Graham(GHM) - 2019 Q3 - Quarterly Report

Part I. FINANCIAL INFORMATION Unaudited Condensed Consolidated Financial Statements This section presents Graham Corporation's unaudited condensed consolidated financial statements for Q3 and nine-month periods ended December 31, 2018, detailing operations, balance sheets, cash flows, and notes on accounting policies including ASC 606 adoption Condensed Consolidated Statements of Operations and Retained Earnings For Q3 2018, net sales were flat at $17.2 million, with net income improving to $95 thousand from a $11.6 million loss, while nine-month net sales grew 23.2% to $68.2 million, achieving $4.2 million net income from a $10.7 million loss Consolidated Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2018 | Q3 2017 | Nine Months 2018 | Nine Months 2017 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $17,198 | $17,281 | $68,190 | $55,356 | | Gross profit | $3,742 | $3,496 | $17,111 | $12,015 | | Net income (loss) | $95 | $(11,622) | $4,245 | $(10,677) | | Diluted EPS | $0.01 | $(1.19) | $0.43 | $(1.09) | Condensed Consolidated Balance Sheets As of December 31, 2018, total assets increased to $156.8 million from $143.3 million at March 31, 2018, driven by investments and inventories, while total liabilities rose due to customer deposits, and stockholders' equity modestly increased to $104.8 million Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2018 | Mar 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $16,675 | $40,456 | | Investments | $63,732 | $36,023 | | Total current assets | $127,785 | $115,400 | | Total assets | $156,761 | $143,333 | | Customer deposits | $32,572 | $13,213 | | Total liabilities | $51,952 | $39,984 | | Total stockholders' equity | $104,809 | $103,349 | Condensed Consolidated Statements of Cash Flows For the nine months ended December 31, 2018, net cash from operations more than doubled to $8.5 million, while investing activities used $29.2 million due to increased investments, and financing activities used $2.9 million, resulting in an overall $23.8 million decrease in cash and cash equivalents Consolidated Statement of Cash Flows Highlights (Nine Months Ended Dec 31, in thousands) | Category | 2018 | 2017 | | :--- | :--- | :--- | | Net cash provided by operating activities | $8,535 | $3,874 | | Net cash used by investing activities | $(29,181) | $(4,565) | | Net cash used by financing activities | $(2,907) | $(2,835) | | Net decrease in cash and cash equivalents | $(23,781) | $(3,315) | | Cash and cash equivalents at end of period | $16,675 | $36,159 | Notes to Condensed Consolidated Financial Statements The notes detail the company's accounting policies, including the significant adoption of ASC 606 on April 1, 2018, which decreased opening retained earnings by $1.022 million, and also provide disaggregated revenue, backlog, inventory, intangible asset, and 2017 Tax Act impact data - The company adopted the new revenue recognition standard ASC 606 on April 1, 2018, using the modified retrospective approach, resulting in a cumulative-effect adjustment that decreased opening retained earnings by $1,022 thousand[31][73] Revenue by Product Line (Nine Months Ended Dec 31, in thousands) | Product Line | 2018 | 2017 | | :--- | :--- | :--- | | Heat transfer equipment | $15,495 | $18,591 | | Vacuum equipment | $28,823 | $15,270 | | All other | $23,872 | $21,495 | | Net sales | $68,190 | $55,356 | Revenue by Geographic Region (Nine Months Ended Dec 31, in thousands) | Geographic Region | 2018 | 2017 | | :--- | :--- | :--- | | U.S. | $42,846 | $37,276 | | Canada | $15,672 | $5,046 | | Asia | $5,591 | $8,228 | | Middle East | $1,705 | $2,958 | | All other | $2,376 | $1,848 | | Net sales | $68,190 | $55,356 | - As of December 31, 2018, the company's backlog (remaining unsatisfied performance obligations) was $133.7 million, with 50% to 55% expected to be recognized as revenue within one year[40] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance, highlighting flat Q3 fiscal 2019 sales but 23% nine-month sales growth, a record $133.7 million backlog, improved market conditions, strong liquidity with $80.4 million in cash and investments, and a positive fiscal 2019 outlook with $90-95 million expected revenue Highlights Key highlights for the first nine months of fiscal 2019 include a 23% increase in net sales to $68.2 million, a 16% rise in orders to $79.6 million, a record $133.7 million backlog, and $4.2 million net income, a significant turnaround from the prior year's loss - Net sales for the first nine months of fiscal 2019 were $68.2 million, up 23% from the prior year[85] - Orders booked in the first nine months of fiscal 2019 increased 16% to $79.6 million[85] - Backlog reached a record $133.7 million at December 31, 2018[85] Results of Operations Sales for Q3 fiscal 2019 were flat at $17.2 million, while nine-month sales rose 23% to $68.2 million driven by international sales, with gross profit margin improving to 25% for the nine-month period due to better pricing and project mix, and SG&A expenses increasing due to headcount and variable