FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For Quarterly Period Ended June 30, 2001
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 - 716-343-2216
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES __X__ No _____
As of August 3, 2001, there were outstanding 1,635,142 shares
of common stock, $.10 per share.
2
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2001
PART I - FINANCIAL INFORMATION
Unaudited consolidated financial statements of Graham
Corporation (the Company) and its subsidiaries as of June 30, 2001
and for the three month period then ended 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.
This part also includes management's discussion and analysis of
the Company's financial condition as of June 30, 2001 and its
results of operations for the three month period then ended.
3
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2001 2001
---- ----
Assets
Current Assets:
Cash and equivalents $ 1,283,000 $ 226,000
Investments 4,905,000
Trade accounts receivable 7,399,000 7,954,000
Inventories 8,892,000 9,383,000
Domestic and foreign income taxes
receivable 732,000 449,000
Deferred income tax asset 903,000 1,021,000
Prepaid expenses and other current assets 416,000 529,000
----------- -----------
19,625,000 24,467,000
Property, plant and equipment, net 9,865,000 10,013,000
Deferred income tax asset 2,268,000 2,113,000
Other assets 9,000 15,000
----------- -----------
$31,767,000 $36,608,000
=========== ===========
4
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (concluded)
June 30, March 31,
2001 2001
---- ----
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 1,130,000 $ 4,164,000
Current portion of long-term debt 88,000 126,000
Accounts payable 3,182,000 4,968,000
Accrued compensation 2,483,000 2,225,000
Accrued expenses and other liabilities 1,031,000 893,000
Customer deposits 1,512,000 929,000
----------- -----------
9,426,000 13,305,000
Long-term debt 166,000 682,000
Accrued compensation 731,000 706,000
Deferred income tax liability 31,000 31,000
Other long-term liabilities 11,000 11,000
Accrued pension liability 1,579,000 1,516,000
Accrued postretirement benefits 3,250,000 3,220,000
----------- -----------
Total liabilities 15,194,000 19,471,000
----------- -----------
Shareholders' equity:
Preferred stock, $1 par value -
Authorized, 500,000 shares
Common stock, $.10 par value -
Authorized, 6,000,000 shares
Issued 1,703,465 shares on June 30, 2001
and 1,697,645 on March 31, 2001 170,000 170,000
Capital in excess of par value 4,619,000 4,575,000
Retained earnings 15,974,000 16,583,000
Accumulated other comprehensive loss (2,187,000) (2,188,000)
----------- -----------
18,576,000 19,140,000
Less:
Treasury stock (1,161,000) (1,161,000)
Notes receivable from officers and
directors (842,000) (842,000)
----------- -----------
Total shareholders' equity 16,573,000 17,137,000
----------- -----------
$31,767,000 $36,608,000
=========== ===========
5
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months
ended June 30,
2001 2000
---- ----
Net Sales $ 9,581,000 $ 8,284,000
----------- -----------
Cost and expenses:
Cost of products sold 7,982,000 6,425,000
Selling, general and administrative 2,432,000 2,307,000
Interest expense 73,000 74,000
----------- -----------
10,487,000 8,806,000
----------- -----------
Loss before income taxes (906,000) (522,000)
Benefit for income taxes (297,000) (168,000)
----------- -----------
Net loss (609,000) (354,000)
Retained earnings at beginning of
period 16,583,000 16,898,000
----------- -----------
Retained earnings at end of period $15,974,000 $16,544,000
=========== ===========
Per Share Data:
Basic:
Net loss $(.37) $(.23)
===== =====
Diluted:
Net loss $(.37) $(.23)
===== =====
6
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30,
2001 2000
---- ----
Operating activities:
Net loss $ (609,000) $ (354,000)
---------- ----------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 245,000 240,000
Gain on sale of property, plant and
equipment (23,000)
Loss on sale of investments 28,000
(Increase) Decrease in operating assets:
Accounts receivable 555,000 (506,000)
Inventory, net of customer deposits 1,085,000 1,814,000
Prepaid expenses and other current and non-
current assets 113,000 ( 115,000)
Increase (Decrease) in operating
liabilities:
Accounts payable, accrued compensation,
accrued expenses and other liabilities (1,389,000) (1,142,000)
Accrued compensation, accrued pension
liability, and accrued postemployment
benefits 118,000 92,000
Domestic and foreign income taxes (294,000) 242,000
Deferred income taxes (37,000)
---------- ----------
Total adjustments 424,000 602,000
---------- ----------
Net cash provided (used) by operating
activities (185,000) 248,000
---------- ----------
7
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)
Three Months Ended June 30,
2001 2000
---- ----
Investing activities:
Purchase of property, plant and equipment (64,000) (188,000)
Proceeds from sale of property, plant &
equipment 27,000
