ghm-10ka_20160331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-K/A

(Amendment No. 1)

(Mark One)

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

For the fiscal year ended March 31, 2016

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)

 

Registrant's telephone number, including area code 585-343-2216

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

 

Title of each class

Name of each exchange on which registered

Common Stock (Par Value $.10)

NYSE

 

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

Title of Class

Preferred Stock Purchase Rights

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes    No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes    No 

Indicate by checkmark 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 checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    No 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

 

Smaller reporting company

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes    No 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 2015, the last business day of the registrant's most recently completed second fiscal quarter, was $168,783,420.  The market value calculation was determined using the closing price of the registrant’s common stock on September 30, 2015, as reported on the NYSE (the exchange on which the registrant’s common stock is listed).  For purposes of the foregoing calculation only, all directors, officers and the Employee Stock Ownership Plan of the registrant have been deemed affiliates.

As of May 23, 2016, the registrant had outstanding 9,646,981shares of common stock, $.10 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement, to be filed in connection with the registrant's 2016 Annual Meeting of Stockholders to be held on July 28, 2016, are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this filing.

 

 

 


EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A (the “Amendment”) amends the Annual Report on Form 10-K for the year ended March 31, 2016 of Graham Corporation (the “Company”), as originally filed with the U.S. Securities and Exchange Commission on June 1, 2016 (the “Original Filing”).  The Company is filing the Amendment solely to amend: (i) Part II-Item 8 “Financial Statements and Supplementary Data” and (ii) Part IV-Item 15 “Exhibits and Financial Statement Schedules”, in each case to correct typographical errors relating to references to the dates of the audit reports (the “Reports”) of Deloitte & Touche LLP, the Company’s Independent Registered Public Accounting Firm.  The correct reference to the date of the Reports is June 1, 2016.  

This Amendment is limited in scope to the portions of the Original Filing discussed above and does not amend, update or change any other items or disclosures contained in the Original Filing. This Amendment continues to speak as of the date of the Original Filing and we have not updated the disclosures contained therein to reflect any events that occurred at any subsequent date.

 

 

 


Table of Contents

GRAHAM CORPORATION

Annual Report on Form 10-K

Year Ended March 31, 2016

 

 

 

 

PART II

 

 

 

 

 

Item 8

Financial Statements and Supplementary Data

5

 

 

 

PART IV

 

 

 

 

 

Item 15

Exhibits, Financial Statement Schedules

35

 

3


 

 

 

 

 

PART II

4


 

Item 8.Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

 

Consolidated Financial Statements:

Page

 

Consolidated Statements of Operations for the years ended March 31, 2016, 2015 and 2014

6

 

Consolidated Statements of Comprehensive Income for the years ended March 31, 2016, 2015, and 2014

7

 

Consolidated Balance Sheets as of March 31, 2016 and 2015

8

 

Consolidated Statements of Cash Flows for the years ended March 31, 2016, 2015 and 2014

9

 

Consolidated Statements of Changes in Stockholders’ Equity for the years ended March 31, 2016, 2015 and 2014

10

 

Notes to Consolidated Financial Statements

11

 

Reports of Independent Registered Public Accounting Firm

33

 

5


CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Year Ended March 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

(Amounts in thousands, except per share data)

 

Net sales

 

$

90,039

 

 

$

135,169

 

 

$

102,218

 

Cost of products sold

 

 

66,784

 

 

 

93,365

 

 

 

70,406

 

Gross profit

 

 

23,255

 

 

 

41,804

 

 

 

31,812

 

Other expenses and income:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

16,331

 

 

 

18,283

 

 

 

16,973

 

Selling, general and administrative - amortization

 

 

234

 

 

 

229

 

 

 

222

 

Restructuring charge

 

 

 

 

 

1,718

 

 

 

 

Other income

 

 

(1,789

)

 

 

 

 

 

 

Interest income

 

 

(261

)

 

 

(189

)

 

 

(94

)

Interest expense

 

 

10

 

 

 

11

 

 

 

1

 

Total other expenses and income

 

 

14,525

 

 

 

20,052

 

 

 

17,102

 

Income before provision for income taxes

 

 

8,730

 

 

 

21,752

 

 

 

14,710

 

Provision for income taxes

 

 

2,599

 

 

 

7,017

 

 

 

4,565

 

Net income

 

$

6,131

 

 

$

14,735

 

 

$

10,145

 

Per share data

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

0.61

 

 

$

1.46

 

 

$

1.01

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

0.61

 

 

$

1.45

 

 

$

1.00

 

Average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

9,976

 

 

 

10,123

 

 

 

10,070

 

Diluted

 

 

9,983

 

 

 

10,143

 

 

 

10,104

 

Dividends declared per share

 

$

.33

 

 

$

.20

 

 

$

.13

 

 

See Notes to Consolidated Financial Statements.

 

 

6


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Year Ended March 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

(Amounts in thousands)

 

Net income

 

$

6,131

 

 

$

14,735

 

 

$

10,145

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(150

)

 

 

3

 

 

 

(7

)

Defined benefit pension and other postretirement plans, net of income tax

   (benefit) provision, of $(804), $(1,802), and $1,244 for the years ended

   March 31, 2016, 2015 and 2014, respectively

 

 

(1,470

)

 

 

(3,294

)

 

 

2,275

 

Total other comprehensive income

 

 

(1,620

)

 

 

(3,291

)

 

 

2,268

 

Total comprehensive income

 

$

4,511

 

 

$

11,444

 

 

$

12,413

 

 

See Notes to Consolidated Financial Statements.

 

 

7


CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

 

(Amounts in thousands, except per share data)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,072

 

 

$

27,271

 

Investments

 

 

41,000

 

 

 

33,000

 

Trade accounts receivable, net of allowances ($91 and $62 at March 31, 2016 and

   2015, respectively)

 

 

12,730

 

 

 

17,249

 

Unbilled revenue

 

 

11,852

 

 

 

18,665

 

Inventories

 

 

10,811

 

 

 

13,994

 

Prepaid expenses and other current assets

 

 

613

 

 

 

529

 

Income taxes receivable

 

 

1,652

 

 

 

339

 

Total current assets

 

 

102,730

 

 

 

111,047

 

Property, plant and equipment, net

 

 

18,747

 

 

 

19,812

 

Prepaid pension asset

 

 

 

 

 

1,332

 

Goodwill

 

 

6,938

 

 

 

6,938

 

Permits

 

 

10,300

 

 

 

10,300

 

Other intangible assets, net

 

 

4,248

 

 

 

4,428

 

Other assets

 

 

168

 

 

 

146

 

Total assets

 

$

143,131

 

 

$

154,003

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of capital lease obligations

 

$

55

 

 

$

60

 

Accounts payable

 

 

10,325

 

 

 

13,334

 

Accrued compensation

 

 

5,317

 

 

 

9,343

 

Accrued expenses and other current liabilities

 

 

3,826

 

 

 

3,247

 

Customer deposits

 

 

8,400

 

 

 

4,179

 

Total current liabilities

 

 

27,923

 

 

 

30,163

 

Capital lease obligations

 

 

157

 

 

 

98

 

Accrued compensation

 

 

 

 

 

124

 

Deferred income tax liability

 

 

3,546

 

 

 

5,876

 

Accrued pension liability

 

 

1,338

 

 

 

315

 

Accrued postretirement benefits

 

 

787

 

 

 

876

 

Total liabilities

 

 

33,751

 

 

 

37,452

 

Commitments and contingencies (Notes 6 and 17)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $1.00 par value, 500 shares authorized

 

 

 

 

 

 

 

 

Common stock, $.10 par value, 25,500 shares authorized 10,468 and 10,433 shares

   issued and 9,646 and 10,133 shares outstanding at March 31, 2016 and 2015,

   respectively

 

 

1,047

 

 

 

1,043

 

Capital in excess of par value

 

 

22,315

 

 

 

21,398

 

Retained earnings

 

 

109,013

 

 

 

106,178

 

Accumulated other comprehensive loss

 

 

(10,676

)

 

 

(9,056

)

Treasury stock (822 and 299 shares)

 

 

(12,319

)

 

 

(3,012

)

Total stockholders’ equity

 

 

109,380

 

 

 

116,551

 

Total liabilities and stockholders’ equity

 

$

143,131

 

 

$

154,003

 

 

See Notes to Consolidated Financial Statements.

 

 

8


CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Year Ended March 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

(Dollar amounts in thousands)

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,131

 

 

$

14,735

 

 

$

10,145

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

2,201

 

 

 

2,079

 

 

 

1,977

 

Amortization

 

 

234

 

 

 

229

 

 

 

222

 

Amortization of unrecognized prior service cost and actuarial losses

 

 

1,214

 

 

 

514

 

 

 

886

 

Discount accretion on investments

 

 

 

 

 

 

 

 

(8

)

Stock-based compensation expense

 

 

697

 

 

 

653

 

 

 

639

 

Loss on disposal or sale of property, plant and equipment

 

 

4

 

 

 

14

 

 

 

223

 

Deferred income taxes

 

 

(1,522

)

 

 

157

 

 

 

(1,011

)

(Increase) decrease in operating assets:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,440

 

 

 

(6,910

)

 

 

(1,001

)

Unbilled revenue

 

 

6,783

 

 

 

(10,835

)

 

 

5,318

 

Inventories

 

 

3,175

 

 

 

2,525

 

 

 

(5,161

)

Income taxes receivable/payable

 

 

(1,309

)

 

 

158

 

 

 

2,137

 

Prepaid expenses and other current and non-current assets

 

 

(162

)

 

 

(152

)

 

 

185

 

Prepaid pension asset

 

 

(1,222

)

 

 

(1,108

)

 

 

(793

)

Increase (decrease) in operating liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

 

(2,836

)

 

 

3,115

 

 

 

595

 

Accrued compensation, accrued expenses and other current and

   non-current liabilities

 

 

(3,178

)

 

 

4,981

 

 

 

28

 

Customer deposits

 

 

4,227

 

 

 

(3,834

)

 

 

1,009

 

Long-term portion of accrued compensation, accrued pension

   liability and accrued postretirement benefits

 

 

(126

)

 

 

(42

)

 

 

(160

)

Net cash provided by operating activities

 

 

18,751

 

 

 

6,279

 

 

 

15,230

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(1,153

)

 

 

(5,300

)

 

 

(5,263

)

Proceeds from disposal of property, plant and equipment

 

 

3

 

 

 

1

 

 

 

32

 

Purchase of investments

 

 

(44,000

)

 

 

(50,000

)

 

 

(109,494

)

Redemption of investments at maturity

 

 

36,000

 

 

 

46,000

 

 

 

108,000

 

Net cash used by investing activities

 

 

(9,150

)

 

 

(9,299

)

 

 

(6,725

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Principal repayments on capital lease obligations

 

 

(59

)

 

 

(80

)

 

 

(88

)

Issuance of common stock

 

 

97

 

 

 

47

 

 

 

581

 

Dividends paid

 

 

(3,296

)

 

 

(2,026

)

 

 

(1,308

)

Purchase of treasury stock

 

 

(9,441

)

 

 

 

 

 

 

Excess tax deduction on stock awards

 

 

6

 

 

 

200

 

 

 

271

 

Net cash used by financing activities

 

 

(12,693

)

 

 

(1,859

)

 

 

(544

)

Effect of exchange rate changes on cash

 

 

(107

)

 

 

4

 

 

 

(9

)

Net (decrease) increase in cash and cash equivalents

 

 

(3,199

)

 

 

(4,875

)

 

 

7,952

 

Cash and cash equivalents at beginning of year

 

 

27,271

 

 

 

32,146

 

 

 

24,194

 

Cash and cash equivalents at end of year

 

$

24,072

 

 

$

27,271

 

 

$

32,146

 

 

See Notes to Consolidated Financial Statements.

