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, 2004
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 - 585-343-2216
(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 _____
Indicate by check mark whether the registrant is an
accelerated filer (as defined by Rule 12b-2 of the Act).
Yes __ __ No __X__
As of February 1, 2005, there were outstanding 1,668,667
shares of common stock, $.10 per share.
2
Graham Corporation and Subsidiaries
Index to Form 10-Q
As of and for the Three and Nine Month Periods Ended December 31, 2004
Page
Part I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 23
Item 4. Controls and Procedures 26
Part II. OTHER INFORMATION
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
3
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 2004
PART I - FINANCIAL INFORMATION
(Dollar amounts in thousands except per share data)
Unaudited condensed consolidated financial statements of
Graham Corporation (the Company) and its subsidiaries as of
December 31, 2004 and for the three month and nine month periods
ended December 31, 2004 and 2003 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 estimates 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. The March
31, 2004 Consolidated Balance Sheet was derived from the
Company's audited Balance Sheet for the year ended March 31,
2004.
This part also includes management's discussion and analysis
of the Company's financial condition as of December 31, 2004 and
its results of operations for the three and nine month periods
ended December 31, 2004.
4
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, March 31,
2004 2004
---- ----
Assets
Current Assets:
Cash and cash equivalents $ 825 $ 467
Investments 1,896 5,296
Trade accounts receivable, net of
allowances ($97 and $75 at December 31
and March 31, respectively) 6,977 8,950
Inventories, net 10,571 6,984
Domestic and foreign income taxes receivable 62 972
Deferred income tax asset 1,813 1,521
Prepaid expenses and other current assets 328 217
------- -------
Total current assets 22,472 24,407
Property, plant and equipment, net 8,652 9,227
Deferred income tax asset 2,169 2,048
Other assets 52 58
------- -------
Total assets $33,345 $35,740
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 1,867 $ 1,925
Current portion of long-term debt 47 44
Accounts payable 2,771 3,230
Accrued compensation 2,733 3,866
Accrued expenses and other liabilities 1,403 1,562
Customer deposits 1,190 2,128
------- -------
Total current liabilities 10,011 12,755
Long-term debt 58 93
Accrued compensation 216 239
Deferred income tax liability 81 77
Other long-term liabilities 365 61
Accrued pension liability 2,700 1,873
Accrued postretirement benefits 2,457 2,540
------- -------
Total liabilities 15,888 17,638
------- -------
5
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (concluded)
(Unaudited)
December 31, March 31,
2004 2004
---- ----
Shareholders' equity:
Preferred Stock, $1 par value -
Authorized, 500,000 shares
Common stock, $.10 par value -
Authorized, 6,000,000 shares
Issued, 1,767,790 shares at December 31
and 1,757,450 shares at March 31 177 176
Capital in excess of par value 5,180 5,097
Retained earnings 16,458 17,322
Accumulated other comprehensive loss
Minimum pension liability adjustment (1,456) (1,456)
Cumulative foreign currency translation
adjustment (1,338) (1,452)
------- -------
19,021 19,687
Less:
Treasury Stock (99,123 shares at December
31, and March 31) (1,385) (1,385)
Notes receivable from officers and directors (179) (200)
------- -------
Total shareholders' equity 17,457 18,102
------- -------
Total liabilities and shareholders' equity $33,345 $35,740
See Notes to Consolidated Financial Statements.
6
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
---- ---- ---- ----
Net sales $12,937 $10,224 $33,781 $31,348
------- ------- ------- -------
Cost and expenses:
Cost of products sold 9,715 8,732 28,130 26,088
Selling, general and
administrative 2,559 2,528 7,450 7,450
Interest expense 34 35 84 93
Other income (1,592) (522)
Other expense 648 648
------- ------- ------- -------
Total costs and expenses 12,956 11,295 34,720 33,109
------- ------- ------- -------
Loss before income taxes (19) (1,071) (939) (1,761)
Provision (benefit) for
income taxes 2 (322) (324) (516)
------- ------- ------- -------
Net loss (21) (749) (615) (1,245)
Retained earnings at
beginning of period 16,562 18,152 17,322 18,810
Dividends (83) (81) (249) (243)
------- ------- ------- -------
Retained earnings at
end of period $16,458 $17,322 $16,458 $17,322
======= ======= ======= =======
Per Share Data:
Basic:
Net loss $(.01) $(.46) $(.37) $(.76)
===== ===== ===== =====
Diluted:
Net loss $(.01) $(.46) $(.37) $(.76)
===== ===== ===== =====
See Notes to Consolidated Financial Statements.
7
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
December 31,
2004 2003
---- ----
Operating activities:
Net loss $ (615) $(1,245)
------- -------
Adjustments to reconcile net loss to net
cash used by operating activities:
Non cash other (income) expense (761) (522)
Depreciation and amortization 751 784
Discount accretion on investments (27) (42)
Loss on sale of property, plant and equipment 2 2
(Increase) decrease in operating assets:
Accounts receivable 2,049 (98)
Inventory, net of customer deposits (3,022) 2,268
Prepaid expenses and other current and non-
current assets (110) (142)
Increase (decrease) in operating liabilities:
Accounts payable, accrued compensation,
accrued expenses and other current and
non-current liabilities (1,199) (3,445)
Non-current accrued compensation, accrued
pension liability and accrued
postemployment benefits (230) (469)
Domestic and foreign income taxes 910 (225)
Deferred income taxes (377) (98)
------- -------
Total adjustments (2,014) (1,049)
------- -------
Net cash used by operating activities (2,629) (2,294)
------- -------
Investing activities:
Purchase of property, plant and equipment (128) (172)
Collection of notes receivable from
officers and directors 22 48
Purchase of investments (6,475) (7,919)
Redemption of investments at maturity 9,903 10,905
------- -------
Net cash provided by investing activities 3,322 2,862
------- -------
Financing activities:
Decrease in short-term debt (137) (263)
Proceeds from issuance of long-term debt 9,195
Principal repayments on long-term debt (31) (9,260)
Issuance of common stock 83 94
Dividends paid (249) (326)
8
GRAHAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)
(Unaudited)
Nine Months Ended
December 31,
2004 2003
---- ----
Acquisition of treasury stock (20)
------- -------
Net cash used by financing activities (334) (580)
------- -------
Effect of exchange rate changes on cash (1) (3)
------- -------
Net increase (decrease)in cash and cash
equivalents 358 (15)
Cash and cash equivalents at beginning of
period 467 217
------- -------
Cash and cash equivalents at end of
period $ 825 $ 202
======= =======
See Notes to Consolidated Financial Statements.
