<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended March 31, 1999.
[ ] 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
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK (Par Value $.10) American Stock Exchange
- ---------------------------------- ----------------------------------
Title of Class Name of each exchange on which
registered
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK PURCHASE RIGHTS
----------------------------
Title of Class
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 (the
"Act") 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
--- ---
page 1 of 63
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best or registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 15, 1999 was $12,111,366.
As of June 15, 1999, there were outstanding 1,519,995 shares of common stock,
$.10 par value. As of June 18, 1999, there were outstanding 1,519,995 common
stock purchase rights.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Notice of Meeting and Proxy Statement for the 1999 Annual
Meeting of Stockholders is incorporated by reference into Part
III of this filing.
An Exhibit Index is located at page 63 of this filing under the sequential
numbering system prescribed by Rule 0-3(b) of the Act.
A cross reference sheet appears as the final page of this filing setting forth
item numbers and captions of Form 10-K and the pages of the Registrant's Proxy
Statement for 1999 Annual Meeting of Stockholders where the corresponding
information appears.
page 2 of 63
<PAGE> 3
PART I
------
Item 1. Business
- ------- --------
(a) General Development of Business
-------------------------------
Registrant is a Delaware company incorporated in 1983. It is
the successor to Graham Manufacturing Co., Inc., which was incorporated in 1936.
The Registrant's business consists of two segments, one operated by Registrant
in the United States and one operated by its indirectly wholly-owned subsidiary
in the United Kingdom.
UNITED STATES OPERATIONS
During the Fiscal Year ended March 31, 1999 ("FY 1998-99") the
Registrant's U.S. operations consisted of its engineering and manufacturing
business in Batavia, NY. Prior to January 1, 1999, business was carried out
through the Registrant's wholly-owned subsidiary, Graham Manufacturing Co., Inc.
("GMC"). Effective January 1, 1999, GMC merged into the Registrant.
The Registrant is a well-recognized supplier of steam jet
ejector vacuum systems, surface condensers for steam turbines, liquid ring
vacuum pumps and compressors, dry pumps and various types of heat exchangers
such as Heliflow and plate and frame exchangers. It possesses expertise in
combining these various products into packaged systems for sale to its customers
in a variety of industrial markets, including oil refining, chemical,
petrochemical, power, pulp and paper, othe process applications, and
shipbuilding.
FY 1998-99 U.S. sales were $48.9 million, a decrease of 5.6%
from the previous fiscal year.
New orders in FY 1998-99 were $36.3 million, down 39% from the
previous fiscal year. Year End backlog stood at $14.6 million, compared to $27.3
million on March 31, 1998 and $21.0 million on March 31, 1997. This decrease was
due mainly to the worldwide recession in the Registrant's principal markets,
exacerbated by the virtual cessation in Asia of capital projects that employ
equipment of the type sold by the Registrant. Condenser orders were down, as
were orders for ejectors and plate heat exchangers. Sales of water heaters were
down. The chemical and refinery markets accounted for slightly less than half of
the revenue for FY 1998-99. Sales of smaller equipment, which accounts for
approximately half of the Registrant's U.S. business, suffered from sluggish
performance during the first part of the year, but returned during the second
half to levels consistent with those of the previous fiscal year.
The decrease in sales put pressure on margins, which were
generally down.
The Registrant's U.S. export sales represented 52% in FY
1998-99. Export sales reflected a near disappearance of new orders
page 3 of 63
<PAGE> 4
from Asia and Latin America. Although the Asian and Latin American economies
appear to have bottomed out, management does not expect these economies to
regain full vitality for at least another year. Refinery work, still affected by
the uncertainty of oil prices and the consolidation of the large oil companies,
is expected to continue at a sluggish pace until plant utilization goes up.
These factors are expected to continue to depress the core markets for sales of
large equipment, although export sales, and sales to Asia particularly, are
expected to be affected by Asian financial uncertainties.
The Registrant had 297 employees in the United States as of as
March 31, 1999.
UNITED KINGDOM OPERATIONS
During FY 1998-99, the Registrant's U.K. operations were
undertaken by its indirectory wholly-owned subsidiary, Graham Precision Pumps
Limited (GPPL) in Congleton, Cheshire, England. GPPL is wholly-owned by Graham
Vacuum & Heat Transfer Limited, which in turn is wholly-owned by the Registrant.
Graham Vacuum and Heat Transfer Limited has no employees.
GPPL manufactures liquid ring vacuum pumps, rotary piston
pumps, oil sealed rotary vane pumps, atmospheric air operated ejectors and
complete vacuum pump systems that are factory assembled with self-supporting
structure.
Sales for FY 1998-99 stood at $5,647,000. This figure
represents the Registrant's lowest U.K. sales in the last three years. U.K.
sales in FY 1998-99 were affected by the strength of the Pound Sterling versus
other currencies and the recession in the U.K. manufacturing sector. Orders for
offshore oil production, which traditionally had shown vitality, ceased almost
entirely.
However, GPPL saw success in FY 1998-99 in obtaining orders
for package systems, an opportunity combining the Company's various competencies
in the manufacture of liquid ring vacuum pumps, ejectors and condenser
technology.
GPPL employed 63 people on March 31, 1999.
page 4 of 63
<PAGE> 5
Capital Expenditures
- --------------------
The Registrant's capital expenditures for FY 1998-99 amounted
to $1,189,000. Of this amount, $1,179,000 was for the U.S. business and $10,000
was for the U.K. business.
(b) Financial Information About Industry Segments
---------------------------------------------
(1) Industry Segments and (2) Information as to Lines of Business
-------------------------------------------------------------
Graham Corporation operates in only one industry segment which
is the design and manufacture of vacuum and heat transfer equipment. The
information required under this item regarding this industry segment is set
forth in statements contained in Notes 1 and 3 to the Consolidated Financial
Statements on pages 24-28 and 30 of the Annual Report on Form 10-K.
(c) Narrative Description of Business
---------------------------------
(1) Business Done and Intended to be Done
-------------------------------------
(i) Principal Products and Markets
------------------------------
The Registrant designs and manufactures vacuum
and heat transfer equipment, primarily custom built. Its products include steam
jet ejector vacuum systems, surface condensers for steam turbines, liquid ring
vacuum pumps and compressors and various types of heat exchangers including
helical coil exchangers marketed under the registered name "Heliflow" and plate
and frame exchangers. These products function to produce a vacuum or to condense
steam or otherwise transfer heat, or any combination of these tasks. They
accomplish this without involving any moving parts and are available in all
metals and in many non-metallic and corrosion resistant materials as well.
This equipment is used in a wide range of
industrial process applications: power generation facilities, including fossil
fuel plants and nuclear plants as well as cogeneration plants and geothermal
power plants that harness naturally occurring thermal energy; petroleum
refineries; chemical plants; pharmaceutical plants; plastics plants; fertilizer
plants; breweries and titanium plants; liquefied natural gas production and soap
manufacturing; air conditioning systems; food processing plants and other
process industries. Among these the principal markets for the Registrant's
products are the chemical, petrochemical, petroleum refining, and electric power
generating industries. The Registrant's equipment is sold by a combination of
direct company sales engineers and independent sales representatives located in
over 40 major cities in the United States and abroad.
page 5 of 63
<PAGE> 6
(ii) Status of Publicly Announced New Products or
--------------------------------------------
Segments
--------
The Registrant has no plans for new products or
for entry into new industry segments that would require the investment of a
material amount of the Registrant's assets or that otherwise is material.
(iii) Sources and Availability of Raw Materials
-----------------------------------------
Registrant experienced no serious material
shortages in FY 1998-99.
(iv) Material Patents, Trademarks
----------------------------
Registrant holds no material patents,
trademarks, licenses, franchises or concessions the loss of which would have a
materially adverse effect upon the business of the Registrant.
(v) Seasonal Variations
-------------------
No material part of the Registrant's business
is seasonal.
(vi) Working Capital Practices (Not Applicable)
-------------------------
(vii) Principal Customers
-------------------
Registrant's principal customers include the
large chemical, petroleum and power companies, which are end users of
Registrant's equipment in their manufacturing and refining processes, as well as
large engineering contractors who build installations for such companies and
others.
No material part of Registrant's business is
dependent upon a single customer or on a few customers, the loss of any one or
more of whom would have a materially adverse effect on Registrant's business. No
customer of Registrant or group of related customers regularly accounts for as
much as 10% of Registrant's consolidated annual revenue.
(viii) Order Backlog
-------------
Backlog of unfilled orders at March 31, 1999
was $15,438,000 compared to $28,199,000 at March 31, 1998, $22,348,000 at March
31, 1997 and $25,578,000 at December 31, 1996.
(ix) Government Contracts (Not Applicable)
--------------------
page 6 of 63
<PAGE> 7
(x) Competition
-----------
Registrant's business is highly competitive and
a substantial number of companies having greater financial resources are engaged
in manufacturing similar products. Registrant is a relatively small factor in
the product areas in which it is engaged with the exception of steam jet
ejectors. Registrant believes it is one of the leading manufacturers of steam
jet ejectors.
(xi) Research Activities
-------------------
During the year ended December 31, 1996, the
three month transition period ending March 31, 1997, FY 1997-98 and FY 1998-99,
Registrant spent approximately $375,000, $91,000, $404,000 and $371,000,
respectively on research activities relating to the development of new products
or the improvement of existing products.
(xii) Environmental Matters
---------------------
Registrant does not anticipate that compliance
with federal, state and local provisions, which have been enacted or adopted
regulating the discharge of material in the environment or otherwise pertaining
to the protection of the environment, will have a material effect upon the
capital expenditures, earnings and competitive position of the Registrant and
its subsidiaries.
(xiii) Number of Persons Employed
--------------------------
On March 31, 1999, Registrant and its
subsidiaries employed 360 persons.
(d) Financial Information About Foreign and Domestic Operations and
---------------------------------------------------------------
Export Sales
------------
(The information called for under this Item is set forth in
Note 3 to Consolidated Financial Statements, on page 30 of this Annual Report on
Form 10-K.)
Item 2. Properties
- ------- ----------
United States: Registrant's corporate headquarters is located
at 20 Florence Avenue, Batavia, New York.
Registrant owns and operates a plant on approximately
thirty-three acres in Batavia consisting of about 204,000 square feet in several
connected buildings built over a period of time to meet increased space
requirements, including 162,000 square feet in manufacturing facilities, 48,000
square feet for warehousing and a 6,000 square-foot building for product
research and development. A 14,000 square foot extension to the Heavy
Fabrication Building was completed in 1991.
page 7 of 63
<PAGE> 8
Registrant's principal offices are in a 45,000 square-foot
building located in Batavia adjacent to its manufacturing facilities which is
owned by the Company.
The plant and office building have been pledged to secure
certain domestic long-term borrowings.
The Registrant leases U.S. sales offices in Los Angeles and
Houston.
United Kingdom: Registrant's subsidiary, Graham Precision
Pumps Limited, has a 41,000 square-foot manufacturing facility located on 15
acres owned by that company in Congleton, Cheshire, England.
Assets of the Registrant with a book value of $26,480,000 have
been pledged to secure certain domestic long-term borrowings. Short and
long-term borrowings of Registrant's United Kingdom subsidiary are secured by
assets of the subsidiary, which have a book value of $3,518,000.
Item 3. Legal Proceedings
- ------- -----------------
The United States Environmental Protection Agency ("EPA")
named the Company's predecessor-in-interest, Graham Manufacturing Co., Inc. as a
Potentially Responsible Party pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act, as amended, in connection with the
Batavia Landfill Site in the Town of Batavia, New York. A Pilot Allocation
"Final Allocation Report" issued on September 30, 1998 by the allocator selected
under the EPA pilot, allocated 1.597% of total remedial costs to the Company. In
April 1999, EPA announced that it will proceed with a modification of the remedy
for the site announced in a 1995 Record of Decision. EPA's estimate of the
modified remedy is approximately $26,000,000 making the Company's full potential
exposure in accordance with this estimate $416,000. EPA's estimate has not been
audited or evaluated for appropriateness or accuracy and may contain significant
portions which are not eligible for recovery. The Company has recorded a
$300,000 liability for this item. The current portion of this liability is
included in the caption "Accrued Expenses and Other Liabilities" and the
long-term portion is included in the caption "Other Long-Term Liabilities" in
the Consolidated Balance Sheets.
Item 4. Submission of Matters to a Vote of Security Holders
- -------
(Not applicable)
page 8 of 63
<PAGE> 9
PART II
Item 5. Market for Registrant's Common Stock and Related Security
- ------- ---------------------------------------------------------
Holder Matters
--------------
(a) The information called for under this Item is set forth under Item 8,
"Financial Statements and Supplementary Data," in the Statement of Quarterly
Financial Data appearing on page 52 of this Annual Report on Form 10-K.
(b) On June 15, 1999, there were approximately 330 holders of the Registrant's
common stock. This figure includes stockholders of record and individual
participants in security position listings who have not objected to the
disclosure of their names; it does not, however, include individual participants
in security position listings who have objected to disclosure of their names. On
June 15, 1999, the closing price of the Registrant's common stock on the
American Stock Exchange was $8.875 per share.