 

 

 

9


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended March 31, 2016, 2015 and 2014

(Dollar and share amounts in thousands)

 

 

 

Common Stock

 

 

Capital in

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Par

 

 

Excess of

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

Stockholders'

 

 

 

Shares

 

 

Value

 

 

Par Value

 

 

Earnings

 

 

Loss

 

 

Stock

 

 

Equity

 

Balance at April 1, 2013

 

 

10,331

 

 

$

1,033

 

 

$

18,596

 

 

$

84,632

 

 

$

(8,033

)

 

$

(3,233

)

 

$

92,995

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,145

 

 

 

2,268

 

 

 

 

 

 

 

12,413

 

Issuance of shares

 

 

78

 

 

 

8

 

 

 

573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

581

 

Stock award tax benefit

 

 

 

 

 

 

 

 

 

 

271

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

271

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,308

)

 

 

 

 

 

 

 

 

 

 

(1,308

)

Recognition of equity-based compensation expense

 

 

 

 

 

 

 

 

 

 

639

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

639

 

Issuance of treasury stock

 

 

 

 

 

 

 

 

 

 

195

 

 

 

 

 

 

 

 

 

 

 

122

 

 

 

317

 

Balance at March 31, 2014

 

 

10,409

 

 

 

1,041

 

 

 

20,274

 

 

 

93,469

 

 

 

(5,765

)

 

 

(3,111

)

 

 

105,908

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,735

 

 

 

(3,291

)

 

 

 

 

 

 

11,444

 

Issuance of shares

 

 

24

 

 

 

2

 

 

 

45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47

 

Stock award tax benefit

 

 

 

 

 

 

 

 

 

 

200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

200

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,026

)

 

 

 

 

 

 

 

 

 

 

(2,026

)

Recognition of equity-based compensation expense

 

 

 

 

 

 

 

 

 

 

653

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

653

 

Issuance of treasury stock

 

 

 

 

 

 

 

 

 

 

226

 

 

 

 

 

 

 

 

 

 

 

99

 

 

 

325

 

Balance at March 31, 2015

 

 

10,433

 

 

 

1,043

 

 

 

21,398

 

 

 

106,178

 

 

 

(9,056

)

 

 

(3,012

)

 

 

116,551

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,131

 

 

 

(1,620

)

 

 

 

 

 

 

4,511

 

Issuance of shares

 

 

35

 

 

 

4

 

 

 

93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

97

 

Stock award tax benefit

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,296

)

 

 

 

 

 

 

 

 

 

 

(3,296

)

Recognition of equity-based compensation expense

 

 

 

 

 

 

 

 

 

 

697

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

697

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,441

)

 

 

(9,441

)

Issuance of treasury stock

 

 

 

 

 

 

 

 

 

 

121

 

 

 

 

 

 

 

 

 

 

 

134

 

 

 

255

 

Balance at March 31, 2016

 

 

10,468

 

 

$

1,047

 

 

$

22,315

 

 

$

109,013

 

 

$

(10,676

)

 

$

(12,319

)

 

$

109,380

 

 

See Notes to Consolidated Financial Statements.

 

 

 

10


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended March 31, 2016, 2015 and 2014

(Amounts in thousands, except per share data)

 

 

Note 1 - The Company and Its Accounting Policies:

Graham Corporation, and its operating subsidiaries, (together, the “Company”), is a global designer, manufacturer and supplier of vacuum and heat transfer equipment used in the chemical, petrochemical, petroleum refining, and electric power generating industries.  Energy Steel & Supply Co. (“Energy Steel”), a wholly-owned subsidiary, is a nuclear code accredited fabrication and specialty machining company which provides products to the nuclear industry. The Company's significant accounting policies are set forth below.

The Company's fiscal years ended March 31, 2016, 2015 and 2014 are referred to as fiscal 2016, fiscal 2015 and fiscal 2014, respectively.

Principles of consolidation and use of estimates in the preparation of financial statements

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Energy Steel, located in Lapeer, Michigan, and Graham Vacuum and Heat Transfer Technology (Suzhou) Co., Ltd., located in China.  All intercompany balances, transactions and profits are eliminated in consolidation.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the related revenues and expenses during the reporting period.  Actual amounts could differ from those estimated.

Translation of foreign currencies

Assets and liabilities of the Company's foreign subsidiary are translated into U.S. dollars at currency exchange rates in effect at year-end and revenues and expenses are translated at average exchange rates in effect for the year.  Gains and losses resulting from foreign currency transactions are included in results of operations. The Company’s sales and purchases in foreign currencies are minimal.  Therefore, foreign currency transaction gains and losses are not significant.  Gains and losses resulting from translation of foreign subsidiary balance sheets are included in a separate component of stockholders' equity.  Translation adjustments are not adjusted for income taxes since they relate to an investment, which is permanent in nature.

Revenue recognition

Percentage-of-Completion Method

The Company 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 majority of the Company's revenue is recognized under this methodology.  The Company has established the systems and procedures essential to developing the estimates required to account for contracts using the percentage-of-completion method.  The percentage-of-completion method is determined by comparing actual labor incurred to a specific date to management's estimate of the total labor to be incurred on each contract or completion of operational milestones assigned to each contract.

Contracts in progress are reviewed monthly by management, and sales and earnings are adjusted in current accounting periods based on revisions in the contract value and estimated costs at completion.  Losses on contracts are recognized immediately when evident to management.  Revenue recognized on contracts accounted for utilizing percentage-of-completion are presented in net sales in the Consolidated Statement of Operations and unbilled revenue in the Consolidated Balance Sheets to the extent that the revenue recognized exceeds the amounts billed to customers.  See "Inventories" below.

Receivables billed but not paid under retainage provisions in its customer contracts were $2,071 and $1,751 at March 31, 2016 and 2015, respectively.

Completed Contract Method

Revenue on contracts not accounted for using the percentage-of-completion method is recognized utilizing the completed contract method.  The majority of the Company's contracts (as opposed to revenue) have a planned manufacturing process of less than

11


 

four weeks and the results reported under this method do not vary materially from the percentage-of-completion method.  The Company recognizes revenue and all related costs on these contracts 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 its contracts after the revenue is recognized.

Cash and cash equivalents

Cash and cash equivalents consist of cash and highly liquid, short-term investments with maturities at the time of purchase of three months or less.

Shipping and handling fees and costs

Shipping and handling fees billed to the customer are recorded in net sales and the related costs incurred for shipping and handling are included in cost of products sold.

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.  The investments are stated at amortized cost which approximates fair value.  All investments held by the Company at March 31, 2016 are scheduled to mature on or before February 3, 2017.

Inventories

Inventories are stated at the lower of cost or market, using the average cost method.  Unbilled revenue in the Consolidated Balance Sheets represents revenue recognized that has not been billed to customers on contracts accounted for on the percentage-of-completion method.  For contracts accounted for on the percentage-of-completion method, progress payments are netted against unbilled revenue to the extent the payment is less than the unbilled revenue for the applicable contract.  Progress payments exceeding unbilled revenue are netted against inventory to the extent the payment is less than or equal to the inventory balance relating to the applicable contract, and the excess is presented as customer deposits in the Consolidated Balance Sheets.

A summary of costs and estimated earnings on contracts in progress at March 31, 2016 and 2015 is as follows:

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Costs incurred since inception on contracts in progress

 

$

35,893

 

 

$

64,912

 

Estimated earnings since inception on contracts in progress

 

 

1,185

 

 

 

16,067

 

 

 

 

37,078

 

 

 

80,979

 

Less billings to date

 

 

38,267

 

 

 

69,636

 

Net under (over) billings

 

$

(1,189

)

 

$

11,343

 

 

The above activity is included in the accompanying Consolidated Balance Sheets under the following captions at March 31, 2016 and 2015 or Notes to Consolidated Financial Statements:

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Unbilled revenue

 

$

11,852

 

 

$

18,665

 

Progress payments reducing inventory (Note 2)

 

 

(4,641

)

 

 

(3,143

)

Customer deposits

 

 

(8,400

)

 

 

(4,179

)

Net under (over) billings

 

$

(1,189

)

 

$

11,343

 

 

Property, plant, equipment, depreciation and amortization

Property, plant and equipment are stated at cost net of accumulated depreciation and amortization.  Major additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred.  Depreciation and amortization are provided based upon the estimated useful lives, or lease term if shorter, under the straight line method.  Estimated useful lives range from approximately five to eight years for office equipment, eight to 25 years for manufacturing equipment and 40 years for buildings

12


 

and improvements.  Upon sale or retirement of assets, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations.

Business combinations

The Company records its business combinations under the acquisition method of accounting.  Under the acquisition method of accounting, the Company allocates the purchase price of each acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition.  The fair value of identifiable intangible assets is based upon detailed valuations that use various assumptions made by management.  Any excess of the purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill.  Direct acquisition-related costs are expensed as incurred.

Intangible assets

Acquired intangible assets other than goodwill consist of permits, customer relationships, and tradenames.  The Company amortizes its definite-lived intangible assets on a straight-line basis over their estimated useful lives.  The estimated useful life is fifteen years for customer relationships.  All other intangibles have indefinite lives and are not amortized.

Impairment of long-lived assets

The Company assesses the impairment of definite-lived long-lived assets or asset groups when events or changes in circumstances indicate that the carrying value may not be recoverable.  Factors that are considered in deciding when to perform an impairment review include: a significant decrease in the market price of the asset or asset group; a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction; a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.  The term more likely than not refers to a level of likelihood that is more than 50%.

Recoverability potential is measured by comparing the carrying amount of the asset or asset group to its related total future undiscounted cash flows.  If the carrying value is not recoverable through related cash flows, the asset or asset group is considered to be impaired.  Impairment is measured by comparing the asset or asset group's carrying amount to its fair value.  When it is determined that useful lives of assets are shorter than originally estimated, and no impairment is present, the rate of depreciation is accelerated in order to fully depreciate the assets over their new shorter useful lives.

