GRAHAM CORP annual report, FY2017

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

MetricFiscal 2018Fiscal 2017Change
Net sales$77,534$91,769Down 16%
Gross profit$17,330$22,161Down 22%
Gross margin22.4%24.1%Down 170 bps
Operating margin(17.3%)7.3%Down 24.6 pts
Net income (loss)$(9,844)$5,023Turned to loss
Diluted earnings (loss) per share$(1.01)$0.52Down $1.53
Operating cash flow$8,511$12,389Down 31%
Cash, cash equivalents and investments$76,479$73,474Up 4%
Working capital$78,105$78,688Down slightly
Capital expenditures$2,051$325Higher
Backlog$117,946$82,590Up 43%
Net orders$112,230$66,128Up 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.