compensation Sales Performance (vs. Prior Year) | Period | Net Sales | Change | Domestic Sales Change | International Sales Change | | :--- | :--- | :--- | :--- | :--- | | Q3 FY2019 | $17.2M | -0.5% | +27% | -52% | | Nine Months FY2019 | $68.2M | +23% | +15% | +40% | - Gross profit margin for the first nine months of fiscal 2019 was 25%, up from 22% in the prior year, due to higher volume and improved pricing[98] - SG&A expenses for the first nine months of fiscal 2019 increased 19% to $13.7 million, primarily due to headcount additions and variable compensation[99] Liquidity and Capital Resources The company maintained a strong liquidity position with $80.4 million in cash and investments at December 31, 2018, with net cash from operations for the first nine months at $8.5 million, and a $25 million revolving credit facility with no outstanding borrowings Liquidity Position (in thousands) | Metric | Dec 31, 2018 | Mar 31, 2018 | | :--- | :--- | :--- | | Cash and investments | $80,407 | $76,479 | | Working capital | $78,676 | $78,105 | - Capital expenditures for fiscal 2019 are projected to be between $2.0 million and $2.5 million[107] - The company has a $25 million line of credit with no amounts outstanding as of December 31, 2018[110] Orders and Backlog Third-quarter orders decreased 43% year-over-year to $23.2 million, while nine-month orders grew 16% to $79.6 million, and backlog increased 5% sequentially to a record $133.7 million, with U.S. Navy projects comprising 50% of the total Backlog Composition by Market | Market | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | U.S. Navy | 50% | 51% | | Refinery | 23% | 35% | | Chemical/Petrochemical | 20% | 4% | | Power (incl. Nuclear) | 5% | 6% | | Other | 2% | 4% | - Approximately 50% to 55% of the backlog is expected to convert to sales within one year, with a significant portion of U.S. Navy orders converting over a longer cycle (up to five years)[113] Outlook The company anticipates continued strength for fiscal year 2019, with expected revenue between $90 million and $95 million, gross profit margins in the 25% to 27% range, and an effective tax rate of approximately 20% Fiscal 2019 Guidance | Metric | Expected Range | | :--- | :--- | | Revenue | $90,000 - $95,000 (in thousands) | | Gross Profit Margin | 25% - 27% | | SG&A | $18,250 - $18,750 (in thousands) | | Effective Tax Rate | ~20% | Quantitative and Qualitative Disclosures About Market Risk The company identifies principal market risks as foreign currency exchange rates, price competition, and project cancellation, with foreign currency risk managed by local currency sales, price risk from global competition, and project cancellation risk mitigated by contractual progress payments with no projects on hold - The company is exposed to foreign currency risk, as international sales were 17% of total sales in Q3 fiscal 2019, but risk is limited as sales are denominated in the local currency of the respective subsidiary[125] - Price risk from global competitors is a factor, though the company believes its quality and engineering provide a competitive advantage[127] - Project cancellation risk is managed through contract structures with progress payments, and as of December 31, 2018, the company had no projects on hold[128] Controls and Procedures As of December 31, 2018, the company's principal executive and financial officers concluded that its disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the third quarter - The President and CEO, along with the CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period[129] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[130] Part II. OTHER INFORMATION Risk Factors This section updates the company's risk factors, highlighting the adverse impact of tariffs imposed by the U.S. and other countries, which could increase costs and reduce product attractiveness, and the potential disruption to business operations from U.S. government shutdowns - Tariffs imposed by the U.S. and other countries, particularly on steel products, could significantly increase costs, make products less competitive, and adversely affect financial performance, especially given the company's operations in China[133] - A lapse in U.S. government appropriations (a "Government Shutdown") could disrupt export licensing and inspection processes, potentially delaying shipments and causing a material adverse impact on revenue and business[134] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the Principal Executive Officer and Principal Financial Officer, and Interactive Data Files (XBRL) for financial reporting - The exhibits filed with the report include officer certifications under Rule 13a-14(a)/15d-14(a) and Section 1350, as well as XBRL Interactive Data Files[136] Signatures The report is formally signed and submitted on behalf of Graham Corporation by its Vice President-Finance & Administration and Chief Financial Officer, Jeffrey Glajch, dated February 1, 2019 - The report was signed on February 1, 2019, by Jeffrey Glajch, Vice President-Finance & Administration and Chief Financial Officer[139]