Graham Corp Q4 FY2023 Earnings Call

Greetings, and welcome to the Graham Corporation's Fourth Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Deborah Pawlowski, Investor Relations for Graham Corporation. Thank you. You may begin.

Thank you, Christine, and good morning, everyone. We certainly appreciate your time today and your interest in Graham Corporation. Here with me on the call are Dan Thoren, our President and CEO; and Chris Thome, our Chief Financial Officer. You should have a copy of the fourth quarter fiscal '23 financial results, which we released earlier this morning. And if not, you can access the release on our website at ir.grahamcorp.com. You will also find on our website the slides that will accompany our conversation today. Dan and Chris are going to provide their formal remarks, after which we will open the line for questions. If you would turn to Slide 2 in the deck, I'll review the Safe Harbor statement. You should be aware that we may make some forward-looking statements during the formal discussions, as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release, as well as with other documents filed by the company with the Securities and Exchange Commission. You can find those documents on our website or at sec.gov. During today's call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and the slides. We also use key performance indicators to help gauge the progress and performance of the company. These key performance metrics are orders, backlog, and book-to-bill. They are operational measures and the company's methodology for calculating these numbers does not meet the definition of a non-GAAP measure as that term is defined by the SEC. But a quantitative reconciliation of each of these does not require or provided, but you can find a disclaimer regarding our use of key performance metrics at the back of our deck in the supplemental slides. So with that, please advance to Slide 3, and I'll turn the call over to Dan to begin.

Thank you, Debbie. Good morning, everyone. We made excellent progress with our strategy in fiscal 2023. We stabilized our vacuum and heat transfer technology business in Batavia, expanded our turbomachinery operations in Denver, and further diversified our revenue with more defense, space, and new energy business. We had record revenue of $157 million for the year, a 28% increase over the prior year. This included about $8.9 million of acquired revenue. Importantly, our revenue growth reflected the success we’ve had with diversifying our markets. Defense was 42% of total revenue and our refining and petrochem markets combined were 31% of revenue. Space grew to 13% of revenue for the year and our other market category driven by new energy was 14% on sales. We are excited about the many opportunities we see in new energy. The hydrogen market is developing quickly and we provide both turbomachinery and heat transfer equipment for these applications. Another interesting market is lithium extraction from geothermal brine. We have historically provided surface condensers for geothermal power plants. But the added value of lithium extraction to the process is driving more investment into geothermal projects. We ended the year on a strong note with orders of $50.8 million in the fourth quarter, and a record $202.7 million of orders for the year. Fourth quarter orders included the $23 million follow-on to provide power hardware for the Mark 48 Torpedo. Book-to-bill for the quarter and the year was quite healthy at 1.2x and 1.3x, respectively. We continue to strengthen our operations, improve productivity, and deliver better gross margins; a better mix of business also helped. Gross margin was 16.2% for the year compared to just 7.4% last year due to the impact of cost and labor overruns on our U.S. Navy programs. As we complete the remaining two first articles from orders received several years ago and as we have more revenue from better priced contracts, we expect margins to further expand. We aren't stopping there, though, as there's still much more work to be done to drive operational excellence, which I'll discuss after Chris presents our financials. One other topic I would like to address is related to a large space customer that filed for bankruptcy during the quarter. It was a disappointment to say the least. This had a net impact of about $2.5 million on our results or approximately $0.19 per diluted share. I was very pleased with the outcome for the year as we were able to achieve our adjusted EBITDA guidance provided at the beginning of the year, despite this event, and it exceeded our raised revenue guidance. With that, let me turn it to Chris to go into greater detail on the results.

