GHM - NYSE

Greetings. Welcome to Graham Corporation's Fiscal Fourth Quarter and Full Year Fiscal 2025 Conference Call. [Operator Instructions] Please note, today's conference is being recorded. At this time, I'll turn the conference over to Tom Cook, Investor Relations for Graham Corporation. Tom, you may now begin your presentation.

Thank you, Rob, and good morning, everyone. Welcome to Graham's Fiscal Fourth Quarter and Full Year 2025 Earnings Call. With me on the call today are Dan Thoren, CEO; Chris Thome, CFO; and Matt Malone, President and COO. This morning, we released our financial results. Our earnings release and accompanying presentation to today's call are available on our website at ir.grahamcorp.com. You should be aware that we may make forward-looking statements during the formal discussion 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 that are filed by the company with the Securities and Exchange Commission. You can find these documents on our website or at sec.gov. During today's call, we will also discuss 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 reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and slides. We also use key performance indicators to help gauge the progress and performance of the company. These key performance metrics are ROIC, orders, backlog and book-to-bill ratio. These are operational measures and a quantitative reconciliation is not required or provided. You can find a disclaimer regarding our use of KPIs at the back of today's presentation. So with that, if you'll please advance to Slide 3, I'll turn it over to Dan to begin. Dan?

Thank you, Tom. Good morning, and welcome, everyone, to our fourth quarter and full year fiscal 2025 earnings call. I'm pleased to report we finished the year with strong momentum as our full year revenue grew approximately 13% to $210 million and adjusted EBITDA increased 69% to $22.4 million or 10.7% as a percentage of sales. These results reflect the continued long-term demand of our product portfolio and solid execution of our business plan. I'd particularly like to highlight our record backlog of $412 million as of March 31, up 7% sequentially. Additionally, our book-to- bill ratio was 1.1, marking the fifth year in a row book-to-bill was over 1.0. This underscores our strong market position and deep expertise in delivering highly engineered mission-critical products. Before I turn it over to Matt, who will outline our stabilize, improve growth strategy, and then to Chris for a detailed review of our financials. I'd like to first highlight our end markets and recent commercial successes, followed by an update on key strategic initiatives that are beginning to deliver results. On the Defense side, we continue to be a key supplier for U.S. Navy programs, including both the Columbia-class and Virginia-class submarine programs and other vital shipbuilding initiatives. This is demonstrated by our recently announced $136.5 million contract award to provide mission-critical equipment for the Virginia-class submarine program. Our Barber-Nichols division has been integral to the Virginia-class submarine program since the 1980s, given our strong performance of high-quality on-time production. Additionally, this latest contract builds upon our successful execution of previous work for these types of multiyear programs. As our relationship with the U.S. Navy deepens, these multiyear programs provide Graham with stable recurring revenue as well as strong visibility into our future revenue for years to come. Additionally, we announced last month that we secured a strategic investment from one of our key defense customers. The investment of $2.2 million will enhance our capabilities in evaluating critical welds in support of the Columbia and Virginia-class submarine programs. As part of the investment, Graham will also contribute $1.4 million for a total project cost of $3.6 million. This builds upon previously announced investments from partners, including a $13.5 million investment to support our capacity expansion initiatives and a $2.1 million grant by BlueForge Alliance to expand our welder training program and equipment. In our Energy and Process side of the business, our diversified product portfolio and innovative solutions are driving continued demand and customer interest. Revenue for the year was up 1% year-over-year, reaching $73 million for fiscal 2025. From a CapEx perspective, in fiscal 2025, we deployed $19 million of capital, demonstrating our commitment to future growth and our product life cycles. Looking ahead for the next few years, we expect capital expenditures to be approximately 7% to 10% of sales as we continue to invest in our businesses in order to support our long-term organic growth goals and to gradually increase our R&D spend to the 1% to 2% of revenue. As a reminder, our maintenance CapEx is approximately $2 million per year. It is important to note in these strategic investments are targeting a return on investment exceeding 20%. These initiatives remain on track and on budget and include state-of-the-art automated welding capabilities, our 30,000 square foot Batavia manufacturing facility, enhanced assembly and testing capabilities in Arvada, expanded X-ray capabilities in Batavia and our cryogenic propellant testing facility in Florida. We expect to see all of these completed in calendar year 2025. These increased capabilities will drive increased throughput and improve quality in future years. Before wrapping up, I'm pleased to report that since announcing our leadership transition in February, the process could not have gone any smoother. Matt and I have been working closely together to ensure a seamless handover. To reiterate what we announced last quarter, Matt will become President and CEO beginning tomorrow, June 10, and I'll be moving to a strategic adviser role focused on corporate development and become Executive Chairman. John Painter, our current Chairman, will become Lead Independent Director. This succession plan reflects our strong ability as a company to develop internal talent and ensures continuity in our strategic vision, highlighted by the internal promotion of Matt and Mike Dixon, who has assumed the role of VP and General Manager of Barber-Nichols. His leadership capabilities and industry knowledge are second to none, which is what made him an easy candidate to nominate for this role. As I mentioned in last quarter's earnings call, Matt has demonstrated exceptional leadership as General Manager of Barber-Nichols since 2021, delivering impressive results, including 9% compound annual revenue growth and achieving double-digit revenue growth in each of the last 2 years. I am more than confident that Matt has what it takes, along with our strong bench of leaders who will support him and share his vision in taking Graham to the next level. These past 4 years have been the most challenging, yet most intellectually stimulating period in my career. We've successfully transformed Graham into a well-diversified business with great visibility and a strategic plan that implements continual improvement with investments to position us for sustainable growth and improving profitability. I'm particularly proud of our team's dedication and resilience in turning this business around. I'm highly confident in our strategic direction and our ability to capitalize on the opportunities ahead under Matt's leadership. Our investments in automation, facility expansion and new technologies are creating a strong foundation for future growth. The combination of our robust backlog, strategic market position and operational improvements position us well to achieve our long-term goals of 8% to 10% organic revenue growth and low to mid-teens adjusted EBITDA margins by fiscal 2027. Finally, I want to take a moment to express my deepest gratitude. To our employees, your dedication, resilience and commitment to excellence have been instrumental in transforming our company. Your hard work has helped us navigate challenges and emerge stronger than ever. And to our customers, thank you for your continued trust and partnership. It has been an honor to lead this remarkable organization. I look forward to continuing to contribute to Graham's success in my new role as Executive Chairman. Now I will turn it over to Matt. Matt?

