e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2009.
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 |
For the transition period from to .
COMMISSION FILE NUMBER 1-8462
GRAHAM CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE
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16-1194720 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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20 Florence Avenue, Batavia, New York
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14020 |
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(Address of principal executive offices)
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(Zip Code) |
585-343-2216
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark 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 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):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of January 29, 2010, there were outstanding 9,845,277 shares of the registrants common
stock, par value $.10 per share.
Graham Corporation and Subsidiary
Index to Form 10-Q
As of December 31, 2009 and March 31, 2009 and for the Nine-Month Periods
Ended December 31, 2009 and 2008
2
GRAHAM CORPORATION AND SUBSIDIARY
FORM 10-Q
DECEMBER 31, 2009
PART I FINANCIAL INFORMATION
3
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Item 1. |
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Unaudited Condensed Consolidated Financial Statements |
GRAHAM CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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December 31, |
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March 31, |
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2009 |
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2009 |
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(Amounts in thousands, except per share data) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
6,638 |
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$ |
5,150 |
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Investments |
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51,062 |
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41,059 |
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Trade accounts receivable, net of allowances ($19 and $39 at
December 31, and March 31, 2009, respectively) |
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7,850 |
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6,995 |
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Unbilled revenue |
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2,027 |
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10,444 |
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Inventories |
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3,638 |
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4,665 |
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Income taxes receivable |
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3,425 |
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4,054 |
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Prepaid expenses and other current assets |
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432 |
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375 |
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Total current assets |
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75,072 |
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72,742 |
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Property, plant and equipment, net |
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9,402 |
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9,645 |
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Prepaid pension asset |
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4,484 |
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4,300 |
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Other assets |
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282 |
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237 |
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Total assets |
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$ |
89,240 |
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$ |
86,924 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Current portion of capital lease obligations |
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$ |
29 |
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$ |
28 |
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Accounts payable |
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3,527 |
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5,514 |
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Accrued compensation |
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3,756 |
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4,630 |
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Accrued expenses and other liabilities |
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2,196 |
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2,266 |
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Customer deposits |
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5,461 |
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5,892 |
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Deferred income tax liability |
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4,870 |
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4,865 |
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Total current liabilities |
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19,839 |
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23,195 |
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Capital lease obligations |
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10 |
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31 |
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Accrued compensation |
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287 |
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250 |
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Deferred income tax liability |
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1,255 |
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1,253 |
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Accrued pension liability |
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248 |
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256 |
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Accrued postretirement benefits |
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856 |
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828 |
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Total liabilities |
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22,495 |
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25,813 |
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Commitments and Contingencies (Note 11) |
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Stockholders equity: |
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Preferred stock, $1.00 par value
Authorized, 500 shares |
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Common stock, $.10 par value
Authorized, 25,500 shares |
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Issued, 10,150 and 10,127 shares at December 31 and
March 31, 2009, respectively |
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1,015 |
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1,013 |
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Capital in excess of par value |
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15,293 |
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14,923 |
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Retained earnings |
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59,125 |
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53,966 |
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Accumulated other comprehensive loss |
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(6,132 |
) |
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(6,460 |
) |
Treasury stock (305 and 279 shares at December 31 and March
31, 2009, respectively) |
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(2,554 |
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(2,325 |
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Notes receivable |
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(2 |
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(6 |
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Total stockholders equity |
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66,745 |
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61,111 |
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Total liabilities and stockholders equity |
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$ |
89,240 |
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$ |
86,924 |
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See Notes to Condensed Consolidated Financial Statements.
