FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For Quarterly Period Ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________
Commission File Number 1-8462
GRAHAM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 16-1194720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 FLORENCE AVENUE, BATAVIA, NEW YORK 14020
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code - 716-343-2216
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES __X__ No _____
As of August 4, 2000, there were outstanding 1,504,472 shares
of common stock, $.10 per share.
<PAGE>2
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2000
PART I - FINANCIAL INFORMATION
Unaudited consolidated financial statements of Graham
Corporation (the Company) and its subsidiaries as of June 30, 2000
and for the three month period then ended are presented on the
following pages. The financial statements have been prepared in
accordance with the Company's usual accounting policies, are based
in part on approximations and reflect all normal and recurring
adjustments which are, in the opinion of management, necessary to a
fair presentation of the results of the interim periods.
This part also includes management's discussion and analysis of
the Company's financial condition as of June 30, 2000 and its
results of operations for the three month period then ended.
<PAGE>3
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
---- ---
<S> <C> <C>
Assets
Current Assets:
Cash and equivalents $ 25,000 $ 1,110,000
Investments 4,905,000 4,905,000
Trade accounts receivable 8,059,000 7,593,000
Inventories 5,223,000 6,640,000
Domestic and foreign income taxes
receivable 56,000 300,000
Deferred income tax asset 1,709,000 1,644,000
Prepaid expenses and other current assets 511,000 400,000
----------- -----------
20,488,000 22,592,000
Property, plant and equipment, net 9,997,000 10,105,000
Deferred income tax asset 1,766,000 1,862,000
Other assets 31,000 37,000
----------- -----------
$32,282,000 $34,596,000
=========== ===========
</TABLE>
<PAGE>4
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (concluded)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
---- ---
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 2,094,000 $ 2,000,000
Current portion of long-term debt 238,000 286,000
Accounts payable 1,895,000 2,672,000
Accrued compensation 2,679,000 3,228,000
Accrued expenses and other liabilities 1,008,000 865,000
Customer deposits 885,000 444,000
Contingent liability 696,000 700,000
----------- -----------
9,495,000 10,195,000
Long-term debt 720,000 1,948,000
Accrued compensation 770,000 766,000
Deferred income tax liability 32,000 33,000
Other long-term liabilities 12,000 13,000
Accrued pension liability 1,408,000 1,339,000
Accrued postretirement benefits 3,229,000 3,210,000
----------- -----------
Total liabilities 15,666,000 17,504,000
----------- -----------
Shareholders' equity:
Preferred stock, $1 par value -
Authorized, 500,000 shares
Common stock, $.10 par value -
Authorized, 6,000,000 shares
Issued 1,690,595 shares on June 30, 2000
and March 31, 2000 169,000 169,000
Capital in excess of par value 4,521,000 4,521,000
Retained earnings 16,544,000 16,898,000
Accumulated other comprehensive loss (2,086,000) (1,964,000)
----------- -----------
19,148,000 19,624,000
Less:
Treasury stock (2,532,000) (2,532,000)
Total shareholders' equity 16,616,000 17,092,000
----------- -----------
$32,282,000 $34,596,000
=========== ===========
</TABLE>
<PAGE>5
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Three Months
ended June 30,
2000 1999
---- ----
<S> <C> <C>
Net Sales $ 8,284,000 $ 9,053,000
----------- -----------
Cost and expenses:
Cost of products sold 6,425,000 6,413,000
Selling, general and administrative 2,307,000 2,298,000
Interest expense 74,000 42,000
----------- -----------
8,806,000 8,753,000
----------- -----------
Income (Loss) before income taxes (522,000) 300,000
Provision (Benefit) for income taxes (168,000) 119,000
----------- -----------
Net income (loss) (354,000) 181,000
Retained earnings at beginning of
period 16,898,000 17,731,000
----------- -----------
Retained earnings at end of period $16,544,000 $17,912,000
=========== ===========
Per Share Data:
Basic:
Net income (loss) $(.23) $.12
===== ====
Diluted:
Net income (loss) $(.23) $.12
===== ====
</TABLE>
<PAGE>6
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net income (loss) $ (354,000) $ 181,000