9
GRAHAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 1 - CHANGE IN ACCOUNTING FOR REVENUE RECOGNITION
During the second quarter of fiscal year 2005, the Company
changed its method of recognizing revenue for certain contracts
from the completed contract to the percentage-of-completion
method. Formerly, only contracts with a planned manufacturing
process in excess of three months and with revenue of at least
$1,000 and 500 pounds sterling, in the USA and UK operating
segments, respectively, were accounted for under the percentage-
of-completion method. Now all contracts with a planned
manufacturing process of four weeks or more (which approximates
575 direct labor hours) and without a dollar threshold are
accounted for using the percentage-of-completion method. The
Company believes this is a preferable accounting method for these
contracts because it measures revenue, costs of products sold and
related income on construction type contracts based on progress
on the contracts, thus providing a better measure of the earnings
process on a more timely basis. The Company extended its scope
of contracts accounted for using the percentage-of-completion
method at this time because management believes that the effects
on the financial statements of applying the completed contract
method on these contracts could begin to vary materially from the
effects of applying the percentage-of-completion method. The
majority of the Company's contracts have a planned manufacturing
process of less than four weeks, and are accounted for using the
completed contract method. Prior period financial results have
been restated to reflect this change. The impact of the change
on net sales, cost of products sold, provision for income taxes
and net income for the prior periods presented and the nine
months ended December 31, 2004 is as follows:
Three Months Ended
December 31, 2003
Amounts Reported Using
----------------------
Percentage
of Completed
Completion Contract
Method Method Difference
---------- --------- ----------
Net sales $10,224 $10,027 $197
Cost of products sold $ 8,732 $ 8,590 $142
(Benefit) provision for income taxes $ (322) $ (339) $ 17
Net income (loss) $ (749) $ (787) $ 38
Net income (loss) per share
Basic $(.46) $(.48) $.02
Diluted $(.46) $(.48) $.02
10
Nine Months Ended
December 31,
-----------------
2003
----
Amounts Reported Using
----------------------
Percentage
of Completed
Completion Contract
Method Method Difference
---------- --------- ----------
Net Sales $31,348 $30,919 $429
Cost of products sold $26,088 $25,727 $361
(Benefit) for income taxes $ (516) $ (540) $ 24
Net income (loss) $(1,245) $(1,289) $ 44
Net income (loss) per share
Basic $(.76) $(.78) $.02
Diluted $(.76) $(.78) $.02
Nine Months Ended
December 31,
-----------------
2004
----
Amounts Reported Using
----------------------
Percentage
of Completed
Completion Contract
Method Method Difference
---------- --------- ----------
Net Sales $33,781 $32,626 $1,155
Cost of products sold $28,130 $27,193 $ 937
(Benefit) for income taxes $ (324) $ (380) $ 56
Net income (loss) $ (615) $ (807) $ 192
Net income (loss) per share
Basic $(.37) $(.48) $.11
Diluted $(.37) $(.48) $.11
11
The effect of the change on retained earnings is as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
2003 2003
---- ----
Balance at beginning of period as
previously reported $18,103 $18,767
Add adjustment for the cumulative
effect on prior periods of
applying retroactively the
change in accounting method 49 43
------- -------
Balance at beginning of period,
as adjusted 18,152 18,810
Net loss (749) (1,245)
Dividends (81) (243)
------- -------
Balance at end of period $17,322 $17,322
======= =======
NOTE 2 - INVENTORIES
Major classifications of inventories are as follows:
December 31, March 31,
2004 2004
---- ----
Raw materials and supplies $ 2,245 $ 1,745
Work in process 10,135 6,169
Finished products 2,613 2,500
------- -------
14,993 10,414
Less - progress payments 4,261 3,309
- inventory reserve 161 121
------- -------
$10,571 $ 6,984
======= =======
12
NOTE 3 - STOCK-BASED COMPENSATION:
The Company accounts for stock-based compensation in
accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation". As permitted by SFAS No. 123, the Company
continues to measure compensation for such plans using the
intrinsic value based method of accounting, prescribed by
Accounting Principles Board (APB), Opinion No. 25, "Accounting
for Stock Issued to Employees". 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.
Under the intrinsic value method, no compensation expense
has been recognized for the Company's stock option plans. Had
compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards
under those plans in accordance with the fair value methodology
prescribed under SFAS No. 123, the Company's net loss and net
loss per share would have been the pro forma amounts indicated
below:
Three Months Ended Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
---- ---- ---- ----
Net loss as reported $ (21) $(749) $(615) $(1,245)
Stock-based employee
compensation cost
net of related tax
benefits (118) (63) (118) (74)
----- ----- ----- -------
Pro forma net loss $(139) $(812) $(733) $(1,319)
===== ===== ===== =======
Basic loss per
share As reported $(.01) $(.46) $(.37) $(.76)
Pro forma $(.08) $(.49) $(.44) $(.80)
Diluted loss per
share As reported $(.01) $(.46) $(.37) $(.76)
Pro forma $(.08) $(.49) $(.44) $(.80)
13
For purposes of the disclosure above, the fair value of each
option grant is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in fiscal years 2005 and
2004:
2005 2004
---- ----
Expected life 5 years 5 years
Volatility 42.84% 47.13%
Risk-free interest rate 3.53% 3.01%
Dividend yield 1.65% 2.25%
NOTE 4 - INCOME (LOSS) PER SHARE:
Basic income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding for the period. Common shares outstanding include
share equivalent units which are contingently issuable shares.