4
GRAHAM CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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December 31, |
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December 31, |
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2009 |
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2008 |
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2009 |
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2008 |
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(Amounts in thousands, except per share data) |
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Net sales |
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$ |
12,166 |
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$ |
24,701 |
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$ |
48,412 |
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$ |
76,263 |
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Cost of products sold |
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8,345 |
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15,339 |
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30,459 |
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44,184 |
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Gross profit |
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3,821 |
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9,362 |
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17,953 |
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32,079 |
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Other expenses and income: |
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Selling, general and administrative |
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2,718 |
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3,567 |
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8,998 |
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11,320 |
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Interest income |
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(11 |
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(83 |
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(44 |
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(386 |
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Interest expense |
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1 |
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34 |
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4 |
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Other expense |
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96 |
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Total other expenses and income |
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2,707 |
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3,485 |
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9,084 |
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10,938 |
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Income before income taxes |
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1,114 |
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5,877 |
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8,869 |
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21,141 |
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Provision for income taxes |
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350 |
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2,087 |
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3,119 |
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7,255 |
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Net income |
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764 |
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3,790 |
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5,750 |
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13,886 |
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Retained earnings at beginning of period |
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58,558 |
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46,995 |
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53,966 |
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37,216 |
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Dividends |
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(197 |
) |
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(203 |
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(591 |
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(557 |
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Effect of transition to a fiscal year end
measurement date for defined benefit
pension and other postretirement plan
assets and obligations |
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37 |
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Retained earnings at end of period |
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$ |
59,125 |
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$ |
50,582 |
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$ |
59,125 |
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$ |
50,582 |
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Per share data: |
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Basic: |
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Net income |
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$ |
.08 |
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$ |
.37 |
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$ |
.58 |
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$ |
1.37 |
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Diluted: |
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Net income |
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$ |
.08 |
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$ |
.37 |
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$ |
.58 |
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$ |
1.36 |
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Weighted average common shares outstanding: |
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Basic: |
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9,903 |
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10,181 |
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9,897 |
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10,145 |
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Diluted: |
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9,945 |
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10,211 |
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9,933 |
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10,221 |
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Dividends declared per share |
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$ |
.02 |
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$ |
.02 |
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$ |
.06 |
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$ |
.055 |
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See Notes to Condensed Consolidated Financial Statements.
5
GRAHAM CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended |
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December 31, |
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2009 |
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2008 |
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(Amounts in thousands) |
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Operating activities: |
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Net income |
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$ |
5,750 |
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$ |
13,886 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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751 |
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749 |
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Amortization of unrecognized prior service cost and actuarial losses |
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508 |
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77 |
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Discount accretion on investments |
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(40 |
) |
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(371 |
) |
Stock-based compensation expense |
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317 |
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315 |
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Loss on disposal of property, plant and equipment |
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3 |
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2 |
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Deferred income taxes |
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(228 |
) |
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1,178 |
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(Increase) decrease in operating assets: |
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Accounts receivable |
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(855 |
) |
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(3,365 |
) |
Unbilled revenue |
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8,419 |
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208 |
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Inventories |
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1,027 |
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(222 |
) |
Income taxes receivable/payable |
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629 |
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|
884 |
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Prepaid expenses and other current and non-current assets |
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(58 |
) |
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(358 |
) |
Prepaid pension asset |
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(184 |
) |
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(3,630 |
) |
Increase (decrease) in operating liabilities: |
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Accounts payable |
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(1,996 |
) |
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(1,483 |
) |
Accrued compensation, accrued expenses and other current and non-current
liabilities |
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(945 |
) |
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(531 |
) |
Customer deposits |
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(432 |
) |
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82 |
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Long-term portion of accrued compensation, accrued pension liability
and accrued postretirement benefits |
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57 |
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24 |
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Net cash provided by operating activities |
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12,723 |
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7,445 |
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Investing activities: |
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Purchase of property, plant and equipment |
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(502 |
) |
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(1,193 |
) |
Proceeds from sale of property, plant and equipment |
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7 |
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1 |
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Purchase of investments |
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(134,673 |
) |
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(102,550 |
) |
Redemption of investments at maturity |
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124,710 |
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96,450 |
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Net cash used by investing activities |
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(10,458 |
) |
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(7,292 |
) |
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Financing activities: |
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Proceeds from issuance of long-term debt |
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821 |
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2,450 |
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Principal repayments on long-term debt |
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(841 |
) |
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(2,471 |
) |
Issuance of common stock |
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34 |
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|
695 |
|
Dividends paid |
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(591 |
) |
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(557 |
) |
Purchase of treasury stock |
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(229 |
) |
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(14 |
) |
Excess tax deduction on stock awards |
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21 |
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|
1,696 |
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Other |
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4 |
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4 |
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Net cash (used) provided by financing activities |
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|
(781 |
) |
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|
1,803 |
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Effect of exchange rate changes on cash |
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4 |
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161 |
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Net increase in cash and cash equivalents |
|
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1,488 |
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|
2,117 |
|
Cash and cash equivalents at beginning of period |
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|
5,150 |
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|
2,112 |
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Cash and cash equivalents at end of period |
|
$ |
6,638 |
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|
$ |
4,229 |
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|
See Notes to Condensed Consolidated Financial Statements.
