FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For Quarterly Period Ended December 31, 2001June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________
Commission File Number 1-8462
GRAHAM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 16-1194720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 FLORENCE AVENUE, BATAVIA, NEW YORK 14020
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code - 716-343-2216585-343-2216
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES __X__ NONo _____
As of February 8,August 2, 2002, there were outstanding 1,648,249 shares
of common stock, $.10 per share.
2
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 2001JUNE 30, 2002
PART I - FINANCIAL INFORMATION
Unaudited consolidated financial statements of Graham
Corporation (the Company) and its subsidiaries as of December 31,
2001June 30, 2002
and for the three month periods ended June 30, 2002 and nine month periods then ended2001 are
presented on the following pages. The financial statements have
been prepared in accordance with the Company's usual accounting
policies, are based in part on approximations and reflect all
normal and recurring adjustments which are, in the opinion of
management, necessary to a fair presentation of the results of the
interim periods. The March 31, 2002 Consolidated Balance Sheet was
derived from the Company's audited financial statements for the
year ended March 31, 2002.
This part also includes management's discussion and analysis of
the Company's financial condition as of December 31, 2001June 30, 2002 and its
results of operations for the three and nine month periodsperiod then ended.
3
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,June 30, March 31,
2001 20012002 2002
---- ----
Assets
Current Assets:
Cash and equivalents $ 2,055,000163,000 $ 226,0002,901,000
Investments 2,495,000 4,905,0008,491,000 2,496,000
Trade accounts receivable, 7,008,000 7,954,000net 9,687,000 17,053,000
Inventories 8,009,000 9,383,0007,298,000 8,342,000
Domestic and foreign income taxes
receivable 449,000351,000
Deferred income tax asset 724,000 1,021,000953,000 1,218,000
Prepaid expenses and other current assets 452,000 529,000538,000 377,000
----------- -----------
20,743,000 24,467,00027,481,000 32,387,000
Property, plant and equipment, net 9,757,000 10,013,0009,696,000 9,726,000
Deferred income tax asset 2,333,000 2,113,0001,885,000 1,585,000
Other assets 2,000 15,0006,000
----------- -----------
$32,835,000 $36,608,000$39,064,000 $43,704,000
=========== ===========
4
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (concluded)
December 31,June 30, March 31,
2001 20012002 2002
---- ----
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 732,0001,034,000 $ 4,164,0001,050,000
Current portion of long-term debt 92,000 126,00089,000 85,000
Accounts payable 1,848,000 4,968,0002,822,000 4,333,000
Accrued compensation 2,649,000 2,225,0003,358,000 4,444,000
Accrued expenses and other liabilities 598,000 893,0001,077,000 1,100,000
Customer deposits 3,564,000 929,0005,721,000 6,704,000
Domestic and foreign income taxes
payable 10,000859,000
----------- -----------
9,493,000 13,305,00014,101,000 18,575,000
Long-term debt 130,000 682,000132,000 150,000
Accrued compensation 705,000 706,000675,000 680,000
Deferred income tax liability 32,000 31,00043,000 41,000
Other long-term liabilities 11,00012,000 11,000
Accrued pension liability 1,717,000 1,516,0001,468,000 1,398,000
Accrued postretirement benefits 3,306,000 3,220,000
----------- -----------3,249,000 3,213,000
Total liabilities 15,394,000 19,471,00019,680,000 24,068,000
----------- -----------
Shareholders' equity:
Preferred Stock,stock, $1 par value -
Authorized, 500,000 shares
Common stock, $.10 par value -
Authorized, 6,000,000 shares
Issued, 1,716,572 shares on December 31,
2001June 30, 2002
and 1,697,645 on March 31, 20012002 172,000 170,000172,000
Capital in excess of par value 4,719,000 4,575,0004,757,000 4,757,000
Retained earnings 16,677,000 16,583,00018,432,000 18,888,000
Accumulated other comprehensive loss (2,124,000) (2,188,000)(1,993,000) (2,178,000)
----------- -----------
19,444,000 19,140,00021,368,000 21,639,000
Less:
Treasury Stockstock (68,323 shares in 2002 and
2001) (1,161,000) (1,161,000)
Notes receivable from officers and
directors (842,000)(823,000) (842,000)
----------- -----------
Total shareholders' equity 17,441,000 17,137,00019,384,000 19,636,000
----------- -----------
$32,835,000 $36,608,000$39,064,000 $43,704,000
=========== ===========
5
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months
Nine Months
ended December 31, ended December 31,June 30,
2002 2001 2000 2001 2000
---- ----
---- ----
Net Sales $11,810,000 $10,558,000 $35,473,000 $30,568,000
----------- ----------- ----------- -----------$10,168,000 $ 9,581,000
Cost and expenses:
Cost of products sold 8,669,000 8,511,000 27,647,000 23,748,0008,338,000 7,982,000
Selling, general and administrative 2,594,000 2,464,000 7,571,000 7,215,0002,504,000 2,432,000
Interest expense 30,000 89,000 135,000 229,00017,000 73,000
----------- -----------
10,859,000 10,487,000
