UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 2020
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to ___________.
Commission File Number 1-8462
GRAHAM CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware |
16-1194720 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
20 Florence Avenue, Batavia, New York |
14020 |
(Address of principal executive offices) |
(Zip Code) |
Registrant's telephone number, including area code 585-343-2216
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Common Stock, Par Value $0.10 Per Share |
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GHM |
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NYSE |
Securities registered pursuant to Section 12(g) of the Act: Preferred Stock Purchase Rights
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on the NYSE Stock Market on September 30, 2019, was $189,547,236.
As of June 1, 2020, the Registrant’s Common Stock outstanding was 9,855,963 shares, $0.10 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement, to be filed in connection with the Registrant's 2020 Annual Meeting of Stockholders to be held on August 11, 2020, are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this filing.
GRAHAM CORPORATION
Annual Report on Form 10-K
Year Ended March 31, 2020
PART I |
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Item 1 |
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Item 1A |
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Item 1B |
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Item 2 |
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Item 3 |
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Item 4 |
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PART II |
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Item 5 |
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Item 6 |
20 |
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Item 7 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A |
30 |
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Item 8 |
31 |
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Item 9 |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9A |
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Item 9B |
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PART III |
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Item 10 |
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Item 11 |
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Item 12 |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
63 |
Item 13 |
Certain Relationships and Related Transactions, and Director Independence |
63 |
Item 14 |
63 |
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PART IV |
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Item 15 |
64 |
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Note: |
Portions of the Registrant's definitive Proxy Statement, to be issued in connection with the Registrant's 2020 Annual Meeting of Stockholders to be held on August 11, 2020, are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K. |
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(Dollar amounts in thousands except per share data)
Graham Corporation ("we," "us," "our") is a global business that designs, manufactures and sells critical equipment for the energy, defense and chemical/petrochemical industries. Our energy markets include oil refining, cogeneration, and alternative power. For the defense industry, our equipment is used in nuclear propulsion power systems for the U.S. Navy. For the chemical and petrochemical industries, our equipment is used in fertilizer, ethylene, methanol and downstream chemical facilities. Graham’s global brand is built upon our world-renowned engineering expertise in vacuum and heat transfer technology, responsive and flexible customer service and high quality standards. We design and manufacture custom-engineered ejectors, vacuum pumping systems, surface condensers and vacuum systems. Our equipment can also 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. We have production facilities located with our headquarters in Batavia. We also have two wholly-owned foreign subsidiaries, Graham Vacuum and Heat Transfer Technology (Suzhou) Co., Ltd. ("GVHTT"), located in Suzhou, China, and Graham India Private Limited ("GIPL"), located in Ahmedabad, India. GVHTT provides sales and engineering support for us in the People’s Republic of China and management oversight throughout Southeast Asia. GIPL serves as a sales and market development office focusing on the refining, petrochemical and fertilizer markets.
On June 24, 2019, we sold our wholly-owned subsidiary, Energy Steel & Supply Co. ("Energy Steel"), located in Lapeer, Michigan, which served the commercial nuclear utility industry.
We were incorporated in Delaware in 1983 and are the successor to Graham Manufacturing Co., Inc., which was incorporated in New York in 1936. Our stock is traded on the NYSE under the ticker symbol "GHM".
Unless indicated otherwise, dollar figures in this Annual Report on Form 10-K are reported in thousands.
Our Products, Customers and Markets
Our products are used in a wide range of industrial process applications, primarily in energy markets, including:
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Petroleum Refining |
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conventional oil refining |
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oil sands extraction and upgrading |
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Defense |
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propulsion systems for nuclear-powered aircraft carriers and submarines |
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Chemical and Petrochemical Processing |
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ethylene, methanol and nitrogen producing plants |
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fertilizer plants |
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plastics, resins and fibers plants |
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downstream petrochemical plants |
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coal-to-chemicals plants |
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gas-to-liquids plants |
•Power Generation /Alternative Energy
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biomass plants |
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cogeneration power plants |
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geothermal power plants |
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ethanol plants |
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fossil fuel plants |
•Other
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oleo chemical plants |
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air conditioning and water heating systems |
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food processing plants |
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pharmaceutical plants |
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liquefied natural gas production facilities |
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Our principal customers include end users of our products in their manufacturing, refining and power generation processes, large engineering companies that build installations for companies in such industries, and the original equipment manufacturers who combine our products with their equipment prior to its sale to end users.
Our products are sold by a team of sales engineers we employ directly as well as by independent sales representatives located worldwide. There may be short periods of time, a fiscal year for example, where one customer may make up greater than 10% of our business. However, if this occurs in multiple years, it is usually not the same customer or project over such a multi-year period. One customer accounted for more than 10% of our revenue in the fiscal year ended March 31, 2020, which we refer to as fiscal 2020, while a different customer accounted for more than 10% of our revenue in the fiscal year ended March 31, 2019, which we refer to as fiscal 2019.
As a result of our diversification efforts to more extensively support the U.S. Navy, we have increased our domestic sales in 2020. Over a business cycle, our domestic sales will generally range between 50% and 75% of total sales. The mix of domestic and international sales can vary from year to year.
Our backlog at March 31, 2020 was $112,389 compared with $132,127 at March 31, 2019. Included in the March 31, 2019 backlog was $8,039 for the commercial nuclear utility business, which was sold in June 2019.
Our Strengths
Our core strengths include:
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We have a value-enhancing sales and development platform. We believe our customer-facing platform of sales, project estimating and application engineering are competitive advantages. We have tools and capabilities that we believe allow us to move quickly and comprehensively as customers evaluate how best to integrate our equipment into their facilities. We believe that our early and deep involvement adds significant value to the process and is an important competitive differentiator in the long sales cycle industries we serve. We believe customers need our engineering and fabrication expertise early in the project life cycle to understand how best to specify our equipment. |
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We are renowned for our strong capabilities to handle complex, custom orders. The orders we receive are extremely complex and we believe that our order management platforms provide another competitive differentiator for our company. In our markets, we believe that order administration, risk management, cost containment, quality and engineering documentation are as important as the equipment itself. We have developed strong order management capabilities to enable us to deliver high quality, engineered-to-order and build-to-spec process-critical equipment in a timely manner. For our customers’ complex, custom orders we typically manage very rigorous interaction between our project management teams and the end user or its engineering firm, as product design and quality requirements are finalized once an order is received. Customers’ supplier selection process begins by assessing these order management capabilities. |
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We maintain a responsive, flexible production environment. We believe our operations platform is adept at handling low volume, high mix orders that are highly customized fabrications. We also believe that our production environment is much different from a highly engineered standard products business. While certain equipment in a product group may look similar, there are often subtle differences which are required to deliver the desired specification. Also, during production it is not uncommon for customer-driven engineering changes to occur that alter the configuration of what had been initially released into production. The markets that we serve demand this flexible operating model. |
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We have the capability to manage outsourced production. Effectively accessing the global fabrication supply chain expands our market reach, increases execution capacity and can improve competitiveness. We use this capability for three primary reasons: 1. Delivering a lower cost manufacturing option; 2. Expanding capacity to execute an order to meet customer timing requirements and 3. Addressing localized content requirements. We have proven capability to deliver our specialized product designs with outsourced fabrication that is on-time, within budget and that meets our high quality standards. |
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We provide robust after-the-sale technical support. Our engineering and performance improvement personnel go to customer sites to audit the performance of our equipment, provide operator training and troubleshoot performance issues. Technical service after a sale is important to our customers as we believe their focus is always on leveraging our equipment to maximize their facilities’ productivity. |
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We have a highly trained workforce. We maintain a long-tenured, highly skilled and extremely flexible workforce. |
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We have a strong balance sheet. We maintain significant cash and investments on hand, and no bank debt, which we believe provides us with the financial flexibility to pursue our business strategy, including growth by acquisition. |
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We have a high-quality credit facility. Our credit facilities provide us with a $35,000 borrowing capacity that is expandable at our option to provide us with up to a total of $60,000 in borrowing capacity. |
Our Strategy
We intend to strategically leverage and deploy our assets, including but not limited to, financial, technical, manufacturing and industry know-how, in order to capture expanded market share within the geographies and industries we serve, expand revenue opportunities in adjacent and countercyclical markets and continually improve our results of operations in order to:
•Generate sustainable earnings growth;
•Reduce earnings volatility;
•Improve our operating performance;
•Generate strong cash flow from operations to reinvest in our business or return to shareholders in the form of ordinary
dividends; and
•Provide an acceptable return to our shareholders.
To accomplish our objectives and maintain strategic focus, we believe that we must:
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Successfully deploy our corporate assets to expand our market share in the industries we currently serve, access and develop a stronger presence in industries where we do not have a historically strong presence, and pursue acquisitions, partnerships and/or other business combinations in order to enter new geographic or industrial markets, new product lines or expand our coverage in existing markets. |
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Identify organic growth opportunities and consummate acquisitions where we believe the strength of the Graham brand will provide us with the ability to expand and complement our core businesses. We intend to extend our existing product lines, move into complementary product lines and expand our global sales presence in order to further broaden our existing markets and reach additional markets. |
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Expand our market presence in the U.S. Navy's Nuclear Propulsion Program. We will continue to demonstrate our proficiency by successfully executing the complex Nuclear Propulsion Program orders that are currently in our backlog by controlling both cost and risk, providing high-quality custom fabrication to exacting military quality control requirements and through disciplined project management. We intend to continue to be a preferred supplier of equipment to the U.S. Navy’s Nuclear Propulsion Program for both surface and submarine vessels. |
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Continue to invest in people and capital equipment to meet the long-term demand for our products in the oil refining, petrochemical processing and defense industries, especially in emerging geographic markets. |
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Continue to deliver the highest quality products and solutions that enable our customers to achieve their operating objectives. We believe that our high quality and technical expertise differentiates us from our competitors and allows us to win new orders based on value. |
In order to effectively implement our strategy, we also believe that we must continue to invest in and leverage our unique value enhancing differentiators, including:
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Invest in engineering resources and technology in order to advance our vacuum and heat transfer technology market penetration. |
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Enhance our engineering capacity and capability, especially in connection with product design, in order to more quickly respond to existing and future customer demands and opportunities. |
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Invest in our manufacturing operations to improve productivity where needed and identify out-sourced capacity to complement our growth strategies. |
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Accelerate our ability to quickly and efficiently bid on available projects through our ongoing implementation of front-end bid automation and design processes. |
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Invest in resources to further serve the U.S. Navy in our core competency areas of engineering and manufacturing, where our commercial capabilities meet U.S. Navy requirements. |
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Implement and expand upon our operational efficiencies through ongoing refinement of our flexible manufacturing flow model as well as achievement of other cost efficiencies. |
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Focus on improving quality to eliminate errors and rework, thereby reducing lead time and enhancing productivity. |
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Further develop a cross-trained, flexible workforce able to adjust to variable product demands by our customers. |
COVID-19 Pandemic Impact
In March 2020, the outbreak of COVID-19 was declared a global pandemic. The COVID-19 pandemic began affecting our business, our customers’ businesses, and the markets we serve in the fourth quarter of our fiscal 2020. Additionally, the COVID-19 pandemic has impacted the already volatile oil industry and markets. The pandemic has impacted both our capital equipment sales as well as our short cycle business.
Our proactive measures in response to the COVID-19 pandemic included approximately three weeks of limited production at our facility in Batavia, New York beginning in late March 2020. As of June 2020, we are nearing our pre-COVID-19 pandemic headcount in our factory, subject to numerous new health and safety protocols as recommended by our federal and local authorities, including requiring appropriate personal protective equipment to be worn by everyone onsite, social distancing markers, staggered employee breaks and meetings to reduce group gatherings, expanded hygiene practices, and barriers as appropriate to separate workers based on our plant layout configuration. We have deployed numerous laptop computers to our sales, engineering, quality, supply chain, finance, and administrative personnel to facilitate remote work. We are limiting external visitors to our Batavia facility and those few that are being allowed must be pre-approved. As we have and continue to implement pandemic response measures, workforce safety and employee well-being continue to be top priorities and we remain committed to the service of our customers and suppliers. For further information on the risks posed to our business from the COVID-19 pandemic, see Item 1A - Risk Factors below, and our discussion of COVID-19 throughout this report.