6
GRAHAM CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
(Unaudited)
(Amounts in thousands, except per share data)
NOTE 1 BASIS OF PRESENTATION:
Graham Corporations (the Companys) Condensed Consolidated Financial Statements include one
wholly-owned foreign subsidiary located in China, and have been prepared in accordance with
accounting principles generally accepted in the United States (GAAP) for interim financial
information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, each as promulgated
by the Securities and Exchange Commission. The Companys Condensed Consolidated Financial
Statements do not include all information and notes required by GAAP for complete financial
statements. The unaudited Condensed Consolidated Balance Sheet as of March 31, 2009 presented
herein was derived from the Companys audited Consolidated Balance Sheet as of March 31, 2009. For
additional information, please refer to the consolidated financial statements and notes included in
the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2009 (fiscal 2009).
In the opinion of management, all adjustments, including normal recurring accruals considered
necessary for a fair presentation, have been included in the Companys Condensed Consolidated
Financial Statements. The Company evaluated subsequent events through February 2, 2010, when the
financial statements were issued.
The Companys results of operations and cash flows for the three and nine months ended
December 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal
year ending March 31, 2010 (fiscal 2010).
Certain reclassifications have been made to prior year amounts to conform with the current
year presentation. In the Condensed Consolidated Balance Sheet at March 31, 2009, the line item
Deferred income tax asset was combined with the line item Other assets. In the Condensed
Consolidated Statement of Cash Flows, the line item Purchase of treasury stock was reported
separately from the line item Other and the line item Amortization of unrecognized prior service
cost and actuarial losses was reported separately from the line item Depreciation and
amortization for the nine months ended December 31, 2008.
NOTE 2 REVENUE RECOGNITION:
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 Companys revenue is recognized under this methodology. The
percentage-of-completion method is determined by comparing actual labor
incurred to a specific date to managements estimate of the total labor to be incurred on each
7
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.
Revenue on contracts not accounted for using the percentage-of-completion method is recognized
utilizing the completed contract method. The majority of the Companys contracts 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. The Company recognizes revenue and all
related costs on these contracts upon substantial completion or shipment to the customer.
Substantial completion is consistently defined as at least 95% complete with regard to direct labor
hours. Customer acceptance is generally required throughout the construction process and the
Company has no further material obligations under its contracts after the revenue is recognized.
At March 31, 2009, the Companys backlog included five orders with a value of $4,443 that had
been placed on hold (i.e., suspended) pending further customer evaluation. During the nine months
ended December 31, 2009, one order valued at $519 was cancelled, one order valued at $235 was
returned to active status and an additional order valued at $3,298 was placed on hold (suspended)
by a customer. At December 31, 2009, four orders valued at an aggregate of $6,987 and included in
backlog remained on hold (i.e., suspended).
NOTE 3 INVESTMENTS:
Investments consist solely of fixed-income debt securities issued by the United States
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 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 December 31, 2009 are scheduled to mature between
January 14, 2010 and May 27, 2010.
NOTE 4 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 Condensed Consolidated Balance Sheets. Unbilled revenue
in the Condensed 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-ofcompletion 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 Condensed Consolidated
Balance Sheets.
8
Major classifications of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2009 |
|
Raw materials and supplies |
|
$ |
1,871 |
|
|
$ |
1,929 |
|
Work in process |
|
|
3,281 |
|
|
|
4,664 |
|
Finished products |
|
|
697 |
|
|
|
695 |
|
|
|
|
|
|
|
|
|
|
|
5,849 |
|
|
|
7,288 |
|
|
|
|
|
|
|
|
|
|
Less progress payments |
|
|
2,211 |
|
|
|
2,623 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,638 |
|
|
$ |
4,665 |
|
|
|
|
|
|
|
|
NOTE 5 STOCK-BASED COMPENSATION:
The Amended and Restated 2000 Graham Corporation Incentive Plan to Increase Shareholder Value
provides for the issuance of up to 1,375 shares of common stock in connection with grants of
incentive stock options, non-qualified stock options, stock awards and performance awards to
officers, key employees and outside directors; provided, however, that no more than 250 shares of
common stock may be used for awards other than stock options. Stock options may be granted at
prices not less than the fair market value at the date of grant and expire no later than ten years
after the date of grant.
