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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended March 31, 1998.
[ ] 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
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GRAHAM CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 16-1194720
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 FLORENCE AVENUE, Batavia, NEW YORK 14020
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code - 716-343-2216
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Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK (Par Value $.10) American Stock Exchange
- ----------------------------- ---------------------------------
Title of Class Name of each exchange on which
registered
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK PURCHASE RIGHTS
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Title of Class
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 (the
"Act") 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best or registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 15, 1998 was $26,565,416.
As of June 15, 1998, there were outstanding 1,585,995 shares of common stock,
$.10 par value. As of June 15, 1998, there were outstanding 1,585,995 common
stock purchase rights.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Notice of Meeting and Proxy Statement for the 1998 Annual
Meeting of Stockholders is incorporated by reference into Part
III of this filing.
An Exhibit Index is located at page 62 of this filing under the sequential
numbering system prescribed by Rule 0-3(b) of the Act.
A cross reference sheet appears as the final page of this filing setting forth
item numbers and captions of Form 10-K and the pages of the Registrant's Proxy
Statement for 1998 Annual Meeting of Stockholders where the corresponding
information appears.
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PART I
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ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Registrant was organized in 1983 as a Delaware holding company
and is the successor to Graham Manufacturing Co., Inc., now a wholly owned
subsidiary of the Registrant. Graham Manufacturing Co., Inc. was organized in
1936 under the laws of the State of New York. The Registrant manages the
activities of various subsidiaries that are located in the United States and the
United Kingdom. It employs 11 people, which includes the Research and
Development Group that serves each of the Registrant's subsidiaries.
UNITED STATES OPERATIONS:
During the Fiscal Year ended March 31, 1998 ("FY 1997-98") the
Registrant's U.S. operations consisted of one independent subsidiary, namely,
Graham Manufacturing Co., Inc. (GMC).
GRAHAM MANUFACTURING CO., INC. -- Batavia, New York
Graham Manufacturing Co., Inc. ("GMC") in Batavia, New York is
a well recognized supplier of steam jet ejector vacuum systems, surface
condensers for steam turbines, liquid ring vacuum pumps and compressors, and
various types of heat exchangers such as Heliflow, plate and frame, and special
types of nuclear shell and tube heat exchangers. GMC possesses expertise in
combining these various products into packaged systems for sale to its customers
in a variety of industrial markets, including oil refining, chemical,
petrochemical, power, pulp and paper, and shipbuilding.
FY 1997-98 sales for GMC were $51.8 million, the highest in
the Company's history.
New orders in FY 1997-98 were $59.7 million, up 19% from the
last full fiscal year, with a strong fourth quarter contributing to a year end
backlog of $27.3 million, comparing to $24.5 million in backlog on December 31,
1996 and $21.0 million on March 31, 1997. This increase was due mainly to growth
in the condenser business. These gains were augmented by marginally higher
orders in FY 1997-98 for ejectors and significantly higher sales of plate heat
exchangers. Sales of water heaters also showed significant growth. The chemical
and refinery markets continued to be important, accounting for slightly less
than half of the revenue for FY 1997-98. U.S. domestic power industry sales
increased and smaller markets such as HVAC and fibers demonstrated an aggregate
modest increase, with significant increase seen in the fertilizer market.
Margins were uniformly favorable across all products lines.
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GMC export sales reached 49% in FY 1997-98, off about 1% from
the previous full fiscal year. More than half of these export sales went to
Asia. Most of the growth in GMC's exports in recent years has been attributable
to a significant increase in shipments to South America and Asia; in FY 1997-98
sales to South America declined, while sales to Asia were 61% higher than for
the fiscal year 1996, the last previous full fiscal year. The Company expects
exports to remain a significant part of its business in FY 1998-99, although
export sales, and sales to Asia particularly, are expected to be affected by
Asian financial uncertainties.
Employment at GMC as of March 31, 1998 was 341.
UNITED KINGDOM OPERATIONS:
During FY 1997-98, Graham Corporation owned one manufacturing
subsidiary in the United Kingdom, Graham Precision Pumps Limited (GPPL) in
Congleton, Cheshire. Ownership was through its U.K. holding company, Graham
Vacuum & Heat Transfer Limited. Graham Vacuum and Heat Transfer Limited (GPPL)
has no employees.
GRAHAM PRECISION PUMPS LIMITED - Congleton, Cheshire
GPPL manufactures liquid ring vacuum pumps, rotary piston
pumps, oil sealed rotary vane pumps, atmospheric air operated ejectors and
complete vacuum pump systems that are factory assembled with self-supporting
structure.
Sales for FY 1997-98 stood at $5,929,000. While it resulted in
a profit, this figure was marginally down from the last full fiscal year.
Sluggish bookings in the domestic U.K. and export markets reflect the high value
of the pound sterling in relation to other currencies.
The contribution remained healthy and this, together with
further cost reductions in addition to those imposed in 1996, yielded
profitability in excess of the budget for the year.
The Company will continue its marketing effort to further
improve its position and increase its market share, primarily in the U.K. and
the U.S. markets.
As of March 31, 1998 employment stood at 63.
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CAPITAL EXPENDITURES
The Registrant's capital expenditures for FY 1997-98 amounted
to $1,400,000. Of this amount, $1,334,000 was for GMC and $66,000 was for GPPL.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
(1) INDUSTRY SEGMENTS AND (2) INFORMATION AS TO LINES OF BUSINESS
Graham Corporation operates in only one industry segment which
is the design and manufacture of vacuum and heat transfer equipment. The
information required under this item regarding this industry segment is set
forth in statements contained in Notes 1 and 3 to the Consolidated Financial
Statements on pages 23-26 and 28 of the Annual Report on Form 10-K.
(c) NARRATIVE DESCRIPTION OF BUSINESS
(1) BUSINESS DONE AND INTENDED TO BE DONE
(i) PRINCIPAL PRODUCTS AND MARKETS
The Registrant designs and manufactures vacuum
and heat transfer equipment, primarily custom built. Its products include steam
jet ejector vacuum systems, surface condensers for steam turbines, liquid ring
vacuum pumps and compressors and various types of heat exchangers including
helical coil exchangers marketed under the registered name "Heliflow" and plate
and frame exchangers. These products function to produce a vacuum or to condense
steam or otherwise transfer heat, or any combination of these tasks. They
accomplish this without involving any moving parts and are available in all
metals and in many non-metallic and corrosion resistant materials as well.
This equipment is used in a wide range of
industrial process applications: power generation facilities, including fossil
fuel plants and nuclear plants as well as cogeneration plants and geothermal
power plants that harness naturally occurring thermal energy; petroleum
refineries; chemical plants; pharmaceutical plants; plastics plants; fertilizer
plants; breweries and titanium plants; liquefied natural gas production and soap
manufacturing; air conditioning systems; food processing plants and other
process industries. Among these the principal markets for the Registrant's
products are the chemical, petrochemical, petroleum refining, and electric power
generating industries. The Registrant's equipment is sold by a combination of
direct company sales engineers and independent sales representatives located in
over 40 major cities in the United States and abroad.
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(ii) STATUS OF PUBLICLY ANNOUNCED NEW PRODUCTS OR
SEGMENTS
The Registrant has no plans for new products or
for entry into new industry segments that would require the investment of a
material amount of the Registrant's assets or that otherwise is material.
(iii) SOURCES AND AVAILABILITY OF RAW MATERIALS
Registrant experienced no serious material
shortages in FY 1997-98.
(iv) MATERIAL PATENTS, TRADEMARKS
Registrant holds no material patents,
trademarks, licenses, franchises or concessions the loss of which would have a
materially adverse effect upon the business of the Registrant.
(v) SEASONAL VARIATIONS
No material part of the Registrant's business
is seasonal.
(vi) WORKING CAPITAL PRACTICES (Not Applicable)
(vii) PRINCIPAL CUSTOMERS
Registrant's principal customers include the
large chemical, petroleum and power companies, which are end users of
Registrant's equipment in their manufacturing and refining processes, as well as
large engineering contractors who build installations for such companies and
others.
No material part of Registrant's business is
dependent upon a single customer or on a few customers, the loss of any one or
more of whom would have a materially adverse effect on Registrant's business.
No customer of Registrant or group of related
customers regularly accounts for as much as 10% of Registrant's consolidated
annual revenue.
(viii) ORDER BACKLOG
Backlog of unfilled orders at March 31, 1998
was $28,199,000 compared to $22,348,000 at March 31, 1997, $25,578,000 at
December 31, 1996 and $21,837,000 at December 31, 1995.
(ix) GOVERNMENT CONTRACTS (Not Applicable)
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(x) COMPETITION
Registrant's business is highly competitive and
a substantial number of companies having greater financial resources are engaged
in manufacturing similar products. Registrant is a relatively small factor in
the product areas in which it is engaged with the exception of steam jet
ejectors. Registrant believes it is one of the leading manufacturers of steam
jet ejectors.
(xi) RESEARCH ACTIVITIES
During the fiscal years ended December 31, 1995
and 1996, the three month transition period ending March 31, 1997 and in the
fiscal year ended March 31, 1998, Registrant spent approximately $277,000,
$375,000, $91,000 and $404,000 respectively on research activities relating to
the development of new products or the improvement of existing products.
(xii) ENVIRONMENTAL MATTERS
Registrant does not anticipate that compliance
with federal, state and local provisions, which have been enacted or adopted
regulating the discharge of material in the environment or otherwise pertaining
to the protection of the environment, will have a material effect upon the
capital expenditures, earnings and competitive position of the Registrant and
its subsidiaries.
(xiii) NUMBER OF PERSONS EMPLOYED
On March 31, 1998, Registrant and its
subsidiaries employed 404 persons.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
(The information called for under this Item is set forth in
Note 3 to Consolidated Financial Statements, on page 28 of this Annual Report on
Form 10-K.)
ITEM 2. PROPERTIES
United States: Registrant's corporate headquarters is located
at 20 Florence Avenue, Batavia, New York.
Registrant's subsidiary, Graham Manufacturing Co., Inc., owns
and operates a plant on approximately thirty-three acres in Batavia consisting
of about 204,000 square feet in several connected buildings built over a period
of time to meet increased space requirements, including 162,000 square feet in
manufacturing facilities, 48,000 square feet for warehousing and a 6,000
square-foot building for product research and development. A 14,000 square foot
extension to the Heavy Fabrication Building was completed in 1991.
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Graham Manufacturing Co., Inc.'s principal offices are in a
45,000 square-foot building located in Batavia adjacent to its manufacturing
facilities which is owned by the Company.
The plant and office building have been pledged to secure
certain domestic long-term borrowings.
Graham Manufacturing Co., Inc. leases U.S. sales offices in
Clifton, New Jersey, Los Angeles and Houston.
United Kingdom: Registrant's subsidiary, Graham Precision
Pumps Limited, has a 41,000 square-foot manufacturing facility located on 15
acres owned by that company in Congleton, Cheshire, England.
Assets of the Registrant with a book value of $29,604,000 have
been pledged to secure certain domestic long-term borrowings. Short and
long-term borrowings of Registrant's United Kingdom subsidiary are secured by
assets of the subsidiary, which have a book value of $3,908,000.
ITEM 3. LEGAL PROCEEDINGS
The United States Environmental Protection Agency has notified
the Company's wholly-owned subsidiary, Graham Manufacturing Co., Inc. ("GMC"),
that it is a Potentially Responsible Party pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, in
connection with the Batavia Landfill Site in the Town of Batavia, New York.
Total remediation expenses for the site are currently estimated at $10.4
million. Based on facts and circumstances currently known to GMC and the
Company, GMC's contribution to the site of material deemed hazardous was minor.
In 1996, the Company recorded a $260,000 provision for the estimated costs,
including legal costs, in connection with this matter based on the currently
available information and assuming a reasonable pro-rata allocation. The related
liability at March 31, 1998 was $250,000 and is included in the caption "Other
Long-Term Liabilities" in the Consolidated Balance Sheet.
ITEM 4. Submission of Matters to a Vote of Security Holders
(Not applicable)
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
(a) The information called for under this Item is set forth under Item 8,
"Financial Statements and Supplementary Data," in the Statement of Quarterly
Financial Data appearing on page 48 of this Annual Report on Form 10-K.
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(b) On June 15, 1998, there were approximately 345 holders of the Registrant's
common stock. This figure includes stockholders of record and individual
participants in security position listings who have not objected to the
disclosure of their names; it does not, however, include individual participants
in security position listings who have objected to disclosure of their names. On
June 15, 1998, the closing price of the Registrant's common stock on the
American Stock Exchange was $16.75 per share.
(c) The Registrant has not paid a dividend since January 4, 1993, when it paid a
dividend of $.07 per share. Currently it does not have plans to resume paying a
dividend in the foreseeable future. Restrictions on dividends are described in
Note 7 to the Consolidated Financial Statements, to be found on pages 32 to 33
of this Report.
