Graham Corporation 10-Q Summary
Reporting period: Three months ended June 30, 2020, the first quarter of fiscal 2021. The source filing is dated August 3, 2020; the request metadata identifies “2019 Q1,” but the filing itself reports fiscal 2021 results and compares them with the three months ended June 30, 2019.
Business context
Graham designs and manufactures custom-engineered vacuum and heat-transfer equipment for energy, chemical and petrochemical, defense, and other industrial markets. Its wholly owned subsidiaries are located in China and India. The company sold its Energy Steel commercial nuclear utility business in June 2019.
Key financial metrics
| Metric | June 30, 2020 | June 30, 2019 | Change |
|---|---|---|---|
| Net sales | $16.710 million | $20.593 million | Down 19% |
| Gross profit | $1.568 million | $4.714 million | Down 67% |
| Gross margin | 9% | 23% | Down 14 percentage points |
| Operating margin | (14%) | (2%) | Down 12 percentage points |
| Net income (loss) | $(1.818) million | $0.082 million | Loss versus profit |
| Diluted earnings (loss) per share | $(0.18) | $0.01 | Down $0.19 |
| Operating cash flow | $(4.373) million | $(4.753) million | Improved $0.380 million |
| Capital expenditures | $0.338 million | $0.294 million | Increased $0.044 million |
SG&A expense was $3.902 million, or 23% of sales, compared with $4.567 million, or 22% of sales, in the prior-year quarter. Interest income declined to $94,000 from $399,000 because of lower short-term investment rates. The effective tax rate was 17%, compared with 23% in the prior-year period.
Financial position, liquidity, and debt
- Cash and cash equivalents were $41.069 million at June 30, 2020, compared with $32.955 million at March 31, 2020.
- Short-term investments were $26.103 million, resulting in cash and investments of $67.172 million versus $73.003 million at March 31, 2020. The investments were certificates of deposit scheduled to mature on or before September 24, 2020.
- Working capital was $75.323 million, with a current ratio of 2.5, compared with $77.443 million and 2.6 at March 31, 2020.
- Total liabilities were $51.942 million and stockholders’ equity was $94.164 million at June 30, 2020.
- The company reported no borrowings outstanding under its credit facilities. Its JPMorgan facility provides a $25 million line, with potential availability up to $50 million, and its HSBC line was increased to $14 million. Letters of credit outstanding totaled $14.888 million.
- Net cash used in financing activities was $1.132 million, including $1.097 million of dividends and $23,000 of treasury-stock purchases. The quarterly dividend declared was $0.11 per share.
Material changes versus the prior comparable period
- Production at the Batavia, New York facility was reduced to approximately 10% of normal staffing at the start of the quarter and averaged approximately 50% of normal capacity, primarily because of COVID-19 precautions. Normal staffing was restored by early June.
- Revenue declined despite a project subcontracted to a Chinese vendor that represented nearly 30% of quarterly sales. Domestic sales fell 35%, while international sales increased 18%.
- Heat-transfer equipment sales increased to $10.673 million from $7.852 million, while vacuum equipment sales fell to $2.551 million from $5.530 million and all other sales fell to $3.486 million from $7.211 million.
- Revenue recognized upon shipment represented approximately 60% of sales, compared with 45% in the prior-year quarter. Revenue recognized over time declined to approximately 40% from 55%, reflecting limited production on larger contracts.
- Orders booked declined to $11.468 million from $15.089 million. The prior-year figure included $2.996 million of Energy Steel orders.
- Backlog was $107.220 million at June 30, 2020, down 5% from $112.389 million at March 31, 2020. Approximately 51% of backlog related to U.S. Navy projects.
- The prior-year quarter included a $893,000 loss related to Energy Steel, including an $87,000 disposal loss, a $98,000 bad-debt charge, and a $338,000 inventory write-down related to Westinghouse’s bankruptcy.
Guidance, outlook, risks, and unusual items
- Fiscal 2021 revenue guidance was $90 million to $95 million, with gross margin of 20% to 22%, SG&A expense of $17 million to $18 million, and an effective tax rate of approximately 22%.
- Management expects interest income to be minimal and positive operating cash flow for the remainder of fiscal 2021. Planned fiscal-year capital expenditures are approximately $2 million to $2.5 million.
- Management’s outlook assumes near-normal Batavia production capacity during the remaining nine months of fiscal 2021, continued supply-chain access, and no significant additional COVID-19-related interruption.
- Approximately 70% to 75% of the June 30 backlog is expected to convert to revenue within one year. Management expects defense programs in backlog to generate $20 million to $25 million of annual revenue in fiscal 2021 and beyond.
- Three projects totaling $4.118 million were delayed beyond fiscal 2021 because of COVID-19 and energy-market conditions. Two projects totaling $562,000 were on hold, and one $654,000 project was cancelled during the quarter.
- Energy and petrochemical customers reduced capital and maintenance spending because of weak oil prices, geopolitical supply-demand imbalances, and COVID-19. Management expects near-term bidding and pricing conditions to remain challenging, although it retains a favorable long-term view of these markets.
- COVID-19 may cause additional workforce, supply-chain, customer-payment, project-cancellation, or production disruptions. The company received no federal Payroll Protection Program relief while continuing to pay full wages and benefits during the capacity reduction.
- The company is defending asbestos-related personal-injury lawsuits and other ordinary-course claims. Management cannot estimate potential losses for most claims but does not currently expect a material adverse effect.
- Product warranty liability declined to $305,000 from $358,000, partly because of a $19,000 reversal of provisions no longer required.
Important facts for investors to verify
- Whether Batavia production remained near normal capacity after the first quarter and whether the fiscal 2021 revenue and margin guidance was achieved.
- The conversion, cancellation, or further delay of the $107.220 million backlog, including the two projects on hold and the three projects delayed beyond fiscal 2021.
- Order trends in energy, petrochemical, and U.S. Navy markets, including the concentration of 51% of backlog in defense programs.
- Operating cash flow, cash and investment balances, credit-facility availability, and letters of credit as the company continued paying dividends despite the quarterly loss.
- The ongoing effects of COVID-19, oil-price volatility, customer capital-budget reductions, supply-chain constraints, foreign-currency exposure, and project-cancellation risk.
- Developments in asbestos litigation and other contingencies, for which the filing states that reasonably possible losses generally cannot be estimated.