---------- ----------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 240,000 263,000
Gain on sale of property, plant and equipment (23,000)
(Increase) Decrease in operating assets:
Accounts receivable (506,000) 637,000
Inventory, net of customer deposits 1,814,000 294,000
Prepaid expenses and other current and non-
current assets (115,000) 19,000
Increase (Decrease) in operating liabilities:
Accounts payable, accrued compensation,
accrued expenses and other liabilities (1,142,000) (1,374,000)
Accrued compensation, accrued pension
liability, and accrued postemployment
benefits 92,000 204,000
Domestic and foreign income taxes 242,000 87,000
Other long-term liabilities (2,000)
---------- ----------
Total adjustments 602,000 128,000
---------- ----------
Net cash provided by operating activities 248,000 309,000
---------- ----------
Investing activities:
Purchase of property, plant and equipment (188,000) (79,000)
Proceeds from sale of property, plant &
equipment 27,000
Purchase of investments (904,000)
Proceeds from maturity of investments 906,000
---------- ----------
Net cash used by investing activities (161,000) (77,000)
---------- ----------
Financing activities:
Increase in short-term debt 95,000 165,000
Proceeds from issuance of long-term debt 5,844,000
Principal repayments on long-term debt (7,103,000) (81,000)
Purchase of treasury stock (10,000)
---------- ----------
Net cash provided (used) by financing activities (1,164,000) 74,000
---------- ----------
Effect of exchange rate on cash (8,000) (6,000)
---------- ----------
Net increase (decrease) in cash and equivalents (1,085,000) 300,000
Cash and equivalents at beginning of period 1,110,000 120,000
---------- ----------
Cash and equivalents at end of period $ 25,000 $ 420,000
========== ==========
</TABLE>
<PAGE>7
GRAHAM CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL INFORMATION
JUNE 30, 2000
---------------------------------------------------------------------------
NOTE 1 - INVENTORIES
---------------------------------------------------------------------------
Major classifications of inventories are as follows:
<TABLE>
<CAPTION>
6/30/00 3/31/00
------- -------
<S> <C> <C>
Raw materials and supplies $1,524,000 $1,627,000
Work in process 6,386,000 6,045,000
Finished products 1,281,000 1,304,000
---------- ----------
9,191,000 8,976,000
Less - progress payments 3,968,000 2,336,000
---------- ----------
$5,223,000 $6,640,000
========== ==========
</TABLE>
---------------------------------------------------------------------------
NOTE 2 - EARNINGS PER SHARE:
---------------------------------------------------------------------------
Basic earnings per share is computed by dividing net income by
the weighted average number of common shares outstanding for the
period. Diluted earnings per share is calculated by dividing net
income by the weighted average number of common and, when
applicable, potential common shares outstanding during the period.
A reconciliation of the numerators and denominators of basic and
diluted earnings per share is presented below:
<TABLE>
<CAPTION>
Three months
ended June 30,
2000 1999
---- ----
<S> <C> <C>
Basic earnings (loss) per share
Numerator:
Net income (loss) $(354,000) $ 181,000
--------- ---------
Denominator:
Weighted common shares outstanding 1,504,000 1,520,000
Share equivalent units (SEU) outstanding
11,000 5,000
--------- ---------
Weighted average shares and SEU's
outstanding 1,515,000 1,525,000
--------- ---------
Basic earnings (loss) per share $(.23) $.12
===== ====
</TABLE>
<PAGE>8
---------------------------------------------------------------------------
NOTE 2 - EARNINGS PER SHARE: (concluded)
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months
ended June 30,
2000 1999
---- ----
<S> <C> <C>
Diluted earnings (loss) per share
Numerator:
Net income (loss) $(354,000) $ 181,000
--------- ---------
Denominator:
Weighted average shares and SEU's
outstanding 1,515,000 1,525,000
Stock options outstanding 6,000
Contingently issuable SEU's 6,000
--------- ---------
Weighted average common and potential
common shares outstanding 1,515,000 1,537,000
--------- ---------
Diluted earnings (loss) per share $(.23) $.12
===== ====
</TABLE>
All options to purchase shares of common stock at various
exercise prices were excluded from the computation of diluted loss
per share as the effect would be antidilutive due to the net loss.
---------------------------------------------------------------------------
NOTE 3 - CASH FLOW STATEMENT
---------------------------------------------------------------------------
Actual interest paid was $77,000 and $41,000 for the three
months ended June 30, 2000 and 1999, respectively. In addition,
actual income taxes refunded were $411,000 for the three months
ended June 30, 2000 and actual income taxes paid were $32,000 for
the three months ended June 30, 1999.
---------------------------------------------------------------------------
NOTE 4 - COMPREHENSIVE INCOME
---------------------------------------------------------------------------
Total comprehensive income (loss) was $(476,000) and $152,000
for the three months ended June 30, 2000 and 1999, respectively.
Other comprehensive loss included foreign currency translation
adjustments of $122,000 and $29,000 for the quarters ended June 30,
2000 and 1999, respectively.
<PAGE>9
---------------------------------------------------------------------------
NOTE 5 - SEGMENT INFORMATION
---------------------------------------------------------------------------
The Company's business consists of two operating segments based
upon geographic area. The United States segment designs and
manufactures heat transfer and vacuum equipment and the operating
segment located in the United Kingdom manufactures vacuum
equipment. Operating segment information is presented below:
<TABLE>
<CAPTION>
Three months
ended June 30,
2000 1999
---- ----
<S> <C> <C>
Sales from external customers
U.S. $7,413,000 $8,054,000
U.K. 871,000 999,000
---------- ----------
Total $8,284,000 $9,053,000
========== ==========
Intersegment sales
U.S. $ 9,000
U.K. 194,000 $ 254,000
----------- ----------
Total $ 203,000 $ 254,000
========== ==========
Segment net income (loss)
U.S. $ (404,000) $ 233,000
U.K. (33,000) (52,000)
---------- ----------
Total $ (437,000) $ 181,000
========== ==========
</TABLE>
The segment net income (loss) above is reconciled to the
consolidated totals as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Total segment net income (loss) $(437,000) $181,000
Eliminations 83,000
--------- --------
Net income (loss) $(354,000) $181,000
========= ========
</TABLE>
<PAGE>10
GRAHAM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
June 30, 2000
Results of Operations
---------------------
Sales decreased 8% in the first quarter of fiscal year 2001
compared to the same period last year. Sales for the first quarter
decreased 8% in the United States and 15% in the United Kingdom
compared to fiscal year 2000. The decrease in the United States
sales is attributable to customer changes to equipment
specifications which resulted in longer production schedules for
several large projects. The decline in the United Kingdom sales is
a reflection of the low level of new orders obtained during fiscal
year 2000. In addition, the strength of the pound sterling as
compared to other foreign currencies and the recession in the
United Kingdom manufacturing sector have adversely impacted sales
volumes and prices.
Cost of sales as a percent of sales for the first quarter was
78% compared to 71% a year ago. Cost of sales as a percent of
sales for the United States operating segment was 80% for the
current quarter compared to 71% for the first quarter of fiscal
year 2000. For the United Kingdom operations, cost of sales
remained stable at 74%. While cost of sales as a percent of sales
remained consistent in the United Kingdom, the significant increase
in the United States is due to product mix as direct costs incurred
in producing the new rectangular condenser product line are greater
than the direct costs for the smaller, circular condensers. In
addition, fixed production costs have increased while sales levels
have declined causing this percentage to climb.
Selling, general and administrative expenses for the three
months ended June 30, 2000 were substantially the same as selling,
general and administrative expenses for the same period of fiscal
year 2000 and represented 28% of sales as compared to 25% in the
first quarter last year. Selling, general and administrative
expenses as a percent of sales exceeds the prior year percentage
primarily due to the decline in sales levels during the current
quarter as compared to the first quarter of last year.
Interest expense for the first quarter is up 76% or $32,000 from
the same period in fiscal year 2000. The increase is attributable
to a higher level of borrowing in the United States during the
quarter for working capital needs.
The effective income tax rate for the first quarter was 32%
compared to 40% for the comparable three months of last year. The
lower rate in the current year results from the utilization of
prior year operating losses in the United Kingdom.
Liquidity and Capital Resources
-------------------------------
The financial condition of the Company remained relatively
stable. Working capital of $10,993,000 at June 30, 2000 compares
to $12,397,000 at March 31, 2000. The working capital decrease
<PAGE>11
Liquidity and Capital Resources (concluded)
-------------------------------------------
reflects decreases of $2,104,000 and $700,000 in current assets and
current liabilities, respectively. The decrease in current assets
related primarily to significant declines in cash and inventory.
The decrease in cash is due to paydowns on long-term debt while the
decline in inventory is due to the receipt of additional progress
payments on several large projects which are reported as a
reduction to inventory. The decrease in current liabilities is
attributable to a reduction in accounts payable which is mainly the
result of timing of purchases. The current ratio has remained
steady at 2.2.
Net cash provided from operating activities for the first
quarter was $248,000. Net loss, adjusted for depreciation and
amortization, used $114,000 of operating cash. However, as noted
above, the receipt of progress payments generated cash from
operations to offset this use. Net cash used in investing
activities for the three month period of $161,000 was utilized for
capital expenditures which were $188,000 compared to $79,000 for
the same period last year. The Company had commitments for capital
expenditures of approximately $625,000 as of June 30, 2000.
Management anticipates spending approximately $1,000,000 in fiscal
year 2001 for capital additions to upgrade computer equipment and
machinery. Net cash used in financing activities of $1,164,000 was
due primarily to paydowns on the United States line of credit.
Management expects that the cash flow from operations and lines
of credit will provide sufficient resources to fund the fiscal year
2001 cash requirements.
The long-term debt to equity ratio of 6% compares to 13% at
March 31, 2000. The total liabilities to assets ratio is 49%
compared to 51% at March 31, 2000. These ratios are reflective of
the continued stability and strength of the Company's financial
condition.
New Orders and Backlog
----------------------
New orders for the first quarter were $12,425,000 compared to
$7,334,000 for the same period last year. Prior to intercompany
eliminations, new orders in the United States were $11,760,000
compared to $6,538,000 for the same period in fiscal year 2000.
New orders in the United Kingdom were $1,101,000 compared to
$1,104,00 for the same quarter last year. The significant increase
in new orders in the United States is due to significant orders
obtained for rectangular condensers and other large equipment in
the refinery and plastics industries.
Management anticipates growth opportunities in the power,
pharmaceutical, fiber and resin industries. The Company will
pursue new business in these areas in order to increase market
share.
<PAGE>12
New Orders and Backlog(concluded)
---------------------------------
Backlog of unfilled orders at June 30, 2000 is $28,418,000
compared to $13,857,000 at this time a year ago and $24,302,000 at
March 31, 2000. Prior to intercompany eliminations, current
backlog in the United States of $28,027,000 compares to $23,689,000
at March 31, 2000 and $13,108,000 at June 30, 1999. Current
backlog in the United Kingdom of $1,179,000 compares to $1,198,000
at March 31, 2000 and $958,000 at June 30, 1999. The current
backlog is reflective of the recent order activity. The current
backlog, with the exception of approximately $5,000,000, is
scheduled to be shipped during the next twelve months and
represents orders from traditional markets in the Company's
established product lines.
Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The Company is exposed to changes in interest rates, foreign
currency exchange rates and equity prices which may adversely
impact its results of operations and financial position. The
Company is exposed to interest rate risk primarily through its
borrowing activities. Risk associated with interest rate
fluctuations on debt is managed by holding interest bearing debt to
the absolute minimum and assessing the risks and benefits for
incurring long-term debt. Based upon variable rate debt outstanding
at June 30, 2000, a 1% change in interest rates would impact annual
interest expense by $27,000.
Over the past three years, Graham's international consolidated
sales exposure approximates fifty percent of annual sales.
Operating in world markets involves exposure to movements in
currency exchange rates. Currency movements can affect sales in
several ways. Foremost, the ability to competitively compete for
orders against competition having a relatively weaker currency.
Business lost due to this cannot be quantified. Secondly,
redemption value of sales can be adversely impacted. The
substantial portion of Graham's sales are collected in U.S.
dollars. The Company enters into forward foreign exchange
agreements to hedge its exposure against unfavorable changes in
foreign currency values on significant sales contracts negotiated
in foreign currencies. Graham uses derivatives for no other
reason.
Foreign operations produced a net loss in the first quarter of
$34,000. As currency exchange rates change, translations of the
income statements of our U.K. business into U.S. dollars affects
year-over-year comparability of operating results. The Company
does not hedge translation risks because cash flows from U.K.
operations are mostly reinvested in the U.K. A 10% change in
foreign exchange rates would impact first quarter net loss by
approximately $3,000.
