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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED MARCH 31, 2001.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 1-8462
GRAHAM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 16-1194720
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
20 FLORENCE AVENUE, BATAVIA, NEW YORK 14020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE -- 716-343-2216
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK (PAR VALUE $.10) AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF CLASS
COMMON STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark 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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of June 4, 2001 was $19,948,732.
As of June 4, 2001, there were outstanding 1,635,142 shares of common
stock, $.10 par value. As of June 4, 2001, there were outstanding 1,635,142
common stock purchase rights.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Notice of Meeting and Proxy Statement for the 2001 Annual Meeting of
Stockholders is incorporated by reference into Part III of this filing.
An Exhibit Index is located at page 35 of this filing under the sequential
numbering system prescribed by Rule 0-3(b) of the Act.
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Graham Corporation (the "Company" or the "Registrant") is a Delaware
company incorporated in 1983. It is the successor to Graham Manufacturing Co.,
Inc., which was incorporated in 1936. The Company's business consists of two
segments, one operated by the Company in the United States and one operated by
its indirectly wholly-owned subsidiary in the United Kingdom.
UNITED STATES OPERATIONS
During the Fiscal Year ended March 31, 2001 ("FY 2000-2001") the Company's
U.S. operations consisted of its engineering and manufacturing business in
Batavia, NY.
The Company is a well-recognized supplier of steam jet ejector vacuum
systems, surface condensers for steam turbines, liquid ring vacuum pumps and
compressors, dry pumps and various types of heat exchangers such as Heliflow and
plate and frame exchangers. It possesses expertise in combining these various
products into packaged systems for sale to its customers in a variety of
industrial markets, including oil refining, chemical, petrochemical, power, pulp
and paper, other process applications, and shipbuilding.
FY 2000-2001 U.S. sales were $40.7 million, an increase of 16% from the
previous fiscal year.
New orders in FY 2000-2001 were $42.5 million, down 3% from the previous
fiscal year. Year end backlog stood at $25.5 million, compared to $23.7 million
on March 31, 2000 and $14.6 million on March 31, 1999. This increase mainly was
due to sales to the power generating and marine application markets, two areas
which the Company has targeted for increased sales. The perceived need for
additional power generating capacity in the United States offers a potential for
significant sales to this market for the next decade.
Similarly, the situation of domestic petroleum refineries running at or
near capacity offers a potential for plant expansions and possible construction
of new refineries, either of which will increase the demand for products in the
nature of those manufactured by the Company. However, significant capital
expenditures in the refinery business have not yet materialized.
Investments in plants producing ethylene and its derivative remain largely
dormant, in consequence of existing over-capacity in that industry. Declining
earnings in the chemical industry resulted in a dampening of new orders for the
Company in that sector.
The Company's U.S. export sales represented 31.9% of U.S. sales in FY
2000-2001, compared to 29.8% of U.S. sales in the previous year. Export sales
reflected a prolonged recession in Asia and Latin America. However, the Asian
and Latin American markets for the Company's products have demonstrated early
signs of recovery. Now that oil prices appear to have stabilized and significant
mergers in the oil industry have been completed, the consensus in the industry
is that opportunities in the refinery markets are expected to increase.
The Company had 289 employees in the United States as of March 31, 2001.
UNITED KINGDOM OPERATIONS
During FY 2000-2001, the Company's U.K. operations were undertaken by its
indirectly wholly-owned subsidiary, Graham Precision Pumps Limited (GPPL) in
Congleton, Cheshire, England. GPPL is wholly-owned by Graham Vacuum & Heat
Transfer Limited, which in turn is wholly-owned by the Company. Graham Vacuum
and Heat Transfer Limited has no employees.
GPPL manufactures liquid ring vacuum pumps, rotary piston pumps, oil sealed
rotary vane pumps, atmospheric air operated ejectors and complete vacuum pump
systems that are factory assembled with self-supporting structure.
Sales for FY 2000-2001 stood at $5,375,000, an increase of 6% compared with
the previous year, reflecting at least in part GPPL's success in the
introduction of its line of dry vacuum pumps.
GPPL employed 52 people on March 31, 2001.
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CAPITAL EXPENDITURES
The Company's capital expenditures for FY 2000-2001 amounted to $1,124,000.
Of this amount, $1,025,000 was for the U.S. business and $99,000 was for the
U.K. business.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
(1) Industry Segments and (2) Information as to Lines of Business
Graham Corporation operates in only one industry segment which is the
design and manufacture of vacuum and heat transfer equipment. Further segment
information is set forth in Note 13 to the Consolidated Financial Statements on
pages 29-32 of the Annual Report on Form 10-K.
(c) NARRATIVE DESCRIPTION OF BUSINESS
(1) Business Done and Intended to be Done
Principal Products and Markets
The Company designs and manufactures vacuum and heat transfer equipment,
primarily custom built. Its products include steam jet ejector vacuum systems,
surface condensers for steam turbines, liquid ring vacuum pumps and compressors
and various types of heat exchangers including helical coil exchangers marketed
under the registered name "Heliflow" and plate and frame exchangers. These
products function to produce a vacuum or to condense steam or otherwise transfer
heat, or any combination of these tasks. They accomplish this without involving
any moving parts and are available in all metals and in many non-metallic and
corrosion resistant materials as well.
This equipment is used in a wide range of industrial process applications:
power generation facilities, including fossil fuel plants and nuclear plants as
well as cogeneration plants and geothermal power plants that harness naturally
occurring thermal energy; petroleum refineries; chemical plants; pharmaceutical
plants; plastics plants; fertilizer plants; breweries and titanium plants;
liquified natural gas production; soap manufacturing; air conditioning systems;
food processing plants and other process industries. Among these the principal
markets for the Company's products are the chemical, petrochemical, petroleum
refining, and electric power generating industries. The Company's equipment is
sold by a combination of direct company sales engineers and independent sales
representatives located in over 40 major cities in the United States and abroad.
Status of Publicly Announced New Products or Segments
The Company has no plans for new products or for entry into new industry
segments that would require the investment of a material amount of the Company's
assets or that otherwise is material.
Sources and Availability of Raw Materials
The Company experienced no serious material shortages in FY 2000-2001.
Material Patents, Trademarks
The Company holds no material patents, trademarks, licenses, franchises or
concessions the loss of which would have a materially adverse effect upon the
business of the Company.
Seasonal Variations
No material part of the Company's business is seasonal.
Principal Customers
The Company's principal customers include the large chemical, petroleum and
power companies, which are end users of the Company's equipment in their
manufacturing and refining processes, as well as large engineering contractors
who build installations for such companies and others.
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No material part of the Company's business is dependent upon a single
customer or on a few customers, the loss of any one or more of whom would have a
materially adverse effect on the Company's business. No customer of the Company
or group of related customers regularly accounts for as much as 10% of the
Company's consolidated annual revenue.
Order Backlog
Backlog of unfilled firm orders at March 31, 2001 was $28,458,000 compared
to $24,302,000 at March 31, 2000 and $15,438,000 at March 31, 1999.
Competition
The Company's business is highly competitive and a substantial number of
companies having greater financial resources are engaged in manufacturing
similar products. However, the Company believes it is one of the leading
manufacturers of steam jet ejectors.
Research Activities
During the fiscal years ended March 31, 2001, 2000, and 1999 the Company
spent approximately $250,000, $255,000, and $371,000, respectively, on research
activities relating to the development of new products or the improvement of
existing products.
Environmental Matters
The Company does not anticipate that compliance with federal, state and
local provisions, which have been enacted or adopted regulating the discharge of
material in the environment or otherwise pertaining to the protection of the
environment, will have a material effect upon the capital expenditures, earnings
and competitive position of the Company and its subsidiaries.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The information called for under this Item is set forth in Note 13 to
Consolidated Financial Statements, on pages 29-32 of this Annual Report on Form
10-K.
ITEM 2. PROPERTIES
United States: The Company's corporate headquarters is located at 20
Florence Avenue, Batavia, New York, consisting of a 45,000 square foot building.
The Company's manufacturing facilities are also located in Batavia, consisting
of approximately thirty-three acres and containing about 204,000 square feet in
several connected buildings, including 162,000 square feet in manufacturing
facilities, 48,000 square feet for warehousing and a 6,000 square foot building
for product research and development.
Additionally the Company leases U.S. sales offices in Los Angeles and
Houston.
United Kingdom: The Company's U.K. subsidiary, Graham Precision Pumps
Limited, owns a 41,000 square foot manufacturing facility located on 15 acres in
Congleton, Cheshire, England.
Assets of the Company with a book value of $28,655,000 have been pledged to
secure certain domestic long-term borrowings. Short and long-term borrowings of
the Company's United Kingdom subsidiary are secured by assets of the subsidiary,
which have a book value of $455,000.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal year covered
by this report to a vote of the Company's security holders.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
(a) The information called for under this Item is set forth under Item 8,
"Financial Statements and Supplementary Data," in the Statement of Quarterly
Financial Data appearing on page 32 of this Annual Report on Form 10-K.
(b) On June 5, 2001, there were approximately 400 holders of the Company's
common stock. This figure includes stockholders of record and individual
participants in security position listings who have not objected to the
disclosure of their names; it does not, however, include individual participants
in security position listings who have objected to disclosure of their names. On
June 4, 2001, the closing price of the Company's common stock on the American
Stock Exchange was $12.20 per share.
(c) The Company has not paid a dividend since January 4, 1993, when it paid
a dividend of $.07 per share. The Company does not plan to resume paying
dividends in the foreseeable future. Restrictions on dividends are described in
Note 5 to the Consolidated Financial Statements included in this Report.
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ITEM 6. SELECTED FINANCIAL DATA
GRAHAM CORPORATION -- TEN YEAR REVIEW
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2001(1) 2000(1) 1999(1) 1998(1) 1997(1)
----------- ----------- ----------- ----------- -----------
OPERATIONS:
Net Sales......................... $44,433,000 $38,728,000 $52,978,000 $56,206,000 $14,257,000
Gross Profit...................... 9,796,000 9,964,000 14,872,000 18,083,000 4,080,000
Income (Loss) From Continuing
Operations...................... 195,000 (833,000) 2,369,000 3,766,000 621,000
Dividends.........................
COMMON STOCK:
Basic Earnings (Loss) From
Continuing Operations Per
Share........................... .12 (.55) 1.48 2.27 .39
Diluted Earnings (Loss) From
Continuing Operations Per
Share........................... .12 (.55) 1.46 2.21 .38
Dividends Per Share...............
FINANCIAL DATA:
Working Capital................... 11,162,000 12,397,000 11,989,000 12,459,000 10,300,000
Capital Expenditures.............. 1,124,000 711,000 1,189,000 1,400,000 237,000
Depreciation...................... 926,000 998,000 983,000 905,000 249,000
Total Assets...................... 36,608,000 34,596,000 34,136,000 37,030,000 31,224,000
Long-Term Debt.................... 682,000 1,948,000 505,000 859,000 2,764,000
Shareholders' Equity.............. 17,137,000 17,092,000 16,712,000 17,775,000 12,538,000
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(1) The financial data presented for 2001-1998 is for the respective twelve
months ended March 31. The financial data presented for 1997 is for the
three month transition period ended March 31, 1997. The financial data
presented for 1996-1991 is for the respective twelve months ended December
31.
