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 DECEMBER 31, 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 February 2, 2004, there were outstanding 1,629,656
shares of common stock, $.10 per share.
2
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 2003
PART I - FINANCIAL INFORMATION
Unaudited condensed consolidated financial statements of
Graham Corporation (the Company) and its subsidiaries as of
December 31, 2003 and for the three month and nine month periods
ended December 31, 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 December 31, 2003 and
its results of operations for the three and nine month periods
then ended.
3
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2003 2003
---- ----
Assets
Current Assets:
Cash and cash equivalents $ 202,000 $ 217,000
Investments 3,502,000 6,446,000
Trade accounts receivable, net 7,619,000 7,295,000
Inventories 8,314,000 10,341,000
Domestic and foreign income taxes receivable 486,000 259,000
Deferred income tax asset 2,142,000 1,846,000
Prepaid expenses and other current assets 541,000 367,000
----------- -----------
22,806,000 26,771,000
Property, plant and equipment, net 9,352,000 9,808,000
Deferred income tax asset 1,510,000 1,610,000
Other assets 73,000 91,000
$33,741,000 $38,280,000
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 1,441,000 $ 1,524,000
Current portion of long-term debt 47,000 80,000
Accounts payable 2,378,000 4,629,000
Accrued compensation 3,762,000 3,283,000
Accrued expenses and other liabilities 1,779,000 2,344,000
Customer deposits 2,159,000 2,132,000
----------- -----------
11,566,000 13,992,000
Long-term debt 106,000 127,000
Accrued compensation 247,000 244,000
Deferred income tax liability 55,000 49,000
Other long-term liabilities 61,000 76,000
Accrued pension liability 1,336,000 1,761,000
Accrued postretirement benefits 2,642,000 3,238,000
----------- -----------
Total liabilities 16,013,000 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 December 31,
2003 and 1,716,572 shares at March 31, 2003 173,000 172,000
Capital in excess of par value 4,849,999 4,757,000
Retained earnings 17,235,000 18,767,000
Accumulated other comprehensive loss (2,644,000) (2,990,000)
----------- -----------
19,613,000 20,706,000
4
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONCLUDED)
December 31, March 31,
2003 2003
---- ----
Less:
Treasury Stock (99,123 shares on December
31, 2003 and 68,323 shares on March 31, 2003) (1,385,000) (1,161,000)
Notes receivable from officers and directors (500,000) (752,000)
----------- -----------
Total shareholders' equity 17,728,000 18,793,000
----------- -----------
$33,741,000 $38,280,000
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months Ended Nine Months Ended
December 31, December 31,
2003 2002 2003 2002
---- ---- ---- ----
Net Sales $10,027,000 $13,703,000 $30,919,000 $35,308,000
----------- ----------- ----------- -----------
Cost and expenses:
Cost of products sold 8,590,000 11,135,000 25,727,000 28,711,000
Selling, general and
administrative 2,528,000 2,814,000 7,450,000 8,019,000
Interest expense 35,000 31,000 93,000 68,000
(522,000)
Other Income ----------- ----------- ----------- -----------
11,153,000 13,980,000 32,748,000 36,798,000
----------- ----------- ----------- -----------
Loss before income taxes (1,126,000) (277,000) (1,829,000) (1,490,000)
Benefit for income taxes (339,000) (99,000) (540,000) (503,000)
----------- ----------- ----------- -----------
Net loss (787,000) (178,000) (1,289,000) (987,000)
Retained earnings at
beginning of period 18,103,000 17,994,000 18,767,000 18,888,000
Dividends (81,000) (86,000) (243,000) (171,000)
----------- ----------- ----------- -----------
Retained earnings at
end of period $17,235,000 $17,730,000 $17,235,000 $17,730,000
=========== =========== =========== ===========
Per Share Data:
Basic:
Net loss $(.48) $(.11) $(.78) $(.59)
===== ====== ===== =====
Diluted:
Net loss $(.48) $(.11) $(.78) $(.59)
===== ===== ===== =====
See Notes to Condensed Consolidated Financial Statements.
