FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For Quarterly Period Ended June 30, 2003
OR
[ ] 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 (I.R.S. Employer
incorporation or organization) 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
(Former name, former address and former fiscal year, if changed
since last report.)
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 __X__ No _____
Indicate by check mark whether the registrant is an
accelerated filer (as defined by Rule 12b-2 of the Act).
Yes __ __ No __X__
As of July 25, 2003, there were outstanding 1,626,756 shares
of common stock, $.10 per share.
2
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2003
PART I - FINANCIAL INFORMATION
Unaudited consolidated financial statements of Graham
Corporation (the Company) and its subsidiaries as of June 30,
2003 and for the three month periods ended June 30, 2003 and 2002
are presented on the following pages. The financial statements
have been prepared in accordance with the Company's usual
accounting policies, are based in part on approximations and
reflect all normal and recurring adjustments which are, in the
opinion of management, necessary to a fair presentation of the
results of the interim periods. The March 31, 2003 Consolidated
Balance Sheet was derived from the Company's audited financial
statements for the year ended March 31, 2003.
This part also includes management's discussion and analysis
of the Company's financial condition as of June 30, 2003 and its
results of operations for the three month period then ended.
3
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2003 2003
---- ----
Assets
Current Assets:
Cash and equivalents $ 318,000 $ 217,000
Investments 4,467,000 6,446,000
Trade accounts receivable, net 5,977,000 7,295,000
Inventories 9,818,000 10,341,000
Domestic and foreign income taxes
receivable 199,000 259,000
Deferred income tax asset 2,199,000 1,846,000
Prepaid expenses and other current assets 676,000 367,000
---------- ----------
23,654,000 26,771,000
Property, plant and equipment, net 9,676,000 9,808,000
Deferred income tax asset 1,413,000 1,610,000
Other assets 85,000 91,000
----------- -----------
$ 34,828,000 $ 38,280,000
============ ============
4
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Concluded)
June 30, March 31,
2003 2003
---- ----
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 1,814,000 $ 1,524,000
Current portion of long-term debt 66,000 80,000
Accounts payable 2,416,000 4,629,000
Accrued compensation 2,788,000 3,283,000
Accrued expenses and other liabilities 2,132,000 2,344,000
Customer deposits 2,227,000 2,132,000
---------- ----------
11,443,000 13,992,000
Long-term debt 127,000 127,000
Accrued compensation 243,000 244,000
Deferred income tax liability 51,000 49,000
Other long-term liabilities 60,000 76,000
Accrued pension liability 1,976,000 1,761,000
Accrued postretirement benefits 2,689,000 3,238,000
---------- ----------
Total liabilities 16,589,000 19,487,000
---------- ----------
Shareholders' equity:
Preferred stock, $1 par value -
Authorized, 500,000 shares
Common stock, $.10 par value -
Authorized, 6,000,000 shares
Issued, 1,724,079 shares at
June 30, 2003 and 1,716,572
shares at March 31, 2003 173,000 172,000
Capital in excess of par value 4,813,000 4,757,000
Retained earnings 18,027,000 18,767,000
Accumulated other comprehensive loss (2,855,000) (2,990,000)
---------- ----------
20,158,000 20,706,000
Less:
Treasury stock (99,123 shares on
June 30, 2003 and 68,323 shares on
March 31, 2003) (1,385,000) (1,161,000)
Notes receivable from officers and
directors (534,000) (752,000)
Total shareholders' equity 18,239,000 18,793,000
----------- -----------
$34,828,000 $38,280,000
=========== ===========
5
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months
ended June 30,
2003 2002
---- ----
Net Sales $ 8,435,000 $10,168,000
----------- -----------
Cost and expenses:
Cost of products sold 7,440,000 8,374,000
Selling, general and administrative 2,407,000 2,468,000
Interest expense 37,000 17,000
Other income (522,000)
9,362,000 10,859,000
--------- ----------
Loss before income taxes (927,000) (691,000)
Benefit for income taxes (269,000) (235,000)
--------- ----------
Net loss (658,000) (456,000)
Retained earnings at beginning of
period 18,767,000 18,888,000
Dividends (82,000)
----------- -----------
Retained earnings at end of period $18,027,000 $18,432,000
=========== ===========
Per Share Data:
Basic:
Net loss $(.40) $(.27)
Diluted: ====== =====
Net loss $(.40) $(.27)
===== =====
6
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months
Ended June 30,
2003 2002
---- ----
Operating activities:
Net loss $ (658,000) $ (456,000)
----------- -----------
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and amortization 240,000 218,000
(Increase) Decrease in operating assets:
Accounts receivable 1,399,000 7,478,000
