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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 June 30, 2004
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 August 3, 2004, there were outstanding 1,658,327 shares
of common stock, $.10 per share.
2
Graham Corporation and Subsidiaries
Index to Form 10-Q
For the Quarterly Period Ended June 30, 2004
Page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 18
Item 4. Controls and Procedures 21
Part II. OTHER INFORMATION
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
3
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2004
PART I - FINANCIAL INFORMATION
(Dollar amounts in thousands except per share data)
Unaudited condensed consolidated financial statements of
Graham Corporation (the Company) and its subsidiaries as of June
30, 2004 and for the three month periods ended June 30, 2004 and
2003 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, 2004
Consolidated Balance Sheet was derived from the Company's audited
Balance Sheet for the year ended March 31, 2004.
This part also includes management's discussion and analysis
of the Company's financial condition as of June 30, 2004 and its
results of operations for the three-month periods ended June 30,
2004 and 2003.
4
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, March 31,
2004 2004
---- ----
Assets
Current assets:
Cash and cash equivalents $ 1,110 $ 467
Investments 4,495 5,296
Trade accounts receivable, net of
allowances ($86 and $75 at June 30 and
March 31, 2004, respectively 6,244 8,950
Inventories, net 6,792 7,015
Domestic and foreign income taxes
receivable 945 972
Deferred income tax asset 1,711 1,538
Prepaid expenses and other current
assets 360 217
------- -------
Total current assets 21,657 24,455
Property, plant and equipment, net 9,034 9,227
Deferred income tax asset 2,457 2,048
Other assets 54 58
------- -------
Total assets $33,202 $35,788
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 1,577 $ 1,925
Current portion of long-term debt 45 44
Accounts payable 2,545 3,230
Accrued compensation 3,240 3,866
Accrued expenses and other liabilities 1,331 1,562
Customer deposits 2,357 2,128
------- -------
Total current liabilities 11,095 12,755
Long-term debt 82 93
Accrued compensation 232 239
Deferred income tax liability 76 77
Other long-term liabilities 45 61
Accrued pension liability 2,222 1,873
Accrued postretirement benefits 2,507 2,540
------- -------
Total liabilities 16,259 17,638
------- -------
5
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONCLUDED)
(UNAUDITED)
June 30, March 31,
2004 2004
---- ----
Shareholders' equity:
Preferred stock, $1 par value -
Authorized, 500,000 shares
Common stock, $.10 par value -
Authorized, 6,000,000 shares
Issued, 1,757,450 shares at June 30 and
March 31, 2004 176 176
Capital in excess of par value 5,097 5,097
Retained earnings 16,189 17,370
Accumulated other comprehensive loss
Minimum pension liability adjustment (1,456) (1,456)
Cumulative foreign currency translation
adjustment (1,486) (1,452)
------- -------
18,520 19,735
Less:
Treasury stock (99,123 shares at June
30 and March 31, 2004) (1,385) (1,385)
Notes receivable from officers and
directors (192) (200)
------- -------
Total shareholders' equity 16,943 18,150
------- -------
Total liabilities and shareholders'
equity $33,202 $35,788
======= =======
6
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
Three Months
ended June 30,
2004 2003
---- ----
Net Sales $ 9,397 $ 8,435
------- -------
Cost and expenses:
Cost of products sold 8,548 7,440
Selling, general and administrative 2,481 2,407
Interest expense 25 37
Other income (522)
------- -------
Total costs and expenses 11,054 9,362
------- -------
Loss before benefit for income taxes (1,657) (927)
Benefit for income taxes (559) (269)
------- -------
Net loss (1,098) (658)
Retained earnings at beginning of
period 17,370 18,767
Dividends (83) (82)
------- -------
Retained earnings at end of period $16,189 $18,027
======= =======
Per Share Data:
Basic:
Net loss $(.66) $(.40)
===== =====
Diluted:
Net loss $(.66) $(.40)
===== =====
7
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended June 30,
2004 2003
---- ----
Operating activities:
Net loss $ (1,098) $ (658)
-------- -------
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization 250 261
Discount accretion on investments (10) (21)
(Increase) Decrease in operating assets:
Accounts receivable 2,683 1,399
Inventory, net of customer deposits 425 737
Prepaid expenses and other current and non-
current assets (145) (293)
Increase (Decrease) in operating liabilities:
Accounts payable, accrued compensation,
accrued expenses and other current and
non-current liabilities (1,108) (3,095)
Non current accrued compensation,
accrued pension liability, and
accrued postemployment benefits (126) (336)
Domestic and foreign income taxes 28 61
Deferred income taxes (590) (129)
-------- -------
Total adjustments 1,407 (1,416)
-------- -------
Net cash provided (used) by operating
activities 309 (2,974)
-------- -------
8
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
(UNAUDITED)
Three Months Ended June 30,
2004 2003
---- ----
Investing activities:
Purchase of property, plant and equipment (65) (58)
Collection of notes receivable from
officers and directors 8 14
Purchase of investments (2,692) (1,500)
Redemption of investments at maturity 3,503 3,500
-------- -------
Net cash provided by investing activities 754 1,956
-------- -------
Financing activities:
(Decrease) Increase in short-term debt, net (327) 209
Proceeds from issuance of long-term debt 5,350
Principal repayments on long-term debt (10) (5,376)
Issuance of common stock 57
Dividends paid (83)
Acquisition of treasury stock (20)
-------- -------
Net cash (used) provided by financing
activities (420) 220
-------- -------
Effect of exchange rate changes on cash (1)
-------- -------
Net increase in cash and cash equivalents 643 101
Cash and cash equivalents at beginning of
period 467 217
-------- -------
Cash and cash equivalents at end of period $1,110 $ 318
======== =======
9
GRAHAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 1 - INVENTORIES
Major classifications of inventories are as follows:
June 30, March 31,
2004 2004
---- ----
Raw materials and supplies $1,757 $ 1,745
Work in process 5,455 6,200
Finished products 2,450 2,500
------ -------
9,662 10,445
Less - progress payments 2,739 3,309
- inventory reserve 131 121
$6,792 $ 7,015
====== =======
NOTE 2 -STOCK-BASED COMPENSATION
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.
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:
10
Three months ended
June 30,
2004 2003
---- ----
Net loss as reported $(1,098) $(658)
Stock-based employee
compensation cost
net of related tax
benefits (11)
------- -----
Pro forma net loss $(1,098) $(669)
======= =====
Basic loss per
share As reported $(.66) $(.40)
Pro forma $(.66) $(.41)
Diluted loss per
share As reported $(.66) $(.40)
Pro forma $(.66) $(.41)
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. During the first quarter of
fiscal year 2005, no options were granted. The following
weighted-average assumptions were used for grants in fiscal year
2004:
Expected life 5 years
Volatility 50.6%
Risk-free interest
rate 2.25%
Dividend yield 2.40%
NOTE 3 - LOSS PER SHARE:
Basic loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding for the
period. Common shares outstanding include share equivalent
units, which are contingently issuable shares. Diluted loss per
share is calculated by dividing net 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 loss per share
is presented below:
11
Three months
ended June 30,
2004 2003
---- ----
Basic loss per share
Numerator:
Net loss $ (1,098) $ (658)
---------- ----------
Denominator:
Weighted common shares outstanding 1,658,327 1,618,616
Share equivalent units (SEUs)
outstanding 16,437 16,155
---------- ----------
Weighted average shares and SEUs
outstanding 1,674,764 1,634,771
---------- ----------
Basic loss per share $(.66) $(.40)
===== =====
Diluted loss per share
Numerator:
Net loss $ (1,098) $ (658)
---------- ----------
Denominator:
Weighted average common and potential
common shares outstanding 1,674,764 1,634,771
---------- ----------
Diluted loss per share $(.66) $(.40)
===== =====
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,
2004 2003
---- ----
Balance at beginning of period $242 $592
Expense for product warranties 62 75
Product warranty claims paid (38) (281)
---- ----
Balance at end of period $266 $386
==== ====
12
NOTE 5 - CASH FLOW STATEMENT
Interest paid was $25 and $31 for the three months ended June
30, 2004 and 2003, respectively. In addition, income taxes
refunded were $10 and $202 for the three months ended June 30,
2004 and 2003, respectively.