6
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
December 31,
2003 2002
---- ----
---- ----
Operating activities:
Net loss $(1,289,000) $ (987,000)
----------- -----------
Adjustments to reconcile net loss to net
cash (used) provided by operating
activities:
Depreciation and amortization 742,000 656,000
Loss on sale of property, plant and 2,000 28,000
equipment
(Increase) Decrease in operating assets:
Accounts receivable (98,000) 9,582,000
Inventory, net of customer deposits 2,336,000 (2,084,000)
Prepaid expenses and other current and
non-current assets (142,000) (162,000)
Increase (Decrease) in operating liabilities:
Accounts payable, accrued compensation,
accrued expenses and other current and
non-current liabilities (3,445,000) (2,471,000)
Accrued compensation, accrued pension
liability, accrued postemployment benefits (53,000) (1,492,000)
Domestic and foreign income taxes (225,000) (1,644,000)
Deferred income taxes (122,000) (38,000)
----------- -----------
Total adjustments (1,005,000) 2,375,000
----------- -----------
Net cash (used) provided by operating
activities (2,294,000) 1,388,000
----------- -----------
Investing activities:
Purchase of property, plant and equipment (172,000) (675,000)
Proceeds from sale of property, plant and
equipment 4,000
Collection of notes receivable from
officers and directors 48,000 59,000
Purchase of investments (7,919,000) (19,220,000)
Redemption of investments at maturity 10,905,000 15,300,000
----------- -----------
Net cash provided (used) by investing
activities 2,862,000 (4,532,000)
----------- -----------
7
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
Nine Months Ended
December 31,
2003 2002
---- ----
---- ----
Financing activities:
(Decrease) Increase in short-term debt (263,000) 293,000
Proceeds from issuance of long-term debt 9,195,000 4,195,000
Principal repayments on long-term debt (9,260,000) (3,895,000)
Issuance of common stock 94,000
Dividends paid (326,000) (86,000)
Acquisition of treasury stock (20,000)
----------- -----------
Net cash (used) provided by financing
activities (580,000) 507,000
----------- -----------
Effect of exchange rate changes on cash (3,000) 3,000
----------- -----------
Net increase (decrease) in cash and cash
equivalents (15,000) (2,634,000)
Cash and cash equivalents at beginning of
period 217,000 2,901,000
----------- -----------
Cash and cash equivalents at end of
period $ 202,000 $ 267,000
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
8
GRAHAM CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL INFORMATION
DECEMBER 31, 2003
NOTE 1 - INVENTORIES
- --------------------------------------------------------------------------
Major classifications of inventories are as follows:
12/31/03 3/31/03
-------- -------
Raw materials and supplies $ 1,686,000 $ 2,417,000
Work in process 5,657,000 14,968,000
Finished products 2,487,000 1,937,000
----------- -----------
9,830,000 19,322,000
Less - progress payments 1,409,000 8,907,000
- inventory reserve 107,000 74,000
----------- -----------
$ 8,314,000 $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 loss and net
loss per share would have been the pro forma amounts indicated
below:
Three Months Ended Nine Months Ended
December 31, December 31,
2003 2002 2003 2002
---- ---- ---- ----
Net loss as reported $(787,000) $(178,000) $(1,289,000) $ (987,000)
Stock-based employee
compensation cost
net of related tax
benefits (63,000) (60,000) (74,000) (62,000)
--------- --------- ----------- -----------
Pro forma net loss $(850,000) $(238,000) $(1,363,000) $(1,049,000)
========= ========= =========== ===========
Basic loss per share
As reported $(.48) $(.11) $(.78) $(.59)
Pro forma $(.52) $(.14) $(.83) $(.63)
Diluted loss per share
As reported $(.48) $(.11) $(.78) $(.59)
Pro forma $(.52) $(.14) $(.83) $(.63)
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 47.13% 50.00%
Risk-free interest rate 3.01% 2.81%
Dividend yield 2.25% 2.35%
10
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.