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GRAHAM CORPORATION -- TEN YEAR REVIEW
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1996 1995(2) 1994(2) 1993 1992 1991
----------- ----------- ----------- ----------- ----------- -----------
OPERATIONS:
Net Sales...................... $51,487,000 $50,501,000 $46,467,000 $44,592,000 $47,514,000 $70,368,000
Gross Profit................... 15,463,000 13,257,000 12,153,000 11,661,000 9,234,000 18,825,000
Income (Loss) From Continuing
Operations................... 3,102,000 1,361,000 9,000 481,000 (2,153,000) 2,421,000
Dividends...................... 293,000 289,000
COMMON STOCK:
Basic Earnings (Loss) From
Continuing Operations Per
Share........................ 1.96 .86 .01 .31 (1.37) 1.56
Diluted Earnings (Loss) From
Continuing Operations Per
Share........................ 1.93 .86 .01 .31 (1.37) 1.55
Dividends Per Share............ .28 .28
FINANCIAL DATA:
Working Capital................ 8,239,000 7,093,000 6,819,000 7,075,000 9,601,000 12,220,000
Capital Expenditures........... 1,291,000 204,000 412,000 513,000 9,213,000 2,553,000
Depreciation................... 892,000 927,000 1,027,000 1,349,000 1,385,000 1,317,000
Total Assets................... 30,494,000 29,499,000 29,927,000 41,388,000 45,573,000 42,023,000
Long-Term Debt................. 1,442,000 3,303,000 5,161,000 6,102,000 9,491,000 7,560,000
Shareholders' Equity........... 11,915,000 8,426,000 7,045,000 14,793,000 14,564,000 14,905,000
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(2) Per share data has been adjusted to reflect a three-for-two stock split on
July 25, 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Graham Corporation consists of two operating segments as determined by
geographic areas (USA: Graham Corporation, UK: Graham Vacuum and Heat Transfer,
Limited and its wholly owned subsidiary, Graham Precision Pumps, Ltd.).
ANALYSIS OF CONSOLIDATED OPERATIONS
2001 2000 1999
----------------- ------------------ -----------------
USA UK USA UK USA UK
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(IN THOUSANDS OF DOLLARS)
Sales............................ $40,686 $5,375 $34,940 $ 5,068 $48,890 $5,647
Net Income (Loss)................ $ 224 $ 41 $ 374 $(1,209) $ 2,066 $ 355
EPS.............................. $ 0.14 $ 0.03 $ 0.25 $ (0.79) $ 1.28 $ 0.22
Identifiable Assets.............. $35,737 $4,665 $34,489 $ 3,831 $32,046 $4,317
2001 COMPARED TO 2000
For FYE 2001 Graham Corporation's consolidated sales (after elimination of
intercompany sales) were $44,433,000, producing a net income of $195,000, or
$0.12 per diluted share. This compares to FYE 2000 with sales of $38,728,000
resulting in a net loss of $833,000 or $0.55 per diluted share.
Consolidated sales were up 15% in FYE 2001 over FYE 2000. USA operations
increased sales by $5,887,000 or 17%. About 60% of this increase came from the
increase in sales into Canada. Other export gains over FYE 2000 were made in
Asia and the Middle East. Increases by products were lead by process vacuum
condensers for the chemical and petrochemical markets and vacuum systems for the
crude oil refineries and petrochemical industries.
The consolidated gross profit margin was 22% as compared to 26% for FYE
2000. This is a lower gross profit margin than usual and was a result of several
factors including depressed selling prices, rising material costs and an overall
product mix bearing lower contribution margins than the Company's traditional
core product margins. Additionally the gross profit margins suffered from
substantial increases in workers compensation charges, energy costs, tooling
expenses and engineering and production reworking.
Consolidated Selling, General and Administrative expenses increased about
6% over FYE 2000. In the USA Graham's costs rose 4% as a result of added costs
incurred in the transportation of oversized products and the launching of a
comprehensive advertising agenda. In the UK SG&A costs rose 21%. This increase
resulted from gearing up for the future manufacturing and selling of Graham's
recent Leybold dry pump acquisition (e.g., staff, sales office in Germany).
Overall, consolidated SG&A expenses were 21% of sales compared to FYE 2000 when
SG&A costs equaled 23% of sales.
Interest expense was up due to prime rate increases and borrowings to
support higher inventories and sales activities.
The current year's net income tax benefit of $221,000 resulted from
resolving certain federal and state income tax matters. The net of tax benefit
for FYE 2000 of $280,000 resulted from the UK restructuring charge discussed
below.
2000 COMPARED TO 1999
Consolidated net sales for fiscal year 2000 were $38,728,000, down 27% from
1999. The decrease was most dramatic in the USA. Shipments in the petroleum
refining and organic petrochemical market segments were down $15,700,000 for
fiscal 2000. Due to anemic demand and unfavorable foreign currency exchange
rates, export sales were the lowest they have been since FYE 1990.
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Consolidated gross profit margins were 26% as compared to 28% for 1999.
About one-half of this decrease was due to a USA environmental reserve provision
relating to the clean up of a former waste disposal site. The remaining amount
was due to lower sales.
Consolidated Selling, General and Administrative expenses decreased about
25% from 1999 due to cost reductions. As a percent of sales, SG&A expenses were
23% compared to 22% for the prior year.
Interest expense was down from 1999 due to holding interest bearing debt to
minimal levels through most of the year.
The FYE 2000 tax credit resulted from a $456,000 deferred tax benefit taken
in the UK as a result of a net operating loss. The effective tax provision for
FYE 1999 was about 14%. The lower than statutory rate was due to the utilization
of prior year losses and valuation allowance reductions.
A consolidated net loss of $833,000 or $0.55 per share was realized for the
twelve months. This loss included a restructuring charge in the UK of
$1,901,000. The restructuring charge was comprised of two elements. The UK work
force was reduced in total 14%, causing a redundancy charge of $186,000. The UK
defined benefit plan was terminated as of September 1999. A defined contribution
plan was initiated in its place. A pension curtailment expense (including
professional expenses) of $1,715,000 was recognized.
SHAREHOLDERS' EQUITY
2001 2000 1999
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(IN THOUSANDS OF DOLLARS)
USA......................................................... $18,786 $18,488 $18,014
UK.......................................................... 2,145 2,327 925
Eliminations................................................ (3,794) (3,723) (2,227)
------- ------- -------
$17,137 $17,092 $16,712
======= ======= =======
Book Value Per Share........................................ $ 10.52 $ 11.36 $ 10.99
======= ======= =======
2001 COMPARED TO 2000
Due to a minimal net income, Shareholders' Equity increased only slightly
in the current year. Book value per share decreased about 7% as a result of the
sale at fair market value of 117,800 treasury shares in FYE 2001. This sale will
result in long-term stock ownership by Officers and Board members of the
Corporation.
2000 COMPARED TO 1999
Shareholders' Equity increased 2% over FYE 1999. In FYE 1999 a charge of
$1,191,000 was recognized, due to the underfunded status of the UK pension fund.
In FYE 2000 the liability was funded and the prior year reserve was eliminated.
This reversal more than offset the net loss for the current year.
LIQUIDITY AND CAPITAL RESOURCES
2001 2000 1999
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USA UK USA UK USA UK
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(IN THOUSANDS OF DOLLARS)
Working Capital.................... $10,310 $1,125 $11,393 $ 1,206 $11,224 $969
Cash Flow from Operations.......... $ 90 $ (912) $ (565) $(1,055) $ 1,874 $487
Cash and Investments............... $ 5,072 $ 59 $ 5,762 $ 253 $ 4,928 $120
Capital Expenditures............... $ 1,025 $ 99 $ 699 $ 12 $ 1,179 $ 10
Long-Term Borrowings............... $ 545 $ 1,757 $ 67 $ 225 $176
Capital Leases..................... $ 111 $ 153 $ 70 $ 340 $ 129 $521
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2001 COMPARED TO 2000
Consolidated cash flow from operations was negative $822,000 in FYE 2001
compared to a deficit of $1,620,000 for the prior year. The current year
shortfall was due to an increase in inventory of 41% or $2,743,000. This buildup
was due to scheduled first half FYE 2002 shipments, billings (minus related cost
of goods sold) on seven percent-of-completion jobs (net of progress payments),
the newly acquired dry pump product line, rising raw material costs, and buying
ahead to protect from raw material price escalations on fixed price contracts
having extended shipment dates.
Capital expenditures for the year ending March 2002 are budgeted at
$884,000. Depreciation is estimated to be $952,000. The Company plans to fund
cash needs through earnings and lines of credit. At March 31, 2001 the USA
unused bank line of credit was $11,653,000. The UK operation had an unused line
available of $266,000.
2000 COMPARED TO 1999
Consolidated cash flow from operations was negative $1,620,000. About
$1,600,000 of cash was used to fund the UK pension liability and pay related
professional costs.
Cash generated from operating activities for FYE 1999 was $2,361,000, which
approximated net income. At March 31, 2000 the USA unused bank line of credit
was $10,029,000. The UK operation had an unused line available of $597,000.
NEW ORDERS AND BACKLOG
NEW ORDERS 2001 2000 1999
---------- ------- ------- -------
(IN THOUSANDS OF DOLLARS)
USA......................................................... $42,541 $44,012 $36,308
UK.......................................................... 7,768 5,154 5,626
Eliminations................................................ (1,542) (1,559) (1,596)
------- ------- -------
Consolidated................................................ $48,767 $47,607 $40,338
======= ======= =======
BACKLOG 2001 2000 1999
------- ------- ------- -------
(IN THOUSANDS OF DOLLARS)
USA......................................................... $25,544 $23,689 $14,624
UK.......................................................... 3,366 1,198 1,127
Eliminations................................................ (452) (585) (313)
------- ------- -------
Consolidated................................................ $28,458 $24,302 $15,438
======= ======= =======
Graham concluded FYE 2001 with a consolidated backlog of $28,458,000, up
17% from March 31, 2000. Approximately ninety percent of the backlog is
scheduled to be shipped by March 31, 2002.
Consolidated orders booked in FYE 2001 were up 2% over FYE 2000. USA
operations saw a 3% decrease in total new orders in FYE 2001, but a 45% increase
in export orders. Significant new orders for the refinery industry were booked
for South America and Canada. UK operations increased new orders in FYE 2001 by
51%. The largest order in the history of GPPL, $2,300,000 for South Africa, in
the petrochemical industry was won. Shipment is expected during the second half
of FYE 2002.