Diluted income (loss) per share is calculated by dividing net
income (loss) 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 (loss)
per share is presented below:
Three Months Ended Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
---- ---- ---- ----
Basic loss per share
Numerator:
Net loss $(21) $(749) $(615) $(1,245)
---- ----- ----- -------
Denominator:
Weighted common shares
outstanding 1,666,613 1,629,656 1,662,472 1,625,601
Share equivalent units
(SEU) outstanding 13,900 16,437 15,689 16,344
--------- --------- --------- ---------
Weighted average shares
and SEUs outstanding 1,680,513 1,646,093 1,678,161 1,641,945
--------- --------- --------- ---------
Basic loss per share $(.01) $(.46) $(.37) $(.76)
===== ===== ===== =====
14
Three Months Ended Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
---- ---- ---- ----
Diluted loss per share
Numerator:
Net loss $(21) $(749) $(615) $(1,245)
Denominator:
Weighted average shares
and SEUs outstanding 1,680,513 1,646,093 1,678,161 1,641,945
--------- --------- --------- ---------
Diluted loss per share $(.01) $(.46) $(.37) $(.76)
===== ===== ===== =====
There are 219,955 options to purchase shares of common stock
at various exercise prices that were excluded from the
computation of diluted loss per share for the three and nine
month periods ended December 31, 2004 and 2003 as the effect
would be antidilutive due to the net losses for the periods.
NOTE 5 - PRODUCT WARRANTY LIABILITY
The reconciliation of the changes in the product warranty
liability is as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
---- ---- ---- ----
Balance at beginning
of period $225 $359 $242 $592
Expense (reversal) for
product warranties 18 (70) 74 50
Product warranty
claims paid (6) (31) (79) (384)
---- ---- ---- ----
Balance at end of
period $237 $258 $237 $258
==== ==== ==== ====
NOTE 6 - CASH FLOW STATEMENT
Interest paid was $84 and $95 for the nine months ended
December 31, 2004 and 2003, respectively. In addition, income
taxes refunded were $886 and $193 for the nine months ended
December 31, 2004 and 2003, respectively.
15
Dividends of $249 and $243 were recorded for the respective
nine month periods ended December 31, 2004 and 2003, of which $83
and $0 were not paid during the respective periods. In addition,
during the nine months ended December 31, 2003, capital
expenditures totaling $11 were financed through the issuance of
capital leases.
NOTE 7 - COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) was $143 and $(536) for the
three months ended December 31, 2004 and 2003, respectively.
Other comprehensive income for the three months ended December
31, 2004 and 2003 included foreign currency translation
adjustments of $164 and $213, respectively. Total comprehensive
loss for the nine months ended December 31, 2004 and 2003 was
$501 and $899, respectively. Other comprehensive income for the
nine months ended December 31, 2004 and 2003 included foreign
currency translation adjustments of $114 and $346, respectively.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The components of pension cost are as follows:
Three Months Ended Nine Months Ended
December 31 December 31
2004 2003 2004 2003
---- ---- ---- ----
Service cost $118 $111 $354 $331
Interest cost 243 224 731 668
Expected return on assets (226) (183) (678) (546)
Amortization of:
Transition asset (3) (11) (11) (11)
Unrecognized prior
service cost 1 1 3 3
Actuarial loss 76 67 228 200
---- ---- ---- ----
Net pension cost $209 $209 $627 $625
==== ==== ==== ====
The Company made contributions of $201 and $773 to the
defined benefit pension plan in the three and nine months ended
December 31, 2004, respectively. The Company does not expect to
make any contributions to the plan for the balance of fiscal year
2005 due to a decrease in the minimum contribution requirement as
a result of the combination of the amortization bases as
permitted by the Internal Revenue Service Code Section 412(b)(4)
and the replacement of the 30-year Treasury bond interest rate
with a four-year weighted average long-term corporate bond
interest rate.
16
The components of the postretirement benefit income are as
follows:
Three Months Ended Nine Months Ended
December 31 December 31
2004 2003 2004 2003
---- ---- ---- ----
Service cost $ 0 $ 4 $ 0 $ 10
Interest cost 19 14 55 47
Amortization of prior
service cost (41) (31) (124) (93)
Amortization of actuarial
loss 5 3 17 7
---- ---- ---- ----
Net postretirement benefit $(17) $(10) $(52) $(29)
==== ==== ==== ====
The Company paid benefits of $3 and $31 related to its
postretirement benefit plan in the three and nine months ended
December 31, 2004, respectively. The Company expects to pay
benefits of approximately $125 for the balance of fiscal year
2005.
NOTE 9 - OTHER INCOME AND EXPENSE
In November 2004, the Company entered into an Agreement and
General Release in connection with the retirement of its former
President and CEO. In accordance with the agreement, the Company
will retain the former officer as an independent consultant for
the period January 1, 2005 to November 8, 2008 and provide
certain medical, dental and insurance benefits during the
consulting period. The agreement also contains a non-compete
provision. The agreement has been accounted for as an individual
deferred compensation arrangement, and, therefore, an expense of
$648 was recognized and is included in the caption "Other Expense"
in the Consolidated Statement of Operations and Retained Earnings
for the three and nine month periods ended December 31, 2004. The
current and long-term portions of the related liability at
December 31, 2004 were $243 and $319, respectively, and are
included in the captions "Accrued Expenses and Other Liabilities"
and "Other Long-Term Liabilities" in the Consolidated Balance
Sheet at December 31, 2004.
In September 2004, the Company settled a contract dispute
with a customer regarding cancellation charges. This settlement
agreement was executed prior to the end of the quarter, and the
unpaid settlement amount due of $183 was received on October 13,
2004. As a result of the settlement, other income of $1,592 was
recorded.
17
On February 4, 2003, the Company irrevocably terminated
postretirement health care benefits for current U.S. employees.
Benefits payable to retirees of record on April 1, 2003 remained
unchanged. As a result of the plan change, a curtailment gain of
$522 was recognized. This gain is included in the caption "Other
Income" in the Consolidated Statement of Operations and Retained
Earnings for the nine months ended December 31, 2003.