Goodwill and intangible assets with indefinite lives are tested annually for impairment.  The Company assesses goodwill for impairment by comparing the fair value of its reporting units to their carrying amounts.  If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value.  Fair values for reporting units are determined based on discounted cash flows.  Indefinite lived intangible assets are assessed for impairment by comparing the fair value of the asset to its carrying value.

Product warranties

The Company estimates the costs that may be incurred under its product warranties and records a liability in the amount of such costs at the time revenue is recognized.  The reserve for product warranties is based upon past claims experience and ongoing evaluations of any specific probable claims from customers.  A reconciliation of the changes in the product warranty liability is presented in Note 5.

Research and development

Research and development costs are expensed as incurred.  The Company incurred research and development costs of $3,746, $3,585 and $3,436 in fiscal 2016, fiscal 2015 and fiscal 2014, respectively.  Research and development costs are included in the line item “Cost of products sold” in the Consolidated Statements of Operations.

13


 

Income taxes

The Company recognizes deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns.  Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using currently enacted tax rates.  The Company evaluates the available evidence about future taxable income and other possible sources of realization of deferred income tax assets and records a valuation allowance to reduce deferred income tax assets to an amount that represents the Company's best estimate of the amount of such deferred income tax assets that more likely than not will be realized.

The Company accounts for uncertain tax positions using a "more likely than not" recognition threshold.  The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective resolution of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position.  These tax positions are evaluated on a quarterly basis.  It is the Company's policy to recognize any interest related to uncertain tax positions in interest expense and any penalties related to uncertain tax positions in selling, general and administrative expense.

The Company files federal and state income tax returns in several U.S. and non-U.S. domestic and foreign jurisdictions.  In most tax jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed.

Stock-based compensation

The Company records compensation costs related to stock-based awards based on the estimated fair value of the award on the grant date.  Compensation cost is recognized in the Company's Consolidated Statements of Operations over the applicable vesting period.  The Company uses the Black-Scholes valuation model as the method for determining the fair value of its equity awards.  For restricted stock awards, the fair market value of the award is determined based upon the closing value of the Company's stock price on the grant date.  The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest.  The Company estimates the forfeiture rate at the grant date by analyzing historical data and revises the estimates in subsequent periods if the actual forfeiture rate differs from the estimates.

14


 

Income per share data

Basic income per share is computed by dividing net income 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 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:

 

 

 

Year ended March 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Basic income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,131

 

 

$

14,735

 

 

$

10,145

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted common shares outstanding

 

 

9,976

 

 

 

10,123

 

 

 

10,056

 

Share equivalent units ("SEUs") outstanding

 

 

 

 

 

 

 

 

14

 

Weighted average common shares and SEUs

   outstanding

 

 

9,976

 

 

 

10,123

 

 

 

10,070

 

Basic income per share

 

$

0.61

 

 

$

1.46

 

 

$

1.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,131

 

 

$

14,735

 

 

$

10,145

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and SEUs

   outstanding

 

 

9,976

 

 

 

10,123

 

 

 

10,070

 

Stock options outstanding

 

 

7

 

 

 

20

 

 

 

34

 

Weighted average common and potential common

   shares outstanding

 

 

9,983

 

 

 

10,143

 

 

 

10,104

 

Diluted income per share

 

$

0.61

 

 

$

1.45

 

 

$

1.00

 

 

There were 54, 12 and 2 options to purchase shares of common stock at various exercise prices in fiscal 2016, fiscal 2015 and fiscal 2014, respectively, which were not included in the computation of diluted income per share as the effect would be anti-dilutive.

Cash flow statement

The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents.

Interest paid was $10 in fiscal 2016, $11 in fiscal 2015, and $12 in fiscal 2014.  In addition, income taxes paid were $5,423 in fiscal 2016, $6,491 in fiscal 2015, and $3,302 in fiscal 2014.

In fiscal 2016, fiscal 2015, and fiscal 2014, non-cash activities included pension and other postretirement benefit adjustments, net of income tax, of $1,470, $3,294 and $(2,275), respectively.  Also, in fiscal 2016, fiscal 2015 and fiscal 2014, non-cash activities included the issuance of treasury stock valued at $255, $325 and $317, respectively, to the Company’s Employee Stock Purchase Plan (See Note 11).

At March 31, 2016, 2015, and 2014, there were $53, $174, and $40, respectively, of capital purchases that were recorded in accounts payable and are not included in the caption "Purchase of property, plant and equipment" in the Consolidated Statements of Cash Flows.  In fiscal 2016, fiscal 2015 and fiscal 2014, capital expenditures totaling $126, $22 and $90, respectively, were financed through the issuance of capital leases.

Accumulated other comprehensive loss

Comprehensive income is comprised of net income and other comprehensive income or loss items, which are accumulated as a separate component of stockholders’ equity.  For the Company, other comprehensive income or loss items include a foreign currency translation adjustment and pension and other postretirement benefit adjustments.

15


 

Fair value measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the "exit price") in an orderly transaction between market participants at the measurement date.  The accounting standard for fair value establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.  Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Level 2 – Valuations determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.

Level 3 –Valuations based on inputs that are unobservable and significant to the overall fair value measurement.  The degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.

The availability of observable inputs can vary and is affected by a wide variety of factors, including, the type of asset/liability, whether the asset/liability is established in the marketplace, and other characteristics particular to the transaction.  To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure.  Therefore, even when market assumptions are not readily available, assumptions are required to reflect those that market participants would use in pricing the asset or liability at the measurement date.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of sales and expenses during the reporting period.  Actual results could differ materially from those estimates.

Accounting and reporting changes

In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), the Securities and Exchange Commission (“SEC”), the Emerging Issues Task Force, the American Institute of Certified Public Accountants or any other authoritative accounting body to determine the potential impact they may have on the Company's consolidated financial statements.

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.”  This guidance establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company’s contracts with customers.  The guidance requires companies to apply a five-step model when recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services.  The guidance also includes a comprehensive set of disclosure requirements regarding revenue recognition.  The guidance allows two methods of adoption:  (1) a full retrospective approach where historical financial information is presented in accordance with the new standard and (2) a modified retrospective approach where the guidance is applied to the most current period presented in the financial statements.  In August 2015, the FASB issued ASU No 2015-14 “Revenue from Contracts with Customers: Deferral of the Effective Date,” which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with earlier application permitted as of annual reporting periods beginning after December 15, 2016.  In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” to clarify the implementation guidance on principal versus agent.  In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts

16


 

with Customers (Topic 606): Identifying Performance Obligations and Licensing,” which clarifies the identifying performance obligations and licensing implementation guidance.  The Company is currently evaluating the impact of adopting these ASU’s and the methods of adoption; however, given the scope of the new standard, the Company is currently unable to provide a reasonable estimate regarding the financial impact or which method of adoption will be elected.  See Note 1 for a description of the Company’s current revenue recognition policy.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory,” which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  This ASU is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.  The Company is currently evaluating the impact that the adoption of this ASU will have on its Consolidated Financial Statements.

In November 2015, the FASB issued guidance related to the balance sheet classification of deferred income taxes.  This guidance simplifies the presentation of deferred income taxes and requires deferred tax liabilities and assets be offset and presented as a single noncurrent amount for all tax-paying components of an entity within a particular tax jurisdiction.  The provisions of the guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.  Earlier application of the guidance is permitted as of the beginning of any interim or annual reporting period and may be applied prospectively or retrospectively to all periods presented.  The provisions of the guidance were adopted by the Company in fiscal 2016, and the Company elected to apply the provisions retrospectively to all periods presented.  The following table presents the impact of applying the provisions retrospectively on individual line items in the Company’s Consolidated Balance Sheet at March 31, 2015:

 

Balance Sheet Caption

 

Before Application

of Guidance

 

 

Reclassification

 

 

After Application

of Guidance

 

Current deferred income tax asset

 

$

647

 

 

$

(647

)

 

$

 

Other assets

 

$

150

 

 

$

(4

)

 

$

146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current deferred income tax liability

 

$

(164

)

 

$

164

 

 

$

 

Long-term deferred income tax liability

 

$

(6,363

)

 

$

487

 

 

$

(5,876

)

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires companies to recognize all leases as assets and liabilities on the consolidated balance sheet.  This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting guidance.  As a result, the effect of leases on the consolidated statement of comprehensive income and a consolidated statement of cash flows is largely unchanged from previous generally accepted accounting principles.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Earlier application is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”  ASU 2016-09 changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows.  ASU 2016-09 is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period and the entity must adopt all of the amendments from ASU 2016-09 in the same period.  The Company is currently evaluating the impact that the adoption of this ASU will have on its Consolidated Financial Statements.

 

Management does not expect any other recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company's consolidated financial statements.

 

 

17


 

Note 2 – Inventories:

Major classifications of inventories are as follows:

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Raw materials and supplies

 

$

3,178

 

 

$

2,763

 

Work in process

 

 

11,615

 

 

 

13,685

 

Finished products

 

 

659

 

 

 

689

 

 

 

 

15,452

 

 

 

17,137

 

Less – progress payments

 

 

4,641

 

 

 

3,143

 

 

 

$

10,811

 

 

$

13,994

 

 

 

Note 3 – Property, Plant and Equipment:

Major classifications of property, plant and equipment are as follows:

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Land

 

$

210

 

 

$

210

 

Buildings and leasehold improvements

 

 

18,774

 

 

 

18,682

 

Machinery and equipment

 

 

28,537

 

 

 

27,749

 

Construction in progress

 

 

70

 

 

 

70

 

 

 

 

47,591

 

 

 

46,711

 

Less – accumulated depreciation and amortization

 

 

28,844

 

 

 

26,899

 

 

 

$

18,747

 

 

$

19,812

 

 

Depreciation expense in fiscal 2016, fiscal 2015, and fiscal 2014 was $2,201, $2,079, and $1,977, respectively.

 

 

Note 4 – Intangible Assets:

Intangible assets are comprised of the following:

 

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Amount

 

At March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

2,700

 

 

$

952

 

 

$

1,748

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles not subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

Permits

 

$

10,300

 

 

$

 

 

$

10,300

 

Tradename

 

 

2,500

 

 

 

 

 

 

2,500

 

 

 

$

12,800

 

 

$

 

 

$

12,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

2,700

 

 

$

772

 

 

$

1,928

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles not subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

Permits

 

$

10,300

 

 

$

 

 

$

10,300

 

Tradename

 

 

2,500

 

 

 

 

 

 

2,500

 

 

 

$

12,800

 

 

$

 

 

$

12,800

 

 

Intangible assets are amortized on a straight line basis over their estimated useful lives.  Intangible amortization expense was $180 in each of fiscal 2016, fiscal 2015 and fiscal 2014.  As of March 31, 2016, amortization expense is estimated to be $180 in each of the fiscal years ending March 31, 2017, 2018, 2019, 2020 and 2021.

