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, 1999
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 5, 1999, there were outstanding 1,519,995 shares
of common stock, $.10 per share.
2
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1999
PART I - FINANCIAL INFORMATION
Unaudited consolidated financial statements of Graham
Corporation (the Company) and its subsidiaries of June 30, 1999 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, 1999 and its
results of operations for the three month period then ended.
3
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
1999 1999
---- ----
Assets
Current Assets:
Cash and equivalents $ 420,000 $ 120,000
Investments 4,907,000 4,928,000
Trade accounts receivable 6,929,000 7,580,000
Inventories 6,570,000 6,803,000
Domestic and foreign income taxes
receivable 73,000
Deferred income tax asset 919,000 950,000
Prepaid expenses and other
current assets 319,000 349,000
----------- -----------
20,064,000 20,803,000
Property, plant and equipment, net 10,265,000 10,450,000
Deferred income tax asset 2,691,000 2,673,000
Other assets 206,000 210,000
----------- -----------
$33,226,000 $34,136,000
=========== ===========
4
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (concluded)
June 30, March 31,
1999 1999
---- ----
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 165,000
Current portion of long-term debt 516,000 $ 546,000
Accounts payable 3,207,000 2,879,000
Accrued compensation 2,569,000 3,938,000
Accrued expenses and other liabilities 696,000 1,043,000
Customer deposits 493,000 408,000
Domestic and foreign income taxes
payable 15,000
----------- -----------
7,661,000 8,814,000
Long-term debt 392,000 505,000
Accrued compensation 1,120,000 1,095,000
Other long-term liabilities 301,000 303,000
Accrued pension liability 3,639,000 3,519,000
Accrued postretirement benefits 3,209,000 3,188,000
----------- -----------
Total liabilities 16,322,000 17,424,000
----------- -----------
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 June 30,
1999 and March 31, 1999 169,000 169,000
Capital in excess of par value 4,521,000 4,521,000
Retained earnings 17,912,000 17,731,000
Accummulated other comprehensive loss (3,105,000) (3,076,000)
----------- -----------
19,497,000 19,345,000
Less:
Treasury stock (2,418,000) (2,408,000)
Employee Stock Ownership Plan Loan
Payable (175,000) (225,000)
----------- -----------
Total shareholders' equity 16,904,000 16,712,000
----------- -----------
$33,226,000 $34,136,000
=========== ===========
5
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months
ended June 30,
1999 1998
---- ----
Net Sales $ 9,053,000 $15,156,000
----------- -----------
Cost and expenses:
Cost of products sold 6,413,000 10,664,000
Selling, general and administrative 2,298,000 2,972,000
Interest expense 42,000 66,000
----------- -----------
8,753,000 13,702,000
----------- -----------
Income before income taxes 300,000 1,454,000
Provision for income taxes 119,000 490,000
----------- -----------
Net income 181,000 964,000
Retained earnings at beginning of
period 17,731,000 15,362,000
----------- -----------
Retained earnings at end of period $17,912,000 $16,326,000
=========== ===========
Per Share Data:
Basic:
Net income $.12 $.58
==== ====
Diluted:
Net income $.12 $.57
==== ====
6
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30,
1999 1998
---- ----
Operating activities:
Net income $ 181,000 $ 964,000
---------- ----------
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation and amortization 263,000 267,000
Loss on sale of property, plant and
equipment 10,000
(Increase) Decrease in operating assets:
Accounts receivable 637,000 (1,822,000)
Inventory, net of customer deposits 294,000 1,702,000
Prepaid expenses and other current and
non-current assets 19,000 (4,000)
Increase (Decrease) in operating
liabilities:
Accounts payable, accrued compensation,
accrued expenses and other liabilities (1,374,000) (2,928,000)
Accrued compensation, accrued pension
liability, and accrued postemployment
benefits 204,000 261,000
Domestic and foreign income taxes 87,000 (163,000)
Other long-term liabilities (2,000) (12,000)
---------- ----------
Total adjustments 128,000 (2,689,000)
---------- ----------
Net cash provided (used) by operating activities 309,000 (1,725,000)
---------- ----------
Investing activities:
Purchase of property, plant and equipment (79,000) (203,000)
Purchase of investments (904,000) (1,251,000)
Proceeds from maturity of investments 906,000 1,366,000
---------- ----------
Net cash used by investing activities (77,000) (88,000)
---------- ----------
Financing activities:
Increase in short-term debt 165,000 2,823,000
Proceeds from issuance of long-term debt 5,110,000
Principal repayments on long-term debt (81,000) (5,050,000)
Purchase of treasury stock (10,000) (1,700,000)
---------- ----------
Net cash provided by financing activities 74,000 1,183,000
---------- ----------
Effect of exchange rate on cash (6,000)
---------- ----------
Net decrease in cash and equivalents 300,000 (630,000)
Cash and equivalents at beginning of period 120,000 1,694,000
---------- ----------
Cash and equivalents at end of period $ 420,000 $1,064,000
========== ==========
7
GRAHAM CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL INFORMATION
JUNE 30, 1999