NOTE 10 - 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:
Three Months Ended Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
---- ---- ---- ----
Sales to external customers
U.S. $10,783 $ 8,891 $28,135 $27,863
U.K. 2,154 1,333 5,646 3,485
------- ------- ------- -------
Total $12,937 $10,224 $33,781 $31,348
======= ======= ======= =======
Intersegment sales
U.S. $ 118 $ 38
U.K. $ 252 $ 1,025 610 2,091
------- ------- ------- -------
Total $ 252 $ 1,025 $ 728 $ 2,129
======= ======= ======= =======
Segment net income (loss)
U.S. $ (69) $ (701) $ (389) $ (914)
U.K. $ 22 (329) (276)
------- ------- ------- -------
Total segment net loss $ (47) $ (701) $ (718) $(1,190)
======= ======= ======= =======
The segment net loss above is reconciled to the consolidated totals
as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
---- ---- ---- ----
Total segment net loss $ (47) $(701) $(718) $(1,190)
Eliminations 26 (48) 103 (55)
----- ----- ----- =======
Net loss $ (21) $(749) $(615) $(1,245)
===== ===== ===== =======
18
NOTE 11 - RELATED PARTY TRANSACTION
On April 1, 2003, the Company acquired 30,800 shares of
common stock previously issued under the Long-Term Stock
Ownership Plan from two former officers. This transaction was
accounted for as a purchase. The shares were redeemed at the
original issue price of $7.25, as compared to a market price at
the time of the closing of $7.55. This transaction resulted in a
$224,000 increase to treasury stock, a $204,000 reduction in
notes receivable from officers and directors and cash payments to
former officers. The cash payments of $20 approximate amounts
previously paid on the notes. (See Note 9 for additional
disclosure of related party transactions).
NOTE 12 - CONTINGENCIES
The Company has been named as a defendant in certain
lawsuits wherein the respective plaintiffs allege personal injury
from exposure to asbestos contained in products made by the
Company. The Company is a co-defendant with numerous other
defendants in these suits. The Company has retained litigation
counsel to defend these claims. The claims are similar to
previous asbestos suits naming the Company as defendant, which
either were dismissed when it was shown that the Company had not
supplied products to the plaintiffs' places of work or were
settled for minimal amounts below the expected defense costs.
The potential for liability is not determinable.
In December 2004, the Company received a request for
payment from the Metal Goods & Manufacturers Trust Fund for $30
relating to a workers' compensation assessment asserted against
members in the Trust Fund during the period 1993 through 2001.
The Company was a member of the Trust Fund from April 1994 until
May 1995. The Company is disputing this claim and has provided
for this contingent liability at December 31, 2004.
From time to time, the Company is subject to legal
proceedings and potential claims arising from contractual
agreements in the ordinary course of business. The Company
believes there are no such matters pending against it that could
have, individually or in the aggregate, a material adverse effect
on its financial statements.
19
NOTE 13 - ACCOUNTING AND REPORTING CHANGES
In November 2004, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 151, "Inventory Costs." This Statement amends
Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing", to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material.
This Statement requires that those items be recognized as current
period charges regardless of whether they meet the criterion of
"abnormal". In addition, this Statement requires that allocation
of fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities. This
Statement is effective for inventory costs incurred during the
fiscal year 2007. The Company believes the adoption of this
Statement will result in the acceleration of recognizing indirect
manufacturing expenses during times of below normal utilization
of plant capacity.
In December 2004, the FASB issued SFAS No. 152, "Accounting
for Real Estate Time-Sharing Transactions" and SFAS No. 153,
"Exchanges of Nonmonetary Assets". Both Statements are effective
for fiscal years beginning after June 15, 2005. The Company does
not believe either of these Statements will have a material
effect on the Company's consolidated financial position, results
of operations or cash flows.
The FASB also issued in December 2004, SFAS No. 123R,
"Share-Based Payment". This Statement revises the standards
established for the accounting of transactions in which an entity
exchanges its equity instruments for goods and services. It also
addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the
issuance of those equity instruments. This Statement is
effective as of the beginning of the first interim reporting
period that begins after December 15, 2005 and applies to all
awards granted after the required effective date and to awards
modified, repurchased, or cancelled after that date. The
adoption of this Statement will have an effect on the Company's
consolidated results of operations. For additional information,
see Note 3 to the Condensed Consolidated Financial Statements.
Certain reclassifications have been made to prior financial
information to conform to the current period presentation.
20
GRAHAM CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (MD&A)
December 31, 2004
OVERVIEW
Graham Corporation consists of two operating segments as
determined by geographic areas (USA: Graham Corporation, UK:
Graham Vacuum and Heat Transfer Limited and its wholly-owned
subsidiary, Graham Precision Pumps Limited).
Graham's fiscal financial reporting year commences April 1
and ends March 31.
