GRAHAM CORP
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Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
| (Mark One) | ||
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
|
For the fiscal year ended
March 31, 2010
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OR
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|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the transition period
from to .
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Commission File
Number 1-8462
GRAHAM CORPORATION
(Exact name of registrant as
specified in its charter)
| DELAWARE | 16-1194720 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
|
incorporation or
organization)
|
Identification No.) | |
| 20 Florence Avenue, Batavia, New York | 14020 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code
585-343-2216
Securities registered pursuant to Section 12(b) of the
Act:
| Title of each class | Name of each exchange on which registered | |
|
Common Stock (Par Value $.10)
|
NYSE Amex |
Securities registered pursuant to Section 12(g) of the
Act:
|
Title of Class
|
| Preferred Stock Purchase Rights |
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
o
No
þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
þ
Indicate by checkmark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by checkmark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes
o
No
o
Indicate by checkmark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
|
Large accelerated filer
o
|
Accelerated filer þ |
Non-accelerated filer
o
(Do not check if a smaller reporting company) |
Smaller Reporting company o |
Indicate by checkmark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
o
No
þ
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of September 30, 2009,
the last business day of the registrant’s most recently
completed second fiscal quarter, was $143,920,692. The market
value calculation was determined using the closing price of the
registrant’s common stock on September 30, 2009, as
reported on the NYSE Amex exchange. For purposes of the
foregoing calculation only, all directors, officers and the
Employee Stock Ownership Plan of the registrant have been deemed
affiliates.
As of May 21, 2010, the registrant had outstanding
9,850,277 shares of common stock, $.10 par value, and
9,850,277 preferred stock purchase rights.
Documents
Incorporated By Reference
Portions of the registrant’s definitive Proxy Statement, to
be filed in connection with the registrant’s 2010 Annual
Meeting of Stockholders to be held on July 29, 2010, are
incorporated by reference into Part III, Items 10, 11,
12, 13 and 14 of this filing.
Table of
Contents
GRAHAM CORPORATION
Annual Report on Form 10-K
Year Ended March 31, 2010
GRAHAM CORPORATION
Annual Report on Form 10-K
Year Ended March 31, 2010
| Note: | Portions of the registrant’s definitive Proxy Statement, to be issued in connection with the registrant’s 2010 Annual Meeting of Stockholders to be held on July 29, 2010, are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K. |
Table of Contents
(Dollar amounts in thousands except per share data).
| Item 1. | Business |
Graham Corporation (“Graham,” the “Company,”
“we,” “us” or “our”) designs,
manufactures and sells custom-built vacuum and heat transfer
equipment to customers worldwide. Our products include steam jet
ejector vacuum systems, surface condensers for steam turbines,
vacuum pumps and compressors, various types of heat exchangers,
including helical coil heat exchangers marketed under the
Heliflow
®
name, and plate and frame heat exchangers. Our products produce
a vacuum, condense steam or transfer heat, or perform a
combination of these tasks. Our products are available in a
variety of metals and non-metallic corrosion resistant materials.
Our products are used in a wide range of industrial process
applications, including:
| • | petroleum refineries; | |
| • | chemical and petrochemical plants; | |
| • | fertilizer plants; | |
| • | power generation facilities, such as fossil fuel, nuclear, cogeneration and geothermal power plants; | |
| • | alternative energy; | |
| • | pharmaceutical plants; | |
| • | plastics plants; | |
| • | liquefied natural gas production facilities; | |
| • | soap manufacturing plants; | |
| • | air conditioning systems; | |
| • | propulsion systems for nuclear aircraft carriers; | |
| • | food processing plants; and | |
| • | other process industries. |
Our
Customers and Markets
Our principal customers are in the chemical, petrochemical,
petroleum refining and power generating industries, and can be
end users of our products in their manufacturing, refining and
power generation processes, large engineering companies that
build installations for companies in such industries,
and/or
the
original equipment manufacturers, who combine our products with
their equipment prior to its sale to end users.
Our products are sold by a team of sales engineers we employ
directly and independent sales representatives located
worldwide. No part of our business is dependent on a single
customer or a few customers, the loss of which would seriously
harm our business, or on contracts or subcontracts that are
subject to renegotiation or termination by a governmental agency.
Historically, 40% to 50% percent of our revenue has been
generated from foreign sales, and we believe that revenue from
the sale of our products outside the U.S. will continue to
account for a significant portion of our total revenue for the
foreseeable future. We have invested significant resources in
developing and maintaining our international sales operations
and presence, and we intend to continue to make such investments
in the future. As a result of the expansion of our presence in
Asia, we expect that the Asian market will over time account for
an increasing percentage of our revenue. We expect international
sales to account for 50% to 60% or more of total revenue over
the next few years.
A breakdown of our net sales by geographic area and product
class for our fiscal years ended March 31, 2010, 2009 and
2008, which we refer to as fiscal 2010, fiscal 2009 and fiscal
2008, respectively, is contained in Note 12 to
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our consolidated financial statements included in Item 8 of
Part II of this Annual Report on
Form 10-K.
Our backlog at March 31, 2010 was $94,255 compared with
$48,290 at March 31, 2009.
We were incorporated in Delaware in 1983 and are the successor
to Graham Manufacturing Co., Inc., which was incorporated in New
York in 1936. Our principal business location is in Batavia, New
York. We also maintain a wholly-owned subsidiary, Graham Vacuum
and Heat Transfer Technology (Suzhou) Co., Ltd., located in
Suzhou, China. As of March 31, 2010, we had
237 full-time employees.
Our
Strengths
Our core strengths include the following:
| • | We have strong brand recognition. Over the past 74 years, we believe that we have built a reputation for top quality, reliable products and high standards of customer service. We have also established a large installed application base. As a result, the Graham name is well known not only by our existing customers, but also by many of our potential customers. We believe that the recognition of the Graham brand allows us to capitalize on market opportunities in both existing and potential markets. | |
| • | We custom engineer and manufacture high quality products and systems that address the particular needs of our customers. With 74 years of engineering expertise, we believe that we are well respected for our knowledge in vacuum and heat transfer technologies. We maintain strict quality control and manufacturing standards in order to manufacture products of the highest quality. | |
| • | We have a global presence. Our products are used worldwide, and we have sales representatives located in many countries throughout the world. | |
| • | We have a strong reputation. We believe that we have a solid reputation and strong relationships with our existing customer base, as well as with our key suppliers. | |
| • | We have a strong balance sheet. We maintain significant cash and investments on hand, and no bank debt. Our defined benefit pension plan obligations are fully funded. | |
| • | We have a high quality credit facility. Our credit facility provides us with a $30,000 borrowing capacity. |
Our
Strategy
Our objective is to capture more market share within the
geographies and industries we serve, expand our geographic
markets, grow our presence in the energy industry and
continually improve our results of operations. Our strategy to
accomplish our objective is:
| • | Capitalize on the strength of the Graham brand in order to win more business in our traditional markets and enter other markets. | |
| • | Identify and consummate acquisition and organic growth opportunities where we believe our brand strength will provide us with the ability to expand and complement our core business. This includes extending our existing product lines, moving into complementary product lines and expanding our global sales presence in order to further broaden our existing markets and reach additional markets. | |
| • | Invest in people and capital equipment to meet the long-term growth in demand for our products in the oil refining, petrochemical processing and power generating industries, especially in emerging markets. Specifically, we intend to strengthen our sales and engineering in Asia and establish manufacturing capabilities where long-term estimates of demand for oil and oil by-products point to continued growth. | |
| • | Deliver highest quality products and solutions that enable our customers to achieve their operating objectives and that differentiate us from our competitors, and which allow us to win new orders based on value. |
In order to effectively implement our strategy, we also believe
that we must continually work to improve our Company. These
efforts include:
| • | Investing in engineering resources and technology in order to advance our vacuum and heat transfer technology market penetration. |
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Table of Contents
| • | Enhancing our engineering and manufacturing capacities, especially in connection with the design of our products, in order to more quickly respond to existing and future customer demand and to minimize underutilization of capacity. | |
| • | Accelerating our bids on available contracts by implementing front-end bid automation and design processes. | |
| • | Expanding our margins by implementing and expanding upon our operational efficiencies through a flexible manufacturing flow model and other cost efficiencies. | |
| • | Continued focus and success on production error elimination and rework reduction. |
Competition
Our business is highly competitive. The principal bases on which
we compete include technology, price, performance, reputation,
delivery, and quality. Our competitors in our primary markets
include:
NORTH
AMERICA
|
Market
|
Competitors
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|
|
Refining vacuum distillation
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Gardner Denver, Inc. | |
|
Chemicals/Petrochemicals
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Croll Reynolds Company, Inc.; Schutte Koerting; Gardner Denver, Inc. | |
|
Turbomachinery Original Equipment Manufacturer
(“OEM”) — refining, petrochemical
|
Ambassador; KEMCO; Yuba Heat Transfer, LLC | |
|
Turbomachinery OEM — power and power producer
|
Holtec; Thermal Engineering International (USA), Inc.; KEMCO; Yuba Heat Transfer, LLC | |
|
HVAC
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Alfa Laval AB; APV; ITT; Ambassador |
INTERNATIONAL
|
Market
|
Competitors
|
|
|
Refining vacuum distillation
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Gardner Denver, Inc.; GEA Wiegand GmbH; Edwards, Ltd.; Korting Hannover AG | |
|
Chemicals/Petrochemicals
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Croll Reynolds Company, Inc.; Schutte Koerting; Gardner Denver, Inc.; GEA Wiegand GmbH; Korting Hannover AG; Edwards, Ltd. | |
|
Turbomachinery OEM — refining, petrochemical
|
DongHwa Entec Co., Ltd.; Bumwoo Engineering Co., Ltd.; Oeltechnik GmbH; KEMCO | |
|
Turbomachinery OEM — power and power producer
|
Holtec; Thermal Engineering International; KEMCO;
Yuba Heat Transfer, LLC |
Intellectual
Property
Our success depends in part on our proprietary technology. We
rely on a combination of patent, copyright, trademark, trade
secret laws and confidentiality provisions to establish and
protect our proprietary rights. We also depend heavily on the
brand recognition of the Graham name in the marketplace.
Availability
of Raw Materials
Although shortages of certain materials can from time to time
affect our ability to meet delivery requirements for certain
orders, historically, we have not been materially adversely
impacted by the availability of raw materials.
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Table of Contents
Working
Capital Practices
Our business does not require us to carry significant amounts of
inventory or materials beyond what is needed for work in
process. We do not provide rights to return goods, or payment
terms to customers that we consider to be extended in the
context of the industries we serve.
Environmental
Matters
We believe that we are in material compliance with existing
environmental laws and regulations. We do not anticipate that
our compliance with federal, state and local laws regulating the
discharge of material in the environment or otherwise pertaining
to the protection of the environment will have a material effect
upon our capital expenditures, earnings or competitive position.
Seasonality
No material part of our business is seasonal in nature. However,
our business is highly cyclical in nature as it depends on the
willingness of our customers to invest in major capital projects.
Research
and Development Activities
During fiscal 2010, fiscal 2009 and fiscal 2008, we spent
$3,824, $3,347 and $3,579, respectively, on research and
development activities related to new products and services, or
the improvement of existing products and services.
Information
Regarding International Sales
The sale of our products outside the U.S. has accounted for
a significant portion of our total revenue during our last three
fiscal years. Approximately 55%, 37% and 46% of our revenue in
fiscal 2010, fiscal 2009 and fiscal 2008, respectively, resulted
from foreign sales. Sales in Asia constituted approximately 33%,
13% and 15% of our revenue in fiscal 2010, fiscal 2009 and
fiscal 2008, respectively. Sales in the Middle East constituted
approximately 10%, 8% and 11% of our revenue in fiscal 2010,
fiscal 2009 and fiscal 2008, respectively. Our foreign sales and
operations are subject to numerous risks, as more particularly
discussed under the heading “Risk Factors” in
Item 1A of Part I of this Annual Report on
Form 10-K.
Available
Information
We are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended. Therefore, we file
periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the “SEC”).
The SEC maintains an Internet website (located at www.sec.gov)
that contains reports, proxy statements and other information
for registrants that file electronically. Additionally, such
reports may be read and copied at the Public Reference Room of
the SEC at 100 F Street NE, Washington, D.C.
20549. Information regarding the SEC’s Public Reference
Room can be obtained by calling
1-800-SEC-0330.
We maintain an Internet website located at www.graham-mfg.com.
On our website, we provide a link to the SEC’s Internet
website that contains the reports, proxy statements and other
information we file electronically. We do not provide this
information on our website because it is more cost effective for
us to provide a link to the SEC’s website. Copies of all
documents we file with the SEC are available in print to any
stockholder who makes a request. Such requests should be made to
our Corporate Secretary at our corporate headquarters. The other
information found on our website is not part of this or any
other report we file with, or furnish to, the SEC.
| Item 1A. | Risk Factors |
Our business and operations are subject to numerous risks, many
of which are described below and elsewhere in this Annual Report
on
Form 10-K.
If any of the events described below or elsewhere in this Annual
Report on
Form 10-K
occur, our business and results of operations could be harmed.
Additional risks and uncertainties that are not presently known
to us, or which we currently deem to be immaterial, could also
harm our business and results of operations.
4
Table of Contents
Risks
related to our business
The
industries in which we operate are cyclical, and downturns in
such industries may adversely affect our operating
results.
Historically, a substantial portion of our revenue has been
derived from the sale of our products to companies in the
chemical, petrochemical, petroleum refining and power generating
industries, or to firms that design and construct facilities for
these industries. The core industries in which our products are
used are, to varying degrees, cyclical and have historically
experienced severe downturns. Although we believe there will be
a long-term expansion of demand for our products in the
petrochemical, petroleum refining and power generating
industries, during fiscal 2009, we entered a sudden downturn in
the demand for our products and services. Historically, previous
cyclical downturns have lasted from one to several years. We
have no way to predict or control the length or severity of the
current downturn. A longer than normal or deeper down cycle
could force us to reduce our infrastructure, which would make it
difficult for us to quickly recover in the subsequent up cycle.
This scenario would require us to rebuild our business and be
slower to gain market share back. A sustained deterioration in
any of the cyclical industries we serve would materially harm
our business and operating results because our customers would
not likely have the resources necessary to purchase our products
nor would they likely have the need to build additional
facilities or improve existing facilities.
We
serve markets that are capital intensive. The recent volatility
and disruption of the capital and credit markets and adverse
changes in the global economy may negatively impact our
operating results. Such volatility and disruption may also
negatively impact our ability to access additional
financing.
Although we believe that the fundamentals that have driven our
growth over the past several years remain essentially unchanged
and that our long-term growth prospects remain strong, we also
expect that the state of the capital and credit markets has
caused a slow-down in spending by our customers as they evaluate
the current and future economic impact of such crisis to their
project plans. If adverse economic and credit conditions persist
or worsen, we would likely experience decreased revenue from our
operations attributable to decreases in the spending levels of
our customers. Adverse economic and credit conditions might also
have a negative adverse effect on our cash flows if customers
demand that we accept smaller project deposits and less frequent
progress payments. In addition, adverse economic and credit
conditions could put downward pricing pressure on us. If any of
the foregoing occurs, there would be an adverse effect on our
results of operations.
Moreover, the state of the capital and credit markets could have
an adverse effect on our ability to obtain additional financing
on commercially reasonable terms, if at all, should we determine
such financing is desirable to expand our business.
The
larger markets we serve are the petroleum refining and
petrochemical industries which are both cyclical in nature and
dependent on the price of oil. As a result, volatility in the
price of crude oil may negatively impact our operating
results.
Although we believe that the global consumption of crude oil
will increase over the course of the next twenty years and a
need to continually increase global oil refining capacity, the
price of crude oil has been very volatile. Many of our products
are purchased in connection with oil refinery construction,
revamps and upgrades. During times of significant volatility in
the market for crude oil, our customers may refrain from placing
orders until the market stabilizes. During such times of high
volatility, we could experience decreased revenue from our
operations attributable to decreases in the spending levels of
our customers.
A
large percentage of our sales are in
non-U.S.
jurisdictions. As a result, we are subject to the economic,
political, regulatory and other risks of international
operations.
For fiscal 2010, approximately 55% of our revenue was from
customers located in countries outside of the U.S. We
believe that revenue from the sale of our products outside the
U.S. will continue to account for a significant portion of
our revenue for the foreseeable future. Moreover, we maintain a
subsidiary and have facilities in China. We believe that revenue
from the sale of our products outside the U.S. will
continue to account for a significant portion of our total
revenue for the foreseeable future. We intend to continue to
expand our international operations
5
Table of Contents
to the extent that suitable opportunities become available. Our
foreign operations and sales could be adversely affected as a
result of:
| • | nationalization of private enterprises and assets; | |
| • | political or economic instability in certain countries, especially during the ongoing global economic crisis; | |
| • | differences in foreign laws, including increased difficulties in protecting intellectual property and uncertainty in enforcement of contract rights; | |
| • | the possibility that foreign governments may adopt regulations or take other actions that could directly or indirectly harm our business and growth strategy; | |
| • | credit risks; | |
| • | currency fluctuations; | |
| • | tariff and tax increases; | |
| • | export and import restrictions and restrictive regulations of foreign governments; | |
| • | shipping products during times of crisis or wars; | |
| • | our failure to comply with U.S. laws regarding doing business in foreign jurisdictions, such as the Foreign Corrupt Practices Act; and | |
| • | other factors inherent in foreign operations. |
We are
subject to foreign currency fluctuations which may adversely
affect our operating results.
We are exposed to the risk of currency fluctuations between the
U.S. dollar and the currencies of the countries in which we
sell our products to the extent that such sales are not based on
U.S. dollars. As such, fluctuations in currency exchange
rates, which cause the value of the U.S. dollar to
increase, could have an adverse effect on the profitability of
our business. While we may enter into currency exchange rate
hedges from time to time to mitigate these types of
fluctuations, we cannot remove all fluctuations or hedge all
exposures and our earnings are impacted by changes in currency
exchange rates. In addition, if the counter-parties to such
exchange contracts do not fulfill their obligations to deliver
the contractual foreign currencies, we could be at risk for
fluctuations, if any, required to settle the obligation. At
March 31, 2010, we held no forward foreign currency
exchange contracts.
If we
fail to introduce enhancements to our existing products or to
keep abreast of technological changes in our markets, our
business and results of operations could be adversely
affected.
Although technologies in the vacuum and heat transfer areas are
well established, we believe our future success depends, in
part, on our ability to enhance our existing products and
develop new products in order to continue to meet customer
demands. Our failure to introduce new or enhanced products on a
timely and cost-competitive basis, or the development of
processes that make our existing technologies or products
obsolete, could harm our business and results of operations.
The
loss of any member of our management team and our inability to
make up for such loss with a qualified replacement could harm
our business.
Competition for qualified management in our industry is intense.
Many of the companies with which we compete for management
personnel have greater financial and other resources than we do
or are located in geographic areas which may be considered by
some to be more desirable places to live. If we are not able to
retain any of our key management personnel, our business could
be harmed.
6
Table of Contents
Our
business is highly competitive. If we are unable to successfully
implement our business strategy, we risk losing market share to
current and future competitors.
Some of our present and potential competitors may have
substantially greater financial, marketing, technical or
manufacturing resources. Our competitors may also be able to
respond more quickly to new technologies or processes and
changes in customer demands. They may also be able to devote
greater resources towards the development, promotion and sale of
their products than we can. In addition, our current and
potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with
third parties that increase their ability to address the needs
of our customers. In addition, customer buying patterns can
change if customers become more price sensitive and accepting of
low cost suppliers. If we cannot compete successfully against
current or future competitors, our business will be harmed.
If we
are unable to make necessary capital investments or respond to
pricing pressures, our business may be harmed.
In order to remain competitive, we need to invest continuously
in research and development, manufacturing, customer service and
support, and marketing. From time to time we also have to adjust
the prices of our products to remain competitive. We may not
have available sufficient financial or other resources to
continue to make investments necessary to maintain our
competitive position.
If
third parties infringe upon our intellectual property or if we
were to infringe upon the intellectual property of third
parties, we may expend significant resources enforcing or
defending our rights or suffer competitive injury.
Our success depends in part on our proprietary technology. We
rely on a combination of patent, copyright, trademark, trade
secret laws and confidentiality provisions to establish and
protect our proprietary rights. If we fail to successfully
enforce our intellectual property rights, our competitive
position could suffer. We may also be required to spend
significant resources to monitor and police our intellectual
property rights. Similarly, if we were to infringe on the
intellectual property rights of others, our competitive position
could suffer. Furthermore, other companies may develop
technologies that are similar or superior to our technologies,
duplicate or reverse engineer our technologies or design around
our patents.
In some instances, litigation may be necessary to enforce our
intellectual property rights and protect our proprietary
information, or to defend against claims by third parties that
our products infringe their intellectual property rights. Any
litigation or claims brought by or against us, whether with or
without merit, could result in substantial costs to us and
divert the attention of our management, which could harm our
business and results of operations. In addition, any
intellectual property litigation or claims against us could
result in the loss or compromise of our intellectual property
and proprietary rights, subject us to significant liabilities,
require us to seek licenses on unfavorable terms, prevent us
from manufacturing or selling certain products or require us to
redesign certain products, any of which could harm our business
and results of operations.
We are
subject to contract cancellations and delays by our customers,
which may adversely affect our operating results.
Contract cancellations may occur, which could reduce the
realizable value of our backlog and negatively impact the amount
of revenue earned and the profitability of our business. Certain
contracts in backlog may contain provisions allowing for the
assessment of cancellation charges to our customers to
substantially compensate us for costs incurred on cancelled
contracts. Delay of contract execution by our customers can
result in volatility in our operating results.
A
decrease in supply or increase in cost of the materials used in
our products could harm our profitability.
Any restrictions on the supply or the increase in the cost of
the materials used by us in manufacturing our products could
significantly reduce our profit margins, which could harm our
results of operations. Any efforts we may engage in to mitigate
restrictions on the supply or price increases of materials by
entering into long-term
7
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purchase agreements, by implementing productivity improvements
or by passing cost increases on to our customers may not be
successful. Our profitability depends largely on the price and
continuity of supply of the materials used in the manufacture of
our products, which in many instances are supplied by a limited
number of sources.
