Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
GHM > SEC Filings for GHM > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for GRAHAM CORP

Form 10-Q for GRAHAM CORP


5-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

(Dollar amounts in thousands, except per share data)

Overview

We are a global business that designs, manufactures and sells critical equipment for the energy industry, which includes the oil refining, petrochemical, as well as the cogeneration, nuclear and alternative power markets. With world-renowned engineering expertise in vacuum and heat transfer technology and a leading nuclear code accredited fabrication and specialty machining company, we design and manufacture custom-engineered ejectors, vacuum pump packages, surface condensers and vacuum systems as well as supplies and components for use inside the reactor vessel and outside the containment vessel of nuclear power facilities. Our equipment is also used by the defense industry in nuclear propulsion power systems and can be found in other diverse applications such as metal refining, pulp and paper processing, water heating, refrigeration, desalination, food processing, pharmaceutical, heating, ventilating and air conditioning.

Our corporate headquarters are located in Batavia, New York and we have production facilities in both Batavia, New York and at our wholly-owned subsidiary, Energy Steel & Supply Co. ("Energy Steel"), in Lapeer, Michigan. We also have a wholly-owned foreign subsidiary, Graham Vacuum and Heat Transfer Technology (Suzhou) Co., Ltd. ("GVHTT"), located in Suzhou, China, which supports sales orders from China and provides engineering support and supervision of subcontracted fabrication.

Our current fiscal year (which we refer to as "fiscal 2015") ends March 31, 2015.

Highlights

Highlights for the three months ended June 30, 2014 include:

Net sales for the first quarter of fiscal 2015 were $28,502, comparable to $28,256 for the first quarter of the fiscal year ended March 31, 2014 (we refer to the fiscal year ended March 31, 2014 as "fiscal 2014").

Net income and income per diluted share for the first quarter of fiscal 2015 were $2,392 and $0.24, compared with net income of $3,808 and income per diluted share of $0.38 for the first quarter of fiscal 2014.

Orders booked in the first quarter of fiscal 2015 were $31,108, down 5% compared with the first quarter of fiscal 2014, when orders were $32,783.

Backlog increased to a record $114,797 at June 30, 2014, up from $112,108 at March 31, 2014.

Gross profit margin and operating margin for the first quarter of fiscal 2015 was 28% and 13%, respectively, compared with 35% and 20%, respectively, for the first quarter of fiscal 2014.

Cash and short-term investments at June 30, 2014 were $61,410, compared with $61,146 at March 31, 2014.


Table of Contents

Forward-Looking Statements

This report and other documents we file with the Securities and Exchange Commission include "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results implied by the forward-looking statements. Such factors include, but are not limited to, the risks and uncertainties identified by us under the heading "Risk Factors" in Item 1A of our Annual Report on Form 10-K for fiscal 2014.

Forward-looking statements may also include, but are not limited to, statements about:

the current and future economic environments affecting us and the markets we serve;

expectations regarding investments in new projects by our customers;

sources of revenue and anticipated revenue, including the contribution from the growth of new products, services and markets;

expectations regarding achievement of revenue and profitability;

plans for future products and services and for enhancements to existing products and services;

our operations in foreign countries;

political instability in regions in which our customers are located;

our growth and acquisition strategy;

our ability to expand nuclear power work into new markets;

our ability to successfully execute our existing contracts;

estimates regarding our liquidity and capital requirements;

timing of conversion of backlog to sales;

our ability to attract or retain customers;

the outcome of any existing or future litigation; and

our ability to increase our productivity and capacity.

Forward-looking statements are usually accompanied by words such as "anticipate," "believe," "estimate," "may," "might," "intend," "interest," "appear," "expect," "estimate," "suggest," "plan," "encourage," "potential" and similar expressions. Actual results could differ materially from historical results or those implied by the forward-looking statements contained in this report.

Undue reliance should not be placed on our forward-looking statements. Except as required by law, we undertake no obligation to update or announce any revisions to forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.


Table of Contents

Current Market Conditions and Growth Opportunities

The strong bidding activity which was evident in our markets throughout fiscal 2014 has continued into fiscal 2015. We believe bidding activity is a leading indicator for the direction and health of our markets. We are seeing evidence of improvement in our business environment and we appear to be in the midst of a market expansion in our oil refining, petrochemical and other related energy markets. We believe the current activity level within our pipeline continues to be more robust than in past cycles.

