension at the discretion of the customer.

Given that each of orders and backlog are operational measures and that the Company's methodology for calculating orders and backlog does not meet the definition of a non-GAAP measure, as that term is defined by the U.S. Securities and Exchange Commission, a quantitative reconciliation for each is not required or provided.

FINANCIAL TABLES FOLLOW.

Graham Corporation
Consolidated Statements of Operations - Unaudited
(Amounts in thousands, except per share data)
		Three Months Ended											Nine Months Ended
		December 31,											December 31,
		2023				2022				% Change			2023				2022				% Change
Net sales		$	43,818			$	39,873			10	%		$	136,463			$	114,091			20	%
Cost of products sold			34,095				33,646			1	%			108,572				95,840			13	%
Gross profit			9,723				6,227			56	%			27,891				18,251			53	%
Gross margin			22.2	%			15.6	%						20.4	%			16.0	%
Other expenses and income:
Selling, general and administrative			8,429				5,284			60	%			21,563				15,828			36	%
Selling, general and administrative – amortization			383				274			40	%			930				821			13	%
Operating profit			911				669			36	%			5,398				1,602			237	%
Operating margin			2.1	%			1.7	%						4.0	%			1.4	%
Loss on extinguishment of debt			726				-			NA				726				-			NA
Other (income) expense, net			93				(63	)		NA				280				(188	)		NA
Interest expense, net			37				294			(87	%)			277				697			(60	%)
Income before provision (benefit) for income taxes			55				438			(87	%)			4,115				1,093			276	%
(Benefit) provision for income taxes			(110	)			70			NA				899				245			267	%
Net income		$	165			$	368			(55	%)		$	3,216			$	848			279	%
Per share data:
Basic:
Net income		$	0.02			$	0.03			(33	%)		$	0.30			$	0.08			275	%
Diluted:
Net income		$	0.02			$	0.03			(33	%)		$	0.30			$	0.08			275	%
Weighted average common shares outstanding:
Basic			10,775				10,611							10,709				10,613
Diluted			10,920				10,660							10,792				10,632
N/A: Not Applicable

Graham Corporation
Consolidated Balance Sheets – Unaudited
(Amounts in thousands, except per share data)
		December 31,				March 31,
		2023				2023
Assets
Current assets:
Cash and cash equivalents		$	15,163			$	18,257
Trade accounts receivable, net of allowances ($1,834 and $1,841 at December 31 and March 31, 2023, respectively)			35,666				24,000
Unbilled revenue			28,671				39,684
Inventories			31,078				26,293
Prepaid expenses and other current assets			4,011				1,534
Income taxes receivable			745				302
Total current assets			115,334				110,070
Property, plant and equipment, net			29,027				25,523
Prepaid pension asset			6,322				6,107
Operating lease assets			7,626				8,237
Goodwill			25,087				23,523
Customer relationships, net			14,584				10,718
Technology and technical know-how, net			11,254				9,174
Other intangible assets, net			7,378				7,610
Deferred income tax asset			1,734				2,798
Other assets			368				158
Total assets		$	218,714			$	203,918
Liabilities and stockholders’ equity
Current liabilities:
Short-term debt obligations		$	3,000			$	-
Current portion of long-term debt			-				2,000
Current portion of finance lease obligations			19				29
Accounts payable			16,365				20,222
Accrued compensation			14,726				10,401
Accrued expenses and other current liabilities			5,255				6,434
Customer deposits			63,005				46,042
Operating lease liabilities			1,221				1,022
Income taxes payable			-				16
Total current liabilities			103,591				86,166
Long-term debt			-				9,744
Finance lease obligations			72				85
Operating lease liabilities			6,760				7,498
Deferred income tax liability			61				108
Accrued pension and postretirement benefit liabilities			1,341				1,342
Other long-term liabilities			3,133				2,042
Total liabilities			114,958				106,985
Stockholders’ equity:
Preferred stock, $1.00 par value, 500 shares authorized			-				-
Common stock, $0.10 par value, 25,500 shares authorized, 10,971 and 10,774 shares issued and 10,828 and 10,635 shares outstanding at December 31, 2023 and March 31, 2023, respectively			1,097				1,075
Capital in excess of par value			31,678				28,061
Retained earnings			80,659				77,443
Accumulated other comprehensive loss			(7,144	)			(7,463	)
Treasury stock (143 and 138 shares at December 31 and March 31, 2023, respectively) respectively)			(2,534	)			(2,183	)
Total stockholders’ equity			103,756				96,933
Total liabilities and stockholders’ equity		$	218,714			$	203,918

Graham Corporation
Consolidated Statements of Cash Flows – Unaudited
(Amounts in thousands)
		Nine Months Ended
		December 31,
		2023				2022
Operating activities:
Net income		$	3,216			$	848
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			2,375				2,611
Amortization			1,487				1,857
Amortization of actuarial losses			632				504
Amortization of debt issuance costs			131				153
Equity-based compensation expense			1,002				582
Loss on extinguishment of debt			726				-
Deferred income taxes			935				232
(Increase) decrease in operating assets, net of acquisitions:
Accounts receivable			(11,335	)			(7,755	)
Unbilled revenue			11,213				(8,082	)
Inventories			(4,357	)			(6,801	)
Prepaid expenses and other current and non-current assets			(1,526	)			(500	)
Income taxes receivable			(459	)			(137	)
Operating lease assets			894				913
Prepaid pension asset			(215	)			(488	)
Increase (decrease) in operating liabilities, net of acquisitions:
Accounts payable			(3,949	)			5,511
Accrued compensation, accrued expenses and other current and non-current liabilities			2,948				2,116
Customer deposits			16,590				18,776
Operating lease liabilities			(825	)			(802	)
Long-term portion of accrued compensation, accrued pension liability and accrued postretirement benefits			-				(592	)
Net cash provided by operating activities			19,483				8,946
Investing activities:
Purchase of property, plant and equipment			(5,193	)			(2,394	)
Proceeds from disposal of property, plant and equipment			38				-
Acquisition of P3 Technologies, LLC, net of cash acquired			(6,812	)			-
Net cash used by investing activities			(11,967	)			(2,394	)
Financing activities:
Borrowings of short-term debt obligations			13,000				5,000
Principal repayments on debt			(22,522	)			(8,517	)
Payment of debt exit costs			(752	)			-
Principal repayments on finance lease obligations			(224	)			(205	)
Issuance of common stock			225				-
Payment of debt issuance costs			(241	)			(122	)
Purchase of treasury stock			(57	)			(22	)
Net cash used by financing activities			(10,571	)			(3,866	)
Effect of exchange rate changes on cash			(39	)			(212	)
Net (decrease) increase in cash and cash equivalents			(3,094	)			2,474
Cash and cash equivalents at beginning of period			18,257				14,741
Cash and cash equivalents at end of period		$	15,163			$	17,215

Graham Corporation
Adjusted EBITDA Reconciliation**
(Unaudited, $ in thousands)
		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2023				2022				2023				2022
Net income		$	165			$	368			$	3,216			$	848
Acquisition & integration costs			274								274				54
Barber-Nichols performance bonus			1,264				-				2,833				-
Debt amendment costs			744				-				744				194
ERP Implementation costs			56				-				56				-
Net interest expense			37				294				277				697
Income taxes			(110	)			70				899				245
Depreciation & amortization			1,422				1,506				3,862				4,468
Adjusted EBITDA		$	3,852			$	2,238			$	12,161			$	6,506
Adjusted EBITDA margin %			8.8	%			5.6	%			8.9	%			5.7	%

Adjusted Net Income and
Adjusted Net Income Per Diluted Share Reconciliation**
(Unaudited, $ in thousands, except per share amounts)
		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2023				2022				2023				2022
Net income		$	165			$	368			$	3,216			$	848
Acquisition & integration costs			274				-				274				54
Amortization of intangible assets			596				619				1,487				1,857
Barber-Nichols performance bonus			1,264				-				2,833				-
Debt amendment costs			744				-				744				194
ERP Implementation costs			56				-				56				-
Normalized tax rate(1)			(675	)			(130	)			(1,241	)			(442	)
Adjusted net income		$	2,424			$	857			$	7,369			$	2,511
GAAP net income per diluted share		$	0.02			$	0.03			$	0.30			$	0.08
Adjusted net income per diluted share		$	0.22			$	0.08			$	0.68			$	0.24
Diluted weighted average common shares outstanding			10,920				10,660				10,792				10,632
(1) Applies a normalized tax rate to non-GAAP adjustments, which are pre-tax, based upon the statutory tax rate.

** Acquisition and Integration Costs are incremental costs that are directly related to the P3 acquisition. These costs may include, among other things, professional, consulting and other fees, system integration costs, and fair value adjustments relating to contingent consideration. In connection with the acquisition of BN, we entered into the BN Performance Bonus agreement to provide employees of BN with a supplemental performance-based award based on the achievement of BN performance objectives for fiscal years ending March 31, 2024, 2025, and 2026 which can range between $2,000 to $4,000 per year. Debt Amendment Costs consists of accelerated write-offs of unamortized deferred debt issuance costs and discounts, prepayment penalties and attorney fees in connection with the amendment of our credit facility in October 2023. ERP Implementation Costs relate to consulting costs incurred in connection with the new ERP system being implemented throughout our Batavia, N.Y. facility and are not expected to reoccur once the project is completed.

Non-GAAP Financial Measures
Adjusted EBITDA is defined as consolidated net income (loss) before net interest expense, income taxes, depreciation, amortization, other acquisition related expenses, and other unusual/nonrecurring expenses. Adjusted EBITDA margin is defined as Adjusted EBITDA as a percentage of sales. Adjusted EBITDA and Adjusted EBITDA margin are not measures determined in accordance with generally accepted accounting principles in the United States, commonly known as GAAP. Nevertheless, Graham believes that providing non-GAAP information, such as Adjusted EBITDA and Adjusted EBITDA margin, is important for investors and other readers of Graham's financial statements, as it is used as an analytical indicator by Graham's management to better understand operating performance. Moreover, Graham’s credit facility also contains ratios based on EBITDA. Because Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures and are thus susceptible to varying calculations, Adjusted EBITDA, and Adjusted EBITDA margin, as presented, may not be directly comparable to other similarly titled measures used by other companies.

Adjusted net income (loss) and adjusted net income (loss) per diluted share are defined as net income (loss) and diluted earnings (loss) per share as reported, adjusted for certain items and at a normalized tax rate. Adjusted net income (loss) and adjusted net income (loss) per diluted share are not measures determined in accordance with GAAP and may not be comparable with the measures used by other companies. Nevertheless, Graham believes that providing non-GAAP information, such as adjusted net income (loss) and adjusted net income (loss) per diluted share, is important for investors and other readers of the Company’s financial statements and assists in understanding the comparison of the current quarter’s and current fiscal year's net income (loss) and net income (loss) per diluted share to the historical periods' net income (loss) and net income (loss) per diluted share. Graham also believes that adjusted net income (loss) per diluted share, which adds back intangible amortization expense related to acquisitions, provides a better representation of the cash earnings of the Company.

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The Graham Stock at the time of publication of the news with a fall of -0,57 % to 17,50EUR on Tradegate stock exchange (02. Februar 2024, 17:05 Uhr).