Graham (GHM) Misses Q3 EPS by 29c, Revenues Miss; Lowers FY20 Gross Margin Outlook, Offers FY20 Revenue Guidance

Graham (NYSE: GHM) reported Q3 EPS of $0.00, $0.29 worse than the analyst estimate of $0.29. Revenue for the quarter came in at $25 million versus the consensus estimate of $29.69 million.

• Third quarter revenue of $25 million; third quarter orders of $20 million
• Backlog remains strong at $123 million as of December 31
• Reiterating fiscal 2020 revenue guidance of 20% to 26% growth and revising gross margin to between 21% and 22%

James R. Lines, Graham’s President and Chief Executive Officer, commented, “The third quarter results met our revenue expectations, however, operating profit fell short of expectations due to an unfavorable project mix in this quarter’s backlog conversion and lower than typical short cycle orders. We anticipate that the fourth quarter operating profit will, accordingly, improve as higher margin backlog is converted and short cycle orders resume their typical pattern.

“There is an expected step-up in revenue and profitability for the fourth quarter as we drive toward full year revenue guidance between $100 and $105 million. Importantly, the bid pipeline remains strong and margin quality continues to improve when compared with backlog orders won nine to 15 months back.”

GUIDANCE:

Graham sees FY2020 revenue of $100-105 million, versus the consensus of $103.1 million.

Based on its near-term order outlook and operating performance for the first three quarters, Graham is updating its fiscal 2020 guidance which excludes the divested Energy Steel business, as follows:

• Revenue anticipated to be between $100 million and $105 million. For fiscal 2019, consolidated revenue excluding Energy Steel was $83.5 million.
• Gross margin expectations between 21% and 22%, with the reduction caused by project mix
• SG&A expense expected to be between $17 million and $17.5 million
• Effective tax rate anticipated to be approximately 20%

Mr. Lines noted, “It is important to point out that the above guidance includes fulfillment of a short cycle naval order that is in backlog. We are confident that this order will be completed, however, due to its size, if we are unable to complete it during the quarter, revenue will likely fall below the lower range of guidance.”

He concluded, “Our pipeline continues to be very active as our customers plan their capacity expansion and upgrade projects. Additionally, we believe we are gaining traction with our initiatives to expand our revenue opportunities derived from our installed base, penetrate new geographic markets, and broaden our revenue from the U.S. Navy. Further, we anticipate continued productivity improvements and margin expansion. We expect that the results of these initiatives will continue to differentiate Graham and drive revenue and margin growth in fiscal 2021.”

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