UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to ___________

Commission File Number 1-8462

 

GRAHAM CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

16-1194720

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

20 Florence Avenue, Batavia, New York

14020

(Address of principal executive offices)

(Zip Code)

585-343-2216

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, Par Value $0.10 Per Share

 

GHM

 

NYSE

 

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     No  

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes     No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

  

 

Accelerated filer

  

Non-accelerated filer

  

 

Smaller reporting company

  

Emerging growth company

  

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes     No  

As of July 25, 2019, there were outstanding 9,880,798 shares of the registrant’s common stock, par value $.10 per share.

 

 

 

 

 


Graham Corporation and Subsidiaries

Index to Form 10-Q

As of June 30, 2019 and March 31, 2019 and for the three months ended June 30, 2019 and 2018

 

 

 

Page

Part I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Unaudited Condensed Consolidated Financial Statements

4

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

Item 6.

Exhibits

27

 

 

 

Signatures

29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


 

GRAHAM CORPORATION AND SUBSIDIARIES

FORM 10-Q

JUNE 30, 2019

PART I – FINANCIAL INFORMATION

3


Item 1.

Unaudited Condensed Consolidated Financial Statements

GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

 

(Amounts in thousands, except per share data)

 

Net sales

 

$

20,593

 

 

$

29,551

 

Cost of products sold

 

 

15,879

 

 

 

22,409

 

Gross profit

 

 

4,714

 

 

 

7,142

 

Other expenses and income:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

4,556

 

 

 

4,551

 

Selling, general and administrative – amortization

 

 

11

 

 

 

59

 

Other expense

 

 

523

 

 

 

 

Other income

 

 

(87

)

 

 

(206

)

Interest income

 

 

(399

)

 

 

(289

)

Interest expense

 

 

3

 

 

 

2

 

Total other expenses and income

 

 

4,607

 

 

 

4,117

 

Income before provision for income taxes

 

 

107

 

 

 

3,025

 

Provision for income taxes

 

 

25

 

 

 

702

 

Net income

 

 

82

 

 

 

2,323

 

Retained earnings at beginning of period

 

 

93,847

 

 

 

99,011

 

Cumulative effect of change in accounting principle, net of

  income tax benefit of $22 and $301 for the three months

  ended June 30, 2019 and 2018, respectively

 

 

(80

)

 

 

(1,022

)

Dividends

 

 

(988

)

 

 

(885

)

Retained earnings at end of period

 

$

92,861

 

 

$

99,427

 

Per share data

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

Net income

 

$

0.01

 

 

$

0.24

 

Diluted:

 

 

 

 

 

 

 

 

Net income

 

$

0.01

 

 

$

0.24

 

Weighted average common shares

  outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

9,855

 

 

 

9,790

 

Diluted

 

 

9,858

 

 

 

9,804

 

Dividends declared per share

 

$

0.10

 

 

$

0.09

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

4


GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

 

(Amounts in thousands)

 

Net income

 

$

82

 

 

$

2,323

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(87

)

 

 

(199

)

Defined benefit pension and other postretirement plans net of

  income tax expense of $55 and $49, for the three

  months ended June 30, 2019 and 2018, respectively

 

 

194

 

 

 

170

 

Total other comprehensive income (loss)

 

 

107

 

 

 

(29

)

Total comprehensive income

 

$

189

 

 

$

2,294

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

5


GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

June 30,

 

 

March 31,

 

 

 

2019

 

 

2019

 

 

 

(Amounts in thousands, except per share data)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,768

 

 

$

15,021

 

Investments

 

 

58,789

 

 

 

62,732

 

Trade accounts receivable, net of allowances ($41 and $33 at June 30 and

   March 31, 2019, respectively)

 

 

14,417

 

 

 

17,582

 

Unbilled revenue

 

 

9,845

 

 

 

7,522

 

Inventories

 

 

24,092

 

 

 

24,670

 

Prepaid expenses and other current assets

 

 

1,456

 

 

 

1,333

 

Income taxes receivable

 

 

1,260

 

 

 

1,073

 

Assets held for sale

 

 

 

 

 

4,850

 

Total current assets

 

 

123,627

 

 

 

134,783

 

Property, plant and equipment, net

 

 

16,836

 

 

 

17,071

 

Prepaid pension asset

 

 

4,485

 

 

 

4,267

 

Operating lease assets

 

