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spk07: Greetings and welcome to the Graham Corporation Third Quarter Fiscal Year 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the presentation. If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Chris Gordon, Investor Relations for Graham Corporation. Thank you, sir. You may begin.
spk03: Thank you, Diego, and good morning, everyone. We appreciate you joining us today to discuss Graham's fiscal 2021 third quarter results. You should have a copy of the news release that was distributed across the wire this morning. We also have slides associated with the commentary that we are providing here today. If you do not have the release or the slides, you can find them on the company's website, at www.gram-mfg.com. On the call with me today are Jim Lyons, our President and Chief Executive Officer, Jeff Gleick, our Chief Financial Officer, and Alan Smith, Vice President and General Manager of our Batavia New York facility. Jeff will start with a financial overview of the period, Alan will then provide an overview of our operations, and Jim will wrap up the prepared remarks with a strategic overview of our business, and provide our outlook for the rest of fiscal year 2021. We will then open the lines for Q&A. As you are aware, we may make some forward-looking statements during this discussion as well as during the Q&A. These statements apply to future events and are subject to risks and uncertainties as well as other factors which could cause actual results to differ materially from what is stated on the call. These risks and uncertainties and other factors are provided in the earnings release and in the slide deck, as well as other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at www.sec.gov. I also want to point out that during today's call, we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for the results prepared in accordance with GAAP. We have provided reconciliations of comparable GAAP to non-GAAP measures in the tables accompanying today's earnings release. With that, it's my pleasure to turn the call over to Jeff Blake.
spk02: Thank you, Chris, and good morning, everyone. If you could turn to slide four. Q3 sales were $27.2 million. up from $25.3 million in Q3 last year. Our COVID-19 impact in the quarter was small compared to Q1, but we still lost approximately $900,000 of revenue due to employee absences related to COVID. Strong sales in Asia supported our refining business. Sales in the defense, the Navy market, were $4.5 million in the quarter and now stand at $17.4 million year-to-date, approximately one-quarter of our total sales through December. Q3 net income was $1.1 million, or 11 cents per share, up from break-even in Q3 last year. Cash is still strong at $69.3 million. Orders in Q3 were in excess of $61 million, our strongest order quarter ever, driven by $52 million in defense orders. Almost all of the defense orders will not start to convert to revenue until fiscal 2023 and beyond. Our backlog is now nearly $150 million, 70% of which is in the defense market. Moving on to slide five, I discussed the sales detail in the last slide with the quarter at $27.2 million. The sales split in the quarter was 39% domestic and 61% international. Last year's third quarter was 53% domestic, 47% international. The stronger international sales in the quarter were primarily driven by projects in Asia, particularly China, where we had one large project which was accounted for on a completed contract rather than a percent complete basis, and a second project which is currently in process and is being accounted for on a percent complete basis. Gross profit increased to $6.2 million, up from $4 million last year, excuse me, primarily due to improved project mix as well as volume. Gross margin was 22.9%, up from 16% last year, which was a particularly poor quarter last year. Even the margins were 6.7%, up from 0.7 in last year's third quarter, And as I mentioned earlier, net income was $1.1 million up from breakeven last year. On to slide six, looking at our unit date results, sales in the first nine months of fiscal 2021 were $71.8 million, up from $67.5 million last year. This is despite our challenging Q1 when production was at 50% of capacity due to COVID impacts. Unit date sales are 52%. percent domestic, 48 percent international, compared with 65 percent and 35 percent respectively last year. Gross profit year-to-date is $15.5 million, up from 13.7 last year, and gross margin is up 130 basis points to 21.6 percent. Year-to-date EBITDA margins were 5.6 percent versus 3.1 percent in the first nine months of last year. Finally, net income was $2 million or $0.20 a share, up from $1.3 million or $0.13 a share last year. Again, the first quarter of this year had a loss due to COVID, but we have more than recovered in the second and third quarter. On to slide seven, cash is at $69.3 million, up $1.4 million this year. from the end of Q2, but still down from $73 million at the end of fiscal 2020. This is primarily due to timing of working capital. Cash per share is $6.94. Our quarterly dividend remains firm at $0.11 a share, and we have paid out $3.3 million year-to-date. Capital spending to date is $1.5 million, similar to last year, and we expect the total for the year to be between $2 and $2.5 million in capital for the full year. Finally, as we are continuing to work on our acquisition pipeline and activities, COVID has not had an adverse impact on our efforts as we have built some very good relationships over time, and these continue. However, many are now remote rather than in-person communications. Alan will continue our presentation by providing more depth on our operations in Q3, and then Jim will provide a market update and our