Non-cash activities during the three months ended June 30,
2004 and 2003 included dividends of $83 and $82, respectively,
which were recorded but not paid. In addition, in the first
quarter of fiscal year 2004, capital expenditures totaling $11
were financed through the issuance of capital leases.
NOTE 6 - COMPREHENSIVE (LOSS) INCOME
Total comprehensive loss was $1,132 and $523 for the three
months ended June 30, 2004 and 2003, respectively. Other
comprehensive income included foreign currency translation
adjustments of $(34) and $135 for the quarters ended June 30,
2004 and 2003, respectively.
NOTE 7 - EMPLOYEE BENEFIT PLANS
The components of pension cost for the three months ended
June 30 are as follows:
2004 2003
---- ----
Service cost $ 118 $ 110
Interest cost 244 221
Expected return on assets (226) (181)
Amortization of:
Transition asset (4) (10)
Unrecognized prior service cost 1 1
Actuarial loss 76 66
----- -----
Net pension cost $ 209 $ 207
===== =====
The Company made contributions of $302 to the defined benefit
pension plan in the first quarter of fiscal year 2005. The
Company expects its contributions to the plan for the balance of
2005 to be approximately $668.
13
The components of the postretirement benefit income for the
three months ended June 30 are as follows:
2004 2003
---- ----
Service cost $ 0 $ 3
Interest cost 18 16
Amortization of prior service cost (41) (31)
Amortization of actuarial loss 6 2
----- -----
Net postretirement benefit income $ (17) $ (10)
===== =====
The Company paid benefits of $15 relating to its
postretirement benefit plan in the first quarter of fiscal year
2005. The Company expects to pay benefits of approximately $141
for the balance of 2005.
NOTE 8 - OTHER INCOME
On February 4, 2003, the Company irrevocably terminated
postretirement health care benefits for current U.S. employees.
Benefits payable to retirees of record on April 1, 2003 remained
unchanged. As a result of the plan change, a curtailment gain of
$522 was recognized. This gain is included in the caption "Other
Income" in the Consolidated Statement of Operations and Retained
Earnings for the three months ended June 30, 2003.
14
NOTE 9 - 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,
2004 2003
---- ----
Sales to external customers
U.S. $ 7,762 $7,611
U.K. 1,635 824
------- ------
Total $ 9,397 $8,435
======= ======
Intersegment sales
U.S. $ 24 $ 28
U.K. 201 341
------- ------
Total $ 225 $ 369
======= ======
Segment net loss
U.S. $ (851) $ (512)
U.K. (307) (298)
------- ------
Total $(1,158) $ (810)
======= ======
The segment net loss above is reconciled to the consolidated
totals as follows:
Total segment net loss $(1,158) $ (810)
Eliminations 60 152
------- ------
Net loss $(1,098) $ (658)
======= ======
15
NOTE 10 - 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 increase to treasury stock, a $204 reduction in notes
receivable from officers and directors and cash payments to
former officers. The cash payments of $20 approximate amounts
previously paid on the notes.
NOTE 11 - CONTINGENCIES
In April 2004, the Company filed a complaint in the United
States District Court for the Northern District of California
alleging breach of contract by a customer. The subject contract
has a value of $5,286 and is protected with cancellation charges.
In January 2002, the contract was suspended by the customer. The
complaint contends that the contract is cancelled and the Company
is entitled to cancellation charges in accordance with the
contract. In June 2004, this customer filed a counterclaim
seeking specific performance of the contract or money damages
including, but not limited to, approximately $1,700 for amounts
previously paid under the contract, the difference between the
contract price and the market price or replacement cost of the
equipment that was to be supplied under contract, plus any and
all incidental and consequential damages incurred by the customer
due to the breach of contract.
In May 2004, the Company was named as a defendant in a
litigation matter alleging personal injury from exposure to
asbestos contained in the Company's product. The Company is a co-
defendant with numerous other defendants in this suit. The
Company is defending this action and has consulted with counsel
with respect to this proceeding. Counsel has advised that given
the plaintiff's work history, his medical diagnosis and the
effect of venue on the magnitude of damages, there is a potential
for significant liability. However, the amount is not
determinable.
