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 September 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 - 585-343-2216
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES __X__ NO _____
As of November 8, 2002, there were outstanding 1,648,249 shares
of common stock, $.10 per share.
PAGE<2>
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2002
PART I - FINANCIAL INFORMATION
Unaudited consolidated financial statements of Graham
Corporation (the Company) and its subsidiaries as of September 30,
2002 and for the three month and six month periods 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. 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 September 30, 2002 and its
results of operations for the three and six month periods then
ended.
3
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2002 2002
---- ----
Assets
Current Assets:
Cash and equivalents $ 297,000 $ 2,901,000
Investments 8,792,000 2,496,000
Trade accounts receivable 6,103,000 17,053,000
Inventories 8,246,000 8,342,000
Domestic and foreign income taxes
receivable 648,000
Deferred income tax asset 1,110,000 1,218,000
Prepaid expenses and other current assets 599,000 377,000
----------- -----------
25,795,000 32,387,000
Property, plant and equipment, net 9,659,000 9,726,000
Deferred income tax asset 1,805,000 1,585,000
Other assets 2,000 6,000
----------- -----------
$37,261,000 $43,704,000
=========== ===========
4
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (concluded)
September 30, March 31,
2002 2002
---- ----
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 1,138,000 $ 1,050,000
Current portion of long-term debt 94,000 85,000
Accounts payable 2,181,000 4,333,000
Accrued compensation 3,430,000 4,444,000
Accrued expenses and other liabilities 1,679,000 1,100,000
Customer deposits 4,447,000 6,704,000
Domestic and foreign income taxes payable 859,000
----------- -----------
12,969,000 18,575,000
Long-term debt 122,000 150,000
Accrued compensation 654,000 680,000
Deferred income tax liability 45,000 41,000
Other long-term liabilities 12,000 11,000
Accrued pension liability 1,156,000 1,398,000
Accrued postretirement benefits 3,276,000 3,213,000
----------- -----------
Total liabilities 18,234,000 24,068,000
----------- -----------
Shareholders' equity:
Preferred Stock, $1 par value -
Authorized, 500,000 shares
Common stock, $.10 par value -
Authorized, 6,000,000 shares
Issued, 1,716,572 shares on September 30,
2002 and March 31, 2002 172,000 172,000
Capital in excess of par value 4,757,000 4,757,000
Retained earnings 17,994,000 18,888,000
Accumulated other comprehensive loss (1,925,000) (2,178,000)
----------- -----------
20,998,000 21,639,000
Less:
Treasury Stock (68,323 shares on
September 30, 2002 and March 31, 2002) (1,161,000) (1,161,000)
Notes receivable from officers and
directors (810,000) (842,000)
----------- -----------
Total shareholders' equity 19,027,000 19,636,000
----------- -----------
$37,261,000 $43,704,000
=========== ===========
5
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months Six Months
ended September 30, ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $11,437,000 $14,082,000 $21,605,000 $23,663,000
----------- ----------- ----------- -----------
Cost and expenses:
Cost of products sold 9,202,000 10,996,000 17,576,000 18,978,000
Selling, general and
administrative 2,737,000 2,545,000 5,205,000 4,977,000
Interest expense 20,000 32,000 37,000 105,000
----------- ----------- ----------- -----------
11,959,000 13,573,000 22,818,000 24,060,000
----------- ----------- ----------- -----------
Income (Loss) before
income taxes (522,000) 509,000 (1,213,000) (397,000)
Provision (Benefit) for
income taxes (169,000) 160,000 (404,000) (137,000)
----------- ----------- ----------- -----------
Net income (loss) (353,000) 349,000 (809,000) (260,000)
Retained earnings at
beginning of period 18,432,000 15,974,000 18,888,000 16,583,000
Dividends (85,000) (85,000)
----------- ----------- ----------- -----------
Retained earnings at
end of period $17,994,000 $16,323,000 $17,994,000 $16,323,000
=========== =========== =========== ===========
Per Share Data:
Basic:
Net income (loss) $(.21) $.21 $(.49) $(.16)
===== ==== ===== =====
Diluted:
Net income (loss) $(.21) $.21 $(.49) $(.16)
===== ==== ===== =====
6
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
September 30,
2002 2001
---- ----
Operating activities:
