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, 1998
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 November 6, 1998, there were outstanding 1,584,995 shares
of common stock, $.10 per share.
2
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1998
PART I - FINANCIAL INFORMATION
Unaudited consolidated financial statements of Graham
Corporation (the Company) and its subsidiaries of September 30,
1998 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.
This part also includes management's discussion and analysis of
the Company's financial condition as of September 30, 1998 and its
results of operations for the three month period then ended.
3
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September March 31,
30,
1998 1998
---- ----
Assets
Current Assets:
Cash and equivalents $ 102,000 $ 1,694,000
Marketable securities 5,153,000 4,801,000
Trade accounts receivable 6,821,000 6,791,000
Inventories 6,062,000 10,278,000
Deferred tax asset 912,000 881,000
Prepaid expenses and other
current assets 499,000 468,000
----------- -----------
19,549,000 24,913,000
Property, plant and equipment, net 9,950,000 10,026,000
Deferred tax asset 2,036,000 2,067,000
Other assets 7,000 24,000
----------- -----------
$31,542,000 $37,030,000
=========== ===========
4
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (concluded)
September March 31,
30,
1998 1998
---- ----
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt due banks $ 40,000
Current portion of long-term debt $ 513,000 505,000
Accounts payable 2,018,000 4,195,000
Accrued compensation 3,624,000 4,940,000
Accrued expenses and other liabilities 846,000 1,039,000
Customer deposits 572,000 779,000
Domestic and foreign income taxes
payable 153,000 956,000
----------- -----------
7,726,000 12,454,000
Long-term debt 615,000 859,000
Deferred compensation 1,115,000 1,007,000
Other long-term liabilities 223,000 264,000
Deferred pension liability 1,398,000 1,464,000
Accrued postretirement benefits 3,247,000 3,207,000
----------- -----------
Total liabilities 14,324,000 19,255,000
----------- -----------
Shareholders' equity:
Preferred Stock, $1 par value -
Authorized, 500,000 shares
Common stock, $.10 par value -
Authorized, 6,000,000 shares
Issued 1,690,595 shares on September
30,
1998 and on March 31, 1998 169,000 169,000
Capital in excess of par value 4,521,000 4,521,000
Cumulative foreign currency
translation adjustment (1,746,000) (1,781,000)
Retained earnings 16,383,000 15,362,000
19,327,000 18,271,000
----------- -----------
Less:
Treasury Stock (1,784,000) (71,000)
Employee Stock Ownership Plan Loan
Payable (325,000) (425,000)
----------- -----------
Total shareholders' equity 17,218,000 17,775,000
----------- -----------
$31,542,000 $37,030,000
=========== ===========
5
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months Six Months
ended September 30, ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
Net Sales $11,417,000 $14,618,000 $26,573,000 $26,473,000
----------- ----------- ----------- -----------
Cost and expenses:
Cost of products sold 8,164,000 9,656,000 18,828,000 17,828,000
Selling, general and
administrative 3,104,000 3,471,000 6,076,000 6,407,000
Interest expense 55,000 61,000 121,000 140,000
----------- ----------- ----------- -----------
11,323,000 13,188,000 25,025,000 24,375,000
----------- ----------- ----------- -----------
Income before income
taxes 94,000 1,430,000 1,548,000 2,098,000
Provision for income
taxes 37,000 485,000 527,000 720,000
----------- ----------- ----------- -----------
Net income 57,000 945,000 1,021,000 1,378,000
Retained earnings at
beginning of period 16,326,000 12,029,000 15,362,000 11,596,000
----------- ----------- ----------- -----------
0
Retained earnings at end
of period $16,383,000 $12,974,000 $16,383,000 $12,974,000 0
=========== =========== =========== ===========
Per Share Data:
Basic:
Net income $.04 $.58 $.63 $.85
==== ==== ==== ====
Diluted:
Net income $.04 $.56 $.62 $.82
==== ==== ==== ====
6
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
September 30,
1998 1997
---- ----
Operating activities:
Net income $ 1,021,000 $ 1,378,000
----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 523,000 513,000
(Gain)Loss on sale of property, plant and