There were no stock option awards granted in the three months ended December 31, 2009 and
2008. Stock option awards of 24 and 18 were granted in the nine months ended December 31, 2009 and
2008, respectively. Stock option awards granted in the fiscal 2010 nine-month period vest 331/3% per
year over a three-year term. Stock option awards granted in the fiscal 2009 nine-month period vest
25% per year over a four-year term. All stock options have a term of ten years from their grant
date.
There were no restricted stock awards in the three months ended December 31, 2009 and 2008.
Restricted stock awards granted in the nine-month periods ended December 31, 2009 and 2008 were 15
and 4, respectively. Restricted stock awards 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
restricted stock awards granted to directors in the fiscal 2010 nine-month period vest 100% on the
first anniversary of the grant date. Restricted stock awards granted in the fiscal 2009 nine-month
period vest over a four-year term as follows: (i) 10% on the first anniversary of the grant date;
(ii) 20% on the second anniversary of the grant date; (iii) 30% on the third anniversary of the
grant date; and (iv) 40% on the fourth anniversary of the grant date.
During the three and nine months ended December 31, 2009, the Company recognized stock-based
compensation costs of $119 and $317, respectively. The income tax benefit recognized related to
stock-based compensation was $41 and $110 for the three and nine months ended December 31, 2009,
respectively. During the three and nine months ended December 31, 2008, the Company recognized
stock-based compensation costs of $57 and $315, respectively.
The income tax benefit recognized related to stock-based compensation for the three and nine
months ended December 31, 2008 was $20 and $112, respectively.
9
The weighted average fair value of stock options granted in the nine months ended December 31,
2009 and 2008 was $8.57 and $16.57, respectively. The fair value of each stock option grant was
estimated using the Black-Scholes option-pricing model with the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Expected life |
|
3 years |
|
5 years |
Expected volatility |
|
|
99.04 |
% |
|
|
61.80 |
% |
Risk-free interest rate |
|
|
1.52 |
% |
|
|
3.22 |
% |
Expected dividend yield |
|
|
.36 |
% |
|
|
.28 |
% |
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
Companys historical exercise patterns. Expected volatility is estimated based on the historical
closing prices of the Companys common stock over the expected life of the options. The risk-free
interest rate is estimated based on the United States Federal Reserves 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 fair value of a restricted share is equal to the market value of a share of the Companys
stock on the date of grant. The weighted average fair value of the restricted shares granted in
the nine months ended December 31, 2009 and 2008 was $15.22 and $30.88, respectively.
The Graham Corporation Outside Directors Long-Term Incentive Plan (the Plan) provides for
awards of share equivalent units for outside directors based upon the Companys performance. Each
unit is equivalent to one share of the Companys common stock. Share equivalent units are credited
to each outside directors account for each of the first five full fiscal years of the directors
service when consolidated net income is at least 100% of the approved budgeted net income for the
year. Share equivalent units are payable in cash or stock upon retirement. In May 2009, the
applicability of the Plan was suspended for any Directors first elected after such date.
Compensation cost for share equivalent units is recorded based on the higher of the quoted
market price of the Companys stock at the end of the period, up to $3.20 per unit, or the stock
price at the date of grant. The cost of share equivalent units earned and charged to pre-tax
income under the Plan was $8 and $10 in the three-month periods ended December 31, 2009 and 2008,
respectively, and $23 and $30 in the nine-month periods ended December 31, 2009 and 2008,
respectively. There were 58 and 54 share equivalent units in the Plan at December 31, 2009 and
2008, respectively, and the related liability recorded was $287 and $250 at December 31, 2009 and
March 31, 2009, respectively. The expense to mark to market the share equivalent units was $5 and
$23 in the three-month periods ended December 31, 2009 and 2008, respectively. The expense
(income) to mark to market the share equivalent units was $11 and $(23) in the nine months ended
December 31, 2009 and 2008, respectively.