----------- -----------
11,293,000 11,064,000 35,353,000 31,192,000
----------- ----------- ----------- -----------
Income (Loss)Loss before income taxes 517,000 (506,000) 120,000 (624,000)
Provision (Benefit)(691,000) (906,000)
Benefit for income taxes 163,000 (203,000) 26,000 (234,000)
----------- -----------(235,000) (297,000)
----------- -----------
Net income (loss) 354,000 (303,000) 94,000 (390,000)loss (456,000) (609,000)
Retained earnings at beginning of
period 16,323,000 16,301,00018,888,000 16,583,000 16,898,000
Loss on issuance of
treasury stock (510,000)
----------- -----------
----------- -----------
Retained earnings at end of period $16,677,000 $15,998,000 $16,677,000 $15,998,000
=========== ===========$18,432,000 $15,974,000
=========== ===========
Per Share Data:
Basic:
Net income (loss) $.21 $(.18) $.06 $(.25)
====loss $(.27) $(.37)
===== ==== =====
Diluted:
Net income (loss) $.21 $(.18) $.06 $(.25)
====loss $(.27) $(.37)
===== ==== =====
6
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NineThree Months Ended December 31,June 30,
2002 2001 2000
---- ----
Operating activities:
Net income (loss)loss $ 94,000(456,000) $ (390,000)
---------- -----------(609,000)
========== ==========
Adjustments to reconcile net loss to net
cash usedprovided (used) by operating
activities:
Depreciation and amortization 722,000 718,000
(Gain) Loss on sale of property, plant and
equipment (4,000) (54,000)218,000 245,000
Loss on sale of investments 28,000
(Increase) Decrease in operating assets:
Accounts receivable 985,000 9,0007,478,000 555,000
Inventory, net of customer deposits 4,035,000 405,000171,000 1,085,000
Prepaid expenses and other current and non-currentnon-
current assets 77,000 (182,000)(146,000) 113,000
Increase (Decrease) in operating
liabilities:
Accounts payable, accrued compensation,
accrued expenses and other liabilities (3,018,000) (1,086,000)
Deferred(2,703,000) (1,389,000)
Accrued compensation, deferredaccrued pension
liability, and accrued postemployment
benefits 286,000 237,000101,000 118,000
Domestic and foreign income taxes 459,000 120,000(1,210,000) (294,000)
Deferred income taxes 94,000 9,000(6,000) (37,000)
---------- ---------------------
Total adjustments 3,664,000 176,0003,903,000 424,000
---------- ---------------------
Net cash provided (used) by operating
activities 3,758,000 (214,000)3,447,000 (185,000)
---------- ---------------------
7
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)
NineThree Months Ended December 31,June 30,
2002 2001 2000
---- ----
Investing activities:
Purchase of property, plant and equipment (496,000) (921,000)
Proceeds(145,000) (64,000)
Collection of notes receivable from
sale of property, plantofficers and equipment 143,000 293,000directors 19,000
Purchase of investments (2,487,000)
Proceeds from maturity(8,462,000)
Redemption of investments at maturity 2,500,000 4,877,000
---------- ---------------------
Net cash provided (used) by investing
activities 2,037,000 (628,000)(6,088,000) 4,813,000
---------- ---------------------
Financing activities:
Increase (Decrease)Decrease in short-term debt (3,456,000) 1,589,000(86,000) (3,034,000)
Proceeds from issuance of long-term debt 4,785,000 11,434,0004,530,000
Principal repayments on long-term debt (5,445,000) (13,258,000)(19,000) (5,111,000)
Issuance of common stock 145,000 54,000
Sale of treasury stock 12,00044,000
---------- ---------------------
Net cash used by financing activities (3,971,000) (169,000)(105,000) (3,571,000)
---------- ---------------------
Effect of exchange rate changes on cash 5,000 (7,000)8,000
---------- ---------------------
Net increase (decrease) in cash and
equivalents 1,829,000 (1,018,000)(2,738,000) 1,057,000
Cash and equivalents at beginning of
period 2,901,000 226,000
1,110,000
---------- ---------------------
Cash and equivalents at end of period $2,055,000 $ 92,000163,000 $1,283,000
========== =====================
8
GRAHAM CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL INFORMATION
DECEMBER 31, 2001JUNE 30, 2002
- -------------------------------------------------------------------------
NOTE 1 - INVENTORIES
- -------------------------------------------------------------------------
Major classifications of inventories are as follows:
12/31/016/30/02 3/31/01
--------02
------- -------
Raw materials and supplies $ 1,554,0001,726,000 $ 1,996,0002,257,000
Work in process 10,630,000 11,243,00014,612,000 13,322,000
Finished products 1,710,000 1,880,0002,424,000 1,724,000
----------- -----------
13,894,000 15,119,00018,762,000 17,303,000
Less - progress payments 5,885,000 5,736,00011,367,000 8,871,000
- inventory reserve 97,000 90,000
----------- -----------
$ 8,009,0007,298,000 $ 9,383,0008,342,000
=========== ===========
- -------------------------------------------------------------------------
NOTE 2 - EARNINGS PER SHARE:
- -------------------------------------------------------------------------
Basic earnings (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding for the period. Common shares outstanding includes
share equivalent units which are contingently issuable shares.
