FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For Quarterly Period Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________
Commission File Number 1-8462
GRAHAM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 16-1194720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 FLORENCE AVENUE, BATAVIA, NEW YORK 14020
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code - 716-343-2216
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES __X__ No _____
As of February 8, 1999, there were outstanding 1,584,995 shares
of common stock, $.10 per share.
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 1998
PART I - FINANCIAL INFORMATION
Unaudited consolidated financial statements of Graham
Corporation (the Company) and its subsidiaries of December 31, 1998
and for the three month and nine month periods then ended are
presented on the following pages. The financial statements have
been prepared in accordance with the Company's usual accounting
policies, are based in part on approximations and reflect all
normal and recurring adjustments which are, in the opinion of
management, necessary to a fair presentation of the results of the
interim periods.
This part also includes management's discussion and analysis of
the Company's financial condition as of December 31, 1998 and its
results of operations for the three month and nine month periods
then ended.
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1998 1998
---- ----
Assets
Current Assets:
Cash and equivalents $ 4,137,000 $ 1,694,000
Marketable securities 200,000 4,801,000
Trade accounts receivable 6,149,000 6,791,000
Inventories 7,978,000 10,278,000
Deferred tax asset 907,000 881,000
Prepaid expenses and other
current assets 395,000 468,000
----------- -----------
19,766,000 24,913,000
Property, plant and equipment, net 10,249,000 10,026,000
Deferred tax asset 2,455,000 2,067,000
Other assets 227,000 24,000
----------- -----------
$32,697,000 $37,030,000
=========== ===========
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (concluded)
December 31, March 31,
1998 1998
---- ----
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt due banks $ 40,000
Current portion of long-term debt $ 566,000 505,000
Accounts payable 1,922,000 4,195,000
Accrued compensation 3,523,000 4,940,000
Accrued expenses and other liabilities 1,127,000 1,039,000
Customer deposits 352,000 779,000
Domestic and foreign income taxes
payable 178,000 956,000
----------- -----------
7,668,000 12,454,000
Long-term debt 645,000 859,000
Deferred compensation 1,105,000 1,007,000
Other long-term liability 216,000 264,000
Deferred pension liability 3,034,000 1,464,000
Accrued postretirement benefits 3,270,000 3,207,000
----------- -----------
Total liabilities 15,938,000 19,255,000
----------- -----------
Shareholders' equity:
Preferred stock, $1 par value -
Authorized, 500,000 shares
Common stock, $.10 par value -
Authorized, 6,000,000 shares
Issued 1,690,595 shares on
December 31, and March 31, 1998 169,000 169,000
Capital in excess of par value 4,521,000 4,521,000
Cumulative foreign currency
translation adjustment (1,791,000) (1,781,000)
Retained earnings 16,786,000 15,362,000
----------- -----------
19,685,000 18,271,000
Less:
Treasury stock (1,784,000) (71,000)
Employee Stock Ownership Plan Loan
Payable (275,000) (425,000)
Minimum pension liability adjustment (867,000)
----------- -----------
Total shareholders' equity 16,759,000 17,775,000
----------- -----------
$32,697,000 $37,030,000
=========== ===========
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months Nine Months
ended December 31, ended December 31,
1998 1997 1998 1997
---- ---- ---- ----
Net Sales $14,219,000 $11,914,000 $40,792,000 $38,387,000
----------- ----------- ----------- -----------
Cost and expenses:
Cost of products sold 10,255,000 8,276,000 29,083,000 26,104,000
Selling, general and
administrative 3,229,000 3,161,000 9,305,000 9,568,000
Interest expense 116,000 61,000 237,000 201,000
----------- ----------- ----------- -----------
13,600,000 11,498,000 38,625,000 35,873,000
----------- ----------- ----------- -----------
Income before income taxes 619,000 416,000 2,167,000 2,514,000
Provision for income taxes 216,000 107,000 743,000 827,000
----------- ----------- ----------- -----------
Net income 403,000 309,000 1,424,000 1,687,000
Retained earnings at
beginning of period 16,383,000 12,974,000 15,362,000 11,596,000
----------- ----------- ----------- -----------
Retained earnings at end
of period $16,786,000 $13,283,000 $16,786,000 $13,283,000
=========== =========== =========== ===========
Per Share Data:
Basic:
Net income $.25 $.19 $.88 $1.04
==== ==== ==== =====
Diluted:
Net income $.25 $.18 $.87 $1.00
==== ==== ==== =====
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
December 31,
1998 1997
---- ----