spk00: updated guidance for fiscal 2021 allen thank you jeff good morning everyone i would ask that you refer to slide nine sales for the third quarter were 27.2 million dollars sales for the refining industry were 16.5 million dollars up from 12.2 million dollars 9.4 million dollars of the revenue were from two projects for the chinese refining market sales to the defense industry We're 4.5 million, and we're up slightly year on year. We continue to see improved backlog conversion as we grow our naval workforce. On prior calls, we discussed first article or first-time fabrication work. We are largely past that now for what's currently in our backlog. We do plan to expand and take on new first article work. However, for now, that type of heavy lifting is behind us. Lastly, our annual guidance remains at $93 to $97 million, which was communicated during our second quarter earnings call. The fourth quarter is set up well for backlog conversion. However, there is always a few million dollars of in and out revenue within any quarter. Moving to slide 10. We experienced a second wave of COVID-19 infections in western New York from November through the middle of January. The company's COVID-19 protocols have been tested and have been proven to be effective in minimizing the spread of the virus within the company. At the peak of the second wave in early January, the production departments were operating at no less than 90% capacity. Due to the outbreak, we temporarily paused our efforts to recruit skilled workers. As of January 19th, we have lifted the pause and are actively recruiting skilled workers. I am pleased to report that we have several candidates in our pipeline. We continue to prioritize improving our productivity in the Navy areas. Productivity enhancements are focused on build flows, faster welding processes, employee training, the creation of jigs and fixtures, and lastly, applying lessons learned. I will now turn the presentation over to Jeff.
spk01: Thank you, Helen, and thank you, Jeff, for your remarks. I ask that everyone refer to slide 12 as I begin my prepared remarks. This chart illustrates how orders can vary considerably from quarter to quarter. A highlight, though, is the order level the last two quarters from the defense industry, specifically orders for the US Navy. The orders for defense during the last two quarters were $65 million. These orders can be large in value and will have multi-year conversion cycles. We have visibility into the Navy's long-term procurement plans. That is a great help and lessens investment risk that may be needed to support growth associated with stronger defense segment revenue. We are operating within challenging energy and chemical, petrochemical markets. Low oil prices due to supply and demand imbalance along with demand destruction for chemical and petrochemical derived consumer products, have contracted orders within our more traditional non-defense end markets. It is important to point out the defense strategy where $100 million in new orders were secured the last 12 quarters, representing 30% of total orders, has been a terrific counterbalance to headwinds within our more traditional markets. Also, Another set of actions were implemented about two years ago to change participation, success, and execution plans within more price-sensitive international markets where we historically did not play. That too has been executed successfully. Across those same 12 quarters, $40 million in orders were won because of a different execution plan, a different selling strategy, Stated differently, approximately 60% of orders the past 12 quarters were from our traditional markets or customers and 40% from strategies to broaden revenue streams. I commend our team for a terrific effort on both strategies. It has really made a big difference in order level during this pullback by our historic customers. Let's move on to slide 13. There is not too much different from last quarter to report. Refining is weak as an overall comment. There are mid- and large-size projects upcoming in India, China, and for the Mideast and North Africa. But overall, refining opportunities have contracted. An active area within U.S. refining markets, however, is related to renewable diesel investments. This is supported by tax policy under the renewable fuels standard and California's low carbon fuel standards. These are smaller, fast-moving projects. However, it has created demand for our products, and that is important right now. The Navy bookings pipeline remains healthy. Orders, they will be intermittent and likely not as strong as the past two quarters. Nonetheless, we expect to build backlog within this segment during the next year with a book to bill above one. The chemical sector is still contracted. We have not seen a change in spending by this market. Global markets need to lift up from the pandemic before we are to anticipate more typical order levels. Short cycle and plant MRO, or plant maintenance, repair, and operating spending, is also pulled back. While defense orders have a positive outlook, order levels from our more traditional customers or markets are expected to stay sluggish. Let's move on now to slide 14. The two bright spots during this pandemic are our cash position that was highlighted by Jeff and our backlog. Backlog is $150 million with approximately $100 million for defense and $50 million for the company's more historic markets. The operational benefits or synergies between defense and commercial markets permit effective utilization of our operating assets while commercial markets, and here I'm referring to refining and chemicals, petrochemicals, are contracted. 