Thank you, Dan, and good morning, everyone. I will begin my remarks on Slide 5. First, I want to acknowledge Dan's tremendous leadership in stabilizing and transforming Graham Corporation, particularly with resetting the corporate strategy and driving consistent results. Under his direction, we've established a strong foundation for sustainable growth moving forward. At the end of fiscal year 2022, we introduced a 5-year strategic vision to provide investors insight into where we are headed. Since then, we've executed on the first phase, stabilize, which we focused on rebuilding the foundation of the business across people, processes, structure and core operating fundamentals, all under the umbrella of continuous improvement. This foundational work is now complete, and we're leveraging that momentum as we evolve into the next phases of improve and growth, which all go hand in hand. I'll walk through these in more detail. Let's start on Slide 6 with where we've been. The stabilized phase initiated under the new leadership team, we focused on resetting our strategy and positioning the business for sustainable success. We addressed critical areas, including process rigor, customer engagement, employee alignment and the completion of low-margin legacy jobs. And since rolling out our strategic plan in the mid-2022, we've consistently delivered results in line with expectations. A few highlights. Revenue more than doubled from $97.5 million to over $210 million, while we reshaped our portfolio from 75% commercial and 25% defense to a more balanced 40% commercial and 60% defense mix. We executed our dozen organic capital projects, each exceeding our 20% ROIC hurdle, including the Mark 48 production ramp-up and the Arvada machine shop expansion. Backlog tripled from $138 million to $412 million, enhancing visibility and supporting disciplined capital deployment. Adjusted EBITDA declined from 6.1% to a low of minus 3.4% during fiscal year 2022 during the company's reset. We have since improved steadily to over 10.7% today with a clear path toward low to mid-teens by fiscal year '27, less than 1 year away. Turning to Slide 7. With the stabilized phase behind us, we've now moved into the improved phase with a focus on completing high ROIC CapEx implementations to realize returns. In fiscal 2026, we expect to complete a high -- a number of high ROIC projects with benefits beginning to flow in fiscal 2027 and beyond. But even now, we are laying the groundwork for the growth phase. We see strong tailwinds across all 3 of our core markets, including Defense, Energy and Process and Space, and we are aligning both organic and inorganic investments to capture that opportunity. In Defense, rising demand for naval platforms is driving significant investment. We're responding with a new 30,000 square foot Navy-focused facility in Batavia, New York, which features automated welding, optimized product flow and advanced machining to accelerate throughput. This $17.5 million initiative is being supported by a $13.5 million customer grant. Additional investments include a renovated Navy overhaul center, a new X-ray facility and enhanced workforce development programs. In the Energy and Process markets, we're advancing innovations like our next-gen nozzle for vacuum distillation towers. -- which can reduce steam consumption by up to 10% or increase throughput, an opportunity we believe could generate $50-plus million of revenue over the next 5 to 10 years. We're also building a state-of-the-art cryogenic test capabilities in Arvada and Jupiter, Florida to serve the internal needs of our customers lacking testing capacity. Demand thus far has been very strong, and our team is busy fielding customer inquiries. Many of these investments are cross-functional and scalable from automated welding and expanded R&D to workforce training and will position us well for future growth. In parallel, we're enhancing our internal operations through initiatives such as our new ERP system in Batavia and a recently secured $50 million credit facility to support future growth, both organic and inorganic. Many of these initiatives will come online at the end of calendar 2025 with benefits to follow in fiscal year 2027 after a short ramp-up phase. Now as we introduce the growth phase, we're focused on key -- 4 key growth drivers: product life cycle expansion, commercialization, global reach and digital transformation. We've broken the product life cycle into 3 stages: value identification, value creation and value extraction. Historically, Graham has excelled at value creation, delivering highly engineered custom solutions. Going forward, we aim to multiply our impact by extending our reach into the value identification and extraction. As Dan transitions to Executive Chair, he will lead our efforts in proactively identifying emerging market needs and aligning them with our technology road map. This will broaden our focus beyond engineering execution to early-stage value identification. We're also working to commercialize our deep product library of proprietary technologies, shifting from one-off solutions to scalable offerings that can serve multiple markets and customers. Internationally, we're expanding the global footprint to better support customers in cost-sensitive regions and unlock additional aftermarket opportunities across our greater than $1 billion global installed base. Digitally, we're evolving our systems to be smarter and more proactive, starting with the aftermarket using tools like AI to enhance efficiency, responsiveness and repeatability. And finally, we continue to evaluate M&A opportunities that align with our core markets and accelerate our product life cycle strategy from value creation to value extraction. To wrap up, our strategy is clear. The foundation is in place and the momentum is building. The transformation we set in motion in fiscal year 2022 has taken hold, and we're now firmly on the path towards our fiscal year 2027 targets and the long-term value creation. With that, I will turn it over to Chris to cover our results in more detail. Chris?