Net loss $ (809,000) $ (260,000)
----------- -----------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 435,000 490,000
(Gain) Loss on sale of property, plant and
equipment 23,000 (10,000)
Loss on sale of investments 28,000
(Increase) Decrease in operating assets:
Accounts receivable 11,093,000 (964,000)
Inventory, net of customer deposits (1,998,000) 3,069,000
Prepaid expenses and other current and
non-current assets (208,000) 60,000
Increase (Decrease) in operating
liabilities:
Accounts payable, accrued compensation,
accrued expenses and other liabilities (2,882,000) (2,229,000)
Accrued compensation, accrued pension
liability, and accrued postemployment
benefits (104,000) 143,000
Domestic and foreign income taxes (1,507,000) 307,000
Deferred income taxes (68,000) 44,000
----------- -----------
Total adjustments 4,784,000 938,000
----------- -----------
Net cash provided by operating activities 3,975,000 678,000
----------- -----------
7
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)
Six Months Ended
September 30,
2002 2001
---- ----
Investing activities:
Purchase of property, plant and equipment (334,000) (365,000)
Proceeds from sale of property, plant and
equipment 5,000 140,000
Collection of notes receivable from
officers and directors 32,000
Purchase of investments (17,227,000) (994,000)
Redemption of investments at maturity 11,000,000 4,877,000
----------- -----------
Net cash provided (used) by investing
activities (6,524,000) 3,658,000
----------- -----------
Financing activities:
Decrease in short-term debt (13,000) (3,256,000)
Proceeds from issuance of long-term debt 4,785,000
Principal repayments on long-term debt (47,000) (5,417,000)
Issuance of common stock 44,000
----------- -----------
Net cash used by financing activities (60,000) (3,844,000)
----------- -----------
Effect of exchange rate changes on cash 5,000 1,000
----------- -----------
Net increase (decrease) in cash and
equivalents (2,604,000) 493,000
Cash and equivalents at beginning of
period 2,901,000 226,000
----------- -----------
Cash and equivalents at end of period $ 297,000 $ 719,000
=========== ===========
8
GRAHAM CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL INFORMATION / SEPTEMBER 30, 2002
- -------------------------------------------------------------------------
NOTE 1 - INVENTORIES
- -------------------------------------------------------------------------
Major classifications of inventories are as follows:
<CAPTION:
9/30/02 3/31/02
------- -------
Raw materials and supplies $ 1,796,000 $ 2,257,000
Work in process 14,794,000 13,322,000
Finished products 2,504,000 1,724,000
----------- -----------
19,094,000 17,303,000
Less - progress payments 10,749,000 8,871,000
- inventory reserve 99,000 90,000
----------- -----------
$ 8,246,000 $ 8,342,000
=========== ===========
- -------------------------------------------------------------------------
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 Six months
ended September 30, ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
Basic earnings (loss)
per share
Numerator:
Net income (loss) $(353,000) $(349,000) $(809,000) $(260,000)
--------- --------- --------- ---------
Denominator:
Weighted common shares
outstanding 1,648,000 1,635,000 1,648,000 1,633,000
Share equivalent units
(SEU) outstanding 16,000 11,000 14,000 11,000
--------- --------- --------- ---------
Weighted average shares
and SEU's outstanding 1,664,000 1,646,000 1,662,000 1,644,000
--------- --------- --------- ---------
Basic earnings (loss)
per share $(.21) $.21 $(.49) $(.16)
===== ==== ===== =====
9
Three months Six months
ended September 30, ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
Diluted earnings (loss)
per share
Numerator:
Net income (loss) $(353,000) $(349,000) $(809,000) $(260,000)
--------- --------- --------- ---------
Denominator:
Weighted average shares
and SEU's outstanding 1,664,000 1,646,000 1,662,000 1,644,000
Stock options
outstanding 19,000
--------- --------- --------- ---------
Weighted average common
and potential common
shares outstanding 1,664,000 1,665,000 1,662,000 1,644,000
--------- --------- --------- ---------
Diluted earnings (loss)
per share $(.21) $.21 $(.49) $(.16)
===== ==== ===== =====
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 six month periods in fiscal year 2003
and the six month period in fiscal year 2002 as the effect would be
antidilutive due to the net losses for the periods.
Options to purchase shares of common stock which totaled
138,800 for the three months ended September 30, 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.
- -------------------------------------------------------------------------
NOTE 3 - CASH FLOW STATEMENT
- -------------------------------------------------------------------------
Interest paid was $37,000 and $116,000 for the six months ended
September 30, 2002 and 2001, respectively. In addition, income
taxes paid (refunded) were $1,171,000 and $(517,000) for the six
months ended September 30, 2002 and 2001, respectively.
Non-cash activities during the six months ended September 30,
2002 and 2001 included capital expenditures totaling $22,000 and
$70,000, respectively, which were financed through the issuance of
capital leases.
10
- -------------------------------------------------------------------------
NOTE 4 - COMPREHENSIVE INCOME
- -------------------------------------------------------------------------
Total comprehensive income (loss) was $(285,000) and $427,000
for the three months ended September 30, 2002 and 2001,
respectively. Other comprehensive income for the three months
ended September 30, 2002 and 2001 included foreign currency
translation adjustments of $68,000 and $78,000, respectively.
Total comprehensive loss for the six months ended September 30,
2002 and 2001 was $556,000 and $181,000, respectively. Other
comprehensive income for the six months ended September 30, 2002
and 2001 included foreign currency translation adjustments of
$253,000 and $79,000, 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:
Three Months Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Sales from external
customers
U.S. $10,478,000 $12,153,000 $19,473,000 $20,629,000
U.K. 959,000 1,929,000 2,132,000 3,034,000
----------- ----------- ----------- -----------
Total $11,437,000 $14,082,000 $21,605,000 $23,663,000
========== =========== =========== ===========
Intersegment sales
U.S. $ 9,000 $ 29,000
U.K. 193,000 $ 247,000 612,000 $ 516,000
----------- ----------- ----------- -----------
Total $ 202,000 $ 247,000 $ 641,000 $ 516,000
=========== =========== =========== ===========
Segment net income
(loss)
U.S. $ (199,000) $ 122,000 $ (765,000) $ (427,000)
U.K. (145,000) 191,000 (158,000) 109,000
----------- ----------- ----------- -----------
Total segment net
income (loss) $ (344,000) $ 313,000 $ (923,000) $ (318,000)
========== =========== =========== ===========
11
The segment net income (loss) above is reconciled to the
consolidated totals as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Total segment net
income (loss) $ (344,000) $ 313,000 $ (923,000) $ (318,000)
Eliminations (9,000) 36,000 114,000 58,000
----------- ----------- ----------- -----------
Net income (loss) $ (353,000) $ 349,000 $ (809,000) $ (260,000)
========== =========== ============ ===========
- -------------------------------------------------------------------------
NOTE 6 - STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 144 & 146
- -------------------------------------------------------------------------
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 September 30, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." This Statement
is effective for exit or disposal activities initiated after
December 31, 2002. The Company does not believe the adoption of
this Standard will have a material effect on the Company's
consolidated financial position, results of operations or cash
flows.
12
GRAHAM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 2002
Results of Operations
- ---------------------
Sales decreased 19% in the second quarter of fiscal year 2003
compared to 2002. Sales for the second quarter decreased 14% in
the United States and 47% in the United Kingdom compared to 2002.
