CFA Society Cleveland - graham-mfg.com Relations...Jun 22, 2016 · Income D&A Working Capital Change Capital Investments Financing/Other Treasury Stock Repurchases Dividends Energy

© 2016 Graham Corp. 1

Midwest Investment Conference 2016CFA Society Cleveland

NYSE: GHM • June 22, 2016

Jeffrey F. GlajchVice President & Chief Financial Officer


Safe Harbor StatementThis presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-looking statements are subject to risks, uncertainties and assumptions and are identified by words such as “expects,” “estimates,” “projects,” “anticipates,” “believes,” “goal,” “outlook,” “priorities,” “could,” and other similar words. All statements addressing operating performance, events, or developments that Graham Corporation expects or anticipates will occur in the future, including but not limited to, statements relating to revenue, backlog and expected performance of Energy Steel & Supply Co., and expected expansion and growth opportunities within the domestic and international nuclear power generation markets, anticipated revenue, the timing of conversion of backlog to sales, profit margins, foreign sales operations, Graham Corporation’s strategy to build its global sales representative channel, the effectiveness of automation in expanding engineering capacity, the ability to improve cost competitiveness, customer preferences, changes in market conditions in the industries in which Graham Corporation operates, changes in general economic conditions and customer behavior and Graham Corporation’s acquisition and organic growth strategies are forward-looking statements. Because they are forward-looking, they should be evaluated in light of important risk factors and uncertainties. These risk factors and uncertainties are more fully described in Graham Corporation's most recent Annual Report filed with the Securities and Exchange Commission, including under the heading entitled “Risk Factors.”

Should one or more of these risks or uncertainties materialize, or should any of Graham Corporation's underlying assumptions prove incorrect, actual results may vary materially from those currently anticipated. In addition, undue reliance should not be placed on Graham Corporation's forward-looking statements. Except as required by law, Graham Corporation disclaims any obligation to update or publicly announce any revisions to any of the forward-looking statements contained in this presentation.


Business & Strategic Overview


Financial Goals

Organic Revenue Growth

Profitability

Capital Stewardship

Double Revenue>$200 million

>17% Average EBITDA Margin*

>12% Average ROIC*

FY16 Revenue$90 million

FY16 EBITDA Margin 12.1%

FY16 ROIC 5.6%

GoalsPerformance Measures Recent Results

* Average Cycle performance

Operating leverage and pricing drive EBITDA margin expansion

Near-term investments currently include $1.5 million to $2.0 million of incremental personnel expense to support longer-term growth objectives


• Leverage assets to capture market share

• Expand predictable base business

• Diversify & strengthen revenue streams

• Reduce earnings volatility

• Key markets:

Refining

Petrochemical

Power

U.S. Navy

Executing Our Strategy to Expand EarningsShort-term objective:

Drive top-line growth through greater market share

Near-term objective: $200 million revenue

Long-term objective: Leverage competencies and

financial strength to diversify and provide further growth


Stronger earnings, less volatility

Refining46%

Acquisitions present incremental growth potential

Diversification Strategy

~ $200 million

Refining46%

Chemical/Petrochemical

20%-30%

Other10%-15%

Navy10%-15%

Refining20%-30%

Power16%

NavyOther

Chemical/ Petrochemical

33%

Refining32%

Projected Mix

Power15%-25%

19%

Recent Mix

~ $90 million


Addressing Key Markets Key Markets Graham

Share* Actions Share Goals*

Global Refining>$150 million annually

~ 25% Assertive pricing strategyTake market shareFurther expand execution capacity

>40%

Global Chemical/Petrochemical>$150 million annually

~15% Dominate U.S. marketTake market share; retain price disciplineWin in AsiaFurther expand execution capacity

>30%

U.S. Navy~$50 million annually

~10% Secure position in both submarine programsWin CVN80

40 to 50%

Power>$250 million annually

<10% Strengthened management teamAlign sales, engineering and operations for growth

Double share

* Market share data are management estimatesSecondary markets are not noted


Targeted Path to $200 Million Revenue

($ in millions)