Diluted earnings (loss) per share is calculated by dividing net
income (loss) by the weighted average number of common and, when
applicable, potential common shares outstanding during the period.
A reconciliation of the numerators and denominators of basic and
diluted earnings (loss) per share is presented below:
Three months
Nine months
ended December 31, ended December 31,June 30,
2002 2001 2000 2001 2000
---- ----
---- ----
Basic earnings (loss)loss per share
Numerator:
Net income (loss) $ 354,000 $ (303,000) $ 94,000 $ (390,000)
---------- ---------- ---------- ----------loss $(456,000) $(609,000)
--------- ---------
Denominator:
Weighted common shares outstanding 1,644,000 1,629,000 1,637,000 1,575,0001,648,000 1,631,000
Share equivalent units (SEU) outstanding 11,000 11,000
11,000 11,000
---------- ---------- ---------- ------------------- ---------
Weighted average shares and SEU's
outstanding 1,655,000 1,640,000 1,648,000 1,586,000
---------- ---------- ---------- ----------1,659,000 1,642,000
--------- ---------
Basic earnings (loss)loss per share $.21 $(.18) $.06 $(.25)
====$(.27) $(.37)
===== ==== =====
9
- -------------------------------------------------------------------------
NOTE 2 - EARNINGS PER SHARE (concluded):
- -------------------------------------------------------------------------
Three months
Nine months
ended December 31, ended December 31,June 30,
2002 2001 2000 2001 2000
---- ----
---- ----
Diluted earnings (loss)loss per share
Numerator:
Net income (loss) $ 354,000 $ (303,000) $ 94,000 $ (390,000)
---------- ---------- ---------- ----------loss $(456,000) ($609,000)
--------- ---------
Denominator:
Weighted average shares
and SEU's outstanding 1,655,000 1,640,000 1,648,000 1,586,000
Stock options
outstanding 23,000 21,000
---------- ---------- ---------- ----------
Weighted average common and potential
common shares outstanding 1,678,000 1,640,000 1,669,000 1,586,000
---------- ---------- ---------- ----------1,659,000 1,642,000
--------- ---------
Diluted earnings (loss)loss per share $.21 $(.18) $.06 $(.25)
====$(.27) $(.37)
===== ==== =====
Options to purchase shares of common stock which totaled 88,600
for the three and nine months ended December 31, 2001 were not
included in the computation of diluted earnings per share as the
effect would be antidilutive due to the options' exercise price
being greater than the average market price of the common shares.
All options to purchase shares of common stock at various
exercise prices were excluded from the computation of diluted loss
per share for the three and nine month periods ended December 31,
2000 as the effect would be antidilutive due to the net losses for
the periods.loss.
- -------------------------------------------------------------------------
NOTE 3 - CASH FLOW STATEMENT
- -------------------------------------------------------------------------
Actual interestInterest paid was $147,000$17,000 and $227,000$84,000 for the ninethree months
ended December 31,June 30, 2002 and 2001, and 2000, respectively. In addition, actual income
taxes refundedpaid were $527,000$981,000 and $364,000$2,000 for the ninethree months ended December 31,June
30, 2002 and 2001, and 2000, respectively.
Non-cash activities during the nine months ended December 31,
2001 and 2000 included capital expenditures totaling $70,000 and
$23,000, respectively, which were financed through the issuance of
capital leases.