Operating activities:
Net income $ 1,424,000 $ 1,687,000
----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 785,000 782,000
Loss on sale of property, plant and equipment 5,000 1,000
(Increase) Decrease in operating assets:
Accounts receivable 636,000 3,094,000
Inventory, net of customer deposits 1,868,000 98,000
Prepaid expenses and other current and
non-current assets 68,000 (3,000)
Increase (Decrease) in operating liabilities:
Accounts payable, accrued compensation,
accrued expenses and other liabilities (3,673,000) 531,000
Estimated liabilities of discontinued
operations (173,000)
Deferred compensation, deferred pension
liability, and accrued postemployment
benefits 307,000 (151,000)
Domestic and foreign income taxes (778,000) 108,000
Deferred income taxes (5,000) (19,000)
Other long-term liabilities (48,000) (93,000)
----------- -----------
Total adjustments (835,000) 4,175,000
----------- -----------
Net cash provided by operating activities 589,000 5,862,000
----------- -----------
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)
Nine Months Ended
December 31,
1998 1997
---- ----
Investing activities:
Purchase of property, plant and equipment (690,000) (766,000)
Proceeds from sale of property, plant and
equipment 5,000 11,000
Purchase of marketable securities (6,407,000) (7,313,000)
Proceeds from maturity of marketable securities 10,987,000 4,452,000
----------- -----------
Net cash provided (used) by investing activities 3,895,000 (3,616,000)
----------- -----------
Financing activities:
Increase (Decrease) in short-term debt (40,000) 59,000
Proceeds from issuance of long-term debt 5,950,000 5,441,000
Principal repayments on long-term debt (6,238,000) (7,129,000)
Issuance of common stock 1,008,000
Purchase of treasury stock (1,713,000)
Sale of treasury stock 13,000
----------- -----------
Net cash used by financing activities (2,041,000) (608,000)
Effect of exchange rate on cash
----------- -----------
Net increase in cash and equivalents 2,443,000 1,638,000
Cash and equivalents at beginning of period 1,694,000 854,000
----------- -----------
Cash and equivalents at end of period $ 4,137,000 $ 2,492,000
=========== ===========
GRAHAM CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL INFORMATION
DECEMBER 31, 1998
- -------------------------------------------------------------------------
NOTE 1 - INVENTORIES
- -------------------------------------------------------------------------
Major classifications of inventories are as follows:
12/31/98 3/31/98
-------- -------
Raw materials and supplies $ 2,459,000 $ 2,707,000
Work in process 8,856,000 12,081,000
Finished products 1,410,000 1,131,000
----------- -----------
12,725,000 15,919,000
Less - progress payments 4,747,000 5,641,000
----------- -----------
$ 7,978,000 $10,278,000
=========== ===========
- --------------------------------------------------------------------------
NOTE 2 - EARNINGS PER SHARE:
- -------------------------------------------------------------------------
Basic earnings per share is computed by dividing net income by
the weighted average number of common shares outstanding for the
period. Diluted earnings per share is calculated by dividing net
income by the weighted average number of common and, when
applicable, potential common shares outstanding during the period.
A reconciliation of the numerators and denominators of basic and
diluted earnings per share is presented below:
Three months Nine months
ended December 31, ended December 31,
1998 1997 1998 1997
---- ---- ---- ----
Basic earning per share
Numerator:
Net income $ 403,000 $ 309,000 $1,424,000 $1,687,000
---------- ---------- ---------- ----------
Denominator:
Weighted common shares
outstanding 1,585,000 1,686,000 1,607,000 1,641,000
Share equivalent units (SEU)
outstanding 5,000 3,000 5,000 3,000
---------- ---------- ---------- ----------
Weighted average shares and
SEU's outstanding 1,590,000 1,689,000 1,612,000 1,644,000
---------- ---------- ---------- ----------
Basic earnings per share $.25 $.19 $.88 $1.04
==== ==== ==== =====
Three months Nine months
ended December 31, ended December 31,
1998 1997 1998 1997
---- ---- ---- ----
Diluted earnings per
share
Numerator:
Net income $ 403,000 $ 309,000 $1,424,000 $1,687,000
---------- ---------- ---------- ----------
Denominator:
Weighted average shares and 1,590,000 1,689,000 1,612,000 1,644,000
SEU's outstanding
Stock options outstanding 4,000 38,000 16,000 48,000
Contingently issuable SEU's 6,000 3,000 5,000 2,000
---------- ---------- ---------- ----------
Weighted average common and
potential common shares
outstanding 1,600,000 1,730,000 1,633,000 1,694,000
---------- ---------- ---------- ----------
Diluted earnings per
share $.25 $.18 $.87 $1.00
==== ==== ==== =====
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.
