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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 September 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 October 28, 2003, there were outstanding 1,629,656
shares of common stock, $.10 per share.
2
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2003
PART I - FINANCIAL INFORMATION
Unaudited consolidated financial statements of Graham
Corporation (the Company) and its subsidiaries as of September
30, 2003 and for the three month and six month periods ended
September 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 September 30, 2003 and
its results of operations for the three and six month periods
then ended.
3
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2003 2003
---- ----
Assets
Current Assets:
Cash and cash equivalents $ 280,000 $ 217,000
Investments 5,428,000 6,446,000
Trade accounts receivable, net 6,341,000 7,295,000
Domestic and foreign income taxes
receivable 131,000 259,000
Deferred income tax asset 2,112,000 1,846,000
Prepaid expenses and other current assets 708,000 367,000
----------- -----------
24,330,000 26,771,000
Property, plant and equipment, net 9,481,000 9,808,000
Deferred income tax asset 1,491,000 1,610,000
Other assets 79,000 91,000
----------- -----------
$35,381,000 $38,280,000
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 1,575,000 $ 1,524,000
Current portion of long-term debt 51,000 80,000
Accounts payable 2,782,000 4,629,000
Accrued compensation 3,791,000 3,283,000
Accrued expenses and other liabilities 2,146,000 2,344,000
Customer deposits 2,084,000 2,132,000
----------- -----------
12,429,000 13,992,000
Long-term debt 116,000 127,000
Accrued compensation 272,000 244,000
Deferred income tax liability 51,000 49,000
Other long-term liabilities 60,000 76,000
Accrued pension liability 1,422,000 1,761,000
Accrued postretirement benefits 2,661,000 3,238,000
----------- -----------
Total liabilities 17,011,000 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, 1,728,779 shares at September 30,
2003 and 1,716,572 shares at March 31,
2003 173,000 172,000
Capital in excess of par value 4,849,000 4,757,000
Retained earnings 18,103,000 18,767,000
Accumulated other comprehensive loss (2,857,000) (2,990,000)
----------- -----------
20,268,000 20,706,000
4
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Concluded)
September 30, March 31,
2003 2003
---- ----
Less:
Treasury Stock (99,123 shares on September
30, 2003 and 68,323 shares on March 31,
2003) (1,385,000) (1,161,000)
Notes receivable from officers and
directors (513,000) (752,000)
----------- -----------
Total shareholders' equity 18,370,000 18,793,000
----------- -----------
$35,381,000 $38,280,000
=========== ===========
See Notes to Consolidated Financial Statements.
5
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months Ended Six Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net Sales $12,457,000 $11,437,000 $20,892,000 $21,605,000
----------- ----------- ----------- -----------
Cost and expenses:
Cost of products sold 9,697,000 9,202,000 17,137,000 17,576,000
Selling, general and
administrative 2,515,000 2,737,000 4,922,000 5,205,000
Interest expense 21,000 20,000 58,000 37,000
Other Income (522,000)
----------- ----------- ----------- ----------
12,233,000 11,959,000 21,595,000 22,818,000
----------- ----------- ----------- ----------
Income (loss) before
income taxes 224,000 (522,000) (703,000) (1,213,000)
Provision (benefit) for
income taxes
68,000 (169,000) (201,000) (404,000)
----------- ----------- ----------- ----------
Net income (loss) 156,000 (353,000) (502,000) (809,000)
Retained earnings at
beginning of period 18,027,000 18,432,000 18,767,000 18,888,000
Dividends (80,000) (85,000) (162,000) (85,000)
----------- ----------- ----------- ----------
Retained earnings at
end of period $18,103,000 $17,994,000 $18,103,000 $17,994,000
=========== =========== =========== ===========
Per Share Data:
Basic:
Net income (loss) $.09 $(.21) $(.31) $(.49)
==== ===== ===== =====
Diluted:
Net income (loss) $.09 $(.21) $(.31) $(.49)
==== ===== ===== =====
See Notes to Consolidated Financial Statements.