Thanks, Matt, and good morning, everyone. I will begin my review of results on Slide 9. But first, I would like to point out that we have updated our end market disclosures to better align with how we evaluate our business and product portfolio. As part of this change, revenue previously classified as refining, chemical, petrochemical and other, which included new energy product sales are now consolidated into one market, which has been renamed Energy and Process. The defense and space end market classifications remain unchanged. Prior period amounts have been updated to reflect this change. With that, let's begin. We had strong growth for our fourth quarter of fiscal 2025 with sales of $59.3 million. This was up 21% over the prior year and included growth across all markets. Sales to the defense market grew by $7.7 million or 28% from the prior year period, driven by growth in existing programs, better execution, improved pricing and the timing of key project milestones. Energy and Process sales contributed $1.8 million to growth, driven by increased sales of capital equipment to the Middle East and Asia and higher aftermarket sales. Aftermarket sales to the Energy and Process and Defense markets of $12.1 million remained strong and were 3% higher than the prior year. Looking at the full year, you can clearly see the effectiveness of our strategic initiatives. We achieved record sales of $209.9 million in fiscal 2025, which was up $24.4 million or 13% over fiscal 2024. This growth has primarily been organic and has been driven by strong defense sales, which was up 23%. Having a full year of P3 results contributed $2.8 million to this increase, which was primarily to the Space and Defense markets. Turning to Slide 10. Gross margin expanded 110 basis points to 27% in the quarter and 330 basis points to 25.2% for the year. Both periods reflected leverage on higher volume, better execution and improved pricing. Additionally, fiscal 2025 gross profit benefited $1.3 million or 62 basis points in margin from the BlueForge Alliance welder training grant received earlier this year to reimburse us for the cost of our defense welder training program in Batavia. We currently do not expect to receive an additional training grant in fiscal 2026. Turning to Slide 11. You can see how our strong performance is translating to the bottom line. Fourth quarter net income was $4.4 million compared to $1.3 million in the prior year. This equated to $0.40 per share on a GAAP basis and $0.43 per share on an adjusted basis for the quarter. Full year net income significantly improved as well to $12.2 million from $4.6 million in the prior year. Earnings per share on a GAAP basis for fiscal 2025 was $1.11 per share and adjusted EPS was $1.24 per share, a 97% increase over the prior year. We saw strong fourth quarter and full year 2025 adjusted EBITDA performance as well. For the quarter, adjusted EBITDA was $7.7 million, a 159% increase over the prior year. As a percentage of sales, adjusted EBITDA margin for the quarter increased 690 basis points to 12.9%. For the full year, fiscal 2025 adjusted EBITDA increased 69% to $22.4 million compared to $13.3 million in fiscal 2024. Adjusted EBITDA margin increased 350 basis points to 10.7% for fiscal 2025. As a reminder, fiscal 2025 adjusted results include the impact of the supplemental earn-out bonus from the acquisition of Barber- Nichols, which will go away at the end of fiscal 2026. This supplemental bonus and applicable taxes amounted to $4.3 million in fiscal 2025 or a 203 basis point decrement to our adjusted EBITDA margin. Given our progress to date and expectations for the future, we are confident in our ability to meet our fiscal 2027 goal of low to mid-teen adjusted EBITDA margins. Moving to Slide 12. You can see that we had a very strong orders for the quarter, which, as you know, can be very lumpy given the nature of our business and being a defense contractor. Orders for the fourth quarter of fiscal 2025 were $86.9 million and included $50 million of a $136.5 million total contract value to procure long lead materials for follow-on contracts to support the U.S. Navy's Virginia-class submarine program. The remaining $86.5 million of this contract was recorded in the first quarter of fiscal 2026 when the PO was definitized and will provide a stable source of recurring revenue through