45 to 50% of our backlog is anticipated to convert during the next 12 months. The fourth quarter is now essentially set up for backlog conversion with, as Alan said, a few million dollars, which typically comes in and out in a quarter. Thus, we have high confidence for the full year guidance. With that, let's move on to the guidance page. We guide to revenue for the full year to be between $93 and $97 million, implying fourth quarter revenue between $21 and $25 million. Full year gross margin should fall between 21 to 22%. SG&A expense at $17.3 to $17.8 million for the full year. Our effective tax rate is planned to be between 22 and 24%. It is important to highlight that the guidance reflects we do not have significant COVID-19 related disruptions or unforeseen impacts in our fourth quarter. I will close with a quick progress review on strategic initiatives. Let's move on to slide 16. We have had an effort to reduce the volatility of our business performance with greater focus on expanding our predictable revenue streams. The Navy is one of those revenue streams, as is revenue from our installed base. Our progress with the Navy has been, or defense, has been very strong. Our backlog has grown, and importantly, we've moved our position from competitively bidding most opportunities to sole source bidding under a larger percentage of those opportunities. So that all is directionally very favorable. For our installed base, with the pandemic and COVID, we've had difficulty gaining access to our customers' plant sites. However, we've been working on IT tools and data analytics to analyze different applications and different products so we can implement programmatic processes to drive proactively our installed base. That's underway, but we have had a pause on building out our installed base team. However, there is work ongoing on the IT side. We are also looking at acquisitions to build stronger, more predictable revenue. Jeff and Chris have done a really – Chris Johnston – have done a really fine job of bringing some high quality targets into the conversation, and we have active dialogue with those now, and we're advancing those discussions. Another initiative, now this will be in an area of our project work, so it does have variability, a cyclical nature to it. However, we have implemented some strategies to change how we participate in more price sensitive markets, which is primarily in Asia. We've been expanding and modifying our execution path there. I'd say that's gone remarkably well as we jumped into that segment of the sandbox in a different way the last couple of years. 15% of our total orders since late in fiscal 2019 have come from this strategy. We have had to be more measured in how we're evolving our organization and our structure to go after this work as we think about the upcoming income statement tied to the pandemic. However, this strategy has been executed well and has had an impact. You may have recalled, you might recall that we did win two very large projects in India. in the recent past and we're queuing up two or three other projects that we're focused on that we're going to pursue aggressively and hopefully win those over the next three to six quarters. And then ultimately, all of this rolls up into strengthening Graham's financial performance. One of the key levers is operational throughput and expanding our revenue conversion here in Batavia That translates into building out our welding, machining, and production workforce. As Alan said, we did place that on pause, that additional team member build out in the last couple of months due to COVID. However, we have that back opened up. We have 20 positions that we are hoping to fill over the next two years that will allow us to expand our backlog conversion and drive revenue growth. That's a very important parameter. And we have a very good program for accessing the direct labor and bringing them on board, putting them through our wealth school and training labs, and then having them proficient and productive in a short period of time. I did mention earlier another way to improve our financial strength is the naval strategy and the evolution of competitively bid strategies. toward a higher percentage in sole source bidding. That has two benefits. One, it increases the predictability of future orders and asset base loading and lessens the risk we would have around any capital investments to support the revenue growth. And then secondarily, but not always, it can provide a stronger margin profile for that work. Also, and Alan has mentioned this, as we get past the first article fabrications, We now can move into repetitive builds and then optimize our production workflows to drive productivity and shorten cycle times, and that will lead to margin enhancement as well. Obviously, our energy markets and petrochemical markets are in a rough spot, so we will balance our investments to benefit us long-term with the realities of short-term income statement pressure. And ideally, we have this fantastic balance sheet with an incredible amount of cash that we've had for quite some time. And our focus, the focus of our board is to put that capital to use with an investment in new revenue streams. And with that, I'd like to open the call up, Diego, for questions. Would you please open the line?