Proceeds from sale of investments 4,877,000
---------- ----------
Net cash provided (used) by investing
activities 4,813,000 (161,000)
---------- ----------
Financing activities:
Increase (decrease) in short-term debt (3,034,000) 95,000
Proceeds from issuance of long-term debt 4,530,000 5,844,000
Principal repayments on long-term debt (5,111,000) (7,103,000)
Issuance of common stock 44,000
---------- ----------
Net cash used by financing activities (3,571,000) (1,164,000)
---------- ----------
Effect of exchange rate on cash (8,000)
---------- ----------
Net increase (decrease) in cash and
equivalents 1,057,000 (1,085,000)
Cash and equivalents at beginning of
period 226,000 1,110,000
---------- ----------
Cash and equivalents at end of period $1,283,000 $ 25,000
========== ==========
8
GRAHAM CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL INFORMATION
JUNE 30, 2001
- -------------------------------------------------------------------------
NOTE 1 - INVENTORIES
- -------------------------------------------------------------------------
Major classifications of inventories are as follows:
6/30/01 3/31/01
------- -------
Raw materials and supplies $ 1,927,000 $ 1,996,000
Work in process 10,723,000 11,243,000
Finished products 1,678,000 1,880,000
----------- -----------
14,328,000 15,119,000
Less - progress payments 5,436,000 5,736,000
----------- -----------
$ 8,892,000 $ 9,383,000
=========== ===========
- -------------------------------------------------------------------------
NOTE 2 - EARNINGS PER SHARE:
- -------------------------------------------------------------------------
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.
A reconciliation of the numerators and denominators of basic and
diluted earnings per share is presented below:
<CAPTION
Three months
ended June 30,
2001 2000
---- ----
Basic loss per share
Numerator:
Net loss $(609,000) $(354,000)
--------- ---------
Denominator:
Weighted common shares outstanding 1,631,000 1,504,000
Share equivalent units (SEU)
outstanding 11,000 11,000
--------- ---------
Weighted average shares and SEU's
outstanding 1,642,000 1,515,000
--------- ---------
Basic loss per share $(.37) $(.23)
===== =====
9
- -------------------------------------------------------------------------
NOTE 2 - EARNINGS PER SHARE (concluded):
- -------------------------------------------------------------------------
Three months
ended June 30,
2001 2000
---- ----
Diluted loss per share
Numerator:
Net loss ($609,000) $(354,000)
--------- ---------
Denominator:
Weighted average shares and SEU's
outstanding 1,642,000 1,515,000
--------- ---------
Weighted average common and potential
common shares outstanding
1,642,000 1,515,000
--------- ---------
Diluted loss per share $(.37) $(.23)
===== =====
All options to purchase shares of common stock at various
exercise prices were excluded from the computation of diluted loss
per share as the effect would be antidilutive due to the net loss.
- -------------------------------------------------------------------------
NOTE 3 - CASH FLOW STATEMENT
- -------------------------------------------------------------------------
Actual interest paid was $84,000 and $77,000 for the three
months ended June 30, 2001 and 2000, respectively. In addition,
actual income taxes paid were $2,000 for the three months ended
June 30, 2001 and actual income taxes refunded were $411,000 for
the three months ended June 30, 2000.
- -------------------------------------------------------------------------
NOTE 4 - COMPREHENSIVE INCOME
- -------------------------------------------------------------------------
Total comprehensive loss was $608,000 and $476,000 for the
three months ended June 30, 2001 and 2000, respectively. Other
comprehensive income (loss) included foreign currency translation
adjustments of $1,000 and $(122,000) for the quarters ended June
30, 2001 and 2000, respectively.
10
- -------------------------------------------------------------------------
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:
Three months
ended June 30,
2001 2000
---- ----
Sales from external customers
U.S. $8,476,000 $7,413,000
U.K. 1,105,000 871,000
---------- ----------
Total $9,581,000 $8,284,000
========== ==========
Intersegment sales
U.S. $ 9,000
U.K. $ 269,000 194,000
---------- ----------
Total $ 269,000 $ 203,000
========== ==========
Segment net loss
U.S. $ (549,000 $ (404,000)
U.K. (82,000) (33,000)
---------- ----------
Total $ (631,000 $ (437,000)
========== ==========
The segment net loss above is reconciled to the consolidated
totals as follows:
Total segment net loss $ (631,000) $ (437,000)
Eliminations 22,000 83,000
---------- ----------
Net loss $ (609,000) $ (354,000)
========== ==========
- -------------------------------------------------------------------------
NOTE 6 - FINANCIAL ACCOUNTING STANDARDS NO. 133
- -------------------------------------------------------------------------
During the first quarter of fiscal year 2002, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities.