the year 2034. Aftermarket orders for the energy and process and defense markets remained strong as well and totaled $11.8 million for the fourth quarter of fiscal 2025, an increase of 50% over the prior year. Finally, orders for the quarter also included $2.2 million from one of our larger defense customers for the expansion of our X-ray capabilities in Batavia to support the U.S. Navy's Columbia and Virginia-class submarine programs. For fiscal 2025, orders decreased to $231 million compared to $268 million in fiscal 2024, primarily due to follow-on orders for critical U.S. Navy programs in fiscal 2024 and the lumpiness of defense market orders. Aftermarket orders in fiscal 2025 for the energy and process and defense markets increased 8% to $46.6 million compared with fiscal 2024. Despite the lumpiness during the year, orders resulted in a book-to-bill ratio of 1.1x for fiscal 2025, meeting our annual goal. This drove our backlog to reach a record $412 million with approximately 83% of it to the defense industry. We expect approximately 45% of this backlog to convert to revenue over the next 12 months, providing great visibility into fiscal 2026. Turning to Slide 13. You can see a summary of our balance sheet and liquidity position. For fiscal 2025, cash provided by operating activities totaled $24.3 million and was driven primarily by our strong cash earnings. Cash and cash equivalents at the end of the year were $21.6 million, up $4.6 million over the prior year as a significant portion of our cash flow from operations was reinvested back into our business. Capital expenditures for fiscal 2025 were $19 million and focused on capacity expansion, increasing capabilities and productivity improvements. Importantly, all major capital projects are on time and on budget and all have a greater than 20% ROIC. As Matt indicated, many of these initiatives will come online by the end of calendar 2025 with benefits to follow in fiscal 2027 after a short ramp-up phase. For the next several years, we expect to continue to pursue both organic and inorganic growth opportunities, which will be funded by our strong cash generation and revolving credit facility. This includes CapEx spend, which will be between 7% to 10% of sales and gradually increasing our R&D spend to 1% to 2% of sales over the next few years. These investments are necessary in order to support our organic growth goals, maintain our technological competitive advantage and disrupt the markets we serve, but only if these opportunities have the proper return on investment. Additionally, we expect to offset a portion of this increased R&D spend through process improvement and operational efficiencies. Moving to guidance. Slide 14 details our outlook for fiscal 2026, which reflects continued momentum and the initial impacts of the 20% plus ROIC strategic investments. I should point out that the outlook we are providing also reflects the expected impact of tariffs on our fiscal 2026 results, which we estimate to be approximately $2 million to $5 million. It goes without saying that this is subject to change based on the fluidity of global trade policy. We expect revenue in the range of $225 million to $235 million, a 10% increase over fiscal 2025 at the midpoint of that range and is supported by our strong backlog and continued momentum across our key markets. We expect to maintain our strong gross profit margins between 24.5% and 25.5% for the full year, reflecting continuous improvement as well as the expected impact of tariffs and no longer receiving a benefit from the welder training grant mentioned earlier. SG&A expenses are projected to be between 17.5% and 18.5% of sales as we continue to invest in our R&D and operational capabilities, including the final cost of our ERP implementation in Batavia as well as the continuing impact of the Barber-Nichols earnout bonus, which ends at the end of fiscal 2026. Based on these factors, we expect adjusted EBITDA to be between $22 million and $28 million. for fiscal 2026, a 12% increase over fiscal 2025 at the midpoint of that range and reflecting our continued focus on operational excellence and margin expansion. These projections keep us firmly on track toward our fiscal 2027 strategic goals of 8% to 10% organic revenue growth and low to mid-teens adjusted EBITDA margins. With that, I'll now turn the call back to Dan.