We expect that the market conditions affecting our customers' investments will drive our future growth. These include:

Changes in domestic natural gas supply and cost have affected the dynamics of the global energy and petrochemical market. Natural gas serves as both an energy source and feedstock to chemical industries. Natural gas in the U.S. has become globally competitive with oil. As such, lower costs and plentiful supply are expected to drive increased domestic use of natural gas in the U.S., as well as the ability to export liquefied natural gas to serve other regions. Low cost and the plentiful supply of North American natural gas have also led to a revival in the U.S. petrochemical market, where we historically have a strong market share. This is a relatively recent phenomena, having occurred over the past five years and is being driven by technology advancements in drilling, which in turn has created a significant increase in supply. As a result, U.S. production of the raw material for ethylene, ethane (which is a side product of natural gas production), has become globally competitive with naphtha (the alternative feedstock for ethylene used in most of the world). As a result, we are witnessing a significant increase in planned construction of new petrochemical producing facilities, including ethylene, ammonia, methanol, propane dehydrogenation (PDH) and urea facilities. In addition, existing petrochemical facilities are restarting idled process units or debottlenecking existing operations to increase throughput. This is the first wave of what we believe will be major investment by petrochemical producers since the 1990's. We expect investment in U.S. petrochemical markets could be significant over the next decade. Such investment could occur in multiple phases.

Investment by the U.S. refining market to upgrade existing facilities has begun to occur. This has resulted in the upgrading of existing equipment and acquisition of new equipment to expand capacity, as a result of different crude feedstocks or an improvement in the end product mix.

Investments, including foreign investments, in North American oil sands projects have occurred over the past few years. These investments suggest that downstream spending involving our equipment might increase in the next few years.

Rising global consumption of crude oil and oil refined products has resulted in planned expansion of global oil refining capacity. This is projected to increase, and is expected to be addressed through new facilities, refinery upgrades, revamps and expansions. Furthermore, the increased regulation worldwide, impacting the refining, petrochemical and nuclear power industries is expected to continue to drive requirements for capital investments.


Table of Contents
Expansion by emerging and developing economies has led to planned investment in new refining, chemical and power production capacity. Strong investment is expected in Asia, the Middle East and South America.

Long term investment by the U.S. Navy to refresh its nuclear powered propulsion program, including aircraft carriers and submarines is anticipated. While this investment is expected to continue, order timing can be impacted by changes in the political landscape.

Investment in new nuclear power capacity in the U.S. and internationally has moderated due to political and social pressures, which were augmented by the tragic earthquake and tsunami that occurred in Japan in March 2011. Although the continued progress at the new U.S. nuclear reactor projects planned for the Summer (South Carolina) and Vogtle (Georgia) facilities suggest some growth in the domestic nuclear market will occur, the low cost of natural gas could dampen additional near-term expansion plans for new nuclear capacity.

The focus on additional safety and back-up redundancies at existing domestic nuclear plants could increase demand for our products in the near-term.

Investments in existing U.S. nuclear plants to extend their operating life and add incremental capacity are expected to continue. The desire to extend the life of the existing nuclear plants including new operating licenses and expanded output (re-rating) of the facilities will require investment and could increase demand for our products.

Investment in international nuclear facilities continues to occur in geographies which are lacking in natural energy sources and are net importers of energy products.

There continues to be long-term growth opportunities in other alternative energy markets, such as geothermal, coal-to-liquids, gas-to-liquids and other emerging technologies, such as biodiesel, and waste-to-energy which are expected to provide additional sales opportunities.

We expect that the outcome of these trends will provide growth opportunities for our business. In addition, we believe we can continue to grow our less cyclical smaller product lines and aftermarket businesses. The planned investments in new petrochemical capacity built in North America, while providing significant volume, are not likely to provide the margin opportunity that the North American refining market yielded in the last upcycle. Less favorable product mix may limit the potential gross margin upside. Along with the margin pressure in the North American petrochemical market, the projected expansion in petrochemical and oil refining in the growing Asian and South American markets, will continue to result in pricing and gross margin pressure, as these markets historically generated lower margins than North American refining markets.

Because of continued global economic and financial uncertainty and the risk associated with growth in emerging economies, we also expect that we will have continued volatility in our order pattern. We continue to expect our new order levels to remain volatile, resulting in both relatively strong and weak quarters. As the chart below indicates, quarterly orders can vary significantly.