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 Nine Months Ended
December 31, December 31,
2003 2002 2003 2002
---- ---- ---- ----
Basic loss per share
Numerator:
Net loss $(787,000) $ (178,000) $(1,289,000) $ (987,000)
--------- ---------- ----------- ----------
Denominator:
Weighted common shares
outstanding 1,630,000 1,648,000 1,626,000 1,648,000
Share equivalent units
(SEU) outstanding 16,000 16,000 16,000 14,000
--------- --------- --------- ----------
Weighted average shares
and SEU's outstanding 1,646,000 1,664,000 1,642,000 1,662,000
--------- --------- --------- ----------
Basic loss per share $(.48) $(.11) $(.78) $(.59)
===== ===== ===== =====
Diluted loss per share
Numerator:
Net loss $(787,000) $ (178,000) $(1,289,000) $ (987,000)
--------- ---------- ----------- ----------
Denominator:
Weighted average shares
and SEUs outstanding 1,646,000 1,664,000 1,642,000 1,662,000
--------- --------- --------- ---------
Diluted loss per share $(.48) $(.11) $(.78) $(.59)
===== ===== ===== =====
All options to purchase shares of common stock at various
exercise prices were excluded from the computation of diluted
loss per share for the three and nine month periods in fiscal
years 2004 and 2003 as the effect would be antidilutive due to
the net losses for the periods.
11
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 Nine Months Ended
December 31, December 31,
2003 2002 2003 2002
---- ---- ---- ----
Balance at beginning
of period $359,000 $471,000 $592,000 $182,000
Expense for product
warranties (70,000) 50,000 50,000 544,000
Product warranty
claims paid (31,000) (130,000) (384,000) (335,000)
-------- -------- -------- --------
Balance at end of period $258,000 $391,000 $258,000 $391,000
======== ======== ======== ========
NOTE 5 - CASH FLOW STATEMENT
- ---------------------------------------------------------------------------
Interest paid was $95,000 and $68,000 for the nine months
ended December 31, 2003 and 2002, respectively. In addition,
income taxes (refunded) paid were $(193,000) and $1,180,000 for
the nine months ended December 31, 2003 and 2002, respectively.
Non-cash activities during the nine months ended December 31,
2003 and 2002 included capital expenditures totaling $11,000 and
$22,000, respectively, which were financed through the issuance
of capital leases. Dividends of $243,000 and $171,000 were recorded
for the respective nine month periods ended December 31, 2003 and
2002, of which $0 and $85,000 were not paid during the respective
periods.
12
NOTE 6 - COMPREHENSIVE INCOME
- ---------------------------------------------------------------------------
Total comprehensive loss was $574,000 and $1,094,000 for the
three months ended December 31, 2003 and 2002, respectively.
Other comprehensive income for the three months ended December
31, 2003 included a foreign currency translation adjustment of
$213,000. Other comprehensive loss for the three months ended
December 31, 2002 included a foreign currency translation
adjustment of $74,000 and a minimum pension liability adjustment,
net of tax, of $(990,000).
Total comprehensive loss for the nine months ended December
31, 2003 and 2002 was $943,000 and $1,650,000, respectively.
Other comprehensive income for the nine months ended December 31,
2003 included a foreign currency translation adjustment of
$346,000. Other comprehensive loss for the nine months ended
December 31, 2002 included a foreign currency translation
adjustment of $327,000 and a minimum pension liability
adjustment, net of tax, of $(990,000).
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 Nine Months Ended
December 31, December 31,
2003 2002 2003 2002
---- ---- ---- ----
Sales from external
customers
U.S. $ 8,694,000 $12,168,000 $27,434,000 $31,641,000
U.K. 1,333,000 1,535,000 3,485,000 3,667,000
---------- ----------- ----------- -----------
Total $10,027,000 $13,703,000 $30,919,000 $35,308,000
=========== =========== =========== ===========
Intersegment sales
U.S. $ 2,000 $ 38,000 $ 31,000
U.K. $ 1,025,000 453,000 2,091,000 1,065,000
Total ----------- ----------- --------- ---------
$ 1,025,000 $ 455,000 $ 2,129,000 $ 1,096,000
=========== =========== =========== ===========
Segment net income (loss)
U.S. $ (739,000) $ (218,000) $ (958,000) $ (983,000) $
U.K. 71,000 (276,000) (87,000)
----------- ----------- ----------- -----------
Total segment net loss $ (739,000) (147,000) (1,234,000) (1,070,000)
Eliminations (48,000) (31,000) (55,000) 83,000
----------- ---------- ----------- -----------
Net loss $ (787,000) $ (178,000) $(1,289,000) $ (987,000)
=========== =========== =========== ===========
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
December 31, 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.).