Thanks, Chris. On Slide 15, we would like to remind everyone of our strategic and operational priorities that will drive our long-term success. Our expanded R&D investments and capital programs are powering key growth initiatives. with a target return on invested capital exceeding 20% for all of our major investments. These opportunities, coupled with our strong balance sheet, provides us with the flexibility to pursue growth, both organically and inorganically as we remain opportunistic for any potential strategic acquisitions. We are proud of what we have accomplished to date, but we still have a lot of work ahead of us to achieve our fiscal 2027 financial goals of 8% to 10% organic revenue growth per year and low to mid-teen adjusted EBITDA margins. The long-term strategic plan we have in place, coupled with our culture of continuous improvement and our newly expanded executive team led by Matt gives me great confidence that we will hit those marks. With that, we can now open the call for questions.

[Operator Instructions] And our first question is from the line of Russell Stanley with Beacon Securities.

Good morning and congrats on an excellent quarter. Maybe my first question just around the guidance and the gross margin outlook, in particular, relative to what you produced in fiscal '25. Understanding that you've got the tariffs in there and the absence of a grant. I'm wondering if there are any other factors you can call out behind the gross margin outlook such as revenue mix or labor availability that's impacting that or if it's really just the first 2 items.

Thanks, Russ. No, it really is just those first 2 items, which we are working to offset with process improvement initiatives that we have in place that we talked about on the call today. But it really is just those 2 factors that are causing maybe a little bit lower-than- expected margin lift.

That's great. Maybe just coming back to that investment you announced in the radiographic testing equipment. Can you elaborate, I guess, on how that helps the business? I imagine that allows you to bring something in-house and the extent perhaps to which that equipment can be used for other verticals.

Yes, Russ, this is Matt. The X-ray equipment has been -- this will be a huge lift for the business. Today, these welds are quite complex on the Navy side specifically. And we either have to -- we have to go through shots that could take up to a week of time. This new piece of equipment has the ability to penetrate into the entire structure within 1, 2 shots that can greatly simplify the process and then really hone in on ensuring that rework is very exact when it's needed. And so between the automated welding, really looking to create stability and repeatability with the in process, coupled with a very -- an efficient process to evaluate the welds, we see great implications from it. What we're starting to also see is the benefit of that same technology across the energy and process side. And so I think you'll continue to hear the theme moving forward of what we're experiencing in one core market can be applied to others and leveraged.

Okay. Got it. Maybe one last question for me, if I can, just around acquisitions. Wondering what you're seeing with respect to target quality and valuation expectations at this point and how you're seeing that opportunity now?

Yes. So the M&A pipeline is, I would say, robust, and Dan and I have continued to interact with many great business leaders around. What we're seeing is this. We're seeing a lot of opportunity from the aging single or small ownership group, mostly private. And we're seeing valuations that I would say are opportunistic for us because exit plans due to capital availability and others is complicated. What we're really seeing at the highest level is we're seeing opportunities that look quite nice because they integrate into our strategy. So they're strategic acquisitions that others wouldn't be able to get the lift from. And so we're sort of in a -- we're in an island of M&A that large businesses wouldn't have transformation from, but they can impact our smaller corporation in great magnitude.