Thank you, Dan, and good morning, everyone. If you turn to Slide 4, you can see that we had strong organic sales growth for our fourth quarter fiscal 2023 with record sales of $43 million. This was up roughly 8% over the prior year period, as well as the trailing third quarter. Our space market led the way with $6.9 million in revenue, which was up $4.6 million year-over-year. This 200% increase was due to growing demand from several key industry customers, some of which have multiple programs with us in this expanding market. Aftermarket sales to the refining and petrochemical markets increased 45% to $7.1 million, or 17% of total revenue. Although aftermarket was up, refining sales were down $4.2 million. This reflects both lower capital projects in this market, as well as tough comparables due to timing as last year's fourth quarter had the benefit of a major project in India. We continue to be encouraged regarding the opportunities in the refining market, given the continued strength in aftermarket demand and the activity with our customers. While defense sales were flat year-over-year, they were still very strong and represented 44% of our quarterly revenue and $18.9 million was the second highest quarter for fiscal 2023. For the quarter, sales in the U.S. were up 9% and represented 83% of our sales. International sales accounted for 17% of total sales and were 5.5% higher than last year. Gross profit and margin improved measurably over last year given our much improved execution on our U.S. Navy projects related to our vacuum and heat transfer business in Batavia. We also benefited from higher volume and pricing as well as improved mix with strong space and aftermarket sales. This more than offset the $800,000 net impact to gross profit related to reserves for one of our space customers' bankruptcy that Dan discussed. Selling, general and administrative expenses in the fourth quarter of fiscal 2023 were $7.5 million, up $1.4 million over the prior year. The increase was the result of $1.7 million in reserves related to our space customer, net of the associated performance-based compensation. Excluding the impact of this bankruptcy, SG&A improved to 13.7% of revenue, compared with 15.4% in the fourth quarter of fiscal 2022 and reflects our improved fiscal discipline and cost containment measures. If you will turn to Slide 5, you can see we had a net loss in the quarter of $0.05 per diluted share, or $481,000. On a non-GAAP basis, which adjusts for amortization of intangibles, adjusted diluted net income and net income per share were breakeven. The net impact related to our space customer had an approximate $0.19 per share impact on diluted earnings per share in the quarter and was not added back into the computation of our adjusted amount. Adjusted EBITDA was $1.2 million for the quarter, which was 200% higher than last year's fourth quarter of $400,000. I will remind you that last year's fourth quarter was impacted by higher costs associated with the investments we made to ensure we could meet our commitments for our strategic U.S. Navy programs, which is now paying dividends. Turning to Slide 6, I will now touch on our full year results. As Dan mentioned, fiscal 2023 sales grew by 28% to a record $157.1 million with all markets and regions showing growth. We are extremely happy with this result, as it was above the high end of our guidance that was raised last quarter. Sales to the space industry increased 269% or $15.4 million to $21.2 million and represented 13% of total revenue. Additionally, aftermarket sales to the refining and petrochemical market increased 26% to $24.9 million. Sales in the U.S. increased 30% to $127.5 million and were 81% of total sales for fiscal 2023. Given our shift over the last couple of years to become much more of a defense business, our geographic mix of revenue is now more heavily weighted in the U.S. International sales were also up, increasing 18% to $29.6 million. Year-over-year, gross margin improved 880 basis points to 16.2%. This reflects an improved mix of sales related to higher margin projects, such as commercial space and aftermarket and improved execution and pricing on our defense contracts. These increases were partially offset by the $0.8 million net impact related to our space customer. Gross profit in fiscal 2022 included an estimated $10 million impact related to labor and material cost overruns for first article U.S. Navy projects. In fiscal 2023, we completed four first article U.S. Navy projects, which were the source of these losses and remain on schedule to complete our remaining two first article projects by the end of the second quarter of fiscal 2024. SG&A expenses in the full year of fiscal 2023 were $24.2 million, including intangible amortization of $1.1 million, an increase of $2.9 million or 13%. The increase reflects the $1.7 million net impact related to our space customer and $1.4 million incremental SG&A expense from the acquisition, given the two additional months of Barber-Nichols operations in our current year results. Offsetting these increases were improved financial discipline, as well as cost containment measures, such as the reduction of outside sales agents and delayed hiring of non-critical positions, as well as the elimination of $0.6 million in acquisition and integration costs incurred last year. GAAP net income and net income per diluted share were $0.4 million and $0.03, respectively. On a non-GAAP basis, adjusted net income and adjusted diluted net income per share were $2.5 million and $0.24, respectively. Turning to Slide 7, you can see how we are improving our balance sheet through improved profitability and fiscal discipline, all while deleveraging and investing for the future. Cash and cash equivalents on March 31, '23 were $18.3 million, up $1 million compared with the end of the third quarter and up $3.6 million from the end of fiscal 2022. Cash generated from operations in the fourth quarter was $5 million and $13.9 million for the year. I should point out that cash flows for the year reflect the impact of $13 million of customer deposits received for materials related to larger defense contracts. Going forward, we expect our cash flow to be lumpy due to the nature of these large contracts. Capital expenditures for the fourth quarter of fiscal 2023 were $1.4 million, and were $3.7 million for the year, or 2.4% of sales. This elevated level reflects our expansion and productivity improvement initiatives, which will support our organic growth opportunities. This strong cash generation allowed us to reduce our debt by $6.6 million during the year and our leverage ratio is as calculated in accordance with the terms of our credit facility was 2.1x at year-end. At March 31, 2023, the amount available under our revolving credit facility was approximately $10 million, providing us ample liquidity to support our strategic investments. If you will now turn to Slide 8, our view on orders for the quarter and the year. We had orders of $50.8 million in the quarter which were up $27.2 million or 115% and included the previously announced $23 million follow-on order for the MK48 Mod 7 Heavyweight Torpedo and a $5 million order for a vacuum system for geothermal and lithium power production. Aftermarket orders for the refining and petrochemical markets were $11.5 million in the fiscal 2023 fourth quarter, an increase of 37%. The aftermarket business tends to be a leading indicator of future capital investments by customers in these markets. For the year, orders reached a new record of $202.7 million, driven by our defense business that was up $53.5 million to $116.7 million. This represented 58% of total orders for the year. We believe these record orders validate the investments we made, our customers' confidence in our execution and the success we are having in winning new business across our diversified markets. This is not to discount demand growth in our other markets including space and new energy, as well as aftermarket demand in our refining and petrochemical markets, which we are also excited about. Aftermarket orders were up 34% for the year to $40.6 million. If you turn to Slide 9, we show our backlog which, given the heavy weighting now to defense, provides us with strong visibility. Backlog at fiscal year-end was up 18% to $301.7 million compared with the end of fiscal 2022. I should point out that there are no orders in backlog related to the space customer who filed for bankruptcy. Approximately 50% to 55% of orders currently in backlog are expected to convert to sales in fiscal 2024, giving us strong confidence in our ability to deliver on revenue and margin guidance. Approximately 25% to 30% of backlog is expected to convert to sales in fiscal 2025 and primarily relate to the defense industry. Turning to Slide 10, we can review our guidance for fiscal 2024. We believe revenue will be between $165 million and $175 million, which suggests top-line growth over fiscal 2023 of about 8% at the midpoint of that range. This is right in line with our long-term strategy to grow revenue 8% to 10% per year. These expectations, as well as the results for fiscal 2023, allow us to raise our fiscal 2027 revenue goal, which is now expected to exceed $200 million, the target just set a year ago. From an adjusted EBITDA perspective, we expect $10.5 million to $12.5 million for next year, which suggests an adjusted EBITDA margin of about 6% to 7%. I should point out that these adjusted measures exclude approximately $2 million to $3 million related to the Barber-Nichols acquisition earn-out bonus, as well as $0.5 million to $1 million of planned ERP implementation costs for our vacuum system and heat transfer operations in Batavia. We will still be impacted in the year by the first article lower margin projects that we entered into several years ago. As those roll out and we start to work on our better-priced contracts, employing our improved processes, we expect margins to expand more meaningfully in fiscal 2025 and beyond to achieve our low to mid-teen adjusted EBITDA margin goal. With that, I will pass the call back to Dan.