Competition
Our business is highly competitive. The principal bases on which we compete include technology, price, performance, reputation, delivery, and quality. Our competitors listed in alphabetical order by market include:
North America |
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Principal Competitors |
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Refining vacuum distillation |
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Croll Reynolds Company, Inc.; Gardner Denver, Inc.; GEA Wiegand GmbH |
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Chemicals/petrochemicals |
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Croll Reynolds Company, Inc.; Gardner Denver, Inc.; Schutte Koerting |
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Turbomachinery Original Equipment Manufacturer ("OEM") – refining, petrochemical |
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Donghwa Entec Co., Ltd.; KEMCO; Oeltechnik GmbH |
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Turbomachinery OEM – power and power producer
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Holtec; KEMCO; Maarky Thermal Systems; Thermal Engineering International (USA), Inc. |
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Navy Nuclear Propulsion Program / Defense |
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DC Fabricators; Joseph Oat; PCC; Triumph Aerospace; Xylem |
international |
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Principal Competitors |
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Refining vacuum distillation |
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Edwards, Ltd.; Gardner Denver, Inc.; GEA Wiegand GmbH; Korting Hannover AG |
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Chemicals/petrochemicals |
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Croll Reynolds Company, Inc.; Edwards, Ltd.; Gardner Denver, Inc.; GEA Wiegand GmbH; Korting Hannover AG; Schutte Koerting |
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Turbomachinery OEM – refining, petrochemical |
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Chem Process Systems; Donghwa Entec Co., Ltd.; Hangzhou Turbine Equipment Co., Ltd.; KEMCO; Mazda (India); Oeltechnik GmbH |
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Turbomachinery OEM – power and power producer |
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Chem Process Systems; Holtec; KEMCO; Mazda (India); SPX Heat Transfer; Thermal Engineering International |
Intellectual Property
Our success depends in part on our ability to protect our proprietary technologies. We rely on a combination of patent, copyright, trademark, trade secret laws and contractual confidentiality provisions to establish and protect our proprietary rights. We also depend heavily on the brand recognition of the Graham name in the marketplace.
Availability of Raw Materials
Historically, we have not been materially adversely impacted by the availability of raw materials.
Working Capital Practices
Our business does not require us to carry significant amounts of inventory or materials beyond what is needed for work in process. We negotiate progress payments from our customers on our large projects to finance costs incurred. We do not provide rights to return goods, or payment terms to customers that we consider to be extended in the context of the industries we serve. We do provide for warranty claims.
Environmental Matters
We believe that we are in material compliance with applicable existing environmental laws and regulations. We do not anticipate that our compliance with federal, state and local laws regulating the discharge of material in the environment or otherwise pertaining to the protection of the environment will have a material adverse effect upon our capital expenditures, earnings or competitive position.
Seasonality
No material part of our business is seasonal in nature. However, our business is highly cyclical in nature as it depends on the willingness of our customers to invest in major capital projects.
Research and Development Activities
During fiscal 2020, fiscal 2019 and the fiscal year ended March 31, 2018, we spent $3,353, $3,538 and $3,211, respectively, on research and development (R&D) activities. The majority of our R&D is application specific to help solve our customers’ problems in order to improve efficiencies, address challenging environments or caustic materials, or redesign for form and function. We may be engineering new products and services for our customers. We also continually look to improve existing products and services.
Employees
As of March 31, 2020, we had 337 employees. We believe that our relationship with our employees is good.
Available Information
We maintain a website located at www.graham-mfg.com. On our website, we provide a link to the Securities and Exchange Commission’s (the "SEC") website that contains the reports, proxy statements and other information we file electronically. We do not provide this information on our website because it is more cost effective for us to provide a link to the SEC's website. Printed copies of all documents we file with the SEC are available free of charge for any stockholder who makes a request. Such requests should be made to our Corporate Secretary at our corporate headquarters. The other information found on our website is not part of this or any other report we file with, or furnish to, the SEC.
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Our business and operations are subject to numerous risks, many of which are described below and elsewhere in this Annual Report on Form 10-K. If any of the events described below or elsewhere in this Annual Report on Form 10-K occur, our business and results of operations could be harmed. Additional risks and uncertainties that are not presently known to us, or which we currently deem to be immaterial, could also harm our business and results of operations.
Risks related to the impact of the COVID-19 pandemic:
Our business, financial condition and results of operations have been and may continue to be adversely affected by global public health pandemics, including the recent COVID-19 pandemic.
Our business, financial condition and results of operations have been and may continue to be adversely affected if the COVID-19 pandemic, or another global health crisis, impacts our employees, suppliers, customers, financing sources or others’ ability to conduct business or negatively affects consumer and business confidence or the global economy. The COVID-19 health crisis has affected large segments of the global economy, including the markets we operate in. The COVID-19 pandemic began affecting our business in the fourth quarter of fiscal 2020. In response to the COVID-19 pandemic, beginning in late March 2020, we had limited production at our facility in Batavia, New York, with only a small staff present, which significantly reduced our production capabilities for approximately three weeks. As of June 2020, we are now nearing the pre-COVID-19 headcount of our production workforce and have applied numerous new health and safety protocols for those working onsite.
The pandemic and any additional preventative or protective actions that governments or we may take in response to the COVID-19 pandemic may have a material adverse effect on our business or our suppliers, distribution channels, and customers, including business shutdowns or disruptions for an indefinite period of time, reduced operations, restrictions on shipping, fabricating or installing products, reduced consumer demand or customers’ ability to make payments. We have and may continue to experience additional operating costs due to increased challenges with our workforce (including as a result of illness, absenteeism or government orders), implementing further precautionary measures to protect the health of our workforce, increased project cancellations or projects put on hold, access to supplies, capital, and fundamental support services (such as shipping and transportation). Any resulting financial impact cannot be fully estimated at this time, but may materially affect our business, financial condition or results of operations. The extent to which the COVID-19 pandemic affects our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain the pandemic or treat its impact, among others.
The impact of the COVID-19 pandemic may also exacerbate other risks discussed in this Item 1A - Risk Factors, any of which could have a material adverse effect on us. The situation surrounding the COVID-19 pandemic and its impact is changing rapidly and additional impacts may arise that we are presently unaware of.
The COVID-19 pandemic may disrupt and cause delays in our supply chains, and such disruptions could adversely affect our results of operations and financial performance.
The raw materials that we source come from a wide variety of domestic and international suppliers. Global sourcing of many of the products we sell is an important factor in our financial results. It is possible that the ongoing COVID-19 pandemic could cause a disruption in our supply chain. If that supply chain is disrupted for an extended period of time, including due to the COVID-19 pandemic or another global health crisis, our ability to meet customer requirements and achieve our financial performance may be affected. We cannot at this time predict the impact of the COVID-19 pandemic on our supply chain, but we are maintaining ongoing communications with our suppliers to monitor their status. Any disruption to our supply chain could negatively impact our operations and financial performance.
Disruption to the global oil markets and resulting substantial price decline, including from the impact of the COVID-19 pandemic, could adversely affect our customers’ and our own results of operations and financial performance.
Our business, consolidated results of operations and financial condition, or that of our customers, may be adversely affected by significant decreases in demand for oil resulting from global restrictions on travel, work from home practices, and the significant reduction in industrial and commercial activity, or an increase in operating costs as a result of the global business disruption resulting from the COVID-19 pandemic or that may result from a future global health crisis. Global oil markets have recently experienced significant volatility and dramatic decreases in prices due to decreased demand during the COVID-19 pandemic resulting from government-led “stay-at-home” orders and social distancing initiatives and a geopolitical imbalance of supply. Demand for some of our products is dependent on the level of expenditures by our customers in the oil and gas industry. Accordingly, continued volatility or downturns in the oil markets, and potential project cancellations, could materially and adversely impact our financial condition or results of operations.
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The COVID-19 pandemic may impact businesses differently across various regions.
We operate and compete globally. The response to the COVID-19 pandemic by domestic and foreign governments has been and may continue to be varied and those differences may impact our competitiveness. Our operating subsidiaries are located in China and India, and those countries’ responses to the COVID-19 pandemic have varied from the United States’ response. There are uncertain political climates in the regions where our subsidiaries operate, and governmental action in those regions may result in the temporary closure or limited operations of our subsidiaries. Government assistance during a pandemic may also differ between private and public companies, which may provide an advantage to one compared with another. This may affect our competitive position and could disrupt the market access and success of our business compared with other current or new competitors. This impact could have a material adverse impact on our financial condition or results of operation.
COVID-19 disruption could impact our management team due to illness from the pandemic.
Our business has specialized management, technical and sales personnel who may become unavailable for an extended period or lost due to the effect of COVID-19 or another pandemic. The COVID-19 pandemic may significantly disrupt our workforce if a significant percentage of our employees are unable to work due to illness or quarantines. In addition, COVID-19-related illness could impact members of our Board of Directors, resulting in absenteeism from meetings of the directors or committees of directors, making it more difficult to convene the quorums of the full Board of Directors or its committees needed to conduct meetings for the management of our affairs. Any of the loss of personnel or disruption in management as described above could have a material adverse impact on our business and results of operations.
Risks related to our business:
The markets we serve include the petroleum refining and petrochemical industries. These industries are both highly cyclical in nature and dependent on the prices of crude oil and natural gas as well as on the differential between the two prices. As a result, volatility in the prices of oil and natural gas may negatively impact our operating results.
A substantial portion of our revenue is derived from the sale of our products to companies in the chemical, petrochemical, and petroleum refining industries, or to firms that design and construct facilities for these industries. These industries are highly cyclical and have historically experienced severe downturns. The prices of crude oil and natural gas have historically been very volatile, as evidenced by the extreme volatility in oil prices over the past few years and, in particular, the recent volatility related to the COVID-19 pandemic. During times of significant volatility in the market for crude oil or natural gas, our customers often refrain from placing orders until the market stabilizes and future demand projections are clearer. If our customers refrain from placing orders with us, our revenue would decline and there could be a material adverse effect on our business and results of operations. We believe that over the long-term, demand for our products will expand in the petrochemical, petroleum refining and power generating industries. A sustained deterioration in any of the industries we serve would materially harm our business and operating results because our customers would not likely have the resources necessary to purchase our products, nor would they likely have the need to build additional facilities or improve existing facilities. As we have seen in the recent past, a cyclical downturn can occur suddenly and result in extremely different financial performance sequentially from quarter to quarter or on an annual comparative basis due to an inability to rapidly adjust costs.
The relative costs of oil, natural gas, nuclear power, hydropower and numerous forms of alternative energy production may have a material adverse impact on our business and operating results.
Global and regional energy supply comes from many sources, including oil, natural gas, coal, hydro, nuclear, solar, wind, geothermal and biomass, among others. A cost or supply shift among these sources could negatively impact our business opportunities going forward and the profitability of those opportunities. A demand shift, where technological advances favor the utilization of one or a few sources of energy may also impact the demand for our products. If demand shifts in a manner that increases energy utilization outside of our traditional customer base or expertise, our business and financial results could be materially adversely affected. In addition, governmental policy can affect the relative importance of various forms of energy sources. For example, non-fossil based sources may require and often receive government tax incentives to foster investment. If these incentives become more prominent, our business and results of operations could suffer.
A transition toward different types of energy may have a material adverse impact on our business and operating results.
Changes in consumer demand, including some driven by governmental and political preferences, toward electric, compressed natural gas, hydrogen vehicles and other alternative energy may impact our business. We have products which can support certain technologies, while other technologies will not require our equipment. A significant change in demand for oil based products may have a material adverse impact on our business.
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Our business is highly competitive. If we are unable to successfully implement our business strategy and compete against entities with greater resources than us or against competitors who have a relative cost advantage, we risk losing market share to current and future competitors.
We encounter intense competition in all of our markets. Some of our present and potential competitors may have substantially greater financial, marketing, technical or manufacturing resources. Our competitors may also be able to respond more quickly to new technologies or processes and changes in customer demands and they may be able to devote greater resources towards the development, promotion and sale of their products. Certain competitors may also have a cost advantage compared to us due to their geography or changes in relative currency values and may compete against us based on price. This may affect our ability to secure new business and maintain our level of profitability. In addition, our current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties that increase their ability to address the needs of our customers. Moreover, customer buying patterns can change if customers become more price sensitive and accepting of lower cost suppliers. If we cannot compete successfully against current or future competitors, our business will be materially adversely affected.
A change in our end use customers, our markets, or a change in the engineering procurement and construction companies serving our markets could harm our business and negatively impact our financial results.
Although we have long-term relationships with many of our end use customers and with many engineering, procurement and construction companies, the project management requirements, pricing levels and costs to support each customer and customer type are often different. Our customers have historically focused on the quality of the engineering and product solutions which we have provided to them. As our markets continue to grow, and new market opportunities expand, we could see a shift in pricing as a result of facing competitors with lower production costs, which may have a material adverse impact on our results of operations and financial results. Because our customers are unable to predict the length of the time period for the economic viability of their plants, there has been more of a focus on relative importance of cost versus quality which looks at short-term costs instead of total long-term cost of operations.