That's great color. Thanks all. I'll hop back in the queue and congrats again.

The next questions come from the line of Dick Ryan with Oak Ridge Financial.

Congratulations guys on continued strong performance. So obviously, with the commentary we've heard from the shipbuilders for the past, whatever, 6 months to a year, the demand is there to get the ships delivered to the Navy. Chris, when you look at the $136 million that's come in, is anything changing within those orders from what you've seen in the past, either from a margin perspective or cost plus versus fixed? Anything changing in the contracts that are being awarded from the profitability side?

And Dick, this is Matt. Maybe I'll take that one. So the answer is no, there's not much changing with one important update. So we now have clauses that we've worked to include in the contract that protect the business from commodity-based pricing volatility. And so we've been negotiating in to protect us, and it's been really important for us moving forward. So we are on firm fixed price as was disclosed in the announcement. But we have some protection clauses for things that are sort of outside of our business control. And on a program, as you can imagine, that lasts 5-plus years, those protections are really critical. In addition, the one other color I'd add is we've been able to factor in the ability to order the majority of the high-risk material early on. So that really allows quote validities to still be active and allows us to press on and get material in-house to take out some of that volatility.

Great. And on the expansion of your capacity, you've made investments, the BlueForge Alliance grant and other customer investments. Where are you in your welder fleet? I mean, we're hopefully not going to go back to a situation of fiscal '21, '22. But how is your employment on the welder side held up? And what do you see going forward as far as those needs might be?

No, I was just going to say our welder training program has been a tremendous success and has been really well received, both within the community and within Graham. I can report that our welders at our Batavia facility are up 10% year-over-year. So the supply of welders has not been an issue for us, and that's enabling us to grow our revenue on the defense side. Matt, anything you wanted to add there?

No.

Okay. Great. Thank you.

Our next questions are from the line of Joe Gomes with NOBLE Capital Markets.

Let me add my congrats to the nice quarter and year. So on the cryogenic facility, you mentioned it should be up and running this year. I was just wondering, you talked about you're out there talking to people for use of the facility. How is the book filling up, so to speak? What kind of utilization rate do you think the facility is going to have once you are up and running?

Yes. So Joe, great question. The first reality is we're on a really aggressive time line. When you look at facilities of this magnitude, they can be years. And we've got Phil Pelfrey, who is the founder and owner at P3 running it because he set these up in the past. And we're essentially sticking to plan. What that means is a lot of the energy has gone into getting the building up, going through the permitting. So today, I can confidently say that we're progressing towards the next few months having it online. The booking side, we're now just starting to transition our energy to it. And the reason being is we had to make sure that we had a facility that was ready to operate. And what I'll say is we don't have any firm bookings today, but we have enough inquiries to make us confident that it will fill up nicely. And there's 2 main differentiators just for your knowledge. So the first is we're augmenting a great need out there. Most of this testing is happening at places like NASA and others at this large scale. The second is we actually have power on the facility. And so when you talk 3-phase high-power capability with all these -- this new shift towards electrification is requiring power at test facilities, which are conventionally located in deserts and other areas where power is not plentiful. And so we're seeing as a result of that pretty heavy demand in the pipeline.

Okay. And just you mentioned the contribution from P3 for the year. How is that -- is P3 has it met your guys' objectives from when you first acquired it? Were you still seeing growth potential there? Maybe just a little color on that acquisition.

Yes. So the acquisition has gone quite well. They are, at this point, fully integrated with the Barber-Nichols team in terms of ERP system, quality manuals and rigor around quality. There's always an evolution as an acquisition unfolds. And what we're seeing is actually potential for greater benefit than we had originally forecasted. And the 2 areas that we're seeing that, the first is the ability to bring advanced technology to our existing energy and process business, which we didn't expect. And so we're seeing them use advanced analytical capability to accelerate the R&D process at the parent Graham business. The second is they've become, in some ways, the fast lane for opportunities that may not have been good fits for Barber-Nichols. And so projects or applications that require a 1 to 6-month turnaround time for what I'll call a novel design, they have a very small capable team that can move extremely rapidly and deploy. And so we've actually, just in the fourth quarter, finished a few of those jobs that had those characteristics that, frankly, we may have had to pass on in the past. So I'd say integration going well, pretty much done at this point and continued path forward looking quite favorable with the biggest focus being on designs that actually impact the larger business units in Graham Corporation.