Thank you, Chris. Let's turn to Slide 11. We continue to evolve our strategy as we advance the organization through steady growth and stronger profitability. Our vision is to build an exceptional company that provides mission-critical, high-compliance products to diverse markets. We believe we can succeed with our highly skilled workforce that is fully engaged because of our open culture that challenges each of us to do our best and aligns with our customers' engineering expertise, responsive service, and timely deliveries. Our focus is on serving markets where our technology is critical to the success of our customers' process or application. This is how we have succeeded over time with our vacuum and heat transfer technology as well as our turbomachinery equipment. Think about the critical nature of our vacuum system on a refinery's distillation column. If it doesn't work, the output of the refinery is severely compromised. Similarly, failure of a torpedo propulsion system in an ocean conflict could be catastrophic. Space communication satellites quit working if our thermal management pumps fail. Our engineering expertise in vacuum heat transfer and turbomachinery and our high-compliance processes developed to create and qualify these solutions are key to our technology differentiation. A second pillar of our strategy is operational excellence. We have many initiatives to continually improve the processes we employ in our operations. We have been consistently upgrading information systems in our turbomachinery operation, and will initiate a long-overdue ERP system upgrade for our vacuum system heat transfer operation. We are making more investments in equipment like automated welding that eliminates rework and provides quick payback. Finally, expanding our shared services to gain economic advantage will continue. The third pillar is our people. Our people are our most valuable asset, and we are committed to grow and develop them to maintain a competitive advantage. We have had good success using engagement surveys to identify gaps in engagement. We then follow through with initiatives such as improved instructions, tools, communication, development programs, and other resources to fill the identified gaps. Leadership development is actually quite advanced for a company of our size, and we have expanded skilled trades training through in-house weld schools, partnerships with community and academic resources, and initiating a machinist apprenticeship program. Finally, we will leverage our external stakeholders, including our communities, our suppliers, our lenders, and our shareholders to be a better business. This means strengthened relationships, improved communications, and finding win-win solutions. We are making steady progress against our plan. And we're quite excited about the opportunities in front of us and encouraged with our stakeholders' support of our journey of building better companies. With that, Christine, we can open the call for questions.