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ITEM 6. SELECTED FINANCIAL DATA
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GRAHAM CORPORATION - TEN YEAR REVIEW
Operations: 1998 1997 1996 1995 (1) 1994 (1)
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Net Sales $56,206,000 $14,257,000 $51,487,000 $50,501,000 $46,467,000
Gross Profit 18,083,000 4,080,000 15,463,000 13,257,000 12,153,000
Income (Loss) From
Continuing Operations 3,766,000 621,000 3,102,000 1,361,000 9,000
Dividends
Common Stock:
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Basic Earnings (Loss)
From Continuing
Operations Per Share 2.27 .39 1.96 .86 .01
Diluted Earnings (Loss)
From Continuing
Operations Per Share 2.21 .38 1.93 .86 .01
Dividends Per Share
Financial Data:
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Working Capital 12,459,000 10,300,000 8,239,000 7,093,000 6,819,000
Capital Expenditures 1,400,000 237,000 1,291,000 204,000 412,000
Depreciation 905,000 249,000 892,000 927,000 1,027,000
Total Assets 37,030,000 31,224,000 30,494,000 29,499,000 29,927,000
Long-Term Debt 859,000 2,764,000 1,442,000 3,303,000 5,161,000
Shareholders' Equity 17,775,000 12,538,000 11,915,000 8,426,000 7,045,000
The financial data presented for 1998 is for the fiscal year ended March 31,
1998. The financial data presented for 1997 is for the three month transition
period ended March 31, 1997. The financial data presented for 1996-1988 is for
the respective calendar year ending December 31.
(1) Per share data has been adjusted to reflect a three-for-two stock split on
July 25,1996.
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GRAHAM CORPORATION - TEN YEAR REVIEW
1993 1992 1991 1990 1989 1988
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$44,592,000 $47,514,000 $70,368,000 $68,042,000 $62,226,000 $62,360,000
11,661,000 9,234,000 18,825,000 16,739,000 16,661,000 16,768,000
481,000 (2,153,000) 2,421,000 1,195,000 3,980,000 1,843,000
293,000 289,000 283,000 97,000
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.31 (1.37) 1.56 .79 2.70 1.25
.31 (1.37) 1.55 .77 2.65 1.25
.28 .28 .28 .10
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7,075,000 9,601,000 12,220,000 9,531,000 8,493,000 5,880,000
513,000 9,213,000 2,553,000 2,702,000 2,622,000 1,749,000
1,349,000 1,385,000 1,317,000 1,175,000 1,003,000 982,000
41,388,000 45,573,000 42,023,000 41,731,000 37,545,000 35,537,000
6,102,000 9,491,000 7,560,000 4,708,000 3,620,000 4,749,000
14,793,000 14,564,000 14,905,000 14,317,000 12,936,000 9,355,000
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis reviews the Company's
financial operating results for the years ended March 31, 1998, December 31,
1996 and 1995 and the three-month period ended March 31, 1997 and its financial
condition at March 31, 1998. The focus of this review is on the underlying
business reasons for significant changes and trends affecting sales, net
earnings, and financial condition. This review should be read in conjunction
with the consolidated financial statements, the related Notes to Consolidated
Financial Statements, and the Ten-Year Review.
Except for the historical information contained herein, the
matters discussed in this annual report are forward-looking statements as
defined in the Private Securities Litigation Reform Act (PSLRA) of 1995. The
Company wishes to take advantage of the "safe harbor" provisions of the PSLRA by
cautioning 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.
ANALYSIS OF CONSOLIDATED OPERATIONS
1998 COMPARED TO 1996
Consolidated sales were $56,206,000 for the fiscal year ended
March 31, 1998 compared to $51,487,000 for the twelve months ended December 31,
1996. Sales from U.S. operations were 11% greater for the current period as a
result in increased surface condenser and ejector sales. Sales in 1998 were the
highest in Graham Manufacturing Company's history and were particularly
benefited by a few large condenser orders. Sales from U. K. operations were down
about 2% for 1998. The strong Pound Sterling compared to other world currencies
gave Graham Precision Pumps great difficulty. The Pound, compared to the
Deutsche Mark and French Franc, reached a nine year high.
Consolidated gross profit margins were 32% in 1998 and 30% in
1996. Domestically, margins rose as a result of strong demand for the Company's
products in general and, in particular, a few excellent large orders, among them
a geothermal condenser order. Despite currency disadvantages, U.K. operations
were able to maintain their gross profit margin percentages from 1996 to 1998.
Sales per employee in the U.K. rose from $84,000 to $97,000.
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Selling, general and administrative expenses remained steady
from 1996 at 22% of sales.
Interest expense declined to about 0.4% of consolidated sales
from 0.7% in 1996. Since 1994, when bank debt was equal to 77% of equity, the
Company has managed to reduce this ratio to 9% in 1996 and 4% currently.
The effective income tax rate for 1998 was 31%, up from 22%
but still below the statutory rate as a result of utilization of U.K.
carryforward tax losses.
Net income for the current year was $3,766,000 or $2.21
diluted earnings per share. This compares to 1996 of $3,102,000 and $1.93 per
share.
THREE MONTHS ENDED MARCH 1997
Effective April 1, 1997, the Company changed its year end from
December 31 to March 31. The Company reported a transition period for the three
months ended March 31, 1997.
Sales for the period were $14,257,000. The product lines that
attributed substantially to the stronger than usual first quarter of the
calendar year were surface condensers, ejectors and vacuum pumps. The gross
profit margin for the period was 29% and represented a continuation of the
excellent cost to price relationship the Company enjoyed going into and
following this period. Selling, general and administrative expenses were 22% of
sales for the three months. Due to low levels of borrowing on the U.S. revolving
credit facility, interest expense for the period was minimal. The income tax
provision for the three months was 34% of pre-tax income. On twenty-eight
percent higher sales, net income for the transition period rose 113% over net
income earned for the same three-month period one year earlier. This increase
resulted from continued productivity gains, and strong demand worldwide for
Graham's products.
1996 COMPARED TO 1995
As noted above, consolidated net sales in 1996 were
$51,487,000, as compared to $50,501,000 in 1995. Sales from U.S. operations rose
1%. Surface condenser 1996 sales increased significantly over 1995. This
increase was largely offset, however, by a reduction in ejector sales. Graham
Precision Pumps 1996 sales increased 10% over the prior year. Slightly more than
one-half of this increase was due to increased sales of pump packages.
Consolidated gross profit margins were 30% in 1996 and 26% in
1995. Gross profit margins from U.S. operations were 29% and 25% for 1996 and
1995, respectively. Compared to 1995, direct material and labor costs as a
percent of sales declined by 4.9%.
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In 1996 the gross profit percentage was improved 1% for out-of-period refunds in
workers compensation insurance. Precision Pumps gross profit margins increased
to 30% in 1996, up 2% over 1995. The improvement came as a result in reduced
direct costs.
Selling, general and administrative expenses increased 11% in
1996. The increase was significantly attributed to incentive wage programs which
vary subject to levels of profit. Included in SG&A expenses are Research &
Development costs. Expenditures invested for product enhancements and new
product development in 1996 increased substantially over 1995 and accounts for
11% of the overall SG&A increase over 1995.
Interest expense in 1996 decreased 42% from 1995 as a result
of lower bank debt and the lower cost of money.
The effective income tax rate for 1996 was 22%. This
exceptionally low rate was due to fuller utilization of U.K. tax benefits and a
decrease in the deferred tax benefit valuation allowance. This reduction was
attributed to the current pattern of generating taxable income on a consistent
basis. The effective tax rate for 1995 of 43% was above the statutory rate of
39% due to an increase in state deferred tax assets.
Net income for 1996 was $3,102,000 or $1.93 per diluted share,
as compared to $1,179,000, or $.75 per diluted share in 1995.
SHAREHOLDERS' EQUITY
Shareholders' Equity increased 42% in the current year. About
72% of this increase was due to net income and another 19% due to the exercise
of stock options.
The three months ended March 31, 1997 resulted in increased
equity of 5%, which was mostly due to earnings.
The year ended December 31, 1996 showed an increase in equity
of 41% over December 31, 1995. Eighty-nine percent of this increase was due to
earnings and 4% was generated from foreign currency translation adjustment.
During the three and one-quarter years ended March 31, 1998
the Company increased shareholders' equity 152%.
LIQUIDITY AND CAPITAL RESOURCES
1998 COMPARED TO 1996
As of March 31, 1998 the Company had consolidated working
capital of $12,459,000. This represents a 51% increase over December 31, 1996.
Included in current assets was cash and marketable securities of $6,495,000 or
$3.92 per share. EBITDA (earnings before interest, income taxes, depreciation
and
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amortization) per share for the current year was $4.03 compared to $3.32 for
1996.
Net cash provided from operations in 1998 was $7,259,000
compared to $4,726,000 for 1996. The favorable position was due to improved
profits and the ability to obtain progress payments on jobs in work-in-progress.
Inventories increased over balances on hand at March 31, 1997 largely due to the
accounting change recognizing certain sales on the percentage-of-completion
method. Capital expenditures in 1998 were $1,400,000 compared to 1996 of
$1,291,000. Ninety-five percent of the capital expenditures were invested in the
U.S. facilities. Consolidated capital budgets for 1999 call for an increase in
expenditures of between 11-13%. There were no major capital expenditure
commitments at March 31, 1998.
At December 31, 1998 the U.S. operation had an unused bank
line of credit available of $10,947,000. The U.K. operation had an unused line
of credit available of $716,000.
Management expects that cash flow from operations and lines of
credit will provide sufficient resources to fund the 1999 cash requirements.
THREE MONTHS ENDED MARCH 31, 1997
There were no significant changes in the financial condition
of the Company during the period compared to the year ended December 31, 1996.
Consolidated working capital at March 31, 1997 was $10,300,000. Accounts
receivable increased due to a 2% increase in sales in the first quarter compared
to the fourth quarter of 1996. Current liabilities decreased mainly due to the
timing of payments of accrued compensation benefits.
Total long-term debt increased $1,314,000 due to additional
borrowings on the U.S. revolving credit facility for short term working capital
needs.
Capital expenditures for the three-month period were $237,000.
1996 COMPARED TO 1995
Consolidated working capital increased 16% compared to 1995.
The time taken to collect sales decreased 14% which resulted in an increase in
cash and marketable securities at December 31, 1996 of $1,597,000 over 1995.
Net cash provided from operations in 1996 was $4,726,000 as
compared to 1995 of $1,644,000. Cash generation was improved as a result of
greater profits and an even quarterly sales pattern. Capital expenditures in
1996 and 1995 were $1,291,000 and $204,000, respectively. Cash resources in 1996
were used to retire U.S. long-term debt and invest in short-term bonds and
commercial paper.
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In 1995, cash was used to finance higher amounts of inventory and to pay a legal
judgment rendered against Graham.
OTHER MATTERS
The Company is modifying its computer software to accommodate
the year 2000. Internal related computer costs are anticipated to be minor. The
Company does not anticipate incurring any external costs to be Year 2000
compliant. Where appropriate, Graham is obtaining confirmation from its
significant suppliers and customers that they, too, are actively making the
required changes. Graham is not aware of any problems at this time. Although
Graham believes it will be Year 2000 compliant, the Company cannot assure anyone
that its customers, suppliers, or governmental agencies will be ready.
Increases in material and labor costs experienced in recent
years have been offset by cost cutting measures and selling price increases.
Obtaining price increases are largely a factor of supply and demand for Graham's
products, whereas inflation factors can originate from influences outside of the
Company's direct global competition. Graham will continue to monitor the impact
of inflation in order to minimize its effects in future years through sales
growth, pricing, product mix strategies, productivity improvements, and cost
reductions.
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.
The Company enters 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 uses derivatives for no other reason.
The Company's U.S. operations are governed by federal
environmental laws, principally the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
the Clean Air Act, and the Clean Water Act, as well as state counterparts
("Environmental Laws"). Environmental Laws require that certain parties fund
remedial actions regardless of fault, legality or original disposal or ownership
of the site. The Company is currently participating in an environmental
assessment at one site under these laws. Future remediation expenses at this
site are subject to a number of uncertainties, including the method and extent
of remediation (dependent, in part, on existing laws and technology), the
percentage and type of material attributable to the Company, the financial
viability of site owners and the other parties, and the availability of state
and federal funds. The Company believes the costs to remediate its identified
environmental project have been
Page 16 of 62
17
fully reserved for in the current financial statements (for additional
information, see Note 13).
Graham Manufacturing sales to Asia over the past three years
represented approximately 23% of the Company's consolidated sales. At present
the Company believes doing business in Asia remains riskier than any other
geographical area it sells to. It is believed Asia's economic and political
problems will be resolved timely. For this reason, the Company plans to continue
to vigorously pursue opportunities in this part of the world.