Table of Contents

We believe that looking at our order level in any one quarter does not provide an accurate indication of our future expectations or performance. Rather, we believe that looking at our orders and backlog over a trailing twelve month period provides a better measure of our business. Our quarterly order levels and trailing twelve month order levels for the first quarter of fiscal 2015 as well as each quarter in fiscal 2014 and fiscal 2013, respectively, are set forth in the table below.

[[Image Removed: LOGO]]

We also expect incremental increases in investments in the domestic market for the refining market and renewed investment in the chemical processing market in North America. We expect growth in the refining and chemical processing capacity to be driven by emerging markets. Moreover, we have expanded our addressable markets with expansion of our business capabilities in the power market and through our focus on U.S. Navy nuclear propulsion projects. We believe our revenue opportunities during the near term will be more heavily weighted in the domestic market. However, over the longer term, we believe opportunities will be equivalent between the domestic and international markets.

Our domestic sales, as a percentage of aggregate product sales, were 78% in the first quarter of fiscal 2015. This is compared with 53% in the same quarter last year. This increase was due to strong domestic orders received in fiscal 2014. 72% of orders came from the domestic market during fiscal 2014, higher than our historic levels of between 50% and 60%.


Table of Contents

Results of Operations

For an understanding of the significant factors that influenced our performance, the following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the notes to our Condensed Consolidated Financial Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.

The following table summarizes our results of operations for the periods indicated:

                                          Three Months Ended June 30,

                                             2014               2013

             Net sales                         $28,502           $28,256
             Net income                         $2,392            $3,808
             Diluted income per share            $0.24             $0.38
             Total assets                     $142,388          $130,267

The First Quarter of Fiscal 2015 Compared With the First Quarter of Fiscal 2014

Sales for the first quarter of fiscal 2015 were $28,502, slightly more than sales of $28,256 for the first quarter of fiscal 2014. The current quarter's sales had greater volume from the domestic chemical and petrochemical markets, offset by lower sales to international refining markets. Power market sales also decreased. Domestic sales in the first quarter of fiscal 2015 compared with the same quarter of fiscal 2014 increased $7,232, or 48%, while international sales year-over-year decreased $6,986, or 53%, primarily as a result of lower sales to Asia (China) and Central America. International sales accounted for 22% and 47% of total sales for the first quarter of fiscal 2015 and fiscal 2014, respectively. Fluctuations in sales among products and geographic locations can vary measurably from quarter to quarter based on timing and magnitude of projects. Sales in the three months ended June 30, 2014 were 23% to the refining industry, 41% to the chemical and petrochemical industries, 17% to the power industry, including the nuclear market and 19% to other commercial and industrial applications. Sales in the three months ended June 30, 2013 were 45% to the refining industry, 16% to the chemical and petrochemical industries, 27% to the power industry, and 12% to other commercial and industrial applications. For additional information on future sales and our markets, see "Orders and Backlog" below.

Our gross profit margin for the first quarter of fiscal 2015 was 28% compared with 35% for the first quarter of fiscal 2014. Gross profit dollars for the first quarter of fiscal 2015 decreased 21% compared with fiscal 2014, to $7,932 from $10,015. Gross profit percentage and dollars decreased largely due to product and project mix during the first quarter of fiscal 2015 when compared with the projects converted in the first quarter of fiscal 2014.

Selling, general and administrative ("SG&A") expenses as a percent of sales for the three-month periods ended June 30, 2014 and 2013 were 15% and 16%, respectively. SG&A expenses in the first quarter of fiscal 2015 were $4,349, a decrease of $54, or 1%, compared with the first quarter of fiscal 2014 SG&A of $4,403.


Table of Contents

Interest income for the three-month periods ended June 30, 2014 and 2013 was $46 and $11, respectively. Low levels of interest income resulted from the continuing low level of interest rates on short term U.S. government securities and money market rates. Interest expense was $3 for the quarter ended June 30, 2014, down from $5 for the quarter ended June 30, 2013.

The effective tax rate in the first quarter of fiscal 2015 was 34%, which compares with 32% in the same period last year, primarily due to the expiration of the federal R&D tax credit.

Net income for the first three months of fiscal 2015 compared with the first three months of fiscal 2014 was $2,392 and $3,808, respectively. Income per diluted share was $0.24 and $0.38, for the respective periods.

  Add GHM to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for GHM - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.