18


 

There was no change in goodwill during fiscal 2016 or fiscal 2015.  Goodwill was $6,938 at March 31, 2016 and 2015.

 

 

Note 5 – Product Warranty Liability:

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

 

 

 

Year ended March 31,

 

 

 

2016

 

 

2015

 

Balance at beginning of year

 

$

653

 

 

$

308

 

Expense for product warranties

 

 

336

 

 

 

930

 

Product warranty claims paid

 

 

(303

)

 

 

(585

)

Balance at end of year

 

$

686

 

 

$

653

 

 

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

 

 

Note 6 - Leases:

The Company leases equipment and office space under various operating leases.  Lease expense applicable to operating leases was $677, $596, and $563 in fiscal 2016, fiscal 2015, and fiscal 2014, respectively.

Property, plant and equipment include the following amounts for leases which have been capitalized:

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Machinery and equipment

 

$

280

 

 

$

288

 

Less accumulated amortization

 

 

75

 

 

 

135

 

 

 

$

205

 

 

$

153

 

 

Amortization of machinery and equipment under capital leases amounted to $40, $54 and $72 in fiscal 2016, fiscal 2015, and fiscal 2014, respectively, and is included in depreciation expense.

As of March 31, 2016, future minimum payments required under non-cancelable leases are:

 

 

 

Operating

Leases

 

 

Capital

Leases

 

2017

 

$

580

 

 

$

64

 

2018

 

 

408

 

 

 

62

 

2019

 

 

364

 

 

 

55

 

2020

 

 

353

 

 

 

33

 

2021

 

 

238

 

 

 

18

 

Total minimum lease payments

 

$

1,943

 

 

$

232

 

 

 

 

 

 

 

 

 

 

Less – amount representing interest

 

 

 

 

 

 

20

 

Present value of net minimum lease payments

 

 

 

 

 

$

212

 

 

 

Note 7 - Debt:

Short-Term Debt

The Company and its subsidiaries had no short-term borrowings outstanding at March 31, 2016 and 2015.

On December 2, 2015, the Company entered into a new revolving credit facility agreement with JPMorgan Chase Bank, N.A. that provides a $25,000 line of credit, including letters of credit and bank guarantees, expandable at the Company’s option at any time up to $50,000.  The agreement has a five year term. This facility replaced a similar facility with Bank of America, N.A.

19


 

At the Company’s option, amounts outstanding under the agreement will bear interest at either: (i) a rate equal to the bank’s prime rate; or (ii) a rate equal to LIBOR plus a margin.  The margin is based on the Company’s funded debt to earnings before interest expense, income taxes, depreciation and amortization (“EBITDA”) and may range from 1.75% to .95%.  Amounts available for borrowing under the agreement are subject to an unused commitment fee of between 0.30% and 0.20%, depending on the above ratio.  The bank’s prime rate was 3.50% at March 31, 2016.  The interest rate under the prior facility with Bank of America, N.A. was also the bank’s prime rate which was 3.25% at March 31, 2015.

Outstanding letters of credit under the agreement are subject to a fee of between 1.20% and 0.70%, depending on the Company’s ratio of funded debt to EBITDA.  The agreement allows the Company to reduce the fee on outstanding letters of credit to a fixed rate of .40% by securing outstanding letters of credit with cash and cash equivalents.  At March 31, 2016, all outstanding letters of credit were secured by cash and cash equivalents.  At March 31, 2016, there were $1,749 letters of credit outstanding on the new revolving credit facility and $8,312 with Bank of America, N.A.  Availability under the line of credit was $23,251 at March 31, 2016.

Under the new revolving credit facility, the Company covenants to maintain a maximum funded debt to EBITDA ratio, as defined in such credit facility, of 3.5 to 1.0 and a minimum earnings before interest expense and income taxes (“EBIT") to interest ratio, as defined in such credit facility, of 4.0 to 1.0.  The agreement also provides that the Company is permitted to pay dividends without limitation if it maintains a maximum funded debt to EBITDA ratio equal to or less than 2.0 to 1.0 and permits the Company to pay dividends in an amount equal to 25% of net income if it maintains a funded debt to EBITDA ratio of greater than 2.0 to 1.0.  The Company was in compliance with all such provisions as of and for the year ended March 31, 2016.  Assets with a book value of $104,059 have been pledged to secure borrowings under the credit facility.

On March 24, 2014, the Company entered into a letter of credit facility agreement to further support its international operations.  The agreement provides a $5,000 line of credit to be used for the issuance of letters of credit.  Under the agreement, the Company incurs an annual facility fee of 0.375% of the maximum amount available under the facility and outstanding letters of credit are subject to a fee of between 1.25% and 0.75%, depending on the Company’s ratio of funded debt to EBITDA, as defined in such credit facility.  The facility requires the Company to maintain a maximum funded debt to EBITDA ratio of 3.5 to 1.0 and a minimum EBIT to interest ratio, as defined in such credit facility, of 4.0 to 1.0.  At March 31, 2016 there were $1,921 letters of credit outstanding and availability under the letter of credit facility was $3,079.

Long-Term Debt

The Company and its subsidiaries had long-term capital lease obligations outstanding as follows:

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Capital lease obligations (Note 6)

 

$

212

 

 

$

158

 

Less: current amounts

 

 

55

 

 

 

60

 

Total

 

$

157

 

 

$

98

 

 

With the exception of capital leases, the Company has no long-term debt payment requirements over the next five years as of March 31, 2016.

 

 

Note 8 - Financial Instruments and Derivative Financial Instruments:

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, investments, and trade accounts receivable.  The Company places its cash, cash equivalents, and investments with high credit quality financial institutions, and evaluates the credit worthiness of these financial institutions on a regular basis. Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of customers comprising the Company's customer base and their geographic dispersion.  At March 31, 2016 and 2015, the Company had no significant concentrations of credit risk.

Letters of Credit

The Company has entered into standby letter of credit agreements with financial institutions relating to the guarantee of future performance on certain contracts.  At March 31, 2016 and 2015, the Company was contingently liable on outstanding standby letters of credit aggregating $11,982 and $10,903, respectively.  See Note 7.

20


 

Foreign Exchange Risk Management

The Company, as a result of its global operating and financial activities, is exposed to market risks from changes in foreign exchange rates.  In seeking to minimize the risks and/or costs associated with such activities, the Company may utilize foreign exchange forward contracts with fixed dates of maturity and exchange rates.  The Company does not hold or issue financial instruments for trading or other speculative purposes and only holds contracts with high quality financial institutions.  If the counter-parties to any such exchange contracts do not fulfill their obligations to deliver the contracted foreign currencies, the Company could be at risk for fluctuations, if any, required to settle the obligation.  At March 31, 2016 and 2015, there were no foreign exchange forward contracts held by the Company.

Fair Value of Financial Instruments

The estimates of the fair value of financial instruments are summarized as follows:

Cash and cash equivalents:  The carrying amount of cash and cash equivalents approximates fair value due to the short-term maturity of these instruments and are considered Level 1 assets in the fair value hierarchy.

Investments:  The fair value of investments at March 31, 2016 and 2015 approximated the carrying value and are considered Level 2 assets in the fair value hierarchy.

 

 

Note 9 – Income Taxes:

An analysis of the components of income before income taxes is presented below:

 

 

 

Year ended March 31,

 

 

 

2016

 

 

2015

 

 

2014

 

United States

 

$

8,301

 

 

$

20,799

 

 

$

14,127

 

China

 

 

429

 

 

 

953

 

 

 

583

 

 

 

$

8,730

 

 

$

21,752

 

 

$

14,710

 

 

The provision for income taxes related to income before income taxes consists of:

 

 

 

Year ended March 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

3,795

 

 

$

6,616

 

 

$

5,146

 

State

 

 

54

 

 

 

165

 

 

 

68

 

Foreign

 

 

272

 

 

 

79

 

 

 

362

 

 

 

 

4,121

 

 

 

6,860

 

 

 

5,576

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

(1,319

)

 

 

(46

)

 

 

(761

)

State

 

 

(82

)

 

 

(184

)

 

 

(184

)

Foreign

 

 

(154

)

 

 

173

 

 

 

(240

)

Changes in valuation allowance

 

 

33

 

 

 

214

 

 

 

174

 

 

 

 

(1,522

)

 

 

157

 

 

 

(1,011

)

Total provision for income taxes

 

$

2,599

 

 

$

7,017

 

 

$

4,565

 

 

21


 

The reconciliation of the provision calculated using the U.S. federal tax rate with the provision for income taxes presented in the consolidated financial statements is as follows:

 

 

 

Year ended March 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Provision for income taxes at federal rate

 

$

3,055

 

 

$

7,613

 

 

$

5,149

 

State taxes

 

 

(28

)

 

 

(103

)

 

 

(139

)

Charges not deductible for income tax purposes

 

 

64

 

 

 

79

 

 

 

59

 

Recognition of tax benefit generated by qualified production

   activities deduction

 

 

(245

)

 

 

(382

)

 

 

(403

)

Research and development tax  credits

 

 

(232

)

 

 

(180

)

 

 

(80

)

Valuation allowance

 

 

33

 

 

 

214

 

 

 

174

 

Uncertain tax positions

 

 

 

 

 

 

 

 

(134

)

Other

 

 

(48

)

 

 

(224

)

 

 

(61

)

Provision for income taxes

 

$

2,599

 

 

$

7,017

 

 

$

4,565

 

 

The net deferred income tax liability recorded in the Consolidated Balance Sheets results from differences between financial statement and tax reporting of income and deductions.  A summary of the composition of the Company's net deferred income tax liability follows:

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Depreciation

 

$

(2,352

)

 

$

(2,196

)

Accrued compensation

 

 

247

 

 

 

881

 

Prepaid pension asset

 

 

355

 

 

 

(465

)

Accrued pension liability

 

 

138

 

 

 

121

 

Accrued postretirement benefits

 

 

309

 

 

 

342

 

Compensated absences

 

 

571

 

 

 

629

 

Inventories

 

 

905

 

 

 

(1,042

)

Warranty liability

 

 

242

 

 

 

231

 

Accrued expenses

 

 

702

 

 

 

313

 

Stock-based compensation

 

 

485

 

 

 

500

 

Intangible assets

 

 

(5,159

)

 

 

(5,230

)

New York State investment tax credit

 

 

985

 

 

 

952

 

Other

 

 

11

 

 

 

40

 

 

 

 

(2,561

)

 

 

(4,924

)

Less:  Valuation allowance

 

 

(985

)

 

 

(952

)

Total

 

$

(3,546

)

 

$

(5,876

)

 

 

 

Deferred income taxes include the impact of state investment tax credits of $311, which expire from 2016 to 2030 and state investment tax credits of $674, which have an unlimited carryforward period.