(c) The Registrant has not paid a dividend since January 4, 1993, when it paid a
dividend of $.07 per share. Currently it does not have plans to resume paying a
dividend in the foreseeable future. Restrictions on dividends are described in
Note 7 to the Consolidated Financial Statements, to be found on pages 36 to 37
of this Report.
page 9 of 63
<PAGE> 10
Item 6. Selected Financial Data
- ------- -----------------------
<TABLE>
<CAPTION>
GRAHAM CORPORATION - TEN YEAR REVIEW
Operations: 1999(1) 1998(1) 1997(1) 1996 1995(2)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $52,978,000 $56,206,000 $14,257,000 $51,487,000 $50,501,000
Gross Profit 14,872,000 18,083,000 4,080,000 15,463,000 13,257,000
Income (Loss) From
Continuing Operations 2,369,000 3,766,000 621,000 3,102,000 1,361,000
Dividends
Common Stock:
- ---------------------------------------------------------------------------------------------
Basic Earnings (Loss)
From Continuing
Operations Per Share 1.48 2.27 .39 1.96 .86
Diluted Earnings (Loss)
From Continuing
Operations Per Share 1.46 2.21 .38 1.93 .86
Dividends Per Share
Financial Data:
- ---------------------------------------------------------------------------------------------
Working Capital 11,989,000 12,459,000 10,300,000 8,239,000 7,093,000
Capital Expenditures 1,189,000 1,400,000 237,000 1,291,000 204,000
Depreciation 983,000 905,000 249,000 892,000 927,000
Total Assets 34,136,000 37,030,000 31,224,000 30,494,000 29,499,000
Long-Term Debt 505,000 859,000 2,764,000 1,442,000 3,303,000
Shareholders' Equity 16,712,000 17,775,000 12,538,000 11,915,000 8,426,000
</TABLE>
(1) The financial data presented for 1999 and 1998 is for the twelve months
ended March 31, 1999 and 1998,respectively. The financial data presented for
1997 is for the three month transition period ended March 31, 1997. The
financial data presented for 1996-1989 is for the respective twelve months
ended December 31.
(2) Per share data has been adjusted to reflect a three-for-two stock split on
July 25,1996.
page 10 of 63
<PAGE> 11
<TABLE>
<CAPTION>
GRAHAM CORPORATION - TEN YEAR REVIEW
1994(2) 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 46,467,000 $ 44,592,000 $ 47,514,000 $ 70,368,000 $ 68,042,000 $ 62,226,000
12,153,000 11,661,000 9,234,000 18,825,000 16,739,000 16,661,000
9,000 481,000 (2,153,000) 2,421,000 1,195,000 3,980,000
293,000 289,000 283,000 97,000
- ----------------------------------------------------------------------------------------
.01 .31 (1.37) 1.56 .79 2.70
.01 .31 (1.37) 1.55 .77 2.65
.28 .28 .28 .10
- ----------------------------------------------------------------------------------------
6,819,000 7,075,000 9,601,000 12,220,000 9,531,000 8,493,000
412,000 513,000 9,213,000 2,553,000 2,702,000 2,622,000
1,027,000 1,349,000 1,385,000 1,317,000 1,175,000 1,003,000
29,927,000 41,388,000 45,573,000 42,023,000 41,731,000 37,545,000
5,161,000 6,102,000 9,491,000 7,560,000 4,708,000 3,620,000
7,045,000 14,793,000 14,564,000 14,905,000 14,317,000 12,936,000
</TABLE>
page 11 of 63
<PAGE> 12
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Graham Corporation (consolidated) consists of two operating
segments as determined by geographic areas (USA, UK). Effective January 1, 1999
Graham Manufacturing Co., Inc. and Graham Corporation (USA) were merged, with
the surviving entity being Graham Corporation. Graham Precision Pumps, Ltd.
remained a 100% owned subsidiary of Graham Corporation's UK 100% owned holding
company, Graham Vacuum and Heat Transfer, Limited.
As of April 1, 1997 Graham Corporation changed its financial
year end from December 31, to March 31. The Company reported a transition period
for three months ended March 31, 1997. Sales, net income and all other key
financial indicators reflected the favorable financial conditions reported for
the financial year immediately preceding and following the three months ended
March 31, 1997.
ANALYSIS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
In Thousands of Dollars
-----------------------
1999 1998 1996
---- ---- ----
USA UK USA UK USA UK
--- -- --- -- --- --
<S> <C> <C> <C> <C> <C> <C>
Sales $48,890 $ 5,647 $51,791 $ 5,929 $46,762 $ 6,059
Net Income $ 2,066 $ 355 $ 3,419 $ 333 $ 2,846 $ 351
EPS $ 1.28 $ 0.22 $ 2.01 $ 0.20 $ 1.77 $ 0.22
Identifiable Assets $32,046 $ 4,317 $35,714 $ 3,490 $28,209 $ 4,541
</TABLE>
- --------------------------------------------------------------------------------
1999 COMPARED TO 1998
Consolidated net sales (after elimination of intercompany
sales) for the twelve months ended March 1999 was $52,978,000 as compared to
$56,206,000 for the year ended March 1998. Sales in 1998 were the highest in
Graham Manufacturing Company's history and were particularly benefited by a few
large condenser orders.
Consolidated gross profit margins were 28% as compared to 32%
for 1998. Margins decreased in the USA from 31% to 27% as a result of fewer
sales together with greater production fixed costs, and less indirect production
absorption into inventory at March 31, 1999. Profit margins in the UK decreased
to 30% from 31%. UK operations experienced comparable indirect production costs
to the preceding year with lower current year sales dollars.
Consolidated Selling, General and Administration expenses as a
result of cost cutting measures decreased about 4% from 1998 and, stated as a
percent of sales, remained consistent with 1998, at 22%.
page 12 of 63
<PAGE> 13
Interest expense in 1999 and 1998 was 0.5% and 0.4% of sales,
respectively. Bank indebtedness was approximately 2% of equity for 1999 and 4%
for 1998.
The effective consolidated income tax rate for FYE March 1999
was 13.6% as compared to last year of 31% and an approximate statutory rate of
39%. The USA 1999 effective rate was 24% and the UK rate resulted in income of
$278,000. The USA company received tax exempt income in 1999 in excess of
$500,000. In the UK, tax loss carryforwards that were previously considered
unusable were determined to be utilizable. As a result of this, the related SFAS
No. 109 valuation allowance was reduced.
Net income for the current year was $2,369,000 or $1.46
diluted earnings per share as compared to $3,766,000 or $2.21 diluted earnings
per share in 1998.
1998 COMPARED TO 1996
Consolidated net sales were $56,206,000 for the fiscal year
ended March 31, 1998 compared to $51,487,000 for the twelve months ended
December 31, 1996. Sales from USA operations were 11% greater than 1996 as a
result of increased surface condenser and ejector sales. Sales from UK
operations were down about 2% for 1998. The strong Pound Sterling compared to
other world currencies gave Graham Precision Pumps great difficulty. The Pound,
compared to the Deutsche Mark and French Franc, reached a nine year high.
Consolidated gross profit margins were 32% in 1998 and 30% in
1996. Domestically, margins rose as a result of strong demand for the Company's
products in general and, in particular, a few excellent large orders. Despite
currency disadvantages, UK operations were able to increase by 1% gross profit
margin percentages from 1996 to 31%. Sales per employee in the UK rose from
$84,000 to $97,000.
Consolidated selling, general and administrative expenses
remained consistent from 1996 at 22% of sales.
Consolidated interest expense declined to about 0.4% of
consolidated sales from 0.7% in 1996. Since 1994, when bank debt was equal to
77% of equity, the Company managed to reduce this ratio to 9% in 1996 and 4% in
1998.
The effective income tax rate for 1998 was 31%, up from 22%
but still below the statutory rate as a result of utilization of UK carryforward
tax losses.
Net income for 1998 was $3,766,000 or $2.21 diluted earnings
per share. This compared to 1996 of $3,102,000 and $1.93 per share.
page 13 of 63
<PAGE> 14
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
In Thousands of Dollars
-----------------------
1999 1998 1996
---- ---- ----
<S> <C> <C> <C>
USA $ 18,014 $ 18,084 $ 12,596
UK 925 1,865 1,575
Eliminations (2,227) (2,174) (2,256)
-------- -------- --------
$ 16,712 $ 17,775 $ 11,915
======== ======== ========
Book Value Per Share $ 10.99 $ 10.54 $ 7.52
======== ======== ========
- --------------------------------------------------------------------------------
</TABLE>
1999 COMPARED TO 1998
Shareholders' Equity decreased 6% in 1999. During the year the Company
acquired 164,700 shares of its stock, for a cost of $2,337,000. Treasury shares
can be used to fund employee benefit programs and other reasons determined
appropriate by the Board. Additionally, the UK operation took a charge to equity
of $1,191,000. The charge approximates the difference between the fair market
value of pension plan assets as of March 31, 1999 and the present value of
future cash outlays of pension obligations as of March 31, 1999. A significant
amount of this liability related to the drop in long-term interest rates and the
resulting effect of lowering the discount rate used to present value future
dollars. This portion of the charge can reverse with increased interest rates
and/or future funding of the pension plan. The aforementioned charges were 67%
offset by net income.
1998 COMPARED TO 1996
Shareholders' Equity increased 49% in 1998 over 1996. About
75% of this increase was due to net income and another 18% due to the exercise
of stock options.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In Thousands of Dollars
-----------------------
1999 1998 1996
---- ---- ----
USA UK USA UK USA UK
--- -- --- -- --- --
<S> <C> <C> <C> <C> <C> <C>
Working Capital $11,224 $ 969 $11,783 $ 830 $ 7,359 $ 1,115
Cash Flow from Operations $ 1,874 $ 487 $ 7,052 $ 207 $ 4,703 $ 23
Cash and Marketable
Securities $ 4,928 $ 120 $ 6,495 $ 0 $ 1,860 $ 148
Capital Expenditures $ 1,179 $ 10 $ 1,334 $ 66 $ 604 $ 687
Bank Debt $ 225 $ 176 $ 425 $ 326 $ 675 $ 412
Capital Leases $ 129 $ 521 $ 184 $ 469 $ 172 $ 669
</TABLE>
- --------------------------------------------------------------------------------
1999 COMPARED TO 1998
Consolidated cash flow from operations in 1999 was $2,361,000
compared to $7,259,000 in 1998. Cash from operations
page 14 of 63
<PAGE> 15
was down from the prior year due to decreased net income and the related effects
on working capital accounts due to the timing recognition between accounting for
certain sales for financial presentation on the percentage-of-completion method
and accrual method for income tax purposes. Consolidated working capital
decreased 4% to $11,989,000 as of March 31, 1999 due to the general downward
trend in business conditions. Cash was used for purchasing the Company's stock,
capital expenditures and reducing interest bearing debt.
In recent years the Company's liquidity has been primarily
generated from operations. USA operations expects to continue supporting cash
needs for operations through earnings, liquidity and capital resources in FYE
March 2000. UK operation needs are anticipated to substantially be supported
through earnings. In addition, limited capital infusions from consolidated
sources may occur. Capital expenditures are budgeted to be less than $1,000,000
in FYE 2000. At March 31, 1999 the domestic unused bank line of credit available
was $11,919,000. The UK operation had an unused line of credit available of
$794,000.
1998 COMPARED TO 1996
Net cash provided from operations in 1998 was $7,259,000
compared to $4,726,000 for 1996. The favorable position was due to improved
profits and the ability to obtain progress payments on jobs in work-in-progress.
Inventories increased over balances on hand at March 31, 1997 largely due to the
accounting change recognizing certain sales on the percentage-of-completion
method. As of March 31, 1998 the Company had consolidated working capital of
$12,459,000. This represents a 51% increase over December 31, 1996. Capital
expenditures in 1998 were $1,400,000 compared to 1996 of $1,291,000. Ninety-five
percent of the capital expenditures in 1998 were invested in the USA facilities.
NEW ORDERS AND BACKLOG
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
In Thousands of Dollars
-----------------------
New Orders 1999 1998 1996
- ---------- ---- ---- ----
<S> <C> <C> <C>
USA $ 36,308 $ 59,718 $ 50,049
UK 5,626 5,789 6,482
Eliminations (1,596) (1,759) (1,490)
-------- -------- --------
Consolidated $ 40,338 $ 63,748 $ 55,041
======== ======== ========
In Thousands of Dollars
-----------------------
Backlog 1999 1998 1996
- ------- ---- ---- ----
USA $ 14,624 $ 27,292 $ 24,514
UK 1,127 1,190 1,364
Eliminations (313) (283) (300)
-------- -------- --------
Consolidated $ 15,438 $ 28,199 $ 25,578
======== ======== ========
- --------------------------------------------------------------------------------
</TABLE>
Consolidated orders in the current year were down 37% from
1998 and 27% from 1996. The decrease in new orders in the current year as
compared to the previous two years reflects the
page 15 of 63
<PAGE> 16
global cessation of capital expenditures in the market segments Graham serves
and, in particular, the decline in Asia where new orders were down in excess of
$7,000,000. By product, surface condensers booked FYE 1999 were fewer by
$18,000,000 compared to March 1998. Orders for surface condensers in 1998 were
up from 1996 in excess of $8,000,000 and ejector orders were up over $1,800,000.
Bookings in 1998 were the highest in the Company's history.
The consolidated backlog as of March 31, 1999 was $15,438,000
down 45% from 1998 and 40% from 1996. The backlog at year end will be shipped
before March 31, 2000 and represents orders from traditional markets in Graham's
established product lines.
MARKET RISK (QUANTITATIVE AND QUALITATIVE DISCLOSURES)
The principal market risks (i.e., the risk of loss arising
from changes in market rates and prices) to which Graham is exposed are:
- interest rates
- foreign exchange rates
- equity price risk
The Company is exposed to interest rate risk primarily through
its borrowing activities and less so through investments in marketable
securities. It is the Company's practice to hold investments to maturity.
Management's strategy for managing risks associated with interest rate
fluctuations on debt is to hold interest bearing debt to the absolute minimum
and carefully assess the risks and rewards for incurring long-term debt.