Consolidated orders in FYE 2000 were up 18% from 1999. The increase in new
orders in the year reflected the Company's ability to adapt to weaknesses in
historically strong markets, specifically in the petrochemical and petroleum
refinery segments. By product, surface condenser orders in FYE 2000 were greater
by $11,002,000 compared to March 1999. A significant portion of this business
came from the ocean marine and power fossil industries. Ejector orders were down
over $4,549,000 from 1999. Orders for surface condensers in 1999 were down from
the prior year in excess of $18,000,000 and ejector orders were down from 1998
about $3,761,000. Fewer orders from Southeast Asia has had its impact after
1998.
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MARKET RISK (QUANTITATIVE AND QUALITATIVE DISCLOSURES)
The principal market risks (i.e., the risk of loss arising from changes in
market rates and prices) to which Graham is exposed are:
- interest rates
- foreign exchange rates
- equity price risk
The Company is exposed to interest rate risk primarily through its
borrowing activities. Management's strategy for managing risks associated with
interest rate fluctuations is to hold interest bearing debt to the absolute
minimum and carefully assess the risks and rewards for incurring long-term debt.
Assuming year ended 2001 variable rate debt, a 1% change in interest rates would
impact annual interest expense by $47,000.
Graham's international consolidated sales exposure for the current year
approximated 37 percent of annual sales. Operating in world markets involves
exposure to movements in currency exchange rates. Currency movements can affect
sales in several ways. Foremost, the ability to competitively compete for orders
against competition having a relatively weaker currency. Business lost due to
this cannot be quantified. Secondly, redemption value of sales can be adversely
impacted. The substantial portion of Graham's sales are collected in US dollars.
The Company enters into forward foreign exchange agreements to hedge its
exposure against unfavorable changes in foreign currency values on significant
sales contracts negotiated in foreign currencies.
Foreign operations resulted in a current year net income of $41,000. As
currency exchange rates change, translations of the income statements of the UK
business into US dollars affects year-over-year comparability of operating
results. We do not hedge translation risks because cash flows from UK operations
are mostly reinvested in the UK. A 10% change in foreign exchange rates would
have impacted the UK reported net income by approximately $4,100.
The Company has a Long-Term Incentive Plan which provides for awards of
share equivalent units (SEU) for outside directors based upon the Company's
performance. The outstanding SEU's are recorded at fair market value thereby
exposing the Company to equity price risk. Gains and losses recognized due to
market price changes are included in the quarterly results of operations. Based
upon the SEU's outstanding at March 31, 2001 and 2000 and a $9 per share price,
a fifty to one hundred percent change in the respective year end market price of
the Company's common stock would positively or negatively impact the Company's
operating results by $48,000 to $96,000 for FYE 2001 and FYE 2000. Assuming
required net income of $500,000 to award SEU's is met, the five outside
directors in accordance with the plan over the next five years, based upon a
market price of the Company's stock of $9 per share, a fifty to one hundred
percent change in the stock price would positively or negatively impact the
Company's operating results by $73,000 to $147,000 in 2002, $98,000 to $196,000
in 2003, $103,000 to $206,000 in 2004, $108,000 to $216,000 in 2005 and
thereafter.
OTHER MATTERS
Increases in material and labor costs traditionally have been offset by
cost cutting measures and selling price increases. Obtaining price increases are
largely a factor of supply and demand for Graham's products, whereas inflation
factors can originate from influences outside of the Company's direct global
competition. Graham will continue to monitor the impact of inflation in order to
minimize its effects in future years through sales growth, pricing, product mix
strategies, purchasing advantageously, productivity improvements, and cost
reductions.
The Company's USA operations are governed by federal environmental laws,
principally the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA), the Clean Air
Act, and the Clean Water Act, as well as state counterparts ("Environmental
Laws"). Environmental Laws require that certain parties fund remedial actions
regardless of fault, legality or original disposal or ownership of the site.
Graham is not involved in any environmental remediation projects.
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ACCOUNTING STANDARD CHANGES
In June 1998 and June 2000 the Financial Accounting Standards Board issued
SFAS No. 133 and 138, respectively. These statements establish accounting and
reporting standards for derivative instruments. In September 2000, the FASB
issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities. Statement No. 133, as amended by SFAS No.
138, and No. 140 are effective for the Company in fiscal year 2002. The impact
of adopting these statements will have no effect on the Company's financial
statements.
FORWARD LOOKING
In FYE 2002 Management does not expect the quantity of significant unusual
charges encountered in FYE 2001. It is believed competition will continue to be
stiff resulting in continued depressed selling prices for at least the first
half of the year. But we are encouraged by the growing need for increased energy
production. Several of Graham's principal markets are in the energy field and
the Company expects to benefit by building vacuum and heat transfer equipment
for these industries.
Graham's principal objective remains to consistently strive to make sound
economic decisions in the areas of operations, investments and financing that
will create value in the future for its shareholders, employees and community.
Certain statements contained in this document, including within this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, that are not historical facts, constitute "Forward-Looking
Statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements, in general, predict, forecast, indicate or
imply future results, performance or achievements and generally use words so
indicative. The Company wishes to caution the reader that numerous important
factors which involve risks and uncertainties, including but not limited to
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and prices, and other factors
discussed in the Company's filings with the Securities and Exchange Commission,
in the future, could affect the Company's actual results and could cause its
actual consolidated results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Included in Item 7, Management's Discussion and Analysis -- Market Risk.
11
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Financial Statements, Notes to Financial Statements, Quarterly Financial
Data)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Net sales........................................... $44,433,000 $38,728,000 $52,978,000
----------- ----------- -----------
Costs and expenses:
Cost of products sold............................. 34,637,000 28,764,000 38,106,000
Selling, general and administrative............... 9,494,000 8,943,000 11,843,000
Interest expense.................................. 328,000 233,000 287,000
Restructuring costs............................... 1,901,000
----------- ----------- -----------
44,459,000 39,841,000 50,236,000
----------- ----------- -----------
Income (Loss) before income taxes................... (26,000) (1,113,000) 2,742,000
Provision (Benefit) for income taxes................ (221,000) (280,000) 373,000
----------- ----------- -----------
Net income (loss)................................... $ 195,000 $ (833,000) $ 2,369,000
=========== =========== ===========
Per Share Data
Basic:
Net income (loss).............................. $ .12 $ (.55) $ 1.48
=========== =========== ===========
Diluted:
Net income (loss).............................. $ .12 $ (.55) $ 1.46
=========== =========== ===========
See Notes to Consolidated Financial Statements.
12
14
CONSOLIDATED BALANCE SHEETS
MARCH 31,
--------------------------
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 226,000 $ 1,110,000
Investments............................................... 4,905,000 4,905,000
Trade accounts receivable................................. 7,954,000 7,593,000
Inventories............................................... 9,383,000 6,640,000
Domestic and foreign income taxes receivable.............. 449,000 300,000
Deferred income tax asset................................. 1,021,000 1,644,000
Prepaid expenses and other current assets................. 529,000 400,000
----------- -----------
24,467,000 22,592,000
Property, plant and equipment, net.......................... 10,013,000 10,105,000
Deferred income tax asset................................... 2,113,000 1,862,000
Other assets................................................ 15,000 37,000
----------- -----------
$36,608,000 $34,596,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ 4,164,000 $ 2,000,000
Current portion of long-term debt......................... 126,000 286,000
Accounts payable.......................................... 4,968,000 2,672,000
Accrued compensation...................................... 2,225,000 3,228,000
Accrued expenses and other liabilities.................... 893,000 1,565,000
Customer deposits......................................... 929,000 444,000
----------- -----------
13,305,000 10,195,000
Long-term debt.............................................. 682,000 1,948,000
Accrued compensation........................................ 706,000 766,000
Deferred income tax liability............................... 31,000 33,000
Other long-term liabilities................................. 11,000 13,000
Accrued pension liability................................... 1,516,000 1,339,000
Accrued postretirement benefits............................. 3,220,000 3,210,000
----------- -----------
Total liabilities...................................... 19,471,000 17,504,000
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value --
Authorized, 500,000 shares
Common stock, $.10 par value --
Authorized, 6,000,000 shares
Issued, 1,697,645 shares in 2001 and 1,690,595 shares
in 2000........................................... 170,000 169,000
Capital in excess of par value.............................. 4,575,000 4,521,000
Retained earnings........................................... 16,583,000 16,898,000
Accumulated other comprehensive loss........................ (2,188,000) (1,964,000)
----------- -----------
19,140,000 19,624,000
Less:
Treasury stock............................................ (1,161,000) (2,532,000)
Notes receivable from officers and directors.............. (842,000)
----------- -----------
Total shareholders' equity.................................. 17,137,000 17,092,000
----------- -----------
$36,608,000 $34,596,000
=========== ===========
See Notes to Consolidated Financial Statements.
13
15
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
-------------------------------------------
2001 2000 1999
------------ ----------- ------------
Operating activities:
Net income (loss)............................... $ 195,000 $ (833,000) $ 2,369,000
------------ ----------- ------------
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities:
Depreciation and amortization................ 948,000 1,050,000 1,041,000
Gain on sale of property, plant and
equipment.................................. (51,000) (22,000) (148,000)
Asset impairment............................. 17,000
(Increase) Decrease in operating assets:
Accounts receivable........................ (489,000) (24,000) (822,000)
Inventories, net of customer deposits...... (2,342,000) 184,000 3,050,000
Domestic and foreign income taxes
receivable.............................. (107,000) (227,000) (1,030,000)
Prepaid expenses and other current and
non-current assets...................... (139,000) (118,000) 103,000
Increase (Decrease) in operating liabilities:
Accounts payable, accrued compensation,
accrued expenses and other
liabilities............................. 739,000 (925,000) (2,046,000)
Accrued compensation, accrued pension
liability and accrued postretirement
benefits................................ 126,000 (354,000) (34,000)
Other long-term liabilities................ 50,000
Deferred income taxes...................... 298,000 (368,000) (172,000)
------------ ----------- ------------
Total adjustments....................... (1,017,000) (787,000) (8,000)
------------ ----------- ------------
Net cash provided (used) by operating
activities................................... (822,000) (1,620,000) 2,361,000
------------ ----------- ------------
Investing activities:
Purchase of property, plant and equipment....... (1,124,000) (711,000) (1,189,000)
Proceeds from sale of property, plant and
equipment.................................... 293,000 49,000 162,000
Purchase of investments......................... (904,000) (12,448,000)
Proceeds from maturity of investments........... 906,000 12,298,000
------------ ----------- ------------
Net cash used by investing activities........... (831,000) (660,000) (1,177,000)
------------ ----------- ------------
Financing activities:
Increase (Decrease) in short-term debt.......... 2,207,000 2,000,000 (40,000)
Proceeds from issuance of long-term debt........ 17,504,000 3,244,000 5,950,000
Principal repayments on long-term debt.......... (18,988,000) (1,834,000) (6,327,000)
Issuance of common stock........................ 54,000
Purchase of treasury stock...................... (124,000) (2,337,000)
Sale of treasury stock.......................... 12,000
------------ ----------- ------------
Net cash provided (used) by financing
activities................................... 789,000 3,286,000 (2,754,000)
------------ ----------- ------------
Effect of exchange rate on cash................. (20,000) (16,000) (4,000)
------------ ----------- ------------
Net increase (decrease) in cash and
equivalents.................................. (884,000) 990,000 (1,574,000)
Cash and cash equivalents at beginning of
year......................................... 1,110,000 120,000 1,694,000
------------ ----------- ------------
Cash and cash equivalents at end of year........ $ 226,000 $ 1,110,000 $ 120,000
============ =========== ============
See Notes of Consolidated Financial Statements.