NEW ORDERS AND BACKLOG
Consolidated new orders in the current year were $63,748,000
compared to $55,041,000 and $52,319,000 for the years ended December 31, 1996
and 1995.
In 1998, Graham Manufacturing's new orders were $59,687,000,
up from $50,008,000 in 1996 and $48,358,000 in 1995. New orders for export from
the U.S. operation equaled about 37% of the total new orders. This is compared
to 46% of the orders received in 1996 and about 50% in 1995. Orders received in
the U.K. operation in 1998 were $4,061,000. This is compared to $5,033,000 in
1996 and $3,961,000 in 1995.
New orders for the three months ended March 31, 1997 were
$11,150,000. New orders in the United States were $9,739,000 and in the United
Kingdom, $1,411,000.
The consolidated backlog as of March 31, 1998 was $28,199,000,
up 10% over 1996 and 29% over 1995. The consolidated backlog as of December 31,
1996 was $25,578,000 and $21,837,000 on December 31, 1995. On March 31, 1997 the
consolidated backlog was $22,348,000. Individual subsidiary backlogs for the
four accounting periods ended March 31, 1998, and 1997 and December 31, 1996 and
1995 were: Graham Manufacturing Co., Inc. - $27,292,000, $21,011,000,
$24,514,000 and $21,136,000; Graham Precision Pumps Ltd. - $907,000, $1,337,000,
$1,064,000 and $701,000, respectively.
The backlog at March 31, 1998 will be shipped before March 31,
1999 and represents orders from traditional markets in Graham's established
product lines.
ACCOUNTING STANDARD CHANGES
The Company changed its method of recognizing sales on
contracts with a duration of three months and with revenues of $1,000,000 or
greater from the completed contract method to the percentage-of-completion
method in the fourth quarter of 1998. All years reported in the Ten-Year Review
and appearing elsewhere in this annual report reflects this change (for
additional information, see Note 1).
Page 17 of 62
18
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 130
establishes standards for reporting and disclosure of comprehensive income and
its components in financial statement format. Comprehensive income is defined as
the change in equity of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997 and is not expected
to have a material effect on the Company's financial statements. SFAS No. 131
establishes standards for reporting information about operating segments by
public companies in their financial statements. It also establishes related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997.
In February 1998, the Financial Accounting Standards Board
issued SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits. The Statement standardizes the disclosure requirements,
requires additional information on changes in the benefit obligations and fair
values of plan assets and eliminates certain disclosures. It does not change the
measurement or recognition of the plans. The Company is currently studying the
pronouncement. The Statement is effective for fiscal years beginning after
December 15, 1997.
FORWARD LOOKING
Graham Corporation is anticipating revenue growth in 1999 in
spite of less robust Asian markets, the strengthening of the Pound Sterling and
greater competitive pricing pressures. The Asian fallout will influence the
macro economic tone in 1998-1999 causing lower contributions per sales dollar.
Management expects to continue to increase shareholder value, but expects net
income from operations to decline for the year ending March 31, 1999. Graham
Corporation is in the first part of its long term strategic plan. The initial
phase of the plan requires spending above recent historical levels in order to
better protect its present markets and to penetrate auxiliary ones. The plan
acknowledges that being a low cost producer alone in a competitive business
environment will not deliver the winning solution. Graham's focus going forward
puts a concentrated emphasis on value and responding to the constantly changing
market opportunities.
Page 18 of 62
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Financial Statements, Notes to Financial Statements, Quarterly
Financial Data)
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------
Three Months
Year Ended Ended Year Ended Year Ended
3/31/98 3/31/97 12/31/96 12/31/95
----------- ----------- ----------- -----------
Net sales....................................... $56,206,000 $14,257,000 $51,487,000 $50,501,000
----------- ----------- ----------- -----------
Costs and expenses:
Cost of products sold........................ 38,123,000 10,177,000 36,024,000 37,244,000
Selling, general and
administrative............................. 12,367,000 3,071,000 11,122,000 9,993,000
Interest expense............................. 242,000 65,000 355,000 616,000
Litigation provision......................... 276,000
----------- ----------- ----------- -----------
50,732,000 13,313,000 47,501,000 48,129,000
----------- ----------- ----------- -----------
Income from continuing operations
before income taxes.......................... 5,474,000 944,000 3,986,000 2,372,000
Provision for income taxes...................... 1,708,000 323,000 884,000 1,011,000
----------- ----------- ----------- -----------
Income from continuing
operations................................... 3,766,000 621,000 3,102,000 1,361,000
Loss from disposal of
discontinued operations...................... (182,000)
----------- ----------- ----------- -----------
Net income $ 3,766,000 $ 621,000 $ 3,102,000 $ 1,179,000
=========== =========== =========== ===========
Per Share Data
Basic:
Income from continuing operations.......... $2.27 $.39 $1.96 $.86
Loss from disposal of discontinued
operations............................... (.11)
----------- ----------- ----------- -----------
Net income $2.27 $.39 $1.96 $.75
=========== =========== =========== ===========
Diluted:
Income from continuing operations.......... $2.21 $.38 $1.93 $.86
Loss from disposal of discontinued
operations (.11)
----------- ----------- ----------- -----------
Net income $2.21 $.38 $1.93 $.75
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
Page 19 of 62
20
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1998 1996
---- ----
Assets
Current assets:
Cash and equivalents............................................... $ 1,694,000 $ 1,263,000
Marketable securities.............................................. 4,801,000 745,000
Trade accounts receivable.......................................... 6,791,000 9,235,000
Inventories........................................................ 10,278,000 6,436,000
Deferred tax asset................................................. 881,000 787,000
Prepaid expenses and other current assets.......................... 468,000 530,000
----------- -----------
24,913,000 18,996,000
Property, plant and equipment, net................................... 10,026,000 9,572,000
Deferred tax asset................................................... 2,067,000 1,852,000
Other assets......................................................... 24,000 74,000
----------- -----------
$37,030,000 $30,494,000
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt due banks.......................................... $ 40,000
Current portion of long-term debt.................................. 505,000 $ 487,000
Accounts payable................................................... 4,195,000 3,923,000
Accrued compensation............................................... 4,940,000 4,081,000
Accrued expenses and other liabilities............................. 1,039,000 1,416,000
Customer deposits.................................................. 779,000 382,000
Domestic and foreign income taxes payable.......................... 956,000 468,000
----------- -----------
12,454,000 10,757,000
Long-term debt....................................................... 859,000 1,442,000
Deferred compensation................................................ 1,007,000 1,067,000
Deferred tax liability............................................... 33,000
Other long-term liabilities.......................................... 264,000 339,000
Deferred pension liability........................................... 1,464,000 1,729,000
Accrued postretirement benefits...................................... 3,207,000 3,212,000
----------- -----------
Total liabilities.................................................. 19,255,000 18,579,000
----------- -----------
Shareholders' equity:
Preferred stock, $1 par value -
Authorized, 500,000 shares
Common stock, $.10 par value -
Authorized, 6,000,000 shares
Issued, 1,690,595 shares in 1998 and
1,586,155 shares in 1996...................................... 169,000 159,000
Capital in excess of par value..................................... 4,521,000 3,210,000
Cumulative foreign currency translation
adjustment...................................................... (1,781,000) (1,748,000)
Retained earnings.................................................. 15,362,000 10,975,000
----------- -----------
18,271,000 12,596,000
Less:
Treasury stock..................................................... (71,000) (6,000)
Employee Stock Ownership Plan loan payable......................... (425,000) (675,000)
----------- -----------
Total shareholders' equity........................................... 17,775,000 11,915,000
----------- -----------
$37,030,000 $30,494,000
=========== ===========
See Notes to Consolidated Financial Statements.
Page 20 of 62
21
- -------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------------
Three Months
Year Ended Ended Year Ended Year Ended
3/31/98 3/31/97 12/31/96 12/31/95
----------- ----------- ----------- -----------
Operating activities:
Net income............................................. $ 3,766,000 $ 621,000 $ 3,102,000 $ 1,179,000
----------- ----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation and amortization........................ 957,000 253,000 913,000 946,000
(Gain) loss on sale of property, plant and equipment 44,000 (7,000) (43,000) (24,000)
(Increase) Decrease in operating assets:
Accounts receivable................................ 3,616,000 (1,197,000) 1,476,000 1,260,000
Inventories, net of customer deposits.............. (3,335,000) (151,000) (235,000) (1,673,000)
Prepaid expenses and other current and
non-current assets............................... 48,000 18,000 9,000 (140,000)
Increase (Decrease) in operating liabilities:
Accounts payable, accrued compensation,
accrued expenses and other liabilities........... 1,882,000 (1,086,000) (544,000) 530,000
Litigation reserve................................. (1,247,000)
Deferred compensation, deferred pension
liability and accrued postretirement
benefits......................................... (438,000) 118,000 294,000 134,000
Domestic and foreign income taxes.................. 1,021,000 (251,000) 230,000 (17,000)
Other long-term liabilities........................ (38,000) (35,000) (45,000) (119,000)
Deferred income taxes.............................. (264,000) (79,000) (431,000) 815,000
----------- ----------- ----------- -----------
Total adjustments................................ 3,493,000 (2,417,000) 1,624,000 465,000
----------- ----------- ----------- -----------
Net cash provided (used) by operating
activities........................................... 7,259,000 (1,796,000) 4,726,000 1,644,000
----------- ----------- ----------- -----------
Investing activities:
Purchase of property, plant and equipment.............. (1,400,000) (237,000) (1,291,000) (204,000)
Proceeds from sale of property, plant and
equipment............................................ 11,000 8,000 74,000 33,000
Purchase of marketable securities...................... (13,699,000) (1,171,000) (2,177,000)
Proceeds from maturity of marketable securities........ 9,429,000 1,372,000 1,432,000
----------- ----------- ----------- -----------
Net cash used by investing activities (5,659,000) (28,000) (1,962,000) (171,000)
----------- ----------- ----------- -----------
Financing activities:
Increase (Decrease) in short-term debt................. 40,000 (209,000) 14,000
Proceeds from issuance of long-term debt............... 5,441,000 2,730,000 2,971,000 11,888,000
Principal repayments on long-term debt................. (7,203,000) (1,321,000) (4,729,000) (13,418,000)
Issuance of common stock............................... 1,020,000 12,000 38,000 11,000
Purchase of treasury stock............................. (71,000) (6,000)
Sale of treasury stock................................. 13,000
----------- ----------- ----------- -----------
Net cash provided (used) by financing activities (760,000) 1,421,000 (1,929,000) (1,511,000)
----------- ----------- ----------- -----------
Effect of exchange rate on cash........................ (6,000) 17,000 (5,000)
----------- ----------- ----------- -----------
Net increase (decrease) in cash and equivalents 840,000 (409,000) 852,000 (43,000)
Cash and equivalents at beginning of year.............. 854,000 1,263,000 411,000 454,000
----------- ----------- ----------- -----------
Cash and equivalents at end of year.................... $ 1,694,000 $ 854,000 $ 1,263,000 $ 411,000
=========== =========== =========== ===========
See Notes of Consolidated Financial Statements.
Page 21 of 62
22
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------
Cumulative
Foreign
Capital in Currency
Common Stock Excess of Translation Retained
Shares Par Value Par Value Adjustment Earnings
------ --------- --------- ---------- --------
Balance at December 31, 1994 1,051,499 $105,000 $3,197,000 $(1,876,000) $ 6,694,000
Issuance of shares.................. 2,500 1,000 22,000
Foreign currency translation
adjustment....................... (15,000)
Net income.......................... 1,179,000
Acquisition of treasury stock
Payments on Employee Stock
Ownership Plan loan payable
--------- -------- ---------- ----------- -----------
Balance at December 31, 1995 1,053,999 106,000 3,219,000 (1,891,000) 7,873,000
Issuance of shares.................. 3,473 38,000
Stock option tax benefit............ 6,000
Stock split......................... 528,683 53,000 (53,000)
Foreign currency translation
adjustment....................... 143,000
Net income.......................... 3,102,000
Payments on Employee Stock
Ownership Plan loan payable
--------- -------- ---------- ----------- -----------
Balance at December 31, 1996 1,586,155 159,000 3,210,000 (1,748,000) 10,975,000
Issuance of shares.................. 1,500 12,000
Stock option tax benefit............ 4,000
Foreign currency translation
adjustment....................... (64,000)
Net income.......................... 621,000
Payments on Employee Stock
Ownership Plan loan payable
--------- -------- ---------- ----------- -----------
Balance at March 31, 1997 1,587,655 159,000 3,226,000 (1,812,000) 11,596,000
Issuance of shares.................. 102,940 10,000 1,010,000
Stock option tax benefit............ 278,000
Sale of treasury stock.............. 7,000
Foreign currency translation
adjustment....................... 31,000
Net income.......................... 3,766,000
Acquisition of treasury stock
Payments on Employee Stock
Ownership Plan loan payable
--------- -------- ---------- ----------- -----------
Balance at March 31, 1998 1,690,595 $169,000 $4,521,000 $(1,781,000) $15,362,000
========= ======== ========== =========== ===========
- ------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------
Employee Stock
Treasury Ownership Plan Shareholders'
Stock Loan Payable Equity
----- ------------ ------
Balance at December 31, 1994 $(1,075,000) $ 7,045,000
Issuance of shares.................. 23,000
Foreign currency translation
adjustment....................... (15,000)
Net income.......................... 1,179,000
Acquisition of treasury stock $ (6,000) (6,000)
Payments on Employee Stock
Ownership Plan loan payable 200,000 200,000
-------- ----------- -----------
Balance at December 31, 1995 (6,000) (875,000) 8,426,000
Issuance of shares.................. 38,000
Stock option tax benefit............ 6,000
Stock split.........................
