Graham Corporation Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2017, representing the second quarter and first half of fiscal 2018. The request metadata identifies “2016 Q2,” but the filing itself is for September 30, 2017.
Business Context
Graham designs and manufactures custom-engineered vacuum, heat-transfer, condenser, fabrication, and specialty-machining equipment for energy, defense, chemical, petrochemical, nuclear, industrial, and U.S. Navy applications. Operations include facilities in New York, Michigan, and China.
Financial Performance and Liquidity
| Metric | Three Months Ended Sept. 30, 2017 | Three Months Ended Sept. 30, 2016 | Six Months Ended Sept. 30, 2017 | Six Months Ended Sept. 30, 2016 |
|---|---|---|---|---|
| Net sales | $17.224 million | $21.126 million | $38.075 million | $43.491 million |
| Gross profit | $3.830 million | $5.010 million | $8.696 million | $9.121 million |
| Gross margin | 22% | 24% | 23% | 21% |
| Net income | $10 thousand | $1.297 million | $945 thousand | $1.382 million |
| Diluted EPS | $0.00 | $0.13 | $0.10 | $0.14 |
| Operating cash flow | Not separately provided | Not separately provided | $848 thousand | $3.251 million |
- Second-quarter operating margin was negative 1%, compared with 8% in the prior-year quarter; first-half operating margin was 3%, compared with 4%.
- Cash and investments totaled $72.102 million at September 30, 2017, compared with $73.474 million at March 31, 2017.
- Cash and cash equivalents were $31.102 million, and short-term certificates of deposit were $41.000 million.
- Working capital was $78.848 million, with a current ratio of 3.8.
- Total debt was limited to capital lease obligations of $199 thousand. No amounts were outstanding under the company’s credit facilities; letters of credit totaled $8.294 million.
- Net cash used in investing activities was $7.430 million, primarily reflecting net purchases of investments. Financing cash use was $1.928 million, including $1.758 million of dividends and $119 thousand of treasury-stock purchases.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 18%; first-half sales declined 12%. Domestic sales were the principal source of the decline, while international sales increased 7% in the quarter and 3% for the first half.
- Second-quarter gross margin fell two percentage points because of a weaker project mix. First-half gross margin improved two percentage points, helped by lower overhead costs.
- SG&A increased 16% in the quarter and 8% for the first half, largely because the prior year benefited from $759 thousand of insurance proceeds. Excluding that benefit, SG&A was lower in both periods.
- The company recorded a $316 thousand restructuring charge in the second quarter, compared with $75 thousand in the prior-year quarter. The first-half 2016 charge was $630 thousand.
- Management reduced its global workforce by approximately 6% and expects annual savings of approximately $1.5 million, with about half expected in fiscal 2018.
- Orders declined 31% in the second quarter and 29% in the first half. Backlog was $72.981 million at September 30, 2017, down 12% from March 31, 2017 but approximately unchanged from June 30, 2017.
- Approximately 69% of backlog related to U.S. Navy projects, while 15% related to refinery projects, 6% to chemical and petrochemical projects, 5% to power projects, and 5% to other industrial applications.
Guidance, Outlook, Risks, and Unusual Items
- Fiscal 2018 revenue guidance is approximately $75 million to $80 million.
- Fiscal 2018 gross margin is expected to be 21% to 23%, SG&A is expected to be $15 million to $15.5 million, and the effective tax rate is expected to be 28% to 30%.
- Management expects fiscal 2018 operating cash flow to be lower than fiscal 2017 because the prior year benefited from increasing customer deposits. Capital expenditures are expected to be approximately $2.5 million to $3.0 million, mostly in the second half of the fiscal year.
- Energy and nuclear markets remain weak because of low and volatile oil prices, reduced customer capital spending, pricing pressure, and production under-utilization. Management expects near-term order levels to remain weak.
- Management continues to expect long-term opportunities in energy, nuclear, and naval nuclear propulsion, supported by diversification and anticipated U.S. Navy demand.
- The company warns that continued weakness in the nuclear market could create a risk of impairment to goodwill and intangible assets.
- Asbestos-related lawsuits and other ordinary-course legal claims are pending. Management cannot estimate a reasonably possible loss but does not expect the matters to have a material effect.
- The company had no projects on hold at September 30, 2017 and no material off-balance-sheet arrangements other than operating leases and letters of credit.
- The company plans to adopt the new revenue standard using a modified retrospective approach in the first quarter of fiscal 2019. Management expects the principal impact to involve the timing of revenue recognition.
- Disclosure controls and procedures were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the timing and sustainability of the expected $1.5 million annual restructuring savings.
- Monitor order intake, backlog conversion, and the concentration of backlog in U.S. Navy projects.
- Assess whether energy and nuclear-market weakness continues to pressure sales, pricing, utilization, and margins.
- Reconcile cash generation with planned capital expenditures, dividends, investments, and customer-deposit movements.
- Evaluate the effect of the new revenue-recognition standard on contract timing, unbilled revenue, and reported margins.
- Review goodwill and intangible-asset impairment risk if nuclear-market opportunities do not materialize.
- Track asbestos litigation, warranty claims, pension and postretirement obligations, and related cash requirements.