Assuming year end 1999 variable rate debt, a 1% change in interest rates would
impact annual interest expense by two thousand dollars.
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 US 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.
Foreign operations constitute about 15% of Graham's 1999
consolidated net income. As currency exchange rates change, translations of the
income statements of our UK business into US dollars affects year-over-year
comparability of operating results.
page 16 of 63
<PAGE> 17
We do not hedge translation risks because cash flows from UK operations are
mostly reinvested in the UK. A 10% change in foreign exchange rates would impact
reported net income by approximately $35,000.
The Company has a Long-Term Incentive Plan which provides for
awards of share equivalent units (SEU) for outside directors based upon the
Company's performance. The outstanding SEU's are recorded at fair market value
thereby exposing the Company to equity price risk. Gains and losses recognized
due to market price changes are included in the quarterly results of operations.
Based upon the SEU's outstanding at March 31, 1999 and 1998 and a $8 per share
price, a twenty to forty percent change in the respective year end market price
of the Company's common stock would positively or negatively impact the
Company's operating results by $19,000 to $37,000 for 1999 and $22,000 to
$43,000 for 1998. In 1999, the gain, net of tax, recorded due to the decline 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 March 31, 1999 market price of
the Company's stock of $8 per share, a twenty to forty percent change in the
stock price would positively or negatively impact the Company's operating
results by $29,000 to $57,000 in 2000, $39,000 to $77,000 in 2001, $41,000 to
$81,000 in 2002, $43,000 to $85,000 in 2003, and $45,000 to $89,000 in 2004.
OTHER MATTERS
The Company has completed its Y2K readiness program. The
program included the following phrases: identifying affected software, hardware,
manufacturing, and telecommunication equipment; assessing the possible 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. Costs required to be compliant were minor. Although Graham believes its
internal operations are Year 2000 ready, the Company cannot assure anyone that
its customers, suppliers or governmental agencies will be ready.
Increases in material and labor costs traditionally have been
offset by cost cutting measures and selling price increases. Obtaining price
increases are largely a factor of supply and demand for Graham's products,
whereas inflation factors can originate from influences outside of the Company's
direct global competition. Graham will continue to monitor the impact of
inflation in order to minimize its effects in future years through sales growth,
pricing, product mix strategies, productivity improvements, and cost reductions.
The Company's USA operations are governed by federal
environmental laws, principally the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
the Clean Air Act, and the
page 17 of 63
<PAGE> 18
Clean Water Act, as well as state counterparts ("Environmental Laws").
Environmental Laws require that certain parties fund remedial actions regardless
of fault, legality or original disposal or ownership of the site. The Company is
currently participating in an environmental assessment at one site under these
laws. Future remediation expenses at this site are subject to a number of
uncertainties, including the method and extent of remediation (dependent, in
part, on existing laws and technology), the percentage and type of material
attributable to the Company, the financial viability of site owners and the
other parties, and the availability of state and federal funds. Graham has
provided for its anticipated costs relevant to this project.
ACCOUNTING STANDARD CHANGES
As of 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 non owner sources. Comprehensive earnings are
reported under Consolidated Statement of Changes In Shareholders' Equity.
Effective April 1, 1998 the Company adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information," and SFAS
No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits." 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. 132 standardizes the disclosure requirements,
requires additional information on charges in the benefit obligations and fair
values of plan assets and eliminates certain disclosures.
In June 1998 the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
The statement establishes accounting and reporting standards for derivative
instruments, and for hedging activities. The statement is effective for fiscal
years beginning after June 15, 2000. Graham uses derivatives on a limited basis
as hedges for foreign currency exposure. The Company is currently studying the
pronouncement.
FORWARD LOOKING
Winning the competitive edge in the new millennium will
require mature companies to reinvent themselves to capture opportunities and
keep pace with emerging markets, information technology and leave in the
distance traditionally cost-prohibitive infrastructures. The era of virtual
customer, continuous
page 18 of 63
<PAGE> 19
reengineering, and superior quality is today an entrenched organizational
mind-set for survival.
In the 21st century the focus will emphasize growth. Graham
believes potentially Asian markets could significantly grow from the current 25%
world share of GDP. Graham has a well established, successful strategy for
selling into Asia and a history of customer loyalty. The Company believes growth
will come from harvesting ideas from its customers and increased coordination
between R&D and marketing; which will lead to new products and product
enhancements. Additionally, the Company is actively pursuing acquisition
opportunities.
The immediate prospects for obtaining significant new orders
in Asia and elsewhere will be difficult. The world economy is expected to
further weaken in the year 1999. The European community, for the immediate
future, may have plateaued in 1998. Significant Latin American economies could
be affected by political events in months ahead which could weaken adjacent
dependent economies. Although the USA economy is proving to be resilient so far,
substantial markets Graham serves are experiencing consolidation, which has
caused freezes on capital investments.
The Company is in excellent financial condition and will
continue to implement its strategies for growth and will further position itself
to take full advantage of new business opportunities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Included in Item 7, Management's Discussion and Analysis --
Market Risk.
page 19 of 63
<PAGE> 20
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
(Financial Statements, Notes to Financial Statements, Quarterly
Financial Data)
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended Year Ended
3/31/99 3/31/98 3/31/97 12/31/96
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net sales ................ $52,978,000 $56,206,000 $14,257,000 $51,487,000
----------- ----------- ----------- -----------
Costs and expenses:
Cost of products sold . 38,106,000 38,123,000 10,177,000 36,024,000
Selling, general and
Administrative ...... 11,843,000 12,367,000 3,071,000 11,122,000
Interest expense ...... 287,000 242,000 65,000 355,000
----------- ----------- ----------- -----------
50,236,000 50,732,000 13,313,000 47,501,000
----------- ----------- ----------- -----------
Income before income taxes 2,742,000 5,474,000 944,000 3,986,000
Provision for income taxes 373,000 1,708,000 323,000 884,000
----------- ----------- ----------- -----------
Net income ............... $ 2,369,000 $ 3,766,000 $ 621,000 $ 3,102,000
=========== =========== =========== ===========
Per Share Data
Basic:
Net income .......... $ 1.48 $ 2.27 $ .39 $ 1.96
=========== =========== =========== ===========
Diluted:
Net income .......... $ 1.46 $ 2.21 $ .38 $ 1.93
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
page 20 of 63
<PAGE> 21
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and equivalents ....................... $ 120,000 $ 1,694,000
Investments ................................ 4,928,000 4,801,000
Trade accounts receivable .................. 7,580,000 6,791,000
Inventories ................................ 6,803,000 10,278,000
Domestic and foreign income taxes receivable 73,000
Deferred income tax asset .................. 950,000 881,000
Prepaid expenses and other current assets .. 349,000 468,000
------------ ------------
20,803,000 24,913,000
Property, plant and equipment, net ........... 10,450,000 10,026,000
Deferred income tax asset .................... 2,673,000 2,067,000
Other assets ................................. 210,000 24,000
------------ ------------
$ 34,136,000 $ 37,030,000
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt due banks .................. $ 40,000
Current portion of long-term debt .......... $ 546,000 505,000
Accounts payable ........................... 2,879,000 4,195,000
Accrued compensation ....................... 3,938,000 4,940,000
Accrued expenses and other liabilities ..... 1,043,000 1,039,000
Customer deposits .......................... 408,000 779,000
Domestic and foreign income taxes payable .. 956,000
------------ ------------
8,814,000 12,454,000
Long-term debt ............................... 505,000 859,000
Accrued compensation ......................... 1,095,000 1,007,000
Other long-term liabilities .................. 303,000 264,000
Accrued pension liability .................... 3,519,000 1,464,000
Accrued postretirement benefits .............. 3,188,000 3,207,000
------------ ------------
Total liabilities .......................... 17,424,000 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 in 1999 and 1998 169,000 169,000
Capital in excess of par value ............. 4,521,000 4,521,000
Retained earnings .......................... 17,731,000 15,362,000
Accumulated other comprehensive loss ....... (3,076,000) (1,781,000)
------------ ------------
19,345,000 18,271,000
Less:
Treasury stock ............................. (2,408,000) (71,000)
Employee Stock Ownership Plan loan payable . (225,000) (425,000)
------------ ------------
Total shareholders' equity ................... 16,712,000 17,775,000
------------ ------------
$ 34,136,000 $ 37,030,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
page 21 of 63
<PAGE> 22
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended Year Ended
3/31/99 3/31/98 3/31/97 12/31/96
------- ------- ------- --------
<S> <C> <C> <C> <C>
Operating activities:
Net income ........................................... $ 2,369,000 $ 3,766,000 $ 621,000 $ 3,102,000
------------ ------------ ------------ ------------
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation and amortization ...................... 1,041,000 957,000 253,000 913,000
(Gain) loss on sale of property, plant and equipment (148,000) 44,000 (7,000) (43,000)
(Increase) Decrease in operating assets:
Accounts receivable .............................. (822,000) 3,616,000 (1,197,000) 1,476,000
Inventories, net of customer deposits ............ 3,050,000 (3,335,000) (151,000) (235,000)
Prepaid expenses and other current and
non-current assets ............................. 103,000 48,000 18,000 9,000
Increase (Decrease) in operating liabilities:
Accounts payable, accrued compensation,
accrued expenses and other liabilities ......... (2,046,000) 1,882,000 (1,086,000) (544,000)
Accrued compensation, accrued pension
liability and accrued postretirement
Benefits ....................................... (34,000) (438,000) 118,000 294,000
Domestic and foreign income taxes payable ........ (1,030,000) 1,021,000 (251,000) 230,000
Other long-term liabilities ...................... 50,000 (38,000) (35,000) (45,000)
Deferred income taxes ............................ (172,000) (264,000) (79,000) (431,000)
------------ ------------ ------------ ------------
Total adjustments .............................. (8,000) 3,493,000 (2,417,000) 1,624,000
------------ ------------ ------------ ------------
Net cash provided (used) by operating
Activities ......................................... 2,361,000 7,259,000 (1,796,000) 4,726,000
------------ ------------ ------------ ------------
Investing activities:
Purchase of property, plant and equipment ............ (1,189,000) (1,400,000) (237,000) (1,291,000)
Proceeds from sale of property, plant and
Equipment .......................................... 162,000 11,000 8,000 74,000
Purchase of investments .............................. (12,448,000) (13,699,000) (1,171,000) (2,177,000)
Proceeds from maturity of investments ................ 12,298,000 9,429,000 1,372,000 1,432,000
------------ ------------ ------------ ------------
Net cash used by investing activities ................ (1,177,000) (5,659,000) (28,000) (1,962,000)
------------ ------------ ------------ ------------
Financing activities:
Increase (Decrease) in short-term debt ............... (40,000) 40,000 (209,000)
Proceeds from issuance of long-term debt ............. 5,950,000 5,441,000 2,730,000 2,971,000
Principal repayments on long-term debt ............... (6,327,000) (7,203,000) (1,321,000) (4,729,000)
Issuance of common stock ............................. 1,020,000 12,000 38,000
Purchase of treasury stock ........................... (2,337,000) (71,000)
Sale of treasury stock ............................... 13,000
------------ ------------ ------------ ------------
Net cash provided (used) by financing activities ..... (2,754,000) (760,000) 1,421,000 (1,929,000)
------------ ------------ ------------ ------------
Effect of exchange rate on cash ...................... (4,000) (6,000) 17,000
------------ ------------ ------------ ------------
Net increase (decrease) in cash and equivalents ...... (1,574,000) 840,000 (409,000) 852,000
Cash and equivalents at beginning of year ............ 1,694,000 854,000 1,263,000 411,000
------------ ------------ ------------ ------------
Cash and equivalents at end of year .................. $ 120,000 $ 1,694,000 $ 854,000 $ 1,263,000
============ ============ ============ ============
</TABLE>
See Notes of Consolidated Financial Statements.
page 22 of 63
<PAGE> 23
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Capital in Other
Common Stock Excess of Retained Comprehensive
Shares Par Value Par Value Earnings Loss
------ --------- --------- -------- ----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1,053,999 $106,000 $3,219,000 $ 7,873,000 $(1,891,000)
--------- -------- ---------- ----------- -----------
Net income........................... 3,102,000
Foreign currency translation
adjustment......................... 143,000
Total comprehensive income.......
Issuance of shares................... 3,473 38,000
Stock option tax benefit............. 6,000
Stock split.......................... 528,683 53,000 (53,000)
Payments on Employee Stock
Ownership Plan loan payable
--------- -------- ---------- ----------- -----------
Balance at December 31, 1996 1,586,155 159,000 3,210,000 10,975,000 (1,748,000)
--------- -------- ---------- ----------- -----------
Net income........................... 621,000
Foreign currency translation
adjustment......................... (64,000)
Total comprehensive income.......
Issuance of shares................... 1,500 12,000
Stock option tax benefit............. 4,000
Payments on Employee Stock
Ownership Plan loan payable
--------- -------- ---------- ----------- -----------
Balance at March 31, 1997 1,587,655 159,000 3,226,000 11,596,000 (1,812,000)
--------- -------- ---------- ----------- -----------
Net income........................... 3,766,000
Foreign currency translation
adjustment......................... 31,000
Total comprehensive income.......
Issuance of shares................... 102,940 10,000 1,010,000
Stock option tax benefit............. 278,000
Sale of treasury stock............... 7,000
Acquisition of treasury stock
Payments on Employee Stock
Ownership Plan loan payable
--------- -------- ---------- ----------- -----------
Balance at March 31, 1998 1,690,595 169,000 4,521,000 15,362,000 (1,781,000)
--------- -------- ---------- ----------- -----------
Net income........................... 2,369,000
Foreign currency translation
adjustment......................... (104,000)
Minimum pension liability
adjustment, net of tax
benefit of $510,000................ (1,191,000)
Total comprehensive income.......