If we
are unable to effectively outsource a portion of our production
during times when we are experiencing strong demand, our results
of operations might be adversely affected. In addition,
outsourcing may negatively affect our profit
margins.
When we experience strong demand for our products, our business
strategy calls for us to increase manufacturing capacity through
outsourcing selected fabrication processes. We could experience
difficulty in outsourcing if customers demand that our products
be manufactured by us exclusively. Furthermore, our ability to
effectively outsource production could be adversely affected by
worldwide manufacturing capacity. If we are unable to
effectively outsource our production capacity when circumstances
warrant, our results of operations could be adversely affected
and we might not be able to deliver products to our customers on
a timely basis. In addition, outsourcing to complete our
products and services can increase the costs associated with
such products and services. If we rely too heavily on
outsourcing and are not able to increase our own production
capacity during times when there is high demand for our products
and services, our margins may be negatively effected.
We
face potential liability from asbestos exposure and similar
claims.
We are a defendant in several lawsuits alleging illnesses from
exposure to asbestos or asbestos-containing products and seeking
unspecified compensatory and punitive damages. We cannot predict
with certainty the outcome of these lawsuits or whether we could
become subject to any similar, related or additional lawsuits in
the future. In addition, because some of our products are used
in systems that handle toxic or hazardous substances, any
failure or alleged failure of our products in the future could
result in litigation against us. Any litigation brought against
us, whether with or without merit, could result in substantial
costs to us as well as divert the attention of our management,
which could harm our business and results of operations.
If we
become subject to product liability claims, our results of
operations and financial condition could be adversely
affected.
The manufacturing and sale of our products exposes us to
potential product liability claims, including those that may
arise from failure to meet product specifications, misuse or
malfunction of, or design flaws in our products, or use of our
products with systems not manufactured or sold by us. For
example, our equipment is installed in facilities that operate
dangerous processes and the misapplication, improper
installation or failure of our equipment may result in exposure
to potentially hazardous substances, personal injury or property
damage.
Provisions contained in our contracts with customers which
attempt to limit our damages may not be enforceable in all
instances or may fail to protect us from liability for damages.
In addition, we carry liability insurance that we believe is
adequate to protect us from product liability claims, however,
our insurance may not cover all liabilities. We may not be able
to maintain this insurance at a reasonable cost or on reasonable
terms, or at all. Any material liability not covered by
provisions in our contracts or by insurance could have a
material adverse effect on our results of operations, financial
condition and cash flows.
Risks
related to operating a subsidiary in China
The
operations of our Chinese subsidiary may be adversely affected
by China’s evolving economic, political and social
conditions.
We conduct our business in China primarily through our
wholly-owned Chinese subsidiary. The results of operations and
future prospects of our Chinese subsidiary are subject to
evolving economic, political and social developments in China.
In particular, the results of operations of our Chinese
subsidiary may be adversely affected by, among other things,
changes in China’s political, economic and social
conditions, changes in policies of the Chinese government,
changes in laws and regulations or in the interpretation of
existing laws and regulations, changes in foreign exchange
regulations, measures that may be introduced to control
inflation, such as interest rate increases, and changes in the
rates or methods of taxation.
8
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Intellectual
property rights are difficult to enforce in China.
Chinese commercial law is relatively undeveloped compared with
the commercial law in many of our other major markets and
limited protection of intellectual property is available in
China as a practical matter. Although we take precautions in the
operations of our Chinese subsidiary to protect our intellectual
property, any local design or manufacture of products that we
undertake in China could subject us to an increased risk that
unauthorized parties will be able to copy or otherwise obtain or
use our intellectual property, which could harm our business. We
may also have limited legal recourse in the event we encounter
patent or trademark infringers.
Uncertainties
with respect to the Chinese legal system may adversely affect
the operations of our Chinese subsidiary.
Our Chinese subsidiary is subject to laws and regulations
applicable to foreign investment in China. There are
uncertainties regarding the interpretation and enforcement of
laws, rules and policies in China. The Chinese legal system is
based on written statutes, and prior court decisions have
limited precedential value. Because many laws and regulations
are relatively new and the Chinese legal system is still
evolving, the interpretations of many laws, regulations and
rules are not always uniform. Moreover, the relative
inexperience of China’s judiciary in many cases creates
additional uncertainty as to the outcome of any litigation, and
the interpretation of statutes and regulations may be subject to
government policies reflecting domestic political changes.
Finally, enforcement of existing laws or contracts based on
existing law may be uncertain and sporadic. For the preceding
reasons, it may be difficult for us to obtain swift and
equitable enforcement of laws ostensibly designed to protect
companies like ours.
Risks
related to the ownership of our common stock
Provisions
contained in our certificate of incorporation, bylaws and our
stockholder rights plan could impair or delay stockholders’
ability to change our management and could discourage takeover
transactions that our stockholders might consider to be in their
best interests.
Provisions of our certificate of incorporation and bylaws, as
well as our stockholder rights plan, could impede attempts by
our stockholders to remove or replace our management and could
discourage others from initiating a potential merger, takeover
or other change of control transaction, including a potential
transaction at a premium over the market price of our common
stock, that our stockholders might consider to be in their best
interests. For example:
| • | We could issue shares of preferred stock with terms adverse to our common stock . Under our certificate of incorporation, our Board of Directors is authorized to issue shares of preferred stock and to determine the rights, preferences and privileges of such shares without obtaining any further approval from the holders of our common stock. We could issue shares of preferred stock with voting and conversion rights that adversely affect the voting power of the holders of our common stock, or that have the effect of delaying or preventing a change in control of our company. | |
| • | We maintain a stockholder rights, or “poison pill,” plan . Our stockholder rights plan has the effect of discouraging any person or group that wishes to acquire 15% or more of our common stock from doing so without obtaining our agreement because such acquisition would cause such person or group to suffer substantial dilution. Such plan may have the effect of discouraging a change in control transaction that our stockholders would otherwise consider to be in their best interests. This plan expires on September 11, 2010. | |
| • | Only a minority of our directors may be elected in a given year . Our bylaws provide for a classified Board of Directors, with only approximately one-third of our Board elected each year. This provision makes it more difficult to effect a change of control because at least two annual stockholder meetings are necessary to replace a majority of our directors. | |
| • | Our bylaws contain advance notice requirements . Our bylaws also provide that any stockholder who wishes to bring business before an annual meeting of our stockholders or to nominate candidates for election as directors at an annual meeting of our stockholders must deliver advance notice of their proposals to us before the meeting. Such advance notice provisions may have the effect of making it more difficult to introduce business at stockholder meetings or nominate candidates for election as director. |
9
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| • | Our certificate of incorporation requires supermajority voting to approve a change of control transaction . Seventy-five percent of our outstanding shares entitled to vote are required to approve any merger, consolidation, sale of all or substantially all of our assets and similar transactions if the other party to such transaction owns 5% or more of our shares entitled to vote. In addition, a majority of the shares entitled to vote not owned by such 5% or greater stockholder are also required to approve any such transaction. | |
| • | Amendments to our certificate of incorporation require supermajority voting . Our certificate of incorporation contains provisions that make its amendment require the affirmative vote of both 75% of our outstanding shares entitled to vote and a majority of the shares entitled to vote not owned by any person who may hold 50% or more of our shares unless the proposed amendment was previously recommended to our stockholders by an affirmative vote of 75% of our Board. This provision makes it more difficult to implement a change to our certificate of incorporation that stockholders might otherwise consider to be in their best interests without approval of our Board. | |
| • | Amendments to our bylaws require supermajority voting . Although our Board of Directors is permitted to amend our bylaws at any time, our stockholders may only amend our bylaws upon the affirmative vote of both 75% of our outstanding shares entitled to vote and a majority of the shares entitled to vote not owned by any person who owns 50% or more of our shares. This provision makes it more difficult for our stockholders to implement a change they may consider to be in their best interests without approval of our Board. |
| Item 1B. | Unresolved Staff Comments |
Not applicable.
| Item 2. | Properties |
Our corporate headquarters, located at 20 Florence Avenue,
Batavia, New York, consists of a 45,000 square foot
building. Our management team and substantially all of our
engineering and research and development operations are based in
our corporate headquarters. Our manufacturing facilities, also
located in Batavia, consist of approximately 33 acres and
contain about 216,000 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, we lease a U.S. sales office in Houston and
our Chinese subsidiary leases a sales and engineering office in
Suzhou, China.
We believe that our properties are generally in good condition,
are well maintained, and are suitable and adequate to carry on
our business.
| Item 3. | Legal Proceedings |
The information required by this Item 3 is contained in
Note 15 to our consolidated financial statements included
in Item 8 of Part II of this Annual Report on
Form 10-K
and is incorporated herein by reference.
| Item 4. | (Removed and Reserved) |
(Amounts in thousands, except per share data)
| Item 5. | Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is traded on the NYSE Amex exchange under the
symbol “GHM”. As of May 21, 2010, there were
9,850 shares of our common stock outstanding that were held
by approximately 151 stockholders of record.
10
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The following table shows the high and low per share prices of
our common stock for the periods indicated, as reported by the
NYSE Amex. The table and the disclosure below takes into account
the effect of our two-for-one stock split in the nature of a
dividend, which became effective October 6, 2008.
| High | Low | |||||||
|
Fiscal year 2010
|
||||||||
|
First quarter
|
$ | 16.12 | $ | 8.70 | ||||
|
Second quarter
|
15.67 | 10.52 | ||||||
|
Third quarter
|
21.84 | 13.37 | ||||||
|
Fourth quarter
|
21.58 | 14.63 | ||||||
|
Fiscal year 2009
|
||||||||
|
First quarter
|
$ | 38.25 | $ | 17.50 | ||||
|
Second quarter
|
54.91 | 21.25 | ||||||
|
Third quarter
|
27.36 | 6.85 | ||||||
|
Fourth quarter
|
13.89 | 7.16 | ||||||
Subject to the rights of any preferred stock we may then have
outstanding, the holders of our common stock are entitled to
receive dividends as may be declared from time to time by our
Board of Directors out of funds legally available for the
payment of dividends. Dividends declared per share by our Board
of Directors for each of the four quarters of fiscal 2010 were
$.02 and for the first, second, third and fourth quarters of
fiscal 2009 were $.015, $.02, $.02 and $.02, respectively. There
can be no assurance that we will pay cash dividends in any
future period or that the level of cash dividends paid by us
will remain constant.
The senior credit facility to which we are a party contains
provisions pertaining to the maintenance of a minimum total
liabilities to tangible net worth ratio as well as restrictions
on the payment of dividends to stockholders and incurrence of
additional long-term debt. The facility also limits the payment
of dividends to stockholders to $1,200 per year.
On January 29, 2009, our Board of Directors authorized a
stock repurchase program, which expired on July 29, 2009.
On July 30, 2009, the stock repurchase program was extended
by our Board of Directors through July 30, 2010. Under the
stock repurchase program, up to 1,000 shares of our common
stock are permitted to be repurchased by us from time to time
either in the open market or through privately negotiated
transactions. The stock repurchase program terminates at the
earlier of the expiration of the program on July 30, 2010,
when all 1,000 shares have been repurchased or when our
Board of Directors terminates the program. Cash on hand has been
used to fund all stock repurchases under the program.
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| Item 6. | Selected Financial Data |
| GRAHAM CORPORATION — FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA | ||||||||||||||||||||
| (For Fiscal Years Ended March 31) | 2010 | 2009 | 2008(1) | 2007(1) | 2006(1) | |||||||||||||||
| (Amounts in thousands, except per share data) | ||||||||||||||||||||
|
Operations:
|
||||||||||||||||||||
|
Net sales
|
$ | 62,189 | $ | 101,111 | $ | 86,428 | $ | 65,822 | $ | 55,208 | ||||||||||
|
Gross profit
|
22,231 | 41,712 | 34,162 | 16,819 | 15,959 | |||||||||||||||
|
Gross profit percentage
|
35.7 | % | 41.3 | % | 39.5 | % | 25.6 | % | 28.9 | % | ||||||||||
|
Income from continuing operations
|
6,361 | 17,467 | 15,034 | 5,761 | 3,586 | |||||||||||||||
|
Dividends
|
788 | 754 | 493 | 387 | 367 | |||||||||||||||
|
Common stock:
|
||||||||||||||||||||
|
Basic earnings from continuing operations per share
|
$ | .64 | $ | 1.72 | $ | 1.52 | $ | .59 | $ | .39 | ||||||||||
|
Diluted earnings from continuing operations per share
|
.64 | 1.71 | 1.49 | .58 | .38 | |||||||||||||||
|
Stockholders’ equity per share
|
7.01 | 6.21 | 4.86 | 3.15 | 2.83 | |||||||||||||||
|
Dividends declared per share
|
.08 | .075 | .05 | .04 | .04 | |||||||||||||||
|
Market price range of common stock
|
||||||||||||||||||||
|
High
|
21.84 | 54.91 | 30.48 | 9.20 | 10.40 | |||||||||||||||
|
Low
|
8.70 | 6.85 | 6.30 | 5.02 | 3.31 | |||||||||||||||
|
Average common shares outstanding — diluted
|
9,937 | 10,195 | 10,085 | 9,850 | 9,336 | |||||||||||||||
|
Financial data at March 31:
|
||||||||||||||||||||
|
Cash and cash equivalents and investments
|
$ | 74,590 | $ | 46,209 | $ | 36,793 | $ | 15,051 | $ | 10,988 | ||||||||||
|
Working capital
|
56,704 | 49,547 | 36,998 | 20,119 | 16,779 | |||||||||||||||
|
Capital expenditures
|
1,003 | 1,492 | 1,027 | 1,637 | 1,048 | |||||||||||||||
|
Depreciation
|
1,107 | 977 | 862 | 874 | 775 | |||||||||||||||
|
Total assets
|
108,979 | 86,924 | 70,711 | 48,878 | 40,556 | |||||||||||||||
|
Long-term debt, including capital lease obligations
|
144 | 31 | 36 | 56 | 30 | |||||||||||||||
|
Stockholders’ equity
|
69,074 | 61,111 | 48,536 | 30,654 | 27,107 | |||||||||||||||
| (1) | Per share data has been adjusted to reflect the following stock splits: a two-for-one stock split declared on July 31, 2008; a five-for-four stock split declared on October 26, 2007; and a two-for-one stock split declared on July 28, 2005. |
12
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
(Amounts in thousands, except per share data)
Overview
We are a global designer and manufacturer of custom-engineered
ejectors, vacuum systems, condensers, liquid ring pump packages
and heat exchangers. Our equipment is used in critical
applications in the petrochemical, oil refinery and electric
power generation industries, including cogeneration and
geothermal plants. Our equipment can also be found in
alternative energy applications, including ethanol, biodiesel
and coal and gas-to-liquids and other applications, and other
diverse applications, such as metal refining, pulp and paper
processing, shipbuilding, water heating, refrigeration,
desalination, soap manufacturing, food processing,
pharmaceuticals, heating, ventilating and air conditioning.
Our corporate offices and production facilities are located in
Batavia, New York. We also have a wholly-owned foreign
subsidiary located in Suzhou, China which supports sales orders
from China and provides engineering support and supervision of
subcontracted fabrication.
Highlights
Highlights for our fiscal year ended March 31, 2010, which
we refer to as fiscal 2010, include:
| • | Net income and income per diluted share for fiscal 2010, were $6,361 and $0.64 compared with net income and income per diluted share of $17,467 and $1.71 for fiscal year ended March 31, 2009, which we refer to as fiscal 2009. | |
| • | Net sales for fiscal 2010 of $62,189 were down 38% compared with $101,111 for fiscal 2009. | |
| • | Orders placed in fiscal 2010 of $108,317 were up 47% compared with fiscal 2009, when orders were $73,874. Fiscal 2010 orders set a record high. | |
| • | Backlog on March 31, 2010 of $94,255 was up 95% from backlog of $48,290 on March 31, 2009. Backlog on March 31, 2010 set a record high. | |
| • | Gross profit and operating margins for fiscal 2010 were 35.7% and 16.2% compared with 41.3% and 26.0%, respectively, for fiscal 2009. | |
| • | Cash and short-term investments at March 31, 2010 were $74,590 compared with $46,209 as of March 31, 2009, up 61%. Cash and investments on hand at March 31, 2010 set a record high. Our cash and short-term investments position includes a significant increase in customer advances, as certain key customers negotiated these pre-payments to lower project costs. | |
| • | At fiscal year end, we had a solid balance sheet that was free of bank debt and that provided financial flexibility. |
Forward-Looking
Statements
This report and other documents we file with the Securities and
Exchange Commission include “forward-looking
statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.
These statements involve known and unknown risks, uncertainties
and other factors that may cause actual results to be materially
different from any future results implied by the forward-looking
statements. Such factors include, but are not limited to, the
risks and uncertainties identified by us under the heading
“Risk Factors” in Item 1A of our Annual Report on
Form 10-K.
Forward-looking statements may also include, but are not limited
to, statements about:
| • | the current and future economic environments affecting us and the markets we serve; | |
| • | sources of revenue and anticipated revenue, including the contribution from the growth of new products, services and markets; |
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| • | plans for future products and services and for enhancements to existing products and services; | |
| • | our operations in foreign countries; | |
| • | estimates regarding our liquidity and capital requirements; | |
| • | timing of conversion of backlog to sales; | |
| • | our ability to attract or retain customers; | |
| • | the outcome of any existing or future litigation; | |
| • | our acquisition strategy; and | |
| • | our ability to increase our productivity and capacity. |
Forward-looking statements are usually accompanied by words such
as “anticipate,” “believe,”
“estimate,” “may,” “intend,”
“expect” and similar expressions. Actual results could
differ materially from historical results or those implied by
the forward-looking statements contained in this report.
Undue reliance should not be placed on our forward-looking
statements. Except as required by law, we undertake no
obligation to update or announce any revisions to
forward-looking statements contained in this Annual Report on
Form 10-K,
whether as a result of new information, future events or
otherwise.
Fiscal
2011 and the Near-Term Market Conditions
The downturn in the global economy which commenced in the fall
of 2007 led to reduced demand for petroleum-based products,
which in turn led our customers to defer investment in major
capital projects. We believe that we are beginning to see some
positive signs that international customers are once again
examining investments in major capital projects.
In addition, we believe that the significant increase in
construction costs, including raw material costs, which had
occurred over the four-to-five-year period prior to the recent
downturn, also led to delays in new commitments by our
customers. The increase in costs resulted in the economics of
projects becoming less feasible, which we believe caused our
customers to choose to wait until costs declined, as they have
recently.
Currently, near-term demand trends that we believe are affecting
our customers’ investments include:
| • | As the world recovers slowly from the global recession, many emerging economies continue to have relatively strong economic growth. This expansion is driving growing energy requirements and the need for more refined petroleum products. Although uncertainty in the capital markets continues, there has been some improved access to capital, which has resulted in certain previously stalled projects being released. | |
| • | The expansion of the Middle Eastern economies and the continued growth in demand for oil and refined products has renewed investment activity in that area. We believe that such renewed activity is exemplified by the re-starting of projects in both the petrochemical and refining industries, such as the Jubail and Yanbu export refinery projects in Saudi Arabia (as construction costs for these projects have reportedly been reduced by 20%). | |
| • | Asia, specifically China, has been experiencing renewed demand for refined petroleum products such as gasoline in calendar year 2009 and thus far in 2010, following reductions in demand during calendar year 2008 as economic uncertainty stymied growth. This renewed demand is driving increased investment in petrochemical and refining projects. | |
| • | South America, specifically Brazil, Venezuela and Colombia, is seeing increased refining and petrochemical investments that are driven by their continually expanding economies and increased local demand for gasoline and other products that are made from oil as the feedstock. | |
| • | The U.S. refining market has declined and refinery utilization has fallen as demand declined from conservation efforts, economic weakness, and uncertainty around U.S. energy policy and its potential |
14
Table of Contents
| impact on production costs. As a result, there have been fewer investment dollars in capital projects for refineries in the U.S. This is expected to continue for the next few years. |
| • | Investments in North American oil sands have been delayed as a result of construction costs and uncertainty around U.S. energy policy (and the potential impact that changes to the energy policy may have on production costs which has impacted project economics and risk). Recently however, there have been investments in extraction projects in Alberta and foreign investment in Alberta which suggest that downstream investments that involve our equipment might increase in the next two to three years. |
We expect that the consequences of these near-term trends will
be more pressure on our gross margins, as the U.S. refining
market has historically provided higher margins than certain
international markets. Because of continued global economic
uncertainty and the risk associated with growth in emerging
economies, we also expect that we will have continued volatility
in our order pattern. For the next several quarters, we expect
to see smaller value projects than what we had seen during the
last expansion cycle. This will require more orders for us to
achieve a similar revenue level.
We continue to expect our new order levels to remain volatile,
resulting in both strong and weak quarters. For example,
sequentially the past four quarters had new order levels of
$8,838, $29,567, $51,644, and $18,268, in the first, second,
third and fourth quarters of fiscal 2010, respectively. We
believe that looking at our order level in any one quarter does
not provide an accurate indication of our future expectations or
performance. Rather, we believe that looking at our orders and
backlog over a rolling four-quarter time period provides a
better measure of our business.
Shift
Back to International Growth Expected to Drive Next Industry
Cycle
Over the long-term, we expect our customers’ markets to
regain their strength and, while remaining cyclical, continue to
grow. We believe the long-term trends remain strong and that the
drivers of future growth include:
Demand
Trends
| • | Global consumption of crude oil is estimated to expand significantly over the next two decades, primarily in emerging markets. This is expected to offset estimated flat to slightly declining demand in North America and Europe. | |
| • | Increased demand is expected for power, refinery and petrochemical products, stimulated by an expanding middle class in Asia. | |
| • | Increased development of geothermal electrical power plants in certain regions is expected to meet projected growth in demand for electrical power. | |
| • | Increased global regulations over the refining and petrochemical industries are expected to continue to drive requirements for capital investments. | |
| • | Increased demand is expected from the nuclear power generation industry and government contractors. |
Impact of
Demand Trends
| • | Construction of new petrochemical plants in the Middle East, where natural gas is plentiful and less expensive, is expected to continue. | |
| • | Increased investments in new power projects are expected in Asia and South America to meet projected consumer demand increases. | |
| • | Global oil refining capacity is projected to increase, and is expected to be addressed through new facilities, refinery upgrades, revamps and expansions. | |
| • | Long-term growth potential is believed to exist in alternative energy markets, such as coal-to-liquids, gas-to-liquids and other emerging technologies, such as biodiesel, ethanol and waste-to-energy. |
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We believe that all of the above factors offer us long-term
growth opportunity to meet our customers’ expected capital
project needs. In addition, we believe we can continue to grow
our less cyclical smaller product lines and aftermarket
businesses.