spk07: Thank you. At this time, we'll be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. That's the star key followed by the number 1 key on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may also press the star key followed by the number 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please. Our first question comes from Theodore O'Neill with the Field Hills. Please go ahead with your question.
spk09: Thanks very much. My first question is about the naval business. On the general dynamics call yesterday, it said that work on the Columbia submarines, which I understand they're working on the first two, will expand significantly. How much of the submarine work is driving your growth in the naval business, and do you think it will also be a long-term driver of growth as they do?
spk01: I'll take this one, Theo, and thanks for the question. The submarine programs, which historically throughout our 80-year history up until the last five years, we weren't in the submarine programs. However, because of our execution on the carrier program, we did get the door opened and we have grown into both the Virginia and Columbia class programs. Our naval growth is driven off of driving into deeply the submarine programs. The call from Electric Boat and the narrative from their conference call was very bullish on the submarine programs and the cash generation from that, and we believe we will be a benefactor of that based on our participation and our strength in those two programs.
spk09: Okay. My next question is about the renewable diesel. Valero Energy said this morning that its board had approved a new 470 million gallon a year renewable diesel plant in Port Arthur, Texas. Is there an opportunity there for Graham, and is that the sort of thing you'd be looking at?
spk01: Absolutely. With Valero in particular, they entered renewable diesel in about 2011 or 2012. And at that first site, we were a participant with our equipment in that first installation, which has been replicated three times at that location. And now they're expanding into Port Arthur with yet another renewable diesel project in partnership with Darling. It's called Diamond Green Diesel. And those projects involve our equipment on both the pretreatment side, the feedstock side, and then on the refining side. Now, to be clear, these are smaller opportunities. They don't compare to a large classic refining opportunity for us. These are in the range of probably $250,000 to $750,000 per item. And there's a couple items in these opportunities. So they are smaller. They move fast. And not only with Valero, but with Marathon, with Phillips 66, with Holiday Frontier, There's a host of renewable green diesel projects that are underway driven off of tax policy and also California's low-carbon fuel standards. And we are a participant, and we're focused on it.
spk09: Great. Thanks very much.
spk01: You're very welcome.
spk07: Our next question comes from John Franzrub with Stability & Company. Please state your question.
spk04: Good morning, guys. Nice to meet you. I want to start with the – the defense business, you pulled in a nice number in the orders bookings this quarter, almost exceeding or certainly seems to be exceeding what your initial expectations were three months ago. And you also alluded to the fact that you expect the book to bill to remain above 1.0. So I guess two questions. Firstly, the orders that you booked in the December quarter, was that something unusual that those orders being pulled forward in any regard? And secondly, when you think about the bulk of the bill into next year, is that largely weighted towards the Virginia class or the Columbia class, or do you expect maybe additional other work that you're not yet involved in?
spk01: I'll take that one as well. The modeling that we had a few quarters back did not consider that the enterprise program would buy another Columbia vessel from us now. However, that did arrive, and we were able to secure that in our quarter that we just recently reported. We were only modeling some Virginia class work and carrier program work. But fortunately, we were able to be a benefactor of a stepped-up cadence for the Columbia program. As we look at the next 12 months, The order slate is principally from the two submarine programs, and some of it is repeat work, and some of it is hopefully breaking into new programs within those two classes of submarine. We don't have those orders yet, but our team is focused on certainly breaking into the new program and also holding our order pattern for those components that we have built several times now.
spk04: Got it, got it. Second question, interestingly, I heard something last week from another couple that suggested that maintenance work in the energy market is being flattened. They're actually seeing some orders being pulled forward into the first quarter that normally would be second calendar quarter and some being pushed back into the third quarter that would normally be second calendar quarter type maintenance work. Are you seeing anything like that? I'm curious if it's something that's happening in the industry or it's standalone for them.
spk01: As an overall remark, what we have observed is MRO spending, maintenance, repair, routine spending that's in the operating budget has moved to the right, has been pushed out as the refiners and also the petrochemical companies focused on in-year cash preservation with the dramatic change in demand. We honestly haven't seen any material change in that decision-making of moving things to the right, pushing those spends out. Our refining customers are saying to us they had to get into 2021 before they could make those types of spends. However, We're only three weeks into 2021, and all I can comment upon is our sales team, our market-facing teams aren't seeing any change in that behavior by those two markets.
