FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For Quarterly Period Ended December 31,1997
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 incorporation (I.R.S. Employer
or organization) Identification No.)
20 FLORENCE AVENUE, Batavia, NEW YORK 14020
(Address of Principal Executive Offices)
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 February 9, 1998 there were outstanding 1,690,595 shares
of common stock, $.10 par value.
<PAGE>2
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 1997
PART I - FINANCIAL INFORMATION
Unaudited consolidated financial statements of Graham
Corporation (the Company) and its subsidiaries as of December 31,
1997 and for the three month and nine 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 December 31, 1997 and its
results of operations for the three month and nine month periods
then ended.
<PAGE>3
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
---- ----
<S> <C> <C>
Assets
Current Assets:
Cash and equivalents $ 2,492,000 $ 854,000
Marketable securities 3,405,000 548,000
Trade accounts receivable 7,301,000 10,388,000
Inventories 7,439,000 6,609,000
Deferred tax asset 841,000 841,000
Prepaid expenses and other current
assets 511,000 507,000
----------- -----------
21,989,000 19,747,000
----------- -----------
Property, plant and equipment, net 9,519,000 9,490,000
Deferred tax asset 1,894,000 1,894,000
Other assets 39,000 65,000
----------- -----------
$33,441,000 $31,196,000
=========== ===========
</TABLE>
<PAGE>4
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (concluded)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
---- ----
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt due banks $ 59,000
Current portion of long-term debt 475,000 $ 479,000
Accounts payable 3,790,000 3,887,000
Accrued compensation 3,989,000 3,100,000
Accrued expenses and other
liabilities 801,000 1,056,000
Customer deposits 1,384,000 509,000
Domestic and foreign income taxes
payable 320,000 212,000
Estimated liabilities of
discontinued opertions 61,000 232,000
----------- -----------
10,879,000 9,475,000
Long-term debt 952,000 2,764,000
Deferred compensation 1,022,000 1,170,000
Deferred tax liability 31,000 31,000
Other long-term liabilities 209,000 302,000
Deferred pension liability 1,688,000 1,765,000
Accrued postretirement benefits 3,256,000 3,179,000
----------- -----------
Total liabilities 18,037,000 18,686,000
----------- -----------
Shareholders' equity:
Preferred stock, $1 par value -
Authorized, 500,000 shares
Common stock, $.10 par value -
Authorized, 6,000,000 shares
Issued 1,688,795 shares on
December 31, 1997 and 1,587,655
on March 31, 1997 169,000 159,000
Capital in excess of par value 4,231,000 3,226,000
Cumulative foreign currency
translation adjustment (1,804,000) (1,812,000)
Retained earnings 13,283,000 11,568,000
----------- -----------
15,879,000 13,141,000
Less:
Treasury Stock (6,000)
Employee Stock Ownership Plan Loan
Payable (475,000) (625,000)
----------- -----------
Total shareholders' equity 15,404,000 12,510,000
----------- -----------
$33,441,000 $31,196,000
=========== ===========
</TABLE>
<PAGE>5
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Three Months Nine Months
ended December 31, ended December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $11,914,000 $13,609,000 $38,601,000 $39,723,000
----------- ----------- ----------- -----------
Cost and expenses:
Cost of products sold 8,292,000 9,137,000 26,271,000 27,569,000
Selling, general and
administrative 3,161,000 2,764,000 9,568,000 8,572,000
Interest expense 61,000 49,000 201,000 229,000
----------- ----------- ----------- -----------
11,514,000 11,950,000 36,040,000 36,370,000
----------- ----------- ----------- -----------
Income before income taxes 400,000 1,659,000 2,561,000 3,353,000
Provision for income taxes 104,000 (9,000) 846,000 656,000
----------- ----------- ----------- -----------
Net income 296,000 1,668,000 1,715,000 2,697,000
Retained earnings at
beginning of period 12,987,000 9,247,000 11,568,000 8,218,000
----------- ----------- ----------- -----------
Retained earnings at end
of period $13,283,000 $10,915,000 $13,283,000 $10,915,000
=========== =========== =========== ===========
Per Share Data:
Net income: Basic $.18 $1.05 $1.04 $1.70
==== ===== ===== =====
Diluted $.17 $1.03 $1.01 $1.67
==== ===== ===== =====
</TABLE>
<PAGE>6
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net income $1,715,000 $2,697,000
---------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 782,000 688,000
(Gain) Loss on sale of property, plant
and equipment 1,000 (40,000)
(Increase) Decrease in operating assets:
Accounts receivable 3,094,000 81,000
Inventory, net of customer deposits 51,000 (22,000)
Prepaid expenses and other current and
non-current assets (3,000) (273,000)
Increase (Decrease) in operating liabilities:
Accounts payable, accrued compensation,
accrued expenses and other liabilities 531,000 1,533,000
Estimated liabilties of discontinued
operations (173,000) (54,000)
Deferred compensation, deferred pension
liability, and accrued postemployment
benefits (151,000) 311,000
Domestic and foreign income taxes 108,000 106,000
Other long-term liabilities (93,000) 78,000
Deferred income taxes (454,000)
---------- ----------
Total adjustments 4,147,000 1,954,000
---------- ----------
Net cash provided by operating activities 5,862,000 4,651,000
---------- ----------
</TABLE>
<PAGE>7
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Investing activities:
Purchase of property, plant and equipment (766,000) (1,190,000)
Proceeds from sale of property, plant and
equipment 11,000 60,000
Purchase of marketable securities (7,313,000) (2,177,000)
Proceeds from maturity of marketable
securities 4,452,000 1,432,000
---------- ----------
Net cash used by investing activities (3,616,000) (1,875,000)
---------- ----------
Financing activities:
Increase (Decrease) in short-term debt 59,000 (355,000)
Proceeds from issuance of long-term debt 5,441,000 915,000
Principal repayments on long-term debt (7,129,000) (2,658,000)
Issuance of common stock 1,008,000 8,000
Sale of treasury stock 13,000
---------- ----------
Net cash used by financing activities (608,000) (2,090,000)
---------- ----------
Effect of exchange rate on cash 26,000
---------- ----------
Net increase in cash and equivalents 1,638,000 712,000
Cash and equivalents at beginning of period 854,000 551,000
---------- ----------
Cash and equivalents at end of period $2,492,000 $1,263,000
========== ==========
</TABLE>
<PAGE>8
GRAHAM CORPORATION AND SUBSIDIARIES / NOTES TO FINANCIAL INFORMATION
December 31, 1997
NOTE 1 - INVENTORIES:
Major classifications of inventories are as follows:
<TABLE>
<CAPTION>
12/31/97 3/31/97
-------- -------
<S> <C> <C>
Raw materials and supplies $ 2,357,000 $ 2,450,000
Work in process 5,681,000 3,985,000
Finished products 1,116,000 1,163,000
----------- -----------
9,154,000 7,598,000
Less - progress payments 1,715,000 989,000
----------- -----------
$ 7,439,000 $ 6,609,000
=========== ===========
</TABLE>
NOTE 2 - EARNINGS PER SHARE:
The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share," which is effective
for financial statements for both interim and annual periods ending
after December 15, 1997. In accordance with this new standard,
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.
All prior period earnings per share amounts have been restated to
reflect this change. A reconciliation of the numerators and
denominators of basic and diluted earnings per share is presented
below:
<TABLE>
<CAPTION>
Three months Nine months
ended December 31, ended December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earning per share
Numerator:
Net income $ 296,000 $1,668,000 $1,715,000 $2,697,000
---------- ---------- ---------- ----------
Denominator:
Weighted common shares
outstanding 1,686,000 1,586,000 1,641,000 1,586,000
Share equivalent units
(SEU) outstanding 3,000 3,000
---------- ---------- ---------- ----------
Weighted average shares
and SEU's outstanding 1,689,000 1,586,000 1,644,000 1,586,000
---------- ---------- ---------- ----------
Basic earnings per share $.18 $1.05 $1.04 $1.70
==== ===== ===== =====
</TABLE>
<PAGE>9
<TABLE>
<CAPTION>
Three months Nine months
ended December 31, ended December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Diluted earnings per share
Numerator:
Net income $ 296,000 $1,668,000 $1,715,000 $2,697,000
---------- ---------- ---------- ----------
Denominator:
Weighted average shares
and SEU's outstanding 1,689,000 1,586,000 1,644,000 1,586,000
Stock options
outstanding 38,000 22,000 48,000 24,000
Contingently issuable
SEU's 3,000 4,000 2,000 4,000
---------- ---------- ---------- ----------
Weighted average common
and potential common
shares outstanding 1,730,000 1,612,000 1,694,000 1,614,000
---------- ---------- ---------- ----------
Diluted earnings per
share $.17 $1.03 $1.01 $1.67
==== ===== ===== =====
</TABLE>
Options to purchase 55,200 shares of common stock at $21.44 per
share and 11,250 shares at $21.25 were granted during the third
quarter of fiscal year 1998 but 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. The options, which expire in October 2007, were
still outstanding at December 31, 1997.