Emerging markets require petroleum-based products. These markets
are expected to continue to grow at rates faster than the
U.S. Therefore, we expect international opportunities will
be more plentiful relative to domestic projects. Our domestic
sales as a percentage of aggregate product sales, which had
increased over the prior three fiscal years from 50% in fiscal
2007 to 54% in fiscal 2008 to 63% in fiscal 2009, decreased to
45% in fiscal 2010. The economic recovery, which we believe has
partly begun in the international markets, will likely provide
greater opportunities than the domestic market in the near term.
Our order rates for fiscal 2010 were 50% domestic and 50%
international. However, the domestic order level was heavily
impacted by a large order (in excess of $25,000) from Northrop
Grumman to supply surface condensers for the U.S. Navy. If
we exclude this project, the international order percentage
would have exceeded 65%. As we look at fiscal 2011 and beyond,
we believe international sales over the next few years will
likely surpass domestic sales.
Results
of Operations
For an understanding of the significant factors that influenced
our performance, the following discussion should be read in
conjunction with our consolidated financial statements and the
notes to our consolidated financial statements included in this
Annual Report on
Form 10-K.
The following table summarizes our results of operations for the
periods indicated:
| Year Ended March 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Net sales
|
$ | 62,189 | $ | 101,111 | $ | 86,428 | ||||||
|
Net income
|
$ | 6,361 | $ | 17,467 | $ | 15,034 | ||||||
|
Diluted income per share
|
$ | 0.64 | $ | 1.71 | $ | 1.49 | ||||||
|
Total assets
|
$ | 108,979 | $ | 86,924 | $ | 70,711 | ||||||
Fiscal
2010 Compared with Fiscal 2009
Sales for fiscal 2010 were $62,189, a 38% decrease, as compared
with sales of $101,111 for fiscal 2009. The decrease was due to
reduced demand for petroleum-based products as a result of the
economic downturn which caused our customers to defer investment
in major capital projects. This decline in sales occurred in all
product lines. International sales accounted for 55% of all
sales for fiscal 2010, which were up from 37% in fiscal 2009.
Domestic sales decreased by $35,793 in fiscal 2010.
International sales declined $3,129 in fiscal 2010, driven by
sales declines in Canada, South America, Middle East and Europe,
somewhat offset by higher sales in Asia and Africa. Sales for
fiscal 2010 were 41% to the refining industry (down from 46% in
fiscal 2009), 35% to the chemical and petrochemical industries
(up from 27%) and 24% to other industrial applications (down
from 27%), including electrical power.
Our gross profit percentage for fiscal 2010 was 35.7% compared
with 41.3% for fiscal 2009. Gross profit dollars for fiscal 2010
decreased 47%, or $19,481, compared with fiscal 2009. Gross
profit dollars decreased due to lower volume, which resulted in
the significant under utilization of our production capacity.
The lower volume and utilization declines were partly offset by
improved raw material purchasing benefits especially in the
first and second quarter of fiscal 2010, and continued
improvements in productivity.
Selling, general and administrative, or SG&A, and other
expenses for fiscal 2010 were $12,189, down 21% compared with
$15,384 in fiscal 2009. Included in fiscal 2009 costs was a
pre-tax charge of $559 for restructuring costs. SG&A and
other expenses as a percentage of sales increased in fiscal 2010
to 19.6% of sales compared with 15.2% of sales in fiscal 2009.
SG&A expenses decreased due to lower variable costs (e.g.,
sales commissions, compensation, headcount expenses) related to
lower sales and cost controls in place throughout fiscal 2010.
Interest income for fiscal 2010 was $55, down from $416 in
fiscal 2009. This decrease was due to lower rates of return on
our investments, which are primarily short-term
U.S. Treasury securities.
16
Table of Contents
Interest expense was $36 in fiscal 2010, up from $5 in fiscal
2009. The increase was due to an interest charge of $32 for
unrecognized tax benefits, as discussed below, taken in fiscal
2010.
Our effective tax rate in fiscal 2010 was 37% compared with an
effective tax rate of 35% for fiscal 2009. The increase was due
to a charge for unrecognized tax benefits of $445 related to
research and development tax credits taken in tax years 2006
through 2010. Such charge is management’s estimate of our
potential exposure related to an ongoing Internal Revenue
Service examination of our research and development tax credits.
We believe our tax position is correct and we intend to continue
to vigorously defend our position. Associated with the tax
charge was an interest charge of $32, as noted in the above
paragraph, and a $10 tax credit, related to the interest charge.
The combination of these charges and credit was a net charge to
earnings of $467 ($435 in taxes and $32 in interest), which
lowered our earnings per share in fiscal 2010 by $0.05 per
share. Excluding the tax charge, our effective tax rate in
fiscal 2010 was 32.5%. The total tax benefit related to the
research and development tax credit that is under review by the
IRS was $2,218 at March 31, 2010. In assessing the
realizability of deferred tax assets, management determined that
a portion of the deferred tax assets related to certain state
investment tax credits and net operating losses will not be
realized and a valuation allowance of $332 was recorded
resulting in an increase in the effective tax rate.
Net income for fiscal 2010 and fiscal 2009 was $6,361 and
$17,467, respectively. Income per diluted share was $0.64 and
$1.71 for the respective periods.
Fiscal
2009 Compared with Fiscal 2008
Sales for fiscal 2009 were $101,111, a 17% increase, as compared
with sales of $86,428 for the fiscal year ended March 31,
2008, which we refer to as fiscal 2008. This growth in sales
came from all product lines: 32% of the gain came from pumps,
29% from spare parts, and the remaining 39% from condensers,
ejectors and heat exchangers. International sales accounted for
37% of all sales for fiscal 2009, which was down from 46% in
fiscal 2008. The strength of the U.S. refining market
during fiscal 2009 was primarily responsible for such shift.
Domestic sales grew $16,838 in fiscal 2009. International sales
declined by 5% in fiscal 2009, driven by sales declines in South
America and the Middle East due to a slowdown in investment in
new capacity. Sales for fiscal 2009 were 46% to the refining
industry (up from 43% in fiscal 2008), 27% to the chemical and
petrochemical industries (down from 31%) and 27% to other
industrial applications (up from 26%), including electrical
power.
Our gross profit percentage for fiscal 2009 was 41.3% compared
with 39.5% for fiscal 2008. Gross profit dollars for fiscal 2009
increased 22%, or $7,550, compared with fiscal 2008. Gross
profit dollars increased due to increased volume, improved
product mix achieved by increased selectivity on orders
accepted, and improved engineering and manufacturing
efficiencies. Our improved operating efficiencies, which were a
continuation of the gains we saw in fiscal 2008, enabled us to
achieve greater sales volume in fiscal 2009 without spending
significant capital (or increasing other fixed costs) to
increase our manufacturing capacity.
SG&A expenses for fiscal 2009 remained similar to the
fiscal 2008 level of 15%. Actual costs in fiscal 2009 increased
$1,751, or 13%, compared with fiscal 2008. SG&A expenses
increased due to greater variable costs (e.g., sales
commissions, variable compensation) related to higher sales and
net income.
During fiscal 2009, as we entered the economic downturn, we
restructured our workforce, eliminating certain management,
office and manufacturing positions. The restructuring resulted
in a pre-tax charge to earnings of $559. This cost was reported
as Other Expense. Our on-going annual cost savings as a result
of the restructuring is expected to be approximately $2,700.
Interest income for fiscal 2009 was $416, down from $1,026 in
fiscal 2008. This decrease was due to lower rates of return on
our investments, which are primarily short-term
U.S. Treasury securities.
Interest expense was $5 in fiscal 2009, down from $10 in fiscal
2008.
Our effective tax rate in fiscal 2009 was 35%, compared with an
effective tax rate of 32% for fiscal 2008. The increase was due
to a higher level of pre-tax income relative to our allowable
level of tax deductions.
Net income for fiscal 2009 and fiscal 2008 was $17,467 and
$15,034, respectively. Income per diluted share was $1.71 and
$1.49 for the respective periods.
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Stockholders’
Equity
The following discussion should be read in conjunction with our
consolidated statements of changes in stockholders’ equity
that can be found in Item 8 of Part II of this Annual
Report on
Form 10-K.
The following table shows the balance of stockholders’
equity on the dates indicated:
|
March 31, 2010
|
March 31, 2009 | March 31, 2008 | ||||||||
| $ | 69,074 | $ | 61,111 | $ | 48,536 | |||||
Fiscal
2010 Compared with Fiscal 2009
Stockholders’ equity increased $7,963 or 13%, at
March 31, 2010 compared with March 31, 2009. This
increase was primarily due to net income and an increase in the
value of pension assets. Dividends paid in fiscal 2010 increased
5%, to $788, due to a dividend increase which occurred in early
fiscal 2009. We repurchased 26 shares in the first quarter
of fiscal 2010 (and a total of 303 shares, including
repurchases completed in the fourth quarter of fiscal
2009) pursuant to our publicly announced stock repurchase
program. The number of shares remaining that have been approved
for repurchase under the stock repurchase program is 697.
On March 31, 2010, our net book value was $7.01 up 13% over
March 31, 2009.
Fiscal
2009 Compared with Fiscal 2008
Stockholders’ equity increased $12,575 or 26%, at
March 31, 2009 compared with March 31, 2008. This
increase was primarily due to net income, offset by a decline in
the value of pension assets. In July 2008, we increased our
dividend per share from 6 cents per share per year to 8 cents
per year. Dividends paid in fiscal 2009 increased 53%, or $261,
due to the above mentioned increase as well as an increase in
mid-fiscal 2008. In fiscal 2009, we increased authorized shares
from 6,000 to 25,500. In October 2008, we split our stock
2-for-1
in
the form of a stock dividend, increasing the actual outstanding
shares to 10,125 shares. We subsequently repurchased
277 shares in the fourth quarter of fiscal 2009 pursuant to
our publicly announced stock repurchase program.
On March 31, 2009, our net book value was $6.21 up 28% over
March 31, 2008.
Liquidity
and Capital Resources
The following discussion should be read in conjunction with our
consolidated statements of cash flows and consolidated balance
sheets appearing in Item 8 of Part II of this Annual
Report on
Form 10-K:
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Working capital(1)
|
$ | 56,704 | $ | 49,547 | ||||
|
Working capital ratio(1)
|
2.6 | 3.1 | ||||||
|
Long-term debt (capital leases)
|
$ | 144 | $ | 31 | ||||
|
Long-term debt/capitalization(2)
|
0.0 | % | 0.0 | % | ||||
|
Long-term liabilities/capitalization(3)
|
7.1 | % | 4.3 | % | ||||
| (1) | Working capital equals current assets minus current liabilities. Working capital ratio equals current assets divided by current liabilities. | |
| (2) | Long-term debt/capitalization equals long-term debt divided by stockholders’ equity plus long-term debt. | |
| (3) | Long-term liabilities/capitalization equals total liabilities minus current liabilities divided by stockholders’ equity plus long-term debt. |
We use the ratios described above to measure our liquidity and
overall financial strength.
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As of March 31, 2010, our contractual and commercial
obligations for the next five fiscal years ending March 31 and
thereafter were as follows:
| Payments Due by Period | ||||||||||||||||||||
|
Less Than
|
1 − 3
|
3 − 5
|
||||||||||||||||||
| Total | 1 Year | Years | Years | Thereafter | ||||||||||||||||
|
Capital lease obligations
|
$ | 219 | $ | 70 | $ | 82 | $ | 67 | $ | — | ||||||||||
|
Operating leases(1)
|
264 | 158 | 106 | — | — | |||||||||||||||
|
Pension and postretirement benefits(2)
|
109 | 109 | — | — | — | |||||||||||||||
|
Accrued compensation
|
292 | — | — | — | 292 | |||||||||||||||
|
Accrued pension liability
|
272 | 26 | 52 | 52 | 142 | |||||||||||||||
|
Other long-term liabilities
|
445 | — | 445 | — | — | |||||||||||||||
|
Total
|
$ | 1,601 | $ | 363 | $ | 685 | $ | 119 | $ | 434 | ||||||||||
| (1) | For additional information, see Note 5 to the consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K. | |
| (2) | Amounts represent anticipated contributions during fiscal 2010 to our postretirement medical benefit plan, which provides healthcare benefits for eligible retirees and eligible survivors of retirees. On February 4, 2003, we terminated postretirement healthcare benefits for our U.S. employees. Benefits payable to retirees of record on April 1, 2003 remained unchanged. We expect to be required to make cash contributions in connection with these plans beyond one year, but such amounts cannot be estimated. No contributions are expected to be made to our defined benefit pension plan for our fiscal year ending March 31, 2011. |
Net cash provided by operating activities for fiscal 2010 was
$30,270, compared with $11,046 for fiscal 2009. The largest
single component was an increase in customer deposits of
$16,130; in fiscal 2009, customer deposits decreased by $100.
The increase in customer deposits resulted from major customers
providing upfront negotiated cash payments to assist in lowering
the cost for Graham to complete their projects. This cash will
be utilized to procure materials for these customers’
projects in the fiscal years ended March 31, 2011 and 2012.
We refer to the fiscal years ending March 31, 2011 and 2012
as fiscal 2011 and fiscal 2012, respectively. We often obtain
progress payments for large projects from our customers
throughout the procurement and manufacturing process. In the
recent instances, more cash was provided shortly after the order
was secured. During fiscal 2011, we expect operating cash flow
will be negative as the customer deposits balance is utilized to
procure materials to support production.
The other major contributors to operating cash generation were
net income, $6,361 and a reduction in unbilled revenue, $7,407.
Compared with fiscal 2009, net income in fiscal 2010 was lower
by $11,106 and the impact of deferred taxes and taxes payable
was ($446) in fiscal 2010 compared with cash generation of
$3,470 in fiscal 2009. Offsetting these reductions in cash
generation, were cash gains of $7,407 in unbilled revenue in
fiscal 2010 compared with a cash usage of $1,675 in fiscal 2009
and lower cash usage for pension, $245 in fiscal 2010 compared
with $7,677 in fiscal 2009 (primarily due to $7,500 in
contribution to the defined benefit pension plan in fiscal 2009).
Cash and cash investments were $74,590 on March 31, 2010
compared with $46,209 on March 31, 2009, up 61%. The
largest component of the improvement was an increase in customer
deposits of $16,130, to $22,022 on March 31, 2010 compared
with $5,892 on March 31, 2009. Cash and cash investments,
net of the customer deposits, as discussed above, was $52,568
compared with $40,317.
We invest net cash generated from operations in excess of cash
held for near-term needs in U.S. government instruments,
generally with maturity periods of up to 180 days.
Investments at March 31, 2010 and March 31, 2009 were
$70,060 and $41,059, respectively.
Other sources of cash for fiscal 2010 included the issuance of
common stock to cover stock options exercised, which raised $63,
as compared with $695 in fiscal 2009. In fiscal 2010, we
recognized a $40 increase in capital in excess of par value for
the income tax benefit realized upon exercise of stock options
in excess of the tax benefit
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amount recognized pertaining to the fair value of stock option
awards treated as compensation expense. This amount compared
with $1,696 for fiscal 2009.
Other significant uses of cash for fiscal 2010 included our
publicly announced stock repurchase program. Under this program,
26 shares of stock were purchased during the first quarter
of fiscal 2010 at a cost of $229 (representing an average price
of $8.91 per share). This compared with 277 shares
purchased in fiscal 2009 at a total cost of $2,288 (representing
an average price of $8.25 per share). Dividend payments of $788
and capital expenditures of $1,003 were made in fiscal 2010,
compared with $754 and $1,492, respectively, for fiscal 2009. In
fiscal 2010, we repaid $39 in excess of amounts borrowed for
bank borrowings and capitalized leases, as compared with $28 for
fiscal 2009.
Capital expenditures in fiscal 2010 were 86% for plant machinery
and equipment and 14% for all other items. Sixty-eight percent
of our capital spending was for productivity improvements and
the balance was primarily for capitalized maintenance. Capital
expenditures for fiscal 2011 are expected to be approximately
$3,300. In excess of 40% of our planned fiscal 2011 capital
expenditures are related to the Northrop Grumman project for the
U.S. Navy won in fiscal 2010. Over 80% of our fiscal 2011
capital expenditures are expected to be for machinery and
equipment, with the remaining amounts to be used for information
technology and other items.
Our revolving credit facility with Bank of America, N.A.
provides us with a line of credit of $30,000, including letters
of credit and bank guarantees. Borrowings under our credit
facility are secured by all of our assets. Letters of credit
outstanding under our credit facility on March 31, 2010 and
2009 were $9,584 and $8,759, respectively. There were no other
amounts outstanding on our credit facility at March 31,
2010 and 2009. Our borrowing rate as of March 31, 2009 was
Bank of America’s prime rate minus 125 basis points,
or 2.00%. Availability under the line of credit was $20,416 at
March 31, 2010. We believe that cash generated from
operations, combined with our investments and available
financing capacity under our credit facility, will be adequate
to meet our cash needs for the immediate future.
Orders
and Backlog
Orders during fiscal 2010 and fiscal 2009 were $108,317 and
$73,874, respectively, representing a 47% increase for fiscal
2010 and a record high. Orders represent communications received
from customers requesting us to supply products and services.
Revenue is recognized on orders received in accordance with our
revenue recognition policy included in Note 1 to the
consolidated financial statements contained in Item 8 of
Part II of this Annual Report on
Form 10-K.
Domestic orders were 50%, or $54,273, of our total orders and
international orders were 50%, or $54,044, of our total orders
in fiscal 2010. Domestic orders grew by $22,860, or 73%,
primarily due to a larger order (in excess of $25,000) from
Northrop Grumman to provide surface condensers for the
U.S. Navy. International orders grew by $11,583, or 27%,
led by renewed refining investment in the Middle East. Middle
East orders were up $16,415, or 194%, compared with fiscal 2009.
Orders from other international regions were down $4,832, with
decreases in Asia, Africa and Canada partly offset by gains in
South America.
Backlog was a record $94,255 at March 31, 2010 compared
with $48,290 at March 31, 2009, a 95% increase. Backlog is
defined by us as the total dollar value of orders received for
which revenue has not yet been recognized. During fiscal 2010,
we were notified by customers that one project with a value of
$519 was cancelled, one order with a value of $3,298 was placed
on hold (suspended) pending further evaluation, and one project
placed on hold (suspended) in fiscal 2009 valued at $235 was
returned to active status. Our backlog has been reduced for the
cancelled projects, but continues to include orders placed on
hold (suspended) with an aggregate value of $6,655 (see Project
Cancellation and Project Continuation Risk in Item 7A of
Part II of this Annual Report on
Form 10-K).
All orders in backlog represent orders from our traditional
markets in established product lines. Approximately 40% to 50%
of orders currently in backlog are not expected to be converted
to sales within the next twelve months. At March 31, 2010,
approximately 37% of our backlog was attributed to equipment for
refinery project work, 15% for chemical and petrochemical
projects, and 48% for other industrial or commercial
applications (including the Northrop Grumman order for the
U.S. Navy). At March 31, 2009, approximately 38% of
our backlog was for refinery project work, 35% for chemical and
petrochemical projects, and 27% for other industrial or
commercial applications.
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In May 2010, one order for $1,588, which had been placed on hold
by our customer in fiscal 2009, was cancelled. This order was
included in the balance of total placed on hold (suspended)
orders that remained in backlog at March 31, 2010.
Production had started on this project prior to being put on
hold. The customer has requested shipment of the partly
completed product as is. This order will be removed from the
balance of on hold (suspended) orders during the first quarter
of fiscal 2011.
Outlook
We believe that we are currently experiencing the bottom of the
cycle associated with our sales to the refinery and
petrochemical markets since we tend to lag the general economic
cycle by twelve to eighteen months. The third and fourth
quarters of fiscal 2010 and the first and second quarter of
fiscal 2011 are expected to represent the trough in level sales
for our business in this down cycle. Sales were $12,166 and
$13,777 in the third and fourth quarter of fiscal 2010,
respectively. We expect the first and second quarter of fiscal
2011 to be in a similar range with some potential for upside
improvement in the second quarter. We anticipate that sales in
the third and fourth quarters of fiscal 2011 will see growth
compared with the first and second quarters of fiscal 2011. We
expect the gross profit margin percentage to be in the
mid-to-upper 20’s range for the first two quarters of
fiscal 2011 as we continue to have under utilized capacity.
Moreover, orders won 6 to 12 months ago that are now
planned for revenue in the first and second quarters have
depressed margins due to the competitive environment at that
time.
Our order activity was strong in fiscal 2010 and our backlog on
March 31, 2010 was $94,255. We expect fiscal 2011 order
levels to continue to be variable across the year, as we have
seen in the past eight sequential quarters. We do not believe
that our markets have fully recovered, and while we have seen
some improvements in the Middle East, Asia and recently, South
America, it is not clear that the recovery has fully taken hold.
We also believe the domestic market will be relatively weak for
fiscal 2011 and beyond.
Normally, we convert 85% to 90% of existing backlog to sales
within a
12-month
period. However, we have a few large orders (e.g. Northrop
Grumman for the U.S. Navy project and a couple large Middle
East refinery orders) that will extend our March 31, 2010
backlog well beyond this normal level. We expect to convert
approximately 50% to 60% of our March 31, 2010 backlog to
sales in fiscal 2011.