10
- -------------------------------------------------------------------------
NOTE 4 - COMPREHENSIVE INCOME
- -------------------------------------------------------------------------
Total comprehensive income (loss)loss was $339,000$271,000 and ($207,000)$608,000 for the
three months ended December 31,June 30, 2002 and 2001, and 2000, respectively. Other
comprehensive income (loss) for the three
months ended December 31, 2001 and 2000 included foreign currency translation
adjustments of ($15,000)$185,000 and $96,000, respectively.
Total comprehensive income (loss)$1,000 for the nine monthsquarters ended December 31,June 30,
2002 and 2001, and 2000 was $158,000 and ($503,000),
respectively. Other comprehensive income (loss) for the nine
months ended December 31, 2001 and 2000 included foreign currency
translation adjustments of $64,000 and ($113,000), respectively.
- -------------------------------------------------------------------------
NOTE 5 - SEGMENT INFORMATION
- -------------------------------------------------------------------------
The Company's business consists of two operating segments based
upon geographic area. The United States segment designs and
manufactures heat transfer and vacuum equipment and the operating
segment located in the United Kingdom manufactures vacuum
equipment. Operating segment information is presented below:
10
- -------------------------------------------------------------------------
NOTE 5 - SEGMENT INFORMATION (concluded)
- -------------------------------------------------------------------------
Three Months Ended Nine Months Ended
December 31, December 31,months
ended June 30,
2002 2001 2000 2001 2000
---- ----
---- ----
Sales fromto external customers
U.S. $10,476,000 $ 9,629,000 $31,105,000 $28,113,0008,995,000 $8,476,000
U.K. 1,334,000 929,000 4,368,000 2,455,0001,173,000 1,105,000
----------- ----------- ----------- ---------------------
Total $11,810,000 $10,558,000 $35,473,000 $30,568,000$10,168,000 $9,581,000
=========== =========== =========== =====================
Intersegment sales
U.S. $ 27,00020,000
U.K. 419,000 $ 27,000 $ 18,000
U.K. 256,000 $ 571,000 772,000 1,340,000269,000
----------- ----------- ----------- ---------------------
Total $ 283,000439,000 $ 571,000 $ 799,000 $ 1,358,000269,000
=========== =========== =========== =====================
Segment net income
(loss)loss
U.S. $ 264,000(566,000) $ (305,000)(549,000)
U.K. (13,000) (82,000)
----------- ----------
Total $ (163,000)(579,000) $ (438,000)
U.K. 121,000 56,000 230,000 22,000
----------- ----------- ----------- -----------(631,000)
=========== ==========
The segment net loss above is reconciled to the consolidated
totals as follows:
Three months
ended June 30,
2002 2001
---- ----
Total segment net 385,000 (249,000) 67,000 (416,000)
incomeloss $ (579,000) $ (631,000)
Eliminations (31,000) (54,000) 27,000 26,000123,000 22,000
----------- ----------- ----------- ---------------------
Net income (loss)loss $ 354,000(456,000) $ (303,000) $ 94,000 $ (390,000)
=========== =========== =========== ===========(609,000)
========== ==========
- -------------------------------------------------------------------------
NOTE 6 - STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 144
- -------------------------------------------------------------------------
During the first quarter of fiscal year 2003, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long Lived
Assets." There was no effect on the Company's consolidated
financial position, results of operations or cash flows resulting
from the adoption of SFAS No. 144 at June 30, 2002.
11
GRAHAM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
December 31, 2001June 30, 2002
Results of Operations
- ---------------------
Sales increased 12%6% in the thirdfirst quarter of fiscal year 20022003
compared to the same period in the previouslast year. Sales for the thirdfirst quarter
(including intersegment sales) increased 9%6% in the United States
and 6%16% in the United Kingdom compared to the first quarter of
fiscal year 2001. Sales for the nine
months ended December 31, 2001 were greater than sales for the same
period last year by 16%. Sales2002. The increase in the United States increased 11%
while sales inis
attributable to the strong backlog entering fiscal year 2003
compared to the backlog entering the first quarter of last year.
Backlog on April 1, 2002 was 43% higher than the backlog at April
1, 2001. In the United Kingdom, increased 35% from the same
period last year. The increasesstrength of the British pound
accounted for 4% of the increase in sales inand the United States are
dueremaining 12%
increase was attributable to the substantial improvement in new order levels while the
United Kingdomhigher sales include several pump packages supplied to a
major project in South Africa.of liquid ring standard
pumps and repairs and service.