10
NOTE 6 INCOME PER SHARE:
Basic income per share is computed by dividing net income by the weighted average number of
common shares outstanding for the period. Common shares outstanding include share equivalent
units, which are contingently issuable shares. Diluted income per share is calculated by dividing
net income by the weighted average number of common shares outstanding and, when applicable,
potential common shares outstanding during the period. A reconciliation of the numerators and
denominators of basic and diluted income per share is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Basic income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
764 |
|
|
$ |
3,790 |
|
|
$ |
5,750 |
|
|
$ |
13,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted common shares outstanding |
|
|
9,845 |
|
|
|
10,126 |
|
|
|
9,840 |
|
|
|
10,083 |
|
Share equivalent units (SEUs) |
|
|
58 |
|
|
|
55 |
|
|
|
57 |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and SEUs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,903 |
|
|
|
10,181 |
|
|
|
9,897 |
|
|
|
10,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
.08 |
|
|
$ |
.37 |
|
|
$ |
.58 |
|
|
$ |
1.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
764 |
|
|
$ |
3,790 |
|
|
$ |
5,750 |
|
|
$ |
13,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares and SEUs outstanding |
|
|
9,903 |
|
|
|
10,181 |
|
|
|
9,897 |
|
|
|
10,145 |
|
Stock options outstanding |
|
|
40 |
|
|
|
30 |
|
|
|
34 |
|
|
|
76 |
|
Contingently issuable SEUs |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and potential
common shares outstanding |
|
|
9,945 |
|
|
|
10,211 |
|
|
|
9,933 |
|
|
|
10,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share |
|
$ |
.08 |
|
|
$ |
.37 |
|
|
$ |
.58 |
|
|
$ |
1.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase a total of 17 and 18 shares of common stock were outstanding at
December, 31, 2009 and 2008, respectively, but were not included in the above computation of
diluted income per share given their exercise prices as they would be anti-dilutive upon issuance.
11
NOTE 7 PRODUCT WARRANTY LIABILITY:
The reconciliation of the changes in the product warranty liability is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Balance at beginning of period |
|
$ |
279 |
|
|
$ |
357 |
|
|
$ |
366 |
|
|
$ |
441 |
|
Expense (income) for product warranties |
|
|
44 |
|
|
|
70 |
|
|
|
(30 |
) |
|
|
134 |
|
Product warranty claims paid |
|
|
(75 |
) |
|
|
(55 |
) |
|
|
(88 |
) |
|
|
(203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
248 |
|
|
$ |
372 |
|
|
$ |
248 |
|
|
$ |
372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income of $30 for product warranties in the nine months ended December 31, 2009
resulted from the reversal of provisions made that were no longer required due to lower claims
experience.
The product warranty liability is included in the line item Accrued expenses and other
liabilities in the Condensed Consolidated Balance Sheets.
NOTE 8 CASH FLOW STATEMENT:
Interest paid was $2 and $4 for the nine months ended December 31, 2009 and 2008,
respectively. In addition, income taxes paid for the nine months ended December 31, 2009 were
$2,697, which was net of a $3,426 refund. For the nine months ended December 31, 2008, income
taxes paid were $3,498.
During the nine months ended December 31, 2009 and 2008, stock option awards were exercised
and the related income tax benefit realized exceeded the tax benefit that had been recorded
pertaining to the compensation cost recognized. This excess tax deduction has been separately
reported under Financing activities in the Condensed Consolidated Statements of Cash Flows.
At December 31, 2009 and 2008, there were $7 and $73 of capital purchases that were recorded
in accounts payable and are not included in the caption Purchase of property, plant and equipment
in the Condensed Consolidated Statements of Cash Flows. In addition, during the nine months ended
December 31, 2008, capital expenditures totaling $31 were financed through the issuance of capital
leases.
Non-cash activities during the nine months ended December 31, 2008 included a reclassification
from Capital in excess of par value to Common stock for $506, which represents the par value of
the additional shares issued to effect the two-for-one stock split effected in the form of a stock
dividend. Non-cash activities during the nine months ended December 31, 2008 also 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.