 

271

 

 

 

 

Other assets

 

 

112

 

 

 

149

 

Total assets

 

$

145,331

 

 

$

156,270

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of capital lease obligations

 

$

51

 

 

$

51

 

Accounts payable

 

 

6,797

 

 

 

12,405

 

Accrued compensation

 

 

4,660

 

 

 

5,126

 

Accrued expenses and other current liabilities

 

 

2,382

 

 

 

2,933

 

Customer deposits

 

 

30,556

 

 

 

30,847

 

Operating lease liabilities

 

 

99

 

 

 

 

Liabilities held for sale

 

 

 

 

 

3,525

 

Total current liabilities

 

 

44,545

 

 

 

54,887

 

Capital lease obligations

 

 

85

 

 

 

95

 

Operating lease liabilities

 

 

167

 

 

 

 

Deferred income tax liability

 

 

1,297

 

 

 

1,056

 

Accrued pension liability

 

 

684

 

 

 

662

 

Accrued postretirement benefits

 

 

608

 

 

 

604

 

Total liabilities

 

 

47,386

 

 

 

57,304

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $1.00 par value, 500 shares authorized

 

 

 

 

 

 

Common stock, $.10 par value, 25,500 shares authorized,

   10,699 and 10,650 shares issued and 9,881 and 9,843 shares

   outstanding at June 30 and March 31, 2019, respectively

 

 

1,070

 

 

 

1,065

 

Capital in excess of par value

 

 

25,360

 

 

 

25,277

 

Retained earnings

 

 

92,861

 

 

 

93,847

 

Accumulated other comprehensive loss

 

 

(8,726

)

 

 

(8,833

)

Treasury stock (818 and 807 shares at June 30 and March 31, 2019,

   respectively)

 

 

(12,620

)

 

 

(12,390

)

Total stockholders’ equity

 

 

97,945

 

 

 

98,966

 

Total liabilities and stockholders’ equity

 

$

145,331

 

 

$

156,270

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6


GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

Operating activities:

 

(Dollar amounts in thousands)

 

Net income

 

$

82

 

 

$

2,323

 

Adjustments to reconcile net income to net cash (used) provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

490

 

 

 

490

 

Amortization

 

 

11

 

 

 

59

 

Amortization of unrecognized prior service cost and actuarial losses

 

 

249

 

 

 

219

 

Equity-based compensation expense

 

 

88

 

 

 

260

 

Loss on disposal or sale of property, plant and equipment

 

 

 

 

 

31

 

Loss on sale of Energy Steel & Supply Co.

 

 

87

 

 

 

 

Deferred income taxes

 

 

202

 

 

 

201

 

(Increase) decrease in operating assets:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3,088

 

 

 

5,543

 

Unbilled revenue

 

 

(2,323

)

 

 

(6,539

)

Inventories

 

 

552

 

 

 

5,150

 

Prepaid expenses and other current and non-current assets

 

 

(166

)

 

 

(451

)

Income taxes receivable

 

 

(187

)

 

 

485

 

Operating lease assets

 

 

105

 

 

 

 

Prepaid pension asset

 

 

(218

)

 

 

(288

)

Increase (decrease) in operating liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

(5,565

)

 

 

(7,122

)

Accrued compensation, accrued expenses and other current and non-current

   liabilities

 

 

(1,005

)

 

 

322

 

Customer deposits

 

 

(242

)

 

 

(643

)

Operating lease liabilities

 

 

(27

)

 

 

 

Long-term portion of accrued compensation, accrued pension liability

   and accrued postretirement benefits

 

 

26

 

 

 

28

 

Net cash (used) provided by operating activities

 

 

(4,753

)

 

 

68

 

Investing activities:

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(294

)

 

 

(163

)

Proceeds from the sale of Energy Steel & Supply Co.