Cost of sales as a percent of sales for the thirdfirst quarter was
73%82% compared to 81%83% a year ago. Cost of sales as a percent of
sales for the three month period was 76% in the United States operating segment was 88% for the
current quarter compared to 83% last86% for the first quarter of fiscal
year and in2002. For the United Kingdom it declined
from 66% to 55%. For the nine months,operations, cost of sales as a
percent of sales remained the same at 78%. Indeclined to 66% from 70% a year ago. The slight
increase in the United States is due to an expense recognized to
adjust the product warranty reserve. The reduced percentage in the
United Kingdom is attributable to improved contribution margins due
to material cost savings on offshore pumps.
Selling, general and administrative expenses for the three
months ended June 30, 2002 were 3% greater than selling, general
and administrative expenses for the same period of fiscal year 2002
and, consistent with the prior year, represented 25% of sales.
Selling, general and administrative expenses increased at
approximately the rate of inflation while as a percentage of sales
percentageit remained unchanged due to the increase in sales.
Interest expense declined substantially from $73,000 for the
three month period in fiscal year 2002 to $17,000 in the current
period. This decrease is attributable to lower levels of 81%short-
term borrowing in the United States during the quarter as compared
to the prior year first quarter. Average short-term borrowing
during the first quarter of fiscal year 2003 and 2002 was $62,000
and $2,100,000, respectively.
The effective income tax rate for the first quarter was
consistent with the prior year period and in the United Kingdom it declined to 62% from 69% for
the same period last year. The favorable percentages in the United
States are due to lower costs incurred for major materials and
product mix, as sales include revenue earned for engineering
services which contribute significantly to gross profit. The
improvement in the United Kingdom reflects relatively stable
manufacturing overhead costs on a much larger sales volume, as well
as product mix.
Selling, general and administrative expenses were 5% higher in
the third quarterat 34% compared to the same period in fiscal year 2001,33%.
Liquidity and represented 22% of sales compared to 23% last year. For the
nine month period, selling, general and administrative expenses
increased 5% as compared to fiscal year 2001 and decreased to 21%
compared to 24% last year.Capital Resources
- -------------------------------
The higher selling, general and
administrative expenses are attributable to costs incurred for
marketing in an effort to increase sales levels. However, since
sales have increased, selling, general and administrative expenses
as a percent of sales have declined.
Interest expense for the third quarter of fiscal year 2001 was
66% lower than interest expense for the comparable three month
period of 2001. For the nine month period, interest expense
decreased 41% as compared to 2001. These significant decreases are
due to the paydown of all outstanding bank borrowings in the United
States.
12
Results of Operations (concluded)
- ---------------------------------
The effective income tax rates for the third quarter and nine
month period of fiscal year 2002 were 32% and 22%, respectively.
The effective tax rates for the three months and nine months ended
December 31, 2000 were 40% and 38%, respectively. The lower tax
rates are attributable to the recognitionfinancial condition of the tax benefits
associated with the operating losses in the United States.
Financial Condition
- -------------------Company remained strong.
Working capital of $11,250,000$13,380,000 at DecemberJune 30, 2002 compares to
$13,812,000 at March 31, 2001 is
consistent with2002. The working capital at the enddecrease
reflects decreases of March of $11,162,000.
The slight increase reflects a decrease$4,906,000 and $4,474,000 in current assets
12
Liquidity and Capital Resources (concluded)
- -------------------------------------------
and current liabilities, of $3,724,000 and $3,812,000, respectively. The decrease in current
assets related primarilywas due to a decrease in accounts receivable inventories,offset by an
increase in investments. Accounts receivable declined due to the
collection of cancellation charges on certain orders for the power
generating industry that were recorded as receivables at year end.
This cash and taxes receivable.cash on hand at March 31, 2002 was invested in
government securities resulting in an increase in investments. The
decrease in current liabilities is primarily attributable to a
reduction in accounts payable, accrued compensation and customer
deposits due to timing of vendor payments, payment of incentive
compensation, and the reclass of customer deposits to progress
payments offsetting inventory as a decrease in short-term
borrowings and accounts payable offset byresult of an increase in customer
deposits. The declinework in
accounts receivable and increase in
customer deposits is attributable to timely collections from
customers during the quarter. The decline in inventories is due to
the significant sales volume during the nine month period while the
decrease in taxes receivable and accounts payable is attributable
to timing of cash receipts and payments.process. The current ratio at
December 31, 2001 is 2.2 compared to 1.8has increased from 1.7 at March 31,
2001.2002 to 1.9 at June 30, 2002.