6
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
September 30,
2003 2002
---- ----
Operating activities:
Net loss $ (502,000) $ (809,000)
---------- ----------
Adjustments to reconcile net loss to net
cash (used) provided by operating
activities:
Depreciation and amortization 488,000 435,000
Loss on sale of property, plant and
equipment 23,000
(Increase) Decrease in operating assets:
Accounts receivable 1,036,000 11,093,000
Inventory, net of customer deposits 1,075,000 (1,998,000)
Prepaid expenses and other current and
non-current assets (328,000) (208,000)
Increase (Decrease) in operating
liabilities:
Accounts payable, accrued compensation,
accrued expenses and other current and
non-current liabilities (2,393,000) (2,882,000)
Accrued compensation, accrued pension
liability, accrued postemployment
benefits (120,000) (104,000)
Domestic and foreign income taxes 129,000 (1,507,000)
Deferred income taxes (120,000) (68,000)
---------- -----------
Total adjustments (233,000) 4,784,000
---------- -----------
Net cash (used) provided by operating
activities (735,000) 3,975,000
---------- -----------
Investing activities:
Purchase of property, plant and equipment (120,000) (334,000)
Proceeds from sale of property, plant and
equipment 5,000
Collection of notes receivable from
officers and directors 35,000 32,000
Purchase of investments (5,421,000) (17,227,000)
Redemption of investments at maturity 6,472,000 11,000,000
---------- -----------
Net cash provided (used) by investing
activities 966,000 (6,524,000)
---------- -----------
7
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
Six Months Ended
September 30,
2003 2002
---- ----
Financing activities:
Decrease in short-term debt (27,000) (13,000)
Proceeds from issuance of long-term debt 5,350,000
Principal repayments on long-term debt (5,401,000) (47,000)
Issuance of common stock 94,000
Dividends paid (162,000)
Acquisition of treasury stock (20,000)
---------- ----------
Net cash used by financing activities (166,000) (60,000)
---------- ----------
Effect of exchange rate changes on cash (2,000) 5,000
---------- ----------
Net increase (decrease) in cash and cash
equivalents 63,000 (2,604,000)
Cash and cash equivalents at beginning of
period 217,000 2,901,000
---------- ----------
Cash and cash equivalents at end of
period $ 280,000 $ 297,000
========== ===========
See Notes to Consolidated Financial Statements.
8
GRAHAM CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL INFORMATION
SEPTEMBER 30, 2003
NOTE 1 - INVENTORIES
- -------------------------------------------------------------------------------
Major classifications of inventories are as follows:
9/30/03 3/31/03
------- -------
Raw materials and supplies $ 1,714,000 $ 2,417,000
Work in process 10,014,000 14,968,000
Finished products 2,573,000 1,937,000
----------- -----------
14,301,000 19,322,000
Less - progress payments 4,873,000 8,907,000
- inventory reserve 98,000 74,000
----------- -----------
$ 9,330,000 $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, as all
options have been granted with an exercise price equal to the
fair market value of the stock on the date of grant. 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 income (loss)
and net income (loss) per share would have been the pro forma
amounts indicated below:
Three Months Ended Six Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss)
as reported $156,000 $(353,000) $(502,000) $(809,000)
Stock-based employee
compensation cost of
related tax benefits (1,000) (11,000) (2,000)
-------- --------- --------- ---------
Pro forma net income (loss)
per share $156,0000 $(354,000) $(513,000) $(811,000)
========= ========= ========= =========
Basic income (loss)
per share As reported
Pro forma $.09 $(.21) $(.31) $(.49)
$.09 $(.21) $(.31) $(.49)
Diluted income
(loss) per share As reported $.09 $(.21) $(.31) $(.49)
Pro forma $.09 $(.21) $(.31) $(.49)
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 - INCOME (LOSS) PER SHARE:
- --------------------------------------------------------------------------------
Basic income (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.
10
Diluted income (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
basic and diluted income (loss) per share is presented below:
Three Months Ended Six Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Basic income (loss) per
share
Numerator:
Net income (loss) $ 156,000 $ (353,000) $ (502,000) $ (809,000)
--------- ---------- ---------- ----------
Denominator:
Weighted common shares
outstanding 1,629,000 1,648,000 1,624,000 1,648,000
Share equivalent units
(SEU) outstanding 16,000 16,000 16,000 14,000
--------- ---------- --------- ---------
Weighted average shares
and SEU's outstanding 1,645,000 1,664,000 1,640,000 1,662,000
--------- ---------- --------- ---------
Basic income (loss) per
share $.09 $(.21) $(.31) $(.49)
==== ===== ===== =====
Diluted income (loss)
per share
Numerator:
Net income (loss) $ 156,000 $ (353,000) $ (502,000) $ (809,000)
--------- ---------- ---------- ----------
Denominator:
Weighted average shares
and SEU's outstanding 1,645,000 1,664,000 1,640,000 1,662,000
Stock options
outstanding 12,000
--------- ---------- ---------- ----------
Weighted average common
and potential common
shares outstanding 1,657,000 1,664,000 1,640,000 1,662,000
--------- ---------- ---------- ----------
Diluted income (loss)
per share $.09 $(.21) $(.31) $(.49)
==== ===== ===== =====
Options to purchase shares of common stock which totaled
136,250 for the three months ended September 30, 2003 were not
included in the computation of diluted earnings per share as the
effect would be antidilutive due to the options' exercise price
being greater than the average market price of the common shares.
