Graham Corporation 10-K Summary
Filing period: Fiscal year ended March 31, 2016. The provided filing is a fiscal 2016 Form 10-K, not a 2014 fourth-quarter filing. Dollar amounts are in thousands except per-share data.
Business Context
Graham designs and manufactures engineered vacuum and heat-transfer equipment for refining, chemical and petrochemical, power-generation, nuclear, and defense markets. Its products are also used in U.S. Navy nuclear propulsion systems. Operations include facilities in Batavia, New York; Energy Steel in Michigan; and a sales and engineering subsidiary in Suzhou, China. The company had 368 employees at March 31, 2016 and reports one operating segment.
Fiscal 2016 was affected by low and volatile crude-oil prices, weaker customer capital spending, lower international demand, and the absence of a large U.S. Navy order received in fiscal 2015.
Financial Performance and Position
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Net sales | $90,039 | $135,169 | Down 33% |
| Gross profit | $23,255 | $41,804 | Down 44% |
| Gross margin | 25.8% | 30.9% | Down 5.1 percentage points |
| Income before taxes | $8,730 | $21,752 | Down 60% |
| Net income | $6,131 | $14,735 | Down 58% |
| Diluted EPS | $0.61 | $1.45 | Down 58% |
| Operating margin | 9.4% | 16.0% | Down 6.6 percentage points |
| Cash flow from operations | $18,751 | $6,279 | Up $12,472 |
| Capital expenditures | $1,153 | $5,300 | Down 78% |
- Domestic sales were $57,027, or 63% of revenue; international sales were $33,012, or 37%.
- Sales mix was 32% refining, 33% chemical and petrochemical, 16% power, and 19% defense and other industrial applications.
- Cash, cash equivalents, and investments totaled $65,072, compared with $60,271 at March 31, 2015.
- Working capital was $74,807, with a current ratio of 3.7.
- Total assets were $143,131 and stockholders’ equity was $109,380.
- The company had no bank borrowings at year-end. Capital lease obligations totaled $212, including $55 current.
- Backlog was $107,963, down from $113,811. Approximately 45% to 55% was expected to convert to fiscal 2017 revenue.
Material Changes Versus the Prior Comparable Period
- Revenue declined $45,130, primarily because of reduced energy-market investment and weaker international sales.
- Gross margin fell because of lower facility utilization, competitive pricing, and costs incurred ahead of revenue for Navy and nuclear initiatives.
- SG&A expense declined to $16,565 from $18,512, but increased to 18.4% of sales from 13.7% because of the lower revenue base.
- Fiscal 2015 included a $1,718 restructuring charge, or $1,164 after tax. Excluding that charge, fiscal 2015 net income was $15,899, or $1.57 diluted EPS.
- Fiscal 2016 included $1,789 of other income from negotiated cancellation charges, primarily related to two cancelled orders totaling $7,168.
- Orders declined 38% to $83,997 from $136,533. Three projects totaling $12,095 were cancelled during fiscal 2016, and two projects totaling $6,466 were on hold at year-end.
- The company repurchased 539 shares for $9,441 and paid $3,296 in dividends, returning $12,737 to shareholders.
- Operating cash flow improved substantially, aided by the conversion of prior-year accounts receivable and unbilled revenue into cash.
Guidance, Outlook, Risks, and Unusual Items
- Management expected fiscal 2017 revenue of approximately $80,000 to $95,000, gross margin of 24% to 26%, SG&A of $17,500 to $18,500, and an effective tax rate of 32% to 33%.
- Fiscal 2017 capital expenditures were expected to be approximately $2,000 to $2,500.
- Management expected fiscal 2017 cash flow to be materially lower than fiscal 2016 because fiscal 2016 benefited from working-capital conversion.
- Longer term, management targeted revenue above $200,000 across the next business cycle, supported by energy-market recovery, power-market growth, and expansion of U.S. Navy work. This is a management objective, not a guaranteed forecast.
- Principal risks include energy-market cyclicality, prolonged low oil and gas prices, customer concentration, fixed-price contract cost overruns, project cancellations and delays, dependence on annual U.S. Navy funding, international and China-related risks, foreign-currency movements, competition, skilled labor shortages, product liability, asbestos litigation, cybersecurity, and potential impairment of goodwill or other intangible assets.
- Asbestos-related lawsuits and other ordinary-course claims were outstanding. Management stated that losses could not be estimated but did not expect the matters to have a material effect on financial condition, results of operations, or cash flows.
- Outstanding standby letters of credit totaled $11,982. Credit facilities provided reported availability of approximately $26,330 in the liquidity discussion, while the JPMorgan facility itself showed $23,251 of availability; the difference reflects multiple facilities and collateral arrangements.
- The company adopted deferred-tax balance-sheet presentation guidance retrospectively and was evaluating the future impact of new revenue-recognition, inventory, lease, and stock-compensation standards.
- Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Most Important Facts to Verify
- Confirm that the intended period is fiscal 2016 rather than the requested “2014 Q4,” because the supplied document is a fiscal 2016 Form 10-K.
- Verify the sustainability of the $18,751 operating cash flow, particularly the contribution from reductions in receivables and unbilled revenue.
- Assess whether the $107,963 backlog, including 47% tied to U.S. Navy projects, converts to revenue and margin as expected.
- Compare actual fiscal 2017 revenue, margin, SG&A, capital spending, and cash flow with management’s stated ranges.
- Review customer cancellations, projects on hold, fixed-price contract estimates, and the effect of under-utilized manufacturing capacity.
- Evaluate exposure to crude-oil prices, energy-sector capital spending, U.S. Navy appropriations, international markets, and China operations.
- Review asbestos claims, warranty reserves, pension funding status, letters of credit, and the terms and covenants of the secured revolving credit facilities.