Graham Corporation

Greetings and welcome to Graham Corporation acquisition of Barber Nichols, Inc. and fourth quarter fiscal year 2021 financial results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pulaski, Investor Relations for Graham Corporation. Thank you. You may begin.

Thank you, Doug, and good morning, everyone. We certainly appreciate you joining us today to discuss Graham's fiscal 2021 fourth quarter and full year results, as well as reviewing the acquisition of Barbara Nichols, Inc., that we announced simultaneously with earnings this morning. You should have a copy of both the financial results and the acquisition announcement that were released this morning before the market opened. There are also two sets of slides for the financial results and the acquisition that we will refer to during our conversation this morning. If you do not have the releases 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 Lines, our Chief Executive Officer, Jeff Gleick, our Chief Financial Officer, and Dan Thorin, our newly named President and Chief Operating Officer. Jim will start with an overview of the acquisition and cover the results of the quarter and the year, as well as provide our financial guidance for fiscal 2022. Jeff will then review details of the transaction, and we will have Dan discuss Barbara Nichols. Jim will wrap up, and then we will open the lines for questions. As you are aware, we may make some forward-looking statements during this discussion, as well as during the Q&A session. 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 today. These risks and uncertainties and other factors are provided in the releases and in the slide decks, as well as with other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at 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 with non-GAAP measures in the tables accompanying today's earnings release. With that, it's my pleasure to turn the call over to Jim Lines. Jim?

Thank you, Debbie, for the introductions. Good morning, everyone. We appreciate you joining Graham's year-end earnings call and also to join in our discussion about Barbara Nichols, a $70 million transformative acquisition we closed today. This is truly an exciting day at Graham, one that benefits all stakeholders, Graham shareholders, employees at both Barbara Nichols and Graham, customers, suppliers, Arvada, Colorado, and Batavia, New York communities from which we draw workforce talent and create stable, well-paying employment and provide a place where employees are stimulated, challenged, developed, rewarded, and able to build long-term careers. This call will have a different format due to the significance of the growth platform and transformative aspect of Barbara Nichols' acquisition. Thus, we will go through year-end results and quickly move into discussing the excitement surrounding adding Barbara Nichols to Graham Corporation. Barbara Nichols is referred to as BNI throughout our discussions this morning. I will begin my remarks with slide three. Let me start by stating I am thrilled to have completed this acquisition. It was nearly three years in the process to get this done. initially engaging with Barbara Nichols in late summer of 2018 when Jeff first visited. Jeff immediately identified BNI met most of the critical criteria for what Graham strategically wanted in an acquisition. As we have discussed in the past, our process for identifying acquisition targets is to establish necessary key attributes of a target, such as but not limited to values and culture, IP protected products, end market served, operations model, and revenue range. I must acknowledge and commend Chris Johnston, our Director of Business Development, for his work in getting this deal done. Chris is responsible for developing the messaging for each target, creating the compelling reasons as to why Graham is an ideal strategic acquirer, and outlining the value of a proposed combination. Most often, a target isn't necessarily for sale. which was the case with BNI. Fortunately, Dan Thorin, the president of BNI, was intrigued by Chris's messaging and agreed to have an initial discussion. It took time to earn trust, develop relationships, and establish the value contributions of both organizations to the combination and agree on terms of the transaction. Jeff, Alan Smith, Chris, and I were impressed right away by Dan and the B&I management team that are remaining with us, as well as B&I's culture, which represents one of their most important assets. The employee engagement, level of positivity, passion for the company, and can-do approach to their business all confirmed Dan and the B&I team have created something very special and extremely powerful. The time it took to complete the deal permitted us to observe Dan and team in action, and their ability to make stretch commitments and deliver on those commitments. We first engaged with BNI at a time when they were wrapping up calendar 2018 at $40 million, up from $30 million a year earlier. Over the ensuing two years, it was wonderful to observe the planning and forecasting processes, and importantly, their ability to deliver forecasted results culminating in $56 million in revenue for calendar year 