Net cash used from operating activities for the first quarter
was $3,447,000. Net loss, adjusted for depreciation and
amortization, used $238,000 of operating cash. Collection of
accounts receivable generated cash flow of $7,478,000 while paydown
of current liabilities and income taxes utilized cash of
$3,913,000. As noted above, net cash used for investing activities
of $6,088,000 reflects primarily the investment of cash flow from
operations in government securities. Capital expenditures for the nine months ended December 31,
2001 were
$496,000$145,000 compared to $921,000$64,000 for the same period last year. There
were no major commitments for capital expenditures as of December 31, 2001.June 30,
2002. Management anticipates spending approximately $1,000,000 in
fiscal year 2003 for capital additions to upgrade computer
equipment and machinery.
Management expects that the cash flow from operations and lines
of credit will provide sufficient resources to fund the fiscal year
20022003 cash requirements.
Total long-term debt decreased $586,000 due to paydowns on
capital leases and the United States line of credit. Debt ratios
have improved with theThe long-term debt to equity ratio remained constant at 1% compared to 5% aton
June 30, 2002 and March 31, 2001.2002. The total liabilities to assets
ratio is currently 47%50% compared to 53%55% at March 31, 2001.2002. These ratios are
reflective of the continued stability and strength of the Company's
financial condition.
New Orders and Backlog
- ----------------------
New orders for the thirdfirst quarter were $9,074,000$8,140,000 compared to
$8,605,000$19,186,000 for the same period last year. Prior to intercompany
eliminations, new orders in the United States were $7,629,000$7,105,000
compared to $7,644,000$17,542,000 for the same period in fiscal year 2001.2002.
New orders in the United Kingdom were $1,692,000$1,214,000 compared to
$1,125,000$1,732,000 for the same quarter last year. For the nine month period, new orders were $40,359,000 compared
to $32,554,000 for the comparable nine month period of the prior
year. Prior to intercompany eliminations,The significant decline
in new orders in the United States were $36,764,000 comparedis due to $29,672,000difficulty encountered
by customers in obtaining financing for capital projects, over
capacity in the same period
last yearpetrochemical and chemical industries and limited
capital expenditures in the chemical, petrochemical and refining
industries due to mergers and acquisitions. The decrease in new
orders in the United Kingdom were $4,304,000
comparedis attributable to $3,810,000customer delays in
2001.placing orders for large equipment.
13
New Orders and Backlog (concluded)
- ----------------------------------
Backlog of unfilled orders at December 31, 2001June 30, 2002 is $33,417,000$34,555,000
compared to $26,242,000$37,267,000 at this time a year ago and $28,458,000$36,529,000 at
March 31, 2001.2002. Prior to intercompany eliminations, current
backlog in the United States of $31,173,000$33,803,000 compares to $25,544,000$35,713,000
at March 31, 20012002 and $25,226,000$33,814,000 at December 31, 2000.June 30, 2001. Current
backlog in the United Kingdom of $2,613,000$869,000 compares to $3,366,000$1,180,000 at
March 31, 20012002 and $1,137,000$3,723,000 at December 31, 2000. BacklogJune 30, 2001. The current
backlog is reflective of the recent low order intake. Included in
backlog is $7,803,000 of orders for electric power plant business
that have been suspended by the customer. In July 2002, an order
previously reported as suspended was activated and placed into
production. The current backlog, with the exception of the
suspended orders, is scheduled to be shipped during the next twelve
months and represents orders from traditional markets in the
Company's established product lines.
In January 2002, the Company received notice from a customer to
suspend work on three orders and cancel five orders for the
electric power generating industry. The three suspended orders
remain in backlog at December 31, 2001 with a value of $8,934,000
and are subject to resumption upon notice from the customer. Two
of the cancelled orders with a contract value of $5,453,000 were
received during the second quarter of fiscal year 2002. New orders
for the three and six month periods ended September 30, 2001 have
been restated to $12,099,000 and $31,285,000, respectively, and
backlog at September 30, 2001 has been restated to $36,158,000 to
reflect these cancellations. The remaining three cancelled orders
with a contract value of $7,283,000 were received and cancelled
during the third quarter and are not included in the third quarter
new order and backlog amounts reported above. In addition, the
current backlog includes approximately $500,000 that is not
scheduled to ship during the next twelve months. Although the
Company has experienced a decline in new orders for the power
industry, management is optimistic that new order levels in the
refining industry will begin to improve.
Quantitative and Qualitative Disclosures about Market Risk
- ---------------------------------------------------------------------------------------------------------------------
The Company is exposed to changes in interest rates, foreign
currency exchange rates and equity prices which may adversely
impact its results of operations and financial position. The
assumptions applied in preparing quantitative disclosures regarding
interest rate, foreign exchange rate and equity price risk are
based upon volatility ranges experienced in relevant historical
periods, management's current knowledge of the business and market
place, and management's judgment of the probability of future
volatility based upon the historical trends and economic conditions
of the business.