11
All options to purchase shares of common stock at various
exercise prices were excluded from the computation of diluted
loss per share for the six month period in fiscal year 2004 and
the three and six month periods in fiscal year 2003 as the effect
would be antidilutive due to the net losses for the periods.
NOTE 4 - PRODUCT WARRANTY LIABILITY
- --------------------------------------------------------------------------------
The Company estimates the costs that may be incurred under
its product warranties and records a liability in the amount of
such costs at the time revenue is recognized. The reserve for
product warranties is based upon past claims experience and
ongoing evaluations of any specific probable claims from
customers.
The reconciliation of the changes in the product warranty
liability is as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Balance at beginning
of period $ 386,000 $ 360,000 $ 592,000 $ 182,000
Expense for product
warranties 45,000 144,000 120,000 344,000
Product warranty
claims paid (72,000) (33,000) (353,000) (55,000)
--------- --------- --------- ---------
Balance at end of
period $ 359,000 $ 471,000 $ 359,000 $ 471,000
========= ========= ========= =========
NOTE 5 - CASH FLOW STATEMENT
- --------------------------------------------------------------------------------
Interest paid was $56,000 and $37,000 for the six months
ended September 30, 2003 and 2002, respectively. In addition,
income taxes (refunded) paid were $(210,000) and $1,171,000 for
the six months ended September 30, 2003 and 2002, respectively.
Non-cash activities during the six months ended September 30,
2003 and 2002 included capital expenditures totaling $11,000 and
$22,000, respectively, which were financed through the issuance
of capital leases. Dividends of $81,000 and $86,000 were
recorded but not paid during the six months ended September 30,
2003 and 2002, respectively.
12
NOTE 6 - COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
Total comprehensive income (loss) was $154,000 and $(285,000)
for the three months ended September 30, 2003 and 2002,
respectively. Other comprehensive income for the three months
ended September 30, 2003 and 2002 included foreign currency
translation adjustments of $(2,000) and $68,000, respectively.
Total comprehensive loss for the six months ended September 30,
2003 and 2002 was $369,000 and $556,000, respectively. Other
comprehensive income for the six months ended September 30, 2003
and 2002 included foreign currency translation adjustments of
$133,000 and $253,000, 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.
13
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 Six Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Sales from external customers
U.S. $11,129,000 $10,478,000 $18,740,000 $19,473,000
U.K. 1,328,000 959,000 2,152,000 2,132,000
----------- ----------- ----------- -----------
Total $12,457,000 $11,437,000 $20,892,000 $21,605,000
=========== =========== =========== ===========
Intersegment sales
U.S. $ 10,000 $ 9,000 $ 38,000 $ 29,000
U.K. 725,000 193,000 1,066,000 612,000
----------- ----------- ----------- -----------
Total $ 735,000 $ 202,000 $ 1,104,000 $ 641,000
=========== =========== =========== ===========
Segment net income (loss)
U.S. $ 293,000 $ (199,000) $ (219,000) $ (765,000)
U.K. 22,000 (145,000) (276,000) (158,000)
----------- ----------- ----------- -----------
Total segment net income
(loss) $ 315,000 $ (344,000) $ (495,000) $ (923,000)
=========== =========== =========== ===========
The segment net income (loss) above is reconciled to the
consolidated totals as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Total segment net income
(loss) $ 315,000 $ (344,000) $ (495,000) $ (923,000)
Eliminations (159,000) (9,000) (7,000) 114,000
----------- ----------- ----------- -----------
Net income (loss) $ 156,000 $ (353,000) $ (502,000) $ (809,000)
=========== =========== =========== ===========
14
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.
15
GRAHAM CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 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 increased 9% in the second 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)
increased 6% and 78%, respectively. The significant increase in
the UK is attributed to several large orders for China from the
petrochemical industry.