Great. And then one last one for me, if I may. Maybe just give us an update on the progress of the next-gen nozzle and the potential clients and customers out there.

Yes. So next-gen nozzle, it's a completed design, but we're never done. This theme of continuous improvement. So on the next-gen nozzle, it's specifically today designed for a subset of large-scale steam injectors. We have made contact with all of the installed base that has those -- has the nozzles installed today, which it can upgrade. And now what happens, Joe, is you have to get to the point where they have an upcoming turnaround, which is when they take the facility down for updates and maintenance. So we're essentially waiting for that process to play out, which could be over the next, as mentioned, sort of 5-plus years. But the sort of conversion or hit rate is going quite well on those inquiries because the ROI for the end users is an immediate payback -- or a very short-term payback, I should say. And it's becoming what I would call a playbook for the future. New technologies. This is one ejector style of nozzle, and we have many more that we think we can apply the same capability to. So excited about what this can sort of become.

Great. Thanks for that. I'll get back in queue.

Our next questions are from the line of Christopher Gordon with Oppenheimer.

Thanks. Good morning. So healthy backlog, you talked about 45% conversion next 12 months, suggests about 2% of the outlook would be book and ship variety. And just looking for a little better understanding of that. It doesn't strike one as a high bar, but what's your normal strengths in pulling book ship business within current year forecast?

Yes. Thanks, Chris. So most of our business, as you know, are long lead projects, right? So from book to ship can be anywhere from 6 months to over a year. So really, at the start of the year, we have to have a large portion of the orders for the next fiscal year in backlog, which we do, as you pointed out. The low run rate business that we have is really our aftermarket business, which is about $40 million. So that's really -- those typically book and ship within 1 to 3 months. So that's really what we're looking to kind of fill that gap. And right now, as you saw from the numbers today, orders still continue to remain strong, but we continue to monitor the situation based upon the uncertainty that's in the market today.

Okay. Great. And you mentioned 5 years running positive book-to-bill. You do have some very long cycle characteristics. Does that lend itself to an ability to comment if you expect to sustain positive book-to-bill this year? And in either scenario, maybe you could provide some context.

Yes. So as stated in the commentary, every year, our goal is to grow our backlog. So we always set in our long-term goals of a book- to-bill ratio of 1.1 for the year for our goals for the year. And as you mentioned, we have been successful in seeing that for the last 5 years. But also, as you know, our orders tend to be very lumpy given the nature of our business. One thing that will give us a lift for fiscal year '26, as we mentioned on the call, is the $86.5 million of the $136.5 million order for the -- to support the Virginia-class submarine. So that gives us a great start to the year.

Okay. And last one for me. You mentioned improved pricing models as part of the gross margin expansion that you've delivered. And just curious if you'd call your pricing models more or less mature right now or still in the process of building the analytics for competitive value capture?

So I'll answer that one in 2 ways. The first is we've made great progress on the pricing models for legacy product. I think where the biggest opportunity still lies as we talk through this full product life cycle capability as we add testing facilities and capability of the portfolio plus disruptive solutions through R&D, we start to enter a regime or a pricing point that no one else potentially could offer that value. And so really, the remaining stone to turn over is in bringing additional value that the customers are willing to pay for.

Our next question is from the line of Tommy Bancroft with Gabelli Funds.

Congratulations. Maybe I could just take a minute to just sort of update us on what the Navy is viewing, obviously, after recent news of the increase in shipbuilding, the Navy's nuclear strategy, I know it's critical to them. There's a lot going on. I mean are you guys able to -- are going to be able to keep up with this huge amount of demand? I know you put a lot of investment in, but it just seems like it's an outrageous number. Just maybe you could just give us your view on that and just your thoughts on sort of keeping up with that growth.