The Company is exposed to interest rate risk primarily through
its borrowing activities. Risk associated with interest rate
fluctuations on debt is managed by holding interest bearing debt to
the absolute minimum and carefully assessing the risks and benefits
for incurring long-term debt. Based upon variable rate debt
outstanding at December 31,June 30, 2002 and 2001, a 1% change in interest
rates would impact annual interest expense by $7,000.$10,000 and $11,000,
respectively.
Over the past three years, Graham's international consolidated
sales exposure outside the U.S. approximates 44%36% of annual sales. Operating in
world markets involves exposure to movements in currency exchange
rates. Currency movements can affect sales in several ways,
foremost,ways.
Foremost, the ability to competitively compete for orders against
competition having a relatively weaker currency. Business lost due
to this cannot be quantified. Secondly, redemption value of salescash can be adversely
impacted.impacted by the conversion of sales in foreign currency to local
currency. The substantial portion of Graham's sales are collected
in U.S. dollars. Thethe local currencies. In the first quarter of 2003 and 2002,
sales in foreign currencies were 2% and 4% of total sales,
respectively. At certain times, the Company entersmay enter into forward
foreign exchange agreements to hedge its exposure against
unfavorable changes in foreign currency values on significant sales
contracts negotiated in foreign currencies.
14
Quantitative and Qualitative Disclosures about Market Risk (concluded)
- ----------------------------------------------------------------------
Graham has limited exposure to foreign currency purchases.
During the three month periods ended June 30, 2002 and 2001,
purchases in foreign currencies were 8% and 4% of cost of goods
sold, respectively. At certain times, forward foreign exchange
contracts may be utilized to limit currency exposure.
Foreign operations produced a net incomeloss of $13,000 and $82,000
in the thirdfirst quarter of fiscal year 2003 and year-to-date of $121,000 and $230,000,2002, respectively.
As currency exchange rates change, translations of the income
statements of our U.K. business into U.S. dollars affects year-over-yearyear-over-
year comparability of operating results. The Company does not
hedge translation risks because cash flows from U.K. operations are
mostly reinvested in the U.K. A 10% change in foreign exchange
rates would impact third quarter and year-to-datehave impacted the U.K. reported net incomeloss by
approximately $12,000$1,000 and $23,000,$8,000 in the first quarter of fiscal year
2003 and 2002, respectively.
The Company has a Long-Term Incentive Plan which provides for
awards of share equivalent units (SEU) for outside directors based
upon the Company's performance. The outstanding SEU's are recorded
at fair market value thereby exposing the Company to equity price
risk. Gains and losses recognized due to market price changes are
included in the quarterly results of operations. Based upon the
SEU's outstanding at December 31,June 30, 2002 and 2001 and 2000 and the respective
quarter end market price per share, a 50% to 100%75% change in the
respective quarter end market price of the Company's common stock
would positively or negatively impact the Company's thirdfirst quarter
operating results by $65,000$74,000 to $131,000$111,000 for 20022003 and $54,000$66,000 to
$109,000$98,000 for 2001.2002. In the third quarterfirst quarters of 2003 and 2002, the
expense,impact on net of a tax benefit, recordedincome due to the increasechange in the stock price was $27,000.not
significant. Assuming required net income of $500,000 to award
SEU's is met and SEU's are granted to the five outside directors in
accordance with the plan over the next five years, based upon the
December 31, 2001June 30, 2002 market price of the Company's stock of $12.20$9.20 per
share, a 50% to 100%75% change in the stock price would positively or
negatively impact the Company's operating results by $115,000$104,000 to
$231,000 in 2003, $120,000 to $241,000$156,000 in 2004 and $125,000$109,000 to $251,000$164,000 in 2005, 2006, 2007, and
2007.2008.
Critical Accounting Policies
- ----------------------------
The following discussion addresses the most critical
accounting policies, which are those that are most important to the
portrayal of the financial condition and results, and that require
judgment.
Revenue Recognition
- -------------------
Percentage-of-Completion - The Company recognizes revenue and
all related costs on contracts with a duration in excess of three
months and with revenues of $1,000,000 and greater using the
percentage-of-completion method. The percentage-of-completion is
determined by relating actual labor incurred to-date to
management's estimate of total labor to be incurred on each
contract. Contracts in progress are reviewed monthly, and sales
and earnings are adjusted in current accounting periods based on
revisions in contract value and estimated costs at completion.
15
Revenue Recognition (concluded)
- -------------------------------
Completed Contract - Contracts with values less than
$1,000,000 are accounted for on the completed contract method. The
Company recognizes revenue and all related costs on these contracts
upon substantial completion or shipment to the customer.