Foreign currency translation
adjustment....................... 143,000
Net income.......................... 3,102,000
Payments on Employee Stock
Ownership Plan loan payable 200,000 200,000
-------- ----------- -----------
Balance at December 31, 1996 (6,000) (675,000) 11,915,000
Issuance of shares.................. 12,000
Stock option tax benefit............ 4,000
Foreign currency translation
adjustment....................... (64,000)
Net income.......................... 621,000
Payments on Employee Stock
Ownership Plan loan payable 50,000 50,000
-------- ----------- -----------
Balance at March 31, 1997 (6,000) (625,000) 12,538,000
Issuance of shares.................. 1,020,000
Stock option tax benefit............ 278,000
Sale of treasury stock.............. 6,000 13,000
Foreign currency translation
adjustment....................... 31,000
Net income.......................... 3,766,000
Acquisition of treasury stock (71,000) (71,000)
Payments on Employee Stock
Ownership Plan loan payable 200,000 200,000
-------- ----------- -----------
Balance at March 31, 1998 $(71,000) $ (425,000) $17,775,000
======== =========== ===========
See Notes of Consolidated Financial Statements.
Page 22 of 62
23
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements Note 1 - The Company and Its
Accounting Policies:
- --------------------------------------------------------------------------------
Graham Corporation and its subsidiaries are primarily engaged in the
design and manufacture of vacuum and heat transfer equipment used in the
chemical, petrochemical, petroleum refining, and electric power generating
industries and sells to customers throughout the world. The Company's
significant accounting policies follow.
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL
STATEMENTS
The consolidated financial statements include the accounts of the
Company and its majority-owned domestic and foreign subsidiaries. All
significant intercompany balances, transactions and profits are eliminated in
consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the related revenues and expenses during the reporting
period. Actual amounts could differ from those estimated.
Certain amounts in prior periods have been reclassified to conform to
the current presentation.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at currency exchange rates in effect at year end and revenues and
expenses are translated at average exchange rates in effect for the year. Gains
and losses resulting from foreign currency transactions are included in results
of operations. Gains and losses resulting from translation of foreign subsidiary
balance sheets are reflected as a separate component of shareholders' equity.
REVENUE RECOGNITION
During the year ended March 31, 1998, the Company changed its method of
accounting for revenue recognition and all related costs on contracts with a
duration in excess of three months and with revenues of $1,000,000 and greater
from the completed contract method to the percentage-of-completion method. Since
the Company has recently experienced a trend of obtaining more significant
contracts with longer durations, it was determined that a change to the
preferable method of percentage-of-completion was necessary to better match
revenue and expense on these contracts in an
Page 23 of 62
24
accounting period. The Company has established the systems and procedures
essential to developing the estimates required to account for a contract using
the percentage-of-completion method. The percentage-of-completion is determined
by relating actual labor incurred to-date to management's estimate of total
labor to be incurred on each contract. Contracts in progress are reviewed
monthly, and sales and earnings are adjusted in current accounting periods based
on revisions in contract value and estimated costs at completion. All contracts
with values less than $1,000,000 continue to be accounted for on the completed
contract method and included in income upon substantial completion or shipment
to the customer. This change has been applied to prior periods by retroactively
restating the financial statements.
The effect of the restatement is as follows:
Three months
ended Year ended December 31,
March 31, 1997 1996 1995
-------------- ---- ----
As reported - Net income................................. $653,000 $3,061,000 $1,134,000
Effect of restatement.................................... (32,000) 41,000 45,000
-------- ---------- ----------
Restated - Net income.................................... $621,000 $3,102,000 $1,179,000
======== ========== ==========
As reported - Basic earnings per share $.41 $1.93 $.72
Effect of restatement.................................... (.02) .03 .03
---- ----- ----
Restated - Basic earnings per share...................... $.39 $1.96 $.75
==== ===== ====
As reported - Diluted earnings per
share $.40 $1.90 $.72
Effect of restatement.................................... (.02) .03 .03
---- ----- ----
Restated - Diluted earnings per share.................... $.38 $1.93 $.75
==== ===== ====
MARKETABLE SECURITIES
Marketable securities consist primarily of fixed-income debt securities
with maturities of beyond three months and less than twelve months. All
marketable securities are classified as held-to-maturity under the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115) as the Company has the
positive intent and ability to hold the securities to maturity. In accordance
with SFAS 115, the securities are stated at amortized cost which approximates
fair value.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out method. Progress payments for orders are
netted against inventory to the extent the payment is less than the inventory
balance relating to the applicable contract. Progress payments that are in
excess of the corresponding inventory balance are presented as customer deposits
in the Consolidated Balance Sheets.
Page 24 of 62
25
PROPERTY AND DEPRECIATION
Property, plant and equipment are stated at cost. Major additions and
improvements are capitalized, while maintenance and repairs are charged to
expense as incurred. Depreciation and amortization are provided based upon the
estimated useful lives under the straight line method. Upon sale or retirement
of assets, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in the results of
operations. Impairment losses are recognized when the carrying value of an asset
exceeds its fair value. The Company regularly assesses all of its long-lived
assets for impairment and determined that no impairment loss need be recognized
in the periods reported.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using currently enacted tax
rates.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) encourages, but does not require companies
to record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
(APB 25) and related Interpretations. 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.
PER SHARE DATA
In the third quarter of fiscal year 1998, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). In
accordance with this new standard, basic earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is calculated by dividing net income
by the weighted average number of common and, when applicable, potential common
shares outstanding during the period. All prior period earnings per share
amounts have been restated to reflect this change. A reconciliation of the
numerators and denominators of basic and diluted earnings per share is presented
below.
Page 25 of 62
26
Three Months
Year Ended Ended Year Ended Year Ended
3/31/98 3/31/97 12/31/96 12/31/95
---------- ---------- ---------- ----------
Basic earnings per share
Numerator:
Income from continuing operations.......... $3,766,000 $ 621,000 $3,102,000 $1,361,000
---------- ---------- ---------- ----------
Denominator:
Weighted common shares outstanding......... 1,653,000 1,586,000 1,584,000 1,578,000
Share equivalent units (SEU)
outstanding.............................. 3,000
---------- ---------- ---------- ----------
Weighted average shares and SEU's
outstanding.............................. 1,656,000 1,586,000 1,584,000 1,578,000
---------- ---------- ---------- ----------
Basic earnings per share from continuing
operations................................... $2.27 $.39 $1.96 $.86
===== ==== ===== ====
Diluted earnings per share
Numerator:
Income from continuing operations.......... $3,766,000 $ 621,000 $3,102,000 $1,361,000
---------- ---------- ---------- ----------
Denominator:
Weighted average shares and SEU's
outstanding.............................. 1,656,000 1,586,000 1,584,000 1,578,000
Stock options outstanding.................. 42,000 33,000 24,000 1,000
Contingently issuable SEU's................ 2,000 4,000 3,000
---------- ---------- ---------- ----------
Weighted average common and potential
common shares outstanding................ 1,700,000 1,623,000 1,611,000 1,579,000
---------- ---------- ---------- ----------
Diluted earnings per share from
continuing operations........................ $2.21 $.38 $1.93 $.86
===== ==== ===== ====
Options to purchase 55,200 shares of common stock at $21.44
per share and 11,250 shares at $21.25 were not included in the computation of
diluted earnings per share because the options' exercise price was greater than
the average market price of the common shares.
STOCK SPLIT
On July 25, 1996, the Board of Directors authorized a three-for-two
stock split distributed on August 23, 1996 to shareholders of record at the
close of business on August 9, 1996. The Company distributed cash in lieu of
fractional shares resulting from the stock split. The Company's par value of
$.10 per share remained unchanged and as a result $53,000 was transferred from
capital in excess of par value to common stock. All per share amounts have been
restated to reflect the stock split.
CASH FLOW STATEMENT
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Actual interest paid was $254,000 in 1998, $65,000 for the three months
ended March 31, 1997, $384,000 in 1996, and $631,000 in 1995. In addition,
actual income taxes paid were $951,000 in 1998, $627,000 for the three months
ended March 31, 1997, $1,084,000 in 1996, and $246,000 in 1995.
During 1998 and 1996, the Company recorded a liability for new capital
lease agreements of $68,000 and $134,000, respectively. Bonus amounts payable to
officers of Graham Corporation and its U.S. subsidiary were paid in Graham
common stock valued at $12,000 in 1995.
Page 26 of 62
27
- --------------------------------------------------------------------------------
Note 2 - Discontinued Operations:
- --------------------------------------------------------------------------------
In September 1994, the Company approved a formal plan to dispose of its
subsidiary, Graham Manufacturing Limited (GML), located in Gloucester, England,
and subsequently sold the operation on January 24, 1995. GML manufactured shell
and tube heat exchangers. The disposal of GML was presented in the Consolidated
Statement of Operations as a discontinued operation. During 1995, the Company
incurred a loss of $182,000 for additional expenses related to the disposal of
GML. There were no tax attributes associated with this loss.
Page 27 of 62
28
- --------------------------------------------------------------------------------
Note 3 - Operations by Geographic Area:
- --------------------------------------------------------------------------------
The Company has operations in the United States and the United Kingdom.
Inter-geographic sales represent intercompany sales made based upon a
competitive pricing structure. All intercompany profits in inventory are
eliminated in the consolidated accounts and are included in the eliminations
caption below. In computing operating profit, corporate and interest expense
have been excluded. Included in corporate expense are research and development
costs of $404,000, $91,000, $375,000 and $277,000 in 1998, 1997, 1996 and 1995,
respectively.