A change in the structure of our markets; the relationships between engineering and procurement companies, original equipment suppliers, others in the supply chain and any of their relationships with the end users could harm our business and negatively impact our financial results.
There are strong and long-standing relationships throughout the supply chain between the many parties involved in serving the end user of our products. A change in the landscape between engineering and procurement companies, original equipment suppliers, others in the supply chain, including disruptions in the supply chain due to the COVID-19 pandemic, and/or with the end users could have a material adverse effect on our business and results of operations. These changes might occur through acquisitions or other business partnerships and could have a material impact on our business and negatively impact our financial results.
The loss of, or significant reduction or delay in, purchases by our largest customers could reduce our revenue and adversely affect our results of operations.
While we may have only one customer represent over 10% of revenue in any one year, a small number of customers have accounted for a substantial portion of our historical net sales. For example, sales to our top ten customers, who can vary each year, accounted for 48%, 41% and 41% of consolidated net sales in fiscal 2020, fiscal 2019 and fiscal 2018, respectively. We expect that a limited number of customers will continue to represent a substantial portion of our sales for the foreseeable future. The loss of any of our major customers, a decrease or delay in orders or anticipated spending by such customers, or a delay in the production of existing orders could materially adversely affect our revenues and results of operations.
We may experience customer concentration risk related to strategic growth for U.S. Navy projects.
We believe our strategy to increase the penetration of U.S. Navy related opportunities may lead to U.S. Navy related projects consistently being greater than 10% of our total revenue. While these projects are spread across multiple contractors for the U.S. Navy, the end customer for these projects is the same. This concentration of business could add additional risk to us should there be a disruption, short or long term, in the funding for these projects or our participation in the U.S. Navy Nuclear Propulsion program.
The size of our contracts with the U.S. Navy may produce volatility over the short term financial results.
We believe our strategy to increase the penetration of U.S. Navy related opportunities, which are often much larger contracts than our commercial contracts, may impact our ability to effectively provide accurate investor guidance for our near term financial results. These contracts can, on occasion, be delayed before or during the revenue recognition cycle. If we are unable to reallocate the resources to other projects, we may see an increase in unpredictable (greater) volatility in our near term financial results.
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A large percentage of our sales occur outside of the U.S. As a result, we are subject to the economic, political, regulatory and other risks of international operations.
For fiscal 2020, 36% of our revenue was from customers located outside of the U.S. Moreover, through our subsidiaries, we maintain a sales office in China and a sales and market development office in India. We believe that revenue from the sale of our products outside the U.S. will continue to account for a significant portion of our total revenue for the foreseeable future. We intend to continue to expand our international operations to the extent that suitable opportunities become available. Our foreign operations and sales could be adversely affected as a result of:
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nationalization of private enterprises and assets; |
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political or economic instability in certain countries and regions, such as the ongoing instability throughout the Middle East and/or portions of the former Soviet Union; |
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the global economic impact as a result of the COVID-19 pandemic |
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political relationships between the U.S. and certain countries and regions; |
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differences in foreign laws, including difficulties in protecting intellectual property and uncertainty in enforcement of contract rights; |
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the possibility that foreign governments may adopt regulations or take other actions that could directly or indirectly harm our business and growth strategy; |
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credit risks; |
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currency fluctuations; |
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tariff and tax increases; |
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export and import restrictions and restrictive regulations of foreign governments; |
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shipping products during times of crisis or war; |
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our failure to comply with U.S. laws regarding doing business in foreign jurisdictions, such as the Foreign Corrupt Practices Act; or |
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other factors inherent in maintaining foreign operations. |
The impact of potential changes in customs and trade policies and tariffs imposed by the U.S. and those imposed in response by other countries, including China, as well as rapidly changing trade relations, could materially and adversely affect our business and results of operations.
The U.S. government has made proposals that are intended to address trade imbalances, which include encouraging increased production in the United States. These proposals could result in increased customs duties and the renegotiation of some U.S. trade agreements. Changes in U.S. and foreign governments’ trade policies have resulted and may continue to result in tariffs on imports into, and exports from, the U.S. Over the past few years, the U.S. imposed tariffs on imports from several countries, including China, Canada, the European Union and Mexico. In response, China, Canada and the European Union have proposed or implemented their own tariffs on certain exports from the U.S. into those countries. Tariffs affecting our products and product components, including raw materials we use, particularly high-end steel and steel related products, may add significant costs to us and make our products more expensive. As a result, our products could become less attractive to customers outside the U.S. due to U.S. import tariffs on our raw materials and our profit margins would be negatively impacted. Accordingly, continued tariffs may weaken relationships with certain trading partners and may adversely affect our financial performance and results of operations. When beneficial to us, we may consider alternate sourcing options, including off shore subcontracting, in order to minimize the impact of the tariffs. Because we conduct aspects of our business in China through our subsidiary, potential reductions in trade with China and diminished relationships between China and the U.S., including as a result of the recent COVID-19 pandemic, as well as the continued escalation of tariffs, could have a material adverse effect on our business and results of operations.
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Global demand growth could be led by emerging markets, which could result in lower profit margins and increased competition.
The increase in global demand could be led by emerging markets. If this is the case, we may face increased competition from lower cost suppliers, which in turn could lead to lower profit margins on our products. Customers in emerging markets may also place less emphasis on our high quality and brand name than do customers in the U.S. and certain other industrialized countries where we compete. If we are forced to compete for business with customers that place less emphasis on quality and brand recognition than our current customers, our results of operations could be materially adversely affected.
Climate change and greenhouse gas regulations may affect our customers’ investment decisions.
Due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emissions. These restrictions may affect our customers' abilities and willingness to invest in new facilities or to re-invest in current operations. These requirements could impact the cost of our customers’ products, lengthen project implementation times, and reduce demand for hydrocarbons, as well as shift hydrocarbon demand toward lower-carbon sources. Any of the foregoing could adversely impact the demand for our products, which in turn could have an adverse effect on our business and results of operations.
The operations of our Chinese subsidiary may be adversely affected by China’s evolving economic, political and social conditions.
We conduct our business in China primarily through our wholly-owned Chinese subsidiary. The results of operations and future prospects of our Chinese subsidiary may be adversely affected by, among other things, changes in China's political, economic and social conditions, including as a result of the COVID-19 pandemic, changes in the relationship between China and its western trade partners, changes in policies of the Chinese government, changes in laws and regulations or in the interpretation of existing laws and regulations, changes in foreign exchange regulations, measures that may be introduced to control inflation, such as interest rate increases and changes in the rates or methods of taxation. In addition, changes in demand could result from increased competition from local Chinese manufacturers who have cost advantages or who may be preferred suppliers for Chinese end users. Also, Chinese commercial laws, regulations and interpretations applicable to non-Chinese owned market participants, such as us, are continually changing. These laws, regulations and interpretations could impose restrictions on our ownership or the operation of our interests in China and have a material adverse effect on our business and results of operations.
Intellectual property rights are difficult to enforce in China and India, which could harm our business.
Chinese commercial law is relatively undeveloped compared with the commercial law in many of our other major markets and limited protection of intellectual property is available in China as a practical matter. Similarly, proprietary information may not be afforded the same protection in India as it is in our other major markets with more comprehensive intellectual property laws. Although we take precautions in the operations of our subsidiaries to protect our intellectual property, any local design or manufacture of products that we undertake could subject us to an increased risk that unauthorized parties will be able to copy or otherwise obtain or use our intellectual property, which could harm our business. We may also have limited legal recourse in the event we encounter patent or trademark infringers, which could have a material adverse effect on our business and results of operations.
Uncertainties with respect to the Chinese legal system may adversely affect the operations of our Chinese subsidiary.
Our Chinese subsidiary is subject to laws and regulations applicable to foreign investment in China. There are uncertainties regarding the interpretation and enforcement of laws, rules and policies in China. The Chinese legal system is based on written statutes, and prior court decisions have limited precedential value. Because many laws and regulations are relatively new and the Chinese legal system is still evolving, the interpretations of many laws, regulations and rules are not always uniform. Moreover, the relative inexperience of China's judiciary in many cases creates additional uncertainty as to the outcome of any litigation, and the interpretation of statutes and regulations may be subject to government policies reflecting domestic political agendas. Finally, enforcement of existing laws or contracts based on existing law may be uncertain and sporadic. For the preceding reasons, it may be difficult for us to obtain timely or equitable enforcement of laws ostensibly designed to protect companies like ours, which could have a material adverse effect on our business and results of operations.
Regulation of foreign investment in India may adversely affect the operations of our Indian subsidiary.
Our subsidiary in India is subject to laws and regulations applicable to foreign investment in India. India regulates ownership of Indian companies by foreign entities. These regulations may apply to our funding of our Indian operating subsidiary. For example, the government of India has set out criteria for foreign investments in India, including requirements with respect to downstream investments by Indian companies owned or controlled by foreign entities and the transfer of ownership or control of Indian companies in certain industries. These requirements may adversely affect our ability to operate our Indian subsidiary. There can be no assurance that we will be able to obtain any required approvals for future acquisitions, investments or operations in India, or that we will be able to obtain such approvals on satisfactory terms.
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Changes in U.S. and foreign energy policy regulations could adversely affect our business.
Energy policy in the U.S. and in the other countries where we sell our products is evolving rapidly and we anticipate that energy policy will continue to be an important legislative priority in the jurisdictions where we sell our products. It is difficult, if not impossible, to predict the changes in energy policy that could occur, as they may be related to changes in political administration, public policy or other factors. The elimination of, or a change in, any of the current rules and regulations in any of our markets could create a regulatory environment that makes our end users less likely to purchase our products, which could have a material adverse effect on our business. Government subsidies or taxes, which favor or disfavor certain energy sources compared with others, could have a material adverse effect on our business and operating results.
Efforts to reduce large U.S. federal budget deficits could result in government cutbacks or shifts in focus in defense spending or in reduced incentives to pursue alternative energy projects, resulting in reduced demand for our products, which could harm our business and results of operations.
Our business strategy calls for us to continue to pursue defense-related projects as well as projects for end users in the alternative energy markets in the U.S. In recent years, the U.S. federal government has incurred large budget deficits. In the event that U.S. federal government defense spending is reduced or alternative energy related incentives are reduced or eliminated in an effort to reduce federal budget deficits, projects related to defense or alternative energy may become less plentiful. The impact of such reductions could have a material adverse effect on our business and results of operations, as well as our growth opportunities.
U.S. Navy orders are subject to annual government funding. A disruption in funding could adversely impact our business.
One of our growth strategies is to increase our penetration of U.S. Navy-related opportunities. Projects for the U.S. Navy and its contractors generally have a much longer order-to-shipment time period than our commercial orders. The time between the awarding of an order to the completion of shipment can take three to seven years. Annual government funding is required to continue the production of this equipment. Disruption of government funding, short or long term, could impact the ability for us to continue our production activity on these orders. For example, the recent emergency spending bills related to the COVID-19 pandemic could compound the uncertainty already present in government funded programs. Since this business is expected to increase as a percentage of our overall business, such a disruption, should it occur, could adversely impact the sales and profitability of our business.
Changes in the competitive environment for U.S. Navy procurement could adversely impact our ability to grow this portion of our business.
Over the past few years, we have expanded our business and the opportunities where we bid related to U.S. Navy projects. This has increased our market share and caused an adverse share position for some of our competitors for these products. Competitor response to our market penetration is possible. Our customers may also raise concerns about their supplier concentration issues and the risk exposure related to this concentration. As the U.S. Navy is looking to expand its fleet, there is also a risk that their facilities, their supply chain or our supply chain for raw materials, may not be able to support this expansion. This could adversely impact our ability to grow this portion of our business.
Contract liabilities for large U.S. Navy contracts may be beyond our normal insurance coverage and a claim could have an adverse impact on our financial results.
We are diligent at managing ongoing risks related to projects and the requirements of our customers. Our history at managing risk provides significant evidence that our exposure and risk are minimal. In addition, we secure business insurance coverage to minimize the impact of a major failure or liability related to our customers. Due to certain U.S. government procurement policies, we may take on the risk of a liability for large U.S. Navy projects in excess of our insurance coverage and at a level which is higher than our commercial projects. A claim related to one of these projects could have an adverse impact on our financial results.