For fiscal 2011, we expect sales to be above fiscal 2010; with
the full year sales projected to increase by 5% to 15% to
between $65,000 and $72,000. The lower end of this range, as
well as potential downside risk is tied to our customers
releasing projects for production. The upper end of the range
and any potential upside above the expected range, may be
achieved by faster conversion of backlog to sales if customers
are willing to accept earlier than currently planned shipments
as well as the receipt of new orders which can convert to sales
within the fiscal year.
We expect gross profit margin to be in the 27% to 31% range.
This margin level is below fiscal 2010, which had strong margins
in the first two quarters resulting from purchasing advantages
gained with raw material cost benefits. Our margins in fiscal
2011 will likely be adversely affected by the following:
| • | A significantly enhanced competitive environment which has been evident through recent orders during the contraction of the industry as competitors have been aggressively pursuing fewer projects; | |
| • | A shift toward international markets, where margins are generally lower than domestic project margins; and | |
| • | Continued expected underutilization of capacity, especially in the first two quarters of fiscal 2011. |
Gross profit margins are expected to improve as volume increases
throughout fiscal 2011 and beyond. We would caution that due to
changes in geographical markets and end use markets, we expect
gross margins are unlikely to reach the 40%+ range achieved in
the prior up cycle. We believe gross profit margin percentage in
the mid-to-upper 30’s is a more realistic expectation. We
also expect this recovery will be more focused on emerging
markets, which historically have lower margins and more
competitive pricing than developed markets. In addition, we
expect more growth in power markets, which typically provide
lower margins than refining and chemical processing end users.
We believe to achieve the upper end of our margin projections
and potential upside above the range can occur with the
following: a.) increased volume to minimize under utilization of
capacity; b.) continued improvements in manufacturing
productivity; and c.) continued focus and success in error
elimination and rework.
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SG&A spending is expected to increase during fiscal 2011 to
between $12,500 and $13,000. Our effective tax rate during
fiscal 2011 is expected to be between 30% and 33%.
Cash flow in fiscal 2011 is expected to be negative due to the
drawdown of customer deposits which grew in the fourth quarter
of fiscal 2010 from $5,461 at December 31, 2009 to $22,022
at March 31, 2010. The increase in customer deposits was
due to a number of major customers who provided upfront
negotiated cash payments to assist in lowering the cost for
Graham to complete their projects. This cash will be utilized to
procure materials for these customers’ projects in fiscal
2011 and fiscal 2012. We also expect to spend $2,800 to $3,300
in capital spending, above our normal $1,500 to $2,000 range,
due to a $1,500 capital project required for the Northrop
Grumman project for the U.S. Navy.
Contingencies
and Commitments
We have been named as a defendant in certain lawsuits alleging
personal injury from exposure to asbestos contained in our
products. We are a co-defendant with numerous other defendants
in these lawsuits and intend to vigorously defend against these
claims. The claims are similar to previous asbestos lawsuits
that named us as a defendant. Such previous lawsuits either were
dismissed when it was shown that we had not supplied products to
the plaintiffs’ places of work or were settled by us for
amounts below expected defense costs. Neither the outcome of
these lawsuits nor the potential for liability can be determined
at this time.
From time to time in the ordinary course of business, we are
subject to legal proceedings and potential claims. As of
March 31, 2010, other than noted above, we were unaware of
any other material litigation matters.
Critical
Accounting Policies
The discussion and analysis of our financial condition and
results of operations are based upon the consolidated financial
statements and the notes to consolidated financial statements
included in Item 8 of Part II of this Annual Report on
Form 10-K,
which have been prepared in accordance with accounting
principles generally accepted in the U.S.
Critical accounting policies are defined as those that reflect
significant judgments and uncertainties, and could potentially
result in materially different results under different
assumptions and conditions.
Revenue Recognition.
We recognize revenue on
all contracts with a planned manufacturing process in excess of
four weeks (which approximates 575 direct labor hours) using the
percentage-of-completion method. The percentage-of-completion
method is determined by comparing actual labor incurred as of a
specific date to our estimate of the total labor to be incurred
on each contract. Contracts in progress are reviewed monthly,
and sales and earnings are adjusted in current accounting
periods based on revisions in the contract value and estimated
material and labor costs at completion. Losses on contracts are
recognized immediately, when evident to management.
Revenue on contracts not accounted for using the
percentage-of-completion method is recognized utilizing the
completed contract method. The majority of the contracts we
enter into have a planned manufacturing process of less than
four weeks and the results reported under this method do not
vary materially from the percentage-of-completion method. We
recognize revenue and all related costs on the completed
contract method upon substantial completion or shipment of
products to the customer. Substantial completion is consistently
defined as at least 95% complete with regard to direct labor
hours. Customer acceptance is required throughout the
construction process and we have no further material obligations
under the contracts after the revenue is recognized.
Pension and Postretirement Benefits.
Defined
benefit pension and other postretirement benefit costs and
obligations are dependent on actuarial assumptions used in
calculating such amounts. These assumptions are reviewed
annually and include the discount rate, long-term expected rate
of return on plan assets, salary growth, healthcare cost trend
rate and other economic and demographic factors. We base the
discount rate assumption for our plans on Moody’s or
Citigroup Pension Liability Index AA-rated corporate long-term
bond yield rate. The long-term expected rate of return on plan
assets is based on the plan’s asset allocation, historical
returns and expectations as to future returns that are expected
to be realized over the estimated remaining life of the plan
liabilities that will be funded with the plan assets. The salary
growth assumptions are determined based on long-term actual
experience
22
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and future and near-term outlook. The healthcare cost trend rate
assumptions are based on historical cost and payment data, the
near-term outlook, and an assessment of likely long-term trends.
Income Taxes.
We use the liability method to
account for income taxes. Under this method, deferred tax
liabilities and assets are recognized for the tax effects of
temporary differences between the financial reporting and tax
bases of liabilities and assets measured using the enacted tax
rate.
Deferred income tax assets and liabilities are determined based
on the difference between the financial statement and tax bases
of assets and liabilities using current tax rates. We evaluate
available information about future taxable income and other
possible sources of realization of deferred income tax assets
and record valuation allowances to reduce deferred income tax
assets to an amount that represents our best estimates of the
amounts of such deferred income tax assets that more likely than
not will be realized.
The calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations.
Significant judgment is required in evaluating our tax positions
and determining our provision for income taxes. During the
ordinary course of business, there are many transactions and
calculations for which the ultimate tax determination is
uncertain. We establish reserves for uncertain tax positions
when we believe that certain tax positions do not meet the more
likely than not threshold. We adjust these reserves in light of
changing facts and circumstances, such as the outcome of a tax
audit or the lapse of the statute of limitations. The provision
for income taxes includes the impact of reserve provisions and
changes to the reserves that are considered appropriate.
Critical
Accounting Estimates and Judgments
We have evaluated the accounting policies used in the
preparation of the consolidated financial statements and the
notes to consolidated financial statements included in
Item 8 of Part II of this Annual Report on
Form 10-K
and believe those policies to be reasonable and appropriate.
We believe that the most critical accounting estimates used in
the preparation of our consolidated financial statements relate
to labor hour estimates used to recognize revenue under the
percentage-of-completion method, accounting for contingencies,
under which we accrue a loss when it is probable that a
liability has been incurred and the amount can be reasonably
estimated, and accounting for pensions and other postretirement
benefits.
As discussed above under the heading “Critical Accounting
Policies,” we recognize a substantial amount of our revenue
using the percentage-of-completion method. The key estimate of
percentage-of-completion accounting is total labor to be
incurred on each contract and to the extent that this estimate
changes, it may significantly impact revenue recognized in each
period.
Contingencies, by their nature, relate to uncertainties that
require us to exercise judgment both in assessing the likelihood
that a liability has been incurred as well as in estimating the
amount of potential loss. For more information on these matters
see the notes to consolidated financial statements included in
Item 8 of Part II of this Annual Report on
Form 10-K.
Accounting for pensions and other postretirement benefits
involves estimating the cost of benefits to be provided well
into the future and attributing that cost over the time period
each employee works. To accomplish this, extensive use is made
of assumptions about inflation, investment returns, mortality,
turnover, medical costs and discount rates. These assumptions
are reviewed annually.
The discount rate used in accounting for pensions and other
postretirement benefits is determined in conjunction with our
actuary by reference to a current yield curve and by considering
the timing and amount of projected future benefit payments. The
discount rate assumption for fiscal 2010 is 7.39% for our
defined benefit pension and 6.88% for our other postretirement
benefit plan. A reduction in the discount rate of 50 basis
points, with all other assumptions held constant, would have
increased fiscal 2010 net periodic benefit expense for our
defined benefit pension and other postretirement benefit plan by
approximately $111 and $0, respectively.
The expected return on plan assets assumption of 8.5% used in
accounting for our pension plan is determined by evaluating the
mix of investments that comprise plan assets and external
forecasts of future long-term investment
23
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returns. A reduction in the rate of return of 50 basis
points, with other assumptions held constant, would have
increased fiscal 2010 net periodic pension expense by
approximately $109.
As part of our ongoing financial reporting process, a
collaborative effort is undertaken involving our managers with
functional responsibilities for financial, credit, tax,
engineering, manufacturing and benefit matters, and outside
advisors such as lawyers, consultants and actuaries. We believe
that the results of this effort provide management with the
necessary information on which to base their judgments and to
develop the estimates and assumptions used to prepare the
financial statements.
We believe that the amounts recorded in the consolidated
financial statements included in Item 8 of Part II of
this Annual Report on
Form 10-K
related to revenue, contingencies, pensions, other post
retirement benefits and other matters requiring the use of
estimates and judgments are reasonable, although actual outcomes
could differ materially from our estimates.
New
Accounting Pronouncements
In the normal course of business, management evaluates all new
accounting pronouncements issued by the Financial Accounting
Standards Board, the SEC, the Emerging Issues Task Force, the
American Institute of Certified Public Accountants or other
authoritative accounting bodies to determine the potential
impact they may have on our consolidated financial statements.
Based upon this review, management does not expect any of the
recently issued accounting pronouncements, which have not
already been adopted, to have a material impact on our
consolidated financial statements.
Off
Balance Sheet Arrangements
We did not have any off balance sheet arrangements as of
March 31, 2010 or March 31, 2009, other than operating
leases.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The principal market risks (i.e., the risk of loss arising from
changes in the market) to which we are exposed are foreign
currency exchange rates, price risk and project cancellation
risk.
The assumptions applied in preparing the following qualitative
and quantitative disclosures regarding foreign currency exchange
rate, price risk and project cancellation risk are based upon
volatility ranges experienced by us in relevant historical
periods, our current knowledge of the marketplace, and our
judgment of the probability of future volatility based upon the
historical trends and economic conditions of the markets in
which we operate.
Foreign
Currency
International consolidated sales for fiscal 2010 were 55% of
total sales compared with 37% for fiscal 2009. Operating in
markets throughout the world exposes us to movements in currency
exchange rates. Currency movements can affect sales in several
ways, the foremost being our ability to compete for orders
against foreign competitors that base their prices on relatively
weaker currencies. Business lost due to competition for orders
against competitors using a relatively weaker currency cannot be
quantified. In addition, cash can be adversely impacted by the
conversion of sales made by us in a foreign currency to
U.S. dollars. In each of fiscal 2010, fiscal 2009, and
fiscal 2008, all sales to the Company and its wholly-owned
subsidiary for which we were paid were denominated in the local
currency (U.S. dollars or RMB). At certain times, we may
enter into forward foreign currency exchange agreements to hedge
our exposure against potential unfavorable changes in foreign
currency values on significant sales contracts negotiated in
foreign currencies.
We have limited exposure to foreign currency purchases. In
fiscal 2010, fiscal 2009 and fiscal 2008, our purchases in
foreign currencies represented 1%, 2% and 2%, respectively, of
the cost of products sold. At certain times, we may utilize
forward foreign currency exchange contracts to limit currency
exposure. Forward foreign currency exchange contracts were not
used in fiscal 2010 or fiscal 2009, and as of March 31,
2010 and 2009, respectively, we held no forward foreign currency
contracts.
24
Table of Contents
Price
Risk
Operating in a global marketplace requires us to compete with
other global manufacturers which, in some instances, benefit
from lower production costs and more favorable economic
conditions. Although we believe that our customers differentiate
our products on the basis of our manufacturing quality and
engineering experience and excellence, among other things, such
lower production costs and more favorable economic conditions
mean that certain of our competitors are able to offer products
similar to ours at lower prices. Moreover, the cost of metals
and other materials used in our products have experienced
significant volatility. Such factors, in addition to the global
effects of the recent volatility and disruption of the capital
and credit markets, have resulted in downward demand and pricing
pressure on our products.
Project
Cancellation and Project Continuation Risk
Recent economic conditions have led to a higher likelihood of
project cancellation by our customers. We had one project for
$519 cancelled in fiscal 2010. In fiscal 2009, three projects
were cancelled, totaling $3,295. We attempt to mitigate the risk
of cancellation by structuring contracts with our customers to
maximize the likelihood that progress payments made to us for
individual projects cover the costs we have incurred. As a
result, we do not believe we have a significant cash exposure to
projects which may be cancelled.
Open orders are reviewed continuously through communications
with customers. If it becomes evident to us that a project is
delayed well beyond its original shipment date, management will
move the project into “placed on hold” (i.e.,
suspended) category. Furthermore, if a project is cancelled by
our customer, it is removed from our backlog.
25
| Item 8. | Financial Statements and Supplementary Data |
INDEX TO
FINANCIAL STATEMENTS
|
Graham Corporation
|
Page | |||
|
Consolidated Financial Statements:
|
||||
| 27 | ||||
| 28 | ||||
| 29 | ||||
| 30 | ||||
| 31 | ||||
| 55 | ||||
26
Table of Contents
| Year Ended March 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
(Amounts in thousands,
|
||||||||||||
| except per share data) | ||||||||||||
|
Net sales
|
$ | 62,189 | $ | 101,111 | $ | 86,428 | ||||||
|
Cost of products sold
|
39,958 | 59,399 | 52,266 | |||||||||
|
Gross profit
|
22,231 | 41,712 | 34,162 | |||||||||
|
Other expenses and income:
|
||||||||||||
|
Selling, general and administrative
|
12,093 | 14,825 | 13,074 | |||||||||
|
Interest income
|
(55 | ) | (416 | ) | (1,026 | ) | ||||||
|
Interest expense
|
36 | 5 | 10 | |||||||||
|
Other expense
|
96 | 559 | — | |||||||||
|
Total other expenses and income
|
12,170 | 14,973 | 12,058 | |||||||||
|
Income before income taxes
|
10,061 | 26,739 | 22,104 | |||||||||
|
Provision for income taxes
|
3,700 | 9,272 | 7,070 | |||||||||
|
Net income
|
$ | 6,361 | $ | 17,467 | $ | 15,034 | ||||||
|
Per share data
|
||||||||||||
|
Basic:
|
||||||||||||
|
Net income
|
$ | .64 | $ | 1.72 | $ | 1.52 | ||||||
|
Diluted:
|
||||||||||||
|
Net income
|
$ | .64 | $ | 1.71 | $ | 1.49 | ||||||
|
Average common shares outstanding:
|
||||||||||||
|
Basic
|
9,899 | 10,134 | 9,912 | |||||||||
|
Diluted
|
9,937 | 10,195 | 10,085 | |||||||||
|
Dividends declared per share
|
$ | .08 | $ | .075 | $ | .05 | ||||||
See Notes to Consolidated Financial Statements.
27
Table of Contents
| March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Amounts in thousands, except per share data) | ||||||||
|
Assets
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 4,530 | $ | 5,150 | ||||
|
Investments
|
70,060 | 41,059 | ||||||
|
Trade accounts receivable, net of allowances
($17 and $39 at March 31, 2010 and 2009, respectively) |
7,294 | 6,995 | ||||||
|
Unbilled revenue
|
3,039 | 10,444 | ||||||
|
Inventories
|
6,098 | 4,665 | ||||||
|
Income taxes receivable
|
4,054 | |||||||
|
Prepaid expenses and other current assets
|
651 | 375 | ||||||
|
Total current assets
|
91,672 | 72,742 | ||||||
|
Property, plant and equipment, net
|
9,769 | 9,645 | ||||||
|
Prepaid pension asset
|
7,335 | 4,300 | ||||||
|
Other assets
|
203 | 237 | ||||||
|
Total assets
|
$ | 108,979 | $ | 86,924 | ||||
|
Liabilities and stockholders’ equity
|
||||||||
|
Current liabilities:
|
||||||||
|
Current portion of capital lease obligations
|
$ | 66 | $ | 28 | ||||
|
Accounts payable
|
6,623 | 5,514 | ||||||
|
Accrued compensation
|
4,010 | 4,630 | ||||||
|
Accrued expenses and other current liabilities
|
2,041 | 2,266 | ||||||
|
Customer deposits
|
22,022 | 5,892 | ||||||
|
Income taxes payable
|
68 | — | ||||||
|
Deferred income tax liability
|
138 | 4,865 | ||||||
|
Total current liabilities
|
34,968 | 23,195 | ||||||
|
Capital lease obligations
|
144 | 31 | ||||||
|
Accrued compensation
|
292 | 250 | ||||||
|
Deferred income tax liability
|
2,930 | 1,253 | ||||||
|
Accrued pension liability
|
246 | 256 | ||||||
|
Accrued postretirement benefits
|
880 | 828 | ||||||
|
Other long-term liabilities
|
445 | — | ||||||
|
Total liabilities
|
39,905 | 25,813 | ||||||
|
Commitments and contingencies (Note 15)
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Preferred stock, $1.00 par value —
|
||||||||
|
Authorized, 500 shares
|
||||||||
|
Common stock, $.10 par value —
|
||||||||
|
Authorized, 25,500 shares
|
||||||||
|
Issued, 10,155 and 10,127 shares at March 31, 2010 and
2009, respectively
|
1,016 | 1,013 | ||||||
|
Capital in excess of par value
|
15,459 | 14,923 | ||||||
|
Retained earnings
|
59,539 | 53,966 | ||||||
|
Accumulated other comprehensive loss
|
(4,386 | ) | (6,460 | ) | ||||
|
Treasury stock (305 and 279 shares at March 31, 2010
and 2009, respectively)
|
(2,554 | ) | (2,325 | ) | ||||
|
Notes receivable
|
— | (6 | ) | |||||
|
Total stockholders’ equity
|
69,074 | 61,111 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 108,979 | $ | 86,924 | ||||
See Notes to Consolidated Financial Statements.
28
Table of Contents
| Year Ended March 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Operating activities:
|
||||||||||||
|
Net income
|
$ | 6,361 | $ | 17,467 | $ | 15,034 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Depreciation and amortization
|
1,119 | 1,005 | 885 | |||||||||
|
Amortization of unrecognized prior service cost and actuarial
losses
|
678 | 106 | 104 | |||||||||
|
Discount accretion on investments
|
(50 | ) | (397 | ) | (904 | ) | ||||||
|
Stock-based compensation expense
|
436 | 372 | 187 | |||||||||
|
Loss on disposal or sale of property, plant and equipment
|
70 | 4 | 3 | |||||||||
|
Deferred income taxes
|
(4,568 | ) | 6,022 | 4,342 | ||||||||
|
(Increase) decrease in operating assets:
|
||||||||||||
|
Accounts receivable
|
(299 | ) | (1,941 | ) | 6,807 | |||||||
|
Unbilled revenue
|
7,407 | (1,675 | ) | (3,969 | ) | |||||||
|
Inventories
|
(1,433 | ) | 132 | (115 | ) | |||||||
|
Income taxes receivable/payable
|
4,122 | (2,552 | ) | (634 | ) | |||||||
|
Prepaid expenses and other current and non-current assets
|
(24 | ) | 90 | (250 | ) | |||||||
|
Prepaid pension asset
|
(245 | ) | (7,677 | ) | (3,045 | ) | ||||||
|
Increase (decrease) in operating liabilities:
|
||||||||||||
|
Accounts payable
|
990 | (11 | ) | 159 | ||||||||
|
Accrued compensation, accrued expenses and other current and
non-current liabilities
|
(401 | ) | 260 | 1,308 | ||||||||
|
Customer deposits
|
16,130 | (100 | ) | (127 | ) | |||||||
|
Long-term portion of accrued compensation, accrued pension
liability and accrued postretirement benefits
|
(23 | ) | (59 | ) | (83 | ) | ||||||
|
Net cash provided by operating activities
|
30,270 | 11,046 | 19,702 | |||||||||
|
Investing activities:
|
||||||||||||
|
Purchase of property, plant and equipment
|
(1,003 | ) | (1,492 | ) | (1,027 | ) | ||||||
|
Proceeds from disposal of property, plant and equipment
|
9 | 1 | 45 | |||||||||
|
Purchase of investments
|
(182,481 | ) | (142,601 | ) | (94,781 | ) | ||||||
|
Redemption of investments at maturity
|
153,530 | 136,620 | 74,680 | |||||||||
|
Net cash used by investing activities
|
(29,945 | ) | (7,472 | ) | (21,083 | ) | ||||||
|
Financing activities:
|
||||||||||||
|
Proceeds from issuance of long-term debt
|
822 | 2,927 | 69 | |||||||||
|
Principal repayments on long-term debt
|
(861 | ) | (2,955 | ) | (106 | ) | ||||||
|
Issuance of common stock
|
63 | 695 | 1,116 | |||||||||
|
Dividends paid
|
(788 | ) | (754 | ) | (493 | ) | ||||||
|
Purchase of treasury stock
|
(229 | ) | (2,303 | ) | — | |||||||
|
Excess tax deduction on stock awards
|
40 | 1,696 | 1,473 | |||||||||
|
Other
|
5 | 5 | (17 | ) | ||||||||
|
Net cash (used) provided by financing activities
|
(948 | ) | (689 | ) | 2,042 | |||||||
|
Effect of exchange rate changes on cash
|
3 | 153 | 76 | |||||||||
|
Net (decrease) increase in cash and cash equivalents
|
(620 | ) | 3,038 | 737 | ||||||||
|
Cash and cash equivalents at beginning of year
|
5,150 | 2,112 | 1,375 | |||||||||
|
Cash and cash equivalents at end of year
|
$ | 4,530 | $ | 5,150 | $ | 2,112 | ||||||
See Notes to Consolidated Financial Statements.