 

 

602

 

 

 

 

Purchase of investments

 

 

(28,651

)

 

 

(55,611

)

Redemption of investments at maturity

 

 

32,595

 

 

 

33,023

 

Net cash provided (used) by investing activities

 

 

4,252

 

 

 

(22,751

)

Financing activities:

 

 

 

 

 

 

 

 

Principal repayments on capital lease obligations

 

 

(10

)

 

 

(26

)

Issuance of common stock

 

 

 

 

 

102

 

Dividends paid

 

 

(988

)

 

 

(885

)

Purchase of treasury stock

 

 

(230

)

 

 

(146

)

Net cash used by financing activities

 

 

(1,228

)

 

 

(955

)

Effect of exchange rate changes on cash

 

 

(76

)

 

 

(141

)

Net decrease in cash and cash equivalents, including cash classified within current

   assets held for sale

 

 

(1,805

)

 

 

(23,779

)

Plus:  Net decrease in cash classified within current assets held for sale

 

 

552

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(1,253

)

 

 

(23,779

)

Cash and cash equivalents at beginning of period

 

 

15,021

 

 

 

40,456

 

Cash and cash equivalents at end of period

 

$

13,768

 

 

$

16,677

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

7


 

GRAHAM CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

 

(Unaudited)

 

 

 

 

 

Common Stock

 

 

Capital in

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Par

 

 

Excess of

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

Stockholders'

 

 

 

Shares

 

 

Value

 

 

Par Value

 

 

Earnings

 

 

Loss

 

 

Stock

 

 

Equity

 

Balance at April 1, 2019

 

 

10,650

 

 

$

1,065

 

 

$

25,277

 

 

$

93,847

 

 

$

(8,833

)

 

$

(12,390

)

 

$

98,966

 

Cumulative effect of change in

  accounting principle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(80

)

 

 

 

 

 

 

 

 

 

 

(80

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

82

 

 

 

107

 

 

 

 

 

 

 

189

 

Issuance of shares

 

 

83

 

 

 

8

 

 

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of shares

 

 

(34

)

 

 

(3

)

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(988

)

 

 

 

 

 

 

 

 

 

 

(988

)

Recognition of equity-based

  compensation expense

 

 

 

 

 

 

 

 

 

 

88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

88

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(230

)

 

 

(230

)

Balance at June 30, 2019

 

 

10,699

 

 

$

1,070

 

 

$

25,360

 

 

$

92,861

 

 

$

(8,726

)

 

$

(12,620

)

 

$

97,945

 

 

 

 

 

 

 

 

Common Stock

 

 

Capital in

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Par

 

 

Excess of

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

Stockholders'

 

 

 

Shares

 

 

Value

 

 

Par Value

 

 

Earnings

 

 

Loss

 

 

Stock

 

 

Equity

 

Balance at April 1, 2018

 

 

10,579

 

 

$

1,058

 

 

$

23,826

 

 

$

99,011

 

 

$

(8,250

)

 

$

(12,296

)

 

$

103,349

 

Cumulative effect of change in

  accounting principle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,022

)

 

 

 

 

 

 

 

 

 

 

(1,022

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,323

 

 

 

(29

)

 

 

 

 

 

 

2,294

 

Issuance of shares

 

 

59

 

 

 

6

 

 

 

96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(885

)

 

 

 

 

 

 

 

 

 

 

(885

)

Recognition of equity-based

  compensation expense

 

 

 

 

 

 

 

 

 

 

260

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

260

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(146

)

 

 

(146

)

Balance at June 30, 2018

 

 

10,638

 

 

$

1,064

 

 

$

24,182

 

 

$

99,427

 

 

$

(8,279

)

 

$

(12,442

)

 

$

103,952

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

8


GRAHAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except per share data)

 

NOTE 1 – BASIS OF PRESENTATION:

Graham Corporation's (the "Company's") Condensed Consolidated Financial Statements include its wholly-owned foreign subsidiaries located in Suzhou, China and Ahmedabad, India.  During the fiscal year ended March 31, 2019 ("fiscal 2019") the Company decided to divest of its wholly-owned domestic subsidiary, Energy Steel & Supply Co. ("Energy Steel"), located in Lapeer, Michigan.  The sale of Energy Steel was completed in June 2019 and the accompanying Condensed Consolidated Financial Statements include the results of operations of Energy Steel for the period April 1, 2019 through June 23, 2019.  The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, each as promulgated by the U.S. Securities and Exchange Commission.  The Company's Condensed Consolidated Financial Statements do not include all information and notes required by GAAP for complete financial statements.  The unaudited Condensed Consolidated Balance Sheet as of March 31, 2019 presented herein was derived from the Company’s audited Consolidated Balance Sheet as of March 31, 2019.  For additional information, please refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for fiscal 2019.  In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included in the Company's Condensed Consolidated Financial Statements.