- -------------------------------------------------------------------------
NOTE 3 - CASH FLOW STATEMENT
- -------------------------------------------------------------------------
Actual interest paid was $240,000 and $201,000 for the nine
months ended December 31, 1998 and 1997, respectively. In
addition, actual income taxes paid were $1,444,000 and $738,000 for
the nine months ended December 31, 1998 and 1997, respectively.
Non cash activities during the nine months ended December 31,
1998 and 1997 included capital expenditures totaling $176,000 and
$17,000, respectively, which were financed through the issuance of
capital leases. In addition, in December 1998 a minimum pension
liability adjustment, net of an allowable intangible asset and tax
benefit, was recognized.
- -------------------------------------------------------------------------
NOTE 4 - COMPREHENSIVE INCOME
- -------------------------------------------------------------------------
Effective April 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." This statement requires reporting and disclosure of
comprehensive income and its components in financial statement
format. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. The Company has
determined that at March 31, 1999 it will display comprehensive
income in a separate statement of comprehensive income. The
Company's comprehensive earnings were as follows:
Three months Nine months
ended December 31, ended December 31,
1998 1997 1998 1997
---- ---- ---- ----
Net income $ 403,000 $ 309,000 $1,424,000 $1,687,000
---------- ---------- ---------- ----------
Other comprehensive income
(loss), net of tax
Minimum pension liability
adjustment (867,000) (867,000)
Foreign currency
translation adjustment (45,000) 27,000 (10,000) 8,000
---------- ---------- ---------- ----------
Total other comprehensive
income (loss) (912,000) 27,000 (877,000) 8,000
---------- ---------- ---------- ----------
Comprehensive income $ (509,000) $ 336,000 $ 547,000 $1,695,000
========== ========== ========== ==========
The minimum pension liability adjustment is net of a tax
benefit of $408,000. The foreign currency translation adjustment
is not currently adjusted for income taxes since it relates to an
investment which is permanent in nature.
GRAHAM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
December 31, 1998
Results of Operations
- ---------------------
Sales increased 19% in the third quarter of fiscal year 1999
compared to the same period in the previous year. Sales for the
third quarter increased 26% in the United States and declined 25%
in the United Kingdom compared to fiscal year 1998. Sales for the
nine months ended December 31, 1998 were greater than sales for the
same period last year by 6%. Sales in the United States increased
8% while sales in the United Kingdom decreased 8% from the same
period last year. The increased sales in the United States is
attributable to revenue recognized on certain large contracts in
process during the third quarter. At the end of the third quarter
of fiscal year 1998 there were no significant jobs in process as
production did not commence on the larger contracts until the
fourth quarter. As a result, fourth quarter sales of this year are
expected to be below fourth quarter sales of the prior year. The
reduced sales in the United Kingdom is due primarily to changes in
the shipment schedule for two jobs which were necessary to
accommodate customer requirements.
Cost of sales as a percent of sales for the third quarter was
72% compared to 69% a year ago. Cost of sales as a percent of
sales for the three month period was 73% in the United States
compared to 70% last year and 66% in the United Kingdom compared to
65% last year. For the nine months, cost of sales as a percent of
sales increased from 68% a year ago to 71% currently. In the
United States, the cost of sales percentage was 72% compared to 69%
last year and in the United Kingdom it improved slightly to 62%
from 63% for the same period last year. The unfavorable
percentages for the three and nine month period are attributable to
product mix and reduced selling prices due to severe price
competition while direct product costs and overhead expenses have
varied consistently with sales volume.