Sales for the six months ended September 30, 2002 declined 9%
compared to the same period last year. Sales for the six months
ended September 30, 2002 in the United States and the United
Kingdom decreased 5% and 23%, respectively, compared to fiscal
2002. The lower sales in the United States are attributable to
shipment delays due to customer changes as well as the weak
economic condition of the Company's major markets. The decrease in
sales levels in the United Kingdom is due to a decline in the sales
of offshore and dry pumps and related spare parts.
Cost of sales as a percent of sales for the second quarter 2003
increased slightly to 80% compared to 78% a year ago. In the
United States, cost of sales as a percent of sales remained stable
at 82%. In the United Kingdom, cost of sales as a percent of sales
for the quarter was 71% compared to 63% last year. For the six
months, cost of sales as a percent of sales was 81% compared to 80%
in fiscal year 2002. For the six month period in the United
States, the cost of sales percentage remained unchanged at 84%
compared to the same period last year while in the United Kingdom
it increased from 66% to 70%. The United Kingdom percentages are a
reflection of product mix as prior year sales consisted of spare
part sales and engineering fees which carried favorable profit
margins.
For the three month and six month periods, selling, general and
administrative expenses increased 8% and 5%, respectively, from the
same periods in fiscal year 2002. Selling, general and
administrative expenses as a percent of sales for the quarters
ended September 30, 2002 and 2001 were 24% and 18%, respectively.
For the six month period, selling, general and administrative
expenses as a percent of sales increased from 21% last year to 24%.
The increased expenses are primarily attributable to increased
employee costs and a commitment to contribute to a community
capital project. Selling, general and administrative expenses as a
percent of sales have increased due to the lower sales volume for
the current quarter and year-to-date compared to the same periods
last year.
Interest expense for the second quarter and six-month period of
the current year decreased 39% and 65%, respectively, compared to
the prior year. These decreases are reflective of the low levels
of borrowing in the United States during the first half of fiscal
year 2003 compared to 2002.
The effective income tax rates for the second quarter and six
month period in fiscal year 2003 of 32% and 33%, respectively, were
relatively consistent with the 2002 effective tax rates of 31% and
35% for the same periods.
13
Liquidity and Capital Resources
- -------------------------------
The financial condition of the Company has remained stable and
strong during fiscal year 2003. Working capital of $12,826,000 at
September 30, 2002 compares to $13,812,000 at March 31, 2002. This
working capital decrease reflects a decline in current assets of
$6,592,000 and a decrease in current liabilities of $5,606,000.
The decrease in current assets related primarily to a significant
decline in accounts receivable which was offset by an increase in
investments. Account receivable decreased due to the collection of
cancellation charges on certain orders for the electric power
generating industry that were recorded at March 31, 2002. This
cash and cash on hand at year end was invested in short-term
government securities. The decrease in current liabilities
reflects a decline in accounts payable, accrued compensation,
customer deposits and income taxes payable. The decrease in
accounts payable and accrued compensation is attributable to timing
of inventory purchases at period end and payment of incentive
compensation. The reduction in customer deposits is the result of
the reclassification of progress payments to offset inventory as
the related inventory is purchased. The decrease in income taxes
payable is due to the payment of the prior year tax liability as
well as the recording of the current year tax benefit. The current
ratio at September 30, 2002 is 2.0 compared to 1.7 at March 31,
2002.
Net cash provided by operating activities for the six months
was $3,975,000. Net loss, adjusted for depreciation and
amortization, used $374,000 of operating cash. Collection of
accounts receivable generated cash flow of $11,093,000 while the
decline in customer deposits and paydown of current liabilities and
income taxes utilized cash of $6,387,000. Net cash used for
investing activities for the first half of the year of $6,524,000
resulted primarily from the purchase of short-term investments.
Capital expenditures were $334,000 compared to $365,000 for the
same period last year. There were major commitments for capital
expenditures of $250,000 as of September 30, 2002.
Management expects that the cash flow from operations and lines
of credit will provide sufficient resources to fund the fiscal year
2003 cash requirements.