Thank you. Our first question comes from Theodore O'Neill with Litchfield Hills Research. Please go ahead with your question.

Thank you, and congratulations on a good quarter.

Thanks, Theo.

You've got some remarkable growth in orders here. And I was wondering if you could give us a little more insight into your success there. Is that new products? Is it taking market share from others? Was this business just there all along you just started asking for it?

I believe it starts with performance. As our businesses effectively meet our customers' needs, they reward us with more orders. Both companies have built strong relationships with many customers, who continue to return due to our performance. This illustrates the significance of the steps we took a year to a year and a half ago to invest in our businesses, even at a cost, to ensure customer satisfaction. Consequently, our customers are coming back to us. We’re also witnessing some expansion in certain areas, but primarily, it's our customers expressing their gratitude for our support and providing us with additional work. To elaborate further, around a year and a half to two years ago, we faced significant supply chain challenges and struggled to obtain necessary equipment. We made significant efforts to assist our customers during this period. While the supply chain has improved somewhat, we still encounter issues in specific areas, particularly with high compliance-related requirements. Although lead times for raw materials and simpler components remain lengthy, we find that requests for special items that involve high compliance and testing requirements encounter difficulties within the supply chain. This emphasizes that delivering high-quality performance and exceptional service, along with thoroughly vetted equipment, is seen as extremely valuable. I truly appreciate our focus on mission-critical high compliance equipment, especially as the market grapples with these challenges. Customers are beginning to recognize how valuable this can be.

You're saying that the high compliance products that you brought to your customers is a differentiator compared to other suppliers?

Absolutely.

Okay. I wanted to ask about Virgin Orbit. I just did some quick lookup online during the call here. It doesn't look like that's coming back. Is that correct?

That is correct. They filed for Chapter 11, and during the process, they did not find a viable path forward. Instead, they transitioned to liquidating their assets, and most of them have been sold off at this point. It seems unlikely they will resume operations. The positive aspect is that some of the other launch market customers showed interest in their assets, leading to bids for their buildings, inventory, and more. The bankruptcy process is still ongoing, but they have managed to sell assets to other space companies.

Okay. Thanks very much.

Our next question comes from the line of Rich Ryan with Oak Ridge Financial. Please proceed with your question.