14
16
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
EMPLOYEE NOTES
STOCK RECEIVABLE
COMMON STOCK ACCUMULATED OWNERSHIP FROM
-------------------- CAPITAL IN OTHER PLAN OFFICERS
PAR EXCESS OF RETAINED COMPREHENSIVE TREASURY LOAN AND
SHARES VALUE PAR VALUE EARNINGS LOSS STOCK PAYABLE DIRECTORS
-------- --------- ---------- ----------- ------------- ----------- --------- ----------
Balance at March 31,
1998..................... 1,690,595 $169,000 $4,521,000 $15,362,000 $(1,781,000) $ (71,000) $(425,000)
-------- -------- ---------- ----------- ----------- ----------- ---------
Net income................. 2,369,000
Foreign currency
translation adjustment... (104,000)
Minimum pension liability
adjustment, net of tax
benefit of $510,000...... (1,191,000)
Total comprehensive
income...............
Acquisition of treasury
stock.................... (2,337,000)
Payments on Employee Stock
Ownership Plan loan
payable.................. 200,000
-------- -------- ---------- ----------- ----------- ----------- ---------
Balance at March 31,
1999..................... 1,690,595 169,000 4,521,000 17,731,000 (3,076,000) (2,408,000) (225,000)
-------- -------- ---------- ----------- ----------- ----------- ---------
Net loss................... (833,000)
Foreign currency
translation adjustment... (79,000)
Minimum pension liability
adjustment, net of tax of
$510,000................. 1,191,000
Total comprehensive
income...............
Acquisition of treasury
stock.................... (124,000)
Payments on Employee Stock
Ownership Plan loan
payable.................. 225,000
-------- -------- ---------- ----------- ----------- ----------- ---------
Balance at March 31,
2000..................... 1,690,595 169,000 4,521,000 16,898,000 (1,964,000) (2,532,000) 0
-------- -------- ---------- ----------- ----------- ----------- ---------
Net income................. 195,000
Foreign currency
translation adjustment... (224,000)
Total comprehensive
loss.................
Issuance of shares......... 7,050 1,000 53,000
Stock option tax benefit... 8,000
Notes receivable from
officers and directors
for the purchase of
treasury stock........... (7,000) (510,000) 1,371,000 0 (842,000)
-------- -------- ---------- ----------- ----------- ----------- --------- ---------
Balance at March 31,
2001..................... 1,697,645 $170,000 $4,575,000 $16,583,000 $(2,188,000) $(1,161,000) $ 0 $(842,000)
======== ======== ========== =========== =========== =========== ========= =========
SHAREHOLDERS'
EQUITY
-------------
Balance at March 31,
1998..................... $17,775,000
-----------
Net income................. 2,369,000
Foreign currency
translation adjustment... (104,000)
Minimum pension liability
adjustment, net of tax
benefit of $510,000...... (1,191,000)
-----------
Total comprehensive
income............... 1,074,000
Acquisition of treasury
stock.................... (2,337,000)
Payments on Employee Stock
Ownership Plan loan
payable.................. 200,000
-----------
Balance at March 31,
1999..................... 16,712,000
-----------
Net loss................... (833,000)
Foreign currency
translation adjustment... (79,000)
Minimum pension liability
adjustment, net of tax of
$510,000................. 1,191,000
-----------
Total comprehensive
income............... 279,000
Acquisition of treasury
stock.................... (124,000)
Payments on Employee Stock
Ownership Plan loan
payable.................. 225,000
-----------
Balance at March 31,
2000..................... 17,092,000
-----------
Net income................. 195,000
Foreign currency
translation adjustment... (224,000)
-----------
Total comprehensive
loss................. (29,000)
Issuance of shares......... 54,000
Stock option tax benefit... 8,000
Notes receivable from
officers and directors
for the purchase of
treasury stock........... 12,000
-----------
Balance at March 31,
2001..................... $17,137,000
===========
See Notes of Consolidated Financial Statements.
15
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS ACCOUNTING POLICIES:
Graham Corporation and its subsidiaries are primarily engaged in the design
and manufacture of vacuum and heat transfer equipment used in the chemical,
petrochemical, petroleum refining, and electric power generating industries and
sells to customers throughout the world. The Company's significant accounting
policies follow.
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 domestic and foreign subsidiaries. All significant
intercompany balances, transactions and profits are eliminated in consolidation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries 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. Gains and losses resulting from translation of foreign subsidiary
balance sheets are included in a separate component of shareholders' equity.
Translation adjustments are not adjusted for income taxes since they relate to
an investment which is permanent in nature.
Revenue Recognition
The Company recognizes revenue and all related costs on contracts with a
duration in excess of three months and with revenues of $1,000,000 and greater
using the percentage-of-completion method. The percentage-of-completion is
determined by relating actual labor incurred to-date to management's estimate of
total labor to be incurred on each contract. Contracts in progress are reviewed
monthly, and sales and earnings are adjusted in current accounting periods based
on revisions in contract value and estimated costs at completion. All contracts
with values less than $1,000,000 are accounted for on the completed contract
method and included in income upon substantial completion or shipment to the
customer.
Investments
Investments consist primarily of fixed-income debt securities with
maturities of beyond three months. All investments are classified as
held-to-maturity as the Company has the positive intent and ability to hold the
securities to maturity. The investments are stated at amortized cost.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out method. Progress payments for orders are netted
against inventory to the extent the payment is less than the inventory balance
relating to the applicable contract. Progress payments that are in excess of the
corresponding inventory balance are presented as customer deposits in the
Consolidated Balance Sheets.
16
18
Property, Plant and Depreciation
Property, plant and equipment are stated at cost. 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 under the straight line method. Estimated useful lives
range from approximately five to twenty-five years for office and manufacturing
equipment and forty years for buildings 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. Impairment losses are recognized when the carrying value of an asset
exceeds its fair value. The Company regularly assesses all of its long-lived
assets for impairment and recognized an impairment loss of $17,000 in 2000. No
such impairment losses were required in 2001 or 1999.
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.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB 25) and related Interpretations. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of grant over the amount an employee must pay
to acquire the stock. Compensation cost for share equivalent units is recorded
based on the quoted market price of the Company's stock at the end of the
period.
Per Share Data
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding for the period.
Diluted earnings (loss) per share is calculated by dividing net income (loss) by
the weighted average number of common and, when applicable, potential common
shares outstanding during the period. A reconciliation of the numerators and
denominators of basic and diluted earnings per share is presented below.
2001 2000 1999
---------- ---------- ----------
Basic earnings (loss) per share
Numerator:
Net income (loss)................................. $ 195,000 $ (833,000) $2,369,000
---------- ---------- ----------
Denominator:
Weighted common shares outstanding................ 1,588,000 1,514,000 1,594,000
Share equivalent units (SEU) outstanding.......... 11,000 9,000 5,000
---------- ---------- ----------
Weighted average shares and SEU's outstanding..... 1,599,000 1,523,000 1,599,000
---------- ---------- ----------
Basic earnings (loss) per share........................ $ .12 $ (.55) $ 1.48
========== ========== ==========
17
19
2001 2000 1999
---------- ---------- ----------
Diluted earnings (loss) per share
Numerator:
Net income (loss)................................. $ 195,000 $ (833,000) $2,369,000
---------- ---------- ----------
Denominator:
Weighted average shares and SEU's outstanding..... 1,599,000 1,523,000 1,599,000
Stock options outstanding......................... 14,000 14,000
Contingently issuable SEU's....................... 6,000
---------- ---------- ----------
Weighted average common and potential common
shares outstanding.............................. 1,613,000 1,523,000 1,619,000
---------- ---------- ----------
Diluted earnings (loss) per share...................... $ .12 $ (.55) $ 1.46
========== ========== ==========
Options to purchase shares of common stock which totaled 116,500, 187,250
and 120,450 in 2001, 2000 and 1999, respectively, were not included in the
computation of diluted earnings (loss) per share as the effect would be
anti-dilutive.
Cash Flow Statement
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Actual interest paid was $319,000 in 2001, $230,000 in 2000, and $292,000
in 1999. In addition, actual income taxes paid (refunded) were $(376,000) in
2001, $331,000 in 2000, and $1,499,000 in 1999.
Non cash activities during 2001, 2000, and 1999 included capital
expenditures totaling $93,000, $3,000 and $290,000, respectively, which were
financed through the issuance of capital leases. In 2000, the minimum pension
liability adjustment, net of a tax benefit, totaling $1,191,000 that was
originally recognized in 1999 was subsequently reversed.
Accumulated Other Comprehensive Loss
Comprehensive income is comprised of net income (loss) and other
comprehensive income or loss items, which are reflected as a separate component
of equity. For the Company, other comprehensive income or loss items include
foreign currency translation adjustments and minimum pension liability
adjustments.
Accounting and Reporting Changes
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. In June 2000, the FASB issued
SFAS No. 138, which amends certain provisions of SFAS No. 133 to clarify areas
causing difficulties in implementation. SFAS No. 133, as amended, requires the
Company to recognize all derivatives on the consolidated balance sheet at fair
value. Derivatives that are not hedges of underlying transactions must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in fair value of derivatives will either be
offset against the changes in fair value of the hedged assets, liabilities or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company has completed the process of evaluating the impact of adopting SFAS
No. 133, as amended. As a result, there was no effect on the Company's
consolidated financial position, results of operations or cash flows resulting
from the adoption of SFAS No. 133, as amended, during the first quarter of
fiscal 2002.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities, which
replaces SFAS No. 125. This Standard is effective for transfers occurring after
March 31, 2001. The Company does not believe the adoption of this Standard will
have a material impact on the Company's consolidated financial position, results
of operations or cash flows.
18
20
NOTE 2 -- INVENTORIES:
Major classifications of inventories are as follows:
2001 2000
----------- -----------
Raw materials and supplies................................ $ 1,996,000 $ 1,627,000
Work in process........................................... 11,243,000 6,045,000
Finished products......................................... 1,880,000 1,304,000
----------- -----------
15,119,000 8,976,000
Less -- progress payments................................. 5,736,000 2,336,000
----------- -----------
$ 9,383,000 $ 6,640,000
=========== ===========
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT:
Major classifications of property, plant and equipment are as follows:
2001 2000
----------- -----------
Land...................................................... $ 281,000 $ 289,000
Leasehold improvements.................................... 160,000 160,000
Buildings and improvements................................ 10,609,000 10,656,000
Machinery and equipment................................... 16,023,000 15,545,000
Construction in progress.................................. 50,000
----------- -----------
27,123,000 26,650,000
Less -- accumulated depreciation and amortization......... 17,110,000 16,545,000
----------- -----------
$10,013,000 $10,105,000
=========== ===========
NOTE 4 -- LEASES:
The Company leases equipment and office space under various operating
leases. Rent expense applicable to operating leases was $150,000, $141,000, and
$188,000 in 2001, 2000, and 1999, respectively. Rent expense in 2000 is net of
sublease income of $11,000.