29
Table of Contents
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
Accumulated
|
||||||||||||||||||||||||||||||||
| Common Stock |
Capital in
|
Other
|
||||||||||||||||||||||||||||||
|
Par
|
Excess of
|
Retained
|
Comprehensive
|
Treasury
|
Notes
|
Stockholders’
|
||||||||||||||||||||||||||
| Shares | Value | Par Value | Earnings | Loss(1) | Stock | Receivable | Equity | |||||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||||||
|
Balance at April 1, 2007
|
3,887,490 | $ | 389 | $ | 10,008 | $ | 22,675 | $ | (2,367 | ) | $ | — | $ | (51 | ) | $ | 30,654 | |||||||||||||||
|
Net income
|
15,034 | 15,034 | ||||||||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
64 | 64 | ||||||||||||||||||||||||||||||
|
Pension and other postretirement benefits adjustments, net of
income tax of $271
|
483 | 483 | ||||||||||||||||||||||||||||||
|
Total comprehensive income
|
15,581 | |||||||||||||||||||||||||||||||
|
Issuance of shares
|
111,266 | 11 | 1,105 | 1,116 | ||||||||||||||||||||||||||||
|
Stock award tax benefit
|
1,473 | 1,473 | ||||||||||||||||||||||||||||||
|
Dividends
|
(493 | ) | (493 | ) | ||||||||||||||||||||||||||||
|
Five-for four stock split
|
992,189 | 99 | (99 | ) | — | |||||||||||||||||||||||||||
|
Recognition of equity-based compensation expense
|
187 | 187 | ||||||||||||||||||||||||||||||
|
Purchase of treasury stock
|
(22 | ) | (22 | ) | ||||||||||||||||||||||||||||
|
Collection of notes receivable from officers and directors
|
40 | 40 | ||||||||||||||||||||||||||||||
|
Balance at March 31, 2008
|
4,990,945 | 499 | 12,674 | 37,216 | (1,820 | ) | (22 | ) | (11 | ) | 48,536 | |||||||||||||||||||||
|
Effect of transition to a fiscal year end measurement date for
defined benefit pension and other postretirement plan assets and
obligations, net of income tax of $260
|
37 | (543 | ) | (506 | ) | |||||||||||||||||||||||||||
|
Balance at April 1, 2008
|
4,990,945 | 499 | 12,674 | 37,253 | (2,363 | ) | (22 | ) | (11 | ) | 48,030 | |||||||||||||||||||||
|
Net income
|
17,467 | 17,467 | ||||||||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
147 | 147 | ||||||||||||||||||||||||||||||
|
Pension and other postretirement benefits adjustments, net of
income tax of $2,387
|
(4,244 | ) | (4,244 | ) | ||||||||||||||||||||||||||||
|
Total comprehensive income
|
13,370 | |||||||||||||||||||||||||||||||
|
Issuance of shares
|
72,659 | 8 | 687 | 695 | ||||||||||||||||||||||||||||
|
Stock award tax benefit
|
1,696 | 1,696 | ||||||||||||||||||||||||||||||
|
Dividends
|
(754 | ) | (754 | ) | ||||||||||||||||||||||||||||
|
Two-for-one
stock split
|
5,063,604 | 506 | (506 | ) | — | |||||||||||||||||||||||||||
|
Recognition of equity-based compensation expense
|
372 | 372 | ||||||||||||||||||||||||||||||
|
Purchase of treasury stock
|
(2,303 | ) | (2,303 | ) | ||||||||||||||||||||||||||||
|
Collection of notes receivable from officers and directors
|
5 | 5 | ||||||||||||||||||||||||||||||
|
Balance at March 31, 2009
|
10,127,208 | 1,013 | 14,923 | 53,966 | (6,460 | ) | (2,325 | ) | (6 | ) | 61,111 | |||||||||||||||||||||
|
Net income
|
6,361 | 6,361 | ||||||||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
2 | 2 | ||||||||||||||||||||||||||||||
|
Pension and other postretirement benefits adjustments, net of
income tax of $1,289
|
2,072 | 2,072 | ||||||||||||||||||||||||||||||
|
Total comprehensive income
|
8,435 | |||||||||||||||||||||||||||||||
|
Issuance of shares
|
27,896 | 3 | 60 | 63 | ||||||||||||||||||||||||||||
|
Stock award tax benefit
|
40 | 40 | ||||||||||||||||||||||||||||||
|
Dividends
|
(788 | ) | (788 | ) | ||||||||||||||||||||||||||||
|
Recognition of equity-based compensation expense
|
436 | 436 | ||||||||||||||||||||||||||||||
|
Purchase of treasury stock
|
(229 | ) | (229 | ) | ||||||||||||||||||||||||||||
|
Collection of notes receivable from officers and directors
|
6 | 6 | ||||||||||||||||||||||||||||||
|
Balance at March 31, 2010
|
10 , 155 , 104 | $ | 1,016 | $ | 15,459 | $ | 59,539 | $ | (4,386 | ) | $ | (2,554 | ) | $ | — | $ | 69 , 074 | |||||||||||||||
| (1) | Accumulated foreign currency translation adjustments were $219, $217 and $70, accumulated pension benefit adjustments were $(4,845), $(7,074) and $(2,351), and accumulated other postretirement benefit adjustments were $240, $397 and $461 at March 31, 2010, 2009 and 2008, respectively, net of tax. |
See Notes to Consolidated Financial Statements.
30
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in
thousands, except per share data)
| Note 1 — | The Company and Its Accounting Policies: |
Graham Corporation (the “Company”) and its operating
subsidiary are primarily engaged in the design, manufacture and
supply of vacuum and heat transfer equipment used in the
chemical, petrochemical, petroleum refining, and electric power
generating industries and sell to customers throughout the
world. The Company’s significant accounting policies are
set forth below.
The Company’s fiscal years ended March 31, 2010, 2009
and 2008 are referred to as fiscal 2010, fiscal 2009 and fiscal
2008, respectively.
Principles
of consolidation and use of estimates in the preparation of
financial statements
The consolidated financial statements include the accounts of
the Company and its wholly-owned foreign subsidiary, Graham
Vacuum and Heat Transfer Technology (Suzhou) Co., Ltd., located
in China. All intercompany balances, transactions and profits
are eliminated in consolidation.
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the related revenues and
expenses during the reporting period. Actual amounts could
differ from those estimated.
Translation
of foreign currencies
Assets and liabilities of 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. The Company’s sales and purchases in
foreign currencies are minimal. Therefore, foreign currency
transaction gains and losses are not significant. Gains and
losses resulting from translation of foreign subsidiary balance
sheets are included in a separate component of
stockholders’ equity. Translation adjustments are not
adjusted for income taxes since they relate to an investment,
which is permanent in nature.
Revenue
recognition
Percentage-of-Completion
Method
The Company recognizes revenue on all contracts with a planned
manufacturing process in excess of four weeks (which
approximates 575 direct labor hours) using the
percentage-of-completion
method. The majority of the Company’s revenue is recognized
under this methodology. The Company has established the systems
and procedures essential to developing the estimates required to
account for contracts using the
percentage-of-completion
method. The
percentage-of-completion
method is determined by comparing actual labor incurred to a
specific date to management’s estimate of the total labor
to be incurred on each contract.
Contracts in progress are reviewed monthly, and sales and
earnings are adjusted in current accounting periods based on
revisions in the contract value and estimated costs at
completion. Losses on contracts are recognized immediately when
evident to management. Revenue recognized on contracts accounted
for utilizing
percentage-of-completion
are presented in net sales in the Consolidated Statement of
Operations and unbilled revenue in the Consolidated Balance
Sheets to the extent that the revenue recognized exceeds the
amounts billed to customers. See “Inventories” below.
Completed Contract Method
Revenue on contracts not accounted for using the
percentage-of-completion
method is recognized utilizing the completed contract method.
The majority of the Company’s contracts have a planned
manufacturing process of less than four weeks and the results
reported under this method do not vary materially from the
31
Table of Contents
percentage-of-completion
method. The Company recognizes revenue and all related costs on
these contracts upon substantial completion or shipment to the
customer. Substantial completion is consistently defined as at
least 95% complete with regard to direct labor hours. Customer
acceptance is generally required throughout the construction
process and the Company has no further obligations under the
contract after the revenue is recognized.
During fiscal 2010, the Company was notified by customers that
one project with a value of $519 was cancelled, one order with a
value of $3,298 was placed on hold (suspended) pending further
evaluation, and one project placed on hold (suspended) in fiscal
2009 valued at $235 was returned to active status. The
Company’s backlog was reduced for the cancelled order. Four
orders with an aggregate value of $6,655 placed on hold
(suspended) remain in backlog at March 31, 2010.
In May 2010, one order for $1,588, which had been placed on hold
by our customer in fiscal 2009, was cancelled. This order was
included in the balance of total placed on hold (suspended)
orders that remained in backlog at March 31, 2010.
Production had started on this project prior to being put on
hold. The customer has requested shipment of the partly
completed product as is. This order will be removed from the
balance of on hold (suspended) orders during the first quarter
of fiscal 2011.
Shipping
and handling fees and costs
Shipping and handling fees billed to the customer are recorded
in net sales and the related costs incurred for shipping and
handling are included in cost of products sold.
Investments
Investments consist of fixed-income debt securities issued by
the U.S. Treasury with original maturities of greater than
three months and less than one year. All investments are
classified as
held-to-maturity,
as the Company believes it has the intent and ability to hold
the securities to maturity. The investments are stated at
amortized cost which approximates fair value. All investments
held by the Company at March 31, 2010 are scheduled to
mature between April 8 and July 8, 2010.
Inventories
Inventories are stated at the lower of cost or market, using the
average cost method. For contracts accounted for on the
completed contract method, progress payments received 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. Unbilled revenue in the Consolidated Balance
Sheets represents revenue recognized that has not been billed to
customers on contracts accounted for on the
percentage-of-completion
method. For contracts accounted for on the
percentage-of-completion
method, progress payments are netted against unbilled revenue to
the extent the payment is less than the unbilled revenue for the
applicable contract. Progress payments exceeding unbilled
revenue are netted against inventory to the extent the payment
is less than or equal to the inventory balance relating to the
applicable contract, and the excess is presented as customer
deposits in the Consolidated Balance Sheets.
A summary of costs and estimated earnings on contracts in
progress at March 31, 2010 and 2009 is as follows:
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Costs incurred since inception on contracts in progress
|
$ | 7,096 | $ | 24,358 | ||||
|
Estimated earnings since inception on contracts in progress
|
2,948 | 18,479 | ||||||
| 10,044 | 42,837 | |||||||
|
Less billings to date
|
30,710 | 40,908 | ||||||
|
Net (over) under billings
|
$ | (20,666 | ) | $ | 1,929 | |||
32
Table of Contents
The above activity is included in the accompanying Consolidated
Balance Sheets under the following captions at March 31,
2010 and 2009 or Notes to Consolidated Financial Statements:
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Unbilled revenue
|
$ | 3,039 | $ | 10,444 | ||||
|
Progress payments reducing inventory (Note 2)
|
(1,683 | ) | (2,623 | ) | ||||
|
Customer deposits
|
(22,022 | ) | (5,892 | ) | ||||
|
Net (over) under billings
|
$ | (20,666 | ) | $ | 1,929 | |||
Property,
plant, equipment and depreciation
Property, plant and equipment are stated at cost net of
accumulated depreciation and amortization. Major additions and
improvements are capitalized, while maintenance and repairs are
charged to expense as incurred. Depreciation and amortization
are provided based upon the estimated useful lives, or lease
term if shorter, under the straight line method. Estimated
useful lives range from approximately five to eight years for
office equipment, eight to twenty-five years for 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. The
Company assesses all of its long-lived assets for impairment
when impairment indicators are identified. When the carrying
value of an asset exceeds its undiscounted cash flows, the
Company recognizes an impairment loss. The impairment is then
calculated as the difference between the carrying value and the
fair value of the asset. No such impairment losses were recorded
in fiscal 2010, fiscal 2009 or fiscal 2008.
Product
warranties
The Company estimates the costs that may be incurred under its
product warranties and records a liability in the amount of such
costs at the time revenue is recognized. The reserve for product
warranties is based upon past claims experience and ongoing
evaluations of any specific probable claims from customers. A
reconciliation of the changes in the product warranty liability
is presented in Note 4.
Research
and development
Research and development costs are expensed as incurred. The
Company incurred research and development costs of $3,824,
$3,347 and $3,579 in fiscal 2010, fiscal 2009 and fiscal 2008,
respectively.
Income
taxes
The Company recognizes deferred income tax assets and
liabilities for the expected future tax consequences of events
that have been recognized in the Company’s financial
statements or tax returns. Deferred income tax assets and
liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities
using currently enacted tax rates. The Company evaluates the
available evidence about future taxable income and other
possible sources of realization of deferred income tax assets
and records a valuation allowance to reduce deferred income tax
assets to an amount that represents the Company’s best
estimate of the amount of such deferred income tax assets that
more likely than not will be realized.
The Company accounts for uncertain tax positions using a
“more likely than not” recognition threshold. The
evaluation of uncertain tax positions is based on factors
including, but not limited to, changes in tax law, the
measurement of tax positions taken or expected to be taken in
tax returns, the effective settlement of matters subject to
audit, new audit activity and changes in facts or circumstances
related to a tax position. These tax positions are evaluated on
a quarterly basis. It is the Company’s policy to recognize
any interest related to uncertain tax positions in interest
expense and any penalties related to uncertain tax positions in
selling general and administrative expense.
The Company files federal and state income tax returns in
several U.S. and
non-U.S. domestic
and foreign jurisdictions. In most tax jurisdictions, returns
are subject to examination by the relevant tax authorities for a
33
Table of Contents
number of years after the returns have been filed. The Company
is currently under examination by the U.S. Internal Revenue
Service for tax years 2006 through 2008.
Stock
splits
On July 31, 2008, the Company’s Board of Directors
declared a
two-for-one
stock split of the Company’s common shares and declared a
post-split quarterly cash dividend of $.02 per share, effective
for the dividend paid on October 6, 2008 to stockholders of
record on September 5, 2008. The
two-for-one
stock split was effected as a stock dividend, and stockholders
received one additional share of common stock for every share of
common stock held on the record date of September 5, 2008.
The new common shares were distributed on or about
October 6, 2008. The par value of the Company’s common
stock, $.10, remained unchanged. All share and per share amounts
in periods prior to the stock split were adjusted to reflect the
two-for-one
stock split. The Statement of Stockholders’ Equity in
fiscal 2009 reflects the stock split by reclassifying from
“Capital in excess of par value” to “Common
stock” an amount equal to the par value of the additional
shares issued to effect the stock split.
On October 26, 2007, the Company’s Board of Directors
declared a
five-for-four
stock split of the Company’s common stock and increased the
quarterly cash dividend to $.03 per share, effective for the
dividend payable on January 3, 2008 to stockholders of
record on November 30, 2007. The
five-for-four
stock split was effected as a stock dividend, and stockholders
received one additional share of common stock for every four
shares of common stock held on the record date of
November 30, 2007. The new common shares were distributed
on January 3, 2008. Fractional shares were aggregated and
sold by the Company’s transfer agent on January 3,
2008 and the cash received was paid to stockholders of record on
November 30, 2007. The par value of the Company’s
common stock of $.10 remained unchanged. All share and per share
amounts in periods prior to the stock split were adjusted to
reflect the
five-for-four
stock split. The Statement of Stockholders’ Equity in
fiscal 2008 reflects the stock split by reclassifying from
“Capital in excess of par value” to “Common
stock” an amount equal to the par value of the additional
shares issued to effect the stock split.
Stock-based
compensation
The Company records compensation costs related to stock-based
awards based on the estimated fair value of the award on the
grant date. Compensation cost is recognized in the
Company’s Consolidated Statements of Operations over the
applicable vesting period. The Company uses the Black-Scholes
valuation model as the method for determining the fair value of
its equity awards. For restricted stock awards, the fair market
value of the award is determined based upon the closing value of
the Company’s stock price on the grant date. The amount of
stock-based compensation expense recognized during a period is
based on the portion of the awards that are ultimately expected
to vest. The Company estimates the forfeiture rate at the grant
date by analyzing historical data and revises the estimates in
subsequent periods if the actual forfeiture rate differs from
the estimates.
Income
per share data
Basic income per share is computed by dividing net income by the
weighted average number of common shares outstanding for the
period. Common shares outstanding include share equivalent units
which are contingently issuable shares. Diluted income per share
is calculated by dividing net income by the weighted average
number of common shares outstanding and, when applicable,
potential common shares outstanding during the
34
Table of Contents
period. A reconciliation of the numerators and denominators of
basic and diluted income per share is presented below:
| Year Ended March 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Basic income per share:
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Net income
|
$ | 6,361 | $ | 17,467 | $ | 15,034 | ||||||
|
Denominator:
|
||||||||||||
|
Weighted common shares outstanding
|
9,842 | 10,073 | 9,838 | |||||||||
|
Share equivalent units (“SEUs”) outstanding
|
57 | 61 | 74 | |||||||||
|
Weighted average shares and SEUs outstanding
|
9,899 | 10,134 | 9,912 | |||||||||
|
Basic income per share
|
$ | .64 | $ | 1.72 | $ | 1.52 | ||||||
|
Diluted income per share:
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Net income
|
$ | 6,361 | $ | 17,467 | $ | 15,034 | ||||||
|
Denominator:
|
||||||||||||
|
Weighted average shares and SEUs outstanding
|
9,899 | 10,134 | 9,912 | |||||||||
|
Stock options outstanding
|
36 | 60 | 173 | |||||||||
|
Contingently issuable SEUs
|
2 | 1 | — | |||||||||
|
Weighted average common and potential common shares outstanding
|
9,937 | 10,195 | 10,085 | |||||||||
|
Diluted income per share
|
$ | .64 | $ | 1.71 | $ | 1.49 | ||||||
There were 17 and 27 options to purchase shares of common stock
at various exercise prices in fiscal 2010 and fiscal 2009,
respectively, which were not included in the computation of
diluted income per share as the effect would be anti-dilutive.
All options to purchase shares of common stock were included in
the fiscal 2008 calculation.
Cash flow
statement
The Company considers all highly liquid investments with an
original maturity of three months or less at the time of
purchase to be cash equivalents.
Interest paid was $4 in fiscal 2010, $5 in fiscal 2009, and $10
in fiscal 2008. In addition, income taxes paid were $3,661 in
fiscal 2010, $4,145 in fiscal 2009, and $1,908 in fiscal 2008.
In fiscal 2010, fiscal 2009, and fiscal 2008, non-cash
activities included pension and other postretirement benefit
adjustments, net of income tax, of $2,072, $4,244 and $483,
respectively. Non-cash activities during fiscal 2009 included
$543, net of income tax, in pension and other postretirement
benefit adjustments required to transition to a fiscal year end
measurement date for plan assets and benefit obligations.
At March 31, 2010, 2009, and 2008, there were $117, $58,
and $158, respectively, of capital purchases that were recorded
in accounts payable and are not included in the caption
“Purchase of property, plant and equipment” in the
Consolidated Statements of Cash Flows. In fiscal 2010, fiscal
2009 and fiscal 2008, capital expenditures totaling $190, $31
and $0, respectively, were financed through the issuance of
capital leases.
Non-cash activities during fiscal 2009 and fiscal 2008 included
a reclassification from “Capital in excess of par
value” to “Common stock” for $506 and $99,
respectively, which represents the par value of the additional
shares issued to effect the
two-for-one
stock split and
five-for-four
stock split, each effected in the form of a stock dividend.
35
Table of Contents
Accumulated
other comprehensive income (loss)
Comprehensive income is comprised of net income and other
comprehensive income or loss items, which are accumulated as a
separate component of stockholders’ equity. For the
Company, other comprehensive income or loss items include a
foreign currency translation adjustment and pension and other
postretirement benefit adjustments.
Fair
value measurements
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability (i.e. the
“exit price”) in an orderly transaction between market
participants at the measurement date. The accounting standards
for fair values establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs
and minimizes the use of unobservable inputs by requiring that
the most observable inputs be used when available. Observable
inputs are inputs that market participants would use in pricing
the asset or liability developed based on market data obtained
from sources independent of the Company. Unobservable inputs are
inputs that reflect the Company’s assumptions about the
assumptions market participants would use in pricing the asset
or liability developed based on the best information available
in the circumstances. The hierarchy is broken down into three
levels based on the reliability of inputs as follows:
Level 1
— Valuations based on quoted
prices in active markets for identical assets or liabilities
that the Company has the ability to access. Since valuations are
based on quoted prices that are readily and regularly available
in an active market, valuation of these products does not entail
a significant degree of judgment.
Level 2
— Valuation is determined from
quoted prices for similar assets or liabilities in active
markets, quoted prices for identical instruments in markets that
are not active or by model-based techniques in which all
significant inputs are observable in the market.
Level 3
— Valuations based on inputs that
are unobservable and significant to the overall fair value
measurement. The degree of judgment exercised in determining
fair value is greatest for instruments categorized in
Level 3.
The availability of observable inputs can vary and is affected
by a wide variety of factors, including, the type of
asset/liability, whether the asset/liability is established in
the marketplace, and other characteristics particular to the
transaction. To the extent that valuation is based on models or
inputs that are less observable or unobservable in the market,
the determination of fair value requires more judgment. In
certain cases, the inputs used to measure fair value may fall
into different levels of the fair value hierarchy. In such
cases, for disclosure purposes the level in the fair value
hierarchy within which the fair value measurement in its
entirety falls is determined based on the lowest level input
that is significant to the fair value measurement in its
entirety.
Fair value is a market-based measure considered from the
perspective of a market participant rather than an
entity-specific measure. Therefore, even when market assumptions
are not readily available, assumptions are required to reflect
those that market participants would use in pricing the asset or
liability at the measurement date.