Inventory, net of customer deposits 737,000 171,000
Prepaid expenses and other current and non-
current assets (293,000) (146,000)
Increase (Decrease) in operating
liabilities:
Accrued compensation, accrued pension
liability, and accrued postemployment
benefits (336,000) 101,000
Domestic and foreign income taxes 61,000 (1,210,000)
Deferred income taxes (129,000) (6,000)
----------- -----------
Total adjustments (1,416,000) 3,903,000
----------- -----------
Net cash provided (used) by operating
activities (2,074,000) 3,447,000
----------- -----------
7
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
Three Months
Ended June 30,
2003 2002
---- ----
Investing activities:
Purchase of property, plant and equipment (58,000) (145,000)
Collection of notes receivable from
officers and directors 14,000 19,000
Purchase of investments (1,500,000) (8,462,000)
Redemption of investments at maturity 3,500,000 2,500,000
----------- -----------
Net cash provided (used) by investing 1,956,000 (6,088,000)
activities ----------- -----------
Financing activities:
Increase (Decrease) in short-term debt 209,000 (86,000)
Proceeds from issuance of long-term debt 5,350,000
Principal repayments on long-term debt (5,376,000) (19,000)
Issuance of common stock 57,000
Acquisition of treasury stock (20,000)
----------- -----------
Net cash provided (used) by financing 220,000 (105,000)
activities ----------- -----------
Effect of exchange rate changes on cash (1,000) 8,000
----------- -----------
Net increase (decrease) in cash and 101,000 (2,738,000)
equivalents
Cash and equivalents at beginning of 217,000 2,901,000
period ----------- -----------
Cash and equivalents at end of period $ 318,000 $ 163,000
========== ===========
8
GRAHAM CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL INFORMATION
JUNE 30, 2003
NOTE 1 - INVENTORIES
- ---------------------------------------------------------------------
Major classifications of inventories are as follows:
June 30, March 31,
2003 2003
-------- ---------
Raw materials and supplies $ 1,819,000 $ 2,417,000
Work in process 12,630,000 14,968,000
Finished products 2,901,000 1,937,000
----------- -----------
17,350,000 19,322,000
Less - progress payments 7,444,000 8,907,000
- inventory reserve 88,000 74,000
----------- -----------
$ 9,818,000 $10,341,000
=========== ===========
NOTE 2 - STOCK-BASED COMPENSATION
- ---------------------------------------------------------------------
In 2003, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure". This standard
provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based
employee compensation. Additionally, the standard also requires
prominent disclosures in the Company's financial statements about
the method of accounting used for stock-based employee
compensation, and the effect of the method used when reporting
financial results.
The Company accounts for stock-based compensation in
accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation". As permitted by SFAS No. 123, the Company
continues to measure compensation for such plans using the
intrinsic value based method of accounting, prescribed by
Accounting Principles Board (APB), Opinion No. 25, "Accounting
for Stock Issued to Employees". Accordingly, compensation cost
for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant
over the amount an employee must pay to acquire the stock.
Compensation cost for share equivalent units is recorded based on
the quoted market price of the Company's stock at the end of the
period.
9
Under the intrinsic value method, no compensation expense
has been recognized for the Company's stock option plans. Had
compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards
under those plans in accordance with the optional methodology
prescribed under SFAS No. 123, the Company's net loss and net
loss per share would have been the pro forma amounts indicated
below:
Three months
ended June 30,
2003 2002
---- ----
Net loss as reported $(658,000) $(456,000)
Stock-based employee
compensation cost
net of related tax
benefits (11,000) (1,000)
--------- ---------
Pro forma net loss $(669,000) $(457,000)
========= =========
Basic loss per
share As reported $(.40) $(.27)
Pro forma $(.41) $(.28)
Diluted loss per
share As reported $(.40) $(.27)
Pro forma $(.41) $(.28)
For purposes of the disclosure above, the fair value of each
option grant is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 2003 and 2002:
2003 2002
---- ----
Expected life 5 years 5 years
Volatility 50.06% 50.00%
Risk-free interest rate 2.25% 2.81%
Dividend yield 2.40% 2.35%
NOTE 3 - EARNINGS (LOSS) PER SHARE:
- ---------------------------------------------------------------------
Basic earnings (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding for the period. Common shares outstanding includes
share equivalent units which are contingently issuable shares.