Substantial completion is consistently defined as at least 95%
complete with regard to direct labor hours. Customer acceptance is
generally required throughout the construction process and the
Company has no further obligations under the contract after the
revenue is recognized.
Use of Estimates - We have made a number of estimates and
assumptions relating to the reporting of assets and liabilities,
the disclosure of contingent assets and liabilities, and reported
amounts of revenue and expenses in preparing our financial
statements in conformity with accounting principles generally
accepted in the United States of America. Actual results could
differ from these estimates.
Forward Looking
- ---------------
Certain statements contained in this document, that are not
historical facts, constitute "Forward-Looking Statements" within
the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements, in general, predict, forecast,
indicate or imply future results, performance or achievements and
generally use words so indicative. The Company wishes to caution
the reader that numerous important factors which involve risks and
uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's
operations, markets, products, services and prices, and other
factors discussed in the Company's filings with the Securities and
Exchange Commission, in the future, could affect the Company's
actual results and could cause its actual consolidated results to
differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company.
1516
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 2001JUNE 30, 2002
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. See index to exhibits.
b. ANo reports on Form 8-K waswere filed on October 25, 2001 and included
Item 9. No financial statements were required to be
filed as part ofduring the report.quarter
ended June 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
GRAHAM CORPORATION
/s/J. R. Hansen
-----------------------------------------____________________________________
J. R. Hansen
Vice President Finance and
Administration / CFO (Principal
Accounting Officer)
Date 08/02/08/02
1617
INDEX OF EXHIBITS
(2) Plan of acquisition, reorganization, arrangement, liquidation
or succession
Not applicable.
(4) Instruments defining the rights of security holders, including
indentures
(a) Equity securities
The instruments defining the rights of the holders of
Registrant's equity securities are as follows:
Certificate of Incorporation, as amended of Registrant
(filed as Exhibit 3(a) to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1989, and incorporated herein by reference.)
By-laws of registrant, as amended (filed as Exhibit
3.2(ii) to the Registrant's annual report on Form 10-K
for the fiscal year ended March 31, 1998, and is
incorporated herein by referenced.reference.)
Stockholder Rights Plan of Graham Corporation (filed as
Item 5 to Registrant's current report filed on Form 8-K
on August 23, 2000 and Registrant's Form 8-A filed on
September 15, 2000, and incorporated herein by
reference.)reference).
(b) Debt securities
Not applicable.
(10) Material Contracts
1989 Stock Option and Appreciation Rights Plan of Graham
Corporation (filed on the Registrant's Proxy Statement for its
1990 Annual Meeting of Stockholders and incorporated herein by
reference.)
1995 Graham Corporation Incentive Plan to Increase
Shareholder Value (filed on the Registrant's Proxy Statement
for its 1996 Annual Meeting of Stockholders and incorporated
herein by reference.)
2000 Graham Corporation Incentive Plan to Increase Shareholder
Value (filed on the Registrant's Proxy Statement for its 2001
Annual Meeting of Stockholders and incorporated herein by
reference.)
Graham Corporation Outside Directors' Long-Term Incentive
Plan (filed as Exhibit 10.3 to the Registrant's annual report
on Form 10-K for the fiscal year ended March 31, 1998, and is
incorporated herein by reference.)
2000 Graham Corporation Incentive Plan to Increase
Shareholder Value (filed on the Registrant's Proxy Statement
for its 2001 Annual Meeting of Stockholders and incorporated
herein by reference).
1718
Index to Exhibits - concluded(concluded)
- -----------------------------
Employment Contracts between Graham Corporation and Named
Executive Officers (filed as Exhibit 10.4 to the Registrant's
annual report on Form 10-K for the fiscal year ended March 31,
1998, and is incorporated herein by reference.)
Senior Executive Severance Agreements with Named
Executive Officers (filed as Exhibit 10.5 to the Registrant's
annual report on Form 10-K for the fiscal year ended March 31,
1998, and is incorporated herein by reference.)
Long-Term Stock Ownership Plan of Graham Corporation
(filed on the Registrant's Proxy Statement for its 2000 Annual
Meeting of Stockholders and incorporated herein by reference.)
(11) Statement re-computation of per share earnings
Computation of per share earnings is included in Note 2
of the Notes to Financial Information.
(15) Letter re-unaudited interim financial information
Not applicable.
(18) Letter re-change in accounting principles
Not Applicable.
(19) Report furnished to security holders
None.
(22) Published report regarding matters submitted to vote of
security holders
None.
(23) Consents of experts and counsel
Not applicable.
(24) Power of Attorney
Not applicable.
(99) Additional exhibits
None.