- -------------------------------------------------------------------------
NOTE 1 - INVENTORIES
- -------------------------------------------------------------------------
Major classifications of inventories are as follows:
6/30/99 3/31/99
------- -------
Raw materials and supplies $1,902,000 $1,945,000
Work in process 5,175,000 5,025,000
Finished products 1,418,000 1,231,000
---------- ----------
8,495,000 8,201,000
Less - progress payments 1,925,000 1,398,000
---------- ----------
$6,570,000 $6,803,000
========== ==========
- -------------------------------------------------------------------------
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
ended June 30,
1999 1998
---- ----
Basic earnings per share
Numerator:
Net income $ 181,000 $ 964,000
--------- ---------
Denominator:
Weighted common shares
outstanding 1,520,000 1,650,000
Share equivalent units (SEU)
outstanding 5,000 3,000
--------- ---------
Weighted average shares and
SEU's outstanding 1,525,000 1,653,000
--------- ---------
Basic earnings per share $.12 $.58
==== ====
8
Three months
ended June 30,
1999 1998
---- ----
Diluted earnings per share
Numerator:
Net income $ 181,000 $ 964,000
Denominator: --------- ---------
Weighted average shares and
SEU's outstanding 1,525,000 1,653,000
Stock options outstanding 6,000 27,000
Contingently issuable SEU's 6,000 6,000
--------- ---------
Weighted average common and
potential common shares
outstanding 1,537,000 1,686,000
--------- ---------
Diluted earnings per share $.12 $.57
==== ====
Options to purchase 55,200 shares of common stock at $21.44 per
share and 9,000 shares at $21.25, 2,250 shares at $17.88, 8,250
shares at $17, 2,250 shares at $16.13, 26,250 shares at $13.17,
8,250 shares at $11.33 and 9,000 shares at $11 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, resulting in an anti-dilutive effect.
- -------------------------------------------------------------------------
NOTE 3 - CASH FLOW STATEMENT
- -------------------------------------------------------------------------
Actual interest paid was $41,000 and $66,000 for the three
months ended June 30, 1999 and 1998, respectively. In addition,
actual income taxes paid were $32,000 and $653,000 for the three
months ended June 30, 1999 and 1998, respectively.
- -------------------------------------------------------------------------
NOTE 4 - COMPREHENSIVE INCOME
- -------------------------------------------------------------------------
Total comprehensive income was $152,000 and $965,000 for the
three months ended June 30, 1999 and 1998, respectively. Other
comprehensive income or loss included foreign currency translation
adjustments of $(29,000) and $1,000 for the quarters ended June 30,
1999 and 1998, respectively.
9
- -------------------------------------------------------------------------
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,
1999 1998
---- ----
Sales from external customers
U.S. $8,054,000 $13,941,000
U.K. 999,000 1,215,000
---------- -----------
Total $9,053,000 $15,156,000
========== ===========
Intersegment sales
U.S.
U.K. $254,000 $340,000
-------- --------
Total $254,000 $340,000
======== ========
Segment net income (loss)
U.S. $233,000 $907,000
U.K. (52,000) 57,000
-------- --------
Total $181,000 $964,000
======== ========
10
GRAHAM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
June 30, 1999
Results of Operations
- ---------------------
Sales decreased 40% in the first quarter of fiscal year 2000
compared to the same period last year. Sales for the first quarter
decreased 42% in the United States and 18% in the United Kingdom
compared to fiscal year 1999. The decrease in the United States
sales is attributable to a significant decline in export shipments
as a result of the economic downturn in Asia and Latin America.
The decline in the United Kingdom sales is due in part to delays
experienced in completing one large contract. In addition, the
continued strength of the pound sterling as compared to other
foreign currencies and the recession in the United Kingdom
manufacturing sector have adversely impacted sales volumes and
prices.
Cost of sales as a percent of sales for the first quarter was
71% compared to 70% a year ago. Cost of sales as a percent of
sales for the United States operating segment was 71% for the first
quarter of both fiscal year 2000 and 1999. For the United Kingdom
operations, cost of sales as a percent of sales rose to 67%
compared to 60% last year. While cost of sales as a percent of
sales remained consistent in the United States, the significant
increase in the United Kingdom is due to product mix and reduced
selling prices, however, production overhead expenses have been
managed to remain at or below prior year levels.
Selling, general and administrative expenses for the three
months ended June 30, 1999 were 23% below selling, general and
administrative expenses for the same period of fiscal year 1999 and
represented 25% of sales as compared to 20% in the first quarter
last year. The reduced expenses is reflective of the downsizing of
the work force in the United States, as well as, a decline in
selling expenses which are directly related to sales. However,
selling, general and administrative expenses as a percent of sales
exceeds the prior year percentage primarily due to fewer sales
during the current quarter.