36
Table of Contents
Accounting
and Reporting Changes
On April 1, 2008, the Company was required to transition to
a fiscal year end measurement date for the plan assets and
benefit obligations of its defined benefit pension and other
postretirement plans. The Company utilized the remeasurement
approach, which required plan assets and benefit obligations to
be remeasured as of the beginning of fiscal 2009. The following
table presents the impact of initially remeasuring the plan
assets and benefit obligations on individual line items in the
Company’s Consolidated Balance Sheet as of April 1,
2008:
|
Before
|
||||||||||||
|
Remeasurement of
|
After Remeasurement
|
|||||||||||
|
Plan Assets and
|
of Plan Assets and
|
|||||||||||
|
Balance Sheet Caption
|
Obligations | Adjustments | Obligations | |||||||||
|
Prepaid pension asset
|
$ | 4,186 | $ | (801 | ) | $ | 3,385 | |||||
|
Long-term deferred income tax liability
|
$ | (315 | ) | $ | 260 | $ | (55 | ) | ||||
|
Accrued postretirement benefits
|
$ | (949 | ) | $ | 35 | $ | (914 | ) | ||||
|
Accumulated other comprehensive loss
|
$ | 1,820 | $ | 543 | $ | 2,363 | ||||||
|
Retained earnings
|
$ | (37,216 | ) | $ | (37 | ) | $ | (37,253 | ) | |||
In the normal course of business, management evaluates all new
accounting pronouncements issued by the Financial Accounting
Standards Board, the Securities and Exchange Commission, the
Emerging Issues Task Force, the American Institute of Certified
Public Accountants or any other authoritative accounting body to
determine the potential impact they may have on the
Company’s consolidated financial statements. Based upon
this review, management does not expect any of the recently
issued accounting pronouncements, which have not already been
adopted, to have a material impact on the Company’s
consolidated financial statements.
Reclassifications
Certain reclassifications have been made to prior year financial
information to conform to the current year presentation.
Previously, in the March 31, 2009 Consolidated Balance
Sheet, the line items “Deferred income tax asset” and
“Other assets” were reported separately. These two
line items have been combined into one line item, “Other
assets.” Previously, in the Consolidated Statement of Cash
Flows for fiscal 2009 and fiscal 2008, all depreciation and
amortization was reported on one line item, “Depreciation
and amortization.” This line has been separated into two
line items, “Amortization of unrecognized prior service
cost and actuarial losses” and “Depreciation and
amortization.”
| Note 2 — | Inventories: |
Major classifications of inventories are as follows:
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Raw materials and supplies
|
$ | 1,843 | $ | 1,929 | ||||
|
Work in process
|
5,365 | 4,664 | ||||||
|
Finished products
|
573 | 695 | ||||||
| 7,781 | 7,288 | |||||||
|
Less — progress payments
|
1,683 | 2,623 | ||||||
| $ | 6,098 | $ | 4,665 | |||||
37
Table of Contents
| Note 3 — | Property, Plant and Equipment: |
Major classifications of property, plant and equipment are as
follows:
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Land
|
$ | 210 | $ | 210 | ||||
|
Buildings and improvements
|
10,713 | 10,709 | ||||||
|
Machinery and equipment
|
17,972 | 17,509 | ||||||
|
Construction in progress
|
498 | 696 | ||||||
| 29,393 | 29,124 | |||||||
|
Less — accumulated depreciation and amortization
|
19,624 | 19,479 | ||||||
| $ | 9,769 | $ | 9,645 | |||||
Depreciation expense in fiscal 2010, fiscal 2009, and fiscal
2008 was $1,107, $977, and $862, respectively.
| Note 4 — | Product Warranty Liability: |
The reconciliation of the changes in the product warranty
liability is as follows:
| Year Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Balance at beginning of year
|
$ | 366 | $ | 441 | ||||
|
Expense for product warranties
|
99 | 204 | ||||||
|
Product warranty claims paid
|
(96 | ) | (279 | ) | ||||
|
Balance at end of year
|
$ | 369 | $ | 366 | ||||
The product warranty liability is included in the line item
“Accrued expenses and other current liabilities” in
the Consolidated Balance Sheets.
| Note 5 — | Leases: |
The Company leases equipment and office space under various
operating leases. Lease expense applicable to operating leases
was $157, $183 and $145 in fiscal 2010, fiscal 2009, and fiscal
2008, respectively.
Property, plant and equipment include the following amounts for
leases which have been capitalized:
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Machinery and equipment
|
$ | 288 | $ | 97 | ||||
|
Less accumulated amortization
|
74 | 41 | ||||||
| $ | 214 | $ | 56 | |||||
Amortization of machinery and equipment under capital leases
amounted to $33, $23 and $34 in fiscal 2010, fiscal 2009, and
fiscal 2008, respectively, and is included in depreciation
expense.
38
Table of Contents
As of March 31, 2010, future minimum payments required
under non-cancelable leases are:
|
Operating
|
Capital
|
|||||||
| Leases | Leases | |||||||
|
2010
|
$ | 158 | $ | 70 | ||||
|
2011
|
66 | 42 | ||||||
|
2012
|
40 | 40 | ||||||
|
2013
|
— | 40 | ||||||
|
2014
|
— | 27 | ||||||
|
Total minimum lease payments
|
$ | 264 | $ | 219 | ||||
|
Less — amount representing interest
|
9 | |||||||
|
Present value of net minimum lease payments
|
$ | 210 | ||||||
| Note 6 — |
|
Short-Term
Debt Due to Banks
The Company and its subsidiary had no short-term borrowings
outstanding at March 31, 2010 and 2009.
The Company’s revolving credit facility agreement provides
a line of credit up to $30,000, including letters of credit and
bank guarantees, through December 5, 2010. See Note 7
to the consolidated financial statements for more information.
There are no sublimits in the agreement with regard to
borrowings, issuance of letters of credit or issuance of bank
guarantees for the Company’s Chinese subsidiary. The credit
facility allows the Company to borrow at the bank’s prime
rate minus a variable percentage that may range from .50% to
1.25% or the LIBOR rate plus a variable percentage that may
range from .50% to 1.25%. The variable percentage is based upon
the Company’s ratio of total liabilities to tangible net
worth. The Company was able to borrow at a rate of prime minus
125 basis points at March 31, 2010 and 2009. The
bank’s prime rate was 3.25% at March 31, 2010 and 2009.
The revolving credit facility allows the Company at any time to
convert balances outstanding not less than $2,000 and up to
$9,000 into a two-year term loan. Under this conversion feature,
which is available through December 5, 2010, the Company
may convert the principal outstanding on the revolving line of
credit to a two-year term loan. Availability under the line of
credit was $20,416 at March 31, 2010.
The Company is required to pay commitment fees on the unused
portion of the revolving credit facility of 25 basis points
less a variable percentage that may range from .0625% to .125%.
The variable percentage is based upon the Company’s ratio
of total liabilities to tangible net worth. The credit facility
contains provisions pertaining to the maintenance of a minimum
total liabilities to tangible net worth ratio of 1.35 to 1 as
well as restrictions on the payment of dividends to stockholders
and incurrence of additional long-term debt. The dividend
provision limits the payment of dividends to stockholders to
$1,200 per year. The Company was in compliance with all such
provisions at March 31, 2010. Assets with a book value of
$94,210 have been pledged to secure certain borrowings under the
credit facility.
Long-Term
Debt
The Company and its subsidiary had long-term capital lease
obligations outstanding as follows:
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Capital lease obligations (Note 5)
|
$ | 210 | $ | 59 | ||||
|
Less: current amounts
|
66 | 28 | ||||||
|
Total
|
$ | 144 | $ | 31 | ||||
With the exception of capital leases, there are no long-term
debt payment requirements over the next five years as of
March 31, 2010.
39
Table of Contents
| Note 7 — | Financial Instruments and Derivative Financial Instruments: |
Concentrations
of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash
equivalents, investments, and trade accounts receivable. The
Company places its cash, cash equivalents, and investments with
high credit quality financial institutions, and evaluates the
credit worthiness of these financial institutions on a regular
basis. Concentrations of credit risk with respect to trade
accounts receivable are limited due to the large number of
customers comprising the Company’s customer base and their
geographic dispersion. At March 31, 2010 and 2009, 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, 2010 and
2009, the Company was contingently liable on outstanding standby
letters of credit aggregating $9,584 and $8,759, 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
holds contracts with high quality financial institutions. If the
counter-parties to any such exchange contracts do not fulfill
their obligations to deliver the contracted foreign currencies,
the Company could be at risk for fluctuations, if any, required
to settle the obligation. At March 31, 2010 and 2009, there
were no foreign exchange forward contracts held by the Company.
Fair
Value of Financial Instruments
The estimates of the fair value of financial instruments are
summarized as follows:
Cash and cash equivalents
:
The carrying
amount of cash and cash equivalents approximates fair value due
to the short-term maturity of these instruments and are
considered Level 1 assets in the fair value hierarchy.
Investments
:
The fair value of
investments at March 31, 2010 and 2009 approximated the
carrying value and are considered Level 1 assets in the
fair value hierarchy.
| Note 8 — | Income Taxes: |
An analysis of the components of income before income taxes is
presented below:
| Year Ended March 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
United States
|
$ | 10,060 | $ | 26,831 | $ | 22,382 | ||||||
|
United Kingdom
|
— | — | (8 | ) | ||||||||
|
China
|
1 | ( 92 | ) | (270 | ) | |||||||
| $ | 10,061 | $ | 26,739 | $ | 22,104 | |||||||
40
Table of Contents
The provision for income taxes related to income before income
taxes consists of:
| Year Ended March 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 8,143 | $ | 3,138 | $ | 2,646 | ||||||
|
State
|
125 | 121 | 73 | |||||||||
|
Foreign
|
— | (9 | ) | 9 | ||||||||
| 8,268 | 3,250 | 2,728 | ||||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(4,658 | ) | 5,827 | 4,474 | ||||||||
|
State
|
(278 | ) | 159 | (55 | ) | |||||||
|
Foreign
|
36 | 36 | (77 | ) | ||||||||
|
Changes in valuation allowance
|
332 | — | — | |||||||||
| (4,568 | ) | 6,022 | 4,342 | |||||||||
|
Total provision for income taxes
|
$ | 3,700 | $ | 9,272 | $ | 7,070 | ||||||
The reconciliation of the provision calculated using the
U.S. federal tax rate with the provision for income taxes
presented in the financial statements is as follows:
| Year Ended March 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Provision for income taxes at federal rate
|
$ | 3,421 | $ | 9,091 | $ | 7,516 | ||||||
|
State taxes
|
(173 | ) | 239 | (6 | ) | |||||||
|
Charges not deductible for income tax purposes
|
32 | 89 | 26 | |||||||||
|
Recognition of tax benefit generated by qualified production
activities deduction
|
(367 | ) | (18 | ) | (206 | ) | ||||||
|
Research and development tax credits
|
(109 | ) | (218 | ) | (234 | ) | ||||||
|
Valuation allowance
|
332 | — | — | |||||||||
|
Uncertain tax positions
|
445 | — | — | |||||||||
|
Other
|
119 | 89 | (26 | ) | ||||||||
|
Provision for income taxes
|
$ | 3,700 | $ | 9,272 | $ | 7,070 | ||||||
41
Table of Contents
The net deferred income tax liability recorded in the
Consolidated Balance Sheets results from differences between
financial statement and tax reporting of income and deductions.
A summary of the composition of the Company’s net deferred
income tax liability follows:
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Depreciation
|
$ | (1,355 | ) | $ | (1,163 | ) | ||
|
Accrued compensation
|
186 | 110 | ||||||
|
Prepaid pension asset
|
(2,556 | ) | (1,695 | ) | ||||
|
Accrued pension liability
|
94 | 99 | ||||||
|
Accrued postretirement benefits
|
344 | 428 | ||||||
|
Compensated absences
|
453 | 469 | ||||||
|
Inventories
|
(553 | ) | (5,701 | ) | ||||
|
Warranty liability
|
128 | 128 | ||||||
|
Accrued expenses
|
210 | 252 | ||||||
|
Stock-based compensation
|
247 | 103 | ||||||
|
Net operating loss carryforwards
|
55 | 188 | ||||||
|
Federal tax credits
|
— | 656 | ||||||
|
New York State investment tax credit
|
311 | 202 | ||||||
|
Other
|
154 | 30 | ||||||
| (2,282 | ) | (5,894 | ) | |||||
|
Less: Valuation allowance
|
(332 | ) | — | |||||
|
Total
|
$ | (2,614 | ) | $ | (5,894 | ) | ||
The net deferred income tax liability is presented in the
Consolidated Balance Sheets as follows:
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Current deferred income tax asset
|
$ | 255 | $ | — | ||||
|
Long-term deferred income tax asset
|
199 | 224 | ||||||
|
Current deferred income tax liability
|
(138 | ) | (4,865 | ) | ||||
|
Long-term deferred income tax liability
|
(2,930 | ) | (1,253 | ) | ||||
| $ | (2,614 | ) | $ | (5,894 | ) | |||
Deferred income taxes include the impact of foreign operating
loss carryforwards of $55, which expire from 2012 to 2015, state
investment tax credits of $262, which expire from 2011 to 2024
and state investment tax credits of $49 with an unlimited
carryforward period.
In assessing the realizability of deferred tax assets,
management considers, within each taxing jurisdiction, whether
it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Management considers
the scheduled reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this
assessment. Based on the consideration of the weight of both
positive and negative evidence, management has determined that a
portion of the deferred tax assets as of March 31, 2010
related to certain state investment tax credits and net
operating losses will not be realized.
The Company files federal and state income tax returns in
several domestic and foreign jurisdictions. In most tax
jurisdictions, returns are subject to examination by the
relevant tax authorities for a number of years after the returns
have been filed. The Company is subject to examination by the
U.S. Internal Revenue Service (the “IRS”) for tax
years 2006 through 2009 and tax years 2006 through 2008 are
currently under examination. During fiscal 2010, the IRS agent
conducting the examination sent the Company a notification of a
possible adjustment to these years, and the Company and such IRS
agent engaged in discussions. The adjustment relates to the
Company’s
42
Table of Contents
claimed research and development tax credit. Although the
Company believes its tax position is correct and will continue
to vigorously defend its position, a liability for unrecognized
tax benefits related to this tax position of $445 was recorded,
which represents management’s estimate of the potential
resolution of this issue. Any additional impact on the
Company’s income tax liability cannot be determined at this
time. The total tax benefit related to the research and
development tax credit that is under review by the IRS was
$2,218 at March 31, 2010. The Company is subject to
examination in state and international tax jurisdictions for tax
years 2006 through 2009 and tax year 2009, respectively. It is
the Company’s policy to recognize any interest related to
uncertain tax positions in interest expense and any penalties
related to uncertain tax positions in selling, general and
administrative expense. The Company had no other unrecognized
tax benefits as of March 31, 2010. During fiscal 2010,
fiscal 2009 and fiscal 2008, the Company recorded $32, $0 and
$0, respectively, for interest and $0 for penalties related to
its uncertain tax position in each of fiscal 2010, fiscal 2009
and fiscal 2008.
The following table summarizes the changes to the unrecognized
tax benefit:
|
Balance at April 1, 2009
|
$ | — | ||
|
Additions based upon tax positions taken during prior periods
|
314 | |||
|
Additions based upon tax positions taken during the current
period
|
131 | |||
|
Balance at March 31, 2010
|
$ | 445 | ||
| Note 9 — | Employee Benefit Plans: |
Retirement
Plans
The Company has a qualified defined benefit plan covering
U.S. employees hired prior to January 1, 2003, which
is non-contributory. Benefits are based on the employee’s
years of service and average earnings for the five highest
consecutive calendar years of compensation in the ten-year
period preceding retirement. The Company’s funding policy
for the plan is to contribute the amount required by the
Employee Retirement Income Security Act of 1974, as amended.
On April 1, 2008, the Company was required to transition to
a fiscal year end measurement date in which it utilized the
remeasurement approach requiring plan assets and benefit
obligations to be remeasured as of the beginning of fiscal 2009.
The measurement date prior to the adoption of the measurement
date provisions was December 31. The pension cost and
changes in the projected benefit obligation and the fair value
of plan assets for fiscal 2009 presented below include the
adjustments to initially remeasure the plan assets and benefit
obligations.
The components of pension cost are:
| Year Ended March 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Service cost during the period
|
$ | 315 | $ | 509 | $ | 471 | ||||||
|
Interest cost on projected benefit obligation
|
1,298 | 1,558 | 1,123 | |||||||||
|
Expected return on assets
|
(1,858 | ) | (2,310 | ) | (1,639 | ) | ||||||
|
Amortization of:
|
||||||||||||
|
Unrecognized prior service cost
|
4 | 5 | 4 | |||||||||
|
Actuarial loss
|
818 | 271 | 236 | |||||||||
|
Net pension cost
|
$ | 577 | $ | 33 | $ | 195 | ||||||
The weighted average actuarial assumptions used to determine net
pension cost are:
| Year Ended March 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Discount rate
|
7.39 | % | 6.75 | % | 5.91 | % | ||||||
|
Rate of increase in compensation levels
|
3.5 | % | 3.5 | % | 3.5 | % | ||||||
|
Long-term rate of return on plan assets
|
8.5 | % | 8.5 | % | 8.5 | % | ||||||
43
Table of Contents
The weighted average discount rate for the three-month period
between measurement dates was 6.48%.
The expected long-term rate of return is based on the mix of
investments that comprise plan assets and external forecasts of
future long-term investment returns, historical returns,
correlations and market volatilities.
The Company does not expect to make any contributions to the
plan during fiscal 2011.
Changes in the Company’s benefit obligation, plan assets
and funded status for the pension plan are presented below:
| Year Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Change in the benefit obligation
|
||||||||
|
Projected benefit obligation at beginning of year
|
$ | 17,895 | $ | 19,019 | ||||
|
Service cost
|
235 | 509 | ||||||
|
Interest cost
|
1,298 | 1,558 | ||||||
|
Actuarial (gain) loss
|
3,854 | (2,438 | ) | |||||
|
Benefit payments
|
(784 | ) | (753 | ) | ||||
|
Projected benefit obligation at end of year
|
$ | 22,498 | $ | 17,895 | ||||
The weighted average actuarial assumptions used to determine the
benefit obligation are:
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Discount rate
|
6.07 | % | 7.39 | % | ||||
|
Rate of increase in compensation levels
|
3.5 | % | 3.5 | % | ||||
The weighted average discount rate for the three-month period
between measurement dates was 6.75%.
|
Change in fair value of plan assets
|
||||||||
|
Fair value of plan assets at beginning of year
|
$ | 22,195 | $ | 23,205 | ||||
|
Actual return on plan assets
|
8,422 | (7,757 | ) | |||||
|
Employer contributions
|
— | 7,500 | ||||||
|
Benefit and administrative expense payments
|
(784 | ) | (753 | ) | ||||
|
Fair value of plan assets at end of year
|
$ | 29,833 | $ | 22,195 | ||||
|
Funded status
|
||||||||
|
Funded status at end of year
|
$ | 7,335 | $ | 4,300 | ||||
|
Amount recognized in the Consolidated Balance Sheets
|
$ | 7,335 | $ | 4,300 | ||||
The projected benefit obligation is the actuarial present value
of benefits attributable to employee service rendered to date,
including the effects of estimated future pay increases. The
accumulated benefit obligation also reflects the actuarial
present value of benefits attributable to employee service
rendered to date, but does not include the effects of estimated
future pay increases. The accumulated benefit obligation as of
March 31, 2010 and 2009 was $18,794 and $14,954,
respectively. At March 31, 2010 and 2009, the pension plan
was fully funded on an accumulated benefit obligation basis.
Amounts recognized in accumulated other comprehensive loss, net
of income tax, consist of:
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Net actuarial losses
|
$ | 4,831 | $ | 7,058 | ||||
|
Prior service cost
|
14 | 16 | ||||||
| $ | 4,845 | $ | 7,074 | |||||
44
Table of Contents
The decrease in accumulated other comprehensive loss, net of
income tax, in fiscal 2010 consists of:
|
Net actuarial gain arising during the year
|
$ | 1,692 | ||
|
Amortization of actuarial loss
|
535 | |||
|
Amortization of prior service cost
|
2 | |||
| $ | 2,229 | |||
The estimated net actuarial loss and prior service cost for the
pension plan that will be amortized from accumulated other
comprehensive loss into net pension cost in fiscal 2011 are $421
and $4, respectively.
The following benefit payments, which reflect future service,
are expected to be paid:
|
2011
|
$ | 897 | ||
|
2012
|
958 | |||
|
2013
|
963 | |||
|
2014
|
1,040 | |||
|
2015
|
1,151 | |||
|
2016-2020
|
6,616 | |||
|
Total
|
$ | 11,625 | ||
The weighted average asset allocation of the plan assets by
asset category is as follows:
|
Target
|
March 31, | |||||||||||
| Allocation | 2010 | 2009 | ||||||||||
|
Asset Category
|
||||||||||||
|
Equity securities
|
50-70 | % | 66 | % | 64 | % | ||||||
|
Debt securities
|
20-50 | % | 34 | % | 35 | % | ||||||
|
Other, including cash
|
0-10 | % | — | 1 | % | |||||||
| 100 | % | 100 | % | |||||||||
The investment strategy of the plan is to generate a consistent
total investment return sufficient to pay present and future
plan benefits to retirees, while minimizing the long-term cost
to the Company. Target allocations for asset categories are used
to earn a reasonable rate of return, provide required liquidity
and minimize the risk of large losses. Targets are adjusted when
considered necessary to reflect trends and developments within
the overall investment environment.