Acquisition of treasury stock........
Payments on Employee Stock
Ownership Plan loan payable
--------- -------- ---------- ----------- -----------
Balance at March 31, 1999 1,690,595 $169,000 $4,521,000 $17,731,000 $(3,076,000)
========= ======== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Employee Stock
Treasury Ownership Plan Shareholders'
Stock Loan Payable Equity
----- ------------ ------
<S> <C> <C> <C>
Balance at December 31, 1995 $ (6,000) $(875,000) $ 8,426,000
----------- --------- -----------
Net income........................... 3,102,000
Foreign currency translation
adjustment......................... 143,000
-----------
Total comprehensive income....... 3,245,000
Issuance of shares................... 38,000
Stock option tax benefit............. 6,000
Stock split..........................
Payments on Employee Stock
Ownership Plan loan payable 200,000 200,000
----------- --------- -----------
Balance at December 31, 1996 (6,000) (675,000) 11,915,000
----------- --------- -----------
Net income........................... 621,000
Foreign currency translation
adjustment......................... (64,000)
-----------
Total comprehensive income....... 557,000
Issuance of shares................... 12,000
Stock option tax benefit............. 4,000
Payments on Employee Stock
Ownership Plan loan payable 50,000 50,000
----------- --------- -----------
Balance at March 31, 1997 (6,000) (625,000) 12,538,000
----------- --------- -----------
Net income........................... 3,766,000
Foreign currency translation
adjustment......................... 31,000
-----------
Total comprehensive income....... 3,797,000
Issuance of shares................... 1,020,000
Stock option tax benefit............. 278,000
Sale of treasury stock............... 6,000 13,000
Acquisition of treasury stock (71,000) (71,000)
Payments on Employee Stock
Ownership Plan loan payable 200,000 200,000
----------- --------- -----------
Balance at March 31, 1998 (71,000) (425,000) 17,775,000
----------- --------- -----------
Net income........................... 2,369,000
Foreign currency translation
adjustment......................... (104,000)
Minimum pension liability
adjustment, net of tax
benefit of $510,000................ (1,191,000)
-----------
Total comprehensive income....... 1,074,000
Acquisition of treasury stock........ (2,337,000) (2,337,000)
Payments on Employee Stock
Ownership Plan loan payable 200,000 200,000
----------- --------- -----------
Balance at March 31, 1999 $(2,408,000) $(225,000) $16,712,000
=========== ========= ===========
</TABLE>
See Notes of Consolidated Financial Statements.
page 23 of 63
<PAGE> 24
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements Note 1 - The Company and Its
Accounting Policies:
- --------------------------------------------------------------------------------
Graham Corporation and its subsidiaries are primarily engaged in the
design and manufacture of vacuum and heat transfer equipment used in the
chemical, petrochemical, petroleum refining, and electric power generating
industries and sells to customers throughout the world. The Company's
significant accounting policies follow.
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL
STATEMENTS
The consolidated financial statements include the accounts of the
Company and its majority-owned domestic and foreign subsidiaries. All
significant intercompany balances, transactions and profits are eliminated in
consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the related revenues and expenses during the reporting
period. Actual amounts could differ from those estimated.
Certain amounts in prior periods have been reclassified to conform to
the current presentation.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at currency exchange rates in effect at year end and revenues and
expenses are translated at average exchange rates in effect for the year. Gains
and losses resulting from foreign currency transactions are included in results
of operations. Gains and losses resulting from translation of foreign subsidiary
balance sheets are reflected as a separate component of shareholders' equity.
Translation adjustments are not adjusted for income taxes since they relate to
an investment which is permanent in nature.
REVENUE RECOGNITION
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
page 24 of 63
<PAGE> 25
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. All contracts
with values less than $1,000,000 are accounted for on the completed contract
method and included in income upon substantial completion or shipment to the
customer.
INVESTMENTS
Investments consist primarily of fixed-income debt securities with
maturities of beyond three months and less than twelve months. All investments
are classified as held-to-maturity under the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115) as the Company has the positive intent
and ability to hold the securities to maturity. In accordance with SFAS 115, the
investments are stated at amortized cost which approximates fair value due to
their short term and highly liquid nature.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out method. Progress payments for orders are
netted against inventory to the extent the payment is less than the inventory
balance relating to the applicable contract. Progress payments that are in
excess of the corresponding inventory balance are presented as customer deposits
in the Consolidated Balance Sheets.
PROPERTY AND DEPRECIATION
Property, plant and equipment are stated at cost. Major additions and
improvements are capitalized, while maintenance and repairs are charged to
expense as incurred. Depreciation and amortization are provided based upon the
estimated useful lives under the straight line method. Estimated useful lives
range from approximately five to twenty-five years for office and manufacturing
equipment and forty years for buildings and improvements. Upon sale or
retirement of assets, the cost and related accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in the results of
operations. Impairment losses are recognized when the carrying value of an asset
exceeds its fair value. The Company regularly assesses all of its long-lived
assets for impairment and determined that no impairment loss need be recognized
in the periods reported.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been
page 25 of 63
<PAGE> 26
recognized in the Company's financial statements or tax returns. Deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using currently
enacted tax rates. The Company evaluates the available evidence about future
taxable income and other possible sources of realization of deferred tax assets
and records a valuation allowance to reduce deferred tax assets to an amount
that represents the Company's best estimate of the amount of such deferred tax
assets that more likely than not will be realized.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB 25) and related Interpretations. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of grant over the amount an employee must pay
to acquire the stock. Compensation cost for share equivalent units is recorded
based on the quoted market price of the Company's stock at the end of the
period.
PER SHARE DATA
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.
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended Year Ended
3/31/99 3/31/98 3/31/97 12/31/96
<S> <C> <C> <C> <C>
Basic earnings per share
Numerator:
Net income ....................................... $2,369,000 $3,766,000 $ 621,000 $3,102,000
---------- ---------- ---------- ----------
Denominator:
Weighted common shares outstanding ............... 1,594,000 1,653,000 1,586,000 1,584,000
Share equivalent units (SEU)
outstanding .................................... 5,000 3,000
---------- ---------- ---------- ----------
Weighted average shares and SEU's
outstanding .................................... 1,599,000 1,656,000 1,586,000 1,584,000
---------- ---------- ---------- ----------
Basic earnings per share .............................. $ 1.48 $ 2.27 $ .39 $ 1.96
========== ========== ========== ==========
Diluted earnings per share
Numerator:
Net income ....................................... $2,369,000 $3,766,000 $ 621,000 $3,102,000
---------- ---------- ---------- ----------
Denominator:
Weighted average shares and SEU's
outstanding .................................... 1,599,000 1,656,000 1,586,000 1,584,000
Stock options outstanding ........................ 14,000 42,000 33,000 24,000
Contingently issuable SEU's ...................... 6,000 2,000 4,000 3,000
---------- ---------- ---------- ----------
Weighted average common and potential
common shares outstanding ...................... 1,619,000 1,700,000 1,623,000 1,611,000
---------- ---------- ---------- ----------
Diluted earnings per share ............................ $ 1.46 $ 2.21 $ .38 $ 1.93
========== ========== ========== ==========
</TABLE>
page 26 of 63
<PAGE> 27
Options to purchase 55,200 shares of common stock at $21.44
per share, 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.
STOCK SPLIT
On July 25, 1996, the Board of Directors authorized a three-for-two
stock split distributed on August 23, 1996 to shareholders of record at the
close of business on August 9, 1996. The Company distributed cash in lieu of
fractional shares resulting from the stock split. The Company's par value of
$.10 per share remained unchanged and as a result $53,000 was transferred from
capital in excess of par value to common stock.
CASH FLOW STATEMENT
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Actual interest paid was $292,000 in 1999, $254,000 in 1998, $65,000
for the three months ended March 31, 1997, and $384,000 in 1996. In addition,
actual income taxes paid were $1,499,000 in 1999, $951,000 in 1998, $627,000 for
the three months ended March 31, 1997, and $1,084,000 in 1996.
Non cash activities during 1999, 1998 and 1996 included capital
expenditures totaling $290,000, $68,000 and $134,000, respectively, which were
financed through the issuance of capital leases. In addition, in 1999 a minimum
pension liability adjustment, net of a tax benefit, was recognized totalling
$1,191,000.
ACCOUNTING AND REPORTING CHANGES
Effective April 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). This statement requires reporting and disclosure of comprehensive income
and its components in a full set of general purpose financial statements.
Comprehensive income is comprised of net income and other comprehensive income
or loss items, which are reflected as a separate component of equity. For the
Company, other comprehensive income or loss items include foreign currency
translation adjustments and minimum pension liability adjustments. The financial
statements presented for prior periods have been reclassified to reflect the
adoption of SFAS 130.
page 27 of 63
<PAGE> 28
In the fourth quarter of fiscal year 1999, the Company adopted
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes new
standards for reporting information about operating segments in interim and
annual financial statements. The basis for determining the Company's operating
segments is the manner in which financial information is used by the Company in
its operations. Segment information is presented in Note 14 of the Consolidated
Financial Statements.
In fiscal year 1999, the Company adopted Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" (SFAS 132). SFAS 132 revises employers'
disclosures about pension and other postretirement benefit plans but does not
change the measurement or recognition of those plans. Restatement of disclosures
for prior years has been made for comparative purposes. These disclosures are
included in Note 8 of the Consolidated Financial Statements.
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.
page 28 of 63
<PAGE> 29
- --------------------------------------------------------------------------------
Note 2 - Inventories:
- --------------------------------------------------------------------------------
Major classifications of inventories are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---- ----
<S> <C> <C>
Raw materials and supplies ........... $ 1,945,000 $ 2,707,000
Work in process ...................... 5,025,000 12,081,000
Finished products .................... 1,231,000 1,131,000
----------- -----------
8,201,000 15,919,000
Less - progress payments ............. 1,398,000 5,641,000
----------- -----------
$ 6,803,000 $10,278,000
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
page 29 of 63
<PAGE> 30
- --------------------------------------------------------------------------------
Note 3 - Property, Plant and Equipment:
- --------------------------------------------------------------------------------
Major classifications of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---- ----
<S> <C> <C>
Land.......................................... $ 290,000 $ 250,000
Leasehold improvements........................ 177,000 177,000
Buildings and improvements.................... 10,631,000 10,528,000
Machinery and equipment....................... 14,767,000 13,584,000
Construction in progress...................... 453,000 705,000
----------- -----------
26,318,000 25,244,000
Less - accumulated depreciation and
Amortization............................... 15,868,000 15,218,000
----------- -----------
$10,450,000 $10,026,000
=========== ===========
- --------------------------------------------------------------------------------
</TABLE>
page 30 of 63
<PAGE> 31
- --------------------------------------------------------------------------------
Note 4 - Leases:
- --------------------------------------------------------------------------------
The Company leases equipment and office space under various operating
leases. Rent expense applicable to operating leases was $188,000, $191,000,
$38,000, and $148,000 in 1999, 1998, 1997 and 1996, respectively.
Property, plant and equipment include the following amounts for leases
which have been capitalized.
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---- ----
<S> <C> <C>
Machinery and equipment................ $ 1,892,000 $ 1,668,000
Less accumulated amortization.......... 940,000 784,000
----------- -----------
$ 952,000 $ 884,000
=========== ===========
</TABLE>
Amortization of property, plant and equipment under capital lease
amounted to $182,000, $158,000, $39,000, and $59,000 in 1999, 1998, 1997 and
1996, respectively, and is included in depreciation expense.
As of March 31, 1999, future minimum payments required under
non-cancelable leases are:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------ ------
<S> <C> <C>
2000............................................ $ 124,000 $ 276,000
2001............................................ 79,000 253,000
2002............................................ 50,000 142,000
2003............................................ 26,000 60,000
2004............................................ 9,000 30,000
Thereafter...................................... 11,000
----------- -----------
Total minimum lease payments.................... $ 299,000 761,000
===========
Less - amount representing interest............. 111,000
-----------
Present value of net minimum lease
Payments..................................... $ 650,000
===========
</TABLE>
page 31 of 63
<PAGE> 32
- --------------------------------------------------------------------------------
Note 5 - Debt:
- --------------------------------------------------------------------------------
Short-Term Debt Due Banks
The Company and its subsidiaries had short-term borrowings outstanding
as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---- ----
<S> <C> <C>
Borrowings of United Kingdom
Subsidiary under line of credit
at bank's rate plus 1 1/2% in
1999 and 1998 $ 40,000
===========
</TABLE>
The United Kingdom subsidiary has a revolving credit facility agreement
which provides a line of credit of 657,000 pounds sterling ($1,057,000 at the
March 31,1999 exchange rate) including letters of credit and long-term
borrowings. The interest rate is the bank's rate plus 1 1/2%. The bank's base
rate was 5 1/2% and 7 1/4% at March 31, 1999 and 1998, respectively. The United
Kingdom operations had available unused lines of credit of $794,000 at March 31,
1999. The weighted average interest rate on short-term borrowings in 1999 and
1998 was 7.9% and 10.8%, respectively.