From time to time, the Company is subject to legal
proceedings arising in the ordinary course of business. The
Company believes there is no other litigation pending against it
that could have, individually or in the aggregate, a material
adverse effect on its financial statements.
16
GRAHAM CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
June 30, 2004
OVERVIEW
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 Limited).
Graham Corporation designs and builds vacuum and heat
transfer equipment for the process industries throughout the
world. The Company is a leader in vacuum technology. The
principal markets for our equipment are the chemical,
petrochemical, petroleum refining and electric power generating
industries, including cogeneration and geothermal plants. Other
markets served include metal refining, pulp and paper processing,
shipbuilding, water heating, refrigeration, desalination, food
processing, drug manufacturing, heating, ventilating and air
conditioning.
Ejectors, liquid ring and dry vacuum pumps, condensers, heat
exchangers and other products we sell, sold either as components
or as complete systems, are used by our customers to produce
synthetic fibers, chemicals, petroleum products (including
gasoline), electric power, processed food (including canned,
frozen and dairy products), pharmaceutical products, paper,
steel, fertilizers and numerous other products used everyday by
people throughout the world.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document, including in
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.
17
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
The discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America ("GAAP").
Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and could
potentially result in materially different results under
different assumptions and conditions. Management has discussed
each of these critical accounting policies and estimates with the
Audit Committee of the Board of Directors.
Revenue Recognition - The Corporation recognizes revenue and all
related costs on contracts with a duration in excess of three
months and with revenue of at least $1,000 and 500 pounds
sterling, in the USA and UK operating segments, respectively,
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 the contract value and estimated costs at
completion.
Revenue not accounted for using the percentage-of-completion
method is accounted for on the completed contract method because
of the large number of contracts and the fact that the effects of
the use of such method do not vary materially from the use of the
percentage-of-completion 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 material obligations under the contract after the
revenue is recognized.
Pension and Postretirement Benefits - The Company's defined
benefit pension and other postretirement benefit costs and
obligations are dependent on actuarial assumptions used in
calculating such amounts. These assumptions, which are reviewed
annually by the Company, include the discount rate, long-term
expected rate of return on plan assets, salary growth, healthcare
cost trend rate and other economic and demographic factors. The
Company bases the discount rate assumption for its plans on the
AA-rated corporate long-term bond yield rate. The long-term
expected rate of return on plan assets is based on the plan's
asset allocation, historical returns and management's expectation
as to future returns that are expected to be realized over the
estimated remaining life of the plan liabilities that will be
funded with the plan assets. The salary growth assumptions are
determined based on the Company's long-term actual experience and
future and near-term outlook. The healthcare cost trend rate
assumptions are based on historical cost and payment data, the
near-term outlook, and an assessment of the likely long-term
trends.
18
To the extent that actual results differ from our
assumptions, the differences are reflected as unrecognized gains
and losses and are amortized to earnings over the estimated
future service period of the plan participants to the extent such
total net recognized gains and losses exceed 10% of the greater
of the plan's projected benefit obligation or the market-related
value of assets. Significant differences in actual experience or
significant changes in future assumptions would affect the
Company's pension and postretirement benefit costs and
obligations.
Use of Estimates - The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities, revenues and expenses
and related disclosure of contingent assets and liabilities at
the date of our financial statements. Actual results may differ
from these estimates under different assumptions or conditions.
Use of estimates include the recording of revenue, pension
obligations, and the underlying assumptions and valuation
reserves for uncollectible accounts, inventory obsolescence,
deferred taxes, warranty and liquidated damages.
Results of Operations
For an understanding of the significant factors that
influenced the Company's performance, the following discussion
should be read in conjunction with the quarterly consolidated
financial statements and the notes to consolidated financial
statements.
Three Months Ended
June 30, 2004 June 30, 2003
------------- -------------
USA UK USA UK
--- -- --- --
Sales $ 7,786 $ 1,836 $ 7,639 $ 1,165
Net Loss $ (851) $ (307) $ (512) $ (298)
Diluted Loss Per Share $ (0.51) $ (0.18) $ (0.31) $ (0.18)
Identifiable Assets $31,223 $ 5,827 $32,349 $ 6,104
Amounts above are inclusive of intercompany amounts.