Property, plant and equipment include the following amounts for leases
which have been capitalized.
2001 2000
---------- ----------
Machinery and equipment..................................... $1,574,000 $1,841,000
Less accumulated amortization............................... 1,013,000 1,102,000
---------- ----------
$ 561,000 $ 739,000
========== ==========
Amortization of property, plant and equipment under capital lease amounted
to $133,000, $192,000, and $182,000 in 2001, 2000, and 1999, respectively, and
is included in depreciation expense.
19
21
As of March 31, 2001, future minimum payments required under non-cancelable
leases are:
OPERATING CAPITAL
LEASES LEASES
--------- --------
2002........................................................ $113,000 $161,000
2003........................................................ 93,000 88,000
2004........................................................ 68,000 60,000
2005........................................................ 52,000 15,000
2006........................................................ 17,000 9,000
Thereafter.................................................. 8,000
-------- --------
Total minimum lease payments................................ $351,000 333,000
========
Less -- amount representing interest........................ 70,000
--------
Present value of net minimum lease payments................. $263,000
========
NOTE 5 -- DEBT:
Short-Term Debt Due Banks
The Company and its subsidiaries had short-term borrowings outstanding as
follows:
2001 2000
---------- ----------
Borrowings under domestic repurchase agreements............. $3,150,000 $2,000,000
Borrowings of United Kingdom subsidiary under line of credit
at bank's rate plus 1 1/2%................................ 1,014,000
---------- ----------
$4,164,000 $2,000,000
========== ==========
In 2000, the Company began borrowing under domestic repurchase agreements
from its investment banker. The interest rate is based upon the federal funds
rate and the type of collateral securing the loan. At March 31, 2001 and 2000,
the interest rate was 5.35% and 6.15%, respectively. The borrowings are secured
by the Company's short-term investments totaling $4,905,000.
The United Kingdom subsidiary has a revolving credit facility agreement
which provides a line of credit of 924,000 pounds sterling ($1,311,000 at the
March 31, 2001 exchange rate) including letters of credit. The interest rate is
the bank's rate plus 1 1/2%. The bank's base rate was 5.75% and 6% at March 31,
2001 and 2000, respectively. The United Kingdom operations had available unused
lines of credit of $266,000 at March 31, 2001. The weighted average interest
rate on short-term borrowings in 2001 and 2000 was 6.5%.
Long-Term Debt
The Company and its subsidiaries had long-term borrowings outstanding as
follows:
2001 2000
-------- ----------
United States revolving credit facility..................... $545,000 $1,757,000
United Kingdom term loan.................................... 67,000
Capital lease obligations (Note 4).......................... 263,000 410,000
-------- ----------
808,000 2,234,000
Less: current amounts, including amounts for capital leases
of $126,000 in 2001 and $219,000 in 2000.................. 126,000 286,000
-------- ----------
$682,000 $1,948,000
======== ==========
The United States revolving credit facility agreement provides a line of
credit of up to $13,000,000 including letters of credit, through October 31,
2002. The agreement allows the Company to borrow at prime minus a
20
22
variable percentage based upon certain financial ratios. The Company was able to
borrow at a rate of prime minus 100 basis points at March 31, 2001 and 2000.
The agreement allows the Company at any time to convert balances
outstanding not less than $2,000,000 and up to $9,000,000 into a two-year term
loan. This conversion feature is available through October 2002, at which time
the Company may convert the principal outstanding on the revolving line of
credit to a two-year term loan. The bank's prime rate was 8% and 9% at March 31,
2001 and 2000, respectively. The United States operations had available unused
lines of credit of $11,653,000 at March 31, 2001.
The United Kingdom term loan had a fixed rate of 9%. This term loan was due
in October 2000 and was repayable in equal monthly installments.
Long-term debt requirements over the next five years, excluding capital
leases, are: 2002 -- $0, 2003 -- $114,000, 2004 -- $272,000, 2005 -- $159,000,
and 2006 -- $0.
The Company is required to pay commitment fees of 1/4% on the unused
portion of the domestic revolving credit facility. No other financing
arrangements require compensating balances or commitment fees. Assets with a
book value of $28,655,000 have been pledged to secure certain domestic long-term
borrowings.
The United Kingdom short-term and long-term bank borrowings are secured by
assets of the United Kingdom subsidiary which have a book value of $455,000 at
March 31, 2001.
Several of the loan agreements contain provisions pertaining to the
maintenance of minimum working capital balances, tangible net worth and
financial ratios as well as restrictions on the payment of cash dividends to
shareholders and incurrence of additional long-term debt. In addition, the
United States operations cannot make any loans or advances exceeding $500,000 to
any affiliates without prior consent of the bank.
NOTE 6 -- 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
actively evaluates the credit worthiness of these financial institutions.
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, 2001 and 2000, 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, 2001 and 2000, the Company was contingently
liable on outstanding standby letters of credit aggregating $828,000 and
$1,263,000, respectively.
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 contracts with high quality
financial institutions. If the counterparties to the 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, 2001, there were no foreign exchange forward contracts
held by the Company. The table below summarizes the notional amount of the
foreign exchange forward contract held by
21
23
the Company at March 31, 2000. The amount represents the U.S. dollar equivalent
of a commitment to sell the foreign currency.
Canadian dollars............................................ $204,000
========
Fair value.................................................. $208,000
========
The Company entered into this foreign exchange forward contract to hedge a
sales commitment denominated in the currency of the sales contract. The term of
the derivative was less than one year.
At March 31, 2000, the Company had a deferred unrealized loss of $4,000
which is expensed as part of the hedged transaction. The amount represents the
loss that would have been recognized had the contract been liquidated at market
value at year end. The fair value of the foreign exchange forward contract is
estimated based on dealer quotes.
Fair Value of Financial Instruments:
The methods and assumptions used to estimate the fair value of financial
instruments are summarized as follows:
INVESTMENTS -- The fair value of investments at March 31, 2001
approximated the carrying value. The fair value of investments at March 31,
2000 was $4,565,000 which is based on quoted market prices.
SHORT-TERM DEBT -- The carrying value of short-term debt approximates
fair value due to the short-term maturity of this instrument.
LONG-TERM DEBT -- The carrying values of credit facilities with
variable rates of interest approximate fair values. The fair value of fixed
rate debt, which approximates the carrying value, was estimated by
discounting cash flows using rates currently available for debt of similar
terms and remaining maturities.
NOTE 7 -- INCOME TAXES:
An analysis of the components of pre-tax income (loss) is presented below:
2001 2000 1999
--------- ----------- ----------
United States.................................. $ (81,000) $ 564,000 $2,664,000
United Kingdom................................. 55,000 (1,677,000) 78,000
--------- ----------- ----------
$ (26,000) $(1,113,000) $2,742,000
========= =========== ==========
The provision (benefit) for income taxes
consists of:
Current:
Federal................................... $(555,000) $ 63,000 $ 515,000
State..................................... 36,000 33,000 84,000
United Kingdom............................ (8,000) (55,000)
--------- ----------- ----------
(519,000) 88,000 544,000
--------- ----------- ----------
Deferred:
Federal................................... 274,000 59,000 78,000
State..................................... 11,000 33,000 (27,000)
United Kingdom............................ 13,000 (412,000) 128,000
Change in valuation allowance............. (48,000) (350,000)
--------- ----------- ----------
298,000 (368,000) (171,000)
--------- ----------- ----------
Total provision (benefit) for income taxes..... $(221,000) $ (280,000) $ 373,000
========= =========== ==========
22
24
The reconciliation of the provision (benefit) calculated using the United
States federal tax rate with the provision for income taxes presented in the
financial statements is as follows:
2001 2000 1999
--------- --------- ---------
Provision (Benefit) for income taxes at federal
rate........................................... $ (9,000) $(378,000) $ 932,000
Recognition of tax benefit of prior year
losses......................................... (317,000)
Difference between foreign and U.S. tax rates.... (1,000) 50,000 (2,000)
State taxes...................................... 35,000 55,000 29,000
Officer life insurance proceeds not taxable...... (171,000)
Charges not deductible for income tax purposes... 29,000 96,000 68,000
Recognition of tax benefit generated by foreign
sales corporation.............................. (98,000) (81,000) (158,000)
Tax credits...................................... (11,000) (14,000) (24,000)
Foreign losses for which no tax benefit was
provided....................................... 48,000 350,000
Reversal of tax reserve.......................... (172,000)
Change in valuation allowance.................... (48,000) (350,000)
Other............................................ 6,000 (8,000) 16,000
--------- --------- ---------
Provision (Benefit) for income taxes............. $(221,000) $(280,000) $ 373,000
========= ========= =========
The deferred income tax asset (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 deferred
income tax asset follows:
2001 2000
----------------------- -----------------------
UNITED UNITED UNITED UNITED
STATES KINGDOM STATES KINGDOM
---------- --------- ---------- ---------
Depreciation....................... $ (574,000) $ (26,000) $ (490,000) $ (33,000)
Accrued compensation............... 332,000 458,000
Accrued pension liability.......... 482,000 413,000
Accrued postretirement benefits.... 1,310,000 1,310,000
Compensated absences............... 520,000 497,000
Inventories........................ (205,000) 6,000 124,000 100,000
Warranty liability................. 54,000 31,000
Contingent liabilities............. 273,000
Foreign loss carryforwards......... 909,000 889,000
Federal tax credits................ 315,000 34,000
New York State investment tax
credit........................... 151,000 80,000
Other.............................. 124,000 (5,000) 64,000
---------- --------- ---------- ---------
2,509,000 884,000 2,794,000 956,000
Less: Valuation allowance.......... (290,000) (277,000)
---------- --------- ---------- ---------
Deferred income tax asset.......... $2,509,000 $ 594,000 $2,794,000 $ 679,000
========== ========= ========== =========
Deferred income taxes include the impact of foreign net operating loss
carryforwards which may be carried forward indefinitely and investment tax
credits which expire from 2006 to 2016. A valuation allowance of $290,000 at
March 31, 2001 is deemed adequate to reserve for the foreign net loss
carryforwards which are not considered probable of realization.
The Company does not provide for additional U.S. income taxes on
undistributed earnings considered permanently invested in its United Kingdom
subsidiary. At March 31, 2001, such undistributed earnings totaled $812,000. It
is not practicable to determine the amount of income taxes that would be payable
upon the remittance of assets that represent those earnings.
23
25
NOTE 8 -- EMPLOYEE BENEFIT PLANS:
Retirement Plans
The Company has a qualified defined benefit plan covering employees in the
United States 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 for 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.
