Graham Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2013, representing the second quarter and first half of fiscal 2014. The request metadata identifies “2012 Q2,” but the provided filing is for September 30, 2013.
Business context
Graham designs and manufactures custom-engineered equipment for refining, petrochemical, power, nuclear, defense, and other industrial markets. Operations include facilities in New York and Michigan and a wholly owned subsidiary in China. Revenue is primarily recognized using percentage-of-completion accounting for longer manufacturing contracts.
Key financial metrics
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Net sales | $24.490 million | $25.902 million | $52.746 million | $48.435 million |
| Gross profit | $8.289 million | $7.913 million | $18.304 million | $14.149 million |
| Gross margin | 34% | 31% | 35% | 29% |
| Net income | $2.589 million | $2.615 million | $6.397 million | $4.005 million |
| Diluted EPS | $0.26 | $0.26 | $0.63 | $0.40 |
| Operating cash flow | Not separately provided | Not separately provided | $4.293 million | $6.244 million |
- Operating margin was 16% in the quarter and 18% for the first six months, compared with 13% and 12%, respectively, in the prior-year periods.
- September 30 cash and cash equivalents were $22.862 million, with $31.999 million of short-term U.S. Treasury investments, for total cash and investments of $54.861 million.
- Working capital was $71.184 million, and the current ratio was 4.3x, versus $64.026 million and 3.6x at March 31, 2013.
- There were no borrowings under the revolving credit facility. Capital lease obligations totaled $170,000, and $11.150 million of letters of credit were outstanding against a $25 million facility, leaving $13.850 million of availability.
- Total assets were $130.850 million and total liabilities were $30.847 million at September 30, 2013.
Material changes versus the prior comparable period
- Second-quarter sales declined 5%, primarily because of low order levels in the first two quarters of fiscal 2013. First-half sales increased 9%, led by a 15% increase in international sales, particularly in Asia.
- Gross profit increased 5% in the quarter and 29% year to date. Management attributed the improvement to product mix, short-cycle product volume and more favorably priced projects.
- Second-quarter net income was essentially flat, while first-half net income increased 60%. The prior-year comparison benefited from a $387,000 reversal of accrued interest related to uncertain tax positions; the current period had only $4,000 of such interest expense for the first six months.
- Orders increased 89% in the quarter to $48.425 million and 79% in the first six months to $81.208 million. Backlog reached a record $114.392 million, up 33% from March 31, 2013.
- Operating cash flow fell to $4.293 million from $6.244 million, primarily because of higher accounts receivable and lower accounts payable and customer deposits.
- Capital expenditures increased to $898,000 from $578,000 in the first six months, while dividends paid increased to $603,000 from $399,000.
Guidance, outlook, risks and unusual items
- Fiscal 2014 revenue guidance was $100 million to $110 million, with gross margin expected at 31% to 33%, SG&A at 16% to 17% of sales, and an effective tax rate of 33% to 34%.
- Management expected positive fiscal 2014 operating cash flow, substantially offset by planned capital spending of $6 million to $7 million, primarily for expansion of the Batavia facility.
- Management anticipated fiscal 2015 revenue of approximately $115 million to $135 million, based on backlog and visibility; this is forward-looking and subject to execution and market conditions.
- Approximately 70% to 75% of backlog was expected to convert to sales within twelve months. U.S. Navy and nuclear projects have longer and potentially uneven conversion cycles.
- Management expected second-half margins to decline from first-half levels because of unusually concentrated delivery timing and increased outsourcing of fabrication.
- Market risks include cyclical and volatile order patterns, project delays or cancellations, commodity and pricing pressure, foreign currency exposure, international economic conditions, and uncertainty in nuclear investment. No projects were on hold at September 30, 2013.
- The company was subject to asbestos-related lawsuits and other ordinary-course claims. Management could not estimate a reasonably possible loss range but did not expect a material financial effect.
- The company had no material off-balance-sheet arrangements other than operating leases and letters of credit. Pension contributions were not expected for the balance of fiscal 2014.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Investor verification items
- Verify the reporting-period discrepancy between the request metadata and the September 30, 2013 filing.
- Assess whether the $114.392 million backlog converts on schedule, particularly the longer-cycle Navy and nuclear projects.
- Monitor second-half gross-margin pressure from outsourcing and compare results with the 31% to 33% fiscal 2014 guidance.
- Reconcile planned $6 million to $7 million capital spending with operating cash flow and liquidity.
- Review accounts receivable growth, customer deposits, and working-capital requirements as revenue and backlog expand.
- Track asbestos litigation and other contingencies, for which the filing provides no estimable loss range.