In the quarter ended September 30, 2004, the Corporation
modified its method of recognizing revenue for certain contracts
from the completed contract to the percentage-of-completion
method. Prior period financial results have been restated to
reflect this change. The impact of the restatement on FYE 2004
information discussed in this MD&A is disclosed as parenthetical
information within the relevant discussion sections. The
restatement did not change previously reported UK financial
information. The impact of the change on net sales, cost of
products sold, provision for income taxes and net income for the
prior periods presented and the nine months ended December 31,
2004 is as follows:
Three Months Ended
December 31, 2003
Amounts Reported Using
----------------------
Percentage
of Completed
Completion Contract
Method Method Difference
---------- --------- ----------
Net sales $10,224 $10,027 $197
Cost of products sold $ 8,732 $ 8,590 $142
(Benefit) provision for income taxes $ (322) $ (339) $ 17
Net income (loss) $ (749) $ (787) $ 38
Net income (loss) per share
Basic $(.46) $(.48) $.02
Diluted $(.46) $(.48) $.02
21
Nine Months Ended
December 31,
-----------------
2003
----
Amounts Reported Using
----------------------
Percentage
of Completed
Completion Contract
Method Method Difference
---------- --------- ----------
Net Sales $31,348 $30,919 $429
Cost of products sold $26,088 $25,727 $361
(Benefit) for income taxes $ (516) $ (540) $ 24
Net income (loss) $(1,245) $(1,289) $ 44
Net income (loss) per share
Basic $(.76) $(.78) $.02
Diluted $(.76) $(.78) $.02
Nine Months Ended
December 31,
-----------------
2004
----
Amounts Reported Using
----------------------
Percentage
of Completed
Completion Contract
Method Method Difference
---------- --------- ----------
Net Sales $33,781 $32,626 $1,155
Cost of products sold $28,130 $27,193 $ 937
(Benefit) for income taxes $ (324) $ (380) $ 56
Net income (loss) $ (615) $ (807) $ 192
Net income (loss) per share
Basic $(.37) $(.48) $.11
Diluted $(.37) $(.48) $.11
The effect of the change on retained earnings is as follows:
22
Three Months Ended Nine Months Ended
December 31, December 31,
2003 2003
---- ----
Balance at beginning of period as
previously reported $18,103 $18,767
Add adjustment for the cumulative
effect on prior periods of
applying retroactively the
change in accounting method 49 43
------- -------
Balance at beginning of period,
as adjusted 18,152 18,810
Net loss (749) (1,245)
Dividends (81) (243)
------- -------
Balance at end of period $17,322 $17,322
======= =======
Graham Corporation designs and builds vacuum and heat
transfer equipment for the process industries throughout the
world. The Company is a leader in vacuum technology in the
principal markets it serves. The principal markets for our
equipment are the chemical, petrochemical, petroleum refining and
electric power generating industries, including cogeneration and
geothermal plants. Other markets served include metal refining,
pulp and paper processing, shipbuilding, water heating,
refrigeration, desalination, food processing, drug manufacturing,
heating, ventilating and air conditioning.
Ejectors, liquid ring and dry vacuum pumps, condensers, heat
exchangers and other products we sell, sold either as components
or as complete systems, are used by our customers to produce
synthetic fibers, chemicals, petroleum products (including
gasoline), electric power, processed food (including canned,
frozen and dairy products), pharmaceutical products, paper,
steel, fertilizers and numerous other products used everyday by
people throughout the world.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document, including in
this MD&A, that are not historical facts, constitute "Forward-
Looking Statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements, in
general, predict, forecast, indicate or imply future results,
performance or achievements and generally use words so
indicative. The Company wishes to caution the reader that
numerous important factors which involve risks and uncertainties,
including but not limited to economic, competitive, governmental
and technological factors affecting the Company's operations,
markets, products, services and prices, and other factors
discussed in the Company's filings with the Securities and
Exchange Commission, in the future, could affect the Company's
actual results and could cause its actual consolidated results to
23
differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
The discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America ("GAAP").
Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and could
potentially result in materially different results under
different assumptions and conditions. Management has discussed
each of these critical accounting policies and estimates with the
Audit Committee of the Board of Directors.
Revenue Recognition - The Corporation recognizes revenue on all
contracts with a planned manufacturing process in excess of four
weeks (which approximates 575 direct labor hours) using the
percentage-of-completion method. The percentage-of-completion
method is determined by relating actual labor incurred to-date to
management's estimate of 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 the contract value and estimated costs at
completion.
Revenue not accounted for using the percentage-of-completion
method is accounted for on the completed contract method because
the majority of the Company's contracts have a planned
manufacturing process of less than four weeks and the results
reported under this method do not vary materially from the use of
the percentage-of-completion method. The Company recognizes
revenue and all related costs on the completed contract method
upon substantial completion or shipment to the customer.
Substantial completion is consistently defined as at least 95%
complete with regard to direct labor hours. Customer acceptance
is generally required throughout the construction process and the
Company has no further material obligations under the contract
after the revenue is recognized.
Pension and Postretirement Benefits - The Company's defined
benefit pension and other postretirement benefit costs and
obligations are dependent on actuarial assumptions used in
calculating such amounts. These assumptions, which are reviewed
annually by the Company, include the discount rate, long-term
expected rate of return on plan assets, salary growth, healthcare
cost trend rate and other economic and demographic factors. The
Company bases the discount rate assumption for its plans on the
AA-rated corporate long-term bond yield rate. The long-term
expected rate of return on plan assets is based on the plan's
asset allocation, historical returns and management's expectation
as to future returns that are expected to be realized over the
estimated remaining life of the plan liabilities that will be
funded with the plan assets. The salary growth assumptions are
determined based on the Company's long-term actual experience and
24
future and near-term outlook. The healthcare cost trend rate
assumptions are based on historical cost and payment data, the
near-term outlook, and an assessment of the likely long-term
trends.
To the extent that actual results differ from our
assumptions, the differences are reflected as unrecognized gains
and losses and are amortized to earnings over the estimated
future service period of the plan participants to the extent such
total net recognized gains and losses exceed 10% of the greater
of the plan's projected benefit obligation or the market-related
value of assets. Significant differences in actual experience or
significant changes in future assumptions would affect the
Company's pension and postretirement benefit costs and
obligations.
Use of Estimates - The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities, revenues and expenses
and related disclosure of contingent assets and liabilities at
the date of our financial statements. Actual results may differ
from these estimates under different assumptions or conditions.
Use of estimates include the recording of revenue, pension
obligations, and the underlying assumptions and valuation
reserves for uncollectible accounts, inventory obsolescence,
deferred taxes, warranty and liquidated damages.
Results of Operations
---------------------
For an understanding of the significant factors that
influenced the Company's performance, the following discussion
should be read in conjunction with the quarterly consolidated
financial statements and the notes to consolidated financial
statements.