45
Table of Contents
The fair values of the Company’s pension plan assets at
March 31, 2010, by asset category, are as follows:
| Fair Value Measurements Using | ||||||||||||||||
|
Quoted Prices in
|
||||||||||||||||
|
Active Markets for
|
Significant Other
|
Significant
|
||||||||||||||
|
At
|
Identical Assets
|
Observable Inputs
|
Unobservable Inputs
|
|||||||||||||
|
Asset Category
|
March 31, 2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Cash
|
$ | 73 | $ | 73 | $ | — | $ | — | ||||||||
|
Equity securities:
|
||||||||||||||||
|
U.S. companies
|
15,943 | 15,943 | — | — | ||||||||||||
|
International companies
|
3,792 | 3,792 | — | — | ||||||||||||
|
Fixed income:
|
||||||||||||||||
|
Corporate bond funds
|
||||||||||||||||
|
Intermediate-term
|
8,035 | 8,035 | — | — | ||||||||||||
|
Short-term
|
1,990 | 1,990 | — | — | ||||||||||||
| $ | 29,833 | $ | 29,833 | $ | — | $ | — | |||||||||
The fair value of Level 1 pension assets are obtained by
reference to the last quoted price of the respective security on
the market which it trades. See Note 1 to the Consolidated
Financial Statements.
On February 4, 2003, the Company closed the defined benefit
plan to all employees hired on or after January 1, 2003. In
place of the defined benefit plan, these employees participate
in the Company’s domestic defined contribution plan. The
Company contributes a fixed percentage of employee compensation
to this plan on an annual basis for these employees. The Company
contribution to the defined contribution plan for these
employees in fiscal 2010, fiscal 2009 and fiscal 2008 was $93,
$111 and $59, respectively.
The Company has a Supplemental Executive Retirement Plan
(“SERP”) which provides retirement benefits associated
with wages in excess of the legislated qualified plan maximums.
Pension expense recorded in fiscal 2010, fiscal 2009, and fiscal
2008 related to this plan was $16, $22 and $20, respectively. At
March 31, 2010 and 2009, the related liability was $272 and
$282, respectively. The current portion of the related liability
of $26 at March 31, 2010 and 2009 is included in the
caption “Accrued Compensation” and the long-term
portion is separately presented in the Consolidated Balance
Sheets.
The Company has a domestic defined contribution plan (401K)
covering substantially all employees. Company contributions to
the plan are determined by a formula based on profitability and
are made at the discretion of the Compensation Committee of the
Board of Directors. Contributions were $230 in fiscal 2010, $259
in fiscal 2009, and $256 in fiscal 2008.
Other
Postretirement Benefits
In addition to providing pension benefits, the Company has a
plan in the U.S. that provides health care benefits for
eligible retirees and eligible survivors of retirees. The
Company’s share of the medical premium cost has been capped
at $4 for family coverage and $2 for single coverage for early
retirees, and $1 for both family and single coverage for regular
retirees.
On February 4, 2003, the Company terminated postretirement
health care benefits for its U.S. employees. Benefits
payable to retirees of record on April 1, 2003 remained
unchanged.
On April 1, 2008, the Company was required to transition to
a fiscal year end measurement date in which it utilized the
remeasurement approach requiring plan benefit obligations to be
remeasured as of the beginning of the year. The measurement date
prior to the adoption of the measurement date provisions was
December 31. The postretirement benefit cost (income) and
the changes in the projected benefit obligation and the fair
value of plan assets for fiscal 2009 presented below include the
adjustments to initially remeasure the plan assets and benefit
obligations.
46
Table of Contents
The components of postretirement benefit cost (income) are:
| Year Ended March 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Interest cost on accumulated benefit obligation
|
$ | 61 | $ | 77 | $ | 61 | ||||||
|
Amortization of prior service benefit
|
(166 | ) | (208 | ) | (166 | ) | ||||||
|
Amortization of actuarial loss
|
22 | 32 | 29 | |||||||||
|
Net postretirement benefit income
|
$ | (83 | ) | $ | (99 | ) | $ | (76 | ) | |||
The weighted average discount rate used to develop the net
postretirement benefit cost were 6.88%, 6.19% and 5.65% in
fiscal 2010, fiscal 2009 and fiscal 2008, respectively. The
weighted average discount rate for the three-month period
between measurement dates was 6%.
Changes in the Company’s benefit obligation, plan assets
and funded status for the plan are as follows:
| Year Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Change in the benefit obligation
|
||||||||
|
Projected benefit obligation at beginning of year
|
$ | 950 | $ | 1,078 | ||||
|
Interest cost
|
61 | 77 | ||||||
|
Actuarial gain (loss)
|
106 | (74 | ) | |||||
|
Benefit payments
|
(128 | ) | (131 | ) | ||||
|
Projected benefit obligation at end of year
|
$ | 989 | $ | 950 | ||||
The weighted average actuarial assumptions used to develop the
accrued postretirement benefit obligation were:
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Discount rate
|
5.15 | % | 6.88 | % | ||||
|
Medical care cost trend rate
|
9.00 | % | 7.50 | % | ||||
The weighted average discount rate for the three-month period
between measurement dates was 6.19%.
The medical care cost trend rate used in the actuarial
computation ultimately reduces to 5% in 2018 and subsequent
years. This was accomplished using 0.5% decrements for the years
ended March 31, 2011 through 2018.
| Year Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Change in fair value of plan assets
|
||||||||
|
Fair value of plan assets at beginning of year
|
$ | — | $ | — | ||||
|
Employer contribution
|
128 | 131 | ||||||
|
Benefit payments
|
(128 | ) | (131 | ) | ||||
|
Fair value of plan assets at end of year
|
$ | — | $ | — | ||||
|
Funded status
|
||||||||
|
Funded status at end of year
|
$ | (989 | ) | $ | (950 | ) | ||
|
Amount recognized in the Consolidated Balance Sheets
|
$ | (989 | ) | $ | (950 | ) | ||
The current portion of the accrued postretirement benefit
obligation of $109 and $122, at March 31, 2010 and 2009,
respectively, is included in the caption “Accrued
Compensation” and the long-term portion is separately
presented in the Consolidated Balance Sheets.
47
Table of Contents
Amounts recognized in accumulated other comprehensive loss
(income), net of income tax, consist of:
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Net actuarial loss
|
$ | 262 | $ | 202 | ||||
|
Prior service cost
|
(503 | ) | (599 | ) | ||||
| $ | (241 | ) | $ | (397 | ) | |||
The decrease in accumulated other comprehensive (income) loss
net of income tax, in fiscal 2010 consists of:
|
Net actuarial loss arising during the year
|
$ | 74 | ||
|
Amortization of actuarial loss
|
(14 | ) | ||
|
Amortization of prior service cost
|
96 | |||
| $ | 156 | |||
The estimated net actuarial loss and prior service cost for the
other postretirement benefit plan that will be amortized from
accumulated other comprehensive loss (income) into net
postretirement benefit income in fiscal 2011 are $30 and $(166),
respectively.
The following benefit payments are expected to be paid during
the fiscal years ending March 31,:
|
2011
|
$ | 109 | ||
|
2012
|
104 | |||
|
2013
|
99 | |||
|
2014
|
90 | |||
|
2015
|
85 | |||
|
2016-2020
|
356 | |||
|
Total
|
$ | 843 | ||
Assumed medical care cost trend rates could have a significant
effect on the amounts reported for the postretirement benefit
plan. However, due to the caps imposed on the Company’s
share of the premium costs, a one percentage point change in
assumed medical care cost trend rates would not have a
significant effect on the total service and interest cost
components or the postretirement benefit obligation.
Employee
Stock Ownership Plan
The Company has a noncontributory Employee Stock Ownership Plan
(“ESOP”) that covers substantially all employees in
the U.S. In 1990, the Company borrowed $2,000 under loan
and pledge agreements. The proceeds of the loans were used to
purchase 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 and
all shares were allocated to participants. There were 309 and
327 shares in the ESOP at March 31, 2010 and 2009,
respectively. There were no Company contributions to the ESOP in
fiscal 2010, fiscal 2009 or fiscal 2008. Dividends paid on
allocated shares accumulate for the benefit of the employees who
participate in the ESOP.
| Note 10 — | Stock Compensation Plans: |
The Amended and Restated 2000 Graham Corporation Incentive Plan
to Increase Shareholder Value provides for the issuance of up to
1,375 shares of common stock in connection with grants of
incentive stock options, non-qualified stock options, stock
awards and performance awards to officers, key employees and
outside directors; provided, however, that no more than
250 shares of common stock may be used for awards other
than stock options.
48
Table of Contents
Stock options may be granted at prices not less than the fair
market value at the date of grant and expire no later than ten
years after the date of grant.
During fiscal 2010 and fiscal 2009, 24 and 19, respectively,
stock options with a term of ten years from the date of grant
were awarded. The stock option awards granted in fiscal 2010
vest
33
1
/
3
%
per year over a three-year term. The stock option awards granted
in fiscal 2009 vest 25% per year over a four-year term. However,
an individual’s outstanding stock options immediately vest
in full upon retirement. The Company has elected to use the
straight-line method to recognize compensation costs related to
such awards.
In fiscal 2010 and fiscal 2009, 15 and 4 shares,
respectively, of restricted stock were awarded. The restricted
shares granted to officers in fiscal 2010 vest 50% on the second
anniversary of the grant date and 50% on the fourth anniversary
of the grant date, and the restricted shares granted to
directors in fiscal 2010 vest 100% on the first anniversary of
the grant date. The restricted shares granted in fiscal 2009
vest over a four-year term as follows: 10% on the first
anniversary of the grant date, 20% on the second anniversary of
the grant date, 30% on the third anniversary of the grant date
and 40% on the fourth anniversary of the grant date.
Notwithstanding the preceding vesting schedules, an
employee’s outstanding restricted shares immediately vest
in full when the employee becomes eligible for retirement, which
is the date on which an employee reaches age 60 and has
been employed on a full-time basis for ten or more years. The
Company recognizes compensation cost in the period the shares
vest.
During fiscal 2010, fiscal 2009, and fiscal 2008, the Company
recognized $436, $372, and $187, respectively, of stock-based
compensation cost and $151, $131 and $65, respectively, of
related tax benefits.
The weighted average fair value of options granted during fiscal
2010, fiscal 2009 and fiscal 2008 was $8.57, $15.91 and $3.00,
respectively, using the Black-Scholes option-pricing model with
the following weighted average assumptions:
| Year Ended March 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Expected life
|
3 years | 4.89 years | 5 years | |||||||||
|
Volatility
|
99.04 | % | 63.68 | % | 43.86 | % | ||||||
|
Risk-free interest rate
|
1.52 | % | 3.12 | % | 4.83 | % | ||||||
|
Dividend yield
|
.36 | % | .28 | % | .63 | % | ||||||
The expected life represents an estimate of the weighted average
period of time that options are expected to remain outstanding
given consideration to vesting schedules and the Company’s
historical exercise patterns. Expected volatility is estimated
based on the historical closing prices of the Company’s
common stock over the expected life of the options. The risk
free interest rate is estimated based on the U.S. Federal
Reserve’s historical data for the maturity of nominal
treasury instruments that corresponds to the expected term of
the option. Expected dividend yield is based on historical
trends.
The Company received cash proceeds from the exercise of stock
options of $63, $695 and $1,116 in fiscal 2010, fiscal 2009 and
fiscal 2008, respectively. In fiscal 2010, fiscal 2009 and
fiscal 2008, the Company recognized a $40, $1,696 and $1,473,
respectively, increase in capital in excess of par value for the
income tax benefit realized upon exercise of stock options in
excess of the tax benefit amount recognized pertaining to the
fair value of stock option awards treated as compensation
expense.
49
Table of Contents
The following table summarizes information about the
Company’s stock option awards during fiscal 2010, fiscal
2009 and fiscal 2008:
|
Weighted
|
||||||||||||||||
|
Shares
|
Average
|
Weighted
|
Aggregate
|
|||||||||||||
|
Under
|
Exercise
|
Average Remaining
|
Intrinsic
|
|||||||||||||
| Option | Price | Contractual Term | Value | |||||||||||||
|
Outstanding at April 1, 2007
|
472 | $ | 4.66 | |||||||||||||
|
Granted
|
112 | $ | 7.33 | |||||||||||||
|
Exercised
|
(258 | ) | $ | 4.33 | ||||||||||||
|
Forfeited
|
(20 | ) | $ | 7.71 | ||||||||||||
|
Expired
|
(12 | ) | $ | 4.25 | ||||||||||||
|
Outstanding at March 31, 2008
|
294 | $ | 5.76 | |||||||||||||
|
Granted
|
19 | $ | 31.06 | |||||||||||||
|
Exercised
|
(142 | ) | $ | 4.90 | ||||||||||||
|
Forfeited
|
(7 | ) | $ | 8.95 | ||||||||||||
|
Outstanding at March 31, 2009
|
164 | $ | 9.23 | |||||||||||||
|
Granted
|
24 | $ | 15.22 | |||||||||||||
|
Exercised
|
(13 | ) | $ | 4.78 | ||||||||||||
|
Outstanding at March 31, 2010
|
175 | $ | 10.37 | 6.77 years | $ | 1,579 | ||||||||||
|
Vested or expected to vest at March 31, 2010
|
167 | $ | 10.29 | 6.73 years | $ | 1,517 | ||||||||||
|
Exercisable at March 31, 2010
|
80 | $ | 8.04 | 5.75 years | $ | 889 | ||||||||||
The following table summarizes information about stock options
outstanding at March 31, 2010:
|
Weighted Average
|
||||||||||||
|
Options Outstanding
|
Remaining
|
|||||||||||
|
at March 31,
|
Weighted Average
|
Contractual Life
|
||||||||||
|
Exercise Price
|
2010 | Exercise Price | (In Years) | |||||||||
|
$ 1.50- 1.76
|
10 | $ | 1.63 | 3.00 | ||||||||
|
2.34- 2.50
|
11 | 2.42 | 2.76 | |||||||||
|
5.56- 8.01
|
104 | 7.22 | 4.58 | |||||||||
|
10.84-15.22
|
33 | 14.30 | 7.33 | |||||||||
|
30.88-44.50
|
17 | 32.41 | 8.76 | |||||||||
|
$ 1.50-44.50
|
175 | $ | 10.37 | 6.77 | ||||||||
The Company calculated intrinsic value (the amount by which the
stock price exceeds the exercise price of the option) as of
March 31, 2010. The Company’s closing stock price was
$17.99 as of March 31, 2010. The total intrinsic value of
the stock options exercised during fiscal 2010, fiscal 2009 and
fiscal 2008 was $123, $4,951 and $3,752, respectively. As of
March 31, 2010, there was $536 of total unrecognized
stock-based compensation expense related to non-vested stock
options and restricted stock. The Company expects to recognize
this expense over a weighted average period of 1.97 years.
The outstanding options expire between June 2011 and May 2019.
Options, stock awards and performance awards available for
future grants were 596 at March 31, 2010.
50
Table of Contents
The following table summarizes information about the
Company’s restricted stock awards during fiscal 2010 and
fiscal 2009:
|
Restricted
|
Weighted Average
|
Aggregate
|
||||||||||
| Stock | Grant Date Fair Value | Intrinsic Value | ||||||||||
|
Non-vested at April 1, 2007
|
— | |||||||||||
|
Granted
|
5 | $ | 6.90 | |||||||||
|
Vested
|
(2 | ) | $ | 6.90 | ||||||||
|
Non-vested at March 31, 2008
|
3 | $ | 6.90 | |||||||||
|
Granted
|
4 | $ | 30.88 | |||||||||
|
Vested
|
(2 | ) | $ | 26.56 | ||||||||
|
Non-vested at March 31, 2009
|
5 | $ | 18.72 | |||||||||
|
Granted
|
15 | $ | 15.22 | |||||||||
|
Vested
|
(1 | ) | $ | 12.31 | ||||||||
|
Non-vested at March 31, 2010
|
19 | $ | 16.15 | $ | 63 | |||||||
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 consolidated net income is at least 100% of the
approved budgeted net income for the year. The share equivalent
units are payable in cash or stock upon retirement. Compensation
cost for share equivalent units is recorded based on the higher
of the quoted market price of the Company’s stock at the
end of the period up to $3.20 per unit or the stock price at
date of grant. The cost of share equivalent units earned and
charged to pre-tax income under this Plan was $30 in fiscal
2010, $40 in fiscal 2009 and $30 in fiscal 2008. At
March 31, 2010 and 2009, there were 58 and 54 share
equivalent units, respectively, in the Plan and the related
liability recorded was $292 and $250 at March 31, 2010 and
2009, respectively. The (income) expense to mark to market the
share equivalent units was $7, $(25) and $8 in fiscal 2010,
fiscal 2009 and fiscal 2008, respectively. On March 12,
2009, the Compensation Committee of the Company’s Board of
Directors suspended the Long-Term Incentive Plan for Directors
first elected after such date.
| Note 11 — | Shareholder Rights Plan: |
On July 27, 2000 the Company adopted a ten-year Shareholder
Rights Plan. Under the Plan, as of September 11, 2000, one
share Purchase Right (“Right”) was 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, such as: (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 fifteen percent 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
becomes 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 Company is acquired in a merger or
other business combination transaction or 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 times
the purchase price of the Right.
51
Table of Contents
| Note 12 — | Segment Information: |
The Company has one reporting and operating segment. The
Company’s U.S. operation 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.
Net sales by product line for the following fiscal years are:
| Year Ended March 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Heat transfer equipment
|
$ | 23,170 | $ | 35,231 | $ | 31,988 | ||||||
|
Vacuum equipment
|
24,564 | 46,043 | 38,911 | |||||||||
|
All other
|
14,455 | 19,837 | 15,529 | |||||||||
|
Net sales
|
$ | 62,189 | $ | 101,111 | $ | 86,428 | ||||||
The breakdown of net sales by geographic area for the following
fiscal years is:
| Year Ended March 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Net Sales:
|
||||||||||||
|
Africa
|
$ | 2,440 | $ | 583 | $ | 342 | ||||||
|
Asia
|
20,308 | 13,255 | 12,840 | |||||||||
|
Australia & New Zealand
|
37 | 115 | 85 | |||||||||
|
Canada
|
1,891 | 8,015 | 5,869 | |||||||||
|
Mexico
|
700 | 528 | 905 | |||||||||
|
Middle East
|
6,390 | 8,373 | 9,918 | |||||||||
|
South America
|
1,327 | 4,038 | 7,862 | |||||||||
|
U.S.
|
28,068 | 63,719 | 46,881 | |||||||||
|
Western Europe
|
1,014 | 2,400 | 1,128 | |||||||||
|
Other
|
14 | 85 | 598 | |||||||||
|
Net sales
|
$ | 62,189 | $ | 101,111 | $ | 86,428 | ||||||
The final destination of products shipped is the basis used to
determine net sales by geographic area. No sales were made to
the terrorist sponsoring nations of Sudan, Iran, Cuba, North
Korea or Syria.
In fiscal 2009, total sales to one customer amounted to 11% of
total net sales for the year. There were no sales to a single
customer that amounted to 10% or more of total consolidated
sales in fiscal 2010 and fiscal 2008.
| Note 13 — | Other Expense: |
In the second quarter of fiscal 2010, the Company’s
workforce was reduced by eliminating several staff positions in
an effort to reduce costs. As a result, a restructuring charge
of $96 was recognized, which included severance and related
employee benefit costs. This charge is included in the caption
“Other Expense” in the fiscal 2010 Consolidated
Statement of Operations.
In the fourth quarter of fiscal 2009, the Company’s
workforce was restructured by eliminating certain management,
office and manufacturing positions. As a result, a restructuring
charge of $559 was recognized, which included severance and
related employee benefit costs. This charge is included in the
caption “Other Expense” in the fiscal 2009
Consolidated Statement of Operations.
52
Table of Contents
A reconciliation of the changes in the restructuring reserve,
which is included in the caption “Accrued Expenses and
Other Current Liabilities” in the Consolidated Balance
Sheet is as follows:
| Year Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Balance at beginning of year
|
$ | 349 | $ | — | ||||
|
Expense for restructuring
|
96 | 559 | ||||||
|
Amounts paid for restructuring
|
(442 | ) | (210 | ) | ||||
|
Balance at end of year
|
$ | 3 | $ | 349 | ||||
| Note 14 — | Purchase of Treasury Stock: |
On January 29, 2009, the Company’s Board of Directors
authorized a stock repurchase program, which expired on
July 29, 2009. On July 30, 2009, the stock repurchase
program was extended by the Board of Directors through
July 30, 2010. Under the stock repurchase program, up to
1,000 shares of the Company’s common stock are
permitted to be repurchased by the Company from time to time
either in the open market or through privately negotiated
transactions. The stock repurchase program terminates at the
earlier of the expiration of the program on July 30, 2010,
when all 1,000 shares have been repurchased or when the
Board of Directors terminates the program. Cash on hand has been
used to fund all stock repurchases under the program. At
March 31, 2010 and 2009, the Company had purchased
303 shares at a cost of $2,517 and 277 shares at a
cost of $2,288, respectively, under this program.
| Note 15 — | Commitments and Contingencies: |
The Company has been named as a defendant in certain lawsuits
alleging personal injury from exposure to asbestos contained in
products made by the Company. The Company is a co-defendant with
numerous other defendants in these lawsuits and intends to
vigorously defend itself against these claims. The claims are
similar to previous asbestos suits that named the Company as
defendant, which either were dismissed when it was shown that
the Company had not supplied products to the plaintiffs’
places of work or were settled for minimal amounts below the
expected defense costs. The outcome of these lawsuits cannot be
determined at this time.
