Graham Corporation (NYSE: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. Graham Corporation has a long history of innovation, dating back to its founding when its founder patented a unique design for a vacuum system used in the sugar refining process.

Business Overview

Over the past few years, Graham Corporation has executed a strategic plan to shift its focus towards the defense industry, which now accounts for 84% of its $399 million backlog. This strategic shift has paid off, with Graham Corporation reporting record revenue of $185.5 million in fiscal 2024, up 18% from the prior year. Net income for the year reached $4.6 million, a significant improvement from $367,000 in fiscal 2023. Operating cash flow was a robust $28.1 million, more than double the prior year, allowing Graham Corporation to pay off its remaining debt and invest in growth initiatives.

Key Performance Drivers

Graham Corporation's strong performance was driven by several key factors. First, Graham Corporation has deepened its relationship with the U.S. Navy, completing and shipping the remaining two first article units for the Columbia-class submarine and Ford-class carrier programs. Importantly, Graham Corporation has leveraged the lessons learned from this process to drive greater production efficiencies and expand margins on subsequent orders.

Graham Corporation's expansion of its operations in Colorado to support the Mark 48 Mod 7 Heavyweight Torpedo Program has also been successful, with higher production volumes translating into operating leverage and improved profitability. On the commercial side, Graham Corporation has gained better insight and leverage, capturing improved pricing power to expand margins.

The acquisition of P3 Technologies in November 2023 has further strengthened Graham Corporation's capabilities, adding complementary turbomachinery solutions and enhancing its engineering and development team. P3 contributed $1.2 million in revenue during the fourth quarter. Graham Corporation plans to leverage P3's patented technologies to deepen its reach into existing space, defense, and new energy markets, while also increasing diversification with technology solutions for the medical industry.

Industry Mix and Sales Distribution

Graham Corporation's diverse industry mix, with 56% of revenue coming from the defense industry, 18% from chemical/petrochemical, 11% from refining, 9% from space, and 6% from other commercial markets, underscores Graham Corporation's strategic approach and ensures resilience and risk mitigation. Domestic sales accounted for 86% of total revenue in the fourth quarter, reflecting the magnitude of Graham Corporation's U.S.-based defense business.

Financials

Gross margin expanded significantly in fiscal 2024, reaching 25.9% in the fourth quarter and 21.9% for the full year, up 930 and 570 basis points, respectively. This improvement was driven by higher volumes, a more favorable sales mix, and better execution and pricing on defense contracts. Graham Corporation also benefited from the margin-accretive contribution of the P3 acquisition.

On the bottom line, Graham Corporation reported net income of $1.3 million in the fourth quarter, compared to a net loss of $481,000 in the prior-year period. For the full year, net income reached $4.6 million, a significant improvement from $367,000 in fiscal 2023. Earnings per share for the year was $0.42, with adjusted EPS of $0.63, a 163% increase over the prior year.

Adjusted EBITDA also saw substantial improvement, doubling to $3 million in the fourth quarter and increasing 56% to $13.3 million for the full year. Adjusted EBITDA margin expanded 180 basis points to 7.2%, putting Graham Corporation solidly on track to achieve its fiscal 2027 goal of low to mid-teen adjusted EBITDA margins.

Outlook

Looking ahead, Graham Corporation provided guidance for fiscal 2025, expecting revenue to be between $200 million and $210 million, implying top-line growth of 11% at the midpoint. Gross margin is expected to expand further to a range of 22% to 23%, while SG&A, including amortization, is anticipated to be between 16.5% and 17.5% of sales. This guidance includes costs associated with the Barbara Nichols supplemental bonus, equity-based compensation, and ERP conversion costs of approximately $6.5 million to $7.5 million.

Graham Corporation expects adjusted EBITDA for fiscal 2025 to be between $16.5 million and $19.5 million, a 35% increase at the midpoint. This implies an adjusted EBITDA margin of 9% at the midpoint, a nearly 200 basis point improvement over the prior year.

Strategic Priorities

Graham Corporation's strategic priorities going forward include engaging with customers to develop full lifecycle product opportunities, driving continuous improvement on the shop floor, and investing in organic and inorganic growth initiatives. Graham Corporation's strong balance sheet, with no debt, provides the flexibility to fund these initiatives and maximize shareholder returns.

Graham Corporation's record $268 million in orders for fiscal 2024, representing a book-to-bill ratio of 1.4x, provides excellent visibility, with approximately 35% to 40% of the $399 million backlog expected to convert to sales in fiscal 2025 and another 25% to 30% in the following 12 months. The majority of the orders that are expected to convert beyond 24 months are for the defense industry, specifically the U.S. Navy, which have a long conversion cycle.

Conclusion

Overall, Graham Corporation has executed its strategic plan exceptionally well, transforming its business mix, improving profitability, and strengthening its balance sheet. Graham Corporation's focus on the defense industry, continuous operational improvements, and strategic investments position it well to continue delivering strong financial performance and shareholder value.