Three Months
Year Ended Ended Year Ended December 31,
March 31, 1998 March 31, 1997 1996 1995
-------------- -------------- ---- ----
Net sales including inter-
geographic sales:
United States
Customers........................ $51,696,000 $13,164,000 $46,721,000 $46,379,000
Inter-geographic................. 95,000 10,000 41,000 24,000
United Kingdom
Customers........................ 4,510,000 1,093,000 4,766,000 4,122,000
Inter-geographic................. 1,419,000 426,000 1,293,000 1,372,000
Inter-geographic sales.............. (1,514,000) (436,000) (1,334,000) (1,396,000)
----------- ----------- ----------- -----------
Net sales........................... $56,206,000 $14,257,000 $51,487,000 $50,501,000
========== =========== =========== ===========
Operating profit:
United States.................... $ 7,801,000 $ 1,569,000 $6,296,000 $ 4,384,000
United Kingdom................... 676,000 59,000 500,000 370,000
Eliminations..................... 13,000 68,000 (95,000) 65,000
----------- ----------- ----------- -----------
Total operating profit.............. 8,490,000 1,696,000 6,701,000 4,819,000
Corporate expense................... (2,774,000) (687,000) (2,360,000) (1,831,000)
Interest expense.................... (242,000) (65,000) (355,000) (616,000)
----------- ----------- ----------- -----------
Income from continuing
operations before income
taxes............................ $ 5,474,000 $944,000 $ 3,986,000 $ 2,372,000
=========== =========== =========== ===========
Identifiable assets
United States.................... $32,834,000 $27,048,000 $25,942,000 $25,433,000
United Kingdom................... 4,085,000 4,510,000 4,916,000 3,870,000
Eliminations..................... (854,000) (719,000) (1,028,000) (391,000)
----------- ----------- ----------- -----------
36,065,000 30,839,000 29,830,000 28,912,000
Corporate assets.................... 965,000 385,000 664,000 587,000
----------- ----------- ----------- -----------
Total assets........................ $37,030,000 $31,224,000 $30,494,000 $29,499,000
=========== =========== =========== ===========
The breakdown of total United States export sales by geographic area
was:
Three Months
Year Ended Ended Year Ended December 31,
March 31, 1998 March 31, 1997 1996 1995
-------------- -------------- ---- ----
Asia................................ $17,073,000 $ 2,932,000 $10,585,000 $ 9,054,000
Australia & New Zealand............. 46,000 949,000 259,000
Canada.............................. 889,000 709,000 2,628,000 2,404,000
Middle East......................... 2,230,000 1,299,000 3,757,000 3,742,000
South America....................... 3,122,000 89,000 3,974,000 1,836,000
Mexico.............................. 495,000 52,000 371,000 1,578,000
Western Europe...................... 1,006,000 148,000 770,000 568,000
Other............................... 547,000 52,000 266,000 208,000
----------- ----------- ----------- -----------
Total domestic export
sales............................ $25,408,000 $ 5,281,000 $23,300,000 $19,649,000
=========== =========== =========== ===========
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- --------------------------------------------------------------------------------
Note 4 - Inventories:
- --------------------------------------------------------------------------------
Major classifications of inventories are as follows:
March 31, December 31,
1998 1996
---- ----
Raw materials and supplies...................................... $ 2,707,000 $ 2,411,000
Work in process................................................. 12,081,000 4,631,000
Finished products............................................... 1,131,000 1,168,000
----------- -----------
15,919,000 8,210,000
Less - progress payments........................................ 5,641,000 1,774,000
----------- -----------
$10,278,000 $ 6,436,000
=========== ===========
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- --------------------------------------------------------------------------------
Note 5 - Property, Plant and Equipment:
- --------------------------------------------------------------------------------
Major classifications of property, plant and equipment are as follows:
March 31, December 31,
1998 1996
---- ----
Land............................................................ $ 250,000 $ 252,000
Leasehold improvements.......................................... 177,000 177,000
Buildings and improvements...................................... 10,528,000 10,430,000
Machinery and equipment......................................... 13,584,000 13,982,000
Construction in progress........................................ 705,000 25,000
----------- -----------
25,244,000 24,866,000
Less - accumulated depreciation and
amortization................................................. 15,218,000 15,294,000
----------- -----------
$10,026,000 $ 9,572,000
=========== ===========
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- --------------------------------------------------------------------------------
Note 6 - Leases:
- --------------------------------------------------------------------------------
The Company leases equipment and office space under various operating
leases. Rent expense applicable to operating leases was $191,000, $38,000,
$148,000 and $184,000 in 1998, 1997, 1996 and 1995, respectively.
Property, plant and equipment include the following amounts for leases
which have been capitalized.
March 31, December 31,
1998 1996
---- ----
Machinery and equipment......................................... $ 1,668,000 $ 1,644,000
Less accumulated amortization................................... 784,000 605,000
----------- -----------
$ 884,000 $ 1,039,000
=========== ===========
Amortization of property, plant and equipment under capital lease
amounted to $158,000, $39,000, $59,000 and $98,000 in 1998, 1997, 1996 and 1995,
respectively, and is included in depreciation expense.
As of March 31, 1998, future minimum payments required under
non-cancelable leases are:
Operating Capital
Leases Leases
------ ------
1999............................................................ $ 132,000 $ 239,000
2000............................................................ 99,000 225,000
2001............................................................ 53,000 202,000
2002............................................................ 26,000 88,000
2003............................................................ 8,000 5,000
Thereafter...................................................... 12,000
----------- -----------
Total minimum lease payments.................................... $ 330,000 $ 759,000
===========
Less - amount representing interest............................. 106,000
-----------
Present value of net minimum lease
payments..................................................... $ 653,000
===========
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- --------------------------------------------------------------------------------
Note 7 - Debt:
- --------------------------------------------------------------------------------
Short-term Debt Due Banks
- -------------------------
The Company and its subsidiaries had short-term borrowings outstanding
as follows:
March 31, December 31,
1998 1996
---- ----
Borrowings of United Kingdom
Subsidiary under line of credit
at bank's rate plus 1 1/2% in
1998 and 1996 $ 40,000 $
----------- ----------
The United Kingdom subsidiary has a revolving credit facility agreement
which provides a line of credit of 659,000 pounds sterling ($1,100,000 at the
March 31,1998 exchange rate) including letters of credit and long-term
borrowings. The interest rate is the bank's rate plus 1 1/2%. The bank's base
rate was 7 1/4% and 6% at March 31, 1998 and December 31, 1996, respectively.
The United Kingdom operations had available unused lines of credit of $716,000
at March 31, 1998. The weighted average interest rate on short-term borrowings
at March 31, 1998 was 10.8%.
Long-Term Debt
- --------------
The Company and its subsidiaries had long-term borrowings outstanding
as follows:
March 31, December 31,
1998 1996
---- ----
Employee Stock Ownership Plan
Loan Payable................................................. $ 425,000 $ 675,000
United Kingdom term loan due in 2000 286,000 412,000
Capital lease obligations (Note 6) 653,000 842,000
----------- -----------
1,364,000 1,929,000
Less: current amounts, including
amounts for capital leases of
$201,000 in 1998 and $192,000 in 1996 505,000 487,000
----------- -----------
$ 859,000 $ 1,442,000
=========== ===========
The United States revolving credit facility agreement provides a line
of credit of up to $13,000,000 including letters of credit, through October 31,
1999. The agreement allows the Company to borrow at prime minus a variable
percentage based upon certain financial ratios. The Company was able to borrow
at a rate of prime minus 100 basis points at March 31, 1998 and prime minus 75
basis points at December 31, 1996.
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The agreement allows the Company at any time to convert balances
outstanding not less than $2,000,000 and up to $9,000,000 into a two-year term
loan. This conversion feature is available through October 1999, at which time
the Company may convert the principal outstanding on the revolving line of
credit to a two-year term loan. The Company had no amounts outstanding on its
revolving credit facility, excluding letters of credit, at March 31, 1998 and
December 31, 1996. The bank's prime rate was 8.5% at March 31, 1998 and December
31, 1996. The United States subsidiary had available unused lines of credit of
$10,947,000 at year end.
The Employee Stock Ownership Plan Loan Payable requires quarterly
payments of $50,000 through 2000. (See Note 10 for a description of the Plan.)
The United Kingdom term loan has a fixed rate of 9%. This term loan is
due in 2000 and is repayable in equal monthly installments.
Long-term debt requirements over the next five years, excluding capital
leases, are: 1999 - $304,000, 2000 - $312,000, 2001 - $95,000, 2002 - $0 and
2003 - $0.
The Company is required to pay commitment fees of 1/4% on the unused
portion of the domestic revolving credit facility. No other financing
arrangements require compensating balances or commitment fees. Assets with a
book value of $29,604,000 have been pledged to secure certain domestic long-term
borrowings.
The United Kingdom short-term and long-term bank borrowings are secured
by assets of the United Kingdom subsidiary which have a book value of
$3,908,000.
Several of the loan agreements contain provisions pertaining to the
maintenance of minimum working capital balances, tangible net worth, capital
expenditures and financial ratios as well as restrictions on the payment of cash
dividends to the parent company and shareholders and incurrence of additional
long-term debt. The most restrictive dividend provision limits the payment of
dividends to shareholders to the greater of $400,000 or 25% of consolidated net
income. In addition, the United States subsidiary cannot make any loans or
advances exceeding $500,000 to any affiliates without prior consent of the bank.
The United States subsidiary may pay dividends to the parent company as long as
the subsidiary remains in compliance with all financial covenants after payment
of the dividends. Under the agreement, restricted net assets of the subsidiary
may not be reduced below $5,000,000 at March 31, 1998.
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- --------------------------------------------------------------------------------
Note 8 - Financial Instruments and Derivative Financial Instruments
- --------------------------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments,
marketable securities and trade receivables. The Company places its temporary
cash investments and marketable securities with high credit quality financial
institutions and actively evaluates the credit worthiness of these financial
institutions. Concentrations of credit risk with respect to trade receivables
are limited due to the large number of customers comprising the Company's
customer base and their geographic dispersion. At March 31, 1998 and December
31, 1996, the Company had no significant concentrations of credit risk.
LETTERS OF CREDIT:
The Company has entered into standby letter of credit agreements with
financial institutions relating to the guarantee of future performance on
certain contracts. At March 31, 1998 and December 31, 1996, the Company was
contingently liable on outstanding standby letters of credit aggregating
$2,111,000 and $2,076,000, respectively.
FOREIGN EXCHANGE RISK MANAGEMENT:
The Company, as a result of its global operating and financial
activities, is exposed to market risks from changes in foreign exchange rates.
In seeking to minimize the risks and/or costs associated with such activities,
the Company utilizes foreign exchange forward contracts with fixed dates of
maturity and exchange rates. The Company does not hold or issue financial
instruments for trading or other speculative purposes and only contracts with
high quality financial institutions. If the counterparties to the exchange
contracts do not fulfill their obligations to deliver the contracted foreign
currencies, the Company could be at risk for fluctuations, if any, required to
settle the obligation. At March 31, 1998 and December 31, 1996, there were no
foreign exchange forward contracts held by the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The differences between the carrying amounts and estimated fair values
of the Company's marketable securities and short- and long-term debt are
insignificant.
The methods and assumptions used to estimate the fair value of
financial instruments are summarized as follows:
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MARKETABLE SECURITIES - The fair value of investments in marketable
securities is based on quoted market prices.
SHORT-TERM DEBT DUE BANKS - The carrying value of short-term debt
approximates fair value due to the short-term maturity of this instrument.
LONG-TERM DEBT - The carrying values of credit facilities with variable
rates of interest approximates fair values. The fair value of fixed rate debt,
which approximates the carrying value, was estimated by discounting cash flows
using rates currently available for debt of similar terms and remaining
maturities.
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- --------------------------------------------------------------------------------
Note 9 - Income Taxes:
- --------------------------------------------------------------------------------
An analysis of the components of pre-tax income from continuing
operations is presented below:
Three Months
Year Ended Ended Year Ended December 31,
March 31, 1998 March 31, 1997 1996 1995
-------------- -------------- ---- ----
United States....................... $ 5,112,000 $ 954,000 $ 3,808,000 $ 2,168,000
United Kingdom...................... 362,000 (10,000) 178,000 204,000
----------- ----------- ------------- -----------
$ 5,474,000 $ 944,000 $ 3,986,000 $ 2,372,000
=========== =========== ============= ===========
The provision for income
taxes on continuing opera-
tions consists of:
Current:
Federal.......................... $ 1,839,000 $ 376,000 $ 1,279,000 $ 97,000
State............................ 113,000 26,000 77,000 16,000
United Kingdom................... 20,000 (41,000) 84,000
----------- ----------- ----------- -----------
1,972,000 402,000 1,315,000 197,000
----------- ----------- ----------- -----------
Deferred:
Federal.......................... (130,000) (88,000) (4,000) 645,000
State............................ 57,000 9,000 64,000 313,000
United Kingdom................... (80,000) (210,000) (1,000)
Change in valuation
allowance...................... (111,000) (281,000) (143,000)
----------- ----------- ----------- -----------
(264,000) (79,000) (431,000) 814,000
----------- ----------- ----------- -----------
Total provision for income
taxes............................ $ 1,708,000 $ 323,000 $ 884,000 $ 1,011,000
=========== =========== =========== ===========
The reconciliation of the provision calculated using the United States
Federal tax rate with the provision for income taxes presented in the financial
statements, excluding discontinued operations, is as follows:
Three Months
Year Ended Ended Year Ended December 31,
March 31, 1998 March 31, 1997 1996 1995
-------------- -------------- ---- ----
Provision for income taxes
at Federal rate................... $ 1,861,000 $ 321,000 $ 1,355,000 $ 806,000
Recognition of tax benefit
of prior year losses.............. (247,000) (102,000)
Difference between foreign
and U.S. tax rates................ (15,000) (9,000) (2,000)
State taxes......................... 131,000 26,000 114,000 324,000
Charges not deductible for
income tax purposes............... 24,000 14,000 59,000 61,000
Recognition of tax benefit
generated by foreign
sales corporation................. (215,000) (14,000) (70,000) (67,000)
Tax credits......................... (26,000) (6,000) (8,000) (18,000)
Foreign losses for which
no tax benefit was
provided.......................... 117,000
Adjustments to prior years'
tax liabilities................... 200,000 (169,000) 62,000
Change in valuation allowance (111,000) (281,000) (143,000)
Other............................... (11,000) (18,000) (5,000) (12,000)
----------- ----------- ----------- -----------
Provision for income taxes.......... $ 1,708,000 $ 323,000 $ 884,000 $ 1,011,000
=========== =========== =========== ===========
The deferred income tax asset recorded in the Consolidated Balance
Sheets results from differences between financial statement
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and tax reporting of income and deductions. A summary of the composition of the
deferred income tax asset follows:
1998 1996
United United United United
States Kingdom States Kingdom
------ ------- ------ -------
Depreciation........................ $ (415,000) $ (84,000) $ (428,000) $ (127,000)
Deferred compensation............... 522,000 446,000
Deferred pension liability.......... 462,000 88,000 454,000 94,000
Accrued postretirement
benefits.......................... 1,298,000 1,299,000
Compensated absences................ 571,000 527,000
Inventories......................... 152,000 117,000
Warranty liability.................. 58,000 78,000
Accrued medical benefits............ 105,000 59,000
Contingent liabilities.............. 98,000 100,000
Foreign loss
carryforwards..................... 696,000 662,000
New York State investment
tax credit........................ 60,000 154,000
Other............................... 26,000 4,000 (21,000) 9,000
---------- ---------- ---------- ----------
2,937,000 704,000 2,785,000 638,000
Less: Valuation allowance........... 693,000 200,000 617,000
---------- ---------- ---------- ----------
Deferred tax asset.................. $2,937,000 $ 11,000 $2,585,000 $ 21,000
========== ========== ========== ==========
Deferred income taxes include the impact of foreign net operating loss
carryforwards which may be carried forward indefinitely and investment tax
credits which expire from 2000 to 2004. In accordance with the provisions of
SFAS 109, a valuation allowance of $693,000 at March 31, 1998 is deemed adequate
to reserve for the foreign net loss carryforwards which are not considered
probable of realization.