At April 1 and June 30, 2001, the Company had no derivatives that
met the criteria for a derivative instrument. As a result,
management of the Company concluded that there was no material
effect on the Company's consolidated financial position, results of
operations or cash flows resulting from the adoption of SFAS No.
133 at June 30, 2001.
11
GRAHAM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
June 30, 2001
Results of Operations
- ---------------------
Sales increased 16% in the first quarter of fiscal year 2002
compared to the same period last year. Sales for the first quarter
increased 14% in the United States and 29% in the United Kingdom
compared to fiscal year 2001. The increase in the United States
sales is attributable to significant sales of the new rectangular
condenser product. The improvement in the United Kingdom sales is
a reflection of the higher order intake level experienced in the
second half of fiscal 2001.
Cost of sales as a percent of sales for the first quarter was
83% compared to 78% a year ago. Cost of sales as a percent of
sales for the United States operating segment was 86% for the
current quarter compared to 80% for the first quarter of fiscal
year 2001. For the United Kingdom operations, cost of sales as a
percent of sales declined to 70% from 74% a year ago. The
significant increase in the United States is due to product mix and
is reflective of the fierce price competition experienced in fiscal
year 2001. The reduced percentage in the United Kingdom is also
attributable to product mix as a higher portion of sales was
comprised of spare parts which generate significant profit margins.
Selling, general and administrative expenses for the three
months ended June 30, 2001 were 5% greater than selling, general
and administrative expenses for the same period of fiscal year 2001
but represented 25% of sales as compared to 28% in the first
quarter last year. Selling, general and administrative expenses as
a percent of sales declined due to the increase in sales levels
during the current quarter as compared to the first quarter of last
year. This is an indication of management's efforts to control
overhead costs.
Interest expense remained stable at $73,000 compared to $74,000
from the same period in fiscal year 2001. The decrease in short-
and long-term debt of $3,588,000 was attributable to a significant
paydown in the United States near the end of the first quarter.
The effective income tax rate for the first quarter was
consistent with the prior year at 33% compared to 32%.
Liquidity and Capital Resources
- -------------------------------
The financial condition of the Company remained stable.
Working capital of $10,199,000 at June 30, 2001 compares to
$11,162,000 at March 31, 2001. The working capital decrease
reflects decreases of $4,842,000 and $3,879,000 in current assets
and current liabilities, respectively. The decrease in current
assets related to the sale of the investments during the quarter.
The decrease in current liabilities is primarily attributable to a
reduction in short-term debt as the proceeds from the sale of the
investments were used to pay down this debt. The current ratio has
increased from 1.8 at March 31, 2001 to 2.1 at June 30, 2001.
12
Liquidity and Capital Resources (concluded)
- -------------------------------------------
Net cash used from operating activities for the first quarter
was $185,000. Net loss, adjusted for depreciation and
amortization, used $364,000 of operating cash. As noted above, net
cash provided from investing activities through the sale of
investments during the three month period of $4,813,000 was
utilized to pay down short- and long-term debt in the United
States. Capital expenditures were $64,000 compared to $188,000 for
the same period last year. There were no major commitments for
capital expenditures as of June 30, 2001. Management anticipates
spending approximately $900,000 in fiscal year 2002 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
2002 cash requirements.
The long-term debt to equity ratio of 2% compares to 5% at
March 31, 2001. The total liabilities to assets ratio is 48%
compared to 53% at March 31, 2001. These ratios are reflective of
the continued stability and strength of the Company's financial
condition.
New Orders and Backlog
- ----------------------
New orders for the first quarter were $19,186,000 compared to
$12,425,000 for the same period last year. Prior to intercompany
eliminations, new orders in the United States were $17,542,000
compared to $11,760,000 for the same period in fiscal year 2001.
New orders in the United Kingdom were $1,732,000 compared to
$1,101,00 for the same quarter last year. The significant increase
in new orders in the United States is due to significant orders
obtained for rectangular condensers.