The components of pension cost are:
2001 2000 1999
--------- --------- ---------
Service cost-benefits earned during the period... $ 352,000 $ 392,000 $ 396,000
Interest cost on projected benefit obligation.... 768,000 741,000 657,000
Expected return on assets........................ (884,000) (823,000) (693,000)
Amortization of transition asset................. (44,000) (44,000) (44,000)
--------- --------- ---------
Net pension cost................................. $ 192,000 $ 266,000 $ 316,000
========= ========= =========
The actuarial assumptions are:
Discount rate used to determine projected benefit
obligation..................................... 7 1/4% 7 1/2% 6 1/2%
Rate of increase in compensation levels.......... 3% 3% 3%
Expected rate of return on plan assets........... 9% 9% 8%
Changes in the Company's benefit obligation, plan assets and funded status
for the pension plan are presented below:
2001 2000
----------- -----------
Change in the benefit obligation
Projected benefit obligation at beginning of year....... $10,610,000 $11,349,000
Service cost............................................ 314,000 392,000
Interest cost........................................... 768,000 741,000
Actuarial (gain) loss................................... 250,000 (1,596,000)
Benefit payments........................................ (323,000) (276,000)
----------- -----------
Projected benefit obligation at end of year............. $11,619,000 $10,610,000
=========== ===========
Change in fair value of plan assets
Fair value of plan assets at beginning of year.......... $ 9,771,000 $ 9,221,000
Actual return on plan assets............................ 337,000 572,000
Employer contribution................................... 506,000 254,000
Benefit and administrative expense payments............. (346,000) (276,000)
----------- -----------
Fair value of plan assets at end of year................ $10,268,000 $ 9,771,000
=========== ===========
Funded status
Funded status at end of year............................ $(1,351,000) $ (839,000)
Unrecognized transition obligation...................... (148,000) (192,000)
Unrecognized prior service cost......................... (2,000) (2,000)
Unrecognized actuarial (gain) loss...................... 79,000 (703,000)
----------- -----------
Net amounts recognized.................................. $(1,422,000) $(1,736,000)
=========== ===========
The current portion of the pension liability as of March 31, 2001 and 2000
is included in the caption "Accrued Compensation" and the long-term portion is
separately presented in the Consolidated Balance Sheets.
24
26
In October 1999, the Company terminated the defined benefit pension plan in
the United Kingdom. This plan was contributory with the employer's share being
actuarially determined. Benefits were based on the employee's years of service
and average earnings for the three highest years for the ten year period
preceding retirement. As a result of the plan termination, a curtailment loss of
$1,682,000 was recognized. This charge is included in the caption "Restructuring
Costs" in the 2000 Consolidated Statement of Operations. Employees may
participate in a defined contribution plan which has replaced the defined
benefit plan.
Pension expense for the U.K. Plan was $209,000 and $206,000 in 2000 and
1999, respectively.
Assets of the United States plan consist primarily of equity securities at
March 31, 2001 and 2000. The unrecognized net asset at transition is being
amortized over the remaining service lives of the participants which
approximates 19 years for the domestic plan.
The Company has a Supplemental Executive Retirement Plan which provides
retirement benefits associated with wages in excess of the legislated qualified
plan maximums. Pension expense recorded in 2001, 2000, and 1999 related to this
plan was $0, $26,000, and $26,000, respectively. At March 31, 2001 and 2000, the
related liability was $92,000 and $107,000, respectively, and is included in the
caption "Accrued Pension Liability" in the Consolidated Balance Sheets.
The Company has defined contribution plans covering substantially all
employees. Company contributions to the domestic plan are based on the
profitability of the Company and amounted to $43,000, $51,000, and $593,000 in
2001, 2000, and 1999, respectively. In fiscal year 2000, a defined contribution
plan was established in the United Kingdom. Company contributions to this plan
are based on a percentage of base salary which varies with the participant's
age. Company contributions were $69,000 and $43,000 in 2001 and 2000,
respectively.
The Company has a deferred compensation plan that allows certain key
employees to defer a portion of their compensation. The principal and interest
earned on the deferred balances are payable upon retirement. The accrued
compensation liability under this plan was $755,000 and $1,100,000 at March 31,
2001 and 2000, respectively.
Employee Stock Ownership Plan
The Company has a noncontributory Employee Stock Ownership Plan (ESOP) that
covers substantially all employees in the United States. In 1990, the Company
borrowed $2,000,000 under loan and pledge agreements. The proceeds of the loans
were used to purchase 87,454 shares of the Company's common stock. The purchased
shares were pledged as security for the payment of principal and interest as
provided in the loan and pledge agreements. Funds for servicing the debt
payments were provided from contributions paid by the Company to the ESOP, from
earnings attributable to such contributions, and from cash dividends paid to the
ESOP on shares of the Company stock which it owns. At March 31, 2000 the loan
had been repaid.
During 2000 and 1999, the Company recognized expense associated with the
ESOP using the shares allocated method. This method recognizes interest expense
as incurred on all outstanding debt of the ESOP and compensation expense related
to principal reductions based on shares allocated for the period. Dividends
received on unallocated shares that are used to service the ESOP debt reduce the
amount of expense recognized each period. The compensation expense associated
with the ESOP was $225,000 and $200,000 in 2000 and 1999, respectively. The ESOP
received no dividends on unallocated shares in 2000 and 1999. Interest expense
in the amount of $10,000 and $25,000 was incurred in 2000 and 1999,
respectively. Dividends paid on allocated shares accumulate for the benefit of
the employees.
Other Postretirement Benefits
In addition to providing pension benefits, the Company has a United States
plan which provides health care benefits for eligible retirees and eligible
survivors of retirees. The Company recognizes the cost of these benefits on the
accrual basis as employees render service to earn the benefits. Early retirees
who are eligible to receive benefits under the plan are required to share in
twenty percent of the medical premium cost. In addition, the Company's share of
the premium costs has been capped.
25
27
The components of postretirement benefit cost are:
2001 2000 1999
-------- -------- --------
Service cost -- benefits earned during the
period........................................... $ 51,000 $ 69,000 $ 69,000
Interest cost on accumulated benefit obligation.... 176,000 168,000 176,000
Amortization of prior service cost................. (87,000) (87,000) (87,000)
-------- -------- --------
Net postretirement benefit cost.................... $140,000 $150,000 $158,000
======== ======== ========
The assumptions used to develop the accrued postretirement benefit
obligation were:
2001 2000 1999
---- ---- ----
Discount rate............................................... 7 1/4% 7 1/2% 6 1/2%
Medical care cost trend rate................................ 7% 7 1/2% 8%
The medical care cost trend rate used in the actuarial computation
ultimately reduces to 4 1/2% in 2006 and subsequent years. This was accomplished
using 1/2% decrements for the years 2002 through 2006.
Changes in the Company's benefit obligation, plan assets and funded status
for the plan are as follows:
2001 2000
----------- -----------
Change in the benefit obligation
Projected benefit obligation at beginning of year....... $ 2,454,000 $ 2,861,000
Service cost............................................ 50,000 69,000
Interest cost........................................... 176,000 168,000
Participant contributions............................... 34,000 31,000
Actuarial (gain) loss................................... 27,000 (517,000)
Benefit payments........................................ (174,000) (158,000)
----------- -----------
Projected benefit obligation at end of year............. $ 2,567,000 $ 2,454,000
=========== ===========
Change in fair value of plan assets
Fair value of plan assets at beginning of year.......... $ 0 $ 0
Employer contribution................................... 140,000 127,000
Participants' contributions............................. 34,000 31,000
Benefit payments........................................ (174,000) (158,000)
----------- -----------
Fair value of plan assets at end of year................ $ 0 $ 0
=========== ===========
Funded status
Funded status at end of year............................ $(2,567,000) $(2,454,000)
Unrecognized prior service cost......................... (695,000) (782,000)
Unrecognized actuarial (gain) loss...................... (97,000) (124,000)
----------- -----------
Net amounts recognized.................................. $(3,359,000) $(3,360,000)
=========== ===========
The current portion of the postretirement benefit obligation is included in
the caption "Accrued Compensation" and the long-term portion is separately
presented in the Consolidated Balance Sheets.
Assumed medical care cost trend rates have a significant effect on the
amounts reported for the postretirement benefit plan. A one percentage point
change in assumed medical care cost trend rates would have the following
effects:
1% INCREASE 1% DECREASE
----------- -----------
Effect on total service and interest cost components........ $ 1,000 $ (1,000)
Effect on postretirement benefit obligation................. $15,000 $(17,000)
26
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NOTE 9 -- STOCK COMPENSATION PLANS:
The 1995 Graham Corporation Incentive Plan to Increase Shareholder Value
provides for the issuance of up to 192,000 shares of common stock in connection
with grants of incentive stock options and non-qualified stock options to
officers, key employees and outside directors. The 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.
The 1989 Stock Option and Appreciation Rights Plan provided for the
issuance of up to 188,700 shares of common stock in connection with grants of
non-qualified stock options and tandem stock appreciation rights to officers,
key employees and certain outside directors. Options can no longer be granted
under this plan.
In November 2000, the Board of Directors adopted the 2000 Graham
Corporation Incentive Plan to Increase Shareholder Value and approved the
granting of non-qualified stock options to purchase 5,000 shares of the
Company's common stock at an exercise price of $11.00 to its outside directors.
If approved by the shareholders, these options will be immediately exercisable
and will expire no later than November 2010. This plan provides for the issuance
of up to 150,000 shares of common stock in connection with grants of incentive
stock options and non-qualified stock options to officers, key employees and
outside directors. The 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.
The Company has a Long-Term Incentive Plan which provides for awards of
share equivalent units for outside directors based upon the Company's
performance. Each unit is equivalent to one share of the Company's common stock.
Share equivalent units are credited to each outside director's account for each
of the first five full fiscal years of the director's service when the profit
target of $500,000 is met. The share equivalent units are payable in cash or
stock upon retirement. The cost of performance units earned and charged to
pre-tax income under this Plan in 2001, 2000, and 1999 was $0, $0, and $50,000,
respectively.
The Company applies APB 25 and related Interpretations in accounting for
its plans. Under the intrinsic value method, no compensation expense has been
recognized for its stock option plans. Had compensation cost for the Company's
two stock option plans been determined based on the fair value at the grant date
for awards under those plans in accordance with the optional methodology
prescribed under SFAS 123, the Company's net income (loss) and net earnings
(loss) per share would have been the pro forma amounts indicated below:
2001 2000 1999
-------- --------- ----------
Net income (loss).................. As reported $195,000 $(833,000) $2,369,000
Pro forma 186,000 (842,000) 2,244,000
Basic earnings (loss) per share.... As reported $ .12 $ (.55) $ 1.48
Pro forma $ .12 $ (.55) $ 1.40
Diluted earnings (loss) per As reported $ .12 $ (.55) $ 1.46
share............................