Long-Term Debt
- --------------
The Company and its subsidiaries had long-term borrowings outstanding
as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---- ----
<S> <C> <C>
Employee Stock Ownership Plan
Loan Payable ......................... $ 225,000 $ 425,000
United Kingdom term loan due in 2000 176,000 286,000
Capital lease obligations (Note 4) 650,000 653,000
---------- ----------
1,051,000 1,364,000
Less: current amounts, including
amounts for capital leases of
$246,000 in 1999 and $201,000 in 1998 546,000 505,000
---------- ----------
$ 505,000 $ 859,000
========== ==========
</TABLE>
The United States revolving credit facility agreement provides a line
of credit of up to $13,000,000 including letters of credit, through October 31,
1999. The agreement allows the Company to borrow at prime minus a variable
percentage based upon certain financial ratios. The Company was able to borrow
at a rate of prime minus 100 basis points at March 31, 1999 and 1998.
The agreement allows the Company at any time to convert balances
outstanding not less than $2,000,000 and up to $9,000,000 into a two-year term
loan. This conversion feature is available
page 32 of 63
<PAGE> 33
through October 1999, at which time the Company may convert the principal
outstanding on the revolving line of credit to a two-year term loan. The Company
had no amounts outstanding on its revolving credit facility, excluding letters
of credit, at March 31, 1999 and 1998. The bank's prime rate was 7.75% and 8.5%
at March 31, 1999 and 1998, respectively. The United States operations had
available unused lines of credit of $11,919,000 at year end.
The Employee Stock Ownership Plan Loan Payable requires quarterly
payments of $50,000 through 2000. (See Note 8 for a description of the Plan.)
The United Kingdom term loan has a fixed rate of 9%. This term loan is
due in 2000 and is repayable in equal monthly installments.
Long-term debt requirements, excluding capital leases, are: 2000 -
$300,000 and 2001 - $101,000.
The Company is required to pay commitment fees of 1/4% on the unused
portion of the domestic revolving credit facility. No other financing
arrangements require compensating balances or commitment fees. Assets with a
book value of $26,480,000 have been pledged to secure certain domestic long-term
borrowings.
The United Kingdom short-term and long-term bank borrowings are secured
by assets of the United Kingdom subsidiary which have a book value of
$3,518,000.
Several of the loan agreements contain provisions pertaining to the
maintenance of minimum working capital balances, tangible net worth, capital
expenditures and financial ratios as well as restrictions on the payment of cash
dividends to shareholders and incurrence of additional long-term debt. The most
restrictive dividend provision limits the payment of dividends to shareholders
to the greater of $400,000 or 25% of consolidated net income. In addition, the
United States operations cannot make any loans or advances exceeding $500,000 to
any affiliates without prior consent of the bank.
page 33 of 63
<PAGE> 34
- --------------------------------------------------------------------------------
Note 6 - Financial Instruments and Derivative Financial Instruments
- --------------------------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments,
short-term investments and trade receivables. The Company places its temporary
cash investments and short-term investments with high credit quality financial
institutions and actively evaluates the credit worthiness of these financial
institutions. Concentrations of credit risk with respect to trade receivables
are limited due to the large number of customers comprising the Company's
customer base and their geographic dispersion. At March 31, 1999 and 1998, the
Company had no significant concentrations of credit risk.
LETTERS OF CREDIT:
The Company has entered into standby letter of credit agreements with
financial institutions relating to the guarantee of future performance on
certain contracts. At March 31, 1999 and 1998, the Company was contingently
liable on outstanding standby letters of credit aggregating $1,168,000 and
$2,111,000, respectively.
FOREIGN EXCHANGE RISK MANAGEMENT:
The Company, as a result of its global operating and financial
activities, is exposed to market risks from changes in foreign exchange rates.
In seeking to minimize the risks and/or costs associated with such activities,
the Company may utilize foreign exchange forward contracts with fixed dates of
maturity and exchange rates. The Company does not hold or issue financial
instruments for trading or other speculative purposes and only contracts with
high quality financial institutions. If the counterparties to the exchange
contracts do not fulfill their obligations to deliver the contracted foreign
currencies, the Company could be at risk for fluctuations, if any, required to
settle the obligation. At March 31, 1999 and 1998, there were no foreign
exchange forward contracts held by the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Based on the methods and assumptions detailed below, the differences
between the carrying amounts and estimated fair values of the Company's
investments and short-and long-term debt are insignificant.
The methods and assumptions used to estimate the fair value of
financial instruments are summarized as follows:
page 34 of 63
<PAGE> 35
INVESTMENTS - The fair value of investments is based on quoted market
prices which approximates book value due to the short term and highly
liquid nature of the investments.
SHORT-TERM DEBT DUE BANKS - The carrying value of short-term debt
approximates fair value due to the short-term maturity of this
instrument.
LONG-TERM DEBT - The carrying values of credit facilities with variable
rates of interest approximate fair values. The fair value of fixed rate
debt, which approximates the carrying value, was estimated by
discounting cash flows using rates currently available for debt of
similar terms and remaining maturities.
page 35 of 63
<PAGE> 36
- --------------------------------------------------------------------------------
Note 7 - Income Taxes:
- --------------------------------------------------------------------------------
An analysis of the components of pre-tax income from continuing
operations is presented below:
<TABLE>
<CAPTION>
Three Months Year Ended
Year Ended Year Ended Ended December 31,
March 31, 1999 March 31, 1998 March 31, 1997 1996
-------------- -------------- -------------- ----
<S> <C> <C> <C> <C>
United States....................... $ 2,664,000 $ 5,112,000 $ 954,000 $ 3,808,000
United Kingdom...................... 78,000 362,000 (10,000) 178,000
----------- ----------- ----------- -------------
$ 2,742,000 $ 5,474,000 $ 944,000 $ 3,986,000
=========== =========== =========== =============
The provision for income
taxes consists of:
Current:
Federal.......................... $ 515,000 $ 1,839,000 $ 376,000 $ 1,279,000
State............................ 84,000 113,000 26,000 77,000
United Kingdom................... (55,000) 20,000 (41,000)
----------- ----------- ----------- -----------
$ 544,000 1,972,000 402,000 1,315,000
----------- ----------- ----------- -----------
Deferred:
Federal.......................... 78,000 (130,000) (88,000) (4,000)
State............................ (27,000) 57,000 9,000 64,000
United Kingdom................... 128,000 (80,000) (210,000)
Change in valuation
allowance...................... (350,000) (111,000) (281,000)
----------- ----------- ----------- -----------
(171,000) (264,000) (79,000) (431,000)
----------- ----------- ----------- -----------
Total provision for income
taxes............................ $ 373,000 $ 1,708,000 $ 323,000 $ 884,000
=========== =========== =========== ===========
</TABLE>
The reconciliation of the provision calculated using the United States
Federal tax rate with the provision for income taxes presented in the financial
statements is as follows:
<TABLE>
<CAPTION>
Three Months Year Ended
Year Ended Year Ended Ended December 31,
March 31, 1999 March 31, 1998 March 31, 1997 1996
-------------- -------------- -------------- ----
<S> <C> <C> <C> <C>
Provision for income taxes
at Federal rate................... $ 932,000 $ 1,861,000 $ 321,000 $ 1,355,000
Recognition of tax benefit
of prior year losses.............. (317,000) (247,000) (102,000)
Difference between foreign
and U.S. tax rates................ (2,000) (15,000) (9,000)
State taxes......................... 29,000 131,000 26,000 114,000
Officer life insurance
proceeds not taxable.............. (171,000)
Charges not deductible for
income tax purposes............... 68,000 24,000 14,000 59,000
Recognition of tax benefit
generated by foreign
sales corporation................. (158,000) (215,000) (14,000) (70,000)
Tax credits......................... (24,000) (26,000) (6,000) (8,000)
Foreign losses for which
no tax benefit was
provided.......................... 350,000 117,000
Adjustments to prior years'
tax liabilities................... 200,000 (169,000)
Change in valuation allowance (350,000) (111,000) (281,000)
Other............................... 16,000 (11,000) (18,000) (5,000)
----------- ----------- ----------- -----------
Provision for income taxes.......... $ 373,000 $ 1,708,000 $ 323,000 $ 884,000
=========== =========== =========== ===========
</TABLE>
The deferred income tax asset recorded in the Consolidated Balance
Sheets results from differences between financial statement
page 36 of 63
<PAGE> 37
and tax reporting of income and deductions. A summary of the composition of the
deferred income tax asset follows:
<TABLE>
<CAPTION>
1999 1998
United United United United
States Kingdom States Kingdom
------ ------- ------ -------
<S> <C> <C> <C> <C>
Depreciation........................ $ (433,000) $ (26,000) $ (415,000) $ (84,000)
Accrued compensation................ 479,000 522,000
Accrued pension liability........... 497,000 596,000 462,000 88,000
Accrued postretirement
benefits.......................... 1,302,000 1,298,000
Compensated absences................ 519,000 571,000
Inventories......................... 169,000 152,000
Warranty liability.................. 39,000 58,000
Accrued medical benefits............ 45,000 105,000
Contingent liabilities.............. 117,000 98,000
Foreign loss
carryforwards..................... 493,000 696,000
New York State investment
tax credit........................ 99,000 60,000
Other............................... 53,000 2,000 26,000 4,000
---------- ---------- ---------- ----------
2,886,000 1,065,000 2,937,000 704,000
Less: Valuation allowance........... 328,000 693,000
---------- ---------- ---------- ----------
Deferred tax asset.................. $2,886,000 $ 737,000 $2,937,000 $ 11,000
========== ========== ========== ==========
</TABLE>
Deferred income taxes include the impact of foreign net operating loss
carryforwards which may be carried forward indefinitely and investment tax
credits which expire from 2006 to 2009. In accordance with the provisions of
SFAS 109, a valuation allowance of $328,000 at March 31, 1999 is deemed adequate
to reserve for the foreign net loss carryforwards which are not considered
probable of realization.
The Company does not provide for additional U.S. income taxes on
undistributed earnings considered permanently invested in its United Kingdom
subsidiary. At March 31, 1998, such undistributed earnings totaled $1,980,000.
It is not practicable to determine the amount of income taxes that would be
payable upon the remittance of assets that represent those earnings.
page 37 of 63
<PAGE> 38
- --------------------------------------------------------------------------------
Note 8 - Employee Benefit Plans:
- --------------------------------------------------------------------------------
Retirement Plans
- ----------------
The Company has qualified defined benefit plans covering substantially
all employees. The Company's plan covering employees in the United States is
non-contributory. Benefits are based on the employee's years of service and
average earnings for the five highest consecutive calendar years of compensation
for the ten year period preceding retirement. The plan for employees in the
United Kingdom is contributory with the employer's share being actuarially
determined. Benefits are based on the employee's years of service and average
earnings for the three highest years for the ten year period preceding
retirement. The Company's funding policy for the United States plan is to
contribute the amount required by the Employee Retirement Income Security Act of
1974. The pension obligations to employees covered by the Company's former
domestic plan, terminated in 1986, were settled through the purchase of annuity
contracts for each participant which guaranteed these future benefit payments.
The components of pension cost are:
<TABLE>
<CAPTION>
1999 1998 1996
U.S. PLAN U.K. PLAN U.S. PLAN U.K. PLAN U.S. PLAN U.K. PLAN
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service cost-benefits
earned during the
period.................. $ 396,000 $ 116,000 $ 362,000 $ 136,000 $ 307,000 $ 108,000
Interest cost on
projected benefit
obligation.............. 657,000 302,000 585,000 294,000 459,000 315,000
Expected return on
assets.................. (693,000) (279,000) (602,000) (359,000) (522,000) (324,000)
Amortization of:
Transition asset........ (44,000) (5,000) (44,000) (5,000) (44,000) (5,000)
Prior service cost...... 17,000 26,000 25,000
Actuarial (gain)
loss................. 55,000 (86,000) (46,000) (28,000)
---------- --------- ---------- --------- --------- ---------
Net pension cost.......... $ 316,000 $ 206,000 $ 301,000 $ 6,000 $ 154,000 $ 91,000
========== ========= ========== ========= ========= =========
</TABLE>
The actuarial assumptions are:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Discount rate used to
determine projected
benefit obligation............ 6 1/2% 5 1/2% 7% 7% 7% 9%
Rate of increase in
compensation levels........... 3% 2 1/2% 3% 3% 3% 5 1/2%
Expected rate of return
on plan assets................ 8% 6 1/2% 8% 8% 8% 10%
</TABLE>
Pension expense for the U.S. Plan and the U.K. Plan for the three month
period ending March 31, 1997 was $38,000 and $2,000, respectively.
page 38 of 63
<PAGE> 39
Changes in the Company's benefit obligation, plan assets and funded
status for the pension plans are presented below:
<TABLE>
<CAPTION>
1999 1998
U.S. PLAN U.K. PLAN U.S. PLAN U.K. PLAN
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Change in the benefit obligation
Projected benefit obligation at
beginning of year...................... $ 9,212,000 $ 5,013,000 $ 8,635,000 $ 3,587,000
Service cost............................. 396,000 116,000 362,000 136,000
Interest cost............................ 657,000 302,000 585,000 294,000
Actuarial (gain) loss.................... 1,314,000 1,633,000 (199,000) 1,112,000
Benefit payments......................... (230,000) (43,000) (171,000) (196,000)
Foreign currency adjustment.............. (240,000) 80,000
----------- ----------- ----------- -----------
Projected benefit obligation at end
of year................................ $11,349,000 $ 6,781,000 $ 9,212,000 $ 5,013,000
=========== =========== =========== ===========
Change in fair value of plan assets
Fair value of plan assets at
beginning of year...................... $ 8,635,000 $ 4,008,000 $ 7,596,000 $ 3,803,000
Actual return on plan assets............. 481,000 540,000 1,210,000 56,000
Employer contribution.................... 335,000 141,000 229,000
Participants' contributions.............. 134,000 43,000
Benefit payments......................... (230,000) (43,000) (171,000) (195,000)
Foreign currency adjustment.............. (167,000) 72,000
----------- ----------- ----------- -----------
Fair value of plan assets at end of
year................................... $ 9,221,000 $ 4,613,000 $ 8,635,000 $ 4,008,000
=========== =========== =========== ===========
Funded status
Funded status at end of year............. $(2,128,000) $(2,168,000) $ (577,000) $(1,005,000)
Unrecognized transition obligation....... (236,000) (26,000) (280,000) (31,000)
Unrecognized prior service cost.......... (2,000) 208,000 (3,000) 225,000
Unrecognized actuarial (gain) loss....... 642,000 1,926,000 (883,000) 808,000
----------- ----------- ----------- -----------
Net amounts recognized................... $(1,724,000) $ (60,000) $(1,743,000) $ (3,000)
=========== =========== =========== ===========
</TABLE>
The Company recognized an additional minimum pension liability for the
underfunded U.K. defined benefit plan. The additional minimum pension liability
is equal to the excess of the accumulated benefit obligation over plan assets
and the accrued liability net of an intangible asset and deferred tax asset.