In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the consideration of the weight of both positive and negative evidence, management determined that a portion of the deferred tax assets as of March 31, 2016 and 2015 related to certain state investment tax credits would not be realized, and recorded a valuation allowance of $985 and $952, respectively.

The Company files federal and state income tax returns in several domestic and international jurisdictions.  In most tax jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed.  The Company is subject to U.S. federal examination for tax years 2013 through 2015 and examination in state tax jurisdictions for tax years 2011 through 2015.  The Company is subject to examination in the People’s Republic of China for tax years 2012 through 2015.  The liability for unrecognized tax benefits was $0 at each of March 31, 2016 and 2015.

 

 

22


 

Note 10 – Employee Benefit Plans:

Retirement Plans

The Company has a qualified defined benefit plan covering U.S. employees hired prior to January 1, 2003, which is non-contributory.  Benefits are based on the employee's years of service and average earnings for the five highest consecutive calendar years of compensation in the ten-year period preceding retirement.  The Company's funding policy for the plan is to contribute the amount required by the Employee Retirement Income Security Act of 1974, as amended.

The components of pension (benefit) cost are:

 

 

 

Year ended March 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Service cost during the period

 

$

521

 

 

$

546

 

 

$

576

 

Interest cost on projected benefit obligation

 

 

1,437

 

 

 

1,434

 

 

 

1,359

 

Expected return on assets

 

 

(3,181

)

 

 

(3,033

)

 

 

(2,728

)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized prior service cost

 

 

 

 

4

 

 

4

 

Actuarial loss

 

 

1,174

 

 

580

 

 

 

1,002

 

Net pension (benefit) cost

 

$

(49

)

 

$

(469

)

 

$

213

 

 

The weighted average actuarial assumptions used to determine net pension cost are:

 

 

 

Year ended March 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Discount rate

 

 

3.74

%

 

 

4.46

%

 

 

4.28

%

Rate of increase in compensation levels

 

 

3.00

%

 

 

3.00

%

 

 

3.00

%

Long-term rate of return on plan assets

 

 

8.00

%

 

 

8.00

%

 

 

8.00

%

 

The expected long-term rate of return is based on the mix of investments that comprise plan assets and external forecasts of future long-term investment returns, historical returns, correlations and market volatilities.

The Company does not expect to make any contributions to the plan during fiscal 2017.

Changes in the Company's benefit obligation, plan assets and funded status for the pension plan are presented below:

 

 

 

Year ended March 31,

 

 

 

2016

 

 

2015

 

Change in the benefit obligation

 

 

 

 

 

 

 

 

Projected benefit obligation at beginning of year

 

$

39,052

 

 

$

32,789

 

Service cost

 

 

417

 

 

 

442

 

Interest cost

 

 

1,437

 

 

 

1,434

 

Actuarial loss (gain)

 

 

(402

)

 

 

5,573

 

Benefit payments

 

 

(1,350

)

 

 

(1,186

)

Liability released through annuity purchase

 

 

(1,710

)

 

 

 

Projected benefit obligation at end of year

 

$

37,444

 

 

$

39,052

 

Change in fair value of plan assets

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of year

 

$

40,384

 

 

$

38,548

 

Employer contribution

 

 

 

 

 

55

 

Actual return on plan assets

 

 

(765

)

 

 

2,967

 

Benefit and administrative expense payments

 

 

(1,350

)

 

 

(1,186

)

Annuities purchased

 

 

(1,798

)

 

 

 

Fair value of plan assets at end of year

 

$

36,471

 

 

$

40,384

 

 

 

 

 

 

 

 

 

 

Funded status

 

 

 

 

 

 

 

 

Funded status at end of year

 

$

(973

)

 

$

1,332

 

Amount recognized in the Consolidated Balance Sheets

 

$

(973

)

 

$

1,332

 

 

23


 

The weighted average actuarial assumptions used to determine the benefit obligation are:

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Discount rate

 

 

3.93

%

 

 

3.74

%

Rate of increase in compensation levels

 

 

3.00

%

 

 

3.00

%

 

During fiscal 2016, the pension plan released liabilities for vested benefits of certain participants through the purchase of nonparticipating annuity contracts with a third party insurance company.  As a result of this transaction, the projected benefit obligation and plan assets decreased $1,710 and $1,798, respectively.  The projected benefit obligation is the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated future pay increases.  In fiscal 2015, the mortality assumption changed from the RP 2000 Mortality Table, projected to 2015 and weighted 50% blue collar for males and the RP 2000 Combined Healthy Table for females projected to 2015 to the sex district RP 2014 dollar weighted annuitant and non-annuitant Mortality Table projected to 2020 using scale MP-2014.  This change resulted in an increase to the projected benefit obligation of approximately $2,145.  The accumulated benefit obligation reflects the actuarial present value of benefits attributable to employee service rendered to date, but does not include the effects of estimated future pay increases.  The accumulated benefit obligation as of March 31, 2016 and 2015 was $32,270 and $33,998, respectively.  At March 31, 2016 and 2015, the pension plan was fully funded on an accumulated benefit obligation basis.

Amounts recognized in accumulated other comprehensive loss, net of income tax, consist of:

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Net actuarial loss

 

$

10,662

 

 

$

9,141

 

 

The increase (decrease) in accumulated other comprehensive loss, net of income tax, consists of:

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Net actuarial loss arising during the year

 

$

2,280

 

 

$

3,578

 

Amortization of actuarial loss

 

 

(759

)

 

 

(375

)

Amortization of prior service cost

 

 

 

 

 

(3

)

 

 

$

1,521

 

 

$

3,200

 

 

The estimated net actuarial loss and prior service cost for the pension plan that will be amortized from accumulated other comprehensive loss into net pension cost in fiscal 2017 are $1,351 and $0, respectively.

The following benefit payments, which reflect future service, are expected to be paid:

 

2017

 

$

1,239

 

2018

 

 

1,261

 

2019

 

 

1,270

 

2020

 

 

1,484

 

2021

 

 

1,639

 

2022-2026

 

 

8,896

 

Total

 

$

15,789

 

 

The weighted average asset allocation of the plan assets by asset category is as follows:

 

 

 

 

 

March 31,

 

Asset Category

 

Target Allocation

 

2016

 

 

2015

 

Equity securities

 

50-70%

 

 

67

%

 

 

66

%

Debt securities

 

20-50%

 

 

33

%

 

 

34

%

 

 

 

 

 

100

%

 

 

100

%

 

The investment strategy of the plan is to generate a consistent total investment return sufficient to pay present and future plan benefits to retirees, while minimizing the long-term cost to the Company.  Target allocations for asset categories are used to earn a

24


 

reasonable rate of return, provide required liquidity and minimize the risk of large losses.  Targets are adjusted when considered necessary to reflect trends and developments within the overall investment environment.

The fair values of the Company's pension plan assets at March 31, 2016 and 2015, by asset category, are as follows:

 

 

 

 

 

 

 

Fair Value Measurements Using

 

Asset Category

 

At

March 31, 2016

 

 

Quoted prices in

active markets for

identical assets

(Level 1)

 

 

Significant other

observable inputs

(Level 2)

 

 

Significant

unobservable inputs

(Level 3)

 

Cash

 

$

103

 

 

$

103

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. companies

 

 

20,010

 

 

 

20,010

 

 

 

 

 

 

 

International companies

 

 

4,459

 

 

 

4,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bond funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intermediate-term

 

 

9,520

 

 

 

9,520

 

 

 

 

 

 

 

Short-term

 

 

2,379

 

 

 

2,379

 

 

 

 

 

 

 

 

 

$

36,471

 

 

$

36,471

 

 

$

 

 

$

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

Asset Category

 

At

March 31,  2015

 

 

Quoted prices in

active markets for

identical assets

(Level 1)

 

 

Significant other

observable inputs

(Level 2)

 

 

Significant

unobservable inputs

(Level 3)

 

Cash

 

$

126

 

 

$

126

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. companies

 

 

21,586

 

 

 

21,586

 

 

 

 

 

 

 

International companies

 

 

4,854

 

 

 

4,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bond funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intermediate-term

 

 

11,109

 

 

 

11,109

 

 

 

 

 

 

 

Short-term

 

 

2,709

 

 

 

2,709

 

 

 

 

 

 

 

 

 

$

40,384

 

 

$

40,384

 

 

$

 

 

$

 

 

The fair value of Level 1 pension assets are obtained by reference to the last quoted price of the respective security on the market which it trades.  See Note 1 to the Consolidated Financial Statements.

On February 4, 2003, the Company closed the defined benefit plan to all employees hired on or after January 1, 2003.  In place of the defined benefit plan, these employees participate in the Company’s domestic defined contribution plan.  The Company contributes a fixed percentage of employee compensation to this plan on an annual basis for these employees.  The Company contribution to the defined contribution plan for these employees in fiscal 2016, fiscal 2015 and fiscal 2014 was $315, $294 and $257, respectively.

The Company has a Supplemental Executive Retirement Plan ("SERP") which provides retirement benefits associated with wages in excess of the legislated qualified plan maximums.  Pension expense recorded in fiscal 2016, fiscal 2015, and fiscal 2014 related to this plan was $76, $70 and $70, respectively.  At March 31, 2016 and 2015, the related liability was $391 and $341, respectively.  The current portion of the related liability of $26 and $26 at March 31, 2016 and 2015, respectively, is included in the caption "Accrued Compensation" and the long-term portion is included in “Accrued Pension Liability” in the Consolidated Balance Sheets.

 

The Company has a domestic defined contribution plan (401k) covering substantially all employees.  The Company provides matching contributions equal to 100% of the first 3% of an employee’s salary deferral and 50% of the next 2% percent of an employee’s salary deferral.  Company contributions are immediately vested.  Contributions were $866 in fiscal 2016, $940 in fiscal 2015 and $831 in fiscal 2014.

25


 

Other Postretirement Benefits

In addition to providing pension benefits, the Company has a plan in the U.S. that provides health care benefits for eligible retirees and eligible survivors of retirees.  The Company’s share of the medical premium cost has been capped at $4 for family coverage and $2 for single coverage for early retirees, and $1 for both family and single coverage for regular retirees.

On February 4, 2003, the Company terminated postretirement health care benefits for its U.S. employees.  Benefits payable to retirees of record on April 1, 2003 remained unchanged.

The components of postretirement benefit expense (income) are:

 

 

 

Year ended March 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Interest cost on accumulated benefit obligation

 

$

29

 

 

$

31

 

 

$

33

 

Amortization of prior service benefit

 

 

 

 

 

(106

)

 

 

(166

)

Amortization of actuarial loss

 

 

40

 

 

 

35

 

 

 

46

 

Net postretirement benefit expense (income)

 

$

69

 

 

$

(40

)

 

$

(87

)

 

The weighted average discount rate used to develop the net postretirement benefit cost were 3.11%, 3.59% and 3.26% in fiscal 2016, fiscal 2015 and fiscal 2014, respectively.