2020. This demonstrated to us that B&I has strong management capabilities and their systems at B&I have the necessary controls and that the business processes are scalable to drive future growth. Barbara Nichols is an outstanding company. We are fortunate to have them become part of Graham Corporation effective today. Jeff will go through the deal rationale in detail. and Dan will provide an overview of Barber-Nichols. However, what I viewed compelling about Barber-Nichols was it fulfilled our goal of diversifying into the defense market, which provides greater stability, multiple-year visibility, and credible long-term asset base loading. The wonderful aspect about B&I products is there is no overlap with Graham's. We serve the defense shipbuilders, specifically the nuclear propulsion program, while BNI serves offensive and defensive systems for the ships. In addition, BNI serves the commercial space market with sophisticated and advanced technologies for rocket engine fuel systems and space life support systems. This is expected to be an expanding long-term growth market due to the Internet of Things, growing communication networks, and the ever-increasing way in which people throughout the world are interconnected. Thus, today we add new market segment revenue within the defense industry, and also bring new markets such as commercial space, advanced power generation, alternative energy, along with capabilities for system integration. Importantly, the acquisition of Barbara Nichols is a catalyst for immediate improvement in revenue and profitability, with top line expanding approximately 50% due to the addition of BNI for the 10 months in fiscal 2022 that we own them, and it provides a terrific platform for follow-on organic and acquisitive growth. I am very pleased and excited to have Barbara Nichols become part of GRAM. Actually, I've been remiss. I've mentioned Dan Thorne a couple times. Dan is on the call, as Deb had mentioned. He and Jeff are in Arvada, Colorado, this morning. Dan was president and CEO of Barbara Nichols until this past May when he moved to chair of the board. Dan joins Graham Corporation as president and chief operating officer and will report directly into me. Dan will be responsible for near and long-term performance of both Barbara Nichols and Graham's historic defense, energy, and petrochemicals businesses. Dan will work with Matt Malone, our vice president general manager for Barbara Nichols. Matt is the current president and CEO at Barbara Nichols. Dan also will work with Alan Smith, our vice president and general manager for Graham. You're all familiar with Alan and the terrific job he has done as our general manager. I'm really excited to get into the detailed discussion about Barbara Nichols and its benefit to long-term shareholder return. However, let's walk through the fourth quarter and year-end results. I will take you through the fourth quarter performance, full year results, and fiscal 22 guidance. Jeff will walk you through the strategic rationale and deal structure. And then Dan grabs the ball to provide an overview of Barbara Nichols. I am now referring to slide four. A key facet of our diversification strategy is to add revenue streams uncorrelated to energy, revenue that is less volatile and provides a long runway for growth, and importantly, offers high levels of multiple year asset base loading. The acquisition of Barbara Nichols fulfills that objective perfectly. Graham's organic defense revenue reached 25% of consolidated sales and was in the mid $20 million range for fiscal 2021. We expect modest growth in fiscal 2022 and then move into the mid $40 million range by fiscal 2025. Complimented by Barbara Nichols' defense revenue, we believe the combination will quickly approach $100 million in defense sales. Our commitment to our installed base for crude oil refining and petrochemical markets will continue to bear fruit. Everything we read, hear, and observe supports continued investment in existing assets for mature markets and new capacity capital investment in emerging economies. Graham's shift into competing in price-sensitive segments of our energy and petrochemical markets, supported by innovation of our operations model, has changed our participation and success in these previously underserved segments. This strategy has been 10% to 15% of sales last year and was at a comparable level in fiscal 2020. The team has done well to navigate the selling cycle to get us in position to win, and also the execution side working with the global supply chain for component fabrication has created cost efficiencies and execution capacity for us. Importantly, Alan and his team achieved margins projected for the orders completed thus far. A key business initiative is to expand the capacity of our production workforce. Today, we need to grow our capacity within our production workforce by 20% in Batavia. That will permit backlog conversion velocity to improve and also expand margins due to operating leverage and reduction in subcontracting. Energy and petrochemical markets feel different today than six months ago. That is encouraging. However, the bid pipeline has a long way to rebuild before returning to pre-2020 levels. We