The Company's results of operations and cash flows for the three months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the current fiscal year, which ends March 31, 2020 ("fiscal 2020").

 

 

NOTE 2 – REVENUE RECOGNITION:

The Company accounts for revenue in accordance with Accounting Standard Codification 606, “Revenue from Contracts with Customers” (“ASC 606”), which it adopted on April 1, 2018 using the modified retrospective approach.

The Company recognizes revenue on contracts when or as it satisfies a performance obligation by transferring control of the product to the customer.  For contracts in which revenue is recognized upon shipment, control is generally transferred when products are shipped, title is transferred, significant risks of ownership have transferred, the Company has rights to payment, and rewards of ownership pass to the customer.  For contracts in which revenue is recognized over time, control is generally transferred as the Company creates an asset that does not have an alternative use to the Company and the Company has an enforceable right to payment for the performance completed to date.

The following table presents the Company’s revenue disaggregated by product line and geographic area:

 

 

 

 

Three Months Ended

 

 

 

June 30,

 

Product Line

 

2019

 

 

2018

 

Heat transfer equipment

 

$

7,852

 

 

$

4,158

 

Vacuum equipment

 

 

5,530

 

 

 

17,216

 

All other

 

 

7,211

 

 

 

8,177

 

Net sales

 

$

20,593

 

 

$

29,551

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Geographic Region

 

 

 

 

 

 

 

 

Asia

 

$

3,219

 

 

$

2,749

 

Canada

 

 

1,348

 

 

 

11,650

 

Middle East

 

 

773

 

 

 

435

 

South America

 

 

359

 

 

 

124

 

U.S.

 

 

14,448

 

 

 

13,453

 

All other

 

 

446

 

 

 

1,140

 

Net sales

 

$

20,593

 

 

$

29,551

 

  

9


A performance obligation represents a promise in a contract to provide a distinct good or service to a customer and is the unit of accounting pursuant to ASC 606.  The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.  Transaction price reflects the amount of consideration to which the Company expects to be entitled in exchange for transferred products.  A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized as the performance obligation is satisfied.  In certain cases, the Company may separate a contract into more than one performance obligation, while in other cases, several products may be part of a fully integrated solution and are bundled into a single performance obligation.  If a contract is separated into more than one performance obligation, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods underlying each performance obligation.  The Company has made an accounting policy election to exclude from the measurement of the contract price all taxes assessed by government authorities that are collected by the Company from its customers.  The Company does not adjust the contract price for the effects of a financing component if the Company expects, at contract inception, that the period between when a product is transferred to a customer and when the customer pays for the product will be one year or less. Shipping and handling fees billed to the customer are recorded in revenue and the related costs incurred for shipping and handling are included in cost of products sold.

Revenue on the majority of the Company’s contracts, as measured by number of contracts, is recognized upon shipment to the customer, however, revenue on larger contracts, which are fewer in number but represent the majority of revenue, is recognized over time as these contracts meet specific criteria established in ASC 606.  Revenue from contracts that is recognized upon shipment accounted for approximately 45% and 30% of revenue for the three-month periods ended June 30, 2019 and 2018, respectively, and revenue from contracts that is recognized over time accounted for approximately 55% and 70% of revenue for the three-month periods ended June 30, 2019 and 2018, respectively. The Company recognizes revenue over time when contract performance results in the creation of a product for which the Company does not have an alternative use and the contract includes an enforceable right to payment in an amount that corresponds directly with the value of the performance completed.  To measure progress towards completion on performance obligations for which revenue is recognized over time the Company utilizes an input method based upon a ratio of direct labor hours incurred to date to management’s estimate of the total labor hours to be incurred on each contract or an output method based upon completion of operational milestones, depending upon the nature of the contract.  The Company has established the systems and procedures essential to developing the estimates required to account for performance obligations over time.  These procedures include monthly review by management of costs incurred, progress towards completion, identified risks and opportunities, sourcing determinations, changes in estimates of costs yet to be incurred, availability of materials, and execution by subcontractors.  Sales and earnings are adjusted in current accounting periods based on revisions in the contract value due to pricing changes and estimated costs at completion.  Losses on contracts are recognized immediately when evident to management.