Changes in the Company's benefit obligation, plan assets and funded status for the plan are as follows:

 

 

 

Year ended March 31,

 

 

 

2016

 

 

2015

 

Change in the benefit obligation

 

 

 

 

 

 

 

 

Projected benefit obligation at beginning of year

 

$

968

 

 

$

951

 

Interest cost

 

 

29

 

 

 

31

 

Actuarial loss (gain)

 

 

(38

)

 

 

75

 

Benefit payments

 

 

(84

)

 

 

(89

)

Projected benefit obligation at end of year

 

$

875

 

 

$

968

 

 

Change in fair value of plan assets

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of year

 

$

 

 

$

 

Employer contribution

 

 

84

 

 

 

89

 

Benefit payments

 

 

(84

)

 

 

(89

)

Fair value of plan assets at end of year

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Funded status

 

 

 

 

 

 

 

 

Funded status at end of year

 

$

(875

)

 

$

(968

)

Amount recognized in the Consolidated Balance Sheets

 

$

(875

)

 

$

(968

)

 

The weighted average actuarial assumptions used to develop the accrued postretirement benefit obligation were:

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Discount rate

 

 

3.16

%

 

 

3.11

%

Medical care cost trend rate

 

 

8.00

%

 

 

8.00

%

 

The medical care cost trend rate used in the actuarial computation ultimately reduces to 5% in 2022 and subsequent years.  This was accomplished using 0.5% decrements for the years ended March 31, 2016 through 2022.

The current portion of the accrued postretirement benefit obligation of $88 and $92, at March 31, 2016 and 2015, respectively, is included in the caption "Accrued Compensation" and the long-term portion is separately presented in the Consolidated Balance Sheets.

26


 

Amounts recognized in accumulated other comprehensive loss, net of income tax, consist of:

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Net actuarial loss

 

$

270

 

 

$

321

 

 

The increase (decrease) in accumulated other comprehensive loss, net of income tax, consists of:

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Net actuarial loss (gain) arising during the year

 

$

(26

)

 

$

48

 

Amortization of actuarial loss

 

 

(25

)

 

 

(23

)

Amortization of prior service cost

 

 

 

 

 

69

 

 

 

$

(51

)

 

$

94

 

 

The estimated net actuarial loss and prior service cost for the other postretirement benefit plan that will be amortized from accumulated other comprehensive loss into net postretirement benefit income in fiscal 2017 are $39 and $0, respectively.

The following benefit payments are expected to be paid during the fiscal years ending March 31:

 

2017

 

$

88

 

2018

 

 

84

 

2019

 

 

81

 

2020

 

 

77

 

2021

 

 

73

 

2022-2026

 

 

304

 

Total

 

$

707

 

 

Assumed medical care cost trend rates could have a significant effect on the amounts reported for the postretirement benefit plan.  However, due to the caps imposed on the Company’s share of the premium costs, a one percentage point change in assumed medical care cost trend rates would not have a significant effect on the total service and interest cost components or the postretirement benefit obligation.

Employee Stock Ownership Plan

The Company has a noncontributory Employee Stock Ownership Plan ("ESOP") that covers substantially all employees in the U.S.  There were 202 and 233 shares in the ESOP at March 31, 2016 and 2015, respectively.  There were no Company contributions to the ESOP in fiscal 2016, fiscal 2015 or fiscal 2014.  Dividends paid on allocated shares accumulate for the benefit of the employees who participate in the ESOP.

Self-Insured Medical Plan

Effective January 1, 2014, the Company commenced self-funding the medical insurance coverage provided to its U.S. based employees.  The Company has obtained a stop loss insurance policy in an effort to limit its exposure to claims.  The Company has specific stop loss coverage per employee for claims incurred during the year exceeding $100 per employee with annual maximum aggregate stop loss coverage per employee of $1,000.  The Company also has total plan annual maximum aggregate stop loss coverage of $2,602.  The liability of $176 and $446 on March 31, 2016 and 2015, respectively, related to the self-insured medical plan is primarily based upon claim history and is included in the caption “Accrued Compensation” in the Consolidated Balance Sheets.

 

 

Note 11 - Stock Compensation Plans:

The Amended and Restated 2000 Graham Corporation Incentive Plan to Increase Shareholder Value 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 250 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.

27


 

In fiscal 2016, fiscal 2015 and fiscal 2014, 34, 30 and 32 shares, respectively, of restricted stock were awarded.  Restricted shares of 15, 12 and 14 granted to officers in fiscal 2016, fiscal 2015 and fiscal 2014, 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 12, 11, and 12 granted to officers and key employees in fiscal 2016, fiscal 2015, and fiscal 2014 respectively, vest 33⅓% per year over a three-year term.  The restricted shares granted to directors of 7, 7 and 6 in fiscal 2016, fiscal 2015 and fiscal 2014, respectively, vest 100% on the anniversary of the grant date.  The Company recognizes compensation cost over the period the shares vest.

During fiscal 2016, fiscal 2015, and fiscal 2014, the Company recognized $653, $598, and $582, respectively, of stock-based compensation cost related to stock option and restricted stock awards, and $230, $210 and $205, respectively, of related tax benefits.

The Company received cash proceeds from the exercise of stock options of $97, $47 and $581 in fiscal 2016, fiscal 2015 and fiscal 2014, respectively.  In fiscal 2016, fiscal 2015 and fiscal 2014, the Company recognized a $5, $197 and $268, respectively, increase in capital in excess of par value for the income tax benefit realized upon exercise of stock options and vesting of restricted shares in excess of the tax benefit amount recognized pertaining to the fair value of stock awards treated as compensation expense.

The following table summarizes information about the Company's stock option awards during fiscal 2016, fiscal 2015 and fiscal 2014:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Shares

 

 

Average

 

 

Weighted

 

Aggregate

 

 

 

Under

 

 

Exercise

 

 

Average Remaining

 

Intrinsic

 

 

 

Option

 

 

Price

 

 

Contractual Term

 

Value

 

Outstanding at April 1, 2013

 

 

146

 

 

$

16.04

 

 

 

 

 

 

 

Exercised

 

 

(52

)

 

 

11.31

 

 

 

 

 

 

 

Forfeited

 

 

(1

)

 

 

19.15

 

 

 

 

 

 

 

Outstanding at March 31, 2014

 

 

93

 

 

 

18.60

 

 

 

 

 

 

 

Exercised

 

 

(2

)

 

 

19.66

 

 

 

 

 

 

 

Forfeited

 

 

(1

)

 

 

18.65

 

 

 

 

 

 

 

Outstanding at March 31, 2015

 

 

90

 

 

 

18.57

 

 

 

 

 

 

 

Exercised

 

 

(7

)

 

 

13.30

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2016

 

 

83

 

 

 

19.03

 

 

4.37 years

 

$

238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested or expected to vest at March  31, 2016

 

 

83

 

 

 

19.03

 

 

4.37 years

 

 

238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2016

 

 

83

 

 

 

19.03

 

 

4.37 years

 

 

238

 

 

The following table summarizes information about stock options outstanding at March 31, 2016:

 

Exercise Price

 

Options Outstanding

at March 31, 2016

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining

Contractual Life

(in years)

 

$  6.90-  7.98

 

 

6

 

 

$

7.00

 

 

 

1.08

 

12.52-15.25

 

 

23

 

 

 

14.64

 

 

 

3.19

 

18.65-21.19

 

 

42

 

 

 

18.94

 

 

 

6.06

 

30.88-44.50

 

 

12

 

 

 

33.04

 

 

 

2.20

 

6.90-44.50

 

 

83

 

 

 

19.03

 

 

 

4.37

 

 

The total intrinsic value of the stock options exercised during fiscal 2016, fiscal 2015 and fiscal 2014 was $71, $32 and $1,221, respectively.  As of March 31, 2016, there was $1,063 of total unrecognized stock-based compensation expense related to non-vested stock options and restricted stock.  The Company expects to recognize this expense over a weighted average period of 1.44 years.

The outstanding options expire between June 2016 and May 2022.  Options, stock awards and performance awards available for future grants were 377 at March 31, 2016.

28


 

The following table summarizes information about the Company's restricted stock awards during fiscal 2016, fiscal 2015 and fiscal 2014:

 

 

 

Restricted Stock

 

 

Weighted Average

Grant Date Fair Value

 

 

Aggregate

Intrinsic Value

 

Non-vested at April 1, 2013

 

 

61

 

 

$

18.51

 

 

 

 

 

Granted

 

 

32

 

 

 

24.00

 

 

 

 

 

Vested

 

 

(24

)

 

 

17.20

 

 

 

 

 

Forfeited

 

 

(5

)

 

 

15.81

 

 

 

 

 

Non-vested at March 31, 2014

 

 

64

 

 

 

21.93

 

 

 

 

 

Granted

 

 

30

 

 

 

28.36

 

 

 

 

 

Vested

 

 

(15

)

 

 

23.04

 

 

 

 

 

Forfeited

 

 

(9

)

 

 

21.56

 

 

 

 

 

Non-vested at March 31, 2015

 

 

70

 

 

 

24.47

 

 

 

 

 

Granted

 

 

34

 

 

 

23.13

 

 

 

 

 

Vested

 

 

(28

)

 

 

23.23

 

 

 

 

 

Forfeited

 

 

(6

)

 

 

19.75

 

 

 

 

 

Non-vested at March 31, 2016

 

 

70

 

 

 

25.03

 

 

$

 

 

During fiscal 2014, the Company terminated its Long-Term Incentive Plan, which provided for awards of share equivalent units (“SEUs”) for outside directors based upon the Company's performance.  Upon termination, the final value of the share equivalent units was determined and the related share equivalent units were cancelled.  The liability at March 31, 2016 and 2015 was $0 and $158, respectively.  During fiscal 2016 and fiscal 2015, $158 and $157, respectively, was paid to the participating directors.

The Company has an Employee Stock Purchase Plan (the "ESPP"), which allows eligible employees to purchase shares of the Company's common stock on the last day of a six-month offering period at a purchase price equal to the lesser of 85% of the fair market value of the common stock on either the first day or the last day of the offering period.  A total of 200 shares of common stock may be purchased under the ESPP.  In fiscal 2016, fiscal 2015 and fiscal 2014, 16, 12 and 16 shares, respectively, were issued from treasury stock to the ESPP for the offering periods in each of the fiscal years.  During fiscal 2016, fiscal 2015 and fiscal 2014, the Company recognized stock-based compensation cost of $44, $55 and $57, respectively, related to the ESPP and $16, $19 and $20, respectively, of related tax benefits.  The Company recognized a $1, $3 and $3 increase in capital in excess of par value for the income tax benefit realized from disqualifying dispositions in excess of the tax benefit amount recognized pertaining to the compensation expense recorded in fiscal 2016, fiscal 2015 and fiscal 2014, respectively.

