Graham Corporation Form 10-Q Summary
Reporting period: Three months ended June 30, 2014, the first quarter of fiscal 2015. The request metadata identifies “2013 Q1,” but the filing itself reports fiscal 2015 results and compares them with the three months ended June 30, 2013.
Business Context
Graham designs and manufactures custom-engineered equipment for refining, petrochemical, chemical, power, nuclear, defense, and other industrial markets. Operations include facilities in New York and Michigan and a wholly owned subsidiary in China.
Key Financial Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $28.502 million | $28.256 million | Up 0.9% |
| Gross profit | $7.932 million | $10.015 million | Down 20.8% |
| Gross margin | 28% | 35% | Down 7 percentage points |
| Net income | $2.392 million | $3.808 million | Down 37.2% |
| Diluted EPS | $0.24 | $0.38 | Down $0.14 |
| Operating margin | 13% | 20% | Down 7 percentage points |
| Operating cash flow | $3.189 million | $2.000 million | Up $1.189 million |
SG&A was $4.349 million, or 15% of sales, compared with $4.403 million, or 16%, in the prior-year quarter. The effective tax rate was approximately 34%, compared with 32% in the prior-year period. Dividends declared increased to $0.04 per share from $0.03.
At June 30, 2014, cash and cash equivalents were $46.410 million and short-term investments were $15.000 million, for total cash and investments of $61.410 million. Working capital was $71.090 million, with a current ratio of 3.9. Capital lease obligations totaled $194,000, and there were no borrowings under the company’s credit facilities. Letters of credit outstanding totaled $18.999 million.
Material Changes Versus the Prior Comparable Period
- Sales were broadly stable, but product and project mix reduced gross profit and gross margin substantially.
- Domestic sales increased 48% to approximately $22.2 million, while international sales decreased 53% to approximately $6.3 million. Domestic sales represented 78% of total sales versus 53% in the prior-year quarter.
- Sales mix shifted toward chemical and petrochemical markets, which represented 41% of sales versus 16% previously. Refining represented 23% versus 45%, and power represented 17% versus 27%.
- Orders declined 5% to $31.108 million from $32.783 million. Domestic orders were 53% of current-quarter orders versus 87% in the prior-year quarter.
- Backlog increased 2% to a record $114.797 million from $112.108 million at March 31, 2014. Management expects approximately 70% to 75% of backlog to convert to sales within 12 months.
- Operating cash flow increased despite lower net income, primarily because of lower inventory and more favorable accounts-receivable changes. Capital expenditures rose to $2.569 million from $295,000, driven by the Batavia capacity expansion.
Guidance, Outlook, Risks, and Unusual Items
- Management expects fiscal 2015 revenue of approximately $120 million to $130 million, representing 17% to 27% growth over fiscal 2014.
- Fiscal 2015 gross margin is expected to be 30% to 32%, SG&A is expected at 15% to 16% of sales, and the effective tax rate is expected at 33% to 34%.
- Fiscal 2015 capital expenditures are expected to be approximately $5.5 million to $6.0 million, with about 60% supporting the Batavia expansion. Cash flow is expected to remain positive.
- Management cited stronger refining, petrochemical, and global energy activity, but noted uncertain order timing, pricing pressure, less favorable product mix, and lower margins in emerging and petrochemical markets.
- Revenue and earnings depend in part on the conversion of the U.S. Navy CVN-79 project and two large domestic nuclear power projects. Delays could adversely affect fiscal 2015 results.
- The company faces asbestos-related lawsuits and other ordinary-course claims. Management cannot estimate a reasonably possible loss range but does not expect a material effect on results, financial position, or cash flows.
- The company recognized a $97,000 warranty expense in the quarter, compared with a $20,000 warranty provision reversal in the prior-year quarter.
- The company adopted no material new accounting standard during the quarter. It is evaluating the future impact of the new FASB revenue-recognition guidance, effective for the company’s fiscal year beginning after December 15, 2016.
- Management stated that disclosure controls were effective and that no material change occurred in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether the expected $120 million to $130 million fiscal 2015 revenue range is supported by backlog conversion and new orders.
- Whether gross margin recovers toward the guided 30% to 32% range after the first-quarter decline to 28%.
- Timing and execution of the CVN-79 and nuclear projects, including any customer delays or cancellations.
- Progress, cost, and capacity benefits from the Batavia expansion and the expected $5.5 million to $6.0 million fiscal 2015 capital program.
- Availability under the credit facilities after considering the $18.999 million of outstanding letters of credit.
- Exposure to international demand, foreign exchange, commodity costs, pricing pressure, and asbestos-related litigation.