Graham (GHM) Tops Q4 EPS by 23c, Revenues Beat

Graham (NYSE: GHM) reported Q4 EPS of $0.06, $0.23 better than the analyst estimate of ($0.17). Revenue for the quarter came in at $23 million versus the consensus estimate of $22 million.

• Q4 revenue of $23.1 million reflected approximately $7 million in delayed revenue as a result of the COVID-19 global pandemic
• Q4 EPS was $0.06; fiscal year 2020 EPS was $0.19
• High quality backlog of $112 million at end of year; Defense industry comprises 52% of backlog
• Strong balance sheet provides ample liquidity with cash balance of $73 million at March 31, 2020

James R. Lines, Graham’s President and Chief Executive Officer, commented, “The COVID-19 global pandemic had a sudden and severe impact on our operations, our customers and our markets and continues to impact demand for our products. Our actions in response to this unparalleled crisis have been driven by our values. We believe that we must protect the health and welfare of our employees, support our community to reduce the spread of the virus, prudently and safely support our customers as a critical infrastructure and defense industry supplier, and stay committed to our longer term strategy for earnings expansion. Out of caution, we had reduced production to approximately 10% of capacity during the latter half of March and first half of April. As we have been ramping our production operations back up to normal levels, we have instituted strict safety and health protocols. We expect to be at approximately 90% of full capacity in June and believe we will average about 50% of production capacity for the first quarter of fiscal 2021. This event had a sudden and severe impact on our fourth quarter, and first quarter of fiscal 2021 leaves us with an uncertain outlook. However, our strong balance sheet, and market positions in navy/defense and energy and chemical will help us weather this crisis and we expect to emerge in an even stronger position.”

He continued, “Prior to the pandemic, our energy and petrochemical markets had already begun to slow. The onset of the COVID-19 pandemic, the resulting significant decline in economic activity, and the international imbalance of crude oil supply and demand, have had an immediate and oversized impact on the energy industry. As a late cycle business, we believe that our backlog will provide us with some cushion as our markets find direction and our customers evaluate projects. Currently, our customers are preserving cash and reducing capital budgets, projects are being delayed and there is significant uncertainty regarding the near- and mid-term outlook. The combined effect is great hesitation by our customers, which is impacting our project pipeline and orders. We believe we are fortunate to have a strong backlog to deliver near-term results. For the longer term, as global economic recovery and expansion develops following the pandemic, we believe that our financial strength, our reputation and our superior customer service will help position us to be at a competitive advantage in our markets, especially as we work to continue to expand our addressable opportunities to serve the defense industry and further leverage our installed commercial base.”

Fiscal 2021 Outlook

Due to the significant economic impact of the COVID-19 pandemic on the energy and petrochemical/chemical markets and the lack of visibility as to the duration or the ultimate impact of the pandemic, the Company is not providing guidance for fiscal 2021 at this time.

Mr. Lines concluded, “With our manufacturing production impeded in the first quarter of fiscal 2021, we expect that revenue, earnings and cash generation will likewise be challenged. We plan to return to more normal production levels in June and begin working through our backlog, which will help the results from operations for the remaining quarters of fiscal 2021. We expect to convert 70-75% of our $112.4 million March 31, 2020 backlog during the year. However, it is important to note that we have had approximately $3.2 million of orders canceled in the fourth quarter and three orders delayed due to the COVID-19 pandemic, causing revenue of $4.1 million to be delayed beyond fiscal 2021. The customer requests for the delays were both in the fourth quarter as well as thus far in the first quarter of fiscal 2021. As a result, we are cautious on our outlook until we have more clarity on the potential for future demand. Encouragingly, we are nearing a steady state of annual revenue from the defense industry with the products we provide for the U.S. Navy. We expect this to reach a level of $20 million to $25 million per year for several years as we replace backlog with new projects over time. Additionally, given our financial strength, we intend to be opportunistic in regards to acquisition opportunities that may occur due to market consolidation and contraction.”

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