Amounts recognized in the Consolidated Balance Sheets consist of the following:
<TABLE>
<CAPTION>
1999 1998
U.S. PLAN U.K. PLAN U.S. PLAN U.K. PLAN
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Accrued benefit liability.................. $(1,724,000) $(1,969,000) $(1,743,000) $ (3,000)
Intangible asset........................... 208,000
Deferred tax asset......................... 510,000
Accumulated other comprehensive
income................................. 1,191,000
----------- ----------- ----------- -----------
$(1,724,000) $ (60,000) $(1,743,000) $ (3,000)
=========== =========== =========== ===========
</TABLE>
The current portion of the pension liability as of March 31, 1999 and
1998 is included in the caption "Accrued Compensation" and the long-term portion
is separately presented in the Consolidated Balance Sheets.
Assets of the United States plan consist primarily of equity securities
at March 31, 1999 and 1998. Assets of the United Kingdom plan consist of an
investment contract with an insurance company which is primarily invested in
equity securities. The vested benefit obligation of the United Kingdom plan is
the actuarial present value of the vested benefits to which the employee is
currently entitled but based on the employee's expected date of separation or
retirement. The unrecognized net asset at transition is being amortized over the
remaining service lives of the participants which approximates 19 years for the
domestic plan and 13 years for the United Kingdom plan.
page 39 of 63
<PAGE> 40
The Company has a Supplemental Executive Retirement Plan for certain
key executives. This unfunded plan provides retirement benefits associated with
wages in excess of the legislated qualified plan maximums. Pension expense
recorded in 1999, 1998, 1997 and 1996 related to this plan was $26,000, $6,000,
$10,000 and $39,000, respectively. At March 31, 1999 and 1998, the related
liability was $81,000 and $55,000, respectively, and is included in the caption
"Accrued Pension Liability" in the Consolidated Balance Sheets.
The Company has a defined contribution plan covering substantially all
domestic employees. Company contributions to this plan are based on the
profitability of the Company and amounted to $593,000, $647,000, $215,000, and
$651,000 in 1999, 1998, 1997 and 1996, respectively.
The Company has a deferred compensation plan that allows certain key
employees to defer a portion of their compensation. The principal and interest
earned on the deferred balances are payable upon retirement. The accrued
compensation liability under this plan was $1,126,000 and $1,231,000 at March
31, 1999 and 1998, respectively.
Employee Stock Ownership Plan
- -----------------------------
The Company has a noncontributory Employee Stock Ownership Plan (ESOP)
that covers substantially all employees in the United States. In 1990, the
Company borrowed $2,000,000 under loan and pledge agreements. The proceeds of
the loans were used to purchase 87,454 shares of the Company's common stock. The
purchased shares are pledged as security for the payment of principal and
interest as provided in the loan and pledge agreements. It is anticipated that
funds for servicing the debt payments will essentially be provided from
contributions paid by the Company to the ESOP, from earnings attributable to
such contributions, and from cash dividends paid to the ESOP on shares of the
Company stock which it owns.
During 1999, 1998, 1997 and 1996 the Company recognized expense
associated with the ESOP using the shares allocated method. This method
recognizes interest expense as incurred on all outstanding debt of the ESOP and
compensation expense related to principal reductions based on shares allocated
for the period. Dividends received on unallocated shares that are used to
service the ESOP debt reduce the amount of expense recognized each period. The
compensation expense associated with the ESOP was $200,000, $200,000, $50,000
and $200,000 in 1999, 1998, 1997 and 1996, respectively. The ESOP received no
dividends on unallocated shares in 1999, 1998, 1997, and 1996. Interest expense
in the amount of $25,000, $42,000, $13,000 and $72,000 was incurred in 1999,
1998, 1997 and 1996, respectively. Dividends paid on allocated shares accumulate
for the benefit of the employees.
page 40 of 63
<PAGE> 41
Other Postretirement Benefits
- -----------------------------
In addition to providing pension benefits, the Company has a United
States plan which provides health care benefits for eligible retirees and
eligible survivors of retirees. The Company recognizes the cost of these
benefits on the accrual basis as employees render service to earn the benefits.
Early retirees who are eligible to receive benefits under the plan are required
to share in twenty percent of the medical premium cost. In addition, the
Company's share of the premium costs has been capped.
The components of postretirement benefit cost are:
<TABLE>
<CAPTION>
1999 1998 1996
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during the period................... $ 69,000 $ 64,000 $ 62,000
Interest cost on accumulated benefit obligation.................... 176,000 166,000 173,000
Amortization of prior service cost................................. (87,000) (87,000) (79,000)
-------- -------- --------
Net postretirement benefit cost.................................... $158,000 $143,000 $156,000
======== ======== ========
</TABLE>
Postretirement benefit cost for the three month period ending March 31,
1997 was $40,000.
The assumptions used to develop the accrued postretirement benefit
obligation were:
<TABLE>
<CAPTION>
1999 1998 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate...................................................... 6 1/2% 7% 7%
Medical care cost trend rate....................................... 8% 8 1/2% 9%
</TABLE>
The medical care cost trend rate used in the actuarial computation
ultimately reduces to 5% in 2005 and subsequent years. This was accomplished
using 1/2% decrements for the years 2000 through 2005.
Changes in the Company's benefit obligation, plan assets and funded
status for the plan are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Change in the benefit obligation
Projected benefit obligation at beginning of year........................ $ 2,549,000 $ 2,641,000
Service cost............................................................. 69,000 64,000
Interest cost............................................................ 176,000 166,000
Participant contributions................................................ 31,000 18,000
Actuarial (gain) loss.................................................... 214,000 (206,000)
Benefit payments......................................................... (178,000) (134,000)
----------- -----------
Projected benefit obligation at end of year.............................. $ 2,861,000 $ 2,549,000
=========== ===========
Change in fair value of plan assets
Fair value of plan assets at beginning of year........................... $ 0 $ 0
Employer contribution.................................................... 147,000 116,000
Participants' contributions.............................................. 31,000 18,000
Benefit payments......................................................... (178,000) (134,000)
----------- -----------
Fair value of plan assets at end of year................................. $ 0 $ 0
=========== ===========
Funded status
Funded status at end of year............................................. $(2,861,000) $(2,549,000)
Unrecognized prior service cost.......................................... (869,000) (956,000)
Unrecognized actuarial (gain) loss....................................... 392,000 178,000
----------- -----------
Net amounts recognized................................................... $(3,338,000) $(3,327,000)
=========== ===========
</TABLE>
page 41 of 63
<PAGE> 42
The current portion of the postretirement benefit obligation is
included in the caption "Accrued Compensation" and the long-term portion is
separately presented in the Consolidated Balance Sheets.
Assumed medical care cost trend rates have a significant effect on the
amounts reported for the postretirement benefit plan. A one percentage point
change in assumed medical care cost trend rates would have the following
effects:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
<S> <C> <C>
Effect on total service and interest cost components $ 17,000 $ (14,000)
Effect on postretirement benefit obligation.............. $ 158,000 $ (138,000)
</TABLE>
page 42 of 63
<PAGE> 43
- --------------------------------------------------------------------------------
Note 9 - Stock Compensation Plans:
- --------------------------------------------------------------------------------
The 1995 Graham Corporation Incentive Plan to Increase Shareholder
Value provides for the issuance of up to 192,000 shares of common stock in
connection with grants of incentive stock options and non-qualified stock
options to officers, key employees and outside directors. The options may be
granted at prices not less than the fair market value at the date of grant and
expire no later than ten years after the date of grant.
The 1989 Stock Option and Appreciation Rights Plan provides for the
issuance of up to 188,700 shares of common stock in connection with grants of
non-qualified stock options and tandem stock appreciation rights to officers,
key employees and certain outside directors. The options may be granted at
prices not less than the fair market value at the date of grant, and expire no
later than ten years after the date of grant.
The Company has a Long-Term Incentive Plan which provides for awards of
share equivalent units for outside directors based upon the Company's
performance. Each unit is equivalent to one share of the Company's common stock.
Share equivalent units are payable in cash or stock upon retirement. The cost of
performance units earned and charged to pre-tax income under this Plan in 1999,
1998, 1997 and 1996 was $50,000, $50,000, $10,000 and $40,000, respectively.
The Company applies APB 25 and related Interpretations in accounting
for its plans. Under the intrinsic value method, no compensation expense has
been recognized for its stock option plans. Had compensation cost for the
Company's two stock option plans been determined based on the fair value at the
grant date for awards under those plans in accordance with the optional
methodology prescribed under SFAS 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended Year Ended
3/31/99 3/31/98 3/31/97 12/31/96
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net income................. As reported $2,369,000 $3,766,000 $621,000 $3,102,000
Pro forma 2,242,000 3,381,000 620,000 3,060,000
Basic earnings
per share............... As reported $1.48 $2.27 $.39 $1.96
Pro forma $1.40 $2.04 $.39 $1.93
Diluted earnings
per share............... As reported $1.46 $2.21 $.38 $1.93
Pro forma $1.39 $1.99 $.38 $1.90
</TABLE>
The weighted average fair value of the options granted during 1999,
1998, and 1996 is estimated as $3.97 $8.02, and $4.63,
page 43 of 63
<PAGE> 44
respectively, using the Black Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
3/31/99 3/31/98 12/31/96
------- ------- --------
<S> <C> <C> <C>
Expected life................................. 5 years 5 years 5 years
Volatility.................................... 37.14% 31.40% 34.74%
Risk-free interest rate....................... 4.53% 5.95% 6.36%
Dividend yield................................ 0% 0% 0%
</TABLE>
Information on options and rights under the Company's plans is as
follows:
<TABLE>
<CAPTION>
Weighted
Option Shares Average
Price Under Exercise
Range Option Price
----- ------ -----
<S> <C> <C> <C>
Outstanding at December 31, 1995.............................. $6.58-13.17 187,650 $10.49
Exercised..................................................... $6.58-8.00 (5,210) 7.28
Granted....................................................... $10.42-11.33 19,350 11.08
Cancelled..................................................... $7.67-13.17 (14,700) 12.72
--------
Outstanding at December 31, 1996.............................. $6.58-13.17 187,090 10.47
Exercised..................................................... $8.08 (1,500) 8.08
--------
Outstanding at March 31, 1997................................. $6.58-13.17 185,590 10.49
Exercised..................................................... $6.58-13.17 (102,940) 9.92
Granted....................................................... $17.88-21.44 66,450 21.29
Cancelled..................................................... $13.17 (5,250) 13.17
--------
Outstanding at March 31, 1998................................. $6.58-21.44 143,850 15.79
Granted....................................................... $7.50-17.00 44,250 9.81
Cancelled..................................................... $13.17 (9,250) 13.17
--------
Outstanding at March 31, 1999................................. $6.58-21.44 178,850 $14.45
========
</TABLE>
At March 31, 1999, the options outstanding had a weighted average
remaining contractual life of 7.17 years. There were 168,050 options exercisable
at March 31, 1999 which had a weighted average exercise price of $14.47. The
remaining options are exercisable at a rate of 20 percent per year from the date
of grant. The outstanding options expire December 1999 to October 2008. The
number of options available for future grants were 84,100 at March 31, 1999 and
119,100 at March 31, 1998.
page 44 of 63
<PAGE> 45
- --------------------------------------------------------------------------------
Note 10 - Shareholder Rights Plan:
- --------------------------------------------------------------------------------
On February 23, 1990 the Company adopted a Shareholder Rights Plan.
Under the Plan, as of March 7, 1990, one share Purchase Right ("Right") is
attached to each outstanding share of Common Stock. When and if the Rights
become exercisable, each Right would entitle the holder of a share of Common
Stock to purchase from the Company an additional share of Common Stock for
$46.67 per share, subject to adjustment. The Rights become exercisable upon
certain events: (i) if a person or group of persons acquires 20% or more of the
Company's outstanding Common Stock; or (ii) if a person or group commences a
tender offer for 30% or more of the Company's outstanding Common Stock.
The Company may redeem the Rights for $.01 per Right at any time prior
to the close of business on the date when the Rights become exercisable.