Thank you. And also, congrats on the good performance and guidance for the current year, Dan and Chris.

Thanks, Rich.

A question on the guidance. In the slide deck, it shows virtually all the revenue you're guiding to is already covered by what's in backlog and expected to be delivered. You have this vulnerability with a space customer that doesn't appear to be included in that. Any other vulnerable areas within your backlog? And maybe the contrary, or the complimentary question there would be, what could happen on the turn side of the business so that somebody could look at this and say, hey, there was upside to what you're currently guided?

Yes, Rich, very good observation on your part. Like other companies, we're still seeing pressures, as Dan just talked about a little bit on the supply chain side as well as the labor side. Although we have seen these conditions improve, they're still not where we were pre-COVID. So, really, as you point out, we have the backlog; it just comes down to execution. So it really just comes to our team continuing to perform, and risks outside our control, such as supply chain and labor.

Okay. Chris, as a follow-on, looking at the year, you've got some delivery on the remaining two first articles during Q1 and Q2, but how should we look at the kind of the top line? How should the revenue line flow as we look at fiscal '24? Any other seasonality, or as you at look at projects, how should we kind of model the revenue growth for '24?

Sure. As you know, Rich, we really don't have a lot of seasonality in our business. Our fourth quarter does, at times, tend to be a little bit higher as our teams are working to hit the goals for the year. So we don't see a lot of seasonality built into our guidance.

Okay. Again on the aftermarket and the refining, petrochem side, your large installed base kind of drives that aftermarket business. But you indicate or you said that that could be a leading indicator down the road. What does new projects in the refining and petrochem space look like either domestically or you've had some interest and expansion in China and India?

Yes. So domestically it is picking up. We are seeing inquiry rates and opportunities domestically continue to grow. So it has been just horribly slow coming back domestically. But we're certainly seeing that coming back. As you noted earlier, we've kind of got our year already booked and Chris indicated that it's all up to us to execute it. So if it doesn't come back as strongly as our pipeline that's indicated, we've got plenty of work domestically for our crew here. What we're seeing internationally is China has opened up after their COVID shutdown, but it's a slow reopening. So we are seeing an increased level of requests to quote on different programs. And then we are quoting on those; how fast it comes back, not entirely clear. But as it comes back, we'll start to see more orders in the second half of the year. That's to build into our fiscal 2025. India, we've got several different bids that are out there that are close to being announced. And so we're hopeful that we can continue our India presence. And then India looks like it kind of flattens out for a year, or maybe two as they go through their election process, and then we fully expect that it kind of comes back on. So it's really interesting to kind of follow all of these different markets; they're all in kind of different places. And so the ability to be flexible and be able to move with the market is something that the diversification that Graham has really been able to build over the last 2 years provides a ton of value. So we're able to kind of move from one market to the other, use our backlog to fill holes and provide a lot more stability. And so we're in a much better place than we have been in prior years. Rich, you followed us for a long time, and you watch the cycles, and so we're in a much better place.

Sure. Thanks for that. One last one on capital allocation. When you look back, Graham had a nominal dividend that was eliminated during the tough couple of years you had. Now that you're back in compliance, does the dividend come back up in the discussion format at the Board level, or how should we look at your capital allocation priorities over the next few years?

Yes. Rich, as Dan and I laid out, last year when we released our long-term strategic plan, our capital allocation starts with organic growth. Right? We feel we have an abundance of capital, organic growth opportunities to take advantage of. From there, if we have excess capital, we'll use it to pay down debt. And then hopefully, within the next few years, we can start looking at M&A again. And then after that, we would look to return that back to shareholders. So we're comfortable with the capital allocation strategy that we have.

Okay, great. Again, great job in the execution, guys. Thanks.

Thank you, Rich.

Thanks, Rich.

Our next question comes from Brett Kearney with Gabelli. Please proceed with your question.

Hi, guys. Good morning, and congrats on the continued momentum.

Hey, thanks, Brett.

Good morning, Brett.

Dan, absolutely agree with your assessment of the landscape in U.S. global manufacturing the ability for differentiation through reliability and performance. I guess, can you talk about the opportunities you're seeing, some of the investments you're making, the ERP system, you noted some digital and automated tools to kind of cement, I guess, that vision for differentiation you see across the platforms.