Consolidated sales (net of intercompany sales) for the
quarter were $9,397, as compared to $8,435 for the quarter ended
June 30, 2003. This represents an 11% increase in sales. Sales
in the USA were up 2% from one year ago. Sales from UK
operations were up 58%. The increase in sales for the current
quarter, compared to sales for the three months ended June 30,
2003, was a result of a significant increase in sales of vacuum
pumps and pump systems.
19
The consolidated gross profit margin for the quarter was 9%,
as compared to 12% for the quarter ended June 30, 2003. By
segment, USA operation's gross profit decreased from 9% to 8% for
the first quarter of FYE 2005 versus FYE 2004, and the UK's gross
profit margin decreased from 8% to 7%. Consolidated gross profit
margins differ from individual segment gross profit margins when
sales between consolidating entities are recognized in
consolidated results in different accounting periods from the
dates of the intercompany sales, and the gross profit margins at
the time of the intercompany sales differ from those realized on
average for the reported periods.
Selling, General and Administrative (SG&A) expenses were 26%
of sales for the current quarter, as compared to 29% for the
quarter ended June 30, 2003. The decrease is due to greater
sales in the current quarter.
Interest expense decreased from $37 to $25 primarily due to
a decrease in average debt from $944 during the quarter ended
June 30, 2003 to $132 for the current quarter in the USA.
Partially offsetting the decrease in the USA was an increase in
the UK, which is attributed to higher bank borrowings needed to
finance work-in-process inventory.
Other income for the current quarter was $0 compared to $522
for the three months ended June 30, 2003. Other income
recognized at June 30, 2003 represents a non-recurring
curtailment gain resulting from the discontinuation of
postretirement medical benefits.
The effective income tax rate for the quarter was 34%, as
compared to 29% at June 30, 2003. The lower than statutory rate
of 29% was based upon a forecasted annual taxable income for FYE
2004 and utilization of the extra territorial income exclusion
benefit from foreign shipments.
The net loss for the quarter was $1,098 or $0.66 per diluted
share. This compares to a net loss of $658 or $0.40 per diluted
share at June 30, 2003.
Liquidity and Capital Resources
Three Months Ended
June 30, 2004 June 30, 2003
------------- -------------
USA UK USA UK
Working Capital $ 9,129 $ 1,762 $10,661 $ 1,653
Cash (Deficit) Flow from
Operations $ (56) $ 365 $(1,865) $ 208
Cash and Investments $ 5,577 $ 28 $ 4,767 $ 18
Capital Expenditures $ 27 $ 37 $ 41 $ 17
Long-Term Bank Borrowings $ 0 $ 0 $ 0 $ 0
Capital Leases $ 127 $ 0 $ 179 $ 13
Working Capital Ratio(1) 2.1 1.6 2.3 1.5
Long-Term Debt/Equity(1) 0.5% 0.0% 0.7% 0.0%
(1)As of June 30
20
Consolidated cash flow from operations was positive $309 for
the current quarter compared to negative cash flow from
operations of $2,074 for the quarter ended June 30, 2003. The
swing in cash flow from negative to positive was achieved through
a decrease in working capital.
The Company expects to consume cash in excess of amounts
generated from operations over the next several months to cover
operating losses and fund a build-up of work-in-process inventory
for increased shipments in future quarters.
The primary source of liquidity is cash flow from
operations, investments in short-term treasury bills and secured
credit agreements.
Orders and Backlog
Orders for the current quarter were $15,157, as compared to
$11,233 for the quarter ended June 30, 2003, representing a 35%
increase and a 47% increase over the four quarter average of FYE
2004. Prior to intercompany elimination, orders in the USA were
$13,545 compared to $10,353 in the quarter ended June 30, 2003.
Orders in the UK were $1,843 as compared to $2,106 one year ago.
Backlog was $27,844 at June 30, 2004, as compared to $26,430
at June 30, 2003. Prior to intercompany eliminations, USA
unfilled orders were $25,045 and UK unfilled orders were $3,160
at June 30, 2004. At June 30, 2003, USA and UK backlog amounts
were $25,696 and $2,404, respectively. Included in the USA
backlog figures at June 30, 2004 were $5,484 in orders that may
not be shipped in the next twelve months. All orders in backlog
represent orders from traditional markets in the Company's
established product lines.