New technology used by the ships for the U.S. Navy may delay projects and may impact our ability to grow this portion of our business.
Certain U.S. Navy vessels are implementing new technologies, unrelated to any of the equipment that we provide. If there is a complication or delay to any ship caused by this new technology, it may delay the procurement and fabrication of future vessels, which could have a negative impact on our business.
Lapses in U.S. government appropriations have, and any future lapses could disrupt U.S. export processing and related procedures and, as a result, may materially and adversely affect our revenue, results of operations and business.
Recently, the U.S. experienced lapses in federal appropriations, which have had, in the past, a short-term effect on our business. Any such future lapse (each, a "Government Shutdown") could negatively affect our ability to ship finished products to customers. We rely on federal government personnel, who are not able to perform their duties during a Government Shutdown, to conduct routine business processes related to the inspection and delivery of our products, process export licenses for us and perform other services for us that, when disrupted, may prevent us from timely shipping products outside the U.S. If we are unable to timely
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ship our products outside the U.S., there could be a material adverse impact on our results of operations and business. Moreover, our inability to ship products, or the perception by customers that we might not be able to timely ship our products in the future, may cause such customers to look to foreign competitors to fulfill their demand. If our customers look to foreign competitors to source equipment of the type we manufacture, there could be a material adverse impact on our results of operations and business.
Near-term income statement impact from competitive contracts could adversely affect our operating results.
During weaker market periods, we may choose to be more aggressive in pricing certain competitive projects to protect or gain market share or to increase the utilization of our facilities. In these situations, it is possible that an incrementally profitable order, while increasing contribution, may be unprofitable from an accounting perspective when including fixed manufacturing costs. In these situations, we are required to recognize the financial loss at the time of order acceptance, or as soon as our cost estimates are updated, whichever occurs first. It is possible we may accumulate losses either on a large project or more than one project such that, in a short time period, for example, a reporting quarter, these losses may have a meaningful impact on the earnings of the period.
Our operating results could be adversely affected by customer contract cancellations and delays.
The value of our backlog as of March 31, 2020 was $112,389. Our backlog can be significantly affected by the timing of large orders. The amount of our backlog at March 31, 2020 is not necessarily indicative of future backlog levels or the rate at which our backlog will be recognized as sales. Although historically the amount of modifications and terminations of our orders has not been material compared with our total contract volume, customers can, and sometimes do, terminate or modify their orders. This generally occurs more often in times of end market or capital market turmoil. As evidence of this, we had orders totaling $24,361 cancelled during the downturn between fiscal 2015 through fiscal 2017, but had no cancellations in fiscal years 2018 and 2019. In fiscal year 2020, we had two cancellations totaling $3,165 and two projects on hold, totaling $562. We cannot predict whether cancellations will occur or accelerate in the future, and the ongoing COVID-19 pandemic may increase the risk of such cancellations. Although certain of our contracts in backlog may contain provisions allowing for us to assess cancellation charges to our customers to compensate us for costs incurred on cancelled contracts, cancellations of purchase orders or modifications made to existing contracts could substantially and materially reduce our backlog and, consequently, our future sales and results of operations. Moreover, delay of contract execution by our customers can result in volatility in our operating results.
Our current backlog contains a number of large orders from the U.S. Navy. In addition, we are continuing to pursue business in this end market which offers large multi-year projects which have an added risk profile beyond that of our historic customer base. A delay, long-term extension or cancellation of any of these projects could have a material adverse effect on our business and results of operations.
An extended downturn could adversely impact the financial stability of our customers and increase the risk of uncollectable accounts receivables.
Our customers participate in cyclical markets, such as petroleum refining, petrochemical and alternate energy. The financial strength of our customers can be impacted by a severe or lengthy downturn in these markets, including any downturn related to the COVID-19 pandemic. This could lead to additional risk in our ability to collect outstanding accounts receivables. We attempt to mitigate this risk with the utilization of progress payments for many projects, but certain industries, end markets and geographies are not as willing to make progress payments. Certain projects require a small portion of the total payments to be held until the customer's facility is fully operational, which can be in excess of one year beyond our delivery of equipment to them. This additional time may add risk to our ability to collect on the outstanding accounts receivables.
Our exposure to fixed-price contracts and the timely completion of such contracts could negatively impact our results of operations.
A substantial portion of our sales is derived from fixed-price contracts, which may involve long-term fixed price commitments by us to our customers. While we believe our contract management processes are strong, we nevertheless could experience difficulties in executing large contracts, including but not limited to, estimating errors, cost overruns, supplier failures and customer disputes. To the extent that any of our fixed-price contracts are delayed, our subcontractors fail to perform, contract counterparties successfully assert claims against us, the original cost estimates in these or other contracts prove to be inaccurate or the contracts do not permit us to pass increased costs on to our customers, our profitability may decrease or losses may be incurred which, in turn, could have a material adverse effect on our business and results of operations. For our U.S. Navy projects, these fixed priced contracts have order to shipment periods which can exceed five years. This additional time-based risk, which we believe is manageable, nevertheless increases the likelihood of cost fluctuation, which could have a material adverse effect on our business and results of operation.
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Given our size and specialization of our business, if we lose any member of our management team and we experience difficulty in finding a qualified replacement, our business could be harmed.
Competition for qualified management and key technical and sales personnel in our industry is intense. Moreover, our technology is highly specialized, and it may be difficult to replace the loss of any of our key technical and sales personnel. Many of the companies with which we compete for management and key technical and sales personnel have greater financial and other resources than we do or are located in geographic areas which may be considered by some to be more desirable places to live. If we are not able to retain any of our key management, technical or sales personnel, it could have a material adverse effect on our business and results of operations.
During certain high demand periods, there can be a shortage of skilled production workers, especially those with high-end welding capabilities. We could experience difficulty hiring or replacing those individuals, which could adversely affect our business.
Our fabrication processes require highly skilled production workers, especially welders. Welding has not been an educational field that has been popular over the past few decades as manufacturing has moved overseas. While we have an in-house weld training program, if we are unable to retain, hire or train an adequate number of individuals with high-end welding capability, this could adversely impact our ability to achieve our financial objectives. In addition, if demand for highly skilled production workers were to significantly outstrip supply, wages for these skilled workers could dramatically increase in our and related industries and that could affect our financial performance. Furthermore, should we not be able to expand our production workforce, we would expect to increase the amount of outsourced fabrication which is likely to result in higher costs and lower margins.
Our acquisition strategy may not be successful or may increase business risk.
The success of our acquisition strategy will depend, in part, on our ability to identify suitable companies or businesses to purchase and then successfully negotiate and close acquisition transactions. In addition, our success depends in part on our ability to integrate acquisitions and realize the anticipated benefits from combining the acquisition with our historical business, operations and management. We cannot provide any assurances that we will be able to complete any acquisitions and then successfully integrate the business and operations of those acquisitions without encountering difficulties, including unanticipated costs, issues or liabilities, difficulty in retaining customers and supplier or other relationships, failure to retain key employees, diversion of our management’s attention, failure to integrate information and accounting systems or establish and maintain proper internal control over financial reporting. Moreover, as part of the integration process, we must incorporate an acquisition’s existing business culture and compensation structure with our existing business. We also need to utilize key personnel who may be distracted from the core business. If we are not able to efficiently integrate an acquisition’s business and operations into our organization in a timely and efficient manner, or at all, the anticipated benefits of the acquisition may not be realized, or it may take longer to realize these benefits than we currently expect, either of which could have a material adverse effect on our business or results of operations.
If we become subject to product liability, warranty or other claims, our results of operations and financial condition could be adversely affected.
The manufacture and sale of our products exposes us to potential product liability claims, including those that may arise from failure to meet product specifications, misuse or malfunction of our products, design flaws in our products, or use of our products with systems not manufactured or sold by us. For example, our equipment is installed in facilities that operate dangerous processes and the misapplication, improper installation or failure of our equipment may result in exposure to potentially hazardous substances, personal injury or property damage.
Provisions contained in our contracts with customers that attempt to limit our damages may not be enforceable or may fail to protect us from liability for damages and we may not negotiate such contractual limitations of liability in certain circumstances. Our insurance may not cover all liabilities and our historical experience may not reflect liabilities we may face in the future. Our risk of liability may increase as we manufacture more complex or larger projects. We also may not be able to continue to maintain such insurance at a reasonable cost or on reasonable terms, or at all. Any material liability not covered by provisions in our contracts or by insurance could have a material adverse effect on our business and financial condition.
Furthermore, if a customer suffers damage as a result of an event related to one of our products, even if we are not at fault, they may reduce their business with us. We may also incur significant warranty claims which are not covered by insurance. In the event a customer ceases doing business with us as a result of a product malfunction or defect, perceived or actual, or if we incur significant warranty costs in the future, there could be a material adverse effect on our business and results of operations.
If third parties infringe upon our intellectual property or if we were to infringe upon the intellectual property of third parties, we may expend significant resources enforcing or defending our rights or suffer competitive injury.
Our success depends in part on our proprietary technology. We rely on a combination of patent, copyright, trademark, trade secret laws and confidentiality provisions to establish and protect our proprietary rights. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer. We may also be required to spend significant resources to monitor
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and police our intellectual property rights. Similarly, if we were found to have infringed upon the intellectual property rights of others, our competitive position could suffer. Furthermore, other companies may develop technologies that are similar or superior to our technologies, duplicate or reverse engineer our technologies or design around our proprietary technologies. Any of the foregoing could have a material adverse effect on our business and results of operations.
In some instances, litigation may be necessary to enforce our intellectual property rights and protect our proprietary information, or to defend against claims by third parties that our products infringe upon their intellectual property rights. Any litigation or claims brought by or against us, whether with or without merit, could result in substantial costs to us and divert the attention of our management, which could materially harm our business and results of operations. In addition, any intellectual property litigation or claims against us could result in the loss or compromise of our intellectual property and proprietary rights, subject us to significant liabilities, require us to seek licenses on unfavorable terms, prevent us from manufacturing or selling certain products or require us to redesign certain products, any of which could have a material adverse effect on our business and results of operations.
We are subject to foreign currency fluctuations which may adversely affect our operating results.
We are exposed to the risk of currency fluctuations between the U.S. dollar and the currencies of the countries in which we sell our products to the extent that such sales are not based on U.S. dollars, and volatility in foreign currency exchange rates has generally increased in connection with the COVID-19 pandemic. Currency movements can affect sales in several ways, the foremost being our ability to compete for orders against foreign competitors that base their prices on relatively weaker currencies. Strength of the U.S. dollar compared with the Euro or Asian currencies may put us in a less competitive position. At the outset of the COVID-19 pandemic, the U.S. dollar saw relative strengthening in relation to the Euro and Asian currencies, however, as the pandemic has continued, the relative strength of the U.S. dollar has increased in volatility. Business lost due to competition for orders against competitors using a relatively weaker currency cannot be quantified. In addition, cash can be adversely impacted by the conversion of sales made by us in a foreign currency to U.S. dollars. While we may enter into currency exchange rate hedges from time to time to mitigate these types of fluctuations, we cannot remove all fluctuations or hedge all exposures and our earnings are impacted by changes in currency exchange rates. In addition, if the counter-parties to such exchange contracts do not fulfill their obligations to deliver the contractual foreign currencies, we could be at risk for fluctuations, if any, required to settle the obligation. Any of the foregoing could adversely affect our business and results of operations. At March 31, 2020, we held no forward foreign currency exchange contracts.
Security threats and other sophisticated computer intrusions could harm our information systems, which in turn could harm our business and financial results.
We utilize information systems and computer technology throughout our business. We store sensitive data, proprietary information and perform engineering designs and calculations on these systems. Threats to these systems, and the laws and regulations governing security of data, including personal data, on information systems and otherwise held by companies is evolving and adding layers of complexity in the form of new requirements and increasing costs of attempting to protect information systems and data and complying with new cybersecurity regulations. Information systems are subject to numerous and evolving cybersecurity threats and sophisticated computer crimes, which pose a risk to the stability and security of our information systems, computer technology, and business. Global cybersecurity threats can range from uncoordinated individual attempts to gain unauthorized access to our information systems and computer technology to sophisticated and targeted measures known as advanced persistent threats. The techniques used in these attacks change frequently and may be difficult to detect for periods of time and we may face difficulties in anticipating and implementing adequate preventative measures. A failure or breach in security could expose our company as well as our customers and suppliers to risks of misuse of information, compromising confidential information and technology, destruction of data, production disruptions and other business risks which could damage our reputation, competitive position and financial results of our operations. Further, our technology resources may be strained due to the increase in the number of remote users in response to the COVID-19 pandemic. In addition, defending ourselves against these threats may increase costs or slow operational efficiencies of our business. If any of the foregoing were to occur, it could have a material adverse effect on our business and results of operations.