equipment 10,000 (22,000)
(Increase) Decrease in operating assets:
Accounts receivable (17,000) 1,573,000
Inventory, net of customer deposits 4,019,000 1,137,000
Prepaid expenses and other current and
non-current assets (28,000) 67,000
Increase (Decrease) in operating liabilities:
Accounts payable, accrued compensation,
accrued expenses and other liabilities (3,771,000) (1,635,000)
Estimated liabilities of discontinued
operations (119,000)
Deferred compensation, deferred pension
liability, and accrued postemployment
benefits 158,000 280,000
Domestic and foreign income taxes (803,000) 15,000
Deferred income taxes (22,000)
Other long-term liabilities (42,000) (73,000)
----------- -----------
Total adjustments 49,000 1,714,000
----------- -----------
Net cash provided by operating activities 1,070,000 3,092,000
----------- -----------
7
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)
Six Months Ended
September 30,
1998 1997
---- ----
Investing activities:
Purchase of property, plant and equipment (399,000) (336,000)
Purchase of marketable securities (5,654,000) (2,851,000)
Proceeds from maturity of marketable
securities 5,291,000 1,156,000
----------- -----------
Net cash used by investing activities (762,000) (2,031,000)
----------- -----------
Financing activities:
(Decrease) Increase in short-term debt (40,000) 144,000
Proceeds from issuance of long-term debt 5,110,000 5,441,000
Principal repayments on long-term debt (5,260,000) (7,066,000)
Issuance of common stock 861,000
Purchase of treasury stock (1,713,000)
----------- -----------
Net cash used by financing activities (1,903,000) (620,000)
----------- -----------
Effect of exchange rate on cash 3,000
----------- -----------
Net increase (decrease) in cash and
equivalents (1,592,000) 441,000
Cash and equivalents at beginning of
period 1,694,000 854,000
----------- -----------
Cash and equivalents at end of period $ 102,000 $ 1,295,000
=========== ===========
8
GRAHAM CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL INFORMATION
SEPTEMBER 30, 1998
- ------------------------------------------------------------------------
NOTE 1 - INVENTORIES
- ------------------------------------------------------------------------
Major classifications of inventories are as follows:
9/30/98 3/31/98
------- -------
Raw materials and supplies $ 2,562,000 $ 2,707,000
Work in process 6,896,000 12,081,000
Finished products 1,166,000 1,131,000
----------- -----------
10,624,000 15,919,000
Less - progress payments 4,562,000 5,641,000
----------- -----------
$ 6,062,000 $10,278,000
=========== ===========
- -------------------------------------------------------------------------
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:
Three months Six months
ended September 30, ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
Basic earning per
share
Numerator:
Net income $ 57,000 $ 945,000 $1,021,000 $ 1,378,000
---------- ---------- ---------- -----------
Denominator:
Weighted common shares
outstanding 1,586,000 1,641,000 1,617,000 1,619,000
Share equivalent units
(SEU) outstanding 6,000 4,000 5,000 3,000
---------- ---------- ---------- -----------
Weighted average shares
and SEU's outstanding 1,592,000 1,645,000 1,622,000 1,622,000
---------- ---------- ---------- -----------
Basic earnings per share $.04 $.58 $.63 $.85
==== ==== ==== ====
9
Three months Six months
ended September 30, ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
Diluted earnings per
share
Numerator:
Net income $ 57,000 $ 945,000 $1,021,000 $ 1,378,000
---------- ---------- ---------- -----------
Denominator:
Weighted average shares
and SEU's outstanding 1,592,000 1,645,000 1,622,000 1,622,000
Stock options
outstanding 17,000 51,000 22,000 53,000
Contingently issuable
SEU's 4,000 2,000 6,000 2,000
---------- ---------- ---------- -----------
Weighted average common
and potential common
shares outstanding 1,613,000 1,698,000 1,650,000 1,677,000
---------- ---------- ---------- -----------
Diluted earnings per share $.04 $.56 $.62 $.82
==== ==== ==== ====
Options to purchase 55,200 shares of common stock at $21.44 per
share and 11,250 shares at $21.25 were not included in the
computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the
common shares.