0

50

100

150

200

FY 2016 Sales Refining Chemical /Petrochemical

Other Power Navy Sales Goal

COREGRAHAM

DIVERSIFICATIONSTRATEGY

$90

$200

$30 – $35

$25 – $30$5 – $10

$15 – $20$15 – $20

Diversification Strategy Drives Growth & Reduces Volatility

Anticipated market recovery


Strengthening Stable Revenue Base

• Expect to exceed $60 million in near-term, through organic growth strategies to capture greater market share:− Nuclear market MRO

− Executing Naval strategy

− Aftermarket strategy

− Short-cycle product strategies

• Stronger predictable base of sales reduces earnings volatility

Reducing Volatility

$21 $25

$29 $33

$25

$31

$42 $45 $45

> $60

Annual Predictable Base Business(Base revenue: $ in millions)

$51

$18


Navy 47%

Other4%

Power17%


11%

Refining 21%

($ in millions)

Backlog by IndustryMarch 31, 2016

Projected Backlog ConversionMarch 31, 2016

Months 12-24

10-20% Within 12 months

45-50%

Beyond 24 Months35-45%

Backlog Remains Stable

$94.9 $85.8

$112.1 $113.8 $108.0

$‐ $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 $80.00 $90.00 $100.00 $110.00 $120.00

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

3/31/2012 3/31/2013 3/31/2014 3/31/2015 3/31/2016

Backlog

Backlog Backlog expected to convert within 12 months

• Predictable base supports future growth; high percentage of U.S. Navy projects in backlog

• ~60% from markets or customers not served by the Company five years ago– Reducing the impact of more cyclical sales in

the energy industry

Reflects benefits of diversification strategy


0

20

40

60

80

100

120

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Core GHM Naval Commercial Nuclear Converts within 12 months

Backlog Mix Illustrates Impact of Diversification Strategies($ in millions)

Diversification strategy impact

Year End Backlog


Diverse Bidding Pipeline

By Industry*


20%-25%

Power15%-20%

Other5%-10%

Refining40%-45%

As of March 31, 2016

$600 Million to $800 Million • $600 million to $800 million TTM

bidding pipeline– Pipeline includes bids to

multiple EPCs or OEMs for one opportunity

– Pipeline is indicative of diversification strategy & opportunity

– Drop in oil prices has impacted bid activity and general level of pipeline Long-term fundamentals

remain intact

* Excludes Navy


Process-Critical Equipment

High Cost of FailureHigh Cost of Failure

Low Fault Tolerance Performance Specifications Low Fault Tolerance Performance Specifications

Difficult or Impossible to ReplaceDifficult or Impossible to Replace

Low Relative CostLow Relative Cost

Customers require quality, complex engineered-to-order equipment


Year 1 Year 2 Year 3 Year 4 Year 5

Value Enhancing Sales Cycle

Year 1 Year 2

Graham Competitive Advantage:Early Involvement

Graham establishes competitive advantage during first 24 months… Understanding pipeline, developing design options, identifying

decision makers, understanding timing, creating strong relationships to…Gain advantage, optimize margin and win business

Concept FEED* EPC Bid Purchase Construction

* Front End Engineering DesignCradle to grave support


Financial Overview


Invested for Diversification Strategy & Energy Market Recovery (Revenue in millions)

(1) See supplemental slide for Adjusted EBITDA reconciliation and other important disclaimers regarding Graham’s use of Adjusted EBITDA(2) Source: Bloomberg(3) FY2012, FY2013 and FY2015 EPS have been adjusted to exclude unusual items. Please see supplemental slides for a reconciliation of GAAP EPS to Adjusted

EPS.

$103.2 $105.0 $102.2

$135.2

$90.019% 17% 17%

19%

12%9% 9% 8% 8% 8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

$0

$20

$40

$60

$80

$100

$120

$140

$160

FY12 FY13 FY14 FY15 FY16

Revenue GHM Adj. EBITDA Margin US Industrials Median Adj. EBITDA Margin

EPS

(1) (2)

$1.01(3)$1.10(3) $1.00 $1.57(3) $0.61


Batavia Expansion (~65% in FY14 and FY15)

$1.7

FY13 FY14 FY15 FY16

Capital Expenditures

$5.3$5.3

11.7% 10.0%

15.6%10.8%

FY13 FY14 FY15 FY 16

Working Capital Utilization(1)