Interest expense for the first quarter is down 36% from the
same period in fiscal year 1999. The decrease is attributable to
lower levels of short- and long-term debt during the quarter in
both the United States and United Kingdom.
The effective income tax rate for the first quarter was 40%
compared to 34% for the comparable three months of last year. No
tax benefits have been recognized on the current year operating
loss in the United Kingdom causing this rate to increase.
11
Liquidity and Capital Resources
- -------------------------------
The financial condition of the Company remains strong. Working
capital of $12,403,000 at June 30, 1999 compares to $11,989,000 at
March 31, 1999. The working capital increase reflects decreases of
$739,000 and $1,153,000 in current assets and current liabilities,
respectively. The decrease in current assets related primarily to
a significant decline in accounts receivable which is attributable
to low sales volumes in the first quarter. Payments of accrued
compensation were made during the first quarter resulting in the
decrease in current liabilities.
Net cash provided from operating activities for the first
quarter was $309,000. Net income, adjusted for depreciation and
amortization, provided $444,000 of operating cash. This was offset
by payments of certain benefits accrued in the prior year. Net
cash used in investing activities for the three month period of
$77,000 was utilized for capital expenditures which were $79,000
compared to $203,000 for the same period last year. There were no
major commitments for capital expenditures as of June 30, 1999.
Management anticipates spending approximately $600,000 in fiscal
year 2000 for capital additions to upgrade computer equipment and
machinery. Net cash provided from financing activities of $74,000
was due to an increase in short-term debt used to finance working
capital needs.
Management expects that the cash flow from operations and lines
of credit will provide sufficient resources to fund the fiscal year
2000 cash requirements.
Total long-term debt was reduced from $1,051,000 at year end to
$908,000 at June 30, 1999 due to scheduled paydowns on bank debt
and capital leases. The long-term debt to equity ratio of 5%
compares to 6% at March 31, 1999. The total liabilities to assets
ratio is 49% compared to 51% at March 31, 1999. 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 $7,334,000 compared to
$11,162,000 for the same period last year. New orders in the
United States were $6,538,000 compared to $9,879,000 for the same
period in fiscal year 1999. New orders in the United Kingdom were
$796,000 compared to $1,283,00 for the same quarter last year. The
significant decline in new orders, specifically in the United
States, is directly related to the economic downturn in Asia and
Brazil and the poor market conditions in the capital equipment
business.
Management is focusing its efforts on increasing the Company's
market share in the standard product business and developing
strategies to seize opportunities in the power, refinery and
petrochemical markets.
12
New Orders and Backlog (concluded)
- ----------------------------------
Backlog of unfilled orders at June 30,1999 is $13,857,000
compared to $24,215,000 at this time a year ago and $15,438,000 at
March 31, 1999. Current backlog in the United States of
$13,108,000 compares to $14,470,000 at March 31, 1999 and
$23,240,000 at June 30, 1998. Current backlog in the United
Kingdom of $749,000 compares to $968,000 at March 31, 1999 and
$975,000 at June 30, 1998. The current backlog is reflective of
the recent order activity. 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.
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 and short-term investments. 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 June 30, 1999, a 1% change in
interest rates would impact annual interest expense by two thousand
dollars. To manage interest rate risk in regards to short-term
investments, the Company invests primarily in fixed rate
instruments and holds investments to maturity.
Historically, Graham's international consolidated sales
exposure approximates fifty percent 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. Graham uses
derivatives for no other reason.
The loss from foreign operations reduced Graham's first
quarter net income by 22%. 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
income by approximately $5,000.
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
13
Quantitative and Qualitative Disclosures about Market Risk (concluded)
- ----------------------------------------------------------------------
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, 1999 and 1998 and a $9.25 per share
price, a twenty to forty percent 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
$30,000 to $60,000 for 2000 and $39,000 to $78,000 for 1999. In
the first quarter of 2000, the loss, net of tax, recorded due to
the increase in the stock price was not significant. Assuming the
net income target of $500,000 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, 1999 market price of the
Company's stock of $9.25 per share, a twenty to forty percent
change in the stock price would positively or negatively impact the
Company's operating results by $39,000 to $80,000 in 2001, $42,000
to $84,000 in 2002 and $44,000 to $88,000 in 2003, 2004 and 2005.
Year 2000 Readiness
- -------------------
The Company has completed its year 2000 readiness program.
This program included he 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. The cost of the program was insignificant. Although the
Company believes its internal operations are year 2000 compliant,
it cannot assure anyone that its customers, suppliers or
governmental agencies will be ready.
Accounting Standard Changes
- ---------------------------
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts, and derivatives utilized for hedging activities.
It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and
measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. Management is evaluating the impact this statement
may have on the Company's financial statements.
14
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1999
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, 1999.
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 08/05/99
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.)
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.