After the Rights become exercisable, if the Company is acquired in a
business combination transaction, or if at least half of the Company's assets or
earning power are sold, then each Right would entitle its holder to purchase
stock of the acquirer (or Graham, if it were the surviving company) at a
discount of 50%. The number of shares that each Right would entitle its holder
to acquire at discount would be the number of shares having a market value equal
to twice the exercise price of the Right.
page 45 of 63
<PAGE> 46
- --------------------------------------------------------------------------------
Note 11 - Contingencies:
- --------------------------------------------------------------------------------
The United States Environmental Protection Agency ("EPA") named the
Company's predecessor-in-interest, Graham Manufacturing Co., Inc. as a
Potentially Responsible Party pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act, as amended, in connection with the
Batavia Landfill Site in the Town of Batavia, New York. A Pilot Allocation
"Final Allocation Report" issued on September 30, 1998 by the allocator selected
under the EPA pilot, allocated 1.597% of total remedial costs to the Company. In
April 1999, EPA announced that it will proceed with a modification of the remedy
for the site announced in a 1995 Record of Decision. EPA's estimate of the
modified remedy is approximately $26,000,000 making the Company's full potential
exposure in accordance with this estimate $416,000. EPA's estimate has not been
audited or evaluated for appropriateness or accuracy and may contain significant
portions which are not eligible for recovery. The Company has recorded a
$300,000 liability for this item. The current portion of this liability is
included in the caption "Accrued Expenses and Other Liabilities" and the
long-term portion is included in the caption "Other Long-Term Liabilities" in
the Consolidated Balance Sheets.
page 46 of 63
<PAGE> 47
- --------------------------------------------------------------------------------
Note 12 - Related Party Transactions:
- --------------------------------------------------------------------------------
Director H. Russel Lemcke is President of the H. Russel Lemcke Group,
which the Company has engaged to assist it in making an acquisition in
fulfillment of its strategic plan. Pursuant to this engagement, which commenced
in May 1999, the Company pays to Mr. Lemcke a retainer of $2,500 per month,
together with out-of-pocket expenses. In the event that the Company were to
acquire another business entity as a result of such assistance, Mr. Lemcke would
be paid a fee of $100,000 plus 1% of the purchase price of the acquired entity.
page 47 of 63
<PAGE> 48
- --------------------------------------------------------------------------------
Note 13 - Fiscal Year End Change:
- --------------------------------------------------------------------------------
In 1997, the Company changed its fiscal year end to March 31. Fiscal
1997 is a three month transition period ended March 31, 1997. The unaudited
Statement of Operations for the comparable three month period in 1996 was as
follows:
<TABLE>
<CAPTION>
UNAUDITED
---------
<S> <C>
Net sales.................................................................... $11,164,000
-----------
Costs and expenses:
Cost of products sold................................................... 8,031,000
Selling, general and administrative..................................... 2,550,000
Interest expense........................................................ 126,000
-----------
10,707,000
Income before income taxes................................................... 457,000
Provision for income taxes................................................... 165,000
-----------
Net income................................................................... $ 292,000
===========
Basic earnings per share..................................................... $ .19
===========
Diluted earnings per share................................................... $ .18
===========
</TABLE>
page 48 of 63
<PAGE> 49
- --------------------------------------------------------------------------------
Note 14 - Segment Information:
- --------------------------------------------------------------------------------
The Company's business consists of two operating segments based upon
geographic area. These segments were determined based upon the manner in which
financial information is used by management in operating the Company. The United
States segment designs and manufactures heat transfer and vacuum equipment. Heat
transfer equipment includes surface condensers, Heliflows, water heaters and
various types of heat exchangers. Vacuum equipment includes steam jet ejector
vacuum systems and liquid ring vacuum pumps. These products are sold
individually or combined into package systems for use in several industrial
markets. The Company also services and sells spare parts for its equipment. The
operating segment located in the United Kingdom manufactures vacuum equipment
which includes liquid ring vacuum pumps, piston pumps, ejectors and complete
vacuum pump systems.
Intersegment sales represent intercompany sales made based upon a
competitive pricing structure. All intercompany profits in inventory are
eliminated in the consolidated accounts and are included in the eliminations
caption below. In computing segment net income or loss, corporate expenses
incurred by the United States segment have been charged to the United Kingdom
segment on a management fee basis. Operating segment information is presented
below:
<TABLE>
<CAPTION>
Three Months Year Ended
Year Ended Year Ended Ended December 31,
March 31, 1999 March 31, 1998 March 31, 1997 1996
-------------- -------------- -------------- ----
<S> <C> <C> <C> <C>
Sales from external
customers:
U.S............................ $48,886,000 $51,696,000 $13,164,000 $46,721,000
U.K............................ 4,092,000 4,510,000 1,093,000 4,766,000
----------- ----------- ----------- -----------
Total.......................... $52,978,000 $56,206,000 $14,257,000 $51,487,000
=========== =========== =========== ===========
Intersegment sales:
U.S............................ $ 4,000 $ 95,000 $ 10,000 $ 41,000
U.K............................ 1,555,000 1,419,000 426,000 1,293,000
----------- ----------- ----------- -----------
Total.......................... $ 1,559,000 $ 1,514,000 $ 436,000 $ 1,334,000
=========== =========== =========== ===========
Interest revenue:
U.S............................ $ 296,000 $ 215,000 $ 17,000 $ 64,000
U.K............................ ___________ ___________ ___________ ___________
Total.......................... $ 296,000 $ 215,000 $ 17,000 $ 64,000
=========== =========== =========== ===========
Interest expense:
U.S............................ $ 239,000 $ 195,000 $ 50,000 $ 316,000
U.K............................ 48,000 47,000 15,000 39,000
----------- ----------- ----------- -----------
Total.......................... $ 287,000 $ 242,000 $ 65,000 $ 355,000
=========== =========== =========== ===========
Depreciation and
amortization.....................
U.S............................ $ 820,000 $ 804,000 $ 187,000 $ 706,000
U.K............................ 221,000 153,000 66,000 207,000
----------- ----------- ----------- -----------
Total.......................... $ 1,041,000 $ 957,000 $ 253,000 $ 913,000
=========== =========== =========== ===========
Income tax expense
(benefit):
U.S............................ $ 651,000 $ 1,679,000 $ 323,000 $ 1,057,000
U.K............................ (278,000) 29,000 ___________ (173,000)
----------- ----------- -----------
Total.......................... $ 373,000 $ 1,708,000 $ 323,000 $ 884,000
=========== =========== =========== ===========
</TABLE>
page 49 of 63
<PAGE> 50
<TABLE>
<CAPTION>
Three Months Year Ended
Year Ended Year Ended Ended December 31,
March 31, 1999 March 31, 1998 March 31, 1997 1996
-------------- -------------- -------------- ----
<S> <C> <C> <C> <C>
Segment net income (loss):
U.S............................ $ 2,066,000 $ 3,419,000 $ 563,000 $ 2,846,000
U.K............................ 355,000 333,000 (10,000) 351,000
----------- ----------- ----------- -----------
Total.......................... $ 2,421,000 $ 3,752,000 $ 553,000 $ 3,197,000
=========== =========== =========== ===========
Segment assets:
U.S............................ $32,046,000 $35,714,000 $29,314,000 $28,209,000
U.K............................ 4,317,000 3,490,000 4,098,000 4,541,000
----------- ----------- ----------- -----------
Total.......................... $36,363,000 $39,204,000 $33,412,000 $32,750,000
=========== =========== =========== ===========
Expenditures for long-lived assets:
U.S............................ $ 1,179,000 $ 1,334,000 $ 187,000 $ 604,000
U.K............................ 10,000 66,000 50,000 687,000
----------- ----------- ----------- -------------
Total.......................... $ 1,189,000 $ 1,400,000 $ 237,000 $ 1,291,000
=========== =========== =========== ===========
</TABLE>
The operating segment information above is reconciled to the
consolidated totals as follows:
<TABLE>
<CAPTION>
Three Months Year Ended
Year Ended Year Ended Ended December 31,
March 31, 1999 March 31, 1998 March 31, 1997 1996
-------------- -------------- -------------- ----
<S> <C> <C> <C> <C>
Net sales
- ---------
Total sales for operating
segments....................... $54,537,000 $57,720,000 $14,693,000 $52,821,000
Elimination of
intersegment sales............. (1,559,000) (1,514,000) (436,000) (1,334,000)
----------- ----------- ----------- -----------
Net sales........................ $52,978,000 $56,206,000 $14,257,000 $51,487,000
=========== =========== =========== ===========
Net income
- ----------
Total segment net income......... $ 2,421,000 $ 3,752,000 $ 553,000 $ 3,197,000
Eliminations..................... (52,000) 14,000 68,000 (95,000)
----------- ----------- ----------- -----------
Net income....................... $ 2,369,000 $ 3,766,000 $ 621,000 $ 3,102,000
=========== =========== =========== ===========
Assets
- ------
Total segment assets............. $36,363,000 $39,204,000 $33,412,000 $32,750,000
Elimination of corporate
investment in
subsidiaries................... (2,021,000) (2,021,000) (2,021,000) (2,021,000)
Elimination of profit in
inventory...................... (206,000) (153,000) (167,000) (235,000)
----------- ----------- ----------- -----------
Total assets..................... $34,136,000 $37,030,000 $31,224,000 $30,494,000
=========== =========== =========== ===========
</TABLE>
Total segment interest revenue, interest expense, depreciation and
amortization, income tax expense (benefit) and expenditures for long-lived
assets are equivalent to the consolidated totals for each of these items.
Operating segments incurred research and development costs of $371,000,
$404,000, $91,000 and $375,000 in 1999, 1998, 1997 and 1996, respectively.
Net sales by product line follows:
<TABLE>
<CAPTION>
Three Months Year Ended
Year Ended Year Ended Ended December 31,
March 31, 1999 March 31, 1998 March 31, 1997 1996
-------------- -------------- -------------- ----
<S> <C> <C> <C> <C>
Heat transfer equipment............. $26,477,000 $27,870,000 $ 7,215,000 $25,750,000
Vacuum equipment.................... 24,836,000 26,667,000 6,680,000 23,307,000
All other........................... 1,665,000 1,669,000 362,000 2,430,000
----------- ----------- ----------- -----------
Net sales........................... $52,978,000 $56,206,000 $14,257,000 $51,487,000
=========== =========== =========== ===========
</TABLE>
page 50 of 63
<PAGE> 51
The breakdown of net sales and long-lived assets by geographic area is:
<TABLE>
<CAPTION>
Three Months Year Ended
Year Ended Year Ended Ended December 31,
March 31, 1999 March 31, 1998 March 31, 1997 1996
-------------- -------------- -------------- ----
<S> <C> <C> <C> <C>
Net Sales:
Asia $ 9,777,000 $17,203,000 $ 2,970,000 $10,756,000
Australia &
New Zealand.................... 63,000 47,000 954,000
Canada........................... 3,593,000 889,000 709,000 2,628,000
Mexico........................... 4,287,000 495,000 52,000 371,000
Middle East...................... 3,648,000 2,288,000 1,338,000 3,883,000
South America.................... 3,231,000 3,122,000 89,000 3,981,000
United States.................... 23,564,000 26,344,000 7,892,000 23,583,000
Western Europe................... 4,140,000 5,041,000 1,155,000 4,844,000
Other............................ 675,000 777,000 52,000 487,000
----------- ----------- ----------- -----------
Net sales........................ $52,978,000 $56,206,000 $14,257,000 $51,487,000
=========== =========== =========== ===========
Long-Lived Assets:
United States.................... $ 8,881,000 $ 8,475,000 $ 7,880,000 $ 7,878,000
United Kingdom................... 1,569,000 1,551,000 1,610,000 1,694,000
----------- ----------- ----------- -----------
Total............................ $10,450,000 $10,026,000 $ 9,490,000 $ 9,572,000
=========== =========== =========== ===========
</TABLE>
page 51 of 63
<PAGE> 52
- --------------------------------------------------------------------------------
Quarterly Financial Data:
- --------------------------------------------------------------------------------
A capsule summary of the Company's unaudited quarterly sales and
earnings per share data for 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
First Second Third Fourth Total
1999 Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Net sales..................... $15,156,000 $11,417,000 $14,219,000 $12,186,000 $52,978,000
Gross profit.................. 4,492,000 3,253,000 3,964,000 3,163,000 14,872,000
Net income.................... 964,000 57,000 403,000 945,000 2,369,000
Per share:
Net income: Basic........ .58 .04 .25 .61 1.48
Diluted...... .57 .04 .25 .60 1.46
Market price range............ 16-18.25 11-17.75 6.75-11.13 6.50-11.13 6.50-18.25
1998
Net sales..................... $11,855,000 $14,618,000 $11,914,000 $17,819,000 $56,206,000
Gross profit.................. 3,683,000 4,962,000 3,638,000 5,800,000 18,083,000
Net income.................... 433,000 945,000 309,000 2,079,000 3,766,000
Per share:
Net income: Basic........ .27 .58 .19 1.23 2.27
Diluted...... .26 .56 .18 1.21 2.21
Market price range............ 13.63-18 16.88-19.75 13-22.88 13.38-18.50 13-22.88
</TABLE>
page 52 of 63
<PAGE> 53
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
Graham Corporation
Batavia, New York
We have audited the accompanying consolidated balance sheets of Graham
Corporation and subsidiaries as of March 31, 1999 and 1998, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the years ended March 31, 1999 and 1998, for the three month period
ended March 31, 1997, and for the year ended December 31, 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Graham Corporation and subsidiaries
as of March 31, 1999 and 1998, and the results of their operations and their
cash flows for the years ended March 31, 1999 and 1998, for the three month
period ended March 31, 1997, and for the year ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Rochester, New York
May 21, 1999
page 53 of 63
<PAGE> 54
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
(Not Applicable)
PART III
--------
Item 10. Directors and Executive Officers
- -------- --------------------------------
The information called for under this Item pursuant to Item
401 of the Commission's Regulation S-K is set forth in statements under
"Election of Directors" on pages 3 and 7 of the Registrant's Proxy Statement for
its 1999 Annual Meeting of Stockholders, which statements are hereby
incorporated herein by reference.