Yes, Tony, 2 things I'll share. The first is, yes, we're seeing continued opportunity, as mentioned, not only in our core swim lanes, which is the stuff we've conventionally provided, but also where others are falling down. We've made some key investments that have really driven -- that will -- that have and will continue to drive efficiency in the process. And what I mean by that is we have automated welders that are being deployed throughout the factory in combination with our extremely skilled welder workforce that we have as just one example. And so we're actually -- we're keeping up today, and we're adding capability to further even expand and absorb more. The second thing I'd mention is we're building this new facility in Batavia, 30,000 square feet, and we have basically put in the infrastructure to put 2 additional facilities next to it should we need to in the future. And what I mean by that is the electricity, the communal meeting areas and stuff are all built for additional expansion. So the turnaround time between need and upstanding of new additional capacity even in addition to what we have is there. And then lastly, when you look at the Barber-Nichols side, we've proactively acquired opportunistically land nearby, as mentioned. It's right next to our current facilities, and we're developing that land in this calendar year to be ready. So we're sort of, to your point, Tony, staying one step ahead and ensuring that we're shovel-ready across all of the different facilities.

The next question is from the line of Gary Schwab with Valley Forge Capital Management.

Great quarter. A question about welders. I know you said that the new welding school, you're up 10% again this year. Is that going to commercial? Or is it going to the Navy side? And what will your new needs be for the headcount growth with these 3 -- the Batavia expansion, the radiographics, the P3 test lab. Are there going to -- how many new roles will be required to support all these capabilities and training and certifications?

Yes. So I'll take that one because it's a pretty expansive question, but I'll start with the welder program specifically. in Batavia specifically. So when you look at Batavia, the majority of that welding talent is going to a mix of defense and energy and process. What we're seeing, Gary, is we're actually working on cross utilizing a lot of those resources. And so we're able to maximize the resource allocation based on the needs in the business. It happens so much right now. It happens to be right now that a lot of that demand is in the Navy side to sort of catch up and then exceed, but we're seeing those resources in times of need deploy to the energy and process side. At P3 specifically, this new test facility coming online, we're being efficient with this. It's not a huge lift in terms of additional personnel. All of the personnel there today knows how to execute and maintain and do the work that's there in that new facility. So it's bringing on someone to oversee the facility as well as an executor, but it's not an extensive list of personnel. So I would just say it's a continued methodical approach kind of that it's in parallel with the percentages that align with our revenue growth. And what I'd lastly add is the nice thing is the majority of it is direct labor. So it really does directly translate to value.

Right. So as you grow these facilities, it seems like you're going to need to grow your base labor greater than 10%. You're adding 3 new facilities basically. Have you had any discussions with your primes to help secure labor if needed because there are certain certifications that are needed for some of these jobs?

Yes. So Gary, I'd flip the script on that question and say, we are -- we have an engaged workforce, and it's a great place to work. We're recruiting the talent internally, and we're actually the place where our customers are asking us how we're doing it. So it's not so much of us asking them. They are supporting us like with the Welder workforce program. But we're actually becoming more of a pilot for how it's done. And so I think we see continued capability to add the talent to fill these facilities and maximize the output.

Okay. Great. And I just have one last question on P3. Has SCAMP been sold? Or is it being evaluated in any industries outside of space such as medical? And what about sales of the MCD? Are there any natural gas operations evaluating MCD?

Yes. So just for the rest of the crew, MCD is multichannel diffuser. And I'll keep this response really high level. And Gary, what I would suggest is Dan is going to introduce that we're attending some conferences. We're going to have some updates at those. So I'd suggest following along. What I would tell you is this, SCAMP has a lot of interest across a lot of applications far reaching out of space. And so yes, we have provided it as disclosed previously for medical applications, and we're seeing it in applications in transportation, both on ground and in air. So there's a lot of uses for SCAMP, which is basically for the rest of the crew at solenoid pump. On the MCD, -- so one of the things that we're working with -- that Dan is leading the charge on is working product market fit for the multichannel diffuser. And we see a huge opportunity to bring new technology and disrupt -- frankly, I'm just going to say it, all 24/7 pumps. So pumps that operate 24/7, we are confident that this potential technology advancement could have a huge impact on that market. So we're in the early phases. It has not been deployed at this point. And one of the first business development areas as part of our enhanced strategy is to bring it to market. .

At this time, we've reached the end of our question-and-answer session. I'll hand the floor over to Dan Thoren for closing remarks.

Okay. Thank you, operator. I'd also like to remind everyone that we will be presenting at the Wells Fargo Industrials Conference later this week on June 12 in Chicago and at the Northland Growth Conference on June 25, which is virtual. Interested investors should contact their sales representative to register and schedule one-on-one or group meetings. As always, a live webcast of the presentation along with presentation materials will be available on our Investor Relations website. We hope to see you there. And as always, please reach out with any questions. Thank you, everyone, for joining us today and for your interest in Graham.