are watching this closely during the next few quarters. Cost measures have not been taken due to the need to have depth across the company's sales, engineering, quality, manufacturing, IT, and other critical departments. It takes a long time to build a proficient knowledge worker at Graham. We continue to evaluate near-term benefit and long-term implications of cost reduction measures. We elected to protect the strength of Graham during this Black Swan event caused by COVID-19. Let's move on to slide five. Fourth quarter sales were $25.7 million. Defense sales were strong at $6.5 million. There also was revenue lift from short-cycle sales driven by the freeze in the U.S. Gulf Coast region. Also, and importantly, 15% to 20% of sales were due to our success penetrating the price-sensitive segment of the refining market. Earnings per share was $0.04, with net income at $400,000. On March 31st, cash was $65 million, of which approximately $40 million was used for the acquisition of Barber Nichols. Backlog on March 31st was $137.6 million, with $104 million for the defense market. In acquiring Barbara Nichols, approximately $100 million of backlog was added effective today. A nearly $240 million multiyear backlog is a valuable asset for Graham. Please move on to slide six. Year over year, revenue increased 11% and gross profit 14%. Profitability and margin were pressured due to decisions we made not to address business costs during the pandemic and also our inability to quickly expand production personnel. Government support during the pandemic has made it difficult to compel potential workers to join the Graham team. This should improve in the coming quarters, but is the headwind now as we want to convert more existing backlog more quickly by having a larger production workforce. We have the infrastructure, but not the human resources. Let's move on to slide 7. Alan Smith and the operations team performed remarkably in achieving full year revenue of $97.5 million. Due to COVID-19, full year throughput capacity was at 85% as an average of what our production workforce could produce if unaffected by lost time due to COVID. This made planning and management of backlog conversion difficult. Alan and his team did fantastic, even though that is not apparent in the results. Here, too, profitability and margins were under pressure due to underabsorption caused by 15% lower throughput and also strategic decisions to hold personnel at pre-COVID levels. On to slide eight. We had strong defense bookings of $69 million for the year. Energy and petrochemicals stayed mired due to demand destruction stemming from the range of implications of COVID-19. We do have a terrific backlog that on March 31st, as I said earlier, was $137.6 million, up $25 million year over year. Importantly, and again, Barbara Nichols adds roughly $100 million into our backlog, bringing the combined total to just under $240 million. $40 million of Barbara Nichols backlog is expected to contribute to fiscal 2022 revenue for the 10 months we own them. 40 to 45% of our organic backlog is expected to convert into revenue during fiscal 2022. Now let's move on to the guidance slide. Full year revenue range is $130 million to $140 million, with $45 to $48 million from Barbara Nichols and the remainder being organic revenue. Adjusted EBITDA is expected to be between $7 million and $9 million. Once we complete purchase accounting treatment of the B&I acquisition, we will be in a position to provide gross margin and SG&A guidance. This is an exciting start to fiscal 2022. Large elements of recent diversification strategies will come together to dramatically improve fiscal 2022 results And more importantly, we shape Graham's future with a path to stronger total shareholder returns. The Barber-Nichols acquisition is transformative for Graham. It is a platform for follow-on organic and M&A investment to propel growth. Graham's defense revenue is in the mid-$20 million range, with growth anticipated to yield more than $40 million of revenue by fiscal 2025. Importantly, we are beyond first article operations, and therefore, margins should improve as well. Just as a reminder, first article operations are first-time fabrications that involved production R&D, production of jigs and fixturing, and defining ideal build flow or order of operations. Once beyond first article work, productivity gains should be achieved. I am pleased by our success in winning work in previously underserved price-focused segments of the energy and petrochemicals markets that represented 15 percent of sales fiscal 19 through 21. It's also worth noting $7 million of new orders were secured during the month of May from the crude oil refinery market. We became involved in these opportunities in early 2019. It is great to see significant order releases from this end market. Both are from the installed base. One is for a U.S. Gulf Coast refiner undertaking a revamp to enable use of lower-cost, lower-quality feedstocks. The other is a Mideast refiner de-bottlenecking the refinery to provide more gasoline and diesel fuels to meet local demand. With those remarks, I want to pass the call over to Jeff and Dan to walk through the acquisition. Jeff?