Three Months Ended
---------------------------------------
December 31, 2004 December 31, 2003
----------------- -----------------
USA UK USA UK
--- -- --- --
Sales $10,783 $ 2,406 $ 8,891 $ 2,358
Net Income (Loss) $ (69) $ 22 $ (701) $ 0
Diluted Income (Loss)Per Share $ (0.04) $ 0.01 $ (0.43) $ 0
Identifiable Assets $31,104 $ 6,046 $31,485 $ 6,176
25
Nine Months Ended
----------------------------------------
December 31, 2004 December 31, 2003
----------------- -----------------
USA UK USA UK
--- --- --- --
Sales $28,253 $ 6,256 $27,901 $ 5,576
Net Loss $ (389) $ (329) $ (914) $ (276)
Diluted Loss Per Share $ (0.23) $ (0.20) $ (0.56) $ (0.17)
Amounts above are inclusive of intercompany amounts.
Consolidated sales (net of intercompany sales) for the
quarter were $12,937, as compared to $10,224 for the quarter
ended December 31, 2003. This represents a 27% increase in
consolidated sales. Sales in the USA were up 21% from one year
ago. Sales from UK operations were up 2%. The increase in USA
sales for the current quarter was due to selling price increases
initiated to mitigate rising material costs and greater surface
condenser sales. (Due to the restatement, FYE 2004 consolidated
and USA sales were increased by $197 for the quarter).
Consolidated sales (net of intercompany sales) for the nine
months were $33,781, as compared to $31,348 for the nine months
ended December 31, 2003. This represents an 8% increase in
sales. Sales in the USA were up 1% from one year ago. Sales
from UK operations were up 12%. The FYE 2005 year-to-date (YTD)
increase in sales was due to USA increased sales in the current
quarter and increased sales YTD in UK operations of offshore oil
extraction pumps. (Due to the restatement, FYE 2004 consolidated
and USA sales increased $429 for the nine months).
The consolidated gross profit margin for the current quarter
was 25%, as compared to 15% for the quarter ended December 31,
2003. By segment, USA operations' gross profit increased from
11% for the third quarter ended December 31, 2003 to 24% for the
current quarter. The UK's gross profit margin remained unchanged
at 25% for both the quarter ended December 31, 2004 and December
31, 2003. The improvement in the USA gross profit margin for the
quarter was due to greater sales volume, selling price increases,
which generated improved contribution margins across all product
lines, and fewer sales of lower margin products. (Due to the
restatement, FYE 2004 consolidated and USA gross profit
percentages increased 1% for the quarter).
26
The consolidated gross profit margin was 17% for both the
nine months ended December 31, 2004 and 2003. USA operations'
gross profit margin of 15% for the nine months ended December 31,
2004 was unchanged, as compared to the nine months ended December
31, 2003. The UK's gross profit margin decreased to 20% for the
nine months ended December 31, 2004 from 22% for the nine months
ended December 31, 2003. The reduction in the UK gross profit
margin for the nine months was due to the shipment of a few
orders taken at very low selling prices. (The restatement did
not change gross profit percentages for the nine months ended
December 31, 2003).
Selling, General and Administrative expenses (SG&A) were 20%
of sales for the current quarter, as compared to 25% for the
quarter ended December 31, 2003 and 22% of sales for the nine
months ended December 31, 2004, as compared to 24% for the nine
month period ended one year earlier. Percentage variances in
SG&A expenses are due to changes in sales levels in both the
quarterly and nine-month comparative periods.
Interest expense was $34 for the quarter ended December 31,
2004 and $35 for the quarter ended December 31, 2003. For the
nine-month periods ended December 31, 2004 and 2003, interest
expense was $84 and $93, respectively. Interest expense for the
current fiscal year to date decreased in the USA, which resulted
in a consolidated decrease of interest expense.
Other income for the nine months ended December 31, 2004 was
$1,592, as compared to $522 for the nine months ended December
31, 2003. Other income of $1,592 resulted from a settlement of a
contract dispute over cancellation charges. The settlement of
this matter ended a complaint filed in April 2004 in the United
States District Court for the Northern District of California
alleging breach of contract by a customer and a counterclaim
filed by the customer seeking specific performance of the
contract or money damages. Other income of $522 recognized for
the nine months ended December 31, 2003 represents a non-
recurring curtailment gain resulting from the discontinuation of
postretirement medical benefits.
Other expense recognized in the current quarter and nine
months ended December 31, 2004 of $648 was incurred in
conjunction with reaching an Agreement and General Release with
its former President and CEO. In accordance with the agreement,
the Company will retain the former officer as an independent
consultant for the period January 1, 2005 to November 8, 2008 and
provide certain medical, dental and insurance benefits during the
consulting period. Other expense for the nine months ended
December 31, 2003 was zero.
27
The effective income tax rate for the quarter was (11)%, as
compared to 30% at December 31, 2003. The effective income tax
rate for the nine months ended December 31, 2004 was 35%, as
compared to 29% at December 31, 2003. The lower effective income
tax rate for the nine-month period ended December 31, 2003, as
compared to 2004, was attributable to permanent items not
available to the Company in FYE 2005. The unusually low
effective income tax rate for the current quarter resulted from
the need to revise the annualized projected effective income tax
rate and recognize the year-to-date provision adjustment in a
quarter when the income (loss) before income tax amount was
minimal. (The restatement did not change the income tax rates
for the three or nine months ended December 31, 2003).
Net loss for the quarter was $21 or $0.01 per diluted share.
This compares to a net loss of $749 or $0.46 per diluted share
for the quarter ended December 31, 2003. Net losses for the nine-
month periods ended December 31, 2004 and 2003 were $615, or
$0.37 per diluted share, and $1,245 or $0.76 per diluted share,
respectively. (For the nine months ended December 31, 2003, the
restatement reduced the consolidated and USA net losses by $44 or
$0.02 per diluted share. The restatement reduced the consolidated
and USA net losses for the quarter ended December 31, 2004 by $38
or $0.02 per diluted share.)