Selling, general and administrative expenses were only 2%
greater in the third quarter compared to the same period in fiscal
year 1998, and represented 23% of sales compared to 27% last year.
For the nine month period, selling, general and administrative
expenses declined 3% as compared to fiscal year 1998 and were 23%
of sales compared to 25% in the prior year. These variances are
primarily attributable to the receipt of proceeds from an insurance
policy. In addition, the third quarter of last year included a
restructuring charge as a result of downsizing the work force in
the United Kingdom.
Interest expense for the third quarter of fiscal year 1999
exceeded interest expense for the comparable three month period of
1998 by 90% and for the nine month period, interest expense
increased 18% as compared to 1998. This increase is due to
interest owed on state franchise and sales tax.
Results of Operations (concluded)
- --------------------------------
The effective income tax rates for the third quarter and nine
month period of fiscal year 1999 were 35% and 34%, respectively.
The effective tax rates for the three months and nine months ended
December 31, 1997 were 26% and 33%, respectively. The favorable
tax rate for the quarter resulted from the utilization of United
Kingdom tax losses.
Financial Condition
- -------------------
Working capital of $12,098,000 at December 31, 1998 compares to
$12,459,000 at the end of March. This working capital decline
reflects a decrease in current assets and current liabilities of
$5,147,000 and $4,786,000, respectively. The decrease in current
assets related primarily to a decrease in marketable securities as
a result of maturities. The related cash was used to purchase
treasury stock. Inventory also declined as there were
significantly more large projects in process at March 31. The
decrease in current liabilities is due to a decline in account
payable which is related to the decrease in inventory. In
addition, accrued compensation and income taxes payable decreased
due to payments made in the first six months of the year. The
current ratio at December 31, 1998 is 2.58 compared to 2.0 at March
31, 1998.
Capital expenditures for the nine month period were $690,000
compared to $766,000 for the same period in 1998. There were no
major commitments for capital expenditures as of December 31, 1998.
There was no short term debt at December 31, 1998 which
compares to a minimal balance of $40,000 at March 31, 1998. During
fiscal year 1999, working capital needs have been mainly financed
with cash flow from operations. Total long term debt decreased
$153,000 due to paydowns which were offset by additional capital
leases for the purchase of machinery. Debt ratios have remained
relatively stable with the long term debt to equity ratio at 7%
compared to 8% at March 31, 1998 and the total liabilities to
assets ratio at 49% compared to 52% at March 31, 1998.
Management expects that the cash flow from operations and lines
of credit will provide sufficient resources to fund the 1999 cash
requirements.
New Orders and Backlog
- ----------------------
New orders for the third quarter were $8,540,000 compared to
$11,951,000 for the same period last year. New orders in the
United States were $7,729,000 compared to $10,981,000 for the same
period in fiscal year 1998. New orders in the United Kingdom were
$811,000 compared to $970,000 for the same quarter last year.
For the nine month period, new orders were $29,841,000 compared
to $49,211,000 for the comparable nine month period of the prior
year. New orders in the United States were $26,398,000 compared to
$46,419,000 for the same period last year and new orders in the
New Orders and Backlog (concluded)
- ---------------------------------
United Kingdom were $3,443,000 compared to $2,792,000 in 1998. The
decline in new orders in the United States is attributable to the
weakening of the Company's markets in Asia and Latin America. The
Company is focusing its efforts to obtain new orders in the power
generating and pharmaceutical markets as management is encouraged
by the possible opportunities in these markets. In light of the
low order levels, the Company has instituted cost reductions and
anticipates that these reductions will significantly impact the
bottom line. The difficulty in obtaining new orders in the United
Kingdom is attributable to low demand in the export market and the
recession in the United Kingdom manufacturing industry.
Backlog of unfilled orders at December 31, 1998 is $17,170,000
compared to $31,549,000 at this time a year ago and $28,199,000 at
March 31, 1998. Current backlog in the United States of
$16,127,000 compares to $27,292,000 at March 31, 1998 and
$30,994,000 at December 31, 1997. Current backlog in the United
Kingdom of $1,043,000 compares to $907,000 at March 31, 1998 and
$555,000 at December 31, 1997. The current backlog is scheduled to
be shipped during the next twelve months and represents orders from
traditional markets in the Company's established product lines.