12
NOTE 9 COMPREHENSIVE INCOME:
Total comprehensive income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
764 |
|
|
$ |
3,790 |
|
|
$ |
5,750 |
|
|
$ |
13,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
10 |
|
|
|
3 |
|
|
|
151 |
|
Defined benefit pension and other
postretirement plans |
|
|
108 |
|
|
|
30 |
|
|
|
325 |
|
|
|
(494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
872 |
|
|
$ |
3,830 |
|
|
$ |
6,078 |
|
|
$ |
13,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension and other postretirement plans reflect the amortization of prior
service costs and recognized gains and losses related to such plans during the periods and the
effect of the Companys transition to a fiscal year end measurement date for plan assets and
benefit obligations. For more information, see Note 14.
NOTE 10 EMPLOYEE BENEFIT PLANS:
The components of pension cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
79 |
|
|
$ |
75 |
|
|
$ |
237 |
|
|
$ |
300 |
|
Interest cost |
|
|
324 |
|
|
|
327 |
|
|
|
973 |
|
|
|
945 |
|
Expected return on assets |
|
|
(465 |
) |
|
|
(457 |
) |
|
|
(1,394 |
) |
|
|
(1,375 |
) |
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost |
|
|
1 |
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
Actuarial loss |
|
|
205 |
|
|
|
81 |
|
|
|
614 |
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost |
|
$ |
144 |
|
|
$ |
27 |
|
|
$ |
433 |
|
|
$ |
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company made no contributions to its defined benefit pension plan during the nine
months ended December 31, 2009 and does not expect to make any contributions to the plan for the
balance of fiscal 2010.
13
The components of the postretirement benefit income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
16 |
|
|
|
15 |
|
|
|
46 |
|
|
|
45 |
|
Amortization of prior service cost |
|
|
(41 |
) |
|
|
(41 |
) |
|
|
(124 |
) |
|
|
(124 |
) |
Amortization of actuarial loss |
|
|
5 |
|
|
|
5 |
|
|
|
16 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net postretirement benefit income |
|
$ |
(20 |
) |
|
$ |
(21 |
) |
|
$ |
(62 |
) |
|
$ |
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company paid benefits of $18 related to its postretirement benefit plan during the
nine months ended December 31, 2009. The Company expects to pay benefits of approximately $104 for
the balance of fiscal 2010.
NOTE 11 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 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 December 31, 2009, other than noted above, management was
unaware of any other material litigation matters.
NOTE 12 INCOME TAXES:
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 United States Internal Revenue Service (the IRS) for tax years 2006 through
2009 and tax years 2006 through 2008 are currently under examination. During the second quarter of
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 Companys 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 during
the second quarter of fiscal 2010, which represents managements estimate of the potential
resolution of this issue. Any additional impact on the Companys income tax liability cannot be
determined at this time. The Company is subject to examination in state and international tax
jurisdictions for tax years 2005 through 2009 and tax years 2006 through 2009, respectively. It is
the Companys
policy to recognize any interest related to uncertain tax positions in interest expense and
any
14
penalties related to uncertain tax positions in selling, general and administrative expense.
The Company had no other unrecognized tax benefits as of December 31, 2009. During the nine months
ended December 31, 2009 and 2008, the Company recorded $32 and $0, respectively, for interest and
penalties related to its uncertain tax position. During the three months ended December 31, 2009
and 2008, no amounts were recorded for interest and penalties related to its uncertain tax
position.
NOTE 13 OTHER EXPENSE:
In September 2009, the Companys workforce was reduced by eliminating several staff positions
in an effort to reduce costs. As a result, a restructuring charge of $96 was recognized in the
second quarter, which included severance and related employee benefit costs. This charge is
included in the caption Other Expense in the Consolidated Statement of Operations for the nine
months ended December 31, 2009.
NOTE 14 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 year 2009. The following table presents
the impact of initially remeasuring the plan assets and benefit obligations on individual line
items in the Companys Consolidated Balance Sheet as of April 1, 2008 (the first day of fiscal
2009):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before |
|
|
|
|
|
After |
|
|
Remeasurement of |
|
|
|
|
|
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 |
) |
Effective with fiscal 2010, the Company will be required to include additional
disclosures about its postretirement benefit plan assets. The disclosures required include the
following: (i) information about how investment allocation decisions are made; (ii) the fair value
of each major category of plan assets for defined benefit pension plans and other postretirement
benefit plans; (iii) information that enables financial statement users to assess the inputs and
valuation techniques used to develop fair value measurements of plan assets; and (iv) information
about significant concentrations of risk in plan assets. The Company is currently evaluating the
effect these requirements may have on its consolidated financial statement disclosures.