The timing of revenue recognition, invoicing and cash collections affect trade accounts receivable, unbilled revenue (contract assets) and customer deposits (contract liabilities) on the Condensed Consolidated Balance Sheets.  Unbilled revenue represents revenue on contracts that is recognized over time and exceeds the amount that has been billed to the customer.  Unbilled revenue is separately presented in the Condensed Consolidated Balance Sheets.  The Company may have an unconditional right to payment upon billing and prior to satisfying the performance obligations.  The Company will then record a contract liability and an offsetting asset of equal amount until the deposit is collected and the performance obligations are satisfied.  Customer deposits are separately presented in the Condensed Consolidated Balance Sheets.  Customer deposits are not considered a significant financing component as they are generally received less than one year before the product is completed or used to procure specific material on a contract, as well as related overhead costs incurred during design and construction.

Net contract assets (liabilities) consisted of the following:

 

 

 

June 30, 2019

 

 

March 31, 2019

 

 

Change

 

 

 

 

 

 

 

 

 

Unbilled revenue (contract assets)

 

$

9,845

 

 

$

7,522

 

 

$

2,323

 

Customer deposits (contract liabilities)

 

 

(30,556

)

 

 

(30,847

)

 

 

291

 

      Net contract liabilities

 

$

(20,711

)

 

$

(23,325

)

 

$

2,614

 

Contract liabilities at June 30, 2019 and March 31, 2019 include $5,134 and $6,382, respectively, of customer deposits for which the Company has an unconditional right to collect payment.  Trade accounts receivable, as presented on the Condensed Consolidated Balance Sheets, includes corresponding balances at June 30, 2019 and March 31, 2019, respectively.  Revenue recognized in the three months ended June 30, 2019 that was included in the contract liability balance at March 31, 2019 was $5,422.  Changes in the net contract liability balance during the three-month period ended June 30, 2019 were impacted by a $2,323 increase in contract assets, of which $2,935 was due to contract progress offset by invoicing to customers of $612.  In addition, contract liabilities decreased $291 driven by revenue recognized in the current period that was included in the contract liability balance at March 31, 2019 offset by new customer deposits of $5,131.

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Receivables billed but not paid under retainage provisions in the Company’s customer contracts were $2,102 and $2,214 at June 30, 2019 and March 31, 2019, respectively.

 

Incremental costs to obtain a contract consist of sales employee and agent commissions.  Commissions paid to employees and sales agents are capitalized when paid and amortized to selling, general and administrative expense when the related revenue is recognized.  Capitalized costs, net of amortization, to obtain a contract were $128 and $133 at June 30, 2019 and March 31, 2019, respectively, and are included in the line item "Prepaid expenses and other current assets" in the Condensed Consolidated Balance Sheets.  The related amortization expense was $46 and $40 in the three months ended June 30, 2019 and 2018, respectively.

The Company’s remaining unsatisfied performance obligations represent a measure of the total dollar value of work to be performed on contracts awarded and in progress.  The Company also refers to this measure as backlog.  As of June 30, 2019, the Company had remaining unsatisfied performance obligations of $117,185.  The Company expects to recognize revenue on approximately 55% to 60% of the remaining performance obligations within one year, 10% to 15% in one to two years and the remaining beyond two years.

 

 

NOTE 3 – INVESTMENTS:

Investments consist of certificates of deposits with financial institutions.  All investments have original maturities of greater than three months and less than one year and are classified as held-to-maturity, as the Company believes it has the intent and ability to hold the securities to maturity.  Investments are stated at amortized cost which approximates fair value.  All investments held by the Company at June 30, 2019 are scheduled to mature on or before December 3, 2019.

 

 

NOTE 4 – INVENTORIES:

Inventories are stated at the lower of cost or net realizable value, using the average cost method.

Major classifications of inventories are as follows:

 

 

 

 

June 30,

 

 

March 31,

 

 

 

2019

 

 

2019

 

Raw materials and supplies

 

$

2,709

 

 

$

2,787

 

Work in process

 

 

20,313

 

 

 

20,553

 

Finished products

 

 

1,070

 

 

 

1,330

 

Total

 

$

24,092

 

 

$

24,670

 

 

 

NOTE 5 – ASSETS AND LIABILITIES HELD FOR SALE:

In March 2019, the Company's Board of Directors approved a plan to sell Energy Steel.  Energy Steel met all of the criteria to classify its assets and liabilities as held for sale at March 31, 2019.  The disposal of Energy Steel did not represent a strategic shift that would have a major effect on the Company’s operations and financial results and was, therefore, not classified as discontinued operations in accordance with ASU 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360):  Reporting Discontinued Operation And Disclosures of Disposals Of Components Of An Entity."  As part of the required assessment under the held for sale guidance, the Company determined that the approximate fair value less costs to sell the operations was less than its carrying value and, as a result, an impairment loss totaling $6,449 was recorded in fiscal 2019.