Diluted earnings (loss) per share is calculated by dividing net
income (loss) by the weighted average number of common and, when
applicable, potential common shares outstanding during the
period. A reconciliation of the numerators and denominators of
10
basic and diluted earnings (loss) per share is presented below:
Three months
ended June 30,
2003 2002
---- ----
Basic loss per share
Numerator:
Net loss $ (658,000) $ (456,000)
---------- ----------
Denominator:
Weighted common shares outstanding 1,619,000 1,648,000
Share equivalent units (SEU) outstanding
16,000 11,000
Weighted average shares and SEU's ---------- ----------
outstanding 1,635,000 1,659,000
---------- ----------
Basic loss per share $(.40) $(.27)
===== =====
Diluted loss per share
Numerator:
Net loss $ (658,000) $ (456,000)
---------- ----------
Denominator:
Weighted average common and potential
common shares outstanding
1,635,000 1,659,000
---------- ----------
Diluted loss per share $(.40) $(.27)
===== =====
All options to purchase shares of common stock at various
exercise prices were excluded from the computation of diluted
loss per share as the effect would be antidilutive due to the net
loss.
NOTE 4 - PRODUCT WARRANTY LIABILITY
- ---------------------------------------------------------------------
The reconciliation of the changes in the product warranty
liability is as follows:
Three months
ended June 30,
2003 2002
---- ----
Balance at beginning of period $ 592,000 $182,000
Expense for product warranties 75,000 200,000
Product warranty claims paid (281,000) (22,000)
--------- --------
Balance at end of period $ 386,000 $360,000
========= ========
11
NOTE 5 - CASH FLOW STATEMENT
- ---------------------------------------------------------------------
Interest paid was $31,000 and $17,000 for the three months
ended June 30, 2003 and 2002, respectively. In addition, income
taxes paid (refunded) were $(202,000) and $981,000 for the three
months ended June 30, 2003 and 2002, respectively.
Non-cash activities during the three months ended June 30,
2003 included capital expenditures totaling $11,000 which were
financed through the issuance of capital leases and dividends of
$82,000 which were recorded but not paid. There were no non-cash
activities during the three months ended June 30, 2002.
NOTE 6 - COMPREHENSIVE INCOME
- ---------------------------------------------------------------------
Total comprehensive loss was $523,000 and $271,000 for the
three months ended June 30, 2003 and 2002, respectively. Other
comprehensive income included foreign currency translation
adjustments of $135,000 and $185,000 for the quarters ended June
30, 2003 and 2002, respectively.
NOTE 7 - OTHER INCOME
- ---------------------------------------------------------------------
On February 4, 2003, the Employee Benefits Committee of the
Board of Directors irrevocably terminated postretirement health
care benefits for current U.S. employees, however, benefits
payable to retirees of record on April 1, 2003 remained
unchanged. As a result of the plan change, a curtailment gain of
$522,000 was recognized. This gain is included in the caption
"Other Income" in the Consolidated Statement of Operations and
Retained Earnings.
12
NOTE 8 - SEGMENT INFORMATION
- ---------------------------------------------------------------------
The Company's business consists of two operating segments
based upon geographic area. The United States segment designs
and manufactures heat transfer and vacuum equipment and the
operating segment located in the United Kingdom manufactures
vacuum equipment. Operating segment information is presented
below:
Three months
ended June 30,
2003 2002
---- ----
Sales to external customers
U.S. $7,611,000 $ 8,995,000
U.K. 824,000 1,173,000
---------- -----------
Total $8,435,000 $10,168,000
========== ===========
Intersegment sales
U.S. $ 28,000 $ 20,000
U.K. 341,000 419,000
---------- -----------
Total $ 369,000 $ 439,000
========== ===========
Segment net loss
U.S. $ (512,000) $ (566,000)
U.K. (298,000) (13,000)
---------- -----------
Total $ (810,000) $ (579,000)
========== ===========
The segment net loss above is reconciled to the consolidated
totals as follows:
Total segment net loss $ (810,000) $ (579,000)
Eliminations 152,000 123,000
---------- -----------
Net loss $ (658,000) $ (456,000)
========== ===========
13
NOTE 9 - RELATED PARTY TRANSACTION
- ---------------------------------------------------------------------
On April 1, 2003, the Company acquired 30,800 shares of
common stock previously issued under the Long-Term Stock
Ownership Plan from two former officers. This transaction was
accounted for as a purchase. The shares were redeemed at the
original issue price of $7.25, as compared to a market price at
the time of the closing of $7.55. This transaction resulted in a
$224,000 increase to treasury stock, a $204,000 reduction in
notes receivable from officers and directors and cash payments to
former officers. The cash payments approximate amounts
previously paid on the notes.
14
GRAHAM CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
June 30, 2003
Graham Corporation consists of two operating segments as
determined by geographic areas (USA: Graham Corporation, UK:
Graham Vacuum and Heat Transfer, Limited and its wholly-owned
subsidiary, Graham Precision Pumps, Ltd.).
Certain statements contained in this document, including
within this Management's Discussion and Analysis of Financial
Condition and Results of Operations, that are not historical
facts, constitute "Forward-Looking Statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-
looking statements, in general, predict, forecast, indicate or
imply future results, performance or achievements and generally
use words so indicative. The Company wishes to caution the
reader that numerous important factors which involve risks and
uncertainties, including but not limited to economic,
competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and prices, and
other factors discussed in the Company's filings with the
Securities and Exchange Commission, in the future, could affect
the Company's actual results and could cause its actual
consolidated results to differ materially from those expressed in
any forward-looking statement made by, or on behalf of, the
Company.
Results of Operations
- ---------------------
Consolidated sales decreased 17% in the first quarter of
fiscal year ending (FYE) March 31, 2004 compared to the same
three month period one year ago. Sales from USA and UK
operations for the current quarter (including intersegment sales)
decreased 15% and 27%, respectively. The decreases are
attributable to fewer shippable goods and, in addition, in the
USA, fewer workable contracts qualifying for percentage-of-
completion revenue recognition. Consolidated backlog on April 1,
2003 was 26% less than the backlog at April 1, 2002 due to fewer
new orders booked in FYE 2003.
Cost of sales as a percent of sales for the first quarter was
88% compared to 82% a year ago. Costs of sales as a percent of
sales for the USA operating segment for the current quarter was
91% compared to 88% for the quarter ended June 30, 2002. For the
UK operating segment, cost of sales as a percent of sales
increased to 92% from 69% a year ago. UK cost of sales as a
percent of sales increased largely due to a decrease in sales
dollars greater than a proportionate decrease in manufacturing
costs. USA manufacturing costs as a percent of sales increased
due to lower sales, product specification complexities and less
overhead cost absorbed into inventory due to lower plant
activity.
Selling, general and administrative (SG&A) expenses for the
quarter were 2% less than SG&A expenses and for the quarter ended
June 30, 2002.
15
Results of Operations (concluded)
- ---------------------
The elimination of postretirement medical benefits in FYE
2003 for all employees and former employees not retired and
receiving medical benefits as of April 1, 2003 resulted in a
curtailment gain of $522,000. This gain is reported as Other
Income for the current quarter. Other Income for the three
months ended June 30, 2002 was zero.
Interest expense increased from $17,000 for the three month
period in fiscal year 2002 to $37,000 in the current period.
This increase is attributable to higher levels of borrowings in
both the USA and UK. Average borrowings during the first quarter
of FYE 2004 and 2003 were $2,673,000 and $1,433,000,
respectively. Borrowings in the USA were greater due to fewer
advanced progress payments on new orders. Borrowings in the UK
increased due to financing working capital needs.
The effective income tax rate for the first quarter was 29%
compared with the quarter ended June 30, 2002 of 34%. The lower
effective rate is due to the anticipated impact of the extra
territorial income exclusion benefit from foreign shipments.
The net loss for the quarter ended June 30, 2003 was $658,000
or $.40 per diluted share. This compared to a net loss of
$456,000 or $.27 per share for the three months ended June 30,
2002.
Liquidity and Capital Resources
- -------------------------------
Consolidated cash flow from operations was negative
$2,074,000 for the three months ended June 30, 2003 as compared
to a positive cash flow from operations of $3,447,000 for the
quarter ended June 30, 2002. The swing of $5,521,000 is
substantially due to reduced cash collections of $6,079,000 in
the current quarter. The unusually large cash collections in the
first quarter of FYE 2003 was due to significant project
cancellation fees invoiced in the fourth quarter of FYE 2002.
Management expects that the cash flow from operations,
investments, and lines of credit will provide sufficient
resources to fund the fiscal year 2004 cash requirements.
The long-term debt to equity ratio remained constant at 1% on
June 30, 2003 and March 31, 2003. The total liabilities to
assets ratio is 48% compared to 51% at March 31, 2003. These
ratios are reflective of the continued stability and strength of
the Company's financial condition.
New Orders and Backlog
- ----------------------
New orders for the first quarter were up 38% at $11,233,000
compared to $8,140,000 for the same period last year. Prior to
intercompany eliminations, new orders in the United States were
$10,353,000 compared to $7,105,000 for the same period in fiscal
year 2003. New orders in the United Kingdom were $2,106,000
compared to $1,214,000 for the same quarter last year. The
increase in new orders in both the USA and UK is due to
improvement in foreign markets, such as China and India, in
16
New Orders and Backlog (concluded)
- ----------------------
specific under-capacity processing industries.
Backlog of unfilled orders at June 30, 2003 is $28,002,000
compared to $25,069,000 at March 31, 2003 and $31,896,000 at June
30, 2002. Prior to intercompany eliminations, current backlog in
the United States of $27,268,000 compares to $24,475,000 at March
31, 2003 and $31,144,000 at June 30, 2002. Current backlog in
the United Kingdom of $2,404,000 compares to $1,348,000 at
March 31, 2003 and $869,000 at June 30, 2002. Included in the
USA backlog is $5,286,000 of orders for electric power plant
business that have been suspended by the customer. These orders
are protected by cancellation fees. The current consolidated
backlog, with the exception of about $7,186,000, is scheduled to
be shipped during the next twelve months and represents orders
from traditional markets in the Company's established product
lines.
Quantitative and Qualitative Disclosures about Market Risk
- ----------------------------------------------------------
The Company is exposed to changes in interest rates, foreign
currency exchange rates and equity prices which may adversely
impact its results of operations and financial position. The
assumptions applied in preparing quantitative disclosures
regarding interest rate, foreign exchange rate and equity price
risk are based upon volatility ranges experienced in relevant
historical periods, management's current knowledge of the
business and market place, and management's judgment of the
probability of future volatility based upon the historical trends
and economic conditions of the business.
The Company is exposed to interest rate risk primarily
through its borrowing activities. Risk associated with interest
rate fluctuations on debt is managed by holding interest bearing
debt to the absolute minimum and carefully assessing the risks
and benefits for incurring long-term debt. Based upon variable
rate debt outstanding at June 30, 2003 and 2002, a 1% change in
interest rates would impact annual interest expense by $18,000
and $10,000, respectively.
Over the past three years, Graham's international
consolidated sales exposure approximates 36% of annual sales.
Operating in world markets involves exposure to movements in
currency exchange rates. Currency movements can affect sales in
several ways. Foremost is the ability to competitively compete
for orders against competition having a relatively weaker
currency. Business lost due to this cannot be quantified.
Secondly, cash can be adversely impacted by the conversion of
sales in foreign currency to local currency. The substantial
portion of Graham's sales is collected in the local currencies.
In the first quarters of both 2004 and 2003, sales in foreign
currencies were 2% of total sales. At certain times, the Company
may enter into forward foreign exchange agreements to hedge its
exposure against unfavorable changes in foreign currency values
on significant sales contracts negotiated in foreign currencies.
17
Quantitative and Qualitative Disclosures about Market Risk (concluded)
- ----------------------------------------------------------
Graham has limited exposure to foreign currency purchases.
During the three month periods ended June 30, 2003 and 2002,
purchases in foreign currencies were 7% and 8% of cost of goods
sold, respectively. At certain times, forward foreign exchange
contracts may be utilized to limit currency exposure.
Foreign operations produced a net loss of $298,000 and
$13,000 in the first quarter of fiscal year 2004 and 2003,
respectively. As currency exchange rates change, translations of
the income statements of our U.K. business into U.S. dollars
affects year-over-year comparability of operating results. The
Company does not hedge translation risks because cash flows from
U.K. operations are mostly reinvested in the U.K. A 10% change
in foreign exchange rates would have impacted the U.K. reported
net loss by approximately $30,000 and $1,000 in the first quarter
of fiscal year 2004 and 2003, respectively.
The Company has a Long-Term Incentive Plan which provides
for awards of share equivalent units (SEU) for outside directors
based upon the Company's performance. The outstanding SEUs are
recorded at fair market value thereby exposing the Company to
equity price risk. Gains and losses recognized due to market
price changes are included in the quarterly results of
operations. Based upon the SEUs outstanding at June 30, 2003 and
2002 and the respective quarter end market price per share, a 50%
to 75% change in the respective quarter end market price of the
Company's common stock would positively or negatively impact the
Company's first quarter operating results by $71,000 to $106,000
for FYE 2004 and $74,000 to $111,000 for FYE 2003. In the first
quarters of FYE 2004 and FYE 2003, the impact on net income due
to the change in the stock price was not significant. Assuming
required net income of $500,000 to award SEUs is met and SEUs are
granted to the seven outside directors in accordance with the
plan over the next five years, based upon the June 30, 2003
market price of the Company's stock of $8.60 per share, a 50% to
75% change in the stock price would positively or negatively
impact the Company's operating results by $125,000 to $250,000 in
2005, $143,000 to $285,000 in 2006, $156,000 to $312,000 in 2007,
$170,000 to $339,000 in 2008 and $174,000 to $347,000 in 2009.
Critical Accounting Policies
- ----------------------------
The following discussion addresses the most critical
accounting policies, which are those that are most important to
the portrayal of the financial condition and results, and that
require judgment.
Revenue Recognition
- -------------------
Percentage-of-Completion - The Company recognizes revenue
and all related costs on contracts with a duration in excess of
three months and with revenues of $1,000,000 and greater using
the percentage-of-completion method. The percentage-of-
completion is determined by relating actual labor incurred to-
date to management's estimate of total labor to be incurred on
each contract. Contracts in progress are reviewed monthly, and
18
Critical Accounting Policies (concluded)
- ----------------------------
sales and earnings are adjusted in current accounting periods
based on revisions in contract value and estimated costs at
completion.
Completed Contract - Contracts with values less than
$1,000,000 are accounted for on the completed contract method.
The Company recognizes revenue and all related costs on these
contracts upon substantial completion or shipment to the
customer. Substantial completion is consistently defined as at
least 95% complete with regard to direct labor hours. Customer
acceptance is generally required throughout the construction
process and the Company has no further obligations under the
contract after the revenue is recognized.
Use of Estimates - We have made a number of estimates and
assumptions relating to the reporting of assets and liabilities,
the disclosure of contingent assets and liabilities, and reported
amounts of revenue and expenses in preparing our financial
statements in conformity with accounting principles generally
accepted in the United States of America. Actual results could
differ from these estimates.
Forward Looking
- ---------------
Graham is beginning to see early signs of a potential global
recovery for its core products. Assisting this recovery is the
weakness in the US dollar and the decrease in the Pound Sterling
compared to the Euro. Still, there are areas of difficulty
ahead. Competitive pricing pressures on new orders remain
ferocious.