Yes, let me hit generally. And then I'll give you some specific examples. This continual improvement, continual investment in our business is in our minds extremely important. It's kind of like compounding and investing. When we're investing capital continually and wisely in our business, it becomes incrementally stronger kind of like your bank account does as you continue to put money in there and compound. So we love the notion of continuing to invest in ourselves and building a better company in the process. If we don't, there's this engineering term called entropy that basically means everything starts to come apart. So your processes drift, you don't have as well-trained employees, and ultimately, you have lower performance in investing. Inflation is that entropy. If you're not continuing to invest, the value of your investment starts to become less. So they kind of go hand in hand, which is really kind of interesting. So we are continuing to invest in our businesses. Just last year, we put some significant money into Barber-Nichols to expand their capacity to support the Mark 48 program. And that facility, our GM Matt Malone in Denver has told me that facility is within a week of going live. The Navy is excited about it, and our customer, our direct customer, SAIC, is really excited about it. And essentially that kind of foresight of investing in that is going to serve the Navy well as the geopolitical tensions continue to rise, and we've all read more and more about that. So that was one investment that we've made. Another one is on this automated welding equipment. As we've got more and more manufacturing expertise within Graham to review our processes and products and look at areas to expand, we've identified in these really tough wells that are hard for a person to follow a very complex weld path and be very, very consistent. We think that the automated welding equipment will enable us to have less defects; it'll go faster; ultimately, better quality in these really challenging welds. And so this investment, where it makes the most sense where you can get good payback by investing in equipment like that is extremely important. The ERP upgrade that you had asked about, in any business, especially a manufacturing business, the flow in the business is extremely important. And if there's lots of handoffs between people, there's lots of opportunities for confusion, mistakes, or whatever. And as we can automate this more and more, and be working with the same information throughout the value-add process, the quicker it goes and the less mistakes there are. And so we're really excited about being able to upgrade the ERP system in Batavia. We think that it's going to have a significant improvement on the flow of product through our factory as well as reduce some of the mistakes or process reworks essentially that we have seen. So that whole information realm is getting tougher and tougher as our customers are wanting high compliance equipment. And they want the proof to back it up that it is high compliance. And so there's a ton of information that goes along with our hardware. And making it available and trackable and findable and communicable within a digital platform is really important. And so we continue to think about people, processes, systems, and investments in those things. And then we've got our business unit saying and product; don't forget about the product, because we have some really cool opportunities. And so, to Chris's point, there are a ton of organic growth opportunities in front of us that we believe that we can give the stockholders a really nice return on investment as we allocate that capital appropriately.

Excellent. And actually the follow-up I had was on this new opportunity, or I guess, expanded opportunity you guys are seeing with the geothermal lithium set. Curious what the potential funnel or kind of magnitude of market opportunity you guys are seeing there? And then I guess, broadly with all the developments in new energy and potentially the traditional energy markets coming back, how you're thinking about resources, prioritization, both capacity and personnel across the organization.

Yes, it's a great question. As we demonstrate our capabilities, expectations from us increase. It really comes down to prioritizing the most strategic programs, particularly those that can command higher prices and yield better returns for our shareholders. That’s where our focus lies right now. You mentioned some exciting opportunities like hydrogen and geothermal power, which has been established for some time. However, when paired with lithium extraction, it significantly enhances investment prospects due to the additional yield beyond just the power generated. It's important for us to remain adaptable and collaborate with our customers to develop new equipment tailored for these emerging applications, including hydrogen. Ultimately, our goal as a business is to maintain strong capabilities, collaborate with our customers to create new products, adapt existing ones, and pursue these exciting opportunities. There is a lot of potential, and we must prioritize and select the right opportunities that will benefit us in the long term and provide substantial profits for our shareholders.

Excellent. Thanks so much, Chris and Dan.

Yes, thanks, Brett.

Our next question comes from the line of Bill Baldwin with Baldwin Anthony Securities. Please proceed with your questions.