In April 2004, Graham filed a complaint for breach of
contract in the United States District Court, asking the Court to
find a contract, valued at $5,144 and included in the $5,484
noted above, cancelled and award cancellation fees as specified
in the contract.
Market Risk (Quantitative and Qualitative Disclosures)
The principal market risks (i.e., the risk of loss arising
from changes in market rates and prices) to which Graham is
exposed are:
interest rates
foreign exchange rates
equity price risk
material availability and price risk
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.
21
The Company is exposed to interest rate risk primarily
through its borrowing activities. Management's strategy for
managing risks associated with interest rate fluctuations is to
hold interest-bearing debt to the absolute minimum and carefully
assess the risks and rewards for incurring long-term debt. Based
upon variable rate debt outstanding at the quarter ended June 30,
2004 and 2003, a 1% change in interest rates would impact annual
interest expense by $16 and $18, respectively.
Graham's international consolidated sales for the past three
years approximates 43%. Operating in world markets involves
exposure to movements in currency exchange rates. Currency
movements can affect sales in several ways, the foremost being
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 U.S. dollars. The substantial portion of Graham's sales is
collected in the local currency (USA - dollars; UK - pounds
sterling). For the quarters ended June 30, 2004 and 2003, sales
in foreign currencies were 5% and 2% of sales, respectively. 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 has limited exposure to foreign currency purchases.
For the quarters ended June 30, 2004 and 2003, purchases in
foreign currencies were 6% and 7%, of cost of goods sold,
respectively. At certain times, forward foreign exchange
contracts may be utilized to limit currency exposure.
UK operations experienced a current quarter net loss of $307
as compared to a quarterly net loss of $298 for June 30, 2003.
As currency exchange rates change, translations of the income
statements of the UK business into US dollars affect year-over-
year comparability of operating results. The increase in the
foreign currency translation rate to convert pounds sterling to
US dollars increased all UK income statement items and order
amounts by 12% and all UK balance sheet and backlog amounts by
10% for the quarter ended June 30, 2004 over 2003. The Company
does not hedge translation risks because cash flows from UK
operations are mostly reinvested in the UK. A 10% change in
foreign exchange rates would have impacted the UK reported net
loss by approximately $31 and $30 for the three months ended June
30, 2004 and 2003, respectively.
The Company has a Long-Term Incentive Plan, which provides
for awards of share equivalent units (SEUs) 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 Company's results of
operations. Based upon the SEUs outstanding at June 30, 2004 and
2003 and a $12 per share price, a 50-75% change in the respective
year end market price of the Company's common stock would
positively or negatively impact the Company's operating results
by $100 to $151 for the June 30, 2004 quarter and $99 to $148
for the three months ended June 30, 2003. Assuming required net
22
income of $500 is met, and based upon a market price of the
Company's stock of $12 per share, a 50-75% change in the stock
price would positively or negatively impact the Company's
operating results by $158 to $237 in 2006, $177 to $265 in 2007,
$191 to $286 in 2008, $205 to $307 in 2009 and $208 to $312 in
2010.
The risks associated with materials include
availability and price increases. Material shortages have
affected the Company's ability to meet delivery requirements for
certain orders. The Company has identified alternative vendors
in such cases and seeks to negotiate escalation provisions in its
contracts in the event that costs of materials increase.
23
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2004
PART II - OTHER INFORMATION
Item 4. Controls and Procedures
1 The Company's President and Chief Executive Officer and its
Vice President-Finance and Chief Financial Officer each have
independently evaluated the Company's disclosure controls and
procedures as defined in Exchange Act Rules 13a-14(c) and 15d-
14(c) as of the end of the period covered by this quarterly
report on Form 10-Q and each regards such controls as effective.
There have been no significant changes to any such
controls or in other factors that could
significantly affect such controls, subsequent to
the date of their evaluation by each of the CEO and
the CFO.
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 17, 2004 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)
24
Date 8/3/04
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.)
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.)
25
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).
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.
(14) Code of Ethics
Not applicable.
(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-14(a) Certifications
26
Index to Exhibits (cont.)
(32) Section 1350 Certifications
(99) Additional exhibits