$51.7 $61.1 $60.3 $65.1

3/31/2013 3/31/2014 3/31/2015 3/31/2016

Strong Balance SheetCash, Cash Equivalents

and Investments

($ in millions)

(1) Defined as current assets (excluding cash and cash equivalents and investments) less current liabilities divided by annual or TTM revenue

$12.4$15.2

$6.3

$18.8

FY13 FY14 FY15 FY16

Operating Cash Flow

$1.2


Strong Cash Generation($ in millions)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

March 2005Cash &

Investments,Net

NetIncome

D&A Working CapitalChange

CapitalInvestments

Financing/Other Treasury StockRepurchases

Dividends Energy SteelAcquisition

March 2016Cash &

Investments,Net

0.8

112.1

18.4 3.0 (24.9)

10.4 (13.0)(12.3)

65.1

Uses of CashSources of Cash

March 2005 to March 2016

~100% of Net Income converted to cash or

returned to shareholders

(18.5)


Graham Capital Allocation Priorities

Dividend Payments

Organic Growth

Stock Repurchases

Acquisition Strategy

Maintain a strong, prudently managed balance sheet

• Invest in current operations to drive organic growth

• Continue consistent dividend payments and increases

• Seek opportunistic acquisitions with cash return that exceeds equity cost of capital

• Return value to shareholders through stock repurchases

Cash from Operations

Cash from Balance Sheet


Shareholder Focus

• Returned $12.7million to shareholders in FY2016− Purchased ~539,000 shares for

$9.4 million under $18 million stock repurchase program

− Paid $3.3 million of dividends

• Sustainable dividends reflect stability of operating cash flows across business cycle36%

63%80%

3/31/2007 3/31/2010 3/31/2016

Institutional Ownership

$0.08 $0.12

$0.16

$0.32 $0.36

Prior 2/11/2013* 2/25/2014* 1/29/2015* 1/28/2016*

Annualized Dividends Per Share

* Reflects date of dividend increase


Acquisition Strategy

Engineered-to-order products for energy industry

Strong management team with customer and quality focus

$20 million – $60 million in annual revenue

Cash return exceeds equity cost of capital

Strong pricing discipline

Diversify products, markets, and/or geographic presence; reduce earnings volatility


• Revenue $80 million – $95 million

• Gross margin 24% – 26%

• SG&A $17.5 million – $18.5 million

• Effective tax rate 32% – 33%

(1) FY2016 Guidance provided as of May 25, 2016

FY2017 Revenue Guidance(1)

Strategic Target: Exceed $200 million in organic revenue


Expected long-term global energy demand growth drives opportunities

Leading market position and worldwide brand recognition

Sales model based on early engineering involvement

Expanding addressable market opportunities

Strong and flexible balance sheet

Acquisition opportunities

Results-oriented management team

Top quartile financial performance

Solid operating leverage and powerful cash generation

Investment Highlights


Midwest Investment Conference 2016CFA Society Cleveland

NYSE: GHM • June 22, 2016


Supplemental Information


Graham Corporation – Market Data

Note: Market data as of June 17, 2016 [Source: Bloomberg]; ownership as of last filing date

United States63%

Asia10%

Middle East12%

Other15%

FY16 Sales $90.0 million

FY16 Orders$84.0 million

United States67%

Asia10%

Middle East5%

Other14%

Founded: 1936IPO: 1968 NYSE: GHMMarket capitalization $175.6 million

Recent price $18.29

52-week range $20.96 – $14.39

Avg. daily trading volume (3 mos.) 24.2k

Common shares outstanding: 9.6 million

Annualized dividend/dividend yield $0.36 / 2.0%

Ownership:

Institutional 79.8%

Insider 2.2%

Fiscal year end March 31


Executive Compensation

• Base Salary– Reviewed annually by our compensation committee and determined based

on company performance, individual performance, job responsibilities, and internal pay equity

– Provides compensation that is not “at-risk” to compensate executive officers

• Annual Incentive Cash Compensation– Based on achievement of threshold, target and maximum levels of net income

and order level targets as well as personal goals

• Long Term Equity Incentive Compensation– Performance-Vested Restricted Stock

• Relative Total Shareholder Return (“TSR”) measure • Relative profitability measure [EBITDA vs. BICC (Baird Industrial Index)]