spk04: Got it. And regarding the balance sheet and M&As, Can you remind us what you think optimal targets would be for acquisitions, size, and markets? Maybe even, you know, what you think the kind of products they might produce would be best fit for you?
spk02: Sure. John, this is Jeff. First off, and if I missed one of your questions, please remind me. With regard to the markets, we're looking to – improve our predictable business, a predictable based business. So how do we do that? We do that really one of a couple of ways. One is looking at opportunities in the Navy or defense markets, which as we've shown here, certainly this last quarter, the ability to get large orders and then ultimately to have them fabricate over a number of years is a very helpful base load of predictability to our business. And then secondly, perhaps looking at things in the commercial markets, more on the aftermarket or MRO side is another area we would consider. But I would say of the two, the defense of the Navy side is much more interesting to us right now and much more in front of us right now. With regard to size, we've pretty consistently talked about looking at businesses somewhere between $20 and $60 million of revenue, purchase price probably in a similar range, perhaps a little bit higher if they're higher margin or profit-level businesses. And the companies that we've looked at over the last number of quarters or a couple of years have been in that range, but we've also looked outside of that range. We've looked above that range. and we've looked below that range. So we're not limiting ourselves necessarily to that range, but it's kind of a sweet spot for us if we can find somewhere in there. Did I answer all your questions, or did I miss something?
spk04: No, I guess the other thing would be would you kind of stick to tangential kind of products to what you make, like maybe something next to the ejector like the silencer, or would you actually – Think about equipment that is really maybe a step or two beyond your core technology.
spk02: I think we would look at both. Particularly if we're looking at similar customers that we have, the ability to get a larger share of that customer's wallet, even if it's not a tangential product, is something we would consider also.
spk04: Okay. Thank you. I appreciate you taking my questions.
spk07: Thank you. Our next question comes from Brett Carney with Gabelli Funds. Please state your question.
spk05: Hi, guys. Good morning. Thanks for taking my question. Morning, Brett.
spk01: Good morning, Brett.
spk05: Morning. I noticed the press release and then also your slide deck, you have kind of a note on opportunities, potential involvement for Graham in kind of the broader energy transition. I guess we touched on this, or you touched on it a little bit already on the call, just wondering what areas kind of stand out for potential opportunities for Graham? Anything in carbon capture or in the newer fuel sources that folks are talking about or governments are putting money towards?
spk01: A great question. We play in the renewable diesel. I spoke about that a moment ago as it pertains to the refining or the use of a bio-based feedstock for producing diesel. But outside of that, in the energy transition, now we're in the early phases. We're trying to make sure we're in the conversation. We're a supplier to these markets. We are also in the hydrogen fuel cell electric vehicle market. And there we serve that market across three types of customers. We are working with the industrial gas companies that provide the hydrogen, if you will. The hydrogen application for fueling cells is very high pressure. For a vehicle, it's at 10,000 PSI. For mass transportation, it's at about 5,000 PSI. The gas has to be compressed to those high pressures. We work with compressor OEMs for our equipment that supports the compression equipment. Then we also work with integrators that take the components and put them into a fueling system. And there, on the back end of the system, the hydrogen, when it's dispensed into a vehicle, needs to be at about minus 40 degrees C, minus 40 degrees F. We provide heat exchangers that provide that cooling and deliver the hydrogen to the vehicle at the right temperature. Now these are smallish applications. An average selling price for us is $10,000 to $50,000. It's important that we're there. This is a long-term play. These would be highly engineered standard products, which would be different from our ETO-type large project work. Similarly, in the compressed natural gas value chain, which can also be for fuels, can also be for natural gas distribution in remote areas. There we play in a similar manner. Those distribution systems are at about 5,000 PSIG for compressed natural gas. It's a compressor OEM or a system integrator that we're working with. So those are a couple of examples of how we're in the conversation, taking our products into those markets and making sure we are participating in the evolving energy market as it moves from using fossil fuels to other complementary alternative fuels. Renewable diesel, also renewable to chemicals, we've been planning on that for over a decade Those are very intermittent type projects, but we do play there as well. And then, of course, I said renewable diesel or biodiesel, which is different. And we've been in those projects for about a decade as well, along with when ethanol took off, we played there as well. But today, I'd say the big movers are renewable diesel, the hydrogen economy, and the natural gas value chain.