- -------------------------------------------------------------------------
NOTE 3 - CASH FLOW STATEMENT
- -------------------------------------------------------------------------
Actual interest paid was $122,000 and $141,000 for the six
months ended September 30, 1998 and 1997, respectively. In
addition, actual income taxes paid were $1,319,000 and $709,000 for
the six months ended September 30, 1998 and 1997, respectively.
- -------------------------------------------------------------------------
NOTE 4 - COMPREHENSIVE INCOME
- -------------------------------------------------------------------------
Effective April 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." This statement requires reporting and disclosure of
comprehensive income and its components in financial statement
format. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. The Company has
determined that at March 31, 1999 it will display comprehensive
income in a separate statement of comprehensive income. The
Company's comprehensive earnings were as follows:
10
Three months Six months
ended September 30, ended September 30,
1998 1997 1998 1997
---- ---- ---- -----
Net income $ 57,000 $ 945,000 $1,021,000 $ 1,378,000
Other comprehensive
income, net of tax
Foreign currency
translation adjustment 34,000 (38,000) 35,000 (19,000)
---------- ---------- ---------- -----------
Comprehensive income $ 91,000 $ 907,000 $1,056,000 $ 1,359,000
========== ========== ========== ===========
The foreign currency translation adjustment is not currently
adjusted for income taxes since it relates to an investment which
is permanent in nature.
11
GRAHAM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1998
Results of Operations
- ---------------------
Sales decreased 22% in the second quarter of fiscal year 1999
compared to 1998. Sales for the second quarter decreased 25% in
the United States and increased 34% in the United Kingdom compared
to 1998. Sales for the six months ended September 30, 1998 were
flat both in the United States and the United Kingdom compared to
sales for the same period last year. The decline in sales for the
second quarter in the United States is attributable to production
scheduling changes for certain projects due to customer
requirements. As a result the shipment of the equipment has been
postponed to the third quarter. The increase in the United Kingdom
sales is due to shipment schedules. Last year a large project
anticipated to ship in the second quarter was delayed until the
third quarter causing second quarter sales to be unusually low.
Cost of sales as a percent of sales for the second quarter 1999
was 72% compared to 66% a year ago. Cost of sales as a percent of
sales for the three month period was 73% in the United States
compared to 67% last year and 59% in the United Kingdom compared to
45% last year. For the six months, cost of sales as a percent of
sales was 71% compared to 67% a year ago. For the six month period
in the United States, the cost of sales percentage was 72% compared
to 68% last year and in the United Kingdom it was 60% compared to
61% for the same period last year. The United States percentage is
reflective of increased material costs while the unfavorable
percentage for the second quarter in the United Kingdom is due
primarily to product mix.
Selling, general and administrative expenses decreased 11% from
the second quarter of 1998. For the six months ended September 30,
1998, selling, general and administrative expenses are down 5% as
compared to the same period in fiscal year 1998 and were 23% of
sales compared to 24% in 1998. These decreases are primarily
attributable to the receipt of proceeds from an insurance policy.
Interest expense for the second quarter and six month period
decreased 10% and 14%, respectively, as compared to the same
periods in 1998. These decreases are due to paydowns of long term
debt in both the United States and the United Kingdom.
The effective income tax rate for the second quarter and six
month period in fiscal year 1999 was 39% and 34%, respectively,
which is relatively consistent with the 1998 effective tax rate of
34% for the same periods.
12
Financial Condition
- -------------------
The financial condition of the Company has remained stable and
strong during fiscal year 1999. Working capital of $11,823,000 at
September 30, 1998 compares to $12,459,000 at March 31, 1998. This
working capital decrease reflects a decrease in current assets of
$5,364,000 and a decrease in current liabilities of $4,728,000.
The decrease in current assets related primarily to a decrease in
cash due to the purchase of treasury stock and a decline in
inventory as there were several large projects in process at March
31 which shipped in the first quarter of fiscal year 1999. The
decrease in current liabilities reflects the decline in accounts
payable which is attributable to timing of purchases and a decrease
in accrued compensation and income taxes payable as significant
payments were made in the first half of 1999. The current ratio at
September 30, 1998 is 2.53 compared to 2.0 at March 31, 1998.