Backlog of unfilled orders at June 30, 2001 is $38,060,000
compared to $28,418,000 at this time a year ago and $28,458,000 at
March 31, 2001. Prior to intercompany eliminations, current
backlog in the United States of $34,607,000 compares to $25,544,000
at March 31, 2001 and $28,027,000 at June 30, 2000. Current
backlog in the United Kingdom of $3,723,000 compares to $3,366,000
at March 31, 2001 and $1,179,000 at June 30, 2000. The current
backlog is reflective of the significant orders obtained for pump
equipment for a South African project and rectangular condensers.
The current backlog, with the exception of approximately
$8,500,000, is scheduled to be shipped during the next twelve
months and represents orders from traditional markets in the
Company's established product lines.
Quantitative and Qualitative Disclosures about Market Risk
- ----------------------------------------------------------
The Company is exposed to changes in interest rates, foreign
currency exchange rates and equity prices which may adversely
impact its results of operations and financial position. The
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 assessing the risks and benefits for
13
Quantitative and Qualitative Disclosures about Market Risk (concluded)
- ----------------------------------------------------------------------
incurring long-term debt. Based upon variable rate debt outstanding
at June 30, 2001, a 1% change in interest rates would impact annual
interest expense by $34,000.
Over the past three years, Graham's international consolidated
sales exposure approximates 44% of annual sales. Operating in
world markets involves exposure to movements in currency exchange
rates. Currency movements can affect sales in several 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 sales
can be adversely impacted. The substantial portion of Graham's
sales are collected in U.S. dollars. 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.
Foreign operations produced a net loss in the first quarter of
$82,000. As currency exchange rates change, translations of the
income statements of our U.K. business into U.S. dollars affects
year-over-year comparability of operating results. The Company
does not hedge translation risks because cash flows from U.K.
operations are mostly reinvested in the U.K. A 10% change in
foreign exchange rates would impact first quarter net loss by
approximately $8,000.
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 June 30, 2001 and 2000 and the respective
quarter end market price per share, a 50% to 100% change in the
respective quarter end market price of the Company's common stock
would positively or negatively impact the Company's first quarter
operating results by $66,000 to $131,000 for 2002 and $41,000 to
$82,000 for 2001. In the first quarter of 2002, the loss, net of
tax, recorded due to the increase in the stock price was 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
June 30, 2001 market price of the Company's stock of $12.25 per
share, a 50% to 100% change in the stock price would positively or
negatively impact the Company's operating results by $116,000 to
$231,000 in 2003, $121,000 to $241,000 in 2004 and $126,000 to
$251,000 in 2005, 2006 and 2007.
14
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2001
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. See index to exhibits.
b. No reports on Form 8-K were filed during the quarter
ended June 30, 2001.
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 08/03/01
15
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 reference.)
Stockholder Rights Plan of Graham Corporation (filed as
Item 5 to Registrant's current report filed on Form 8-K
on August 23, 2000 and Registrant's Form 8-A filed on
September 15, 2000, and incorporated herein by
reference).
(b) Debt securities
Not applicable.
(10) Material Contracts
1989 Stock Option and Appreciation Rights Plan of Graham
Corporation (filed on the Registrant's Proxy Statement for its
1990 Annual Meeting of Stockholders and incorporated herein by
reference.)
1995 Graham Corporation Incentive Plan to Increase Shareholder
Value (filed on the Registrant's Proxy Statement for its 1996
Annual Meeting of Stockholders and incorporated herein by
reference.)
Graham Corporation Outside Directors' Long-Term Incentive Plan
(filed as Exhibit 10.3 to the Registrant's annual report on
Form 10-K for the fiscal year ended March 31, 1998, and is
incorporated herein by reference.)
16
Index to Exhibits (cont.)
- -------------------------
2000 Graham Corporation Incentive Plan to Increase
Shareholder Value (filed on the Registrant's Proxy Statement
for its 2001 Annual Meeting of Stockholders and incorporated
herein by reference).
Employment Contracts between Graham Corporation and Named
Executive Officers (filed as Exhibit 10.4 to the Registrant's
annual report on Form 10-K for the fiscal year ended March 31,
1998, and is incorporated herein by reference.)
Senior Executive Severance Agreements with Named Executive
Officers (filed as Exhibit 10.5 to the Registrant's annual
report on Form 10-K for the fiscal year ended March 31, 1998,
and is incorporated herein by reference.)
Long-Term Stock Ownership Plan of Graham Corporation (filed
on the Registrant's Proxy Statement for its 2000 Annual
Meeting of Stockholders and incorporated herein by reference.)
(11) Statement re-computation of per share earnings
Computation of per share earnings is included in Note 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.