Year 2000 Readiness
- -------------------
The Company has established a program to assess the impact of
the Year 2000 on the software and hardware utilized in its internal
operations. The cost to address the Year 2000 issues has been
estimated at $85,000. This program includes the following phases:
identifying affected software, hardware, and manufacturing and
telecommunication equipment and assessing the impact of the Year
2000 issue; hardware and software remediation; testing; surveying
the Year 2000 readiness of customers and suppliers; and developing
a contingency plan. Modification and testing of hardware and
software has been completed. Manufacturing hardware and software
and telecommunication hardware is currently Year 2000 compliant.
Remediation of the telecommunication software is in process with an
expected completion date of March 31, 1999. The Company is
surveying its customers and suppliers regarding their readiness for
the Year 2000 and anticipates completing this phase of the program
by March 31, 1999.
The Company relies on third-party suppliers for products and
services. If these suppliers do not adequately address the impact
of the Year 2000 on their own systems and products in a timely
manner, it may be necessary for the Company to secure alternate
vendors to supply these required products and services. The
Company has developed a contingency plan to handle this situation.
Other Matters
- -------------
On January 28, 1999 the Board of Directors authorized a
repurchase of the Company's common stock of up to two million
dollars. This action reflects management's confidence in the
future of the business and is another means to add to shareholders'
value.
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 1998
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. See index to exhibits.
b. No reports on Form 8-K were filed during the quarter
ended December 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
GRAHAM CORPORATION
/s/J. R. Hansen
____________________________________
J. R. Hansen
Vice President Finance and
Administration / CFO (Principal
Accounting Officer)
Date 02/08/99
INDEX OF EXHIBITS
(2) Plan of acquisition, reorganization, arrangement, liquidation
or succession
Not applicable.
(4) Instruments defining the rights of security holders, including
indentures
(a) Equity securities
The instruments defining the rights of the holders of
Registrant's equity securities are as follows:
Certificate of Incorporation, as amended of Registrant
(filed as Exhibit 3(a) to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1989, and incorporated herein by reference.)
By-laws of registrant, as amended (filed as Exhibit
3.2(ii) to the Registrant's annual report on Form 10-K
for the fiscal year ended March 31, 1998, and is
incorporated herein by referenced.)
Shareholder Rights Plan of Graham Corporation (filed as
Exhibit (4) to Registrant's current report filed on Form
8-K on February 26, 1991, as amended by Registrant's
Amendment No. 1 on Form 8 dated June 8, 1991, and
incorporated herein by reference.)
(b) Debt securities
Not applicable.
(10) Material Contracts
1989 Stock Option and Appreciation Rights Plan of Graham
Corporation (filed on the Registrant's Proxy Statement for its
1991 Annual Meeting of Shareholders and incorporated herein by
reference.)
1995 Graham Corporation Incentive Plan to Increase
Shareholder Value (filed on the Registrant's Proxy Statement
for its 1996 Annual Meeting of Shareholders and incorporated
herein by reference.)
Graham Corporation Outside Directors' Long-Term Incentive
Plan (filed as Exhibit 10.3 to the Registrant's annual report
on Form 10-K for the fiscal year ended March 31, 1998, and is
incorporated herein by reference.)
Index to Exhibits (cont.)
- ------------------------
Employment Contracts between Graham Corporation and Named
Executive Officers (filed as Exhibit 10.4 to the Registrant's
annual report on Form 10-K for the fiscal year ended March 31,
1998, and is incorporated herein by reference.)
Senior Executive Severance Agreements with Named
Executive Officers (filed as Exhibit 10.5 to the Registrant's
annual report on Form 10-K for the fiscal year ended March 31,
1998, and is incorporated herein by reference.)
(11) Statement re-computation of per share earnings
Computation of per share earnings is included in Note 2
of the Notes to Financial Information.
(15) Letter re-unaudited interim financial information
Not applicable.
(18) Letter re-change in accounting principles
Not Applicable.
(19) Report furnished to security holders
None.
(22) Published report regarding matters submitted to vote of security
holders
None.
(23) Consents of experts and counsel
Not applicable.
(24) Power of Attorney
Not applicable.
(27) Financial Data Schedule
Financial Data Schedule is included herein as Exhibit 27
of this report.
(99) Additional exhibits
None.