spk05: Perfect. Thank you so much, guys.
spk01: You're welcome.
spk07: And just a reminder to the audience, if you'd like to queue up for a question, please press star 1 on your telephone keypad. To remove yourself from the queue, press star 2. Once again, to ask a question, press star 1 on your telephone keypad. Our next question comes from Tom Spiro with Spiro Capital. Please state your question.
spk08: Tom Spiro, Spiro Capital. Good morning, gentlemen.
spk01: Good morning, Tom. Good morning.
spk08: First, my congratulations on the strong bookings for the quarter year to date. They really validate the diversification strategies that have been implemented over the last few years, and it validates your decision earlier this year to hang in there with the employment and keep the faith. So congratulations. That's most impressive. Just a couple of questions. With respect to our new business in India and China, we have more exposure now to foreign partners. I was wondering whether you have any concerns that the pandemic, which may be brought under control here in the U.S., may prove to be a much greater problem over there and that our foreign partners may have difficulty performing.
spk01: A great question. In the Asian economies, we are seeing the pandemic or COVID situation be more pervasive and a larger problem in certain Southeast Asian countries. I don't want to cite them, but we've seen in Southeast Asia that for about three or four months, projects have just stopped. Now, we're not executing any projects in Southeast Asia with a fabrication partner. We have done it in Northern Asia, and we do it in China and also in India, where thus far, COVID has not created execution projects delays of any magnitude. However, we are watching that. We have localized our quality inspection services, gram personnel. We've hired individuals in China. We've hired individuals in India to surveil and support our local fabrication partners while being complemented when we can by our fabrication experts here in the U.S. So it is a potentially challenging situation, but right now in China, And in India, those are the two areas where we have projects ongoing now, large projects. We haven't had a COVID-led problem.
spk08: That's helpful. Thanks. Jeff, do you have a preliminary CapEx budget for the next fiscal year?
spk02: Tom, at this point, we do not. We do not.
spk08: Okay. Would you expect it to vary dramatically from your historical numbers? Is there anything kind of unusual coming up we need to think about?
spk02: Nothing out of the ordinary. I see.
spk08: Okay. And lastly, on the acquisition subject, stock market's high. You've got the SPACs out there trying to buy everything. Lots of money floating around. I was curious whether the acquisition possibilities that you folks are reviewing, you're seeing pricing strengthen and it's multiples going up and it's becoming more challenging to find opportunities that fall within your price range.
spk02: Tom, given where we're looking, and I spoke earlier on an earlier question where we're focused on the defense market and to a lesser extent on the aftermarket and the commercial markets, both of those are markets, particularly the defense, which have had pretty high multiples to begin with. So we haven't necessarily seen that move to get worse, but that is certainly a headwind for us, something that we have to work through. But the availability of cash is, while it's it's impacting the pricing of the markets. Really, the specific markets that we're focusing on are such good markets that they already were at pretty high multiples. So we'll just work our way through it, and that's part of our process.
spk08: Well, thanks very much, and good luck.
spk02: Thanks, Tom. Thank you, Tom.
spk07: Our next question comes from John Dasher with Pinnacle Capital Management. Please state your question.
spk06: Good morning, everyone. I was just curious, when you talk about the Navy business and you're moving beyond first article cost structure to standardized defense manufacturing processes, could you remind us exactly what you're talking about there?
spk00: Yeah, this is Alan. When we're doing first article builds, There's a lot of testing that needs to be done of the material and specialized jigs and fixtures that need to be developed because our new builds haven't existed and we have to prep our manufacturing process. That effort is fairly involved. And in the remarks, I was trying to indicate that we are past that effort. We have the materials approved. built all of the first-to-gram equipment and fabrication processes, and now it's becoming more rote as we take on subsequent work from the Navy.
spk01: Why don't you also talk about when there's a first-time build in industry shock testing?
spk00: So, yeah, so for what Jim's referring to, For the Columbia class, because it's a brand-new ship for the Navy, it's important that the equipment can withstand attacks from the enemy. So when we build our equipment, we also build a prototype unit, which is actually subjective to death charges, to make sure that the equipment can withstand the shock and survive it and still work properly.
