Graham Corporation — Form 10-Q Summary
Reporting period: The source filing is for the three and nine months ended December 31, 2020, Graham’s fiscal third quarter and first nine months of fiscal 2021. Although the request metadata identifies “2019 Q3,” the filing compares fiscal 2021 with fiscal 2020. The statements are unaudited.
Business context
Graham designs and manufactures custom-engineered vacuum and heat-transfer equipment for energy, chemical and petrochemical, and U.S. Navy defense markets. Operations include facilities in Batavia, New York, and wholly owned subsidiaries in China and India. The company sold its Energy Steel commercial nuclear utility business in June 2019.
Key financial metrics
| Metric | Q3 FY2021 | Q3 FY2020 | 9M FY2021 | 9M FY2020 |
|---|---|---|---|---|
| Net sales | $27.154 million | $25.286 million | $71.818 million | $67.522 million |
| Gross profit | $6.227 million | $4.044 million | $15.488 million | $13.706 million |
| Gross margin | 23% | 16% | 22% | 20% |
| Net income | $1.060 million | $0.009 million | $1.986 million | $1.296 million |
| Diluted EPS | $0.11 | Less than $0.01 | $0.20 | $0.13 |
| Operating margin | 5% | (2%) | 3% | 0% |
- Cash and liquidity: Cash and investments totaled $69.292 million at December 31, 2020, compared with $73.003 million at March 31, 2020. Working capital was $78.695 million, with a 2.8 current ratio.
- Cash flow: Nine-month operating cash flow was $0.670 million, compared with cash used of $4.119 million in the prior-year period. Capital expenditures were $1.462 million and dividends paid were $3.292 million.
- Debt: There were no borrowings outstanding under the credit facilities at December 31, 2020. The company entered into a one-year JPMorgan revolving facility with a $22 million line, expandable to $37 million with bank approval, and maintained a $15 million HSBC letter-of-credit facility.
- Letters of credit: Outstanding letters of credit were $17.100 million. Borrowing availability was $15 million and additional letter-of-credit availability was $4.9 million.
- Backlog and orders: Third-quarter orders were $61.753 million and nine-month orders were $108.195 million. Backlog reached a record $149.736 million at December 31, 2020, including approximately 70% related to U.S. Navy defense projects.
- Dividends: Dividends declared were $0.11 per share in the quarter and $0.33 per share for the nine months.
Material changes versus the prior comparable period
- Third-quarter sales increased 7%, while nine-month sales increased 6%. International sales rose sharply, offsetting lower domestic sales.
- Third-quarter gross profit increased 54%, primarily from improved project mix and higher outsourced production volume. The prior-year quarter had an unusually low gross margin.
- Nine-month net income increased 53%. The prior-year period included a $0.893 million loss related to the divested Energy Steel business, as well as other expense items related to a customer bankruptcy.
- Interest income declined substantially to $0.143 million for nine months from $1.080 million, reflecting lower market investment rates.
- Revenue recognized at shipment increased to approximately 50% of nine-month revenue from 30% in the prior-year period, while revenue recognized over time declined to approximately 50% from 70%. The filing attributes this change partly to COVID-19-related production limitations and the completion of two China projects that did not qualify for over-time recognition.
- COVID-19-related employee absences reduced third-quarter sales by approximately $0.9 million and gross and operating profit by approximately $0.4 million. First-quarter production also operated at approximately 50% of normal staffing capacity on average.
- Defense backlog increased $46.376 million from March 31, 2020, while commercial backlog declined $9.029 million.
Guidance, outlook, risks, and unusual items
- Fiscal 2021 guidance: Revenue of $93 million to $97 million, gross margin of 21% to 22%, SG&A expense of $17.250 million to $17.750 million, effective tax rate of 22% to 24%, and capital expenditures of approximately $2 million to $2.5 million.
- Management expects approximately 45% to 50% of the $149.736 million backlog to convert to sales within the next twelve months. Three projects totaling $4.118 million of expected revenue were delayed beyond fiscal 2021, two projects totaling $0.562 million were on hold, and one $0.654 million project was cancelled.
- The outlook assumes near-normal Batavia production capacity and minimal supply-chain disruption during the final quarter of fiscal 2021. Commercial energy markets remain weak because of COVID-19, excess crude-oil supply, reduced customer budgets, and challenging pricing.
- Management views the U.S. Navy market as comparatively resilient and expects defense programs in backlog to generate $20 million to $30 million of annual revenue in fiscal 2021 and beyond, subject to project timing.
- Principal risks include COVID-19 impacts on employees, suppliers and customers; project delays or cancellations; energy-market weakness; material-cost volatility; foreign-exchange and trade-policy risks; dependence on U.S. Navy programs; and execution of long-term contracts.
- The company is defending asbestos-related personal-injury lawsuits and other ordinary-course claims. Management does not believe the outcomes will materially affect operations, financial position or cash flows, but cannot estimate a loss range for most matters.
- The filing reports no off-balance-sheet arrangements other than letters of credit. Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Confirm that the applicable period is December 31, 2020, fiscal Q3 2021, rather than 2019 Q3 as indicated in the request metadata.
- Assess whether the record backlog, particularly the 70% U.S. Navy concentration, converts to revenue and cash flow on the projected schedule.
- Monitor COVID-19 absenteeism, Batavia production capacity, supply-chain access, project delays, holds and cancellations.
- Evaluate the sustainability of the 21% to 22% gross-margin guidance after the unusually favorable third-quarter project mix.
- Track working-capital conversion, customer deposits, unbilled revenue, receivables, and the company’s expectation for improved fourth-quarter cash flow.
- Review credit-facility covenants, letter-of-credit collateral requirements, and available borrowing capacity.
- Consider exposure to weak commercial energy markets, pricing pressure, foreign exchange, material costs, and unresolved litigation.