Item 11. Executive Compensation
- -------- ----------------------
The information called for under this Item is set forth in
statements under "Directors' Fees" on pages 5 and 6 of Registrant's Proxy
Statement for its 1999 Annual Meeting of Stockholders and also under
"Compensation of Executive Officers" on pages 8 to 12 of such proxy statement,
which statements are hereby incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
-----------------------------------------------
The information called for under this Item is set forth in
statements under "Principal Stockholders" on page 2 of Registrant's Proxy
Statement for its 1999 Annual Meeting of Stockholders, which statements are
hereby incorporated herein by reference.
(b) Security Ownership of Management
--------------------------------
The information called for under this Item is set forth in
statements under "Principal Stockholders" on page 2, "Election of Directors" on
pages 3 to 6 and "Executive Officers" on page 7 of Registrant's Proxy Statement
for its 1999 Annual Meeting of Stockholders, which statements are hereby
incorporated herein by reference.
(c) Changes in Control
------------------
(Not applicable.)
page 54 of 63
<PAGE> 55
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
The information called for under this Item is set forth in statements
under "Principal Stockholders" on page 2 and "Election of Directors" on pages 3
to 6 of Registrant's Proxy Statement for its 1999 Annual Meeting of
Stockholders, which statements are hereby incorporated herein by reference.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-k
- -------- ---------------------------------------------------------------
(a) (1) The following are Financial Statements and related information filed
as part of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Sequential
Page Number
-----------
<S> <C>
(A) Consolidated Statements of Operations for the Fiscal Years ended March
31, 1999 and March 31, 1998, the period January 1, 1997-March 31, 1997
and the Year ended December 31,
1996................................................................ 20
(B) Consolidated Balance Sheets as of March 31, 1999 and March 31,
1998................................................................ 21
(C) Consolidated Statements of Cash Flows for the Fiscal Years ended March
31, 1999 and March 31, 1998, the period January 1, 1997-March 31, 1997
and the Year ended December 31,
1996................................................................ 22
(D) Consolidated Statements of Changes in Shareholders' Equity for the
Fiscal Years ended March 31, 1999 and March 31, 1998, the period
January 1, 1997-March 31, 1997 and the Year ended December 31,
1996................................................................ 23
(E) Notes to Consolidated Financial Statements; and..................... 24-51
(F) Quarterly Financial Data............................................ 52
(G) Report of Independent Auditors...................................... 53
(a) (2) The following are Financial Statement Schedules and related
information required to be filed as part of this Annual Report on Form 10-K by
Items 8 and 14(d) of Form 10-K: Sequential
Page Number
------------
(A) The items set forth in Items 14(a)(1)(A) through (E) above;
and................................................................. 20-51
(B) Independent Auditors' Report on Financial Statement
Schedules........................................................... 57
Financial Statement Schedules for the Fiscal Years ended March 31,
1999 and March 31, 1998, the period January 1, 1997-March 31, 1997 and
the Year ended December 31, 1996 as follows:
(ii) Valuation and Qualifying Accounts (Schedule II)............ 58
</TABLE>
page 55 of 63
<PAGE> 56
Other financial statement schedules not included in this
Annual Report on Form 10-K have been omitted because they are not applicable or
because the required information is shown in the financial statements or notes
thereto.
page 56 of 63
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Graham Corporation
Batavia, New York
We have audited the consolidated financial statements of Graham Corporation and
subsidiaries as of March 31, 1999 and 1998, and for the years ended March 31,
1999 and 1998, for the three month period ended March 31, 1997, and for the year
ended December 31, 1996 and have issued our report thereon dated May 21, 1999;
such report is included elsewhere in this Annual Report on Form 10-K. Our audits
also included the consolidated financial statement schedule of Graham
Corporation and subsidiaries, listed in Item 14(a)2. This financial statement
schedule is the responsibility of the Corporation's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Rochester, New York
May 21, 1999
page 57 of 63
<PAGE> 58
GRAHAM CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
beginning costs and Charged to end of
Description of period expenses other accounts Deductions period
--------- -------- -------------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1999
Reserves deducted from the asset
to which they apply:
Reserve for doubtful accounts $ 23,000 $ 23,000 $ 1,000 (d) $ (25,000) $ 22,000
Reserve for inventory
Obsolescence 42,000 63,000 (4,000)(b) 101,000
Reserves included in the
balance sheet caption Other
Long-term liabilities:
Reserve for contingencies 250,000 100,000 (50,000) 300,000
----------- ---------- --------- ----------- ----------
$ 315,000 $ 186,000 $ (3,000) $ (75,000) $ 423,000
=========== ========== ========= =========== ==========
Year ended March 31, 1998
Reserves deducted from the asset
to which they apply:
Reserve for doubtful accounts $ 31,000 $ 4,000 $ 2,000 (d) $ (14,000) $ 23,000
Reserve for inventory
Obsolescence 108,000 39,000 1,000 (b) (106,000) 42,000
Reserves included in the
balance sheet caption Other
Long-term liabilities:
Reserve for contingencies 248,000 104,000 (102,000) 250,000
Reserve for discontinued
Operations 271,000 (6,000)(c) (265,000)(a) 0
----------- ---------- --------- ----------- ----------
$ 658,000 $ 147,000 $ (3,000) $ (487,000) $ 315,000
=========== ========== ========= =========== ==========
Three months ended March 31, 1997
Reserves deducted from the asset
to which they apply:
Reserve for doubtful accounts $ 40,000 $ 9,000 $ (1,000)(b) $ (17,000) $ 31,000
Reserve for inventory
Obsolescence 103,000 9,000 (4,000)(b) 108,000
Reserves included in the
balance sheet caption Other
Long-term liabilities:
Reserve for contingencies 257,000 (9,000) 248,000
Reserve for discontinued
Operations 392,000 (16,000)(b) (105,000)(a) 271,000
----------- ---------- --------- ----------- ----------
$ 792,000 $ 18,000 $ (21,000) $ (131,000) $ 658,000
=========== ========== ========= =========== ==========
Year ended December 31, 1996
Reserves deducted from the asset
to which they apply:
Reserve for doubtful accounts $ 81,000 $ 26,000 $ 11,000 (b) $ (78,000) $ 40,000
Reserve for inventory
Obsolescence 222,000 91,000 11,000 (b) (221,000) 103,000
Reserves included in the
balance sheet caption Other
Long-term liabilities:
Reserve for contingencies 260,000 (3,000) 257,000
Reserve for discontinued
Operations 711,000 64,000 41,000 (b) (424,000)(a) 392,000
----------- ---------- --------- ----------- ----------
$ 1,014,000 $ 441,000 $ 63,000 $ (726,000) $ 792,000
=========== ========== ========= =========== ==========
</TABLE>
Notes:
(a) Represents costs charged against the reserve associated with the
discontinued operation.
(b) Represents foreign currency translation adjustment.
(c) Represents a reversal of the reserve and a foreign currency translation
adjustment.
(d) Represents a bad debt recovery and a foreign currency translation
adjustment.
page 58 of 63
<PAGE> 59
(a) (3) The following exhibits are required to be filed by Item 14(c) of
Form 10-K:
Exhibit No.
- -----------
*3.1 Articles of Incorporation of Graham Corporation
+3.2 By-laws of Graham Corporation
*4.1 Certificate of Incorporation of Graham Corporation
(included as Exhibit 3.1)
**4.2 Shareholder Rights Plan of Graham Corporation
***10.1 1989 Stock Option and Appreciation Rights Plan of
Graham Corporation
****10.2 1995 Graham Corporation Incentive Plan to Increase
Shareholder Value
+10.3 Graham Corporation Outside Directors' Long-Term
Incentive Plan
+10.4 Employment Contracts between Graham Corporation
and Named Executive Officers
+10.5 Senior Executive Severance Agreements with Named
Executive Officers
11 Statement regarding computation of per share
earnings
Computation of per share earnings is included
in Note 1 of the Notes to Consolidated
Financial Statements
+18 Letter regarding change in accounting principles
21 Subsidiaries of the registrant
23 Consent of Deloitte and Touche LLP
27 Financial Data Schedule
- ----------------
+ Incorporated herein by reference from the Annual Report of
Registrant on Form 10-K for the fiscal year ended March 31, 1998.
* Incorporated herein by reference from the Annual Report of
Registrant on Form 10-K for the year ended December 31, 1989.
** Incorporated herein by reference from the Registrant's Current
Report on Form 8-K dated February 26, 1991, as amended by
Registrant's Amendment No. 1 Form 8 dated June 8, 1991.
*** Incorporated herein by reference from the Registrant's Proxy
Statement for its 1991 Annual Meeting of Shareholders.
**** Incorporated herein by reference from the Registrant's Proxy
Statement for its 1996 Annual Meeting of Shareholders.
(b) The Registrant filed no reports on Form 8-K during the last quarter of the
fiscal year covered by this Annual Report on Form 10-K.
page 59 of 63
<PAGE> 60
Cross Reference Sheet for Annual Report on Form 10-K for the year ended
March 31, 1999, setting forth item numbers and captions of Form 10-K (and
related Items of Regulation S-K referred to therein) under which information is
incorporated by reference and the pages in the Registrant's Proxy Statement for
the 1999 Annual Meeting of Stockholders where that information appears.
<TABLE>
<CAPTION>
FORM 10-K: PART NO Regulation S-K Proxy Statement for 1999
Item No. and Caption Item No. and Caption Annual Meeting of Stockholders
- -------------------- -------------------- ------------------------------
Caption: Page:
<S> <C> <C> <C>
Item 10. Directors and Item 401. Directors and Election of Directors 3-7
Executive Officers of Executive Officers
Registrant
Item 405. Directors and Disclosure Pursuant to 7
Executive Officers Item 405 of SEC
Regulation S-K
Item 11. Executive Item 401. Executive Directors' Fees 6
Compensation Compensation Compensation of 8-11
Executive Officers
Item 12. Security Item 403(a). Security Principal Stockholders 2
Ownership of Certain Ownership of Certain
Beneficial Owners and Beneficial Owners
Management
Item 403(b). Security Principal Stockholders 2
Ownership of Management Election of Directors 3-6
Executive Officers 7
Item 13. Certain Item 404(a). Transactions Principal Stockholders 2
Relationships and with Management and Election of Directors 3-6
Related Transactions Others
Item 404(b). Certain Principal Stockholders 2
Business Relations Election of Directors 3 -6
</TABLE>
page 60 of 63
<PAGE> 61
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GRAHAM CORPORATION
------------------------------------
DATE: June 18, 1999 By /s/ J. Ronald Hansen
------------------------------------
J. Ronald Hansen
Vice President-Finance & Administration
and Chief Financial Officer (Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
President and Chief
/s/ Alvaro Cadena Executive Officer; June 18, 1999
- ------------------------------- Director
Alvaro Cadena
Vice President-Finance &
Administration and Chief
/s/ J. Ronald Hansen Financial Officer (Principal June 18, 1999
- ------------------------------- Accounting Officer)
J. Ronald Hansen
/s/ Philip S. Hill Director June 18, 1999
- -------------------------------
Philip S. Hill
/s/ Cornelius S. Van Rees Director June 18, 1999
- -------------------------------
Cornelius S. Van Rees
/s/ Jerald D. Bidlack Director; Chairman of June 18, 1999
- ------------------------------- the Board
Jerald D. Bidlack
/s/ Helen H. Berkeley Director June 18, 1999
- -------------------------------
Helen H. Berkeley
/s/ H. Russel Lemcke Director June 18, 1999
- -------------------------------
H. Russel Lemcke
page 61 of 63
<PAGE> 62
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
EXHIBITS
filed with
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
of
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED March 31, 1999
--------------------
GRAHAM CORPORATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
page 62 of 63
<PAGE> 63
GRAHAM CORPORATION
FORM 10-K
March 31, 1999
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
21 Subsidiaries of the Registrant
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
page 63 of 63
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT IN FISCAL YEAR 1999
United Kingdom
- --------------
Graham Vacuum and Heat Transfer Limited
The Forge
Congleton, Cheshire SW12 4HQ, England
Graham Precision Pumps Limited
The Forge
Congleton, Cheshire SW12 4HQ, England
page 1 of 1
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
Graham Corporation
We consent to the incorporation by reference in Registration Statement
No.'s 2-83432, 2-82275, 33-82432, 333-00401 and Post-Effective Amendment No. 1
to Registration Statement No. 33-82432 of Graham Corporation and subsidiaries on
Forms S-3 and S-8 of our reports dated May 21, 1999, appearing in this Annual
Report on Form 10-K of Graham Corporation and subsidiaries for the year ended
March 31, 1999.
/s/ Deloitte & Touche LLP
- ----------------------------
Deloitte & Touche LLP
Rochester, New York
June 25, 1999
page 1 of 1
<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 is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 120
<SECURITIES> 4,928
<RECEIVABLES> 7,602
<ALLOWANCES> 22
<INVENTORY> 6,803
<CURRENT-ASSETS> 20,803
<PP&E> 26,318
<DEPRECIATION> 15,868
<TOTAL-ASSETS> 34,136
<CURRENT-LIABILITIES> 8,814
<BONDS> 505
0
0
<COMMON> 169
<OTHER-SE> 16,543
<TOTAL-LIABILITY-AND-EQUITY> 34,136
<SALES> 52,978
<TOTAL-REVENUES> 52,978
<CGS> 38,106
<TOTAL-COSTS> 38,106
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 23
<INTEREST-EXPENSE> 287
<INCOME-PRETAX> 2,742
<INCOME-TAX> 373
<INCOME-CONTINUING> 2,369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,369
<EPS-BASIC> 1.48
<EPS-DILUTED> 1.46
</TABLE>