Capital expenditures for the six month period were $399,000
compared to $336,000 for the same period last year. Commitments
for capital expenditures as of September 30, 1998 were
approximately $250,000.
During the second quarter very little short term borrowing was
required to finance working capital needs. Total long-term debt
decreased $236,000 due to paydowns on the ESOP loan and the United
Kingdom term loan. The long-term debt to equity ratio is 7%
compared to 8% at March 31, 1998 and the total liabilities to
assets ratio is 45% compared to 52% at March 31, 1998. These
ratios reflect management's continued effort to maintain current
debt levels.
Management expects that the cash flow from operations and lines
of credit will provide sufficient resources to fund the fiscal year
1999 cash requirements.
New Orders and Backlog
- ----------------------
New orders for the second quarter were $10,139,000 compared to
$16,472,000 for the same period last year. New orders in the
United States were $8,791,000 compared to $15,792,000 for the same
period in 1998. New orders in the United Kingdom were $1,348,000
compared to $680,000 for the same quarter last year.
For the first half of the fiscal year new orders were
$21,301,000 compared to $37,260,000 for the comparable six month
period of 1998. New orders in the United States were $18,670,000
for the six month period compared to $35,438,000 for the same
period last year and new orders in the United Kingdom were
$2,631,000 compared to $1,822,000 in 1998. The substantial decline
in new orders in the United States is mainly attributable to the
Asian crisis and a downturn in the Latin America market. In
addition, the Company is facing fierce competition, especially in
the petrochemical industry. Management is taking measures to
address current market conditions including cost reductions, and is
optimistic that the power industry will experience growth resulting
in new orders in this market. The increase in the United Kingdom
orders is due to the Company's success in obtaining export orders.
13
Backlog of unfilled orders at September 30, 1998 is $22,965,000
compared to $31,489,000 at this time a year ago and $28,199,000 at
March 31, 1998. Current backlog in the United States of
$21,532,000 compares to $27,292,000 at March 31, 1998 and
$30,377,000 at September 30, 1997. Current backlog in the United
Kingdom of $1,433,000 compares to $907,000 at March 31, 1998 and
$1,112,000 at September 30, 1997. The current backlog is scheduled
to be shipped during the next twelve months and represents orders
from traditional markets in the Company's established product
lines.
Other Matters
- -------------
The Company has established a program to assess the impact of
the Year 2000 on the software and hardware utilized in its internal
operations. The cost to address the Year 2000 issues has been
estimated at $85,000. This program includes the following phases:
identifying affected software, hardware, and manufacturing and
telecommunication equipment and assessing the impact of the Year
2000 issue; hardware and software remediation; testing; surveying
the Year 2000 readiness of customers and suppliers; and developing
a contingency plan. Modification and testing of hardware and
software is currently in process with an anticipated completion
date of December 31, 1998. Manufacturing and telecommunication
equipment is also expected to be Year 2000 compliant by the end of
1998. The Company has begun surveying its customers and suppliers
regarding their readiness for the Year 2000 and anticipates
completing this phase of the program by March 31, 1999.
The Company relies on third-party suppliers for products and
services. If these suppliers do not adequately address the impact
of the Year 2000 on their own systems and products in a timely
manner, it may be necessary for the Company to secure alternate
vendors to supply these required products and services. The
Company has developed a contingency plan to handle this situation.
14
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1998
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 September 30, 1998.
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 11/06/98
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 referenced.)
Shareholder Rights Plan of Graham Corporation (filed as
Exhibit (4) to Registrant's current report filed on Form
8-K on February 26, 1991, as amended by Registrant's
Amendment No. 1 on Form 8 dated June 8, 1991, 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
1991 Annual Meeting of Shareholders 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 Shareholders 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.)
- -------------------------
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.)
(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.
(27) Financial Data Schedule
Financial Data Schedule is included herein as Exhibit 27
of this report.
(99) Additional exhibits
None.