spk06: Okay. So the infrastructure is in place. Have you actually bought raw materials yet for those Navy contracts?
spk00: Yes. For the contracts in our backlog, we have the material, and we've actually moved into production. So not only do we have the material, we are actually actively fabricating those jobs in our backlogs.
spk06: Okay. And you're doing all of that in-house? You're not outsourcing it to anyone else, correct?
spk00: Yes. Yes.
spk06: Okay. And when do you anticipate invoicing the Navy for this product? I would guess there's milestones that have to be met, but what's your best guess as to when you're going to start invoicing the customer?
spk00: We have been invoicing the Navy for some time now. Our work is a mix of milestone-based as well as percent complete. So on the percent complete, as we input labor, we are invoicing our customer each month.
spk06: Okay. Did I miss it on the presentation? What percentage of the revenues were Navy in the December quarter?
spk02: This is Jeff. In the quarter, it was about approximately $4.5 million. And year-to-date, it's a little over $17 million. $17 million. And what do you anticipate it to be for the For the full year, we have communicated that we expect it to be about a quarter of our revenue, which is where it is year-to-date through December. I think we're at about 24-plus percent of our total revenue. We expect it to be somewhere around a quarter of our total revenue, which, given the guidance that Jim spoke to, would be somewhere around $23 to $24 million. Okay.
spk06: And for the next fiscal year, fiscal 2022, How does it ramp from there, do you think?
spk02: We haven't given explicit guidance there other than we've suggested that over the next number of years that that number will be between $20 and $30 million and the opportunity to perhaps grow it beyond that upper limit somewhere in that window, but we've not given explicit guidance on what we expect that to be next year yet.
spk06: Okay. So $20 to $30 million per year? Correct. Correct. Okay, good. And I guess finally, do you have a credit line in place? I know you've got a lot of cash, but sometimes these government contracts can be a little lumpy in terms of money going out but no money coming in. Is there a credit line in place to support the cash?
spk02: Yes, there is. The credit line we have in place right now, we have a $50 million revolver, as well as we have two lines for letters of credit, one of $7 million with JPMorgan Chase, who we have our our $15 million revolver with, and we also have a $15 million letter of credit line with HSBC. And those two letter of credit lines are really helpful for our international business. Jim mentioned about the work we're doing in India and China as well as other international locations. Those letter of credit lines are really important to support that and to protect us going forward. And then I wanted to follow on to Alan's answer or to your question regarding our payments from the Navy. We do, and the Navy is very similar to our commercial business in that we structure our payments and our invoicing and our payments to try to mimic our expected cash outflow so that our need for working capital to support these projects is relatively small. I think if you look back historically at our net working capital, And I'll define networking capital as our networking capital excluding cash. It's typically somewhere between 0% and 10% of sales. I think right now it might be toward the higher end of that range. But our working capital needed to support our business is relatively small because of the way we structure our contracts, and our larger projects are funded by the customers who are doing the work for us. So the Navy, for example, is funding the project as we're doing the work so we don't get too out of sync with regard to cash. There are times, actually, we end up ahead a little bit on some of those projects. but that's usually a short-term thing is we get cash in. We're typically using it fairly quickly for inventory purchases. So we try to manage our cash two ways. One is through the customer milestone payments, and then secondly, when we do need to utilize our cash, we're pretty careful about that so we're not out on cash on projects at any point in time.
spk06: Okay, good. And I guess finally, is the profitability of the Navy business – equal to, greater than, or less than the non-Navy business on an operating income model? Sure.
spk02: It's in a similar range at an operating level. It does have a lot of labor, so we certainly have a lot of cost to travel with that, but it's in a similar range.
spk06: Okay, great. Thanks. That's very helpful.
spk02: Sure. Thank you.
spk07: Thank you. And final reminder, if you'd like to ask a question at this time, please press star 1 on your telephone keypad. We'll pause for a few moments while we pull for questions. There appears to be no additional requests for questions. I'll turn it back to management for closing remarks.
spk01: Thank you. Thank you, Diego, and thank you, everyone, for your attention and your thoughtful questions this morning. We appreciate the engagement and we look forward to updating you in a coming call. Stay safe. Goodbye.
spk07: Thank you. This concludes today's conference. All parties may disconnect. Have a good day.
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