We face potential liability from asbestos exposure and similar claims that could result in substantial costs to us as well as divert attention of our management, which could have a material adverse effect on our business and results of operations.
We are a defendant in a number of lawsuits alleging illnesses from exposure to asbestos or asbestos-containing products and seeking unspecified compensatory and punitive damages. We cannot predict with certainty the outcome of these lawsuits or whether we could become subject to any similar, related or additional lawsuits in the future. In addition, because some of our products are used in systems that handle toxic or hazardous substances, any failure or alleged failure of our products in the future could result in litigation against us. For example, a claim could be made under various regulations for the adverse consequences of environmental contamination. Any litigation brought against us, whether with or without merit, could result in substantial costs to us as well as divert the attention of our management, which could have a material adverse effect on our business and results of operations.
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Many of our large international customers are nationalized or state-owned businesses. Any failure to comply with the United States Foreign Corrupt Practices Act could adversely impact our competitive position and subject us to penalties and other adverse consequences, which could harm our business and results of operations.
We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or making other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Many foreign companies, including some of our competitors, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in certain of the jurisdictions in which we may operate or sell our products. While we strictly prohibit our employees and agents from engaging in such conduct and have established procedures, controls and training to prevent such conduct from occurring, it is possible that our employees or agents will engage in such conduct and that we might be held responsible. If our employees or other agents are alleged or are found to have engaged in such practices, we could incur significant costs and suffer severe penalties or other consequences that may have a material adverse effect on our business, financial condition and results of operations.
Provisions contained in our certificate of incorporation and bylaws could impair or delay stockholders' ability to change our management and could discourage takeover transactions that some stockholders might consider to be in their best interests.
Provisions of our certificate of incorporation and bylaws could impede attempts by our stockholders to remove or replace our management and could discourage others from initiating a potential merger, takeover or other change of control transaction, including a potential transaction at a premium over the market price of our common stock, that our stockholders might consider to be in their best interests. Such provisions include:
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We could issue shares of preferred stock with terms averse to our common stock. Under our certificate of incorporation, our Board of Directors is authorized to issue shares of preferred stock and to determine the rights, preferences and privileges of such shares without obtaining any further approval from the holders of our common stock. We could issue shares of preferred stock with voting and conversion rights that adversely affect the voting power of the holders of our common stock, or that have the effect of delaying or preventing a change in control of our company. |
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Only a minority of our directors may be elected in a given year. Our bylaws provide for a classified Board of Directors, with only approximately one-third of our Board elected each year. This provision makes it more difficult to effect a change of control because at least two annual stockholder meetings are necessary to replace a majority of our directors. |
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Our bylaws contain advance notice requirements. Our bylaws also provide that any stockholder who wishes to bring business before an annual meeting of our stockholders or to nominate candidates for election as directors at an annual meeting of our stockholders must deliver advance notice of their proposals to us before the meeting. Such advance notice provisions may have the effect of making it more difficult to introduce business at stockholder meetings or nominate candidates for election as director. |
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Our certificate of incorporation requires supermajority voting to approve a change of control transaction. Seventy-five percent of our outstanding shares entitled to vote are required to approve any merger, consolidation, sale of all or substantially all of our assets and similar transactions if the other party to such transaction owns 5% or more of our shares entitled to vote. In addition, a majority of the shares entitled to vote not owned by such 5% or greater stockholder are also required to approve any such transaction. |
|
• |
Amendments to our certificate of incorporation require supermajority voting. Our certificate of incorporation contains provisions that make its amendment require the affirmative vote of both 75% of our outstanding shares entitled to vote and a majority of the shares entitled to vote not owned by any person who may hold 50% or more of our shares unless the proposed amendment was previously recommended to our stockholders by an affirmative vote of 75% of our Board. This provision makes it more difficult to implement a change to our certificate of incorporation that stockholders might otherwise consider to be in their best interests without approval of our Board. |
|
• |
Amendments to our bylaws require supermajority voting. Although our Board of Directors is permitted to amend our bylaws at any time, our stockholders may only amend our bylaws upon the affirmative vote of both 75% of our outstanding shares entitled to vote and a majority of the shares entitled to vote not owned by any person who owns 50% or more of our shares. This provision makes it more difficult for our stockholders to implement a change they may consider to be in their best interests without approval of our Board. |
Not applicable.
17
Our corporate headquarters, located at 20 Florence Avenue, Batavia, New York, consists of a 45,000 square foot building. Our manufacturing facilities, also located in Batavia, consist of approximately 33 acres and contain about 260,000 square feet in several buildings, including 206,000 square feet in manufacturing facilities, 48,000 square feet for warehousing and a 6,000 square-foot building for product research and development. Additionally, we lease an approximately 1,500 square foot U.S. sales office in Houston, Texas and GVHTT leases an approximately 4,900 square foot sales and engineering office in Suzhou, China. In fiscal 2019, the Company established Graham India Private Limited ("GIPL") as a wholly-owned subsidiary. GIPL, located in Ahmedabad, India, serves as a sales and market development office focusing on the refining, petrochemical and fertilizer markets. We lease a sales and marketing office of approximately 777 square feet in Ahmedabad, India.
We believe that our properties are generally in good condition, are well maintained, and are suitable and adequate to carry on our business.
The information required by this Item 3 is contained in Note 18 to our consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K and is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.
18
(Amounts in thousands, except per share data)
Item 5. |
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is traded on the NYSE exchange under the symbol "GHM". As of June 1, 2020, there were 9,855,963 shares of our common stock outstanding that were held by approximately 134 stockholders of record.
Subject to the rights of any preferred stock we may then have outstanding, the holders of our common stock are entitled to receive dividends as may be declared from time to time by our Board of Directors out of funds legally available for the payment of dividends. Our Board of Directors declared dividends per share of $0.10 for the first quarter of fiscal 2020 and $0.11 in each of the second, third and fourth quarters of fiscal 2020. While we anticipate that we will continue to pay quarterly cash dividends in the future, there can be no assurance that we will pay such dividends in any future period or that the level of cash dividends paid by us will remain constant.
Our senior credit facility contains provisions pertaining to the maintenance of a maximum funded debt to earnings before interest expense, income taxes, depreciation and amortization, or EBITDA, ratio and a minimum level of earnings before interest expense and income taxes to interest ratio as well as restrictions on the payment of dividends to stockholders. The facility limits the payment of dividends to stockholders to 25% of net income if our funded debt to EBITDA ratio is greater than 2.0 to 1. As of March 31, 2020 and May 31, 2020 we did not have any funded debt outstanding. More information regarding our senior credit facility can be found in Note 9 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.
19
GRAHAM CORPORATION – FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
(for fiscal years ended March 31)
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||||
Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
90,604 |
|
|
$ |
91,831 |
|
|
$ |
77,534 |
|
|
$ |
91,769 |
|
|
$ |
90,039 |
|
Gross profit |
|
|
18,148 |
|
|
|
21,909 |
|
|
|
16,975 |
|
|
|
22,157 |
|
|
|
23,255 |
|
Gross profit percentage |
|
|
20.0 |
% |
|
|
23.9 |
% |
|
|
21.9 |
% |
|
|
24.1 |
% |
|
|
25.8 |
% |
Net income (loss)(1) |
|
|
1,872 |
|
|
|
(308 |
) |
|
|
(9,844 |
) |
|
|
5,023 |
|
|
|
6,131 |
|
Cash dividends |
|
|
4,250 |
|
|
|
3,834 |
|
|
|
3,517 |
|
|
|
3,492 |
|
|
|
3,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) from continuing operations per share |
|
$ |
0.19 |
|
|
$ |
(0.03 |
) |
|
$ |
(1.01 |
) |
|
$ |
0.52 |
|
|
$ |
0.61 |
|
Diluted earnings (loss) from continuing operations per share |
|
|
0.19 |
|
|
|
(0.03 |
) |
|
|
(1.01 |
) |
|
|
0.52 |
|
|
|
0.61 |
|
Stockholders' equity per share |
|
|
9.79 |
|
|
|
10.05 |
|
|
|
10.58 |
|
|
|
11.72 |
|
|
|
11.34 |
|
Dividends declared per share |
|
|
0.43 |
|
|
|
0.39 |
|
|
|
0.36 |
|
|
|
0.36 |
|
|
|
0.33 |
|
Market price range of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
23.77 |
|
|
|
28.98 |
|
|
|
24.03 |
|
|
|
24.99 |
|
|
|
25.25 |
|
Low |
|
|
11.07 |
|
|
|
19.00 |
|
|
|
17.97 |
|
|
|
17.11 |
|
|
|
14.39 |
|
Average common shares outstanding – diluted |
|
|
9,879 |
|
|
|
9,823 |
|
|
|
9,764 |
|
|
|
9,728 |
|
|
|
9,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial data at March 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and investments |
|
$ |
73,003 |
|
|
$ |
77,753 |
|
|
$ |
76,479 |
|
|
$ |
73,474 |
|
|
$ |
65,072 |
|
Working capital |
|
|
77,443 |
|
|
|
79,896 |
|
|
|
78,105 |
|
|
|
78,688 |
|
|
|
74,807 |
|
Capital expenditures |
|
|
2,417 |
|
|
|
2,138 |
|
|
|
2,051 |
|
|
|
325 |
|
|
|
1,153 |
|
Depreciation |
|
|
1,957 |
|
|
|
1,968 |
|
|
|
1,986 |
|
|
|
2,092 |
|
|
|
2,201 |
|
Total assets |
|
|
148,120 |
|
|
|
156,270 |
|
|
|
143,333 |
|
|
|
151,570 |
|
|
|
143,131 |
|
Long-term debt, including capital lease obligations |
|
|
55 |
|
|
|
95 |
|
|
|
55 |
|
|
|
143 |
|
|
|
157 |
|
Stockholders' equity |
|
|
96,724 |
|
|
|
98,966 |
|
|
|
103,349 |
|
|
|
114,110 |
|
|
|
109,380 |
|
(1) Net (loss) income in fiscal 2019 includes a loss from goodwill and other impairments of $5,320, which is net of an income tax benefit of $1,129. Net (loss) income in fiscal 2018 includes a loss from impairment of goodwill and intangible assets of $12,014, which is net of an income tax benefit of $2,802.
20
(Amounts in thousands, except per share data)
Overview
We are a global business that designs, manufactures and sells critical equipment for the energy, defense and chemical/petrochemical industries. Our energy markets include oil refining, cogeneration, and alternative power. For the defense industry, our equipment is used in nuclear propulsion power systems for the U.S. Navy. For the chemical and petrochemical industries, our equipment is used in fertilizer, ethylene, methanol and downstream chemical facilities.
Graham's global brand is built upon our world-renowned engineering expertise in vacuum and heat transfer technology, responsive and flexible service and high quality standards. We design and manufacture custom-engineered ejectors, vacuum pumping systems, surface condensers and vacuum systems. Our equipment can also be found in other diverse applications such as metal refining, pulp and paper processing, water heating, refrigeration, desalination, food processing, pharmaceutical, and heating, ventilating and air conditioning.
Our corporate headquarters are located in Batavia, New York. We have production facilities co-located with our headquarters in Batavia. We also have wholly-owned foreign subsidiaries, Graham Vacuum and Heat Transfer Technology (Suzhou) Co., Ltd. ("GVHTT"), located in Suzhou, China and Graham India Private Limited ("GIPL"), located in Ahmedabad, India. GVHTT provides sales and engineering support for us in the People's Republic of China and management oversight throughout Southeast Asia. GIPL serves as a sales and market development office focusing on the refining, petrochemical and fertilizer markets.
On June 24, 2019, we sold our wholly-owned subsidiary, Energy Steel & Supply Co. ("Energy Steel"), located in Lapeer, Michigan, which served the commercial nuclear utility industry.
This management's discussion and analysis of financial condition and results of operations for the fiscal year ended March 31, 2020 omits a comparative discussion regarding the fiscal year ended March 31, 2018. Such information is located in Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.