On June 24, 2019, the Company completed the sale of Energy Steel to Hayward Tyler, a division of Avingtrans PLC, a global leader in performance-critical pumps and motors for the energy sector.  Under the terms of the stock purchase agreement, the Company received proceeds of $602, subject to a certain adjustments, including a customary working capital adjustment that is expected to be finalized within 90 days of the sale.  In addition, $202 of Energy Steel’s net accounts receivable was assigned to the Company.  The Company recognized a loss on the disposal of $87 in the first quarter of fiscal 2020.  As of June 24, 2019, all of the Energy Steel assets and liabilities were legally transferred, and therefore, are not included in the Company’s Condensed Consolidated Balance Sheet at June 30, 2019.

The following table reconciles the major classes of assets and liabilities classified as held for sale in the Condensed Consolidated Balance Sheet at March 31, 2019:

 

11


 

 

March 31, 2019

 

 

 

 

 

 

Major classes of assets included as held for sale

 

 

 

 

Cash

 

$

552

 

Trade accounts receivable, net of allowances

 

 

1,921

 

Unbilled revenue

 

 

302

 

Inventories

 

 

1,809

 

Prepaid expenses and other current assets

 

 

130

 

Income taxes receivable

 

 

10

 

Deferred tax asset

 

 

126

 

Total major classes of assets included as held for sale

 

$

4,850

 

 

 

 

 

 

Major classes of liabilities included as held for sale

 

 

 

 

Accounts payable

 

$

520

 

Accrued compensation

 

 

326

 

Accrued expenses and other current liabilities

 

 

746

 

Customer deposits

 

 

1,933

 

Total major classes of liabilities included as held for sale

 

$

3,525

 

 

 

NOTE 6 – EQUITY-BASED COMPENSATION:

The Amended and Restated 2000 Graham Corporation Incentive Plan to Increase Shareholder Value, as approved by the Company’s stockholders at the Annual Meeting on July 28, 2016, provides for the issuance of up to 1,375 shares of common stock in connection with grants of incentive stock options, non-qualified stock options, stock awards and performance awards to officers, key employees and outside directors; provided, however, that no more than 467 shares of common stock may be used for awards other than stock options.  Stock 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.

  Restricted stock awards granted in the three-month periods ended June 30, 2019 and 2018 were 83 and 53, respectively.  Restricted shares of 40 and 27 granted to officers in fiscal 2020 and fiscal 2019, respectively, vest 100% on the third anniversary of the grant date subject to the satisfaction of the performance metrics for the applicable three-year period.  Restricted shares of 28 and 20 granted to officers and key employees in fiscal 2020 and fiscal 2019, respectively, vest 33⅓% per year over a three-year term.  Restricted shares of 15 and 6 granted to directors in fiscal 2020 and fiscal 2019, respectively, vest 100% on the first year anniversary of the grant date.  No stock option awards were granted in the three-month periods ended June 30, 2019 and 2018.  

During the three months ended June 30, 2019 and 2018, the Company recognized equity-based compensation costs related to restricted stock awards of $87 and $260, respectively.  The income tax benefit recognized related to equity-based compensation was $20 and $58 for the three months ended June 30, 2019 and 2018, respectively.       

The Company has an Employee Stock Purchase Plan (the "ESPP"), which allows eligible employees to purchase shares of the Company's common stock at a discount of up to 15% of its fair market value on the (1) last, (2) first or (3) lower of the last or first day of the six-month offering period.  A total of 200 shares of common stock may be purchased under the ESPP.  During each of the three months ended June 30, 2019 and 2018, no equity-based compensation costs were recognized related to the ESPP.             