Consolidated sales for the six months ended September 30,
2003 as compared to 2002 were down 3%. The decrease in sales for
the six months is a result of weakening activity in the principal
markets served by USA operations.
Cost of sales as a percent of sales for the second quarter
was 78% compared to 80% a year ago. Costs of sales as a percent
of sales for the USA operating segment for the current quarter
was 78% compared to 82% for the quarter ended September 30, 2002.
For the UK operating segment, cost of sales as a percent of sales
was 73% as compared to 71% a year ago. Costs of sales for the
six months ended September 30, 2003 was 82% as compared to 81%
for the six months ended September 30, 2002. By operating
segment, USA costs of sales was 83% versus 84% and UK costs of
sales was 80% compared to 70% for the respective periods ended
September 30, 2003 and 2002. Consolidated costs of sales for
both the quarterly results and year-to-date results are
approximately the same. Operating segment differences from one
16
period to the next resulted largely from differences in product
mix and market pricing on specific projects. There are no upward
or downward trends on operating costs.
Selling, general and administrative (SG&A) expenses for the
quarter were 8% less than SG&A expenses for the quarter ended one
year before and 5% lower for the comparative six months. The
decrease is due to cost savings actions initiated previously.
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 was reported as Other
Income in the first quarter of FYE 2004. Other Income for the
first quarter of FYE 2003 and for the six months ended September
30, 2003 and 2002 was zero.
Interest expense increased from $20,000 for the second three
month period in fiscal year 2003 to $21,000 in the current
period. For the six months ended September 30, 2003, as compared
to 2002, interest expense increased $21,000 or 57%. This
increase came in the UK and relates to higher inventories and
corresponding higher borrowings. Actions are being taken to
reduce inventory in the UK operation.
The effective income tax rate for the three and six months
ended September 30, 2003 was 30% and 29%, respectively, as
compared to 32% and 33% for the prior year respective periods.
The lower effective six month rate is due to the anticipated
impact of the extra territorial income exclusion benefit from
foreign shipments.
The net income for the quarter ended September 30, 2003 was
$156,000 or $.09 per diluted share. This compared to a net loss
of $353,000 or $.21 per share for the three months ended
September 30, 2002. For the six months ended, the net loss as of
September 30, 2003 was $502,000 or $.31 per diluted share, as
compared to a net loss of $809,000 or $.49 per diluted share for
the six months ended September 30, 2002. In summary, cost saving
actions previously initiated are taking hold.
Liquidity and Capital Resources
- -------------------------------
Consolidated cash flow from operations was negative $735,000
for the six months ended September 30, 2003, as compared to the
six months ended September 30, 2002 when cash flow from
operations was positive $3,975,000. The swing is substantially
due to reduced cash collection of $10,057,000 in the current
period. In the comparative prior six month period, significant
project cancellation fees were collected.
As indicated in Note 7 to the Consolidated Financial
Statements, the Employee Benefits Committee of the Board of
Directors terminated postretirement medical benefits for current
US employees. At September 30, 2003 a liability remains on the
balance sheet, however, 61% of the accrued amount of $2,806,000
does not represent a cash obligation to anyone. This liability
will be amortized into income over the next eleven years.
17
The Company has the ability to convert the principal
outstanding on its line of credit to a two year term loan.
Therefore, outstanding balances on the line of credit are
classified as long term debt. The Company utilized the line of
credit continuously throughout the first quarter of the fiscal
year to fund operations and working capital. This activity is
reflected under financing activities in the Consolidated
Statements of Cash Flows.
The long-term debt to equity ratio remained approximately 1%
at September 30 and March 31, 2003. The total liabilities to
asset ratio was reduced from 51% at March 31, 2003 to 48% at
September 30, 2003 and the current assets to current liabilities
ratio improved to 2 to 1 from 1.9 to 1 for the same period.
These key ratios are reflective of the continued stability and
strength of the Company's financial condition.
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.
New Orders and Backlog
- ----------------------
Orders for the second quarter were down 30% at $7,854,000
compared to $11,294,000 for the same period last year. Prior to
intercompany eliminations, orders in the United States were
$4,971,000 compared to $9,912,000 for the same period in fiscal
year 2003. Orders in the United Kingdom were $3,004,000 compared
to $1,932,000 for the same quarter last year. The increase in
orders in the UK reflects one order for $967,000 relating to a
Russian offshore oil project. The decrease in orders in the USA
is due to delays in order placements on active projects and
competitive pricing. Orders for the six months ended September
30, 2003 were $19,087,000 as compared to $19,434,000 for the
comparable six month period one year ago. The modest decrease in
order entry indicates that weak demand will continue into the
immediate future.