Results of Operations
- ---------------------
Consolidated sales decreased 27% in the third 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 29% and increased 19%, respectively. The significant
decrease in the USA sales is attributed to low order intake in
prior quarters. This was due to order placements being postponed
and/or "engineering only" releases being awarded.
Consolidated sales for the nine months ended December 31,
2003 as compared to 2002 were down 12%. The decrease in sales
for the nine months is a result of minimal capital spending
activity in the principal markets served by USA operations. USA
sales are down 13% compared to the nine months ended December 31,
2002. Traditionally, capital spending, followed by increases in
selling prices, commence well into the consumer driven economic
recovery and after plant capacities are approaching full
limitations. Graham's management believes traditional markets
that drive Graham's revenue (e.g. ethylene, ammonia/nitrogen,
methanol, power, and refining markets) are beginning to enter an
expansion phase. The quality of the sales inquiries are superior
to the recent past, with more inquiries today for actual projects
funded or planned to proceed. UK sales are up 18%. The
direction in UK sales is upward due to several large orders for
the petrochemical industry and robust activity in offshore oil
operations.
Cost of sales as a percent of sales for the third quarter was
86% compared to 81% a year ago. Costs of sales as a percent of
sales for the USA operating segment for the current quarter was
89% compared to 84% for the quarter ended December 31, 2002. For
the UK operating segment, cost of sales as a percent of sales was
75% as compared to 65% a year ago. Costs of sales for the nine
months ended December 31, 2003 was 83% as compared to 81% for the
nine months ended December 31, 2002. By operating segment, USA
costs of sales was 85% versus 84% and UK costs of sales was 78%
compared to 68% for the respective nine month periods ended
December 31, 2003 and 2002. The continued erosion in gross
profit margins reflects the competitive nature of the business in
periods of exceptionally low expansion and modernization
activities in the chemical and refinery industries. To retain
and grow market share, Graham is accepting orders at pricing
levels that were not ordinarily accepted in better economic times.
15
Selling, general and administrative (SG&A) expenses for the
quarter were 10% less than SG&A expenses for the quarter ended
one year before and 7% lower for the comparative nine months.
The decrease is due to cost savings actions previously initiated.
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.
Interest expense increased from $31,000 for the three month
period ended December 31, 2002 to $35,000 in the current quarter.
For the nine months ended December 31, 2003, as compared to 2002,
interest expense increased $25,000 or 37%. This increase was in
the UK and relates to higher inventories and higher borrowings.
Actions are being taken to reduce inventory and pay down debt in
the UK operation.
The effective income tax rate for the three and nine months
ended December 31, 2003 was 30% and 29%, respectively, as
compared to 36% and 34% for the prior year respective periods.
The lower effective nine month rate is due to the anticipated
impact of the extra territorial income exclusion benefit from
foreign shipments and a one time benefit resulting from the
elimination of executive split-dollar life insurance benefits.
The net loss for the quarter ended December 31, 2003 was
$787,000 or $.48 per diluted share. This compares to a net loss
of $178,000 or $.11 per diluted share for the three months ended
December 31, 2002. For the nine months ended, the net loss as of
December 31, 2003 was $1,289,000 or $.78 per diluted share, as
compared to a net loss of $987,000 or $.59 per diluted share for
the nine months ended December 31, 2002.
Liquidity and Capital Resources
- -------------------------------
Consolidated cash flow from operations was negative
$2,294,000 for the nine months ended December 31, 2003, as
compared to the nine months ended December 31, 2002 when cash
flow from operations was positive $1,388,000. The swing is due
to increased operating losses and reduced cash collections. In
the comparative prior nine month period, significant project
cancellation fees were collected.
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 USA line of credit are
classified as long term debt. The Company utilized the line of
credit continuously throughout the first and third quarters of
the fiscal year to fund operations and working capital. This
activity is reflected under financing activities in the
Consolidated Statements of Cash Flows. At December 31, 2003, no
amounts were outstanding on this line of credit.
16
Management expects that the cash flow from operations, cash
investments, and lines of credit will provide sufficient
resources to fund the foreseeable future cash requirements. The
Company expects to consume cash over the first several months of
fiscal year 2005 to cover operating losses and to fund a
build-up of work-in-process inventory for increased shipments in
the second half of FYE 2005. Looking ahead, sales projections
indicate a recovery in shipments in the second half of fiscal year
2005 and a corresponding improvement in cash flow.
