Graham Corporation Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2018, fiscal 2019. The provided filing is not a 2017 Q2 filing; it compares fiscal 2019 with fiscal 2018. Graham designs and manufactures custom-engineered vacuum and heat-transfer equipment for energy, defense, chemical and petrochemical markets, including U.S. Navy nuclear propulsion applications.
Financial performance and position
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $21.441 million | $17.224 million | $50.992 million | $38.075 million |
| Gross profit | $6.227 million | $3.741 million | $13.369 million | $8.519 million |
| Gross margin | 29% | 22% | 26% | 22% |
| Net income | $1.827 million | $0.010 million | $4.150 million | $0.945 million |
| Diluted EPS | $0.19 | $0.00 | $0.42 | $0.10 |
| Operating margin | 7% | 0% | 8% | 2% |
- Q2 sales increased 24%; first-half sales increased 34%. Growth reflected higher volume, improved pricing and project mix, particularly in refining and international activity.
- Orders were $34.416 million in Q2, up 101%, and $56.393 million for the first six months, up 100%.
- Backlog reached a record $127.796 million at September 30, 2018, versus $117.946 million at March 31, 2018. Approximately 55% to 60% is expected to convert to revenue within one year.
- SG&A was $4.778 million in Q2 and $9.388 million year to date, up 28% and 26%, respectively, primarily due to compensation, new hires and performance-related costs.
- Six-month operating cash flow was $5.075 million versus $0.848 million in the prior-year period. Capital expenditures were $0.367 million and dividends paid were $1.868 million.
- At September 30, cash and investments totaled $78.989 million, including $23.378 million of cash and $55.611 million of short-term investments. Working capital was $80.193 million and the current ratio was 2.6.
- Debt was minimal: capital lease obligations totaled $0.091 million, and there were no borrowings under the company’s credit facilities. Letters of credit outstanding were $6.953 million.
- Total assets were $157.058 million and stockholders’ equity was $105.254 million at September 30, 2018.
Material changes versus the prior comparable period
- Profitability improved substantially as higher revenue and better project pricing and mix more than offset higher SG&A.
- The prior-year periods included a $0.316 million restructuring charge, or approximately $0.224 million after tax; no comparable charge was recorded in fiscal 2019.
- Interest income increased to $0.351 million in Q2 and $0.640 million year to date, compared with $0.162 million and $0.313 million, respectively.
- Graham adopted ASC 606 revenue recognition on April 1, 2018 using the modified retrospective method. The adoption reduced opening retained earnings by $1.022 million and changed the timing and balance-sheet classification of revenue, inventory, receivables and customer deposits.
- ASC 606 reduced reported Q2 sales by $1.172 million versus the amount that would have been reported under the prior standard, but increased first-half sales by $1.857 million. Reported Q2 net income was $0.121 million lower, while first-half net income was $0.019 million higher.
- Customer deposits increased to $30.539 million from $13.213 million at March 31, 2018, while unbilled revenue was $10.582 million. These balances reflect contract timing and the new revenue standard.
- Revenue was concentrated in vacuum equipment for the first half, which generated $25.058 million versus $11.412 million in the prior-year period. Canadian sales were $15.123 million versus $3.199 million.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2019 revenue of approximately $98 million to $105 million, gross margin of 25% to 27%, SG&A of $18.5 million to $18.75 million and an effective tax rate of approximately 20%.
- Fiscal 2019 capital expenditures are expected to be approximately $2 million to $2.5 million. Management expects positive full-year cash flow, although second-half cash generation may be more moderate than in the first half.
- Management reported improving refining and chemical/petrochemical activity, but commercial nuclear markets remain weak. New orders are expected to remain variable.
- U.S. Navy projects represented 51% of backlog. Approximately 10% to 15% of long-lived U.S. Navy backlog is expected to convert to revenue during the remaining six months of fiscal 2019.
- Key risks include project execution and cancellation, timing of backlog conversion, foreign currency, pricing pressure, tariffs and changing trade relations, especially involving China, Canada and steel-related inputs.
- The company faces asbestos-related lawsuits and other ordinary-course legal proceedings. Management cannot estimate a reasonably possible loss but does not currently expect a material impact.
- The company expects the pending lease standard to materially increase reported assets and liabilities, without a material effect on operations or cash flows.
- Defined benefit obligations, contract-cost estimates, revenue recognized over time and project labor-hour estimates are significant accounting judgments.
Investor verification checklist
- Verify the filing period: the source is a September 30, 2018 Form 10-Q, despite the request metadata identifying 2017 Q2.
- Reconcile ASC 606 effects when comparing fiscal 2019 results with prior periods, particularly sales, inventory, unbilled revenue and customer deposits.
- Assess whether record orders and the $127.8 million backlog convert to revenue at management’s expected pace and margins.
- Monitor concentration in U.S. Navy backlog and exposure to refining, petrochemical and commercial nuclear cycles.
- Evaluate the effect of tariffs, steel costs, foreign trade conditions and project cancellations on margins and cash flow.
- Review the pending lease accounting adoption and any changes in asbestos litigation exposure or tax estimates.