Graham Corporation Form 10-Q Summary
Reporting period: The supplied filing covers the three and nine months ended December 31, 2015, Graham’s fiscal 2016 third quarter and year-to-date period. This does not match the request metadata identifying “2014 Q3”; the comparable periods are the three and nine months ended December 31, 2014.
Business context
Graham designs and manufactures custom-engineered vacuum and heat-transfer equipment, nuclear components, and related systems for energy, defense, chemical and petrochemical, power, refining, and industrial markets. Operations include facilities in Batavia, New York; Lapeer, Michigan; and Suzhou, China.
Key financial metrics
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Net sales | $17.323 million | $33.646 million | $67.738 million | $97.714 million |
| Gross profit | $3.524 million | $10.103 million | $18.696 million | $29.019 million |
| Gross margin | 20% | 30% | 28% | 30% |
| Net income | $1.274 million | $3.992 million | $5.611 million | $10.570 million |
| Diluted EPS | $0.13 | $0.39 | $0.56 | $1.04 |
| Operating cash flow | Not separately provided | Not separately provided | $22.171 million | $7.505 million |
SG&A was $3.738 million, or 22% of sales, in the quarter and $12.622 million, or 19% of sales, for the first nine months. The effective tax rate was 22% in the quarter and 30% year to date, compared with 30% and 32%, respectively, in the prior-year periods.
At December 31, 2015, cash and cash equivalents were $31.215 million, investments were $42.000 million, and total liquidity from cash and investments was $73.215 million. Working capital was $80.332 million, with a 3.9 current ratio. Total debt consisted primarily of capital lease obligations of $229,000; no borrowings were outstanding under the revolving credit facilities. Letters of credit totaled $10.042 million, and reported availability under the JPMorgan Chase and HSBC facilities was $28.743 million.
Total assets were $151.009 million and stockholders’ equity was $115.066 million at December 31, 2015. The company generated $22.171 million of operating cash flow, used $9.879 million in investing activities, and used $8.207 million in financing activities during the first nine months. Financing uses included $2.415 million of dividends and $5.852 million of treasury-stock purchases.
Material changes versus the prior comparable periods
- Third-quarter sales declined 49%; nine-month sales declined 31%, reflecting weaker refining and chemical markets and customer-driven project delays.
- Quarterly gross profit declined 65%, and gross margin fell to 20%, primarily because lower revenue caused under-absorption of fixed production costs. Year-to-date gross margin decreased to 28% from 30%.
- Net income declined 68% in the quarter and 47% year to date. Results included $1.784 million of net cancellation-fee income, with no comparable income in fiscal 2015.
- Orders were $22.263 million in the quarter, including a $3.313 million cancellation from backlog, and $66.840 million year to date, including two cancellations totaling $7.168 million. Year-to-date orders declined 25%.
- Backlog was $113.150 million at December 31, 2015, approximately flat with March 31, 2015. About 45% to 50% was expected to convert to sales within 12 months; one order totaling $10.084 million was on hold.
- Cash and investments increased 21% from March 31, 2015, supported by customer collections and reductions in unbilled revenue. The company repurchased 328,000 shares for $5.852 million during the first nine months.
- The company entered into a new five-year JPMorgan Chase revolving credit facility providing $25 million of capacity, expandable to $50 million, replacing a similar Bank of America facility.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2016 revenue of $90 million to $95 million, gross margin of 27% to 28%, SG&A of 17% to 18% of sales, and an effective tax rate of 30% to 31%.
- Year-end cash, cash equivalents, and investments are expected to be between $70 million and $75 million. Fiscal 2016 capital expenditures are expected to be approximately $1.5 million to $2.0 million.
- Management expects weak refining and petrochemical demand to continue through the final three months of fiscal 2016 because of sustained low and volatile crude-oil prices. The timing of market recovery and new orders remains uncertain.
- Management retains its long-term objective of growing revenue to more than $200 million across the next business cycle, supported by power-market diversification, U.S. Navy work, and potential acquisitions.
- Key risks include project cancellations or delays, backlog conversion timing, customer capital-spending decisions, commodity-price volatility, competitive pricing, foreign-exchange exposure, contract-estimate revisions under percentage-of-completion accounting, and dependence on U.S. Navy and energy markets.
- The company faces asbestos-related lawsuits and other ordinary-course claims. Management cannot estimate a reasonably possible loss range but does not expect the matters to have a material effect on operations, financial position, or cash flows.
- The $1.784 million cancellation-charge income and the $158,000 reversal of excess product-warranty provisions are unusual items that benefited current-period results.
Important facts for investors to verify
- Confirm that the intended filing is the December 31, 2015 Form 10-Q rather than a 2014 third-quarter filing.
- Assess whether revenue, order intake, and backlog conversion support management’s $90 million to $95 million fiscal 2016 revenue outlook.
- Separate recurring operating profitability from the $1.784 million cancellation-fee benefit and the warranty-provision reversal.
- Review the concentration and timing of backlog, including the 44% attributable to U.S. Navy projects and the $10.084 million order on hold.
- Monitor gross-margin performance as lower production utilization may continue to pressure fixed-cost absorption.
- Review the JPMorgan credit agreement, collateral requirements, financial covenants, letters of credit, and dividend limitations.
- Evaluate exposure to asbestos litigation, customer cancellations, low crude-oil prices, and percentage-of-completion accounting estimates.