The Company does not provide for additional U.S. income taxes on
undistributed earnings considered permanently invested in its United Kingdom
subsidiary. At March 31, 1998, such undistributed earnings totaled $1,624,000.
It is not practicable to determine the amount of income taxes that would be
payable upon the remittance of assets that represent those earnings.
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- --------------------------------------------------------------------------------
Note 10 - Employee Benefit Plans:
- --------------------------------------------------------------------------------
Retirement Plans
- ----------------
The Company has defined benefit plans covering substantially all
employees. The Company's plan covering employees in the United States is
non-contributory. Benefits are based on the employee's years of service and
average earnings for the five highest consecutive calendar years of compensation
for the ten year period preceding retirement. The plan for employees in the
United Kingdom is contributory with the employer's share being actuarially
determined. Benefits are based on the employee's years of service and average
earnings for the three highest years for the ten year period preceding
retirement. The Company's funding policy for the United States plan is to
contribute the amount required by the Employee Retirement Income Security Act of
1974. The pension obligations to employees covered by the Company's former
domestic plan, terminated in 1986, were settled through the purchase of annuity
contracts for each participant which guaranteed these future benefit payments.
The components of pension cost are:
1998 1996 1995
U.S. PLAN U.K. PLAN U.S. PLAN U.K. PLAN U.S. PLAN U.K. PLAN
--------- --------- --------- --------- --------- ---------
Service cost-benefits
earned during the
period................. $ 362,000 $ 156,000 $ 307,000 $ 104,000 $ 261,000 $ 175,000
Interest cost on
projected benefit
obligation............. 585,000 294,000 459,000 315,000 475,000 295,000
Actual return on
assets................. (1,210,000) (118,000) (477,000) 146,000 (1,600,000) (501,000)
Net amortization and
deferral............... 564,000 (326,000) (135,000) (474,000) 1,168,000 109,000
---------- --------- --------- --------- ---------- ---------
Net pension cost......... $ 301,000 $ 6,000 $ 154,000 $ 91,000 $ 304,000 $ 78,000
========== ========= ========= ========= ========== =========
The actuarial assumptions are:
Discount rate used to
determine projected
benefit obligation............ 7% 7% 7% 9% 7% 9%
Rate of increase in
compensation levels........... 3% 4 1/2% 3% 5 1/2% 3% 5 1/2%
Expected rate of return
on plan assets................ 8% 8% 8% 10% 8% 10%
Pension expense for the U.S. Plan and the U.K. Plan for the three month
period ending March 31, 1997 was $38,000 and $2,000, respectively. The service
cost for 1998, 1997, 1996 and 1995 is net of employee contributions to the
United Kingdom plan of $42,000, $11,000, $93,000, and $49,000, respectively.
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The funded status of the pension plan is presented below:
1998 1996
U.S. PLAN U.K. PLAN U.S. PLAN U.K. PLAN
--------- --------- --------- ---------
Vested benefit obligation.................. $ 5,775,000 $ 4,997,000 $ 4,776,000 $ 3,377,000
=========== =========== =========== ===========
Accumulated benefit obligation............. $ 5,857,000 $ 5,013,000 $ 5,196,000 $ 3,389,000
=========== =========== =========== ===========
Plan assets at fair value.................. $ 8,635,000 $ 4,008,000 $ 7,499,000 $ 3,933,000
Projected benefit obligation for
services rendered to date................ 9,212,000 5,169,000 7,275,000 3,389,000
----------- ----------- ----------- -----------
Projected benefit obligation less than
or (in excess of) plan assets............ (577,000) (1,161,000) 224,000 544,000
Unrecognized net loss from past
experience different from that
assumed and effect of changes in
assumptions.............................. (883,000) 969,000 (1,290,000) (1,057,000)
Unrecognized prior service cost............ (3,000) 225,000 (3,000) 265,000
Unrecognized net asset at
transition............................... (280,000) (30,000) (335,000) (38,000)
----------- ----------- ----------- -----------
Pension (liability) asset.................. $(1,743,000) $ 3,000 $(1,404,000) $ (286,000)
=========== =========== =========== ===========
The current portion of the pension liability as of March 31, 1998 is
included in the caption "Accrued Compensation" and the long-term portion is
separately presented in the Consolidated Balance Sheets. As of December 31,
1996, the entire liability was long-term.
Assets of the United States plan consist primarily of equity securities
at March 31, 1998 and December 31, 1996. Assets of the United Kingdom plan
consist of an investment contract with an insurance company which is primarily
invested in equity securities. The vested benefit obligation of the United
Kingdom plan is the actuarial present value of the vested benefits to which the
employee is currently entitled but based on the employee's expected date of
separation or retirement. The unrecognized net asset at transition is being
amortized over the remaining service lives of the participants which
approximates 19 years for the domestic plan and 13 years for the United Kingdom
plan.
In 1996, the Company adopted a Supplemental Executive Retirement Plan
for certain key executives. This unfunded plan provides retirement benefits
associated with wages in excess of the legislated qualified plan maximums.
Pension expense recorded in 1998, 1997 and 1996 related to this plan was $6,000,
$10,000 and $39,000, respectively. At March 31, 1998 and December 31, 1996, the
related liability was $55,000 and $39,000, respectively, and is included in the
caption "Deferred Pension Liability" in the Consolidated Balance Sheet.
The Company has a defined contribution plan covering substantially all
domestic employees. Company contributions to this plan are based on the
profitability of the Company and amounted to $647,000, $215,000, $651,000, and
$320,000 in 1998, 1997, 1996 and 1995, respectively.
The Company has a deferred compensation plan that allows certain key
employees to defer a portion of their compensation. The principal and interest
earned on the deferred balances are
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payable upon retirement. The deferred compensation liability under this plan was
$1,231,000 and $1,104,000 at March 31, 1998 and December 31, 1996, respectively.
Employee Stock Ownership Plan
- -----------------------------
The Company has a noncontributory Employee Stock Ownership Plan (ESOP)
that covers substantially all employees in the United States. The Company
borrowed $2,000,000 under loan and pledge agreements. The proceeds of the loans
were used to purchase 87,454 shares of the Company's common stock. The purchased
shares are pledged as security for the payment of principal and interest as
provided in the loan and pledge agreements. It is anticipated that funds for
servicing the debt payments will essentially be provided from contributions paid
by the Company to the ESOP, from earnings attributable to such contributions,
and from cash dividends paid to the ESOP on shares of the Company stock which it
owns. During 1998, 1997, 1996 and 1995 the Company recognized expense associated
with the ESOP using the shares allocated method. This method recognizes interest
expense as incurred on all outstanding debt of the ESOP and compensation expense
related to principal reductions based on shares allocated for the period.
Dividends received on unallocated shares that are used to service the ESOP debt
reduce the amount of expense recognized each period. The compensation expense
associated with the ESOP was $200,000, $50,000, $200,000 and $200,000 in 1998,
1997, 1996 and 1995, respectively. The ESOP received no dividends on unallocated
shares in 1998, 1997, 1996, and 1995. Interest expense in the amount of $42,000,
$13,000, $72,000 and $97,000 was incurred in 1998, 1997, 1996 and 1995,
respectively. Dividends paid on allocated shares accumulate for the benefit of
the employees.
Other Postretirement Benefits
- -----------------------------
In addition to providing pension benefits, the Company has a United
States plan which provides health care benefits for eligible retirees and
eligible survivors of retirees. The Company recognizes the cost of these
benefits on the accrual basis as employees render service to earn the benefits.
Early retirees who are eligible to receive benefits under the plan are required
to share in twenty percent of the medical premium cost. In addition, the
Company's share of the premium costs has been capped.
The components of postretirement benefit cost are:
1998 1996 1995
---- ---- ----
Service cost - benefits earned during the period................... $ 64,000 $ 62,000 $ 45,000
Interest cost on accumulated benefit obligation.................... 166,000 173,000 156,000
Net amortization................................................... (87,000) (79,000) (87,000)
-------- -------- --------
Net postretirement benefit cost.................................... $143,000 $156,000 $114,000
======== ======== ========
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Postretirement benefit cost for the three month period ending March 31,
1997 was $40,000.
The assumptions used to develop the accrued postretirement benefit
obligation were:
1998 1996 1995
---- ---- ----
Discount rate...................................................... 7% 7% 7%
Medical care cost trend rate....................................... 8 1/2% 9% 9 1/2%
The medical care cost trend rate used in the actuarial computation
ultimately reduces to 5% in 2005 and subsequent years. This was accomplished
using 1/2% decrements for the years 1999 through 2005.
The table of actuarially computed benefit obligations is presented
below:
1998 1996
---- ----
Accumulated postretirement benefit obligation:
Retirees................................................................. $ 908,000 $ 958,000
Fully eligible active plan participants.................................. 420,000 532,000
Other active plan participants........................................... 1,221,000 1,151,000
---------- ----------
Unfunded accumulated postretirement benefit
obligation............................................................... 2,549,000 2,641,000
Unrecognized net loss from past experience
different from that assumed and effects of changes
in assumptions........................................................... (178,000) (374,000)
Unrecognized prior service cost............................................. 956,000 1,064,000
---------- ----------
Accrued postretirement benefit obligation................................... $3,327,000 $3,331,000
========== ==========
The effect of a one percentage point increase in each future year's
assumed medical care cost trend rate, holding all other assumptions constant,
would not have a material effect on the net postretirement benefit cost or the
accrued postretirement benefit obligation.
The current portion of the postretirement benefit obligation is
included in the caption "Accrued Compensation" and the long-term portion is
separately presented in the Consolidated Balance Sheets.
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- --------------------------------------------------------------------------------
Note 11 - Stock Compensation Plans:
- --------------------------------------------------------------------------------
The 1995 Graham Corporation Incentive Plan to Increase Shareholder
Value provides for the issuance of up to 192,000 shares of common stock in
connection with grants of incentive stock options and non-qualified stock
options to officers, key employees and outside directors. The options may be
granted at prices not less than the fair market value at the date of grant and
expire no later than ten years after the date of grant.
The 1989 Stock Option and Appreciation Rights Plan provides for the
issuance of up to 188,700 shares of common stock in connection with grants of
non-qualified stock options and tandem stock appreciation rights to officers,
key employees and certain outside directors. The options may be granted at
prices not less than the fair market value at the date of grant, and expire no
later than ten years after the date of grant.
In 1996 the Company adopted a Long-Term Incentive Plan which provides
for awards of share equivalent units for outside directors based upon the
Company's performance. Each unit is equivalent to one share of the Company's
common stock. Share equivalent units are payable in cash or stock upon
retirement. The cost of performance units earned and charged to pre-tax income
under this Plan in 1998, 1997 and 1996 was $50,000, $10,000 and $40,000,
respectively.