Key Results
Key results for our fiscal year ended March 31, 2020, which we refer to as "fiscal 2020" include:
|
• |
Net sales for fiscal 2020 were $90,604, down 1% compared with $91,831 for the fiscal year ended March 31, 2019, which we refer to as "fiscal 2019." Included in our fiscal 2020 and 2019 sales were $1,276 and $8,336, respectively, for the aforementioned commercial nuclear utility business which was sold in June 2019. |
|
• |
Net income and income per diluted share for fiscal 2020, were $1,872 and $0.19, respectively, compared with net (loss) and (loss) per diluted share of ($308) and ($0.03), respectively, for fiscal 2019. Included in net income and income per diluted share for fiscal 2020 was a loss of ($893) for our commercial nuclear utility business. For fiscal 2019, included in net income and income per diluted share were $5,320 and $0.54, respectively, for an impairment charge. In addition, for fiscal 2019, excluding the impairment charge, there was an after tax operating loss of ($1,459) for our commercial nuclear utility business. |
|
• |
Operating cash flow for fiscal 2020 was $1,239, down from $7,917 in fiscal 2019. |
|
• |
Net orders received in fiscal 2020 were $80,034 compared with fiscal 2019, when net orders received were $101,241. Included in the fiscal 2020 and 2019 orders were $2,996 and $11,019, respectively, for the divested commercial nuclear utility business. |
|
• |
Backlog on March 31, 2020 was $112,389 compared with backlog of $132,127 on March 31, 2019. Included in the fiscal 2019 backlog was $8,039 from the commercial nuclear utility business. |
|
• |
Gross profit and operating margins for fiscal 2020 were 20.0% and 0.7%, respectively, compared with 23.9% and (2.6%), respectively, for fiscal 2019. |
|
• |
In fiscal 2020, $4,250 was returned to shareholders as dividends compared with $3,834 in fiscal 2019. |
21
|
• |
Cash and cash equivalents and short-term investments at March 31, 2020 were $73,003 compared with $77,753 as of March 31, 2019, a decrease of $4,750. |
|
• |
At March 31, 2020, we had a solid balance sheet that was free of bank debt and which we believe provides us with the financial flexibility to pursue our business and acquisition strategies. |
Forward-Looking Statements
This report and other documents we file with the Securities and Exchange Commission ("SEC") 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 Part I and elsewhere in this Annual Report on Form 10-K.
Forward-looking statements may also include, but are not limited to, statements about:
|
• |
the impacts of, and risks caused by, the COVID-19 pandemic on our business operations, our customers and our markets; |
|
• |
the current and future economic environments, including the volatility associated with the COVID-19 pandemic, 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 anticipated growth; |
|
• |
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; |
|
• |
tariffs and trade relations between the United States and its trading partners; |
|
• |
our ability to affect our growth and acquisition strategy; |
|
• |
our ability to maintain or expand work for the U.S. Navy; |
|
• |
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," "contemplate," "continue," "could," "estimate," "may," "might," "intend," "interest," "appear," "expect," "suggest," "plan," "predict," "project," "encourage," "potential," "should," "view," "will," 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. All forward-looking statements included in this Form 10-K are made only as of the date indicated or as of the date of this Form 10-K. 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. New risks and uncertainties arise from time to time and we cannot predict these events or how they may affect us and cause actual results to differ materially from those expressed or implied by our forward-looking statements. Therefore, you should not rely on our forward-looking statements as predictions of future events. When considering these risks, uncertainties and assumptions, you should keep in mind the cautionary statements contained in this report and any documents incorporated herein by reference. You should read this document and the documents that we reference in this Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
22
Our global energy and petrochemical markets turned downward during the latter part of fiscal 2020. These markets were adversely impacted by a dramatic reduction in oil prices, partly due to the COVID-19 pandemic, but importantly, also due to geopolitical imbalance of supply compared with demand, which began to appear before COVID-19 was prevalent. Accordingly, volatility in pricing began prior to the COVID-19 pandemic and has increased because of it. As noted above, customers have significantly reduced their capital budgets to invest in upgrading and turnaround maintenance for existing facilities. This has impacted and will continue to impact both our capital equipment sales as well as our short cycle business.
The COVID-19 pandemic has further impacted our customers, the markets which they serve and the operation of our business. The near term impact on global energy and petrochemical demand was immediate and significant. Our customers’ plans for capital spending and operational upgrades have been significantly reduced and their outlook for this calendar year, and likely beyond, has turned negative.
Over the long-term, our view for the global energy and petrochemical markets is that general economic fundamentals will drive increasing demand and result in continued capital investment to satisfy increasing global demand for energy and chemicals. These fundamentals include rising populations, strong emerging market economic growth, and overall global economic expansion. We believe the long-term outlook in our key markets supports our growth plans. However, until there is greater clarity regarding the impact of COVID-19 on the global economy, energy demand and customer financial strength, new order levels may be challenged due to the resulting weak energy and petrochemical markets.
Our naval nuclear propulsion market has demand tied to aircraft carrier and submarine vessel construction schedules of the primary shipyards who service the U.S. Navy. We expect growth in our naval nuclear propulsion business to result from our strategic actions to increase our market share, our successful performance, and expected increases in demand.
The chart below shows the impact of our successful diversification strategy into multiple U.S. Navy defense platforms. The diversification began with our entry into the nuclear carrier program and expanded into both the Virginia and Columbia class nuclear submarine programs. Our U.S. Navy defense business makes up 52% of our total backlog. Each vessel platform has made up at least 10% of our total backlog for the past three years. On March 31, 2020, the nuclear carriers, Virginia class submarines and Columbia class submarines make up 16%, 12% and 24% of our backlog, respectively. We believe this diversification will be especially beneficial during periods where our commercial markets are weak.
23
For an understanding of the significant factors that influenced our performance, the following discussion should be read in conjunction with our consolidated financial statements and the notes to our consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K.
The following table summarizes our results of operations for the periods indicated:
|
|
Year Ended March 31, |
|
|||||||||
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
|||
Net sales |
|
$ |
90,604 |
|
|
$ |
91,831 |
|
|
$ |
77,534 |
|
Gross profit |
|
$ |
18,148 |
|
|
$ |
21,909 |
|
|
$ |
16,975 |
|
Gross profit margin |
|
|
20.0 |
% |
|
|
23.9 |
% |
|
|
21.9 |
% |
SG&A expense (1) |
|
$ |
16,879 |
|
|
$ |
17,878 |
|
|
$ |
15,769 |
|
SG&A as a percent of sales |
|
|
18.6 |
% |
|
|
19.5 |
% |
|
|
20.3 |
% |
Net income (loss) |
|
$ |
1,872 |
|
|
$ |
(308 |
) |
|
$ |
(9,844 |
) |
Diluted income (loss) per share |
|
$ |
0.19 |
|
|
$ |
(0.03 |
) |
|
$ |
(1.01 |
) |
Total assets |
|
$ |
148,120 |
|
|
$ |
156,270 |
|
|
$ |
143,333 |
|
Total assets excluding cash, cash equivalents and investments |
|
$ |
75,117 |
|
|
$ |
78,517 |
|
|
$ |
66,854 |
|
|
(1) |
Selling, general and administrative expense is referred to as "SG&A." |
Fiscal 2020 Compared with Fiscal 2019
Sales for fiscal 2020 were $90,604, down 1% as compared with sales of $91,831 for fiscal 2019. Included in our fiscal 2020 and 2019 sales were $1,276 and $8,336, respectively, for the Energy Steel business which was sold in June 2019. Domestic sales were $58,042 or 64% of total sales, down from $59,441 or 65% of total sales in fiscal 2019. Domestic sales decreased $1,399, or 2%, compared with fiscal year 2019. International sales accounted for $32,562, or 36% of total sales, for fiscal 2020, up from $32,390, or 35% of total sales in fiscal 2019. International sales increased $172, compared with fiscal 2019. By market, sales for fiscal 2020 were 37% to the refining industry (down from 50% in fiscal 2019), 34% to the chemical and petrochemical industries (up from 18% in fiscal 2019), 3% to the power markets (down from 11% in fiscal 2019), and 26% to defense and other industrial applications (up from 21% in fiscal 2019).
The COVID-19 pandemic impacted our financial results in the fourth quarter of fiscal 2020. We estimated that revenue was adversely impacted by COVID-19 by approximately $7 million, of which $5 million was related to a project being fabricated in China and $2 million was related to lower production capacity at our Batavia, New York facility. In late March 2020, we limited production at our production facility in Batavia, New York, with only a very small staff. This temporary reduction in workforce substantially reduced our production capacity during this time period. We continued to pay our employees, despite lacking revenue to cover those costs. Beginning in mid-April and subsequent to fiscal 2020 year-end, we began ramping up our production personnel and as of June 2020 are nearing our pre-COVID-19 headcount in our factory. We are committed to diligently protecting our workforce while endeavoring to minimize any unfavorable impact to our business and our customers.
Our gross margin for fiscal 2020 was 20.0% compared with 23.9% for fiscal 2019. The decrease in gross margin was primarily due to increased production costs, as our business was structured for expected strong growth in fiscal 2021, which now appears unlikely. These additional costs adversely impacted current period results. Gross profit for fiscal 2020 decreased $3,761, or 17%, compared with fiscal 2019 on similar volume and lower gross margin as noted above, compared with fiscal 2019.
SG&A expense for fiscal 2020 was $16,879, down 6%, or $999, compared with $17,878 in fiscal 2019. SG&A as a percentage of sales in fiscal 2020 was 18.6% of sales compared with 19.5% of sales in fiscal 2019. Included in SG&A in fiscal 2020 and fiscal 2019 was $621 and $1,980, respectively, for SG&A for the commercial nuclear utility business.
During the first quarter of fiscal 2020, we completed the sale of our commercial nuclear utility business. We recorded a loss on the sale of the business of $617, before and after tax, in fiscal 2020. In fiscal 2019, we reviewed the market value of the business at such time and determined the assets to be impaired based on such market value. We also estimated the fair value of the commercial nuclear utility business related to the carrying value of Energy Steel. The impairment review indicated that the fair value of the intangible assets, goodwill and other long-lived assets of the business were negligible, due to erosion of the Energy Steel business and commercial nuclear utility industry. As a result, we recorded impairment losses of $1,700, $2,000, $1,208, $1,222, and $319 for permits, tradename, customer relationships, goodwill, and other long-lived assets, respectively. The total impairment charge was $6,449 before taxes and $5,320 after taxes.
24
Interest income for fiscal 2020 was $1,324, down from $1,462 in fiscal 2019. Interest expense in each of fiscal 2020 and fiscal 2019 was $12.
Our effective tax rate in fiscal 2020 was 19%. Our effective tax rate was not meaningful in fiscal 2019, as we had a tax expense despite a pre-tax loss, due to non-deductibility of the goodwill portion of the write down for our commercial nuclear utility business. The effective tax rate in fiscal 2019 included the tax benefit of $1,129 related to the impairment charge.
Net income and income per diluted share for fiscal 2020, were $1,872 and $0.19, respectively, compared with net (loss) and (loss) per diluted share of ($308) and ($0.03), respectively, for fiscal 2019. Included in net income and income per diluted share for fiscal 2020 was a loss of ($893) for the operation and sale of our commercial nuclear utility business. For fiscal 2019, included in net income and income per diluted share were $5,320 and $0.54, respectively, for an impairment charge. In addition, for fiscal 2019, excluding the impairment charge, there was an after tax operating loss of ($1,459) for our commercial nuclear utility business.
Liquidity and Capital Resources
The following discussion should be read in conjunction with our consolidated statements of cash flows and consolidated balance sheets appearing in Item 8 of Part II of this Annual Report on Form 10-K:
|
|
March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
Cash and investments |
|
$ |
73,003 |
|
|
$ |
77,753 |
|
Working capital(1) |
|
|
77,443 |
|
|
|
79,896 |
|
Working capital ratio(2) |
|
|
2.6 |
|
|
|
2.5 |
|
Working capital excluding cash and investments |
|
|
4,440 |
|
|
|
2,143 |
|
Working capital excluding cash and investments as a percent of net sales |
|
|
4.9 |
% |
|
|
2.3 |
% |
(1) Working capital equals current assets minus current liabilities.
(2) Working capital ratio equals current assets divided by current liabilities.
We use the above ratios to assess our liquidity and overall financial strength.
Net cash generated by operating activities for fiscal 2020 was $1,239, compared with $7,917 for fiscal 2019. The $6,678 decrease in cash generated was due to cash usage from customer deposits and unbilled revenue. These were mostly offset by cash generations for earnings, inventory and accounts receivable. In fiscal 2019, customer deposits were a cash generator.
Capital spending in fiscal 2020 was $2,417, compared with $2,138 in fiscal 2019. Capital expenditures in each of fiscal 2020 and fiscal 2019 were approximately 85% for facilities along with machinery and equipment and the remaining 15% for all other items.
Dividend payments were $4,250 in fiscal 2020, compared with $3,834 in fiscal 2019.
Cash and investments were $73,003 at March 31, 2020, compared with $77,753 at March 31, 2019, down $4,750 or 6%.
We invest net cash generated from operations in excess of cash held for near-term needs in short-term, less than 365 days, certificates of deposit, money market accounts or U.S. government instruments, generally with maturity periods of up to 180 days. Our certificates of deposit are used to securitize our outstanding letters of credit, which reduces our cost on those letters of credit. Approximately 95% of our cash and investments are held in the U.S. The remaining 5% is invested in our China operations.
Capital expenditures for the fiscal year ending March 31, 2021, which we refer to as "fiscal 2021," are expected to be between approximately $2,000 and $2,500. Approximately 80% to 85% of our fiscal 2021 capital expenditures are expected to be for machinery and equipment, with the remaining amounts expected to be used for other items.
Our revolving credit facility with JP Morgan Chase, N.A. ("JP Morgan Chase") provides us with a line of credit of $25,000, including letters of credit and bank guarantees. In addition, our JP Morgan Chase agreement allows us to increase the line of credit, at our discretion, up to another $25,000, for total availability of $50,000. Borrowings under this credit facility are secured by all of our assets. We also had a $10,000 unsecured line of credit with HSBC, N.A. ("HSBC") at March 31, 2020. Subsequent to the fiscal 2020 year end, this line of credit was increased to $14,000. See Note 19 to the consolidated financial statements contained in Item 8 of Part II of this Annual Report on Form 10-K for a discussion of the increase to our line of credit with HSBC. Letters of credit outstanding on March 31, 2020 and March 31, 2019 were $13,328 and $8,503, respectively. The outstanding letters of credit as of March 31, 2020
25
were issued by JP Morgan Chase and HSBC. There were no other amounts outstanding on our credit facilities at March 31, 2020 and March 31, 2019. The borrowing rate under our JP Morgan Chase facility as of March 31, 2020 was the bank’s prime rate, or 3.25%. Availability under the JP Morgan Chase and HSBC lines of credit was $21,672 and $22,505 at March 31, 2020 and March 31, 2019, respectively.
We believe that cash generated from operations, combined with the liquidity provided by our investments and available financing capacity under our credit facility, will be adequate both to meet our cash needs for the immediate future and to support our growth strategies.
Stockholders' Equity
The following discussion should be read in conjunction with our consolidated statements of changes in stockholders' equity that can be found in Item 8 of Part II of this Annual Report on Form 10-K. The following table shows the balance of stockholders' equity on the dates indicated:
March 31, 2020 |
|
|
March 31, 2019 |
|
||
$ |
96,724 |
|
|
$ |
98,966 |
|
Fiscal 2020 Compared with Fiscal 2019
Stockholders' equity decreased $2,242 or 2%, at March 31, 2020 compared with March 31, 2019.
On March 31, 2020, our net book value per share was $9.79, down from $10.05 at March 31, 2019.
Contractual Obligations
As of March 31, 2020, our contractual and commercial obligations for the next five fiscal years ending March 31 and thereafter were as follows:
|
|
|
|
|
|
Payments Due by Period |
|
|||||||||||||
|
|
Total |
|
|
Less Than 1 Year |
|
|
1 – 3 Years |
|
|
3 – 5 Years |
|
|
Thereafter |
|
|||||
Capital lease obligations(1) |
|
$ |
110 |
|
|
$ |
48 |
|
|
$ |
52 |
|
|
$ |
10 |
|
|
$ |
— |
|
Operating leases(1) |
|
|
249 |
|
|
|
162 |
|
|
|
79 |
|
|
|
8 |
|
|
|
— |
|
Pension and postretirement benefits(2) |
|
|
77 |
|
|
|
77 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Accrued pension liability |
|
|
747 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
747 |
|
Total |
|
$ |
1,183 |
|
|
$ |
287 |
|
|
$ |
131 |
|
|
$ |
18 |
|
|
$ |
747 |
|
|
(1) |
For additional information, see Note 8 to the consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K. |
(2) Amounts represent anticipated contributions during fiscal 2020 to our postretirement medical benefit plan, which provides healthcare benefits for eligible retirees and eligible survivors of retirees. On February 4, 2003, we terminated postretirement healthcare benefits for our U.S. employees. Benefits payable to retirees of record on April 1, 2003 remained unchanged. We expect to be required to make cash contributions in connection with these plans beyond one year, but such amounts cannot be estimated. No contributions are expected to be made to our defined benefit pension plan for fiscal 2021.
Orders and Backlog
Orders in fiscal 2020 decreased 21% to $80,034 from $101,241 in fiscal 2019. Orders in fiscal 2020 and 2019 included $2,996 and $11,019, respectively, for the divested commercial nuclear utility business. Orders represent communications received from customers requesting us to supply products and services. Revenue is recognized on orders received in accordance with our revenue recognition policy described in Notes 1 and 2 to the consolidated financial statements contained in Item 8 of Part II of this Annual Report on Form 10-K.
26
Domestic orders were 54%, or $43,045, and international orders were 46%, or $36,989, of our total net orders in fiscal 2020. This compared with net domestic orders of $62,205, or 61%, of total net orders, and international orders of $39,036, or 39%, of our total orders in fiscal 2019. Domestic orders decreased by $19,160, or 31%. Net international orders decreased by $2,047, or 5% in fiscal 2020.
Backlog was $112,389 at March 31, 2020, down 15% compared with $132,127 at March 31, 2019. Included in the fiscal 2019 backlog was $8,039 from the commercial nuclear utility business. Backlog is defined by us as the total dollar value of orders received for which revenue has not yet been recognized. All orders in backlog represent orders from our traditional markets in established product lines. We had two projects totaling $3,165 cancelled in fiscal 2020. Approximately 70% to 75% of orders currently in our backlog are expected to be converted to sales within one year. At March 31, 2020, approximately 27% of our backlog was attributed to equipment for refinery project work, 17% for chemical and petrochemical projects, 52% for U.S. Navy projects and 4% for power and other industrial or commercial applications. At March 31, 2019, approximately 22% of our backlog was attributed to equipment for refinery project work, 19% for chemical and petrochemical projects, 49% for U.S. Navy projects and 10% for power, including commercial nuclear energy, other industrial or commercial applications. At March 31, 2020, we had two projects totaling $562 on hold. At March 31, 2019, we had no projects on hold.
Outlook
Capital spending in the energy markets we serve began to decrease during the second half of fiscal 2020 and the pace of activity materially contracted as COVID-19 became a global health issue in the fourth quarter of fiscal 2020. Net orders from customers in the fourth quarter of fiscal 2020 fell to their lowest levels in nearly three years, driven by very low refining orders. Our bidding activity also slowed in the second half of fiscal 2020, with international opportunities in emerging markets stronger than domestic markets. At March 31, 2020, 52% of our backlog was for the U.S. Navy. Our pipeline for the U.S. Navy continues to be robust, but quarterly fluctuations in order levels will occur due to the size and timing of release of the U.S. Navy projects. Navy programs in backlog are planned to deliver $20 to $25 million per year of revenue in fiscal 2021 and beyond.
While the near term opportunities in the global energy and petrochemical markets have slowed significantly due to the combined impact of the COVID-19 pandemic and the geopolitical imbalance of supply, and this may continue for the foreseeable future, we continue to believe in the long-term strength of the energy and petrochemical markets. Coupled with our diversification strategy with the U.S. Navy, we believe that the long-term strength of our markets will support our goal to significantly grow our business. We have invested in capacity to serve our commercial customers as well as to expand the work we do for the U.S. Navy. We intend to continue to look for organic growth opportunities as well as acquisitions or other business combinations that we believe will allow us to expand our presence in both our existing and ancillary markets.
Our expectations for sales and profitability assume that we are able to operate our production facility in Batavia, New York at or near normal capacity for the last three quarters of fiscal 2021. In our first quarter of fiscal 2021, our production capability was significantly reduced due to the COVID-19 pandemic. Our production was at approximately one-third of its capacity in the first two months of the first quarter of fiscal 2021 and we are expecting to be at approximately 50% of normal production for the first quarter of fiscal 2021.
We expect a weak first quarter of fiscal 2021, for the reasons previously noted. For the remaining nine months of fiscal 2021, we expect to operate at normal capacity. We project that approximately 70% to 75% of our $112,389 March 31, 2020 backlog will convert to sales in fiscal 2021. We expect the remaining backlog will convert beyond fiscal 2021, which includes a combination of U.S. Navy orders that have a long conversion cycle (up to five years) as well as certain commercial orders, the conversion of which has been extended by our customers. We had two projects totaling $3,165 canceled in fiscal 2020. At March 31, 2020, we had two projects totaling $562 put on hold by our customers. Furthermore, as of June 2020, we have three projects which have been delayed by our customers due to COVID-19 and related energy market dynamics, causing revenue of $4,118 to be delayed beyond fiscal 2021. Given extreme market uncertainty resulting from the COVID-19 pandemic and the volatility in the oil markets, at this time we are not providing any quantitative revenue guidance.
We expect that cash flow in fiscal 2021 will be challenged in the first quarter of the fiscal year, primarily due to our reduced production in the first quarter, but will improve in the remaining part of the fiscal year.
Contingencies and Commitments
We have been named as a defendant in lawsuits alleging personal injury from exposure to asbestos allegedly contained in, or accompanying, our products. We are a co-defendant with numerous other defendants in these lawsuits and intend to vigorously defend ourselves against these claims. The claims are similar to previous asbestos lawsuits that named us as a defendant. Such previous lawsuits either were dismissed when it was shown that we had not supplied products to the plaintiffs’ places of work or were
27
settled by us for immaterial amounts. We cannot provide any assurances that any pending or future matters will be resolved in the same manner as previous lawsuits.
As of March 31, 2020, we are subject to the claims noted above, as well as other legal proceedings and potential claims that have arisen in the ordinary course of business. Although the outcome of the lawsuits to which we are, or may become, a party to cannot be determined and an estimate of the reasonably possible loss or range of loss cannot be made for the majority of claims, we do not believe that the outcomes, either individually or in the aggregate, will have a material effect on our results of operations, financial position or cash flows.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements and the notes to consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the U.S.
Critical accounting policies are defined as those that reflect significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions.
Revenue Recognition. The Company accounts for revenue in accordance with Accounting Standard Codification 606, "Revenue from Contracts with Customers" ("ASC 606"), which it adopted on April 1, 2018 using the modified retrospective approach.
We recognize revenue on all contracts when control of the product is transferred to the customer. Control is generally transferred when products are shipped, title is transferred, significant risks of ownership have transferred, we have rights to payment, and rewards of ownership pass to the customer. Customer acceptance may also be a factor in determining whether control of the product has transferred. Although revenue on the majority of our contracts, as measured by number of contracts, is recognized upon shipment to the customer, revenue on larger contracts, which are fewer in number but generally represent the majority of revenue, is recognized over time as these contracts meet specific criteria in ASC 606. Revenue from contracts that is recognized upon shipment accounted for approximately 30% of revenue in fiscal 2020. Revenue from contracts that is recognized over time accounted for approximately 70% of revenue in fiscal 2020. We recognize revenue over time when contract performance results in the creation of a product for which we do not have an alternative use and the contract includes an enforceable right to payment in an amount that corresponds directly with the value of the performance completed. To measure progress towards completion on performance obligations for which revenue is recognized over time we utilize an input method based upon a ratio of direct labor hours incurred to date to management’s estimate of the total labor hours to be incurred on each contract or an output method based upon completion of operational milestones, depending upon the nature of the contract.
Pension and Postretirement Benefits. Defined benefit pension and other postretirement benefit costs and obligations are dependent on actuarial assumptions used in calculating such amounts. These assumptions are reviewed annually and include the discount rate, long-term expected rate of return on plan assets, salary growth, healthcare cost trend rate and other economic and demographic factors. We base the discount rate assumption for our plans on the FTSE Pension Liability Above-Median AA-Index. The long-term expected rate of return on plan assets is based on the plan’s asset allocation, historical returns and expectations as to future returns that are expected to be realized over the estimated remaining life of the plan liabilities that will be funded with the plan assets. The salary growth assumptions are determined based on long-term actual experience and future and near-term outlook. The healthcare cost trend rate assumptions are based on historical cost and payment data, the near-term outlook, and an assessment of likely long-term trends.
Income Taxes. We use the liability method to account for income taxes. Under this method, deferred tax liabilities and assets are recognized for the tax effects of temporary differences between the financial reporting and tax bases of liabilities and assets measured using the enacted tax rate.
Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using current tax rates. We evaluate available information about future taxable income and other possible sources of realization of deferred income tax assets and record valuation allowances to reduce deferred income tax assets to an amount that represents our best estimates of the amounts of such deferred income tax assets that more likely than not will be realized.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for uncertain tax positions when we believe that certain tax positions do not meet the more likely than not threshold. We adjust these reserves in light of changing facts and circumstances, such as the outcome of a tax audit or the lapse of the statute of
28
limitations. The provision for income taxes includes the impact of reserve provisions and changes to the reserves that are considered appropriate.
Critical Accounting Estimates and Judgments
We have evaluated the accounting policies used in the preparation of the consolidated financial statements and the notes to consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K and believe those policies to be reasonable and appropriate.
We believe that the most critical accounting estimates used in the preparation of our consolidated financial statements relate to labor hour estimates and establishment of operational milestones which are used to recognize revenue over time, accounting for contingencies, under which we accrue a loss when it is probable that a liability has been incurred and the amount can be reasonably estimated, and accounting for pensions and other postretirement benefits.
As discussed above under the heading "Critical Accounting Policies," we recognize a majority of our revenue using an over-time recognition method. The key estimate for the over-time recognition model is total labor to be incurred on each contract and to the extent that this estimate changes, it may significantly impact revenue recognized in each period.
As a result of the adoption of ASC 606, we anticipate certain large international contracts will not qualify for over-time revenue recognition which may cause inordinate quarter-to-quarter and year-to-year financial performance volatility.
Contingencies, by their nature, relate to uncertainties that require us to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss. For more information on these matters, see the notes to consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K.
Accounting for pensions and other postretirement benefits involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, extensive use is made of assumptions about inflation, investment returns, mortality, turnover, medical costs and discount rates. These assumptions are reviewed annually.
The discount rate used in accounting for pensions and other postretirement benefits expense (income) is determined in conjunction with our actuary by reference to a current yield curve and by considering the timing and amount of projected future benefit payments. The discount rate assumption for fiscal 2020 was 3.83% for our defined benefit pension plan and 3.37% for our other postretirement benefit plan. A reduction in the discount rate of 50 basis points, with all other assumptions held constant, would have increased fiscal 2020 net periodic benefit expense for our defined benefit pension plan and other postretirement benefit plan by approximately $311 and $0, respectively.
The expected return on plan assets assumption of 7.0% used in accounting for our pension plan is determined by evaluating the mix of investments that comprise plan assets and external forecasts of future long-term investment returns. A reduction in the rate of return of 50 basis points, with other assumptions held constant, would have increased fiscal 2020 net periodic pension expense by approximately $190.
During fiscal 2020 and fiscal 2019, the pension plan released liabilities for vested benefits of certain participants through the purchase of nonparticipating annuity contracts with a third-party insurance company. As a result of these transactions, in fiscal 2020 and fiscal 2019, the projected benefit obligation decreased $1,420 and $1,589, respectively, and plan assets decreased $1,420 and $1,718, respectively.
As part of our ongoing financial reporting process, a collaborative effort is undertaken involving our managers with functional responsibilities for financial, credit, tax, engineering, manufacturing and benefit matters, and outside advisors such as lawyers, consultants and actuaries. We believe that the results of this effort provide management with the necessary information on which to base their judgments and to develop the estimates and assumptions used to prepare the financial statements.
We believe that the amounts recorded in the consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K related to revenue, contingencies, pensions, other postretirement benefits and other matters requiring the use of estimates and judgments are reasonable, although actual outcomes could differ materially from our estimates.
New Accounting Pronouncements
In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board, the SEC, the Emerging Issues Task Force, the American Institute of Certified Public Accountants or any
29
other authoritative accounting body to determine the potential impact they may have on our consolidated financial statements. For discussion of the newly issued accounting pronouncements see ''Accounting and reporting changes'' in Note 1 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2020, other than letters of credit incurred in the ordinary course of business and operating leases and letters of credit as of March 31, 2019.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks (i.e., the risk of loss arising from market changes) to which we are exposed are foreign currency exchange rates, price risk and project cancellation risk.
The assumptions applied in preparing the following qualitative and quantitative disclosures regarding foreign currency exchange rate, price risk and project cancellation risk are based upon volatility ranges experienced by us in relevant historical periods, our current knowledge of the marketplace, and our judgment of the probability of future volatility based upon the historical trends and economic conditions of the markets in which we operate.
Foreign Currency
International consolidated sales for fiscal 2020 were 36% of total sales, up from 35% of sales in fiscal 2019. Operating in markets throughout the world exposes us to movements in currency exchange rates, including the recent increased volatility in foreign currency exchange rates resulting from the COVID-19 pandemic. Currency movements can affect sales in several ways, the foremost being our ability to compete for orders against foreign competitors that base their prices on relatively weaker currencies. Business lost due to competition for orders against competitors using a relatively weaker currency cannot be quantified. In addition, cash can be adversely impacted by the conversion of sales made by us in a foreign currency to U.S. dollars. In fiscal 2020, substantially all sales by us and our wholly owned subsidiaries, for which we were paid, were denominated in the local currency of the respective subsidiary (U.S. dollars or Chinese RMB).
We have limited exposure to foreign currency purchases. In fiscal 2020, our purchases in foreign currencies represented 1% of the cost of products sold. At certain times, we may enter into forward foreign currency exchange agreements to hedge our exposure against potential unfavorable changes in foreign currency values on significant sales and purchase contracts negotiated in foreign currencies. Forward foreign currency exchange contracts were not used in fiscal 2020 and as of March 31, 2020, we held no forward foreign currency contracts.
Price Risk
Operating in a global marketplace requires us to compete with other global manufacturers which, in some instances, benefit from lower production costs and more favorable economic conditions. Although we believe that our customers differentiate our products on the basis of our manufacturing quality and engineering experience and excellence, among other things, such lower production costs and more favorable economic conditions mean that our competitors are able to offer products similar to ours at lower prices. In extreme market downturns, such as we recently experienced, we typically see depressed price levels. Moreover, the cost of metals and other materials used in our products have experienced significant volatility. Such factors, in addition to the global effects of the recent volatility and disruption of the capital and credit markets, have resulted in downward demand and pricing pressure on our products.
Project Cancellation and Project Continuation Risk
Adverse economic or specific project conditions can lead to a project being placed on hold or cancelled by our customers. In fiscal 2020, we had two projects totaling $3,165 cancelled. In fiscal 2019, we had no projects cancelled. At March 31, 2020, we had two projects totaling $562 on hold. At March 31, 2019, we had no projects on hold. We attempt to mitigate the risk of cancellation by structuring contracts with our customers to maximize the likelihood that progress payments made to us for individual projects cover the costs we have incurred. As a result, we do not believe we have a significant cash exposure to projects which may be cancelled.
Open orders are reviewed continuously through communications with customers. If it becomes evident to us that a project is delayed well beyond its original shipment date, management will move the project into "placed on hold" (i.e., suspended) category. Furthermore, if a project is cancelled by our customer, it is removed from our backlog.
30
INDEX TO FINANCIAL STATEMENTS
31
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Year Ended March 31, |
|
|||||||||
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
|||
|
|
(Amounts in thousands, except per share data) |
|
|||||||||
Net sales |
|
$ |
90,604 |
|
|
$ |
91,831 |
|
|
$ |
77,534 |
|
Cost of products sold |
|
|
72,456 |
|
|
|
69,922 |
|
|
|
60,559 |
|
Gross profit |
|
|
18,148 |
|
|
|
21,909 |
|
|
|
16,975 |
|
Other expenses and income: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
16,868 |
|
|
|
17,641 |
|
|
|
15,533 |
|
Selling, general and administrative - amortization |
|
|
11 |
|
|
|
237 |
|
|
|
236 |
|
Goodwill and other impairments |
|
|
— |
|
|
|
6,449 |
|
|
|
14,816 |
|
Restructuring charge |
|
|
— |
|
|
|
— |
|
|
|
316 |
|
Other expense |
|
|
617 |
|
|
|
— |
|
|
|
— |
|
Other income |
|
|
(348 |
) |
|
|
(823 |
) |
|
|
(478 |
) |
Interest income |
|
|
(1,324 |
) |
|
|
(1,462 |
) |
|
|
(606 |
) |
Interest expense |
|
|
12 |
|
|
|
12 |
|
|
|
12 |
|
Total other expenses and income |
|
|
15,836 |
|
|
|
22,054 |
|
|
|
29,829 |
|
Income (loss) before provision (benefit) for income taxes |
|
|
2,312 |
|
|
|
(145 |
) |
|
|
(12,854 |
) |
Provision (benefit) for income taxes |
|
|
440 |
|
|
|
163 |
|
|
|
(3,010 |
) |
Net income (loss) |
|
$ |
1,872 |
|
|
$ |
(308 |
) |
|
$ |
(9,844 |
) |
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.19 |
|
|
$ |
(0.03 |
) |
|
$ |
(1.01 |
) |
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.19 |
|
|
$ |
(0.03 |
) |
|
$ |
(1.01 |
) |
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
9,876 |
|
|
|
9,823 |
|
|
|
9,764 |
|
Diluted |
|
|
9,879 |
|
|
|
9,823 |
|
|
|
9,764 |
|
Dividends declared per share |
|
$ |
0.43 |
|
|
$ |
0.39 |
|
|
$ |
0.36 |
|
See Notes to Consolidated Financial Statements.
32
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
Year Ended March 31, |
|
|||||||||
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
|||
|
|
(Amounts in thousands) |
|
|||||||||
Net income (loss) |
|
$ |
1,872 |
|
|
$ |
(308 |
) |
|
$ |
(9,844 |
) |
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(198 |
) |
|
|
(235 |
) |
|
|
344 |
|
Defined benefit pension and other postretirement plans, net of income tax (benefit) provision of $(153), $(63), and $476, for the years ended March 31, 2020, 2019 and 2018, respectively |
|
|
(525 |
) |
|
|
(348 |
) |
|
|
1,668 |
|
Total other comprehensive (loss) income |
|
|
(723 |
) |
|
|
(583 |
) |
|
|
2,012 |
|
Total comprehensive income (loss) |
|
$ |
1,149 |
|
|
$ |
(891 |
) |
|
$ |
(7,832 |
) |
See Notes to Consolidated Financial Statements.
33
|
|
March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
|
|
(Amounts in thousands, except per share data) |
|
|||||
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
32,955 |
|
|
$ |
15,021 |
|
Investments |
|
|
40,048 |
|
|
|
62,732 |
|
Trade accounts receivable, net of allowances ($33 at each of March 31, 2020 and 2019) |
|
|
15,400 |
|
|
|
17,582 |
|
Unbilled revenue |
|
|
14,592 |
|
|
|
7,522 |
|
Inventories |
|
|
22,291 |
|
|
|
24,670 |
|
Prepaid expenses and other current assets |
|
|
906 |
|
|
|
1,333 |
|
Income taxes receivable |
|
|
485 |
|
|
|
1,073 |
|
Assets held for sale |
|
|
— |
|
|
|
4,850 |
|
Total current assets |
|
|
126,677 |
|
|
|
134,783 |
|
Property, plant and equipment, net |
|
|
17,587 |
|
|
|
17,071 |
|
Prepaid pension asset |
|
|
3,460 |
|
|
|
4,267 |
|
Operating lease assets |
|
|
243 |
|
|
|
— |
|
Other assets |
|
|
153 |
|
|
|
149 |
|
Total assets |
|
$ |
148,120 |
|
|
$ |
156,270 |
|
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of finance lease obligations |
|
$ |
40 |
|
|
$ |
51 |
|
Accounts payable |
|
|
14,253 |
|
|
|
12,405 |
|
Accrued compensation |
|
|
4,453 |
|
|
|
5,126 |
|
Accrued expenses and other current liabilities |
|
|
3,352 |
|
|
|
2,933 |
|
Customer deposits |
|
|
26,983 |
|
|
|
30,847 |
|
Operating lease liabilities |
|
|
153 |
|
|
|
— |
|
Liabilities held for sale |
|
|
— |
|
|
|
3,525 |
|
Total current liabilities |
|
|
49,234 |
|
|
|
54,887 |
|
Finance lease obligations |
|
|
55 |
|
|
|
95 |
|
Operating lease liabilities |
|
|
82 |
|
|
|
— |
|
Deferred income tax liability |
|
|
721 |
|
|
|
1,056 |
|
Accrued pension liability |
|
|
747 |
|