NOTE 3 - CASH FLOW STATEMENT:
Actual interest paid was $201,000 and $224,000 for the nine
months ended December 31, 1997 and 1996, respectively. In
addition, actual income taxes paid were $738,000 and $1,000,000 for
the nine months ended December 31, 1997 and 1996.
NOTE 4 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
SFAS No.130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 establishes standards for 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. SFAS No.
130 is effective for fiscal years beginning after December 31, 1997
and is not expected to have a material effect on the Company's
financial statements.
<PAGE>10
NOTE 4 - RECENTLY ISSUED ACCOUNTING STANDARDS (concluded)
SFAS No. 131 establishes standards for reporting information
about operating segments by public companies in their financial
statements. It also establishes related disclosures about products
and services, geographic areas and major customers. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997.
The Company is currently evaluating what impact this standard will
have on its disclosures.
<PAGE>11
GRAHAM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
December 31, 1997
Results of Operations
- ---------------------
Sales decreased 12% in the third quarter of fiscal year 1998
compared to the same period in 1996. Sales for the third quarter
declined 16% in the United States and increased 27% in the United
Kingdom compared to 1996. Sales for the nine months ended December
31, 1997 were less than sales for the same period last year by 3%.
Sales in both the United States and United Kingdom decreased 3%
from the same period last year. The reduced sales in the United
States is primarily attributable to sales volume as one significant
job did not ship in the third quarter as originally scheduled.
Sales for the fourth quarter are expected to substantially exceed
third quarter sales which is typical of the Company's business
cycle. The increase in the United Kingdom third quarter sales is
due to the completion of a large contract and an increase in new
orders with short production cycles allowing the equipment to be
manufactured and shipped within the quarter. The decline in United
Kingdom sales for the nine month period is reflective of the fierce
competition encountered in obtaining new orders due to the strength
of the Pound Sterling.
Cost of sales as a percent of sales for the third quarter was
70% compared to 67% a year ago. Cost of sales as a percent of
sales for the three month period was 70% in the United States
compared to 67% last year and 65% in the United Kingdom compared to
64% last year. For the nine months, cost of sales as a percent of
sales was relatively consistent at 68% compared to 69% a year ago.
In the United States, the cost of sales percentage was 69% compared
to 70% last year and in the United Kingdom it improved to 63% from
65% for the same period last year. The unfavorable percentages for
the third quarter are attributable to product mix and the impact of
production overhead expenses remaining constant while sales
declined. The improvement in the cost of sales percentages for the
nine month period is due to a reduction in material costs.
Selling, general and administrative expenses were 14% greater
in the third quarter compared to the same period in 1996, and
represented 27% of sales compared to 20% in 1996. For the nine
month period, selling, general and administrative expenses
increased 12% as compared to 1996 and were 25% of sales compared to
22% in 1996. These increases are primarily attributable to the
hiring of additional sales personnel and higher selling expenses
incurred as part of the implementation of the U.S. subsidiary's
strategic marketing plan. In addition, the United Kingdom
subsidiary recognized a restructuring charge in the third quarter
as a result of downsizing the work force.
Interest expense for the third quarter of fiscal year 1998
exceeded interest expense for the comparable three month period of
1996 by 24% due to additional borrowing by the United Kingdom
operation. For the nine month period, interest expense declined
12% as compared to 1996. This decrease mainly reflects lower
interest rates and minimal borrowing on the United States revolving
credit facility.
<PAGE>12
The effective income tax rates for the third quarter and nine
month period of fiscal year 1998 were 26% and 33%, respectively.
The favorable tax rate for the quarter resulted from the
determination that certain United Kingdom tax losses will be
utilized this year. The 1996 effective tax rates for the three
months and nine months ended December 31, 1996 were unusually low
due to the utilization of United Kingdom corporate expenses to
offset income and a decrease in the valuation allowance.