Liquidity and Capital Resources
-------------------------------
As of and for the Nine Months Ended
---------------------------------------
December 31, 2004 December 31, 2003
----------------- -----------------
USA UK USA UK
--- --- --- ---
Working Capital $10,830 $ 1,914 $ 9,720 $ 1,918
Cash Flow (Deficit) from Operations $(2,824) $ 195 $(2,612) $ 318
Cash and Investments $ 2,711 $ 10 $ 3,660 $ 44
Capital Expenditures $ 53 $ 74 $ 141 $ 31
Long-Term Bank Borrowings $ 0 $ 0 $ 0 $ 0
Capital Leases $ 105 $ 0 $ 154 $ 0
Working Capital Ratio(1) 2.6 1.6 2.2 1.6
Long-Term Debt/Equity(1) 0.6% 0% 0.6% 0%
(1)As of December 31
Working Capital Ratio equals Current Assets divided by Current Liabilities
Long-Term Debt/Equity equals (Current Portion of Long-Term Debt and Long-
Term Debt) divided by Shareholders' Equity
Consolidated cash flow from operations was negative $2,629
for the nine months ended December 31, 2004 compared to negative
cash flow from operations of $2,294 for the nine months ended
December 31, 2003. The increase in negative cash flow was due to
increased inventories. Inventories increased in preparation for
significant FYE 2005 fourth quarter shipments, for stocking
standard products and due to rising material costs.
28
The primary source of liquidity is cash flow from
operations, investments in short-term treasury bills and secured
credit agreements.
Orders and Backlog
------------------
Consolidated orders for the current quarter were $16,195, as
compared to $9,965 for the quarter ended December 31, 2003,
representing a 63% increase. Prior to intercompany elimination,
USA orders were $13,954, as compared to $8,301 in the quarter
ended December 31, 2003. Orders in the UK were $2,638, as
compared to $2,394 one year ago.
Consolidated orders for the nine months ended December 31,
2004 were $41,707, up 44%, as compared to $29,052 for the nine
months ended December 31, 2003. Prior to intercompany
elimination, USA orders for the nine months ended December 31,
2004 were $36,600, as compared to $23,624 for the nine months
ended December 31, 2003. UK orders were $5,985 and $7,504 for
the nine months ended December 31, 2004 and 2003, respectively.
Orders of surface condensers were up $10,013 over the nine
months ended December 31, 2003 due to increased demand in major
project work in the chemical, energy and refinery sectors.
Improved business conditions are global. As compared to December
31, 2003, for USA products, export orders are up 53% and domestic
orders are up 57%. Profit margins on orders in backlog have also
improved.
Backlog was $24,722 at December 31, 2004, as compared to
$15,759 at December 31, 2003, representing a 57% increase. Prior
to intercompany eliminations, USA backlog was $22,145 and UK
backlog was $3,082 at December 31, 2004. At December 31, 2003,
USA and UK backlog amounts were $12,840 and $3,712, respectively.
The prior year backlog amounts have been restated to reflect
contract cancellations and the restatement of sales due to the
change in the revenue recognition accounting method. All orders
in backlog represent orders from traditional markets in the
Company'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:
- foreign currency exchange rates
- equity price risk (related to its Long-Term Incentive Plan for Directors)
- material availability and price risk
The assumptions applied in preparing quantitative
disclosures regarding foreign currency exchange rate and equity
price risk are based upon volatility ranges experienced in
relevant historical periods, management's current knowledge of
the business and market place, and management's judgment of the
probability of future volatility based upon the historical trends
and economic conditions of the business.
29
Graham's international consolidated sales for the past three
years approximates 43% of total sales. Operating in world
markets involves exposure to movements in currency exchange
rates. Currency movements can affect sales in several ways, the
foremost being the ability to compete for orders against
competition having a relatively weaker currency. Business lost
due to this cannot be quantified. Secondly, cash can be
adversely impacted by the conversion of sales in foreign currency
to U.S. dollars. The substantial portion of Graham's sales is
collected in the local currency (USA - dollars; UK - pounds
sterling). For both quarters ended December 31, 2004 and 2003,
sales in foreign currencies were 2% of sales. For the nine
months ended December 31, 2004 and 2003, sales in foreign
currencies were 3% and 2% of total sales, respectively. At
certain times, the Company may enter into forward foreign
currency exchange agreements to hedge its exposure against
unfavorable changes in foreign currency values on significant
sales contracts negotiated in foreign currencies.
Graham has limited exposure to foreign currency purchases.
For the three month periods ended December 31, 2004 and 2003,
purchases in foreign currencies were 5% and 9% of cost of goods
sold, respectively. For the nine month periods ended December
31, 2004 and 2003, purchases in foreign currencies were 6% and
10% of cost of goods sold, respectively. In FYE 2004 and 2005,
USA operations recorded an unusually significant dollar volume of
orders utilizing UK subsidiary products in conjunction with USA
equipment. At certain times, forward foreign currency exchange
contracts may be utilized to limit currency exposure.
UK operations experienced a current quarter net income of
$22, as compared to a quarterly net income (loss) of $0 for
December 31, 2003. For the nine months ended December 31, 2004
and 2003, foreign operations produced net losses of $329 and
$276, respectively. As currency exchange rates change,
translations of the income statements of the UK business into US
dollars affect year-over-year comparability of operating results.
The increase in the foreign currency translation rate to convert
pounds sterling to US dollars increased all UK income statement
items and order amounts by 12% and all UK balance sheet and
backlog amounts by 7% for the nine months ended December 31, 2004
over 2003. The Company does not hedge translation risks because
cash flows from UK operations are mostly reinvested in the UK. A
10% change in foreign currency exchange rates would have impacted
the UK reported net loss by approximately $3 and $0 for the three
months ended December 31, 2004 and 2003, and $33 and $28 for the
nine month periods, respectively.
The Company has a Long-Term Incentive Plan, which provides
for awards of share equivalent units (SEUs) for outside directors
based upon the Company's performance. The outstanding SEUs 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 Company's results of
operations. Based upon the SEUs outstanding at December 31, 2004
and 2003 and a $12 per share price, a 50-75% change in the
respective year end market price of the Company's common stock
would positively or negatively impact the Company's operating
30 (Continued)
results by $79 to $118 for the three and nine months ended
December 31, 2004 and $99 to $148 for the three and nine months
ended December 31, 2003. Assuming required net income of $500 is
met, and based upon a market price of the Company's stock of $12
per share, a 50-75% change in the stock price would positively or
negatively impact the Company's operating results by $122 to $183
in 2006, $136 to $203 in 2007, $146 to $218 in 2008, $156 to $233
in 2009 and $158 to $237 in 2010.