<PAGE>13
Quantitative and Qualitative Disclosures about Market Risk (concluded)
----------------------------------------------------------------------
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 June 30, 2000 and 1999 and the respective
quarter end market price per share, a twenty to forty percent
change in the respective quarter end market price of the Company's
common stock would positively or negatively impact the Company's
first quarter operating results by $26,000 to $53,000 for 2001 and
$20,000 to $40,000 for 2000. In the first quarter of 2001, the
loss, net of tax, recorded due to the increase in the stock price
was not significant. Assuming required net income of $500,000 to
award SEU's is met and SEU's are granted to the five outside
directors in accordance with the plan over the next five years,
based upon the June 30, 2000 market price of the Company's stock of
$7.63 per share, a twenty to forty percent change in the stock
price would positively or negatively impact the Company's operating
results by $36,000 to $73,000 in 2002, $38,000 to $77,000 in 2003
and $40,000 to $81,000 in 2004, 2005 and 2006.
Accounting Standard Changes
---------------------------
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts, and derivatives utilized for hedging activities.
It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and
measure those instruments at fair value. This statement is
effective for the Company in fiscal 2002. The impact of adopting
this statement is not expected to have an adverse effect on the
Company's financial statements.
<PAGE>14
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2000
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. See index to exhibits.
b. No reports on Form 8-K were filed during the quarter
ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
GRAHAM CORPORATION
____________________________________
J. R. Hansen
Vice President Finance and
Administration / CFO (Principal
Accounting Officer)
Date 08/04/00
<PAGE>15
INDEX OF EXHIBITS
(2) Plan of acquisition, reorganization, arrangement, liquidation
or succession
Not applicable.
(4) Instruments defining the rights of security holders, including
indentures
(a) Equity securities
The instruments defining the rights of the holders of
Registrant's equity securities are as follows:
Certificate of Incorporation, as amended of Registrant
(filed as Exhibit 3(a) to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1989, and incorporated herein by reference.)
By-laws of registrant, as amended (filed as Exhibit
3.2(ii) to the Registrant's annual report on Form 10-K
for the fiscal year ended March 31, 1998, and is
incorporated herein by reference.)
(b) Debt securities
Not applicable.
(10) Material Contracts
1989 Stock Option and Appreciation Rights Plan of Graham
Corporation (filed on the Registrant's Proxy Statement for its
1990 Annual Meeting of Stockholders and incorporated herein by
reference.)
1995 Graham Corporation Incentive Plan to Increase
Shareholder Value (filed on the Registrant's Proxy Statement
for its 1996 Annual Meeting of Stockholders and incorporated
herein by reference.)
Graham Corporation Outside Directors' Long-Term Incentive
Plan (filed as Exhibit 10.3 to the Registrant's annual report
on Form 10-K for the fiscal year ended March 31, 1998, and is
incorporated herein by reference.)
Employment Contracts between Graham Corporation and Named
Executive Officers (filed as Exhibit 10.4 to the Registrant's
annual report on Form 10-K for the fiscal year ended March 31,
1998, and is incorporated herein by reference.)
Senior Executive Severance Agreements with Named
Executive Officers (filed as Exhibit 10.5 to the Registrant's
annual report on Form 10-K for the fiscal year ended March 31,
1998, and is incorporated herein by reference.)
<PAGE>16
Index to Exhibits (cont.)
-------------------------
Long-Term Stock Ownership Plan of Graham Corporation
(filed on the Registrant's Proxy Statement for its 2000 Annual
Meeting of Stockholders and incorporated herein by reference.)
(11) Statement re-computation of per share earnings
Computation of per share earnings is included in Note 2
of the Notes to Financial Information.
(15) Letter re-unaudited interim financial information
Not applicable.
(18) Letter re-change in accounting principles
Not Applicable.
(19) Report furnished to security holders
None.
(22) Published report regarding matters submitted to vote of
security holders
None.
(23) Consents of experts and counsel
Not applicable.
(24) Power of Attorney
Not applicable.
(27) Financial Data Schedule
Financial Data Schedule is included herein as Exhibit 27
of this report.
(99) Additional exhibits
None.
