Graham Corporation — Form 10-Q Summary
Reporting period and business context: The filing covers the three months ended June 30, 2019, Graham’s first quarter of fiscal 2020, not 2018 Q1 as indicated in the request metadata. Graham designs and manufactures custom-engineered vacuum and heat-transfer equipment for energy, defense, chemical and petrochemical markets, including U.S. Navy applications. The company completed the sale of Energy Steel & Supply Co. on June 24, 2019.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $20.593 million | $29.551 million | Down 30% |
| Gross profit | $4.714 million | $7.142 million | Down 34% |
| Gross margin | 23% | 24% | Down 1 percentage point |
| Operating income (loss) | $(0.376) million | $2.532 million | Declined to a loss |
| Operating margin | (2%) | 9% | Down 11 percentage points |
| Net income | $0.082 million | $2.323 million | Down 96% |
| Diluted EPS | $0.01 | $0.24 | Down $0.23 |
| Cash flow from operations | $(4.753) million | $0.068 million | Declined by $4.821 million |
Adjusted results excluding the divested commercial nuclear business and related sale costs: Adjusted net income was $0.982 million, or $0.10 per diluted share, versus $2.722 million, or $0.28 per diluted share, in the prior-year quarter. Adjusted operating profit was $0.727 million, with a 3.8% adjusted operating margin, versus $3.030 million and an 11.4% margin.
Revenue mix: Heat-transfer equipment revenue increased to $7.852 million from $4.158 million, while vacuum equipment revenue declined to $5.530 million from $17.216 million. U.S. revenue increased 7% to $14.448 million, while international revenue fell 62%, primarily because the prior-year period included a large Canadian refining project.
Liquidity and balance sheet: Cash and investments totaled $72.557 million at June 30, 2019, compared with $77.753 million at March 31, 2019. Cash and cash equivalents were $13.768 million and short-term investments were $58.789 million. Working capital was $79.082 million, with a 2.8 current ratio. The company had no borrowings outstanding under its credit facilities; outstanding letters of credit totaled $7.918 million. Available capacity was $22.667 million under the JPMorgan Chase facility and $5.000 million under an unsecured HSBC line, subject to the stated facility terms.
Capital allocation and obligations: The company paid $0.988 million in dividends, repurchased $0.230 million of treasury stock and invested $0.294 million in property, plant and equipment. Capital lease obligations totaled $0.136 million, and operating lease liabilities totaled $0.266 million. Fiscal 2020 capital expenditures are expected to be approximately $2.5 million to $2.8 million.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because of lower international revenue and the absence of the prior-year Canadian refining project. The divested commercial nuclear business contributed $1.276 million of current-quarter sales versus $2.922 million in the prior-year quarter.
- Orders booked decreased to $15.089 million from $21.977 million. Backlog was $117.185 million at June 30, 2019, down from $132.127 million at March 31, 2019, including a $9.777 million reduction related to the Energy Steel sale.
- SG&A was broadly stable at $4.567 million versus $4.610 million, but SG&A increased to 22% of sales from 16% because of the lower revenue base.
- Other expense was $0.523 million, including an $0.087 million loss on the Energy Steel disposal. The filing also identifies a $0.098 million bad-debt charge and a $0.338 million inventory write-down related to Westinghouse Electric Company in the prior-year first quarter.
- The company adopted the new lease standard on April 1, 2019, recognizing operating lease right-of-use assets of $0.676 million, lease liabilities of $0.732 million and an $0.080 million reduction to opening retained earnings.
- Net cash used in operations reflected working-capital movements, including decreases in accounts payable and accrued liabilities, partly offset by collections of accounts receivable.
Guidance, Outlook, Risks and Unusual Items
Guidance: Management expects fiscal 2020 revenue of approximately $100 million to $105 million, excluding the divested commercial nuclear business, representing anticipated growth of 20% to 26% versus fiscal 2019 comparable revenue of $83.495 million. Expected gross margin is 24% to 26%, SG&A is expected to be $17 million to $18 million excluding first-quarter commercial nuclear SG&A, and the effective tax rate is expected to be approximately 20%. Management expects fiscal 2020 cash flow to remain solid.
Backlog and market outlook: Approximately 55% to 60% of backlog is expected to convert to revenue within one year. At June 30, 2019, backlog was 54% U.S. Navy, 21% refinery, 21% chemical and petrochemical, and 4% power and other industrial applications. Management described the energy and petrochemical pipeline as robust but said customer investment decisions and order timing remain measured and variable.
Key risks: Results are exposed to project timing, customer cancellations, contract-cost estimates, commodity and material prices, foreign currency movements, tariffs and trade policy, global energy-market conditions, dependence on U.S. Navy construction schedules, execution of long-term contracts and litigation outcomes. Revenue recognized over time depends on estimates of labor hours, costs to complete and operational milestones.
Contingencies: The company is a defendant in asbestos-related lawsuits and other ordinary-course claims. Management stated that losses cannot currently be estimated but does not expect the matters to have a material effect on financial position, results or cash flows. No projects were on hold at June 30, 2019.
Investor Verification Checklist
- Reconcile the fiscal 2020 revenue guidance of $100 million to $105 million with quarterly order intake, backlog conversion and the divestiture-adjusted prior-year base.
- Assess whether the 3.8% adjusted first-quarter operating margin can improve toward the 24% to 26% gross-margin outlook despite elevated SG&A as a percentage of sales.
- Monitor cash conversion, particularly operating cash flow, accounts payable, unbilled revenue, inventories and customer deposits.
- Verify the timing and profitability of the $117.185 million backlog, including its concentration in U.S. Navy projects and the expected conversion beyond one year.
- Evaluate the financial effects of the Energy Steel sale, including final working-capital adjustments and the removal of its future revenue, costs and backlog.
- Review contract-estimate changes, potential losses on long-term contracts, asbestos litigation developments and exposure to tariffs, currency movements and material-price volatility.