The risks associated with materials include availability and
price increases. Material shortages have affected the Company's
ability to meet delivery requirements for certain orders. The
Company has identified alternative vendors in such cases and
seeks to negotiate escalation provisions in its sales contracts
in the event that costs of materials increase. Profit margins on
sales would be reduced to the extent rising material costs could
not be passed on to Graham's customers.
Contingencies
-------------
The Company is a co-defendant with numerous other defendants
in matters of litigation alleging personal injury from exposure
to asbestos contained in some of the Company's products
previously manufactured. To date, it has been the Company's
experience that upon investigation the cases have been dismissed
or settled for minimal amounts. However, the magnitude of
potential damages on unsettled current claims is not
determinable.
In December 2004, the Company received a request for
payment from the Metal Goods & Manufacturers Trust Fund for $30
relating to a workers' compensation assessment asserted against
members in the Trust Fund during the period 1993 through 2001.
The Company was a member of the Trust Fund from April 1994 until
May 1995. The Company is disputing this claim. It is not
possible to predict the outcome of this dispute at this time,
however, management has provided for this contingent liability at
December 31, 2004.
From time to time, the Company is subject to legal
proceedings and potential claims arising from contractual
agreements in the ordinary course of business. The Company
believes there are no such matters pending against it that could
have, individually or in the aggregate, a material adverse effect
on its financial statements.
New Accounting Pronouncements
-----------------------------
In November 2004, the Financial Accounting Standard Board
(FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 151, Inventory Costs. This Statement amends the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing, "to clarify the
accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted materials. This Statement
requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "abnormal." In
addition, this Statement requires that allocation of fixed
31 (Continued)
production overheads to the costs of conversion be based on the
normal capacity of the production facilities. SFAS No. 151 will
be effective for inventory costs incurred on a prospective basis
during fiscal years beginning after June 15, 2005. The
pronouncement will have the effect of accelerating the
recognition of indirect manufacturing costs in times of below
normal manufacturing capacity utilization.
In December 2004, the FASB issued SFAS Nos. 152, Accounting
for Real Estate Time-Sharing Transactions and 153, Exchanges of
Nonmonetary Assets as Amendment of ARB Opinion No. 29. Both
statements are effective for fiscal years beginning after June
15, 2005. It is anticipated that neither pronouncement will have
a significant, if any, impact on Graham's financial reporting, if
any.
The FASB also issued in December 2004, SFAS No. 123R,
"Share-Based Payment". This Statement revises the standards
established for the accounting of transactions in which an entity
exchanges its equity instruments for goods and services. It also
addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the
issuance of those equity instruments. This Statement is
effective as of the beginning of the first interim reporting
period that begins after December 15, 2005 and applies to all
awards granted after the required effective date and to awards
modified, repurchased, or cancelled after that date. The
adoption of this Statement will have an effect on the Company's
consolidated results of operations. For additional information,
see Note 3 to the Condensed Consolidated Financial Statements.
Controls and Procedures
-----------------------
The Company's President and Chief Executive Officer
and its Vice President-Finance and Chief Financial Officer each
have independently evaluated the Company's disclosure controls
and procedures as defined in Exchange Act Rules 13a-14(c) and 15d-
14(c) as of the end of the period covered by this quarterly
report on Form 10-Q and each regards such controls as effective.
There have been no significant changes to any such
controls or in other factors that could significantly affect such
controls, subsequent to the date of their evaluation by each of
the CEO and the CFO.
32
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 2004
PART II - OTHER INFORMATION
Item 5. Other Information
The Company's Chief Executive Officer and Chief
Financial Officer have furnished to the SEC the certifications
with respect to this Form 10-Q that is required by Section 302 and
906 of the Sarbanes-Oxley Act of 2002. These certifications are
included in Exhibits 31 and 32 to this Form 10-Q.
Item 6. Exhibits
a. See index to exhibits.
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 2/1/05
33
INDEX OF EXHIBITS
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession
Not applicable.
(3)(i) Articles of Incorporation of Graham
Corporation (filed as Exhibit 3(b) to the Registrant's
annual report on Form 10-K for the year ended December
31, 1989, and incorporated herein by reference.)
(3)(ii) By-laws of registrant, as amended (filed as Exhibit
3(ii) to the Registrant's quarterly report on Form 10-Q
for the quarter ended June 30, 2004, and incorporated
herein by reference).
(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.)
Stockholder Rights Plan of Graham Corporation
(filed as Item 5 to Registrant's current report
filed on Form 8-K on August 23, 2000 and
Registrant's Form 8-A filed on September 15,
2000, and incorporated herein by reference.)
(b) Debt securities
Not applicable.
(10) Material Contracts
(10.1) Indemnification Agreements with Named Directors
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.)
34
Index to Exhibits (Continued)
2000 Graham Corporation Incentive Plan to Increase
Shareholder Value (filed on the Registrant's Proxy
Statement for its 2001 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 Exhibit 10.2 to
Registrant's current report filed on Form 8-K on
December 2, 2004, and are 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.)
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.)
Agreement and Release of Claims dated November 29, 2004
between Alvaro Cadena and Graham Corporation (filed as
Exhibit 10.1 to Registrant's current report filed on
Form 8-K on December 2, 2004 and is incorporated herein
by reference.)
Indemnification Agreement with Named Officer (filed as
Exhibit 10.1 to Registrant's current report filed on
Form 8-K on January 25, 2005 and is incorporated herein
by reference.)
(11) Statement re-computation of per share earnings
Computation of per share earnings is included in Note 4
of the Notes to Financial Information.
(14) Code of Ethics
The Company's code of ethics is available on the
Company's website at www.graham-mfg.com.
(15) Letter re-unaudited interim financial information
Not applicable.
35 (Continued)
(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.
(31) Rule 13a-14(a)/15d-14(a) Certifications
(32) Section 1350 Certifications
(99) Additional exhibits
None.