 

 

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NOTE 7 – INCOME PER SHARE:

Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period.  Diluted income per share is calculated by dividing net income by the weighted average number of common shares outstanding and, when applicable, potential common shares outstanding during the period.  A reconciliation of the numerators and denominators of basic and diluted income per share is presented below:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

Basic income per share

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

Net income

 

$

82

 

 

$

2,323

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares

   outstanding

 

 

9,855

 

 

 

9,790

 

Basic income per share

 

$

.01

 

 

$

.24

 

Diluted income per share

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

Net income

 

$

82

 

 

$

2,323

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares

   outstanding

 

 

9,855

 

 

 

9,790

 

Stock options outstanding

 

 

3

 

 

 

14

 

Weighted average common and

   potential common shares

   outstanding

 

 

9,858

 

 

 

9,804

 

Diluted income per share

 

$

.01

 

 

$

.24

 

 

Options to purchase a total of 4 and 2 shares of common stock were outstanding at June 30, 2019 and 2018, respectively, but were not included in the above computation of diluted income per share given their exercise prices as they would not be dilutive upon issuance.

 

 

NOTE 8 – PRODUCT WARRANTY LIABILITY:

The reconciliation of the changes in the product warranty liability is as follows:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

Balance at beginning of period

 

$

366

 

 

$

493

 

Expense for product warranties

 

 

27

 

 

 

48

 

Product warranty claims paid

 

 

(35

)

 

 

(49

)

Balance at end of period

 

$

358

 

 

$

492

 

 

 

The product warranty liability is included in the line item "Accrued expenses and other current liabilities" in the Condensed Consolidated Balance Sheets.

 

 

NOTE 9 – LEASES:

The Company accounts for leases in accordance with Accounting Standard Codification 842, "Leases," which it adopted on April 1, 2019 using the modified retrospective approach.  See Note 16 to the Condensed Consolidated Financial Statements for further discussion of this adoption.

The Company leases certain manufacturing facilities, office space, machinery and office equipment.  An arrangement is considered to contain a lease if it conveys the right to use and control an identified asset for a period of time in exchange for consideration.  If it is determined that an arrangement contains a lease, then a classification of a lease as operating or finance is

13


determined by evaluating the five criteria outlined in the lease accounting guidance at inception.  Leases generally have remaining terms of one year to five years, whereas leases with an initial term of twelve months or less are not recorded on the Condensed Consolidated Balance Sheets.  The depreciable life of leased assets related to finance leases are limited by the expected term of the lease, unless there is a transfer of title or purchase option that the Company believes is reasonably certain of exercise.  Certain leases include options to renew or terminate.  Renewal options are exercisable per the discretion of the Company and vary based on the nature of each lease.  The term of the lease includes renewal periods only if the Company is reasonably certain that it will exercise the renewal option.  When determining if a renewal option is reasonably certain of being exercised, the Company considers several factors, including but not limited to, the cost of moving to another location, the cost of disruption of operations, whether the purpose or location of the leased asset is unique and the contractual terms associated with extending the lease.  The Company’s lease agreements do not contain any residual value guarantees or any material restrictive covenants and the Company does not sublease to any third parties.  As of June 30, 2019, the Company did not have any material leases that have been signed but not commenced.

Right-of-use (“ROU”) lease assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date.  ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make payments in exchange for that right of use.  Finance lease ROU assets and operating lease ROU assets are included in the line items “Property, plant and equipment, net” and “Operating lease assets”, respectively, in the Condensed Consolidated Balance Sheets.  The current portion and non-current portion of finance and operating lease liabilities are all presented separately in the Condensed Consolidated Balance Sheets.

The discount rate implicit within the Company’s leases is generally not readily determinable, and therefore, the Company uses an incremental borrowing rate in determining the present value of lease payments based on rates available at commencement.

The weighted average remaining lease term and discount rate for finance and operating leases are as follows:

 

 

 

June 30,

 

 

 

2019

 

Finance Leases

 

 

 

 

Weighted-average remaining lease term in years

 

 

1.93

 

Weighted-average discount rate

 

 

9.27

%

 

 

 

 

 

Operating Leases

 

 

 

 

Weighted-average remaining lease term in years

 

 

2.44

 

Weighted-average discount rate

 

 

5.50

%

 

The components of lease expense are as follows:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2019

 

Finance lease cost:

 

 

 

 

  Amortization of right-of-use assets

 

$

25

 

  Interest on lease liabilities

 

 

3

 

Operating lease cost

 

 

109

 

Short-term lease cost

 

 

11

 

Total lease cost

 

$

148

 

 

Operating lease costs during the three months ended June 30, 2019 were included within cost of sales and selling, general and administrative expenses.

As of June 30, 2019, future minimum payments required under non-canc