The Company applies APB 25 and related Interpretations in accounting
for its plans. Accordingly, no compensation expense has been recognized for its
stock option plans. Had compensation cost for the Company's two 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
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
Three Months
Year Ended Ended Year Ended Year Ended
3/31/98 3/31/97 12/31/96 12/31/95
------- ------- -------- --------
Net income................. As reported $3,766,000 $621,000 $3,102,000 $1,179,000
Pro forma 3,381,000 620,000 3,060,000 1,065,000
Basic earnings
per share............... As reported $2.27 $.39 $1.96 $.75
Pro forma $2.04 $.39 $1.93 $.67
Diluted earnings
per share............... As reported $2.21 $.38 $1.93 $.75
Pro forma $1.99 $.38 $1.90 $.67
The weighted average fair value of the options granted during 1998,
1996 and 1995 is estimated as $8.30, $4.62, and $3.59, respectively, using the
Black Scholes option pricing model with the following weighted average
assumptions:
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43
Year Ended Year Ended Year Ended
3/31/98 12/31/96 12/31/95
---------- ---------- ----------
Expected life........................................... 5 years 5 years 5 years
Volatility.............................................. 31.40% 34.74% 44.28%
Risk-free interest rate................................. 5.95% 6.35% 6.21%
Dividend yield.......................................... 0% 0% 0%
Information on options and rights under the Company's plans is as
follows:
Weighted
Option Shares Average
Price Under Exercise
Range Option Price
----- ------ -----
Outstanding at December 31, 1994.............................. $5.00-13.17 146,550 $11.49
Exercised..................................................... $5.00 (2,250) 5.00
Granted....................................................... $6.58-$8.00 50,550 7.59
Cancelled..................................................... $7.67-13.17 (7,200) 12.25
-------
Outstanding at December 31, 1995.............................. $6.58-13.17 187,650 10.49
Exercised..................................................... $6.58-8.00 (5,210) 7.28
Granted....................................................... $10.42-11.33 21,600 11.07
Cancelled..................................................... $7.67-13.17 (14,700) 12.72
-------
Outstanding at December 31, 1996.............................. $6.58-13.17 189,340 10.47
Exercised..................................................... $8.08 (1,500) 8.08
-------
Outstanding at March 31, 1997................................. $6.58-13.17 187,840 10.49
Exercised..................................................... $6.58-13.17 (102,940) 9.92
Granted....................................................... $21.25-21.44 66,450 21.41
Cancelled..................................................... $13.17 (5,250) 13.17
-------
Outstanding at March 31, 1998................................. $6.58-21.44 146,100 $15.77
=======
At March 31, 1998, the options outstanding had a weighted average
remaining contractual life of 7.07 years. There were 134,700 options exercisable
at March 31, 1998 which had a weighted average exercise price of $16.30. The
remaining options are exercisable at a rate of 20 percent per year from the date
of grant. The outstanding options expire December 1999 to October 2007. The
number of options available for future grants were 116,850 at March 31, 1998 and
178,050 at December 31, 1996.
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44
- --------------------------------------------------------------------------------
Note 12 - Shareholder Rights Plan:
- --------------------------------------------------------------------------------
On February 23, 1990 the Company adopted a Shareholder Rights Plan.
Under the Plan, as of March 7, 1990, one share Purchase Right ("Right") is
attached to each outstanding share of Common Stock. When and if the Rights
become exercisable, each Right would entitle the holder of a share of Common
Stock to purchase from the Company an additional share of Common Stock for
$46.67 per share, subject to adjustment. The Rights become exercisable upon
certain events: (i) if a person or group of persons acquires 20% or more of the
Company's outstanding Common Stock; or (ii) if a person or group commences a
tender offer for 30% or more of the Company's outstanding Common Stock.
The Company may redeem the Rights for $.01 per Right at any time prior
to the close of business on the date when the Rights become exercisable.
After the Rights become exercisable, if the Company is acquired in a
business combination transaction, or if at least half of the Company's assets or
earning power are sold, then each Right would entitle its holder to purchase
stock of the acquirer (or Graham, if it were the surviving company) at a
discount of 50%. The number of shares that each Right would entitle its holder
to acquire at discount would be the number of shares having a market value equal
to twice the exercise price of the Right.
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45
- --------------------------------------------------------------------------------
Note 13 - Contingencies:
- --------------------------------------------------------------------------------
The United States Environmental Protection Agency has notified the
Company's wholly-owned subsidiary, Graham Manufacturing Co., Inc. ("GMC"), that
it is a Potentially Responsible Party pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, in
connection with the Batavia Landfill Site in the Town of Batavia, New York.
Total remediation expenses for the site are currently estimated at $10.4
million. Based on facts and circumstances currently known to GMC and the
Company, GMC's contribution to the site of material deemed hazardous was minor.
In 1996, the Company recorded a $260,000 provision for the estimated costs,
including legal costs, in connection with this matter based on the currently
available information and assuming a reasonable pro-rata allocation. The related
liability at March 31, 1998 was $250,000 and is included in the caption "Other
Long-Term Liabilities" in the Consolidated Balance Sheet.
The Company expensed $276,000 in 1995 for settlement of a litigation
matter.
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46
- --------------------------------------------------------------------------------
Note 14 - Subsequent Event:
- --------------------------------------------------------------------------------
In May 1998, the Company acquired 100,000 shares of its common stock at
market price for $1,700,000 from the estate of the Company's former Chairman of
the Board. The Company will hold these shares as treasury stock.
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47
- --------------------------------------------------------------------------------
Note 15 - Fiscal Year End Change:
- --------------------------------------------------------------------------------
In 1997, the Company changed its fiscal year end to March 31. Fiscal
1997 is a three month transition period ended March 31, 1997. The unaudited
Statement of Operations for the comparable three month period in 1996 was as
follows:
Unaudited
---------
Net sales.................................................................... $11,164,000
-----------
Costs and expenses:
Cost of products sold................................................... 8,031,000
Selling, general and administrative..................................... 2,550,000
Interest expense........................................................ 126,000
-----------
10,707,000
-----------
Income before income taxes................................................... 457,000
Provision for income taxes................................................... 165,000
-----------
Net income................................................................... $ 292,000
===========
Basic earnings per share..................................................... $.19
====
Diluted earnings per share................................................... $.18
====
47 of 62
48
- --------------------------------------------------------------------------------
Quarterly Financial Data:
- --------------------------------------------------------------------------------
A capsule summary of the Company's unaudited quarterly sales and
earnings per share data for 1998 and 1996 is presented below:
First Second Third Fourth Total
1998 (1) Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
Net sales..................... $11,855,000 $14,618,000 $11,914,000 $17,819,000 $56,206,000
Gross profit.................. 3,683,000 4,962,000 3,638,000 5,800,000 18,083,000
Net income.................... 433,000 945,000 309,000 2,079,000 3,766,000
Per share:
Net income: Basic........ .27 .58 .19 1.23 2.27
Diluted...... .26 .56 .18 1.21 2.21
Market price range............ 13.63-18 16.88-19.75 13-22.88 13.38-18.50 13-22.88
1996 (1)
Net sales..................... $11,164,000 $14,060,000 $12,275,000 $13,988,000 $51,487,000
Gross profit.................. 3,133,000 4,009,000 3,729,000 4,592,000 15,463,000
Net income.................... 292,000 577,000 481,000 1,752,000 3,102,000
Per share:
Net income: Basic........ .19 .36 .30 1.11 1.96
Diluted...... .18 .36 .30 1.09 1.93
Market price range............ 9.42-12.17 9.17-12.25 9.25-12.58 9-11.38 9-12.58
Quarterly Financial Data Notes:
- -------------------------------
(1) The first three quarters of 1998 and the four quarters of 1996 were
restated in the financial data presented to reflect the change in method
in accounting for revenue recognition for certain long-term contracts.
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49
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
Graham Corporation
Batavia, New York
We have audited the accompanying consolidated balance sheets of Graham
Corporation and subsidiaries as of March 31, 1998 and December 31, 1996, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the year ended March 31, 1998, the three month period ended
March 31, 1997, and for the years ended December 31, 1996 and 1995. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Graham Corporation and subsidiaries
as of March 31, 1998 and December 31, 1996, and the results of their operations
and their cash flows for the year ended March 31, 1998, for the three month
period ended March 31, 1997, and for the years ended December 31, 1996 and 1995
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, for the year
ended March 31, 1998 the Corporation changed its method of accounting for
revenue recognition from the completed contract to the percentage-of-completion
method for certain long-term contracts and, retroactively, restated all prior
year financial statements for the change.
s\Deloitte & Touche LLP
Deloitte & Touche LLP
Rochester, New York
May 22, 1998
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50
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------- -----------------------------------------------------------
and Financial Disclosure
------------------------
(Not Applicable)
PART III
--------
Item 10. Directors and Executive Officers
- -------- --------------------------------
(The information called for under this Item pursuant to Item
401 of the Commission's Regulation S-K is set forth in statements under
"Election of Directors" on pages 3 and 7 of the Registrant's Proxy Statement for
its 1998 Annual Meeting of Stockholders, which statements are hereby
incorporated herein by reference.
Item 11. Executive Compensation
- -------- ----------------------
(The information called for under this Item is set forth in
statements under "Directors' Fees" on pages 5 and 6 of Registrant's Proxy
Statement for its 1998 Annual Meeting of Stockholders and also under
"Compensation of Executive Officers" on pages 8 to 12 of such proxy statement,
which statements are hereby incorporated herein by reference.)
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
-----------------------------------------------
(The information called for under this Item is set forth in
statements under "Principal Stockholders" on page 2 of Registrant's Proxy
Statement for its 1998 Annual Meeting of Stockholders, which statements are
hereby incorporated herein by reference.)
(b) Security Ownership of Management
--------------------------------
(The information called for under this Item is set forth in
statements under "Principal Stockholders" on page 2, "Election of Directors" on
pages 3 to 6 and "Executive Officers" on page 7 of Registrant's Proxy Statement
for its 1998 Annual Meeting of Stockholders, which statements are hereby
incorporated herein by reference.)
(c) Changes in Control
------------------
(Not applicable.)
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51
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
(The information called for under this Item is set forth in
statements under "Principal Stockholders" on page 2 and "Election of Directors"
on pages 3 to 6 of Registrant's Proxy Statement for its 1998 Annual Meeting of
Stockholders, which statements are hereby incorporated herein by reference.)
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
- -------- -----------------------------------------------------------
8-K
---
(a) (1) The following are Financial Statements and related information filed as
part of this Annual Report on Form 10-K.
Sequential
Page Number
-----------
(A) Consolidated Statements of Operations for the Year ended March 31,
1998, the period January 1, 1997-March 31, 1997 and the Years ended
December 31, 1996 and 1995;......................................................... 19
(B) Consolidated Balance Sheets as of March 31, 1998
and December 31, 1996;.............................................................. 20
(C) Consolidated Statements of Cash Flows for the
Year ended March 31, 1998, the period January 1, 1997-March 31, 1997
and the Years ended
December 31, 1996 and 1995;......................................................... 21
(D) Consolidated Statements of Changes In
Shareholders' Equity for the Year ended March 31, 1998, the period
January 1, 1997-March 31, 1997 and
the Years ended December 31, 1996 and 1995;......................................... 22
(E) Notes to Consolidated Financial Statements; and..................................... 23-47
(F) Report of Independent Auditors...................................................... 49
(a) (2) The following are Financial Statement Schedules and related information
required to be filed as part of this Annual Report on Form 10-K by Items 8 and
14(d) of Form 10-K:
Sequential
Page Number
-----------
(A) The items set forth in Items 14(a)(1)(A) through
(E) above; and...................................................................... 19-47
-----
(B) Independent Auditors' Report on Financial
Statement Schedules................................................................. 53
Financial Statement Schedules for the Year ended March 31, 1998, the
period January 1, 1997- March 31, 1997 and the Years ended December
31, 1996 and 1995 as follows:
(i) Condensed Financial Information of Registrant (Schedule I).................
54-56
(ii) Valuation and Qualifying Accounts (Schedule II)............................
57
51 of 62
52
Other financial statement schedules not included in this
Annual Report on Form 10-K have been omitted because they are not applicable or
because the required information is shown in the financial statements or notes
thereto.
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53
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Graham Corporation
Batavia, New York
We have audited the consolidated financial statements of Graham Corporation and
subsidiaries as of March 31, 1998 and December 31, 1996, for the year ended
March 31, 1998, for the three month period ended March 31, 1997, and for the
years ended December 31, 1996 and 1995 and have issued our report thereon dated
May 22, 1998 (which expresses an unqualified opinion and includes an explanatory
paragraph relating to a change in accounting for revenue recognition from the
completed contract to the percentage-of-completion method for certain long-term
contracts); such report is included elsewhere in this Annual Report on Form
10-K. Our audits also included the consolidated financial statement schedules of
Graham Corporation and subsidiaries, listed in Item 14(a)2. These financial
statement schedules are the responsibility of the Corporation's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Rochester, New York
May 22, 1998
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54
GRAHAM CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
Three Months
Year Ended Ended Year Ended Year Ended
3/31/98 3/31/97 12/31/96 12/31/95
------- ------- -------- --------
Costs and expenses:
General and administrative...................... $2,104,000 $ 542,000 $1,703,000 $1,423,000
Interest expense................................ 42,000 13,000 72,000 98,000
---------- ---------- ---------- ----------
Parent company operating loss before
income tax benefit............................ 2,146,000 555,000 1,775,000 1,521,000
Benefit for income taxes........................ (705,000) (188,000) (491,000) (580,000)
---------- ---------- ---------- ----------
Net parent company operating loss............... 1,441,000 367,000 1,284,000 941,000
---------- ---------- ---------- ----------
Equity in earnings of continuing
subsidiaries.................................. 8,024,000 1,590,000 6,135,000 4,169,000
Less expenses directly allocable to
continuing subsidiaries:
Research and development.................... 404,000 91,000 375,000 276,000
Provision for income taxes.................. 2,413,000 511,000 1,374,000 1,591,000
---------- ---------- ---------- ----------
Equity in net earnings of subsidiaries.......... 5,207,000 988,000 4,386,000 2,302,000
---------- ---------- ---------- ----------
Income from continuing operations............... 3,766,000 621,000 3,102,000 1,361,000
Equity in net losses of discontinued
subsidiaries.................................. (182,000)
---------- ---------- ---------- ----------
Net income $3,766,000 $ 621,000 $3,102,000 $1,179,000
========== ========== ========== ==========
The Notes to Consolidated Financial Statements in Part II are an integral part
of this schedule.
