Graham Corporation Form 10-Q Summary
Reporting period: Three months ended June 30, 2011, the first quarter of fiscal 2012. The supplied metadata identifies “2010 Q1,” but the filing itself clearly covers June 30, 2011, with comparison to June 30, 2010. Graham designs and manufactures engineered equipment for refining, petrochemical, power generation, nuclear, alternative energy, and other industrial markets. Results include Energy Steel & Supply Co., acquired December 14, 2010.
Financial Performance and Position
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $25.012 million | $13.351 million | Up 87% |
| Gross profit | $8.197 million | $3.850 million | Up 113% |
| Gross margin | 33% | 29% | Up 4 percentage points |
| Income before taxes | $4.497 million | $1.292 million | Up 248% |
| Net income | $3.016 million | $0.878 million | Up 244% |
| Diluted earnings per share | $0.30 | $0.09 | Up $0.21 |
| Operating margin | 18% | 10% | Up 8 percentage points |
| Orders booked | $19.043 million | $8.124 million | Up 134% |
Energy Steel contributed $3.865 million of sales and $5.178 million of orders. Sales mix was 48% refining, 12% chemical and petrochemical, 23% power including nuclear, and 17% other industrial and commercial applications. International sales represented 55% of total sales, compared with 59% in the prior-year quarter.
SG&A expense increased to approximately $3.7 million from $2.6 million, but declined to 15% of sales from 19%. The increase reflected Energy Steel, higher headcount, and higher variable costs. The effective tax rate for the quarter was 33%; management projected a fiscal 2012 effective rate of 33% to 35%.
Cash Flow, Liquidity, and Debt
- Net cash used in operating activities was $1.588 million, compared with $2.800 million used in the prior-year quarter.
- Net cash provided by investing activities was $7.282 million, including $17.320 million of investment maturities and $9.698 million of investment purchases.
- Capital expenditures were $0.340 million, compared with $0.525 million; fiscal 2012 capital expenditures were expected to be $3.0 million to $3.5 million.
- Cash and cash equivalents were $25.204 million at June 30, 2011, compared with $19.565 million at March 31, 2011. Cash and short-term investments totaled $41.103 million, down from $43.083 million.
- Working capital was $47.047 million, with a current ratio of 2.6, compared with $44.003 million and 2.3 at March 31, 2011.
- The company had no borrowings under its $25 million revolving credit facility. Letters of credit totaled $16.582 million, leaving $8.418 million of availability. The facility could be increased to $50 million at the company’s discretion.
- Total liabilities were $41.360 million and stockholders’ equity was $76.835 million at June 30, 2011. Debt consisted primarily of capital lease obligations totaling $0.252 million.
Material Changes Versus the Prior Comparable Period
- Revenue and profitability increased substantially due to higher organic volume, improved facility utilization, and the Energy Steel acquisition.
- Gross margin expanded from 29% to 33%, while operating margin improved from 10% to 18%.
- Orders increased 134%, although backlog declined 6% sequentially to $85.199 million from $91.096 million at March 31, 2011.
- Approximately 80% to 85% of backlog was expected to convert to sales within twelve months, below the historical 85% to 90% range because of the multiyear Northrop Grumman U.S. Navy project.
- Accounts receivable increased to $14.925 million from $8.681 million, partly reflecting the conversion of unusually high prior-period unbilled revenue as projects were completed and shipped.
- Amortization increased materially because of acquired intangible assets; first-quarter intangible amortization expense was $116 thousand versus none in the prior-year quarter. The company also expensed $38 thousand of acquired inventory step-up.
Guidance, Outlook, Risks, and Unusual Items
Management expected fiscal 2012 revenue of $95 million to $105 million, representing growth of approximately 30% to 40% over fiscal 2011, with Energy Steel contributing approximately 16% to 20% of revenue. Expected fiscal 2012 gross margin was 29% to 32%, SG&A was expected to be $16 million to $17 million, and cash flow was expected to be positive.
Management cited an improving recovery in refinery and petrochemical markets, strength in international markets, alternative energy, and U.S. nuclear work. However, order timing was expected to remain volatile. International growth may pressure pricing and margins, and copper and steel costs remained elevated and volatile. Two projects, the U.S. Navy project and a Middle East refinery project, were expected to represent approximately 25% of fiscal 2012 revenue.
- The Energy Steel acquisition included a contingent earn-out ranging from zero to $2.0 million; $1.498 million was recorded as a liability and additional purchase price. Purchase accounting remained preliminary and could result in material adjustments.
- The company faced asbestos-related personal injury lawsuits. Outcomes and potential liability could not be determined.
- The IRS was examining tax years 2009 and 2010. A prior IRS proposal sought to disallow substantially all research and development tax credits claimed for 2006 through 2008. Unrecognized tax benefits included $477 thousand related to this position and an additional $888 thousand uncertain tax benefit.
- Revenue recognition relies substantially on percentage-of-completion estimates, including total labor hours and costs to complete contracts. Changes in estimates could affect reported revenue and earnings.
- Nuclear permits and the Energy Steel tradename were treated as indefinite-lived assets and subject to annual impairment testing. Goodwill totaled $7.404 million.
- The company reported no off-balance-sheet arrangements other than operating leases and letters of credit, and no projects were on hold at June 30, 2011.
Investor Verification Checklist
- Verify the filing period against the metadata: the document is for June 30, 2011, not 2010 Q1.
- Assess how much of the revenue and margin improvement is attributable to Energy Steel versus organic growth.
- Monitor conversion of the $85.199 million backlog, particularly the multiyear Northrop Grumman project and the two projects expected to comprise approximately 25% of fiscal 2012 revenue.
- Compare future gross margins with the 29% to 32% fiscal 2012 guidance and evaluate exposure to international pricing and raw-material costs.
- Track operating cash flow, accounts receivable, unbilled revenue, customer deposits, and the expected positive fiscal 2012 cash flow.
- Review the Energy Steel earn-out, preliminary purchase-price allocation, goodwill, and indefinite-lived intangible assets for subsequent adjustments or impairment.
- Follow the IRS research-and-development tax-credit examination and asbestos litigation for potential cash or earnings effects.