19
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2003
PART II - OTHER INFORMATION
Item 4. Controls and Procedures
a. Disclosure controls and procedures. Within 90 days
before filing this report, we evaluated the
effectiveness of the design and operation of our
disclosure controls and procedures. Our disclosure
controls and procedures are the controls and other
procedures that we designed to ensure that we
record, process, summarize and report in a timely
manner the information we must disclose in reports
that we file with or submit to the SEC. Alvaro
Cadena, our Chief Executive Officer, and J. Ronald
Hansen, our Chief Financial Officer, reviewed and
participated in this evaluation. Based on this
evaluation, Messrs. Cadena and Hansen concluded
that, as of the date of their evaluation, our
disclosure controls were effective.
b. Internal controls. Since the date of the
evaluation described above, there have not been any
significant changes in our internal accounting
controls or in other factors that could
significantly affect those controls.
Item 5. Other Information
a. The Company's chief executive officer and chief
financial officer have furnished to the SEC the
certification with respect to this Form 10-Q that
is required by Section 906 of the Sarbanes-Oxley
Act of 2002.
Item 6. Exhibits and Reports on Form 8-K
a. See index to exhibits.
b. A Form 8-K was filed on June 10, 2003 and included
Items 7 and 9. No financial statements were
required to be filed as part of the report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
GRAHAM CORPORATION
/s/J. Ronald Hansen
-----------------------------------
J. Ronald Hansen
Vice President Finance and
Administration / CFO (Principal
Accounting Officer)
Date 7/25/03
20
INDEX OF EXHIBITS
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession
Not applicable.
(4) Instruments defining the rights of security holders,
including indentures
(a)Equity securities
The instruments defining the rights of the holders of
Registrant's equity securities are as follows:
Certificate of Incorporation, as amended of Registrant
(filed as Exhibit 3(a) to the Registrant's annual
report on Form 10-K for the fiscal year ended December
31, 1989, and incorporated herein by reference.)
By-laws of registrant, as amended (filed as Exhibit
3.2(ii) to the Registrant's annual report on Form 10-K
for the fiscal year ended March 31, 1998, and is
incorporated herein by reference.)
Stockholder Rights Plan of Graham Corporation (filed
as Item 5 to Registrant's current report filed on Form
8-K on August 23, 2000 and Registrant's Form 8-A filed
on September 15, 2000, and incorporated herein by
reference).
(b)Debt securities
Not applicable.
(10) Material Contracts
1989 Stock Option and Appreciation Rights Plan of
Graham Corporation (filed on the Registrant's Proxy
Statement for its 1990 Annual Meeting of Stockholders and
incorporated herein by reference.)
1995 Graham Corporation Incentive Plan to Increase
Shareholder Value (filed on the Registrant's Proxy Statement
for its 1996 Annual Meeting of Stockholders and incorporated
herein by reference.)
Graham Corporation Outside Directors' Long-Term
Incentive Plan (filed as Exhibit 10.3 to the Registrant's
annual report on Form 10-K for the fiscal year ended March
31, 1998, and is incorporated herein by reference.)
21
Index to Exhibits (continued)
2000 Graham Corporation Incentive Plan to Increase
Shareholder Value (filed on the Registrant's Proxy Statement
for its 2001 Annual Meeting of Stockholders and incorporated
herein by reference).
Employment Contracts between Graham Corporation and
Named Executive Officers (filed as Exhibit 10.4 to the
Registrant's annual report on Form 10-K for the fiscal year
ended March 31, 1998, and is incorporated herein by
reference.)
Senior Executive Severance Agreements with Named
Executive Officers (filed as Exhibit 10.5 to the
Registrant's annual report on Form 10-K for the fiscal year
ended March 31, 1998, and is incorporated herein by
reference.)
Long-Term Stock Ownership Plan of Graham Corporation
(filed on the Registrant's Proxy Statement for its 2000
Annual Meeting of Stockholders and incorporated herein by
reference.)
(11) Statement re-computation of per share earnings
Computation of per share earnings is included in Note 3
of the Notes to Financial Information.
(15) Letter re-unaudited interim financial information
Not applicable.
(18) Letter re-change in accounting principles
Not Applicable.
(19) Report furnished to security holders
None.
(22) Published report regarding matters submitted to vote of
security holders
None.
(23) Consents of experts and counsel
Not applicable.
(24) Power of Attorney
Not applicable.
(31) Rule 13a-14(a)/15d-14a Certifications
(32) Section 1350 Certifications
(99) Additional exhibits