* Information is presented for the parent company only.
** Cash dividends paid to the parent company by consolidated subsidiaries
were $2,729,000, $829,000, $3,650,000, and $1,750,000 in 1998, 1997, 1996
and 1995, respectively.
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55
GRAHAM CORPORATION AND SUBSIDIARIES*
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
3/31/98 12/31/96
------- --------
ASSETS
Prepaid expenses......................................................... $ 95,000 $ 86,000
Due from subsidiaries.................................................... 501,000 353,000
----------- -----------
Total current assets.................................................. 596,000 439,000
Property, plant & equipment, net......................................... 400,000 339,000
Investment in subsidiaries............................................... 18,475,000 12,457,000
Other assets............................................................. 5,000 21,000
----------- -----------
$19,476,000 $13,256,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term debt........................................ $ 206,000 $ 200,000
Accounts payable......................................................... 180,000 148,000
Other current liabilities................................................ 969,000 478,000
----------- -----------
Total current liabilities............................................. 1,355,000 826,000
Long-term debt........................................................... 238,000 475,000
Deferred compensation.................................................... 108,000 40,000
----------- -----------
1,701,000 1,341,000
----------- -----------
Shareholders' equity:
Preferred stock, $1 par value -
authorized, 500,000 shares
Common stock, $.10 par value -
authorized, 6,000,000 shares
issued, 1,690,595 shares in 1998 and
1,586,155 shares in 1996............................................ 169,000 159,000
Capital in excess of par value........................................... 4,521,000 3,210,000
Cumulative foreign currency translation
adjustment............................................................ (1,781,000) (1,748,000)
Retained earnings........................................................ 15,362,000 10,975,000
----------- -----------
18,271,000 12,596,000
Less:
Treasury stock........................................................... (71,000) (6,000)
Employee Stock Ownership Plan loan payable............................... (425,000) (675,000)
----------- -----------
Total shareholders' equity 17,775,000 11,915,000
----------- -----------
$19,476,000 $13,256,000
=========== ===========
The Notes to Consolidated Financial Statements in Part II are an integral part
of this Schedule.
* Information is presented for the parent company only.
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56
GRAHAM CORPORATION AND SUBSIDIARIES*
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
Three Months
Year Ended Ended Year Ended Year Ended
31/31/98 3/31/97 12/31/96 12/31/95
-------- ------- -------- --------
Net cash provided (used) by operating
activities................................... $ (860,000) $ (5,000) $ 76,000 $ 3,000
---------- ---------- ---------- ----------
Investing activities:
Purchase of property, plant and
equipment.................................. (102,000) (8,000) (112,000)
Proceeds from sale of property, plant
and equipment.............................. 1,000 6,000
---------- ---------- ---------- ----------
Net cash used by investing activities (102,000) (7,000) (106,000)
---------- ---------- ---------- ----------
Financing Activities:
Principal repayments of long-term debt (8,000) (8,000)
Issuance of common stock..................... 1,020,000 12,000 38,000 11,000
Purchase of treasury stock................... (71,000) (6,000)
Sale of treasury stock....................... 13,000
---------- ---------- ---------- ----------
Net cash provided (used) by
financing activities....................... 962,000 12,000 30,000 (3,000)
---------- ---------- ---------- ----------
Net increase in cash and equivalents............ 0 0 0 0
Cash and equivalents at beginning of
year......................................... 0 0 0 0
---------- ---------- ---------- ----------
Cash and equivalents at end of year $ 0 $ 0 $ 0 $ 0
========== ========== ========== ==========
The Notes to Consolidated Financial Statements in Part II are an integral part
of this schedule.
* Information is presented for the parent company only.
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57
GRAHAM CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
beginning costs and Charged to end of
Description of Period Expenses other Accounts Deductions Period
--------- -------- -------------- ---------- ------
Year ended March 31, 1998
Reserves deducted from the asset
to which they apply:
Reserve for doubtful accounts $ 31,000 $ 4,000 $ 2,000 (d) $ (14,000) $ 23,000
Reserve for inventory
obsolescence 108,000 39,000 1,000 (b) (106,000) 42,000
Reserves included in the
balance sheet caption Other
Long-term liabilities:
Reserve for contingencies 248,000 104,000 (102,000) 250,000
Reserve for discontinued
operations 271,000 (6,000)(c) (265,000)(a) 0
---------- ---------- -------- ----------- ----------
$ 658,000 $ 147,000 $ (3,000) $ (487,000) $ 315,000
========== ========== ======== =========== ==========
Three months ended March 31, 1997
Reserves deducted from the asset
to which they apply:
Reserve for doubtful accounts $ 40,000 $ 9,000 $ (1,000)(b) $ (17,000) $ 31,000
Reserve for inventory
obsolescence 103,000 9,000 (4,000)(b) 108,000
Reserves included in the
balance sheet caption Other
Long-term liabilities:
Reserve for contingencies 257,000 (9,000) 248,000
Reserve for discontinued
operations 392,000 (16,000)(b) (105,000)(a) 271,000
---------- ---------- -------- ----------- ----------
$ 792,000 $ 18,000 $(21,000) $ (131,000) $ 658,000
========== ========== ======== =========== ==========
Year ended December 31, 1996
Reserves deducted from the asset
to which they apply:
Reserve for doubtful accounts $ 81,000 $ 26,000 $ 11,000 (b) $ (78,000) $ 40,000
Reserve for inventory
obsolescence 222,000 91,000 11,000 (b) (221,000) 103,000
Reserves included in the
balance sheet caption Other
Long-term liabilities:
Reserve for contingencies 260,000 (3,000) 257,000
Reserve for discontinued
operations 711,000 64,000 41,000 (b) (424,000)(a) 392,000
---------- ---------- -------- ----------- ----------
$1,014,000 $ 441,000 $ 63,000 $ (726,000) $ 792,000
========== ========== ======== =========== ==========
Year ended December 31, 1995
Reserves deducted from the asset
to which they apply:
Reserve for doubtful accounts $ 119,000 $ 42,000 $ (80,000) $ 81,000
Reserve for inventory
obsolescence 236,000 1,000 $ (3,000)(b) (12,000) 222,000
Reserves included in the
balance sheet caption Other
Long-term liabilities:
Reserve for contingencies 1,247,000 101,000 (1,348,000)
Reserve for discontinued
operations 883,000 182,000 (9,000)(b) (345,000)(a) 711,000
---------- ---------- -------- ----------- ----------
$2,485,000 $ 326,000 $(12,000) $(1,785,000) $1,014,000
========== ========== ======== =========== ==========
Notes:
(a) Represents costs charged against the reserve associated with the
discontinued operation.
(b) Represents foreign currency translation adjustment.
(c) Represents a reversal of the reserve and a foreign currency translation
adjustment.
(d) Represents a bad debt recovery and a foreign currency translation
adjustment.
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(a) (3) The following exhibits are required to be filed by Item 14(c) of Form
10-K:
Exhibit No.
- -----------
*3.1 (i) Articles of Incorporation of Graham Corporation
3.2 (ii) By-laws of Graham Corporation
*4.1 (a) Certificate of Incorporation of Graham Corporation
(included as Exhibit 3.1)
**4.2 (b) Shareholder Rights Plan of Graham Corporation
***10.1 1989 Stock Option and Appreciation Rights Plan of Graham
Corporation
****10.2 1995 Graham Corporation Incentive Plan to Increase
Shareholder Value
10.3 Graham Corporation Outside Directors' Long-Term
Incentive Plan
10.4 Employment Contracts between Graham Corporation and
Named Executive Officers
10.5 Senior Executive Severance Agreements with Named
Executive Officers
11 Statement regarding computation of per share earnings
Computation of per share earnings is included
in Note 1 of the Notes to Consolidated
Financial Statements
18 Letter regarding change in accounting principles
21 Subsidiaries of the registrant
23 Consent of Experts and Counsel
27 Financial Data Schedule
- -------------------
* Incorporated herein by reference from the Annual Report of
Registrant on Form 10-K for the year ended December 31, 1989.
** Incorporated herein by reference from the Registrant's Current
Report on Form 8-K dated February 26, 1991, as amended by
Registrant's Amendment No. 1 Form 8 dated June 8, 1991.
*** Incorporated herein by reference from the Registrant's Proxy
Statement for its 1991 Annual Meeting of Shareholders.
**** Incorporated herein by reference from the Registrant's Proxy
Statement for its 1996 Annual Meeting of Shareholders.
(b) The Registrant filed no reports on Form 8-K during the last quarter of the
fiscal year covered by this Annual Report on Form 10-K.
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59
Cross Reference Sheet for Annual Report on Form 10-K for the year ended
March 31, 1998, setting forth item numbers and captions of Form 10-K (and
related Items of Regulation S-K referred to therein) under which information is
incorporated by reference and the pages in the Registrant's Proxy Statement for
the 1998 Annual Meeting of Stockholders where that information appears.
FORM 10-K: PART NO Regulation S-K Proxy Statement for 1998
Item No. and Caption Item No. and Caption Annual Meeting of Stockholders
- -------------------- -------------------- ------------------------------
Caption: Page:
Item 10. Directors and Item 401. Directors and Election of Directors 3-7
Executive Officers of Executive Officers
Registrant
Item 405. Directors and Disclosure Pursuant to 7
Executive Officers Item 405 of SEC
Regulation S-K
Item 11. Executive Item 401. Executive Directors' Fees 5-6
Compensation Compensation Compensation of 8-12
Executive Officers
Item 12. Security Item 403(a). Security Principal Stockholders 2
Ownership of Certain Ownership of Certain
Beneficial Owners and Beneficial Owners
Management
Item 403(b). Security Principal Stockholders 2
Ownership of Management Election of Directors 3-6
Executive Officers 7
Item 13. Certain Item 404(a). Transactions Principal Stockholders 2
Relationships and with Management and Election of Directors 3-6
Related Transactions Others
Item 404(b). Certain Principal Stockholders 2
Business Relations Election of Directors 3 -6
59 of 62
60
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GRAHAM CORPORATION
------------------------------------
DATE: June 15, 1998 By /s/ J. Ronald Hansen
------------------------------------
J. Ronald Hansen
Vice President-Finance & Administration
and Chief Financial Officer (Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
President and Chief
/s/ Alvaro Cadena Executive Officer; June 15, 1998
- -------------------------------------------- Director
Alvaro Cadena
Vice President-Finance &
Administration and Chief
/s/ J. Ronald Hansen Financial Officer (Principal June 15, 1998
- -------------------------------------------- Accounting Officer)
J. Ronald Hansen
/s/ Philip S. Hill Director June 15, 1998
- --------------------------------------------
Philip S. Hill
/s/ Cornelius S. Van Rees Director June 15, 1998
- --------------------------------------------
Cornelius S. Van Rees
/s/ Jerald D. Bidlack Director; Chairman of June 15, 1998
- -------------------------------------------- the Board
Jerald D. Bidlack
/s/ Helen H. Berkeley Director June 15, 1998
- --------------------------------------------
Helen H. Berkeley
/s/ H. Russel Lemcke Director June 15, 1998
- --------------------------------------------
H. Russel Lemcke
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
EXHIBITS
filed with
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
of
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED March 31, 1998
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GRAHAM CORPORATION
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62
GRAHAM CORPORATION
FORM 10-K
March 31, 1998
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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3.2 By-laws of Graham Corporation
10.3 Graham Corporation Outside Directors' Long-Term Incentive
Plan
10.4 Employment Contracts between Graham Corporation and Named
Executive Officers
10.5 Senior Executive Severance Agreements with Named Executive
Officers
18 Letter regarding change in accounting principles
21 Subsidiaries of the Registrant
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
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