New Orders and Backlog
- ----------------------
Orders for the current quarter were up 13% at $9,965,000
compared to $8,790,000 for the same period last year. Prior to
intercompany eliminations, orders in the United States were
$8,301,000 compared to $6,833,000 for the same period in fiscal
year 2003. Orders in the United Kingdom were $2,394,000 compared
to $2,276,000 for the same quarter last year. The increase in
orders for USA operations may not represent an upward trend,
however, as aforementioned, the Company is receiving indicators
that a strong recovery is possibly six to nine months ahead.
Orders for the nine months ended December 31, 2003 were
$29,052,000 as compared to $28,224,000 for the comparable nine
month period one year ago. The consolidated increase in orders
for the nine months is due to increased bookings by the UK
company.
Backlog of unfilled orders at December 31, 2003 is
$22,222,000 compared to $21,973,000 at September 30, 2003 and
$25,431,000 at December 31, 2002. Prior to intercompany
eliminations, current backlog in the United States of $19,303,000
compares to $19,605,000 at September 30, 2003 and $23,733,000 at
December 31, 2002. Current backlog in the United Kingdom of
$3,712,000 compares to $3,410,000 at September 30, 2003 and
$2,054,000 at December 31, 2002. Included in the USA backlog is
an order worth $5,144,000, the status of which is uncertain.
The current consolidated backlog, with the exception of about
$5,484,000, 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
17
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 December 31, 2003 and 2002, a 1% change
in interest rates would impact annual interest expense by $14,000
and $19,000, 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 third quarters of fiscal 2004 and 2003, sales in foreign
currencies were 2% and 1%, respectively, of total sales. For the
nine months ended December 31, 2003 and 2002, sales in foreign
currencies were 2% of total sales for both the nine month periods
ended December 31, 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 December 31, 2003
and 2002, purchases in foreign currencies were 9% and 5% of cost
of goods sold, respectively and 10% and 7%, respectively, for the
nine 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 third
quarter of 2003 and 2002 of zero and $71,000, respectively, and
$(276,000) and $(87,000) for the nine month periods ended
December 31, 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
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 third quarter results by approximately zero and
$7,000 in fiscal years ended 2004 and 2003, respectively, and
$28,000 and $9,000 for the nine months ended December 31, 2003
and 2002, respectively.
18
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 December 31, 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 third quarter operating results by $84,000 to
$126,000 for FYE 2004 and $71,000 to $106,000 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 December
31, 2003 market price of the Company's stock of $10.20 per share,
a 50% to 75% change in the stock price would positively or
negatively impact the Company's operating results by $138,000 to
$207,000 in 2005, $156,000 to $233,000 in 2006, $169,000 to
$253,000 in 2007, $182,000 to $273,000 in 2008 and $185,000 to
$278,000 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
- -------------------
USA Operations
--------------
Percentage-of-Completion - For USA operations, 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.
Completed Contract - Contracts with values less than
$1,000,000 are accounted for in the USA on the completed contract
method. The Company recognizes revenue and all related costs on
the completed contract method 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.
19
UK Operations
-------------
UK operations recognizes revenue on all orders upon
shipment.
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 Information
- ---------------------------
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.
20
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 2003
PART II - OTHER INFORMATION
Item 4. Controls and Procedures
The Company maintains a set of disclosure controls and
procedures designed to ensure that information required to be
disclosed by the Company in reprots that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported as and when requiared. As of December 31,
2003, an evaluation was carried out under the supervision and
with the participation of the Company's management, including the
chief executive officer and chief financial officer, of the
effectiveness of the Company's disclosure controls and procedures.
Based on that evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective.
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 October 28, 2003 and included
Items 7 and 12. 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: February 2, 2004
21
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 (filed as Exhibit
3(ii) to the Registrant's quarterly report on Form 10-Q
for the quarter ended September 30, 2003 and
incorporated herein by reference).
(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.)
22
Index to Exhibits (cont.)
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.)
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
None.
(23) Consents of experts and counsel
Not applicable.
23
Index to Exhibits (cont.)
(24) Power of Attorney
Not applicable.
(31) Rule 13a-14(a)/15d-14a Certifications
(32) Section 1350 Certifications
(99) Additional exhibits
None.