Thank you very much. I got a couple of areas here, I'd like to focus on, if I could, Dan and Chris. On the aftermarket business, is it primarily almost entirely a domestic business for Graham in the refining and petrochemical area?

Yes. Yes.

And is that heavily weighted towards the refining side? Would that comprise the majority of the aftermarket beyond the petroleum refining?

And petrochemical, yes.

So how would that break out between petrochemicals and petroleum refinery roughly just half and half or …?

It's going to be heavier towards the refinery, Bill. You're exactly right. I don't know that we have that break down between the - yes.

Well, I'm just trying to get a feel for how the business breaks out. And is most of your inquiries as far as aftermarket business going forward, is that primarily weighted to petroleum refineries? Is that where the heavy inquiries are and where you would expect the heavier capital projects eventually unfold would be on the refinery side?

Yes, historically, the majority of our equipment has been on the refinery side. And we would expect that the aftermarket inquiry follows that, because that's the source of the installed base, it's the source.

With your strong order situation in the aftermarket, how are you doing with execution? Dan and Chris, are your deliveries mostly on schedule? Are raw material and labor shortages affecting your ability to manage that business efficiently?

Yes, you hit the nail right on the head, Bill. Our on-time delivery isn't where we'd like it to be because of the labor and the long lead times. However, we're firing on all cylinders with regards to aftermarket. In the current quarter, we had $7.1 million of aftermarket sales, which is a record for us. So the team continues to execute and is just really firing on all cylinders right now. And we're looking forward to what they can do once maybe some of these external forces free up, and we get some of these process improvement and productivity initiatives in place.

So you think compared to your competition, though, would you say that you're definitely competitive, and you're likely not to lose any potential business going forward because of these issues on delivery right now?

Yes. So I think everybody is struggling in some areas with the supply chain. And so some of the forging houses are struggling quite a bit right now.

Right.

We are observing some oddities with certain specialty materials, like baskets for example. Specialty fastener companies are having significant difficulties. These components often require high tolerance, high strength, and high compliance, and many are finding it challenging to source them. It's strange because while raw material pricing has stabilized and lead times have lengthened, when we attempt to purchase components, we occasionally encounter situations where we cannot obtain them for six months. Additionally, inventories have not been built up adequately, leading to ongoing challenges in the supply chain and delivery processes.

But as you know, Bill, none of these challenges are unique to us, it's everyone that's experiencing.

Regarding the variability in your cash flow, it appears that your unbilled revenues were quite significant. As you addressed those revenues, they seemed to offset much of the situation with your customer deposits. This is noteworthy since your deposits were a considerable source of revenue, while unbilled revenues were somewhat of a burden for you.

Yes, absolutely.

So does that kind of balance out over time, serve your cash flow?

Yes, we think we have some upside on the unbilled levels as you astutely pointed out. That's been one of the areas of focus of mine as well as the team's, ever since I started. We think that's going to start to free up over the course of this year, and will definitely be a positive cash generator for us.

Very good.

As far as our cash flow, so given the size of these contracts and these customer deposits and the changes in the unbilled revenue, we do expect our cash flows to be very lumpy, but over time, I think if you take a look at our EBITDA level, that's more reflective of the cash that we're generating. It just is very lumpy in nature. Over time, we'll be improving and increasing.

And lastly, can you wrap any potential numbers around the turn out liability post 2024?

Sure.

Is there a cap on that? I know you announced something on that quite a while back …

That’s okay. Yes, no problem, let me walk you through it. So it's a 3-year program starting in our fiscal '24. So fiscal '24, '25, '26, the threshold level is $2 million and up to a max of $4 million each year. So over the 3-year period, a max of $6 million to $12 million in potential additional payouts in addition to the normal employee bonuses. And this was all negotiated shortly after the acquisition is all publicly released, so we can certainly talk about it.

Right. I remember that. I remember that, yes. I just couldn't locate it. So …

Yes. So, let's say the team is 100% focused on this. And if there is an ability to recapture, we're going to try to go after, and we're going to get it recaptured. But it's just too soon to tell; and we wanted to make sure that we were adequately reserved.