 

 

Note 12 – Changes in Accumulated Other Comprehensive Loss:

The changes in accumulated other comprehensive loss by component for fiscal 2016 and fiscal 2015 are:

 

 

 

Pension and Other Postretirement

Benefit Items

 

 

Foreign

Currency

Items

 

 

Total

 

Balance at April 1, 2014

 

$

(6,168

)

 

$

403

 

 

$

(5,765

)

Other comprehensive income before reclassifications

 

 

(3,626

)

 

 

3

 

 

 

(3,623

)

Amounts reclassified from accumulated other comprehensive

   loss

 

 

332

 

 

 

 

 

 

332

 

Net current-period other comprehensive income

 

 

(3,294

)

 

 

3

 

 

 

(3,291

)

Balance at March 31, 2015

 

 

(9,462

)

 

 

406

 

 

 

(9,056

)

Other comprehensive income before reclassifications

 

 

(2,255

)

 

 

(150

)

 

 

(2,405

)

Amounts reclassified from accumulated other comprehensive

   loss

 

 

785

 

 

 

 

 

 

785

 

Net current-period other comprehensive income

 

 

(1,470

)

 

 

(150

)

 

 

(1,620

)

Balance at March 31, 2016

 

$

(10,932

)

 

$

256

 

 

$

(10,676

)

 

29


 

The reclassifications out of accumulated other comprehensive loss by component are as follows:

Year ended March 31, 2016

 

Details about Accumulated Other

Comprehensive Loss Components

 

Amounts Reclassified from

Accumulated Other

Comprehensive Loss

 

 

 

Affected Line Item in the

Consolidated Statements of

Operations

Pension and other postretirement benefit items:

 

 

 

 

 

 

 

Amortization of unrecognized prior service

   benefit

 

$

 

(1)

 

 

Amortization of actuarial loss

 

 

(1,214

)

(1)

 

 

 

 

 

(1,214

)

 

 

Income before provision for income taxes

 

 

 

(429

)

 

 

Provision for income taxes

 

 

$

(785

)

 

 

Net income

 

Year ended March 31, 2015

 

Details about Accumulated Other

Comprehensive Loss Components

 

Amounts Reclassified from

Accumulated Other

Comprehensive Loss

 

 

 

Affected Line Item in the

Consolidated Statements of

Operations

Pension and other postretirement benefit items:

 

 

 

 

 

 

 

Amortization of unrecognized prior service

   benefit

 

$

102

 

(1)

 

 

Amortization of actuarial loss

 

 

(616

)

(1)

 

 

 

 

 

(514

)

 

 

Income before provision for income taxes

 

 

 

(182

)

 

 

Provision for income taxes

 

 

$

(332

)

 

 

Net income

 

(1)

These accumulated other comprehensive loss components are included within the computation of net periodic pension and other postretirement benefit costs.  See Note 10.

 

 

Note 13 - Segment Information:

The Company has one reporting segment as its operating segments meet the requirement for aggregation.  The Company and its operating subsidiaries design and manufacture heat transfer and vacuum equipment for the chemical, petrochemical, refining and electric power generating markets.  Energy Steel supplies components and raw materials for the nuclear power generating market.  Heat transfer equipment includes surface condensers, Heliflows, water heaters and various types of heat exchangers.  Vacuum equipment includes steam jet ejector vacuum systems and liquid ring vacuum pumps.  These products are sold individually or combined into package systems.  The Company also services and sells spare parts for its equipment.

Net sales by product line for the following fiscal years are:

 

 

 

Year ended March 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Heat transfer equipment

 

$

31,479

 

 

$

58,224

 

 

$

37,086

 

Vacuum equipment

 

 

28,323

 

 

 

28,698

 

 

 

27,236

 

All other

 

 

30,237

 

 

 

48,247

 

 

 

37,896

 

Net sales

 

$

90,039

 

 

$

135,169

 

 

$

102,218

 

 

30


 

The breakdown of net sales by geographic area for the following fiscal years is:

 

 

 

Year ended March 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

 

Africa

 

$

112

 

 

$

237

 

 

$

152

 

Asia

 

 

8,859

 

 

 

11,253

 

 

 

11,486

 

Australia & New Zealand

 

 

230

 

 

 

330

 

 

 

307

 

Canada

 

 

8,702

 

 

 

15,807

 

 

 

11,419

 

Central America

 

 

36

 

 

 

1,772

 

 

 

3,210

 

Europe

 

 

856

 

 

 

943

 

 

 

2,091

 

Mexico

 

 

620

 

 

 

407

 

 

 

728

 

Middle East

 

 

11,039

 

 

 

10,155

 

 

 

4,350

 

South America

 

 

2,558

 

 

 

7,866

 

 

 

4,625

 

U.S.

 

 

57,027

 

 

 

86,399

 

 

 

63,850

 

Net sales

 

$

90,039

 

 

$

135,169

 

 

$

102,218

 

 

The final destination of products shipped is the basis used to determine net sales by geographic area.  No sales were made to the terrorist sponsoring nations of Sudan, Iran, or Syria.

There were no sales to a single customer that amounted to 10% or more of total consolidated net sales in fiscal 2016, fiscal 2015 or fiscal 2014.

 

 

Note 14 – Restructuring Charge:

In fiscal 2015, the Company eliminated certain director, management, office and manufacturing positions.  As a result, a restructuring charge of $1,718 was recognized, which included severance costs.  This charge is included in the caption “Restructuring Charge” in the fiscal 2015 Consolidated Statement of Operations.  A reconciliation of the changes in the restructuring reserve is as follows:

 

 

 

Year ended

March 31, 2016

 

 

Year ended

March 31, 2015

 

Balance at beginning of year

 

$

1,718

 

 

$

 

(Income) expense for restructuring

 

 

(3

)

 

 

1,718

 

Amounts paid for restructuring

 

 

(1,641

)

 

 

 

Balance at end of year

 

$

74

 

 

$

1,718

 

 

The liability of $74 at March 31, 2016 and the current portion of the liability of $1,594 at March 31, 2015 are included in the caption “Accrued Compensation” in the Consolidated Balance Sheets.  The long-term portion of $124 at March 31, 2015 is separately presented in the Consolidated Balance Sheet.

 

 

NOTE 15 – Other Income:

During fiscal 2016, certain orders from customers were cancelled. The contracts for the cancelled orders included provisions that entitled the Company to cancellation charges. The amount of the cancellation charges were negotiated and settled with the customers. This income, net of costs incurred on the contracts, of $1,789 is presented in the caption “Other Income” in the fiscal 2016 Consolidated Statement of Operations.

 

 

NOTE 16 – Purchase of Treasury Stock:

On January 29, 2015, the Company’s Board of Directors authorized a stock repurchase program.  Under the stock repurchase program the Company is permitted to repurchase up to $18,000 of its common stock either in the open market or through privately negotiated transactions. Cash on hand has been used to fund all stock repurchases under the program.  For the year ended March 31, 2016, the Company had purchased 539 shares at an aggregate cost of $9,441 under this program. No shares were purchased under this program in fiscal 2015.

 

 

31


 

Note 17– Commitments and Contingencies:

The Company has been named as a defendant in lawsuits alleging personal injury from exposure to asbestos allegedly contained in, or accompanying, products made by the Company. The Company is a co-defendant with numerous other defendants in these lawsuits and intends to vigorously defend itself against these claims. The claims in the Company’s current lawsuits are similar to those made in previous asbestos suits that named the Company as a 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 immaterial amounts.

As of March 31, 2016, the Company was subject to the claims noted above, as well as other legal proceedings and potential claims that have arisen in the ordinary course of business.

Although the outcome of the lawsuits, legal proceedings or potential claims to which the Company is, or may become, a party to cannot be determined and an estimate of the reasonably possible loss or range of loss cannot be made, management does not believe that the outcomes, either individually or in the aggregate, will have a material effect on the Company’s results of operations, financial position or cash flows.

 

 

Note 18 - Quarterly Financial Data (Unaudited):

A capsule summary of the Company's unaudited quarterly results for fiscal 2016 and fiscal 2015 is presented below:

 

 

 

First

 

 

Second

 

 

Third

 

 

Fourth

 

 

 

Total

 

Year ended March 31, 2016

 

Quarter

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

 

 

Year

 

Net sales

 

$

27,617

 

 

$

22,798

 

 

$

17,323

 

 

$

22,301

 

 

 

$

90,039

 

Gross profit

 

 

8,037

 

 

 

7,135

 

 

 

3,524

 

 

 

4,559

 

 

 

 

23,255

 

Net income

 

 

2,361

 

 

 

1,976

 

 

 

1,274

 

 

 

520

 

 

 

 

6,131

 

Per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

.23

 

 

$

.20

 

 

$

.13

 

 

$

.05

 

 

 

$

0.61

 

Diluted

 

$

.23

 

 

$

.20

 

 

$

.13

 

 

$

.05

 

 

 

$

0.61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market price range of common stock

 

$19.82-25.25

 

 

$15.71-20.60

 

 

$15.63-18.88

 

 

$14.39-20.24

 

 

 

$14.39-25.25

 

 

 

 

First

 

 

Second

 

 

Third

 

 

Fourth

 

 

 

Total

 

 

Year ended March 31, 2015

 

Quarter

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

 

 

Year

 

 

Net sales

 

$

28,502

 

 

$

35,566

 

 

$

33,646

 

 

$

37,455

 

 

 

$

135,169

 

 

Gross profit

 

 

7,932

 

 

 

10,984

 

 

 

10,103

 

 

 

12,785

 

 

 

 

41,804

 

 

Net income

 

 

2,392

 

 

 

4,186

 

 

 

3,992

 

 

 

4,165

 

(1)

 

 

14,735

 

(1)

Per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

.24

 

 

$

.41

 

 

$

.39

 

 

$

.41

 

 

 

$

1.46

 

 

Diluted

 

$

.24

 

 

$

.41

 

 

$

.39

 

 

$

.41

 

 

 

$

1.45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market price range of common stock

 

$26.20-34.88

 

 

$27.99-35.35

 

 

$26.06-34.65

 

 

$20.58-28.86

 

 

 

$20.58-35.35

 

 

 

(1)

In the fourth quarter of fiscal 2015, the Company recognized a $1,718 restructuring charge.   As a result, net income includes the restructuring charge, net of tax, of $1,164.