Backlog of unfilled orders at September 30, 2003 is
$23,545,000 compared to $28,002,000 at June 30, 2003 and
$31,793,000 at September 30, 2002. Prior to intercompany
eliminations, current backlog in the United States of $21,177,000
compares to $27,268,000 at June 30, 2003 and $30,568,000 at
September 30, 2002. Current backlog in the United Kingdom of
$3,410,000 compares to $2,404,000 at June 30, 2003 and $1,714,000
at September 30, 2002. Included in the USA backlog is $5,144,000
of orders for electric power plant business that have been
suspended by the customer. These orders are protected by
cancellation fees. The amount of the cancellation fees is based
upon a specific formula contained in the contract. 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.
18
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 September 30, 2003 and 2002, a 1% change
in interest rates would impact annual interest expense by $16,000
and $11,000, 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 seller's currency.
In the second quarters of 2004 and 2003, sales in foreign
currencies were 3% and 2%, respectively, of total sales. For the
six months ended September 30, 2003 and 2002, sales in foreign
currencies were 2% of total sales for both the six month periods
ended September 30, 2003 and 2002. 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.
Graham historically has had limited exposure to foreign
currency purchases. Long term, this trend is expected to
continue. During the three month periods ended September 30,
2003 and 2002, purchases in foreign currencies were 13% and 3% of
cost of goods sold, respectively and 11% and 4%, respectively,
for the six months then ended. In FYE 2004, USA operations has
entered a significant dollar volume of orders utilizing UK
subsidiary products in conjunction with USA equipment. At
certain times, forward foreign exchange contracts may be utilized
to limit currency exposure.
Foreign operations produced net income (loss) in the second
quarter of 2003 and 2002 of $22,000 and $(145,000), respectively,
and $(276,000) and $(158,000) for the six month periods ended
September 30, 2003 and 2002, respectively. As currency exchange
rates change, translations of the income statements of our UK
business into US dollars affects year-over-year comparability of
19
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 second quarter results by approximately $2,000 and
$14,000 in fiscal years ended 2004 and 2003, respectively, and
$28,000 and $16,000 for the six months ended September 30, 2003
and 2002, 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 September 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 second quarter operating results
by $78,000 to $117,000 for FYE 2004 and $69,000 to $103,000 for
FYE 2003. 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
September 30, 2003 market price of the Company's stock of $9.52
per share, a 50% to 75% change in the stock price would
positively or negatively impact the Company's operating results
by $132,000 to $198,000 in 2005, $150,000 to $225,000 in 2006,
$163,000 to $245,000 in 2007, $177,000 to $265,000 in 2008 and
$180,000 to $271,000 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 method 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
sales and earnings are adjusted in current accounting periods
based on revisions in contract value and estimated costs at
completion.
20
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.
21
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2003
PART II - OTHER INFORMATION
Item 4. Controls and Procedures
a. Disclosure controls and procedures. As of the end of
the period covered by this quarterly 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
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 July 28, 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. R. Hansen
Vice President Finance and
Administration / CFO (Principal
Accounting Officer)
Date 10/28/03
22
INDEX OF EXHIBITS
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession
Not applicable.
(3)(i) Articles of Incorporation of Graham
Corporation (filed as Exhibit 3(b) to the Registrant's
annual report on Form 10-K for the year ended December
31, 1989, and incorporated herein by reference.)
(3)(ii) By-laws of registrant, as amended
(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.)
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.)
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.)
23
Index to Exhibits (continued)
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.)
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
24
Index to Exhibits (continued)
The 2003 Annual Meeting of Stockholders of Graham
Corporation was held on July 22.
The individuals named below were reelected to serve on
the Company's Board of Directors:
Votes For Votes Withheld
Helen H. Berkeley 1,518,168 13,524
Alvaro Cadena 1,504,471 27,221
Jerald D. Bidlack, William C. Denninger, Philip S.
Hill, H. Russel Lemcke, James J. Malvaso and Cornelius S.
Van Rees all continue as directors of the Company.
The appointment of Deloitte & Touche LLP as independent
auditors was ratified, with 1,523,070 shares voting for,
3,806 shares voting against, and 4,816 shares abstaining.
(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
None.