Pro forma $ .12 $ (.55) $ 1.39
The weighted average fair value of the options granted during 2001, 2000,
and 1999 is estimated as $5.15, $3.54, and $3.98, respectively, using the Black
Scholes option pricing model with the following weighted average assumptions:
2001 2000 1999
------- ------- -------
Expected life........................................... 5 years 5 years 5 years
Volatility.............................................. 44.04% 41.48% 37.14%
Risk-free interest rate................................. 5.78% 6.05% 4.53%
Dividend yield.......................................... 0% 0% 0%
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Information on options and rights under the Company's plans is as follows:
WEIGHTED
OPTION SHARES AVERAGE
PRICE UNDER EXERCISE
RANGE OPTION PRICE
------------- -------- --------
Outstanding at March 31, 1998.................... $6.58 - 21.44 143,850 $15.79
Granted.......................................... $7.50 - 17.00 43,500 9.84
Cancelled........................................ $13.17 (9,250) 13.17
--------
Outstanding at March 31, 1999.................... $6.58 - 21.44 178,100 14.47
Granted.......................................... $7.75 30,400 7.75
Expired.......................................... $13.17 (26,250) 13.17
--------
Outstanding at March 31, 2000.................... $6.58 - 21.44 182,250 13.54
Granted.......................................... $11.00 31,000 11.00
Exercised........................................ $6.58 - 8.42 (7,050) 7.71
Cancelled........................................ $21.44 (8,700) 21.44
--------
Outstanding at March 31, 2001.................... $6.58 - 21.44 197,500 $13.00
========
At March 31, 2001, the options outstanding had a weighted average remaining
contractual life of 7.17 years. There were 192,700 options exercisable at March
31, 2001 which had a weighted average exercise price of $12.94. The remaining
options are exercisable at a rate of 20 percent per year from the date of grant.
The outstanding options expire May 2003 to October 2010. The number of options
available for future grants were 176,150 at March 31, 2001 and 48,450 at March
31, 2000.
NOTE 10 -- SHAREHOLDER RIGHTS PLAN:
On July 27, 2000 the Company adopted a Shareholder Rights Plan. Under the
Plan, as of September 11, 2000, one share Purchase Right ("Right") is attached
to each outstanding share of Common Stock. When and if the Rights become
exercisable, each Right would entitle the holder of a share of Common Stock to
purchase from the Company one one-hundredth (1/100) interest in a share of
Series A Junior Participating preferred stock, at a price of $45.00 per one
one-hundredth (1/100) interest in a share of preferred stock, subject to
adjustment. The Rights become exercisable upon certain events: (i) if a person
or group of affiliated persons acquires 15% or more of the Company's outstanding
Common Stock; or (ii) if a person or group commences a tender offer for 15% or
more of the Company's outstanding Common Stock.
The Company may redeem the Rights for $.01 per Right at any time prior to
the acquisition by a person or group of affiliated persons of beneficial
ownership of 15% or more of the Company's outstanding common stock ("Acquiring
Person").
In the event that any person or group of affiliated persons become an
Acquiring Person, each holder of a Right other than Rights beneficially owned by
the Acquiring Person will have the right to receive upon exercise a number of
shares of Common Stock having a market value of twice the purchase price of the
Right. In the event that the Corporation is acquired in a merger or other
business combination transaction or fifty percent (50%) or more of its
consolidated assets or earning power is sold, each holder of a Right will have
the right to receive, upon exercise, a number of shares of common stock of the
acquiring corporation that at the time of such transaction will have a market
value of two (2) times the purchase price of the Right.
NOTE 11 -- RESTRUCTURING COSTS:
During fiscal year 2000, the defined benefit pension plan in the United
Kingdom was terminated which resulted in a curtailment loss of $1,682,000. In
addition, the Company incurred fees and expenses of $33,000 in
28
30
administering the closure of the plan. The curtailment loss and related expenses
are included in the caption "Restructuring Costs" in the 2000 Consolidated
Statement of Operations.
In October and March of fiscal year 2000, the United Kingdom subsidiary, in
an effort to reduce costs, restructured its work force by eliminating positions
at the staff and senior management levels. As a result, a restructuring charge
of $186,000 was recognized which included severance and related employee benefit
costs. This charge is also included in the caption "Restructuring Costs" in the
2000 Consolidated Statement of Operations.
NOTE 12 -- RELATED PARTY TRANSACTIONS:
Director H. Russel Lemcke is President of the H. Russel Lemcke Group, which
the Company engaged in May 1999 to assist it in making an acquisition in
fulfillment of its strategic plan. Pursuant to this engagement, in the event
that the Company were to acquire another business entity as a result of such
assistance, Mr. Lemcke would be paid a fee of $100,000 plus 1% of the purchase
price of the acquired entity.
In April 2000, the Board of Directors adopted a Long-Term Stock Ownership
Plan to encourage officers and directors to broaden their equity ownership in
the Company. The Board authorized the sale under the Plan of up to 160,000
shares of the Company's common stock currently held as treasury stock. Of the
amount authorized, eligible participants purchased 117,800 shares at fair market
value.
NOTE 13 -- SEGMENT INFORMATION:
The Company's business consists of two operating segments based upon
geographic area. These segments were determined based upon the manner in which
financial information is used by management in operating the Company. The United
States segment designs and manufactures heat transfer and vacuum equipment. 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 for use in several industrial
markets. The Company also services and sells spare parts for its equipment. The
operating segment located in the United Kingdom manufactures vacuum equipment
which includes liquid ring vacuum pumps, piston pumps, ejectors and complete
vacuum pump systems.
Intersegment sales represent intercompany sales made based upon a
competitive pricing structure. All intercompany profits in inventory are
eliminated in the consolidated accounts and are included in the eliminations
caption below. In computing segment net income or loss, corporate expenses
incurred by the United States segment have been charged to the United Kingdom
segment on a management fee basis. Operating segment information is presented
below:
2001 2000 1999
----------- ----------- -----------
Sales from external customers:
U.S. ...................................... $40,665,000 $34,778,000 $48,886,000
U.K. ...................................... 3,768,000 3,950,000 4,092,000
----------- ----------- -----------
Total................................... $44,433,000 $38,728,000 $52,978,000
=========== =========== ===========
Intersegment sales:
U.S. ...................................... $ 21,000 $ 162,000 $ 4,000
U.K. ...................................... 1,607,000 1,118,000 1,555,000
----------- ----------- -----------
Total................................... $ 1,628,000 $ 1,280,000 $ 1,559,000
=========== =========== ===========
Interest revenue:
U.S. ...................................... $ 342,000 $ 346,000 $ 296,000
U.K. ......................................
----------- ----------- -----------
Total................................... $ 342,000 $ 346,000 $ 296,000
=========== =========== ===========
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31
2001 2000 1999
----------- ----------- -----------
Interest expense:
U.S. ...................................... $ 294,000 $ 199,000 $ 239,000
U.K. ...................................... 34,000 34,000 48,000
----------- ----------- -----------
Total................................... $ 328,000 $ 233,000 $ 287,000
=========== =========== ===========
Depreciation and amortization:
U.S. ...................................... $ 776,000 $ 827,000 $ 820,000
U.K. ...................................... 172,000 223,000 221,000
----------- ----------- -----------
Total................................... $ 948,000 $ 1,050,000 $ 1,041,000
=========== =========== ===========
Income tax expense (benefit):
U.S. ...................................... $ (199,000) $ 188,000 $ 651,000
U.K. ...................................... 13,000 (468,000) (278,000)
----------- ----------- -----------
Total................................... $ (186,000) $ (280,000) $ 373,000
=========== =========== ===========
Segment net income (loss):
U.S. ...................................... $ 224,000 $ 374,000 $ 2,066,000
U.K. ...................................... 41,000 (1,209,000) 355,000
----------- ----------- -----------
Total................................... $ 265,000 $ (835,000) $ 2,421,000
=========== =========== ===========
Segment assets:
U.S. ...................................... $35,737,000 $34,489,000 $32,046,000
U.K. ...................................... 4,665,000 3,831,000 4,317,000
----------- ----------- -----------
Total................................... $40,402,000 $38,320,000 $36,363,000
=========== =========== ===========
Expenditures for long-lived assets:
U.S. ...................................... $ 1,025,000 $ 699,000 $ 1,179,000
U.K. ...................................... 99,000 12,000 10,000
----------- ----------- -----------
Total................................... $ 1,124,000 $ 711,000 $ 1,189,000
=========== =========== ===========
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32
The operating segment information above is reconciled to the consolidated
totals as follows:
2001 2000 1999
----------- ----------- -----------
NET SALES
Total sales for operating segments........... $46,061,000 $40,008,000 $54,537,000
Elimination of intersegment sales............ (1,628,000) (1,280,000) (1,559,000)
----------- ----------- -----------
Net sales.................................... $44,433,000 $38,728,000 $52,978,000
=========== =========== ===========
INCOME TAX PROVISION (BENEFIT)
Total income tax provision (benefit)......... $ (186,000) $ 280,000 $ 373,000
Eliminations................................. (35,000)
----------- ----------- -----------
Provision (Benefit) for income taxes......... $ (221,000) $ 280,000 $ 373,000
=========== =========== ===========
NET INCOME (LOSS)
Total segment net income (loss).............. $ 265,000 $ (835,000) $ 2,421,000
Eliminations................................. (70,000) 2,000 (52,000)
----------- ----------- -----------
Net income (loss)............................ $ 195,000 $ (833,000) $ 2,369,000
=========== =========== ===========
ASSETS
Total segment assets......................... $40,402,000 $38,320,000 $36,363,000
Elimination of corporate investment in
subsidiaries............................... (3,521,000) (3,521,000) (2,021,000)
Elimination of profit in inventory........... (273,000) (203,000) (206,000)
----------- ----------- -----------
Total assets................................. $36,608,000 $34,596,000 $34,136,000
=========== =========== ===========
Total segment interest revenue, interest expense, depreciation and
amortization and expenditures for long-lived assets are equivalent to the
consolidated totals for each of these items. Operating segments incurred
research and development costs of $250,000, $255,000, and $371,000 in 2001,
2000, and 1999, respectively.