Financial Condition
- -------------------
The financial condition of the Company has improved since March
31, 1997. Working capital of $11,110,000 at December 31, 1997
compares to $10,272,000 at the end of March. This working capital
increase reflects an increase in current assets and current
liabilities of $2,242,000 and $1,404,000, respectively. The
increase in current assets related primarily to an increase in cash
and equivalents and marketable securities offset by a decrease in
accounts receivable due to a decline in sales. The increase in
current liabilities is due to an increase in progress payments
received from customers for jobs in process and an increase in
accrued compensation related to the timing of the accrual and
payment of certain benefits. The current ratio at December 31,
1997 is 2.02 compared to 2.08 at March 31, 1997.
Capital expenditures for the nine month period were $766,000
compared to $1,190,000 for the same period in 1996. Commitments
for capital expenditures as of December 31, 1997 were approximately
$400,000.
Short term debt at December 31, 1997 was $59,000 which compares
to a zero balance at March 31, 1997. This represents borrowings in
the United Kingdom for working capital needs. Total long term debt
decreased $1,816,000 due primarily to paydowns on the United States
revolving line of credit. The long term debt to equity ratio is 9%
compared to 26% at March 31, 1997 and the total liabilities to
assets ratio is 54% compared to 60% at March 31, 1997.
Management expects that the cash flow from operations and lines
of credit will provide sufficient resources to fund the 1998 cash
requirements.
New Orders and Backlog
- ----------------------
New orders for the third quarter were $11,951,000 compared to
$16,081,000 for the same period last year. New orders in the
United States were $10,981,000 compared to $14,838,000 for the same
period in 1996. New orders in the United Kingdom were $970,000
compared to $1,243,000 for the same quarter last year.
For the nine month period, new orders were $49,211,000 compared
to $43,610,000 for the comparable nine month period of 1996. New
orders in the United States were $46,419,000 compared to
$39,894,000 for the same period last year and new orders in the
United Kingdom were $2,792,000 compared to $3,716,000 in 1996.
Although new orders in the United States for the third quarter were
below expectations due to project delays at the contractor level,
<PAGE>13
New Orders and Backlog (concluded)
- ----------------------------------
year-to-date order intake has been very good due to strong market
conditions. The difficulty in obtaining new orders in the United
Kingdom is attributable to competition and the strength of the
Pound Sterling in relation to other European currencies. In light
of the recent events in the Far East, the Company anticipates
increased competition in obtaining new orders from the Asian
markets, and, therefore, will focus its efforts on other markets
that have not been as severely impacted by the Asian crisis.
Backlog of unfilled orders at December 31, 1997 is $31,549,000
compared to $25,578,000 at this time a year ago and $22,348,000 at
March 31, 1997. Current backlog in the United States of
$30,994,000 compares to $21,011,000 at March 31, 1997 and
$24,514,000 at December 31, 1996. Current backlog in the United
Kingdom of $555,000 compares to $1,337,000 at March 31, 1997 and
$1,064,000 at December 31, 1996. 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
- -------------
On January 29, 1998, the Board of Directors authorized a
repurchase of up to 100,000 shares of the Company's common stock.
This action reflects management's confidence in the future of the
business and is another way to utilize the Company's resources to
add to shareholder value.
<PAGE>14
GRAHAM CORPORATION
FORM 10-Q
DECEMBER 31, 1997
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 December 31, 1997.
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 &
Administraton / CFO
Date 02/09/98
<PAGE>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(ii) to the Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1995, 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.)
(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-unaduited interim financial information
Not applicable.
<PAGE>16
Index to Exhibits (cont.)
- -------------------------
(18) Letter rechange 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Graham Corporation consolidated balance sheet and consolidated statement
of operations and retained earnings and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 2,492
<SECURITIES> 3,405
<RECEIVABLES> 7,309
<ALLOWANCES> 8
<INVENTORY> 7,439
<CURRENT-ASSETS> 21,989
<PP&E> 25,130
<DEPRECIATION> 15,611
<TOTAL-ASSETS> 33,441
<CURRENT-LIABILITIES> 10,879
<BONDS> 952
0
0
<COMMON> 169
<OTHER-SE> 15,235
<TOTAL-LIABILITY-AND-EQUITY> 33,441
<SALES> 38,601
<TOTAL-REVENUES> 38,601
<CGS> 26,271
<TOTAL-COSTS> 26,271
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 201
<INCOME-PRETAX> 2,561
<INCOME-TAX> 846
<INCOME-CONTINUING> 1,715
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,715
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.01
</TABLE>