The long-term debt to equity ratio remained stable at 1% on
September 30, 2002 and March 31, 2002. The total liabilities to
assets ratio is 49% compared to 55% at March 31, 2002. These
ratios are reflective of the Company's ability to maintain a strong
balance sheet while experiencing depressed market conditions.
New Orders and Backlog
- ----------------------
New orders for the second quarter were $11,294,000 compared to
$12,099,000 for the same period last year. Prior to intercompany
eliminations, new orders in the United States were $9,912,000
compared to $11,592,000 for the same period in fiscal 2002. New
orders in the United Kingdom were $1,932,000 compared to $881,000
for the same quarter last year.
14
New Orders and Backlog (concluded)
- ----------------------------------
For the first half of the fiscal year new orders were
$19,434,000 compared to $31,285,000 for the comparable six month
period of fiscal 2002. Prior to eliminations, new orders in the
United States were $17,016,000 for the six month period compared to
$29,134,000 for the same period last year and new orders in the
United Kingdom were $3,146,000 compared to $2,613,000 in fiscal
2002. The decline in new order activity in the United States is
due to difficulty encountered by customers in obtaining financing
for capital projects, over capacity in the petrochemical and
chemical markets and limited capital spending in the chemical,
petrochemical and refining industries due to mergers and
acquisitions. The increase in new orders in the United Kingdom is
attributable primarily to the increase in the foreign currency
exchange rate used to convert to U.S. dollars.
Backlog of unfilled orders at September 30, 2002 is
$34,452,000, compared to $35,365,000 at this time a year ago and
$36,529,000 at March 31, 2002. Prior to eliminations, current
backlog in the United States of $33,227,000 compares to $35,713,000
at March 31, 2002 and $33,254,000 at September 30, 2001. Current
backlog in the United Kingdom of $1,714,000 compares to $1,180,000
at March 31, 2002 and $2,521,000 at September 30, 2001. The
current backlog is reflective of the new order levels. Included in
backlog at September 30, 2002 and 2001 is $11,159,000 and
$10,567,000, respectively, of orders that have been suspended and
are with customers operating directly or indirectly in the
financially pressured electric power generating business and/or
whose financial condition has eroded. 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.
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 assessing the risks and benefits for
incurring long-term debt. Based upon variable rate debt outstanding
at September 30, 2002 and 2001, a 1% change in interest rates would
impact annual interest expense by $11,000 and $9,000, respectively.
15
Quantitative and Qualitative Disclosures about Market Risk (continued)
- ----------------------------------------------------------------------
Over the past three years, Graham's international consolidated
sales exposure approximates 36% of annual sales. Operating in
world markets involves exposure to movements in currency exchange
rates. Currency movements can affect sales in several ways.
Foremost is the ability to competitively compete for orders against
competition having a relatively weaker currency. Business lost due
to this cannot be quantified. Secondly, cash can be adversely
impacted by the conversion of sales in foreign currency to local
currency. The substantial portion of Graham's sales are collected
in the local currencies. For both the three and six month periods
ended September 30, 2002 sales in foreign currencies were 2% of
total sales and 3% of total sales for the same periods in fiscal
year 2002. At certain times, the Company may enter into forward
foreign exchange agreements to hedge its exposure against
unfavorable changes in foreign currency values on significant sales
contracts negotiated in foreign currencies.
Graham has limited exposure to foreign currency purchases.
During the three month periods ended September 30, 2002 and 2001,
purchases in foreign currencies were 3% and 4% of cost of goods
sold, respectively. For the first half of fiscal year 2003 and
2002, purchases in foreign currencies were 4% and 3% of cost of
goods sold, respectively. At certain times, forward foreign
exchange contracts may be utilized to limit currency exposure.