Net sales by product line follows:
2001 2000 1999
----------- ----------- -----------
Heat transfer equipment...................... $19,366,000 $18,166,000 $26,477,000
Vacuum equipment............................. 21,999,000 18,716,000 24,836,000
All other.................................... 3,068,000 1,846,000 1,665,000
----------- ----------- -----------
Net sales.................................... $44,433,000 $38,728,000 $52,978,000
=========== =========== ===========
31
33
The breakdown of net sales and long-lived assets by geographic area is:
2001 2000 1999
----------- ----------- -----------
Net Sales:
Asia...................................... $ 3,567,000 $ 3,541,000 $ 9,777,000
Australia & New Zealand................... 35,000 461,000 63,000
Canada.................................... 5,796,000 2,246,000 3,593,000
Mexico.................................... 511,000 695,000 4,287,000
Middle East............................... 1,895,000 1,153,000 3,648,000
South America............................. 747,000 2,710,000 3,231,000
United States............................. 27,811,000 24,731,000 23,564,000
Western Europe............................ 3,824,000 2,918,000 4,140,000
Other..................................... 247,000 273,000 675,000
----------- ----------- -----------
Net sales................................. $44,433,000 $38,728,000 $52,978,000
=========== =========== ===========
Long-Lived Assets:
United States............................. $ 8,889,000 $ 8,767,000 $ 8,881,000
United Kingdom............................ 1,124,000 1,338,000 1,569,000
----------- ----------- -----------
Total.................................. $10,013,000 $10,105,000 $10,450,000
=========== =========== ===========
QUARTERLY FINANCIAL DATA:
A capsule summary of the Company's unaudited quarterly results for 2001 and
2000 is presented below:
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
---------- ----------- ----------- ----------- -----------
2001
Net sales................ $8,284,000 $11,726,000 $10,558,000 $13,865,000 $44,433,000
Gross profit............. 1,859,000 2,914,000 2,047,000 2,976,000 9,796,000
Net income (loss)........ (354,000) 267,000 (303,000) 585,000 195,000
Per share:
Net income (loss):
Basic............... (.23) .17 (.18) .36 .12
Diluted............. (.23) .16 (.18) .35 .12
Market price range....... 7.06 - 8.63 7.38 - 12.94 9.00 - 12.38 8.25 - 10.75 7.06 - 12.94
2000
Net sales................ $9,053,000 $11,659,000 $ 8,288,000 $ 9,728,000 $38,728,000
Gross profit............. 2,640,000 3,291,000 1,803,000 2,230,000 9,964,000
Net income (loss)........ 181,000 509,000 (2,388,000) 865,000 (833,000)
Per share:
Net income (loss):
Basic............... .12 .33 (1.57) .57 (.55)
Diluted............. .12 .33 (1.57) .57 (.55)
Market price range....... 7.63 - 9.44 6 - 9.44 6.06 - 8.25 6 - 8.13 6 - 9.44
32
34
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
Graham Corporation
Batavia, New York
We have audited the accompanying consolidated balance sheets of Graham
Corporation and subsidiaries as of March 31, 2001 and 2000, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended March 31, 2001. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America and with United Kingdom auditing
standards issued by the Auditing Practices Board. 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, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2001 in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Rochester, New York
May 18, 2001
33
35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information called for under this Item is set forth in statements under
"Election of Directors" on page 3 and "Executive Officers" on page 6 of the
Company's Proxy Statement for its 2001 Annual Meeting of Stockholders, which
statements are hereby incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for under this Item is set forth in statements under
"Directors' Fees" on page 5 of the Company's Proxy Statement for its 2001 Annual
Meeting of Stockholders and also under "Compensation of Executive Officers" on
pages 7 to 11 of such proxy statement, which statements are hereby incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The information called for under this Item is set forth in statements under
"Principal Stockholders" on page 2 of the Company's Proxy Statement for its 2001
Annual Meeting of Stockholders, which statements are hereby incorporated herein
by reference.
(b) SECURITY OWNERSHIP OF MANAGEMENT
The information called for under this Item is set forth in statements under
"Principal Stockholders" on page 2, "Election of Directors" on page 3 and
"Executive Officers" on pages 7 to 11 of the Company's Proxy Statement for its
2001 Annual Meeting of Stockholders, which statements are hereby incorporated
herein by reference.
(c) CHANGES IN CONTROL
(Not applicable.)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for under this Item is set forth in statements under
"Election of Directors" on page 5 of the Company's Proxy Statement for its 2001
Annual Meeting of Stockholders, which statements are hereby incorporated herein
by reference.
34
36
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following are Financial Statements and related information
filed as part of this Annual Report on Form 10-K.
SEQUENTIAL
PAGE NUMBER
-----------
(A) Consolidated Statements of Operations for the Fiscal Years
ended March 31, 2001, 2000 and 1999......................... 12
(B) Consolidated Balance Sheets as of March 31, 2001 and 2000... 13
(C) Consolidated Statements of Cash Flows for the Fiscal Years
ended March 31, 2001, 2000 and 1999......................... 14
(D) Consolidated Statements of Changes in Shareholders' Equity
for the Fiscal Years ended March 31, 2001, 2000 and 1999.... 15
(E) Notes to Consolidated Financial Statements; and............. 16-32
(F) Quarterly Financial Data.................................... 32
(G) Report of Independent Auditors.............................. 33
(a) (2) In addition to the above, the following Financial Statement
Schedules and related information are required to be filed as part of this
Annual Report on Form 10-K by Items 8 and 14(d) of Form 10-K:
SEQUENTIAL
PAGE NUMBER
-----------
Independent Auditors' Report on Financial Statement
(A) Schedules................................................... 36
Financial Statement Schedules for the Fiscal Years ended
March 31, 2001, 2000 and 1999 as follows:
(ii) Valuation and Qualifying Accounts (Schedule II)........ 37
Other financial statement schedules not included in this Annual Report on
Form 10-K have been omitted because they are not applicable or because the
required information is shown in the financial statements or notes thereto.
No items have been reported on Form 8-K since the Company's filing of Form
10-Q for the quarter ended December 31, 2000.
35
37
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
Graham Corporation
Batavia, New York
We have audited the consolidated financial statements of Graham Corporation
and subsidiaries as of March 31, 2001 and 2000, and for each of the three years
in the period ended March 31, 2001 and have issued our report thereon dated May
18, 2001; such report is included elsewhere in this Annual Report on Form 10-K.
Our audits also included the consolidated financial statement schedule of Graham
Corporation and subsidiaries, listed in Item 14(a)2. This financial statement
schedule is the responsibility of the Corporation's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
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
May 18, 2001
36
38
GRAHAM CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
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, 2001
Reserves deducted from the asset to
which they apply:
Reserve for doubtful accounts.... $ 23,000 $(11,000)(c) $ 12,000(b) $ 24,000
Reserve for inventory
obsolescence.................. 146,000 12,000 (12,000)(a) (106,000)(d) 40,000
Reserves included in the balance
sheet caption
Accrued expenses
Reserve for contingencies........ 700,000 (32,000)(c) (668,000)(e) 0
-------- -------- -------- --------- --------
Year ended March 31, 2000.............. $869,000 $(31,000) $ 0 $(774,000) $ 64,000
======== ======== ======== ========= ========
Reserves deducted from the asset to
which they apply:
Reserve for doubtful accounts.... $ 22,000 $ (8,000)(c) $ 12,000(b) $ (3,000) $ 23,000
Reserve for inventory
obsolescence.................. 101,000 47,000 (2,000)(a) 146,000
Reserves included in the balance
sheet caption
Accrued expenses
Reserve for contingencies........ 300,000 430,000 (30,000) 700,000
-------- -------- -------- --------- --------
$423,000 $469,000 $ 10,000 $ (33,000) $869,000
======== ======== ======== ========= ========
Year ended March 31, 1999
Reserves deducted from the asset to
which they apply:
Reserve for doubtful accounts.... $ 23,000 $ 23,000 $ 1,000(b) $ (25,000) $ 22,000
Reserve for inventory
obsolescence.................. 42,000 63,000 (4,000)(a) 101,000
Reserves included in the balance
sheet caption
Accrued expenses and Other
long-term liabilities:
Reserve for contingencies..... 250,000 100,000 (50,000) 300,000
-------- -------- -------- --------- --------
$315,000 $186,000 $ (3,000) $ (75,000) $423,000
======== ======== ======== ========= ========
---------------
Notes:
(a) Represents foreign currency translation adjustment.
(b) Represents a bad debt recovery and a foreign currency translation
adjustment.
(c) Represents a reversal of the reserve.
(d) Represents a write-off of obsolete inventory thereby reducing inventory and
the reserve.
(e) Represents the final settlement payment for the Batavia Landfill EPA claim.
37
39
(a) (3) The following exhibits are required to be filed by Item 14(c) of
Form 10-K:
EXHIBIT
NO.
-------
*3.1 Articles of Incorporation of Graham Corporation
+3.2 By-laws of Graham Corporation
*4.1 Certificate of Incorporation of Graham Corporation (included
as Exhibit 3.1)
**4.2 Stockholder Rights Plan of Graham Corporation
***10.1 1989 Stock Option and Appreciation Rights Plan of Graham
Corporation
****10.2 1995 Graham Corporation Incentive Plan to Increase
Shareholder Value
+10.3 Graham Corporation Outside Directors' Long-Term Incentive
Plan
+10.4 Employment Contracts between Graham Corporation and Named
Executive Officers
+10.5 Senior Executive Severance Agreements with Named Executive
Officers
++10.6 2000 Graham Corporation Incentive Plan to Increase
Shareholder Value
11 Statement regarding computation of per share earnings
Computation of per share earnings is included in Note 1 of
the Notes to Consolidated Financial Statements
21 Subsidiaries of the registrant
23.1 Consent of Deloitte and Touche LLP
---------------
* Incorporated herein by reference from the Annual Report of Registrant on
Form 10-K for the year ended December 31, 1989.
** Incorporated herein by reference from the Registrant's Current Report on
Form 8-K dated August 23, 2000 and Registrant's Form 8-A dated September
15, 2000.
*** Incorporated herein by reference from the Registrant's Proxy Statement for
its 1991 Annual Meeting of Shareholders.
**** Incorporated herein by reference from the Registrant's Proxy Statement for
its 1996 Annual Meeting of Shareholders.
+ Incorporated herein by reference from the Annual Report of Registrant on
Form 10-K for the fiscal year ended March 31, 1998.
++ Incorporated herein by reference from the Registrant's Proxy Statement for
its 2001 Annual Meeting of Shareholders.
38
40
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
DATE: June 6, 2001 By /s/ J. RONALD HANSEN
-----------------------------------------------------
J. Ronald Hansen
Vice President-Finance & Administration and Chief
Financial Officer (Principal Accounting Officer)
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.
SIGNATURE
---------
/s/ ALVARO CADENA President and Chief Executive June 6, 2001
--------------------------------------------------- Officer; Director
Alvaro Cadena
/s/ J. RONALD HANSEN Vice President-Finance & June 6, 2001
--------------------------------------------------- Administration and Chief
J. Ronald Hansen Financial Officer (Principal
Accounting Officer)
/s/ PHILIP S. HILL Director June 6, 2001
---------------------------------------------------
Philip S. Hill
/s/ CORNELIUS S. VAN REES Director June 6, 2001
---------------------------------------------------
Cornelius S. Van Rees
/s/ JERALD D. BIDLACK Director; Chairman of the Board June 6, 2001
---------------------------------------------------
Jerald D. Bidlack
/s/ HELEN H. BERKELEY Director June 6, 2001
---------------------------------------------------
Helen H. Berkeley
/s/ H. RUSSEL LEMCKE Director June 6, 2001
---------------------------------------------------
H. Russel Lemcke
39
41
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
EXHIBITS
filed with
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
of
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED March 31, 2001
--------------------
GRAHAM CORPORATION
===============================================================================