 

 

32


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Graham Corporation

Batavia, New York

We have audited the accompanying consolidated balance sheets of Graham Corporation and subsidiaries (the “Company”) as of March 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Graham Corporation and subsidiaries as of March 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of March 31, 2016, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 1, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

 

/s/DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Rochester, New York

June 1, 2016

 

33


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Graham Corporation

Batavia, New York

 

We have audited the internal control over financial reporting of Graham Corporation and subsidiaries (the “Company”) as of March 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A of its Annual Report on Form 10-K for the year ended March 31, 2016. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2016, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and consolidated financial statement schedule as of and for the year ended March 31, 2016 of the Company and our reports dated June 1, 2016 expressed an unqualified opinion on those consolidated financial statements and consolidated financial statement schedule.

 

/s/DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Rochester, New York

June 1, 2016

 

 

 

34


 

Part IV

Item 15.

Exhibits, Financial Statement Schedules

We have filed our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K and have listed such financial statements in the Index to Financial Statements included in Item 8.  In addition, the financial statement schedule entitled “Schedule II - Valuation and Qualifying Accounts” is filed as part of this Annual Report on Form 10-K under this Item 15.

All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and notes thereto.

The exhibits filed as part of this Annual Report on Form 10-K are listed in the Index to Exhibits following the signature page of this Form 10-K.

 

35


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Graham Corporation

Batavia, New York

We have audited the consolidated financial statements of Graham Corporation and subsidiaries (the "Company") as of March 31, 2016 and 2015, and for each of the three years in the period ended March 31, 2016, and the Company's internal control over financial reporting as of March 31, 2016, and have issued our reports thereon dated June 1, 2016; such consolidated financial statements and reports are included in this Form 10-K. Our audits also included the consolidated financial statement schedule of the Company listed in Item 15. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

/s/DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Rochester, New York

June 1, 2016

 

 

36


 

GRAHAM CORPORATION AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

(In Thousands)

 

 

 

Balance at

 

 

Charged to

 

 

Charged to

 

 

 

 

 

 

Balance at

 

 

 

Beginning

 

 

Costs and

 

 

Other

 

 

 

 

 

 

End of

 

Description

 

of Period

 

 

Expenses

 

 

Accounts

 

 

Deductions

 

 

Period

 

Year ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserves deducted from the asset to which they apply:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for doubtful accounts receivable

 

$

62

 

 

$

38

 

 

$

 

 

$

(9

)

 

$

91

 

Reserves included in the balance sheet caption "accrued

   expenses"

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product warranty liability

 

$

653

 

 

$

336

 

 

$

 

 

$

(303

)

 

$

686

 

Reserves included in the balance sheet caption "accrued

   compensation"

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring reserve

 

$

1,718

 

 

$

(3

)

 

$

 

 

$

(1,641

)

 

$

74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserves deducted from the asset to which they apply:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for doubtful accounts receivable

 

$

46

 

 

$

24

 

 

$

 

 

$

(8

)

 

$

62

 

Reserves included in the balance sheet caption "accrued

   expenses"

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product warranty liability

 

$

308

 

 

$

930

 

 

$

 

 

$

(585

)

 

$

653

 

Reserves included in the balance sheet caption "accrued

   compensation"

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring reserve

 

$

 

 

$

1,718

 

 

$

 

 

$

 

 

$

1,718

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserves deducted from the asset to which they apply:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for doubtful accounts receivable

 

$

33

 

 

$

19

 

 

$

 

 

$

(6

)

 

$

46

 

Reserves included in the balance sheet caption "accrued

   expenses"

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product warranty liability

 

$

408

 

 

$

125

 

 

$

 

 

$

(225

)

 

$

308

 

 

 

37


 

INDEX TO EXHIBITS

 

(3)

Articles of Incorporation and By-Laws

 

 

 

3.1

Certificate of Incorporation of Graham Corporation, as amended, is incorporated herein by reference from Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008.  

 

 

 

 

3.2

Amended and Restated By-laws of Graham Corporation is incorporated herein by reference from Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2015.

 

 

 

(10)

Material Contracts

 

 

#

10.1

Long-Term Stock Ownership Plan of Graham Corporation is incorporated herein by reference from Appendix A to the Company’s Proxy Statement for its 2000 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on June 30, 2000.

 

 

 

#

10.2

Graham Corporation Policy Statement for U.S. Foreign Service Employees is incorporated herein by reference from Exhibit 99.1 to the Company's Current Report on Form 8-K dated March 27, 2006.

 

 

 

#

10.3

Employment Agreement between Graham Corporation and James R. Lines executed July 27, 2006 with an effective date of August 1, 2006, is incorporated herein by reference from Exhibit 99.1 to the Company's Current Report on Form 8-K dated July 27, 2006.

 

 

 

#

10.4

Amended and Restated 2000 Graham Corporation Incentive Plan to Increase Shareholder Value is incorporated herein by reference from Appendix A to the Company's Proxy Statement for its 2006 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on June 23, 2006.

 

 

 

#

10.5

Employment Agreement between Graham Corporation and Alan E. Smith executed August 1, 2007 with an effective date of July 30, 2007, is incorporated herein by reference from Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended March 31, 2008.

 

 

 

#

10.6

Form of Director Non-Qualified Stock Option Agreement is incorporated herein by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008.

 

 

 

#

10.7

Amendment to Employment Agreement dated as of December 31, 2008 by and between Graham Corporation and James R. Lines is incorporated herein by reference from Exhibit 99.1 to the Company's Current Report on Form 8-K dated December 31, 2008.

 

 

 

#

10.8

Amendment to Employment Agreement dated as of December 31, 2008 by and between Graham Corporation and Alan E. Smith is incorporated herein by reference from Exhibit 99.2 to the Company's Current Report on Form 8-K dated December 31, 2008.

 

 

 

#

10.9

Graham Corporation Annual Stock-Based Incentive Award Plan for Senior Executives is incorporated herein by reference from Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended March 31, 2009.

 

 

 

#

10.10

Graham Corporation Annual Executive Cash Bonus Program is incorporated herein by reference from Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended March 31, 2009.

 

 

 

#

10.11

Form of Director Restricted Stock Agreement is incorporated herein by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009.

 

 

 

#

10.12

Form of Employee Non-Qualified Stock Option Agreement is incorporated herein by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009.

 

 

 

#

10.13

Form of Employee Time-Vested Restricted Stock Agreement is incorporated herein by reference from Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013.

 

 

 

#

10.14

Form of Indemnification Agreement between Graham Corporation and each of its Directors and Officers is incorporated herein by reference from Exhibit 99.2 to the Company's Current Report on Form 8-K dated January 29, 2010.

 

 

 

#

10.15

Form of Employee Performance-Vested Restricted Stock Agreement is incorporated herein by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013.

 

 

 

#

10.16

Amended and Restated Employment Agreement between Graham Corporation and Jeffrey F. Glajch executed and effective on July 29, 2010 is incorporated herein by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010.

 

 

.

38


 

 

10.17

Policy Statement on Stockholder Rights Plans is incorporated herein by reference from Exhibit 99.1 to the Company's Current Report on Form 8-K dated September 9, 2010.

 

 

 

#

10.18

Compensation information, including information regarding restricted stock grants made to the Company’s named executive officers under the Amended and Restated Graham Corporation Incentive Plan to Increase Shareholder Value and named executive officer cash bonus information, previously filed on the Company’s Current Report on Form 8-K dated May 28, 2015, is incorporated herein by reference.

 

 

 

#

10.19

Compensation information regarding named executive officer base salaries previously filed on the Company’s Current Report on Form 8-K dated March 23, 2016 is incorporated herein by reference.

 

 

 

#

10.20

Graham Corporation Supplemental Executive Retirement Plan is incorporated herein by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012.

 

 

 

#

10.21

Employment Agreement between Graham Corporation and Jennifer R. Condame executed and effective on July 25, 2013 is incorporated herein by reference from Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013.  

 

10.22

Continuing Letter of Credit Facility dated March 24, 2014 between Graham Corporation and HSBC Bank, USA, National Association is incorporated herein by reference from Exhibit 99.2 to the Company’s Current Report on Form 8-K dated March 20, 2014.

 

 

 

10.23

Letter Agreement dated March 24, 2014, with respect to the Continuing Letter of Credit Facility dated March 24, 2014, between Graham Corporation and HSBC Bank, USA, National Association is incorporated herein by reference from Exhibit 99.3 to the Company’s Current Report on Form 8-K dated March 20, 2014.

 

 

 

 

10.24

Credit Agreement between the Company and JPMorgan Chase Bank, N.A., dated December 2, 2015 is incorporated herein by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2015.

 

 

 

 

10.25

Revolving Credit Note between the Company and JPMorgan Chase Bank, N.A., dated December 2, 2015 is incorporated herein by reference from Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2015.

 

 

 

 

10.26

Pledge and Security Agreement between the Company and JPMorgan Chase Bank, N.A., dated December 2, 2015 is incorporated herein by reference from Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2015.

 

 

 

 

10.27

Trademark Security Agreement between the Company and JPMorgan Chase Bank, N.A., dated December 2, 2015 is incorporated herein by reference from Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2015.

 

 

 

 

10.28

Patent Security Agreement between the Company and JPMorgan Chase Bank, N.A., dated December 2, 2015 is incorporated herein by reference from Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2015.

 

 

(11)

Statement re computation of per share earnings

 

 

 

 

Computation of per share earnings is included in Note 1 of the Notes to the Consolidated Financial Statements contained in this Annual Report on Form 10-K.

 

 

(14)

Code of Ethics

 

 

 

14.1

Graham Corporation Code of Business Conduct and Ethics, as amended and restated, is incorporated herein by reference from Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2014.

 

 

 

(21)

Subsidiaries of the registrant

 

 

 

*

21.1

Subsidiaries of the registrant

 

 

 

(23)

Consents of Experts and Counsel

 

 

 

**

23.1

Consent of Deloitte & Touche LLP, dated June 1, 2016

**

23.2

Consent of Deloitte & Touche LLP, dated February 8, 2017

 

 

 

39


 

(31)

Rule 13a-14(a)/15d-14(a) Certifications

 

 

 

**

31.1

Certification of Principal Executive Officer

 

 

 

**

31.2

Certification of Principal Financial Officer

 

 

 

(32)

Section 1350 Certifications

 

 

 

**

32.1

Section 1350 Certifications

 

 

 

(101)

Interactive Date File

 

 

 

*

101.INS

XBRL Instance Document

 

 

 

*

101.SCH

XBRL Taxonomy Extension Schema Document

 

 

 

*

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

*

101.DEF

XBRL Taxonomy Definitions Linkbase Document

 

 

 

*

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

*

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

*

  Previously filed.

**

  Exhibits filed with this report.

#

  Management contract or compensatory plan.

 

 

40


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

GRAHAM CORPORATION

 

 

 

February 8, 2017

By:

/s/ Jeffrey F.  Glajch

 

 

Jeffrey F. Glajch

 

 

Vice President-Finance & Administration,

 

 

Chief Financial Officer and Corporate Secretary

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

41