Graham Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended December 31, 2012; fiscal year ending March 31, 2013. The request metadata identifies “2011 Q3,” but the filing itself is for the 2012 fiscal third quarter. Financial statements are unaudited and presented under U.S. GAAP.
Business context
Graham designs and manufactures custom-engineered ejectors, vacuum systems, condensers, pumps and heat exchangers for refining, petrochemical, chemical, power-generation and other industrial markets. Through Energy Steel & Supply Co., it also supplies nuclear-code-accredited components and materials. Operations include facilities in New York, Michigan and China.
Key financial metrics
| Metric | Q3 FY2013 | Q3 FY2012 | 9M FY2013 | 9M FY2012 |
|---|---|---|---|---|
| Net sales | $25.633 million | $24.329 million | $74.068 million | $82.936 million |
| Gross profit | $7.128 million | $6.462 million | $21.277 million | $27.459 million |
| Gross margin | 28% | 27% | 29% | 33% |
| Net income | $3.047 million | $1.640 million | $7.052 million | $10.124 million |
| Diluted EPS | $0.30 | $0.16 | $0.70 | $1.01 |
| Operating margin | 15% | 11% | 13% | 19% |
Quarterly sales increased 5%, while nine-month sales decreased 11%. Quarterly net income rose 86%; nine-month net income declined 30%. The filing attributes the quarterly improvement partly to improved pricing and increased subcontracting.
Net income included a $975,000 reversal of the remaining Energy Steel contingent earn-out liability. Excluding this unusual item, quarterly net income was $2.072 million, or $0.21 diluted EPS, and nine-month net income was $6.077 million, or $0.61 diluted EPS.
For the nine months, net cash provided by operating activities was $14.948 million versus $3.914 million in the prior-year period. Capital expenditures were $971,000 versus $2.621 million, dividends paid were $599,000, and net cash used in financing activities was $607,000. Cash and cash equivalents were $28.110 million at December 31, 2012.
Cash and short-term investments totaled $55.107 million, compared with $41.688 million at March 31, 2012. Working capital was $60.189 million and the current ratio was 3.4. The company had no borrowings under its revolving credit facility; $11.274 million of letters of credit were outstanding, leaving $13.726 million of availability under the $25 million facility. Total capital lease obligations were $238,000.
Material changes versus the prior comparable period
- Third-quarter sales increased 5%, but nine-month sales fell 11%, primarily because of lower international sales, pricing and volume.
- International sales increased in the quarter, led by the Middle East, but declined 13% for the nine-month period. Domestic sales declined in both periods.
- Quarterly gross margin improved to 28% from 27%; nine-month gross margin fell to 29% from 33% because of lower volume, capacity utilization and less favorable project pricing in the first half.
- SG&A decreased 17% in the quarter, principally because of the $975,000 earn-out reversal. Excluding that reversal, SG&A increased 9% in the quarter and 6% for the nine months.
- Orders increased 12% in the quarter and 9% for the nine months. Backlog was $90.741 million, down from $94.934 million at March 31, 2012.
- Operating cash flow improved substantially, primarily from collections and changes in unbilled revenue, customer deposits and income taxes.
Guidance, outlook and risks
- Fiscal 2013 revenue guidance was $102.5 million to $107.5 million, compared with $103.2 million in fiscal 2012.
- Fiscal 2013 gross margin was expected to be 29% to 31%; SG&A was expected to be 15.5% to 16% of sales, or 16.5% to 17% excluding the earn-out reversal.
- The projected fiscal 2013 effective tax rate was 29% to 30%. Capital expenditures were expected to be $1.5 million to $2.0 million.
- Management expected positive fiscal-year cash flow but cautioned that fourth-quarter working-capital timing could make quarterly cash flow negative.
- Management viewed refining, petrochemical and energy markets as being in the early stages of recovery, but expected order levels to remain volatile and quarterly results to fluctuate.
- Approximately 75% to 85% of backlog was expected to convert to sales within twelve months, below the historical 85% to 90% rate because of multi-year Navy and nuclear projects.
- Key risks include project timing or cancellation, pricing pressure, metal and material cost volatility, foreign currency exposure, dependence on capital spending by customers, international-market uncertainty and execution of long-term contracts.
- The company was defending asbestos-related and other ordinary-course claims. Management could not estimate a reasonably possible loss but did not expect a material financial impact.
- No projects were on hold at December 31, 2012. The filing states that there were no material off-balance-sheet arrangements other than operating leases and letters of credit.
- The former Vice President of Sales resigned January 9, 2013. A January 31 separation agreement provides six months of salary continuation and target fiscal 2013 bonus payments of $7,125 per month for six months.
Investor verification points
- Confirm the filing period, since the supplied metadata says 2011 Q3 while the filing reports December 31, 2012.
- Assess underlying profitability excluding the $975,000 nonrecurring earn-out reversal.
- Monitor whether backlog converts within management’s 75% to 85% estimate and whether multi-year nuclear and Navy projects create timing volatility.
- Reconcile fiscal 2013 revenue and margin guidance with the nine-month run rate and expected fourth-quarter sales.
- Review international exposure, pricing pressure and project mix for potential further gross-margin compression.
- Verify liquidity after considering letters of credit, capital expenditures, dividends, pension and postretirement obligations, and potential litigation or tax contingencies.