Yes. Hi, Dan, Chris. Great job as everyone has mentioned. I have a question regarding lithium and direct lithium extraction. Are you in discussions with any other companies, either in the U.S. or abroad?

In general, I would say that we have spoken with many different companies that require surface condensers for their power cycles. Yes, we engage with quite a few of those individuals. The Shelton C application is unique and quite exciting. This is the first instance where we are supplying equipment, and I know our customer is eager to replicate this success, as they have mentioned in the press. Therefore, there is a continuous opportunity to provide support in this area. Geothermal power tends to have low profit margins, and it can be challenging to generate revenue in this sector. However, integrating lithium extraction with this process is economically beneficial, and the method is significantly cleaner and more efficient than traditional approaches that involve evaporating water in a lake bed. Overall, it's an exciting area to be involved in for numerous reasons.

You mentioned hydrogen multiple times in the presentation, but you didn't provide much detail. Can you share what types of projects you are pursuing in hydrogen?

Yes. So, hydrogen as you know can be pretty challenging. First of all, it's cold in its liquid form. And then from a material perspective, there's a limited types of material that you can use in hydrogen. And so, it ends up being some pretty specialty equipment that is used in hydrogen operations. So Barber-Nichols is a turbomachinery house, and they have built cryogenic pumps for gosh, over 40 years. And so, Barber-Nichols has been involved in providing cryogenic pumps, liquid argon, hydrogen, helium all types of stuff. And with the major air products players, we have supplied turbomachinery to those major air product types of players. And so, we see opportunities from them, and I can't name anything specific, but we see opportunities with them to provide turbomachinery. And then Graham has some unique heat exchange capability with their Heliflow heat exchanger that can handle some really extreme temperature ranges. And it's very applicable to hydrogen service. And so, again, we have been supplying these heat exchangers to various companies that are involved in the production, transportation, and distribution fueling side of the hydrogen economy, and everybody is kind of working on their best solution to enable the hydrogen economy. As you've seen, there's a lot of chatter in this market. And people are spending some big dollars to invest in it and develop the capacity to support it. And so, we're in there and we're participating still too early to say, what will come out of it. But again, great place to be at this point in time.

Okay, great. Let me just ask a couple of bookkeeping questions. On the K, you mentioned there is still approximately $1 million to $2 million in potential additional exposure related to Virgin Orbit and the space customer. Depending on the outcome of the proceedings and the asset sales, the company does not currently anticipate any further impact in '24 or beyond. So does that mean that the $1 million to $2 million could be recaptured?

Yes, I know, it's a little bit confusing, Gary. So let me walk you through it. So during the quarter, we reserve $3.1 million for inventory and accounts receivable related to Virgin Orbit. That $3 million charge resulted in a $600,000 reduction in performance-based compensation since all our bonus programs are performance-based. So the net impact to the quarter and the year was $2.5 million. As you know, bankruptcy proceedings are complicated, and they take some time to work themselves out. So we still have a little bit of exposure left on our balance sheet, which we feel very comfortable with what we reserved during the quarter. But again, these proceedings and us being able to capture value from what we have left on our balance sheet is uncertain. But we feel very comfortable with where we reserved at the end of the quarter and don't see any more impact for 2024. But never say never, so we wanted to at least put that qualifier out there.

Okay, so there's no recapture. You just don't expect any more reserve?

Yes. So let's say the team is 100% focused on this. And if there is an ability to recapture, we're going to try to go after, and we're going to get it recaptured. But it's just too soon to tell and we wanted to make sure that we were adequately reserved.

Thank you, everyone, for your time. I just want to reiterate the three key themes, we hope you take away from our call. First, we're delivering on our promises. And while we have the several years to achieve our fiscal 2027 goals, we are demonstrating our ability to get there. Second one is we have successfully diversified the business and have expanded our customer base. Even with the event with our one space customer, we were able to absorb that and still deliver for the year. Third is we have a large opportunity set in front of us. And we have the strategy and team to continue to drive growth and improve profitability. I hope you all enjoy the rest of your day. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.