Foreign operations produced net income (loss) in the second
quarter of 2003 and 2002 of $(145,000) and $191,000, respectively,
and $(158,000) and $109,000 for the six month periods ended
September 30, 2002 and 2001, respectively. 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 have
impacted the second quarter results by approximately $14,000 and
$19,000 in fiscal year 2003 and 2002, respectively, and $16,000 and
$11,000 for the six months ended September 30, 2002 and 2001,
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 September 30, 2002 and 2001 and the respective
quarter end market price per share, a 50% to 75% change in the
respective quarter end market price of the Company's common stock
would positively or negatively impact the Company's second quarter
operating results by $67,000 to $103,000 for 2003 and $44,000 to
$66,000 for 2002. In the second quarters of 2003 and 2002, the
income, net of taxes, recorded due to the decrease in the stock
price was not significant. Assuming required net income of
16
Quantitative and Qualitative Disclosures about Market Risk (concluded)
- ----------------------------------------------------------------------
$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 September 30, 2002 market price of the
Company's stock of $8.50 per share, a 50% to 75% change in the
stock price would positively or negatively impact the Company's
operating results by $99,000 to $148,000 in 2004 and $104,000 to
$155,000 in 2005, 2006, 2007 and 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.
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,
17
Forward Looking (concluded)
- ---------------------------
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 filing 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.
18
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2002
PART II - OTHER INFORMATION
Item 4. Controls and Procedures
a. Disclosure controls and procedures. Within 90 days
before filing this report, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures.
Our disclosure controls and procedures are the controls and other
procedures that we designed to ensure that we record, process,
summarize and report in a timely manner the information we must
disclose in reports that we file with or submit to the SEC. Alvaro
Cadena, our Chief Executive Officer, and J. Ronald Hansen, our
Chief Financial Officer, reviewed and participated in this
evaluation. Based on this evaluation, Messrs. Cadena and Hansen
concluded that, as of the date of their evaluation, our disclosure
controls were effective.
b. Internal controls. Since the date of the evaluation
described above, there have not been any significant changes in our
internal accounting controls or in other factors that could
significantly affect those controls.
Item 5. Other Information
The Company's chief executive officer and chief financial
officer have furnished to the SEC the certification with respect to
this Form 10-Q that is required by Section 906 of the Sarbanes-
Oxley Act of 2002.
Item 6. Exhibits and Reports on Form 8-K.
a. See index to exhibits.
b. A Form 8-K was filed on August 6, 2002 and included
item 9. No financial statements were required to be filed as part
of the report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
GRAHAM CORPORATION
/s/J.R. Hansen
-----------------------------------------
J. R. Hansen
Vice President Finance and
Administration / CFO (Principal
Accounting Officer)
Date 11/11/02
19
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.)
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.)
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.)
20
Index to Exhibits (continued)
- -----------------------------
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
The 2001 Annual Meeting of Stockholders of Graham
Corporation was held on July 25.
The individuals named below were reelected to serve on
the Company's Board of Directors:
Votes For Votes Withheld
H. Russel Lemcke 1,587,920 30,887
Cornelius S. Van Rees 1,585,287 33,520
Helen H. Berkeley, Alvaro Cadena, Jerald D. Bidlack and
Philip S. Hill all continue as directors of the Company.
The appointment of Deloitte & Touche LLP as independent
auditors was ratified, with 1,592,386 shares voting for,
23,474 shares voting against, and 2,947 shares abstaining.
(23) Consents of experts and counsel
Not applicable.
21
Index to Exhibits (concluded)
- -----------------------------
(24) Power of Attorney
Not applicable.
(99) Additional exhibits
None.
22
CERTIFICATIONS
I, Alvaro Cadena, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Graham
Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3 Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
presents in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-
14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weakness in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
23
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.
/s/Alvaro Cadena
Date: 11/11/02 ________________________________
Alvaro Cadena
Chief Executive Officer
24
I, J. Ronald Hansen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Graham
Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3 Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
presents in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-
14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weakness in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
25
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.
/s/J. Ronald Hansen
Date: 11/11/02 ________________________________
J. Ronald Hansen
Chief Financial Officer