• Time-Vested Restricted Stock– Designed to retain executives and align their interests with those of our

shareholders

Shareholder Alignment


Professional Development & Improved Training

Redefined Traditional Roles & Addressed Organizational Constraint

Increased Decision Rights

Added New Skills to our Bench

Performance Management &

Increased Accountability

• Empowerment

• Direct labor as value creator vs. cost

• Unlocked potential of human capital

PEOPLE

CultureTransformation: PowerofEngagementHuman capital is our most critical asset


Refining32%

Chemical/ Petrochem

33%

Power 16%

Chemical/Petrochemical Industry ExpansionNatural Gas Growth Trend

• Total expected market demand ~$150 million annually

– Market share: low to mid teens

• Tactics for growth– Capitalize on customer relationships and strong

brand– Early engagement on projects– Expand foothold in Asia

• Market demand drivers– New capacity– Revamp and debottleneck– Replacement equipment– Monetization of domestic natural gas resources

Key Metric: 1mmTPY of new capacity $5mm to $8mm of opportunity

Navy/Other 19%

Percents based on FY 2016 sales of

$90.0 million


Global Oil Refining Industry

• Total expected market demand ~$150 million to ~$200 million annually

– Market share: high 20s to low 30s

• Tactics for growth– Going after more projects

– Build the capacity to execute the opportunities

• Market demand drivers– New capacity– Revamp/upgrades, debottlenecking, feedstock

changes– Statutory regulations; ULSD, clean gasoline, etc.– Replacement equipment

Leading Supplier of Vacuum Systems and Surface Condensers

Refining32%

Chemical/ Petrochem

33%Power 16%

Navy/Other 19%

Key Metric: 1mmbbl/day of new capacity $45mm to $60mm of opportunity


$90.0 million


Power Industry Expansion

• Tactics for growth– Strong pipeline for replacing and upgrading

equipment at existing power facilities• Expanding addressable opportunities for

replacement via Energy Steel & Graham synergies

• Capture opportunities at new build/restarts• Access China and India markets• Market demand drivers

– MRO– New capacity

• Nuclear• Renewable• Cogeneration

• Rerate, power augmentations

Refining32%

Chemical/ Petrochem

33%Power 16%

Key Metric: 1,000mw new nuclear capacity $30mm to $40mm opportunity

Navy/Other 19%

Deepen Reach into Nuclear Power Industry with Value-Add Equipment and Materials


$90.0 million


• Aircraft carrier program ~$35 million to ~$40 million per carrier; bid CVN 80 in 2016

• Submarine program– ~$15 million to ~$20 million per Virginia Class;

45 subs, building one to two subs per year– ~$20 million to ~$25 million per Ohio

Replacement Class; 11 to 13 subs planned with construction scheduled to begin in 2021

• Tactics for growth– Certifications– Capital investments– Foot in the door

• Market demand drivers– Build out of Virginia Class sub program– Ohio Replacement Class sub program– Carrier fleet– Replacement equipment

Refining32%

Chemical/ Petrochem

33%

Power 16%

Navy/Other 19%

Naval Nuclear Propulsion ProgramBecome Lead Supplier of Surface Condensers and Ejectors for U.S. Navy


$90.0 million


Investments in Capacity for Organic Growth

• Invested $15 million in facilities and equipment in last 5 years

• Added 40,000 ft2 of additional manufacturing space• New machines and technology

Expanded/Upgraded Facilities

• Established dedicated facility for U.S. Navy• Flexibility to address other demand

Supports Diversification

Strategy

• Increased workforce by 40%31 welders, 7 machinists, 20 engineers

• IT processes • Human resource processes• Brand: Employer of Choice

People Investments


Adjusted EBITDA Reconciliation – Annual(in thousands)

Fiscal Years Ended March 31 2012 2013 2014 2015 2016

GAAP operating profit $ 17,095 $ 15,262 $ 14,617 $ 21,574 $ 6,131

Restructuring charge - - - 1,717 -

Acquisition costs - - - - -

Depreciation & amortization 2,024 2,079 2,199 2,308 2,435

Adjusted EBITDA $ 19,119 $ 17,341 $ 16,816 $ 25,600 $ 10,914

Adjusted EBITDA margin 19% 17% 17% 19% 12%

Non-GAAP Financial Measures:

Adjusted EBITDA is defined as consolidated net income before interest expense and income, income taxes, depreciation and amortization and a nonrecurring restructuring charge. Adjusted EBITDA margin is Adjusted EBITDA divided by sales. Adjusted EBITDA and Adjusted EBITDA margin are not measures determined in accordance with generally accepted accounting principles in the United States, commonly known as GAAP. Nevertheless, Graham believes that providing non-GAAP information such as Adjusted EBITDA and Adjusted EBITDA margin are important for investors and other readers of Graham's financial statements, as they are used as analytical indicators by Graham's management to better understand operating performance. Graham’s credit facility also contains ratios based on EBITDA. Because Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures and are thus susceptible to varying calculations, Adjusted EBITDA and Adjusted EBITDA margin, as presented, may not be directly comparable to other similarly titled measures used by other companies.


Adjusted EPS Reconciliation(in millions, except per share data)

FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

GAAP diluted earnings per share $ 1.06 $ 1.11 $ 1.00 $ 1.45 $ 0.61

Acquisition costs after tax, per diluted share - - - - -

Adjustment of historical R&D tax credits after tax, per diluted share 0.04 - - - -

Restructuring charge after tax, per diluted share - - - 0.12 -

Reversal of Energy Steel earn-out after tax, per diluted share - (0.10) - - -

Adjusted diluted earnings per share $ 1.10 $ 1.01 $ 1.00 $ 1.57 $ 0.61


North American CompetitionMarket Competitors

Refining vacuum distillation Croll Reynolds Company, Inc.; Gardner Denver, Inc.; GEA Wiegand GmbH

Chemicals/Petrochemicals Croll Reynolds Company, Inc.; Gardner Denver, Inc.; Schutte Koerting

Turbomachinery OEM – refining, petrochemical

Ambassador; Donghwa Entec Co., Ltd..; KEMCO; Oeltechnik GmbH; SPX Heat Transfer

Turbomachinery OEM – power and power producer

Holtec; KEMCO; Maarky Thermal Systems; SPX Heat Transfer; Thermal Engineering International (USA), Inc.

Nuclear Consolidated; Dubose; Energy & Process; Joseph Oat; Nova; Nusource; Tioga

Naval Nuclear Propulsion Program/Defense DC Fabricators; Joseph Oat; PCC; Triumph Aerospace; Xylem


Market CompetitorsRefining vacuum distillation Edwards, Ltd.; Gardner Denver, Inc.; GEA

Wiegand GmbH; Korting Hannover AG

Chemicals/Petrochemicals Croll Reynolds Company, Inc.; Edwards, Ltd.; Gardner Denver, Inc.; GEA Wiegand GmbH; Korting Hannover AG; Schutte Koerting

Turbomachinery OEM – refining, petrochemical

Chem Process Systems; Donghwa Entec Co., Ltd.; Hangzhou Turbine Equipment Co., Ltd.; KEMCO; Mazda (India); Oeltechnik GmbH

Turbomachinery OEM – power and power producer

Chem Process Systems; Holtec; KEMCO; Mazda (India); SPX Heat Transfer; Thermal Engineering International

International Competition


Supports a steam turbine and enables the conversion of maximum energy in high pressure steam into power.

Products: Surface Condenser

Vital Processing Components

An ejector system lowers the pressure in the distillation column to allow crude oil to boil at a lower temperature. This allows for more efficient and cost‐effective separation of crude oil into valuable products, such as diesel, gas oils,kerosene, and other fuels.

A condenser supports a steam turbine and enables the conversion of maximum energy in high pressure steam into power.

REFINERY EJECTOR SYSTEMCNOOC HUIZHOU REFINERY–CHINA240,000 BBL/DAY REFINERY

39

CFA Society Cleveland - graham-mfg.com Relations...Jun 22, 2016 · Income D&A Working Capital Change Capital Investments Financing/Other Treasury Stock Repurchases Dividends Energy

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