Graham Corporation Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2018. The supplied filing is a fiscal 2018 Form 10-K, not a 2016 fourth-quarter filing. Unless otherwise noted, dollar amounts are in thousands except per-share data.
Business Context
Graham designs and manufactures engineered vacuum and heat-transfer equipment for refining, chemical and petrochemical processing, power generation, commercial nuclear, and U.S. Navy nuclear-propulsion applications. Operations include facilities in Batavia, New York; Energy Steel in Michigan; and a sales and engineering subsidiary in China. The company had 304 employees at March 31, 2018 and operates as one reportable segment.
Key Financial Metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Net sales | $77,534 | $91,769 | Down 16% |
| Gross profit | $17,330 | $22,161 | Down 22% |
| Gross margin | 22.4% | 24.1% | Down 170 bps |
| Operating margin | (17.3%) | 7.3% | Down 24.6 pts |
| Net income (loss) | $(9,844) | $5,023 | Turned to loss |
| Diluted earnings (loss) per share | $(1.01) | $0.52 | Down $1.53 |
| Operating cash flow | $8,511 | $12,389 | Down 31% |
| Cash, cash equivalents and investments | $76,479 | $73,474 | Up 4% |
| Working capital | $78,105 | $78,688 | Down slightly |
| Capital expenditures | $2,051 | $325 | Higher |
| Backlog | $117,946 | $82,590 | Up 43% |
| Net orders | $112,230 | $66,128 | Up 70% |
The company had no bank borrowings at March 31, 2018. Debt consisted primarily of $143 in capital lease obligations, including $55 classified as long-term debt. Credit facilities provided total borrowing and letter-of-credit capacity of up to approximately $55,000, with $8,233 of letters of credit outstanding and no funded revolver borrowings.
Dividends declared were $0.36 per share, or $3,517 paid during fiscal 2018. The company reported total assets of $143,333 and stockholders’ equity of $103,349 at year-end.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because domestic sales fell 25% to $51,950, partially offset by a 13% increase in international sales to $25,584.
- Sales mix shifted toward refining, chemical and petrochemical, defense and other industrial applications, while power-market sales declined as a percentage of revenue.
- Gross margin declined because fiscal 2017 benefited from a large atypical order and fiscal 2018 had lower volume.
- SG&A increased 5% to $15,646, partly because fiscal 2017 included a $759 insurance settlement benefit.
- Fiscal 2018 included a $14,816 pre-tax impairment charge related to Energy Steel’s commercial nuclear business: $8,600 for permits, $500 for the tradename and $5,716 for goodwill.
- The company recorded $280 of additional pre-tax charges related to the Westinghouse bankruptcy and suspension of work at the Summer, South Carolina nuclear facility, plus a $316 restructuring charge.
- Excluding impairment and related commercial-nuclear charges, the Tax Cuts and Jobs Act effects, and restructuring, management reported fiscal 2018 net income of $1,801, or $0.18 per diluted share, versus adjusted fiscal 2017 net income of $5,464, or $0.56 per share.
- Orders and backlog improved substantially, with no project cancellations or projects on hold reported at March 31, 2018.
Guidance, Outlook and Management Commentary
- Management expected fiscal 2019 revenue of approximately $90,000 to $95,000, gross margin of 24% to 25%, SG&A of $18,000 to $18,750, and an effective tax rate of 20% to 22%.
- Approximately 55% to 60% of March 31, 2018 backlog was expected to convert to fiscal 2019 revenue. Navy contracts may take up to five years to convert.
- Management saw improving refining and broader energy-market activity in the second half of fiscal 2018 but described the recovery as recent and quarterly order timing as unpredictable.
- U.S. Navy projects represented approximately 56% of backlog, creating concentration in a single end customer despite multiple contractors.
- Management expected fiscal 2019 capital expenditures of approximately $2,000 to $2,500 and moderate cash flow.
Risks, Contingencies and Unusual Items
- The business is cyclical and sensitive to oil and natural-gas prices, customer capital spending, energy policy and global economic conditions.
- Customer concentration remains material: the top ten customers represented 41% of fiscal 2018 sales, although no individual customer exceeded 10%.
- International sales represented 33% of fiscal 2018 revenue, exposing the company to currency, political, regulatory, trade and China-related risks.
- U.S. Navy contracts depend on annual government funding and involve long order-to-shipment periods, fixed-price exposure and potentially higher liability than commercial projects.
- Fixed-price contracts and percentage-of-completion accounting depend on labor-hour, cost-to-complete and milestone estimates; unfavorable revisions could reduce earnings or create immediate losses.
- The company is a defendant in asbestos-related lawsuits and other ordinary-course claims. Management could not estimate reasonably possible losses but did not believe the matters would be material.
- The Tax Cuts and Jobs Act produced provisional tax effects, including a $185 transition-tax expense and deferred-tax remeasurement benefits. The filing states that certain calculations remained subject to finalization.
- The company adopted or planned accounting changes, including adoption of the new revenue standard on April 1, 2018, expected to reduce opening retained earnings by approximately $1,000, primarily because of delayed recognition of approximately $5,000 of net sales.
Most Important Facts to Verify
- Confirm that the intended period is fiscal 2018 rather than the request metadata identifying “2016 Q4.”
- Reconcile reported GAAP loss of $9,844 with management’s adjusted net income of $1,801 and assess whether the impairment is truly nonrecurring.
- Evaluate the quality and timing of the $117,946 backlog, particularly the 56% attributable to U.S. Navy projects and the expected conversion rate.
- Assess whether the projected fiscal 2019 revenue, margin and cash-flow outlook is supported by orders, customer funding and contract economics.
- Review the Energy Steel impairment assumptions and the continuing weakness in commercial nuclear markets.
- Monitor customer concentration, fixed-price contract performance, percentage-of-completion estimates and potential contract cancellations.
- Review final Tax Cuts and Jobs Act calculations and the effect of the new revenue-recognition standard on reported sales, retained earnings and comparability.