From time to time in the ordinary course of business, the
Company is subject to legal proceedings and potential claims. At
March 31, 2010, other than noted above, management was
unaware of any other material litigation matters.
| Note 16 — | Quarterly Financial Data (Unaudited): |
A capsule summary of the Company’s unaudited quarterly
results for fiscal 2010 and fiscal 2009 is presented below:
|
First
|
Second
|
Third
|
Fourth
|
Total
|
||||||||||||||||
|
Year Ended March 31, 2010
|
Quarter | Quarter | Quarter | Quarter | Year | |||||||||||||||
|
Net sales
|
$ | 20,138 | $ | 16,108 | $ | 12,166 | $ | 13,777 | $ | 62,189 | ||||||||||
|
Gross profit
|
8,278 | 5,854 | 3,821 | 4,278 | 22,231 | |||||||||||||||
|
Provision for income taxes
|
1,529 | 1,240 | 350 | 581 | 3,700 | |||||||||||||||
|
Net income
|
3,518 | 1,468 | 764 | 611 | 6,361 | |||||||||||||||
|
Per share:
|
||||||||||||||||||||
|
Net income:
|
||||||||||||||||||||
|
Basic
|
$ | .36 | $ | .15 | $ | .08 | $ | .06 | $ | .64 | ||||||||||
|
Diluted
|
$ | .35 | $ | .15 | $ | .08 | $ | .06 | $ | .64 | ||||||||||
|
Market price range of common stock
|
$ | 8.70-16.12 | $ | 10.52-15.67 | $ | 13.37-21.84 | $ | 14.63-21.58 | $ | 8.70-21.84 | ||||||||||
53
Table of Contents
|
First
|
Second
|
Third
|
Fourth
|
Total
|
||||||||||||||||
|
Year Ended March 31, 2009
|
Quarter | Quarter | Quarter | Quarter | Year | |||||||||||||||
|
Net sales
|
$ | 27,647 | $ | 23,915 | $ | 24,701 | $ | 24,848 | $ | 101,111 | ||||||||||
|
Gross profit
|
12,218 | 10,499 | 9,362 | 9,633 | 41,712 | |||||||||||||||
|
Provision for income taxes
|
2,842 | 2,326 | 2,087 | 2,017 | 9,272 | |||||||||||||||
|
Net income
|
5,684 | 4,412 | 3,790 | 3,581 | 17,467 | |||||||||||||||
|
Per share:
|
||||||||||||||||||||
|
Net income:
|
||||||||||||||||||||
|
Basic
|
$ | .56 | $ | .43 | $ | .37 | $ | .35 | $ | 1.72 | ||||||||||
|
Diluted
|
$ | .56 | $ | .43 | $ | .37 | $ | .35 | $ | 1.71 | ||||||||||
|
Market price range of common stock
|
$ | 17.50-38.25 | $ | 21.25-54.91 | $ | 6.85-27.36 | $ | 7.16-13.89 | $ | 6.85-54.91 | ||||||||||
54
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Graham Corporation
Batavia, New York
We have audited the accompanying consolidated balance sheets of
Graham Corporation and subsidiary (the “Company”) as
of March 31, 2010 and 2009, and the related consolidated
statements of operations, changes in stockholders’ equity,
and cash flows for each of the three years in the period ended
March 31, 2010. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Graham Corporation and subsidiary as of March 31, 2010 and
2009, and the results of their operations and their cash flows
for each of the three years in the period ended March 31,
2010, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial
statements, as of April 1, 2008, the Company adopted the
measurement date provisions of Financial Accounting Standards
Board (FASB) Accounting Standards Codification 715,
Compensation — Retirement Benefits
.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of
March 31, 2010, based on the criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated May 25, 2010 expressed an
unqualified opinion on the Company’s internal control over
financial reporting.
Deloitte & Touche LLP
Rochester, New York
May 25, 2010
55
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Graham Corporation
Batavia, New York
We have audited the internal control over financial reporting of
Graham Corporation and subsidiary (the “Company”) as
of March 31, 2010, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Management’s Annual Report on Internal Control over
Financial Reporting appearing under Item 9A of its Annual
Report on
Form 10-K
for the year ended March 31, 2010. Our responsibility is to
express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of March 31, 2010, based on the criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and consolidated financial
statement schedule as of and for the year ended March 31,
2010 of the Company and our reports dated May 25, 2010
expressed an unqualified opinion (and included an explanatory
paragraph concerning the adoption of the measurement date
provisions of Financial Accounting Standards Board (FASB)
Accounting Standards Codification 715,
Compensation — Retirement Benefits
, as of
April 1, 2008) on those consolidated financial
statements and consolidated financial statement schedule.
Deloitte & Touche LLP
Rochester, New York
May 25, 2010
56
Table of Contents
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.
| Item 9A. | Controls and Procedures |
Conclusion
Regarding Disclosure Controls and Procedures
Management, including our President and Chief Executive Officer
(principal executive officer) and Vice
President-Finance & Administration and Chief Financial
Officer (principal financial officer), has evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by
this Annual Report on
Form 10-K.
Based upon, and as of the date of that evaluation, our President
and Chief Executive Officer and Vice
President-Finance & Administration and Chief Financial
Officer concluded that the disclosure controls and procedures
were effective, in all material respects, to ensure that
information required to be disclosed in the reports we file and
submit under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), is (i) recorded, processed,
summarized and reported as and when required and (ii) is
accumulated and communicated to our management, including our
President and Chief Executive Officer and Vice
President-Finance & Administration and Chief Financial
Officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes
in Internal Control Over Financial Reporting
There has been no change to our internal control over financial
reporting during the fourth quarter of the fiscal year covered
by this Annual Report on
Form 10-K
that has materially affected, or that is reasonably likely to
materially affect our internal control over financial reporting.
Management’s
Annual Report on Internal Control over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rule 13a-15(f).
A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our organization have
been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override. The design of any system of controls is
also based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design
will succeed in achieving our stated goals under all potential
future conditions. Moreover, over time controls may become
inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in the design of an internal
control system, misstatements due to error or fraud may occur
and not be detected. However, these inherent limitations are
known features of the financial reporting process. Therefore, it
is possible to design into the process safeguards to reduce,
though not eliminate, this risk.
Under the supervision and with the participation of management,
including the principal executive officer and principal
financial officer, we conducted an assessment of the
effectiveness of its internal control over financial reporting
based on the framework in
Internal Control —
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on the
assessment under this framework, management concluded that our
internal control over financial reporting was effective as of
March 31, 2010.
Deloitte & Touche LLP, the independent registered
public accounting firm that audited the financial statements
included in this Annual Report on
Form 10-K,
has issued an attestation report on our internal control over
financial reporting.
| Item 9B. | Other Information |
Not applicable.
57
Table of Contents
| Item 10. | Directors, Executive Officers and Corporate Governance |
Except as otherwise stated specifically in this response to
Item 10, the information required by this Item 10 is
incorporated herein by reference from the statements under the
headings “Election of Directors,” “Executive
Officers,” “Corporate Governance” and
“Section 16(a) Beneficial Ownership Reporting
Compliance” contained in our proxy statement for our 2010
Annual Meeting of Stockholders, to be filed within 120 days
after the year ended March 31, 2010.
Code of Ethics.
We have adopted a Code of
Business Conduct and Ethics applicable to our principal
executive officer, principal financial officer, controller and
others performing similar functions. Our Code of Business
Conduct and Ethics also applies to all of our other employees
and to our directors. Our Code of Business Conduct and Ethics is
available on our website located at www.graham-mfg.com under the
heading “Corporate Governance.” We intend to satisfy
any disclosure requirements pursuant to Item 5.05 of
Form 8-K
regarding any amendment to, or a waiver from, certain provisions
of our Code of Business Conduct and Ethics by posting such
information on our website.
| Item 11. | Executive Compensation |
The information required by this Item 11 is incorporated
herein by reference from the statements under the heading
“Compensation of Named Executive Officers and
Directors” contained in our proxy statement for our 2010
Annual Meeting of Stockholders, to be filed within 120 days
after the year ended March 31, 2010.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Except as set forth below, the information required by this
Item 12 is incorporated herein by reference from the
statements under the headings “Security Ownership of
Certain Beneficial Owners” and “Security Ownership of
Management” contained in our proxy statement for our 2010
Annual Meeting of Stockholders, to be filed within 120 days
after the year ended March 31, 2010.
Securities
Authorized for Issuance under Equity Compensation Plans as of
March 31, 2010
| Equity Compensation Plan Information | ||||||||||||
|
Number of securities
|
||||||||||||
|
remaining available
|
||||||||||||
|
for future issuance
|
||||||||||||
|
Number of securities to
|
Weighted average
|
under equity
|
||||||||||
|
be issued upon exercise
|
exercise price of
|
compensation plans
|
||||||||||
|
of outstanding options,
|
outstanding options,
|
(excluding securities
|
||||||||||
|
Plan Category
|
warrants and rights | warrants and rights | reflected in column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
|
Equity compensation plans approved by security holders
|
175 | $ | 10.37 | 596 | ||||||||
|
Equity compensation plans not approved by security holders
|
— | — | — | |||||||||
|
Total
|
175 | $ | 10.37 | 596 | ||||||||
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item 13 is incorporated
herein by reference from the statements under the headings
“Certain Relationships and Related Transactions” and
“Corporate Governance” contained in our proxy
statement for our 2010 Annual Meeting of Stockholders, to be
filed within 120 days after the year ended March 31,
2010.
58
Table of Contents
| Item 14. | Principal Accounting Fees and Services |
The information required by this Item 14 is incorporated
herein by reference from the statements under the heading
“Ratification of the Selection of Independent Registered
Public Accounting Firm” contained in our proxy statement
for our 2010 Annual Meeting of Stockholders, to be filed within
120 days after the year ended March 31, 2010.
| Item 15. | Exhibits and Financial Statement Schedules |
We have filed our Consolidated Financial Statements in
Part II, Item 8 of this Annual Report on
Form 10-K
and have listed such financial statements in the Index to
Financial Statements included in Item 8. In addition, the
financial statement schedule entitled
“Schedule II — Valuation and Qualifying
Accounts” is filed as part of this Annual Report on
Form 10-K
under this Item 15.
All other schedules have been omitted since the required
information is not present or is not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the Consolidated Financial
Statements and notes thereto.
The exhibits filed as part of this Annual Report on
Form 10-K
are listed in the Index to Exhibits following the signature page
of this
Form 10-K.
59
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Graham Corporation
Batavia, New York
We have audited the consolidated financial statements of Graham
Corporation and subsidiary (the “Company”) as of
March 31, 2010 and 2009, and for each of the three years in
the period ended March 31, 2010, and the Company’s
internal control over financial reporting as of March 31,
2010, and have issued our reports thereon dated May 25,
2010 (which report on the consolidated financial statements
expresses an unqualified opinion and includes an explanatory
paragraph concerning the adoption of the measurement date
provisions of Financial Accounting Standards Board (FASB)
Accounting Standards Codification 715,
Compensation — Retirement Benefits
, as of
April 1, 2008); such consolidated financial statements and
reports are included elsewhere in this
Form 10-K.
Our audits also included the consolidated financial statement
schedule of the Company listed in Item 15. This
consolidated financial statement schedule is the responsibility
of the Company’s management. Our responsibility is to
express an opinion based on our audits. In our opinion, such
consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the
information set forth therein.
Deloitte & Touche LLP
Rochester, New York
May 25, 2010
60
Table of Contents
GRAHAM
CORPORATION AND SUBSIDIARIES
SCHEDULE II —
VALUATION AND QUALIFYING ACCOUNTS
(In
Thousands)
|
Balance at
|
Charged to
|
Charged to
|
Balance at
|
|||||||||||||||||
|
Beginning
|
Costs and
|
Other
|
End of
|
|||||||||||||||||
|
Description
|
of Period | Expenses | Accounts | Deductions | Period | |||||||||||||||
|
Year ended March 31, 2010
|
||||||||||||||||||||
|
Reserves deducted from the asset to which they apply:
|
||||||||||||||||||||
|
Reserve for doubtful accounts receivable
|
$ | 39 | $ | (5 | ) | $ | — | $ | (17 | ) | $ | 17 | ||||||||
|
Reserves included in the balance sheet caption “accrued
expenses”
|
||||||||||||||||||||
|
Product warranty liability
|
366 | 99 | — | (96 | ) | 369 | ||||||||||||||
|
Restructuring reserve
|
349 | 96 | — | (442 | ) | 3 | ||||||||||||||
|
Year ended March 31, 2009
|
||||||||||||||||||||
|
Reserves deducted from the asset to which they apply:
|
||||||||||||||||||||
|
Reserve for doubtful accounts receivable
|
$ | 41 | $ | 38 | $ | — | $ | (40 | ) | $ | 39 | |||||||||
|
Reserves included in the balance sheet caption “accrued
expenses”
|
||||||||||||||||||||
|
Product warranty liability
|
441 | 204 | — | (279 | ) | 366 | ||||||||||||||
|
Restructuring reserve
|
— | 559 | — | (210 | ) | 349 | ||||||||||||||
|
Year ended March 31, 2008
|
||||||||||||||||||||
|
Reserves deducted from the asset to which they apply:
|
||||||||||||||||||||
|
Reserve for doubtful accounts receivable
|
$ | 48 | $ | 4 | $ | — | $ | (11 | ) | $ | 41 | |||||||||
|
Reserves included in the balance sheet caption “accrued
expenses”
|
||||||||||||||||||||
|
Product warranty liability
|
357 | 361 | — | (277 | ) | 441 | ||||||||||||||
|
Restructuring reserve
|
14 | (1 | ) | — | (13 | ) | — | |||||||||||||
61
Table of Contents
INDEX TO
EXHIBITS
|
(2)
|
Plan of acquisition, reorganization, arrangement, liquidation or succession | |||||
| Not applicable. | ||||||
|
(3)
|
Articles of Incorporation and By-Laws | |||||
| 3 | .1 | Certificate of Incorporation of Graham Corporation, as amended, is incorporated herein by reference from Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008. | ||||
| 3 | .2 | Amended and Restated By-laws of Graham Corporation are incorporated herein by reference from Exhibit 3.2 to the Company’s Current Report on Form 8-K dated October 25, 2007. | ||||
|
(4)
|
Instruments defining the rights of security holders, including indentures | |||||
| 4 | .1 | Stockholder Rights Plan is incorporated herein by reference from Exhibit 99.3 to the Company’s Form 8-A filed with the Securities and Exchange Commission on September 15, 2000 (SEC File No. 000-18703). | ||||
|
(9)
|
Voting trust agreement | |||||
| Not applicable. | ||||||
|
(10)
|
Material Contracts | |||||
| #10 | .1 | 1995 Graham Corporation Incentive Plan to Increase Shareholder Value is incorporated herein by reference from Appendix A to the Company’s Proxy Statement for its 1996 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on April 8, 1996 (SEC File No. 001-08462). | ||||
| #10 | .2 | Long-Term Stock Ownership Plan of Graham Corporation is incorporated herein by reference from Appendix A to the Company’s Proxy Statement for its 2000 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on June 30, 2000 (SEC File No. 001-08462). | ||||
| #10 | .3 | Graham Corporation Outside Directors’ Long-Term Incentive Plan is incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 3, 2005. | ||||
| #10 | .4 | Graham Corporation Policy Statement for U.S. Foreign Service Employees is incorporated herein by reference from Exhibit 99.1 to the Company’s Current Report on Form 8-K dated March 27, 2006. | ||||
| #10 | .5 | Graham Corporation Annual Stock-Based Incentive Award Plan in effect for the years ended March 31, 2007, 2008 and 2009 is incorporated herein by reference from Exhibit 99.2 to the Company’s Current Report on Form 8-K dated March 27, 2006. | ||||
| #10 | .6 | Employment Agreement between Graham Corporation and James R. Lines executed July 27, 2006 with an effective date of August 1, 2006, is incorporated herein by reference from Exhibit 99.1 to the Company’s Current Report on Form 8-K dated July 27, 2006. | ||||
| #10 | .7 | Amended and Restated 2000 Graham Corporation Incentive Plan to Increase Shareholder Value is incorporated herein by reference from Appendix A to the Company’s Proxy Statement for its 2006 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on June 23, 2006. | ||||
| 10 | .8 | Loan Agreement between the Company and Bank of America, N.A., dated as of December 5, 2007, is incorporated herein by reference from Exhibit 99.1 to the Company’s Current Report on Form 8-K dated December 5, 2007. | ||||
| 10 | .9 | Security Agreement between the Company and Bank of America, N.A., dated as of December 5, 2007, is incorporated herein by reference from Exhibit 99.2 to the Company’s Current Report on Form 8-K dated December 5, 2007. | ||||
| 10 | .10 | Patent Security Agreement between the Company and Bank of America, N.A., dated as of December 5, 2007, is incorporated herein by reference from Exhibit 99.3 of the Company’s Current Report on Form 8-K dated December 5, 2007. | ||||
| 10 | .11 | Trademark Security Agreement between the Company and Bank of America, N.A., dated as of December 5, 2007, is incorporated herein by reference from the Company’s Current Report on Form 8-K dated December 5, 2007. | ||||
| #10 | .12 | Employment Agreement between Graham Corporation and Alan E. Smith executed August 1, 2007 with an effective date of July 30, 2007 is incorporated herein by reference from Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2008. | ||||
| #10 | .13 | Form of Director Non-Qualified Stock Option Agreement is incorporated herein by reference from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008. | ||||
62
Table of Contents
| #10 | .14 | Amendment to Employment Agreement dated as of December 31, 2008 by and between Graham Corporation and James R. Lines, is incorporated herein by reference from Exhibit 99.1 to the Company’s Current Report on Form 8-K dated December 31, 2008. | ||||
| #10 | .15 | Amendment to Employment Agreement dated as of December 31, 2008 by and between Graham Corporation and Alan E. Smith, is incorporated herein by reference from Exhibit 99.2 to the Company’s Current Report on Form 8-K dated December 31, 2008. | ||||
| 10 | .16 | Amendment No. 1 to Loan Agreement between Graham Corporation and Bank of America, N.A., dated as of February 13, 2009, is incorporated herein by reference from Exhibit 99.1 to the Company’s Current Report on Form 8-K dated February 13, 2009. | ||||
| #10 | .17 | Employment Agreement dated March 2, 2009 between Jeffrey Glajch and Graham Corporation is incorporated herein by reference from Exhibit 99.1 to the Company’s Current Report on Form 8-K dated March 2, 2009. | ||||
| #10 | .18 | Graham Corporation Annual Stock-Based Incentive Award Plan for Senior Executives is incorporated herein by reference from Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2009. | ||||
| #10 | .19 | Graham Corporation Annual Executive Cash Bonus Program is incorporated herein by reference from Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2009. | ||||
| 10 | .20 | Amendment No. 2 to Loan Agreement between Graham Corporation and Bank of America, N.A. dated as of August 19, 2009, is incorporated herein by reference from Exhibit 99.1 to the Company’s Current Report on Form 8-K dated August 19, 2009. | ||||
| #10 | .21 | Form of Director Restricted Stock Agreement is incorporated herein by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009. | ||||
| #10 | .22 | Form of Employee Non-Qualified Stock Option Agreement is incorporated herein by reference from Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009. | ||||
| #10 | .23 | Form of Employee Restricted Stock Agreement is incorporated herein by reference from Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009. | ||||
| #10 | .24 | Form of Indemnification Agreement between Graham Corporation and each of its Directors and Officers is incorporated herein by reference from Exhibit 99.2 to the Company’s Current Report on Form 8-K dated January 29, 2010. | ||||
|
(11)
|
Statement re computation of per share earnings | |||||
| Computation of per share earnings is included in Note 1 of the Notes to the Consolidated Financial Statements contained in this Annual Report on Form 10-K. | ||||||
|
(12)
|
Statement re computation of ratios | |||||
| Not applicable. | ||||||
|
(13)
|
Annual report to security holders, Form 10-Q or quarterly report to security holders | |||||
| Not applicable. | ||||||
|
(14)
|
Code of Ethics | |||||
| Not applicable. | ||||||
|
(16)
|
Letter re change in certifying accountant | |||||
| Not applicable. | ||||||
|
(18)
|
Letter re change in accounting principles | |||||
| Not applicable. | ||||||
|
(21)
|
Subsidiaries of the registrant | |||||
| *21 | .1 | Subsidiaries of the registrant | ||||
|
(22)
|
Published report regarding matters submitted to vote of security holders. | |||||
| Not applicable. | ||||||
|
(23)
|
Consents of Experts and Counsel | |||||
| *23 | .1 | Consent of Deloitte & Touche LLP | ||||
63
Table of Contents
|
(24)
|
Power of Attorney | |||||
| Not applicable. | ||||||
|
(31)
|
Rule 13a-14(a)/15d-14(a) Certifications | |||||
| *31 | .1 | Certification of Principal Executive Officer | ||||
| *31 | .2 | Certification of Principal Financial Officer | ||||
|
(32)
|
Section 1350 Certifications | |||||
| *32 | .1 | Section 1350 Certifications | ||||
|
(99)
|
Additional Exhibits | |||||
| Not applicable. | ||||||
| * | Exhibits filed with this report. | |
| # | Management contract or compensatory plan. |
64
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this annual report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GRAHAM CORPORATION
| May 25, 2010 | ||
|
By:
/s/
Jeffrey
Glajch
Vice President-Finance & Administration and Chief Financial 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/
James
R. Lines
|
President and Chief Executive Officer and Director (Principal Executive Officer) | May 25, 2010 | ||||
|
/s/
Jeffrey
Glajch
|
Vice President-Finance & Administration and Chief Financial Officer (Principal Financial Officer) | May 25, 2010 | ||||
|
/s/
Jennifer
R. Condame
|
Chief Accounting Officer and Controller (Principal Accounting Officer) | May 25, 2010 | ||||
|
/s/
Helen
H. Berkeley
|
Director | May 25, 2010 | ||||
|
/s/
Jerald
D. Bidlack
|
Director and Chairman of the Board | May 25, 2010 | ||||
|
/s/
Alan
Fortier
|
Director | May 25, 2010 | ||||
|
/s/
James
J. Malvaso
|
Director | May 25, 2010 | ||||
|
/s/
Gerard
T. Mazurkiewicz
|
Director | May 25, 2010 | ||||
|
/s/
Cornelius
S. Van Rees
|
Director | May 25, 2010 | ||||
65
Table of Contents
UNITED STATES 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 YEAR ENDED
March 31, 2010
GRAHAM CORPORATION
66
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. (removed and Reserved)Part II (amounts in Thousands, Except Per Share Data)Part IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 The Company and Its Accounting Policies:Note 2 Inventories:Note 3 Property, Plant and Equipment:Note 4 Product Warranty Liability:Note 5 Leases:Note 6 Debt:Note 7 Financial Instruments and Derivative Financial Instruments:Note 8 Income Taxes:Note 9 Employee Benefit Plans:Note 10 Stock Compensation Plans:Note 11 Shareholder Rights Plan:Note 12 Segment Information:Note 13 Other Expense:Note 14 Purchase Of Treasury Stock:Note 15 Commitments and Contingencies:Note 16 Quarterly Financial Data (unaudited):Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules