ghm-10q_20200630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

☐	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)

585-343-2216

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.10 Per Share

GHM

NYSE

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	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of July 28, 2020, there were outstanding 9,976,893 shares of the registrant’s common stock, par value $0.10 per share.

Graham Corporation and Subsidiaries

Index to Form 10-Q

As of June 30, 2020 and March 31, 2020 and for the three months ended June 30, 2020 and 2019

		Page
Part I.	FINANCIAL INFORMATION

Item 1.	Unaudited Condensed Consolidated Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21

Item 4.	Controls and Procedures	22

Part II.	OTHER INFORMATION

Item 1A.	Risk Factors	22

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 6.	Exhibits	24

Signatures		25

GRAHAM CORPORATION AND SUBSIDIARIES

FORM 10-Q

JUNE 30, 2020

PART I – FINANCIAL INFORMATION

Item 1.Unaudited Condensed Consolidated Financial Statements

GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
	June 30,
	2020			2019
	(Amounts in thousands, except per share data)
Net sales	$	16,710		$	20,593
Cost of products sold		15,142			15,879
Gross profit		1,568			4,714
Other expenses and income:
Selling, general and administrative		3,902			4,556
Selling, general and administrative – amortization		—			11
Other expense		—			523
Other income		(55	)		(87	)
Interest income		(94	)		(399	)
Interest expense		5			3
Total other expenses and income		3,758			4,607
(Loss) income before provision for income taxes		(2,190	)		107
(Benefit) provision for income taxes		(372	)		25
Net (loss) income	$	(1,818	)	$	82
Per share data
Basic:
Net (loss) income	$	(0.18	)	$	0.01
Diluted:
Net (loss) income	$	(0.18	)	$	0.01
Weighted average common shares outstanding:
Basic		9,895			9,855
Diluted		9,895			9,858
Dividends declared per share	$	0.11		$	0.10

See Notes to Condensed Consolidated Financial Statements.

GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

	Three Months Ended
	June 30,
	2020			2019
	(Amounts in thousands)
Net (loss) income	$	(1,818	)	$	82
Other comprehensive income:
Foreign currency translation adjustment		9			(87	)
Defined benefit pension and other postretirement plans net of income tax expense of $61 and $55, for the three months ended June 30, 2020 and 2019, respectively		205			194
Total other comprehensive income		214			107
Total comprehensive (loss) income	$	(1,604	)	$	189

See Notes to Condensed Consolidated Financial Statements.

GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,			March 31,
	2020			2020
	(Amounts in thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents	$	41,069		$	32,955
Investments		26,103			40,048
Trade accounts receivable, net of allowances ($47 and $33 at June 30 and March 31, 2020, respectively)		17,054			15,400
Unbilled revenue		15,683			14,592
Inventories		22,656			22,291
Prepaid expenses and other current assets		1,262			906
Income taxes receivable		975			485
Total current assets		124,802			126,677
Property, plant and equipment, net		17,323			17,587
Prepaid pension asset		3,670			3,460
Operating lease assets		206			243
Other assets		105			153
Total assets	$	146,106		$	148,120
Liabilities and stockholders’ equity
Current liabilities:
Current portion of finance lease obligations	$	33		$	40
Accounts payable		9,713			14,253
Accrued compensation		4,551			4,453
Accrued expenses and other current liabilities		3,963			3,352
Customer deposits		31,082			26,983
Operating lease liabilities		137			153
Total current liabilities		49,479			49,234
Finance lease obligations		50			55
Operating lease liabilities		60			82
Deferred income tax liability		1,017			721
Accrued pension liability		774			747
Accrued postretirement benefits		562			557
Total liabilities		51,942			51,396
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $1.00 par value, 500 shares authorized		—			—
Common stock, $0.10 par value, 25,500 shares authorized, 10,780 and 10,689 shares issued and 9,969 and 9,881 shares outstanding at June 30 and March 31, 2020, respectively		1,078			1,069
Capital in excess of par value		26,516			26,361
Retained earnings		88,474			91,389
Accumulated other comprehensive loss		(9,342	)		(9,556	)
Treasury stock (811 and 808 shares at June 30 and March 31, 2020, respectively)		(12,562	)		(12,539	)
Total stockholders’ equity		94,164			96,724
Total liabilities and stockholders’ equity	$	146,106		$	148,120

See Notes to Condensed Consolidated Financial Statements.

GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended
	June 30,
	2020			2019
Operating activities:	(Dollar amounts in thousands)
Net (loss) income	$	(1,818	)	$	82
Adjustments to reconcile net (loss) income to net cash used by operating activities:
Depreciation		486			490
Amortization		—			11
Amortization of unrecognized prior service cost and actuarial losses		266			249
Equity-based compensation expense		164			88
Gain on disposal or sale of property, plant and equipment		(4	)		—
Loss on sale of Energy Steel & Supply Co.		—			87
Deferred income taxes		282			202
(Increase) decrease in operating assets:
Accounts receivable		(1,646	)		3,088
Unbilled revenue		(1,091	)		(2,323	)
Inventories		(361	)		552
Prepaid expenses and other current and non-current assets		(356	)		(166	)
Income taxes receivable		(490	)		(187	)
Operating lease assets		37			105
Prepaid pension asset		(210	)		(218	)
Increase (decrease) in operating liabilities:
Accounts payable		(4,430	)		(5,565	)
Accrued compensation, accrued expenses and other current and non-current liabilities		709			(1,005	)
Customer deposits		4,094			(242	)
Operating lease liabilities		(37	)		(27	)
Long-term portion of accrued compensation, accrued pension liability and accrued postretirement benefits		32			26
Net cash used by operating activities		(4,373	)		(4,753	)
Investing activities:
Purchase of property, plant and equipment		(338	)		(294	)
Proceeds from disposal of property, plant and equipment		6			—
Proceeds from the sale of Energy Steel & Supply Co.		—			602
Purchase of investments		(26,103	)		(28,651	)
Redemption of investments at maturity		40,048			32,595
Net cash provided by investing activities		13,613			4,252
Financing activities:
Principal repayments on finance lease obligations		(12	)		(10	)
Principal repayments on long-term debt		(4,599	)		—
Proceeds from the issuance of long-term debt		4,599			—
Dividends paid		(1,097	)		(988	)
Purchase of treasury stock		(23	)		(230	)
Net cash used by financing activities		(1,132	)		(1,228	)
Effect of exchange rate changes on cash		6			(76	)
Net increase (decrease) in cash and cash equivalents, including cash classified within current assets held for sale		8,114			(1,805	)
Net decrease in cash classified within current assets held for sale		—			552
Net increase (decrease) in cash and cash equivalents		8,114			(1,253	)
Cash and cash equivalents at beginning of period		32,955			15,021
Cash and cash equivalents at end of period	$	41,069		$	13,768

See Notes to Condensed Consolidated Financial Statements.

GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

	Common Stock						Capital in						Accumulated Other						Total
				Par			Excess of			Retained			Comprehensive			Treasury			Stockholders'
	Shares			Value			Par Value			Earnings			Loss			Stock			Equity
Balance at April 1, 2020		10,689		$	1,069		$	26,361		$	91,389		$	(9,556	)	$	(12,539	)	$	96,724
Comprehensive income											(1,818	)		214						(1,604	)
Issuance of shares		113			11			(11	)											—
Forfeiture of shares		(22	)		(2	)		2												—
Dividends											(1,097	)								(1,097	)
Recognition of equity-based compensation expense								164												164
Purchase of treasury stock																	(23	)		(23	)
Balance at June 30, 2020		10,780		$	1,078		$	26,516		$	88,474		$	(9,342	)	$	(12,562	)	$	94,164

	Common Stock						Capital in						Accumulated Other						Total
				Par			Excess of			Retained			Comprehensive			Treasury			Stockholders'
	Shares			Value			Par Value			Earnings			Loss			Stock			Equity
Balance at April 1, 2019		10,650		$	1,065		$	25,277		$	93,847		$	(8,833	)	$	(12,390	)	$	98,966
Cumulative effect of change in accounting principle											(80	)								(80	)
Comprehensive income											82			107						189
Issuance of shares		83			8			(8	)											—
Forfeiture of shares		(34	)		(3	)		3												—
Dividends											(988	)								(988	)
Recognition of equity-based compensation expense								88												88
Purchase of treasury stock																	(230	)		(230	)
Balance at June 30, 2019		10,699		$	1,070		$	25,360		$	92,861		$	(8,726	)	$	(12,620	)	$	97,945

See Notes to Condensed Consolidated Financial Statements.

GRAHAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except per share data)

NOTE 1 – BASIS OF PRESENTATION:

Graham Corporation's (the "Company's") Condensed Consolidated Financial Statements include its wholly-owned foreign subsidiaries located in Suzhou, China and Ahmedabad, India. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X, each as promulgated by the U.S. Securities and Exchange Commission. The Company's Condensed Consolidated Financial Statements do not include all information and notes required by GAAP for complete financial statements. The unaudited Condensed Consolidated Balance Sheet as of March 31, 2020 presented herein was derived from the Company’s audited Consolidated Balance Sheet as of March 31, 2020. For additional information, please refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2020 ("fiscal 2020"). In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included in the Company's Condensed Consolidated Financial Statements.

The Company's results of operations and cash flows for the three months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the current fiscal year, which ends March 31, 2021 ("fiscal 2021").

NOTE 2 – REVENUE RECOGNITION:

The Company recognizes revenue on contracts when or as it satisfies a performance obligation by transferring control of the product to the customer. For contracts in which revenue is recognized upon shipment, control is generally transferred when products are shipped, title is transferred, significant risks of ownership have transferred, the Company has rights to payment, and rewards of ownership pass to the customer. For contracts in which revenue is recognized over time, control is generally transferred as the Company creates an asset that does not have an alternative use to the Company and the Company has an enforceable right to payment for the performance completed to date.

The following table presents the Company’s revenue disaggregated by product line and geographic area:

	Three Months Ended
	June 30,
Product Line	2020		2019
Heat transfer equipment	$	10,673	$	7,852
Vacuum equipment		2,551		5,530
All other		3,486		7,211
Net sales	$	16,710	$	20,593


Geographic Region
Asia	$	5,163	$	3,219
Canada		992		1,348
Middle East		449		773
South America		220		359
U.S.		9,438		14,448
All other		448		446
Net sales	$	16,710	$	20,593

A performance obligation represents a promise in a contract to provide a distinct good or service to a customer. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Transaction price reflects the amount of consideration to which the Company expects to be entitled in exchange for transferred products. A contract’s transaction

price is allocated to each distinct performance obligation and revenue is recognized as the performance obligation is satisfied. In certain cases, the Company may separate a contract into more than one performance obligation, while in other cases, several products may be part of a fully integrated solution and are bundled into a single performance obligation. If a contract is separated into more than one performance obligation, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods underlying each performance obligation. The Company has made an accounting policy election to exclude from the measurement of the contract price all taxes assessed by government authorities that are collected by the Company from its customers. The Company does not adjust the contract price for the effects of a financing component if the Company expects, at contract inception, that the period between when a product is transferred to a customer and when the customer pays for the product will be one year or less. Shipping and handling fees billed to the customer are recorded in revenue and the related costs incurred for shipping and handling are included in cost of products sold.

Revenue on the majority of the Company’s contracts, as measured by number of contracts, is recognized upon shipment to the customer. Revenue on larger contracts, which are fewer in number but represent the majority of revenue, is recognized over time. However, in the three months ended June 30, 2020, revenue recognized over time was lower than revenue recognized upon shipment due to limited production on large contracts as a result of the COVID-19 pandemic. Revenue from contracts that is recognized upon shipment accounted for approximately 60% and 45% of revenue for the three-month periods ended June 30, 2020 and 2019, respectively, and revenue from contracts that is recognized over time accounted for approximately 40% and 55% of revenue for the three-month periods ended June 30, 2020 and 2019, respectively. The Company recognizes revenue over time when contract performance results in the creation of a product for which the Company does 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 the Company utilizes 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. The Company has established the systems and procedures essential to developing the estimates required to account for performance obligations over time. These procedures include monthly review by management of costs incurred, progress towards completion, identified risks and opportunities, sourcing determinations, changes in estimates of costs yet to be incurred, availability of materials, and execution by subcontractors. Sales and earnings are adjusted in current accounting periods based on revisions in the contract value due to pricing changes and estimated costs at completion. Losses on contracts are recognized immediately when evident to management.

The timing of revenue recognition, invoicing and cash collections affect trade accounts receivable, unbilled revenue (contract assets) and customer deposits (contract liabilities) on the Condensed Consolidated Balance Sheets. Unbilled revenue represents revenue on contracts that is recognized over time and exceeds the amount that has been billed to the customer. Unbilled revenue is separately presented in the Condensed Consolidated Balance Sheets. The Company may have an unconditional right to payment upon billing and prior to satisfying the performance obligations. The Company will then record a contract liability and an offsetting asset of equal amount until the deposit is collected and the performance obligations are satisfied. Customer deposits are separately presented in the Condensed Consolidated Balance Sheets. Customer deposits are not considered a significant financing component as they are generally received less than one year before the product is completed or used to procure specific material on a contract, as well as related overhead costs incurred during design and construction.

Net contract assets (liabilities) consisted of the following:

	June 30, 2020			March 31, 2020			Change

Unbilled revenue (contract assets)	$	15,683		$	14,592		$	1,091
Customer deposits (contract liabilities)		(31,082	)		(26,983	)		(4,099	)
Net contract liabilities	$	(15,399	)	$	(12,391	)	$	(3,008	)

Contract liabilities at June 30, 2020 and March 31, 2020 include $8,823 and $3,660, respectively, of customer deposits for which the Company has an unconditional right to collect payment. Trade accounts receivable, as presented on the Condensed Consolidated Balance Sheets, includes corresponding balances at June 30, 2020 and March 31, 2020, respectively. Revenue recognized in the three months ended June 30, 2020 that was included in the contract liability balance at March 31, 2020 was $7,350. Changes in the net contract liability balance during the three-month period ended June 30, 2020 were impacted by a $1,091 increase in contract assets, of which $1,751 was due to contract progress offset by invoicing to customers of $660. In addition, contract liabilities increased $4,099 driven by revenue recognized in the current period that was included in the contract liability balance at March 31, 2020 offset by new customer deposits of $11,449.

Receivables billed but not paid under retainage provisions in the Company’s customer contracts were $2,926 and $2,016 at June 30, 2020 and March 31, 2020, respectively.

Incremental costs to obtain a contract consist of sales employee and agent commissions. Commissions paid to employees and sales agents are capitalized when paid and amortized to selling, general and administrative expense when the related revenue is recognized. Capitalized costs, net of amortization, to obtain a contract were $72 and $45 at June 30, 2020 and March 31, 2020, respectively, and are included in the line item "Prepaid expenses and other current assets" in the Condensed Consolidated Balance Sheets. The related amortization expense was $10 and $46 in the three months ended June 30, 2020 and 2019, respectively.

The Company’s remaining unsatisfied performance obligations represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. The Company also refers to this measure as backlog. As of June 30, 2020, the Company had remaining unsatisfied performance obligations of $107,220. The Company expects to recognize revenue on approximately 70% to 75% of the remaining performance obligations within one year, 15% to 20% in one to two years and the remaining beyond two years.

NOTE 3 – INVESTMENTS:

Investments consist of certificates of deposits with financial institutions. All investments have original maturities of greater than three months and less than one year and are classified as held-to-maturity, as the Company believes it has the intent and ability to hold the securities to maturity. Investments are stated at amortized cost which approximates fair value. All investments held by the Company at June 30, 2020 are scheduled to mature on or before September 24, 2020.

NOTE 4 – INVENTORIES:

Inventories are stated at the lower of cost or net realizable value, using the average cost method.

Major classifications of inventories are as follows:

	June 30,		March 31,
	2020		2020
Raw materials and supplies	$	3,149	$	3,061
Work in process		18,283		18,018
Finished products		1,224		1,212
Total	$	22,656	$	22,291

NOTE 5 – EQUITY-BASED COMPENSATION:

The Amended and Restated 2000 Graham Corporation Incentive Plan to Increase Shareholder Value, as approved by the Company’s stockholders at the Annual Meeting on July 28, 2016, provides for the issuance of up to 1,375 shares of common stock in connection with grants of incentive stock options, non-qualified stock options, stock awards and performance awards to officers, key employees and outside directors; provided, however, that no more than 467 shares of common stock may be used for awards other than stock options. Stock options may be granted at prices not less than the fair market value at the date of grant and expire no later than ten years after the date of grant.

Restricted stock awards granted in the three-month periods ended June 30, 2020 and 2019 were 113 and 83, respectively. Restricted shares of 54 and 40 granted to officers in fiscal 2021 and fiscal 2020, respectively, vest 100% on the third anniversary of the grant date subject to the satisfaction of the performance metrics for the applicable three-year period. Restricted shares of 38 and 28 granted to officers and key employees in fiscal 2021 and fiscal 2020, respectively, vest 33⅓% per year over a three-year term. Restricted shares of 21 and 15 granted to directors in fiscal 2021 and fiscal 2020, respectively, vest 100% on the first year anniversary of the grant date. No stock option awards were granted in the three-month periods ended June 30, 2020 and 2019.

During the three months ended June 30, 2020 and 2019, the Company recognized equity-based compensation costs related to restricted stock awards of $155 and $87, respectively. The income tax benefit recognized related to equity-based compensation was $38 and $20 for the three months ended June 30, 2020 and 2019, respectively.

The Company has an Employee Stock Purchase Plan (the "ESPP"), which allows eligible employees to purchase shares of the Company's common stock at a discount of up to 15% of its fair market value on the (1) last, (2) first or (3) lower of the last or first day of the six-month offering period. A total of 200 shares of common stock may be purchased under the ESPP. During the three months