15
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
(Dollar 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. Our subsidiary in China supports
sales orders from Asia and provides engineering support and supervision of subcontracted
fabrication.
Highlights
Our current fiscal year ends March 31, 2010 (fiscal 2010). Highlights for the three and nine
months ended December 31, 2009 include:
|
|
|
Net income and income per diluted share for the third quarter of fiscal 2010
were $764 and $0.08, respectively, compared with net income of $3,790 and income
per diluted share of $0.37 for the third quarter of our year ended March 31, 2009
(fiscal 2009). Net income and income per diluted share for the first nine months
of fiscal 2010 were $5,750 and $0.58, respectively, compared with net income of
$13,886 and income per diluted share of $1.36 for the first nine months of fiscal
2009. |
|
|
|
|
Net sales for the third quarter of fiscal 2010 were $12,166, down 51% compared
with $24,701 for the third quarter of fiscal 2009. Net sales for the first nine
months of fiscal 2010 were $48,412, down 37% compared with net sales of $76,263 for
the first nine months of fiscal 2009. |
|
|
|
|
Orders booked in the third quarter of fiscal 2010 were $51,644, up 538% compared
with the third quarter of fiscal 2009, when orders were $8,098. Orders booked in
the first nine months of fiscal 2010 were $90,049, up 69% compared with orders
booked of $53,349 in the first nine months of fiscal 2009. The order level in the
third quarter of fiscal 2010 includes a large order (in excess of $25,000) with
Northrop Grumman Corporation to provide surface condensers for a U.S. Navy aircraft
carrier, which is expected to begin to be converted to sales beginning with our
fiscal year ending March 31, 2012 (fiscal 2012) and continuing into fiscal years
ending March 31, 2013 (fiscal 2013) and 2014 (fiscal 2014). |
|
|
|
|
Backlog increased to $89,769 at December 31, 2009, representing a 78% increase
compared with September 30, 2009, when our backlog was $50,469. We believe 50% of
current backlog will convert to sales over the next 12 months. Normally, 85-90% of
the backlog is expected to convert to sales within the next 12 months. |
16
|
|
|
Gross profit margin for the three and nine-month period ended December 31, 2009
was 31% and 37%, respectively, compared with 38% and 42%, respectively, for the
three and nine-month periods ended December 31, 2008. |
|
|
|
|
Cash and short-term investments at December 31, 2009 were $57,700 compared with
$46,209 at March 31, 2009. |
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 for fiscal 2009. 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; |
|
|
|
|
plans for future products and services and for enhancements to existing products
and services; |
|
|
|
|
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 these 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 report, whether as a result of new information, future events or
otherwise.
Fiscal 2010 and the Near-Term Market Conditions
We believe that 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 also believe that we are beginning to see some
positive signs that international customers are once again examining investments in major capital
projects.
17
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 as they began to anticipate construction
costs to decline (following recent decreases in commodity costs).
Currently, near-term demand trends that we believe are affecting our customers investments
include:
|
|
|
Middle East demand for oil and its by-products continue to increase and has
begun to drive renewed investment activity. 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 refinery projects (as
construction costs for these projects have reportedly been reduced by 20%). |
|
|
|
|
Asia, specifically China, has been experiencing renewed demand in calendar year
2009, following calendar year 2008 reductions in demand. In turn, this renewed
demand is driving new investment in petrochemical and refining projects. |
|
|
|
|
South America, specifically Brazil, Venezuela and Columbia, is seeing increased
refining and petrochemical investments that are driven by increased local demand. |
|
|
|
|
A shift away from the U.S. refining market driven by lower demand, lower
refinery utilization and uncertainty around U.S. energy policy (and the impact that
any changes to energy policy may have on production costs). |
|
|
|
|
Delays in North American oil sands investments due to construction costs and
uncertainty around U.S. energy policy (and the impact that any changes to energy
policy may have on production costs). However, we believe that recent investments
in extraction projects in Alberta suggest that downstream investments might
increase in 24-36 months. |
The consequences of these near-term trends are expected to continue to put pressure on gross
margins, as the U.S. refining market has historically provided higher margins than certain
international markets and will likely result in continued volatility in our order pattern. For the
next several quarters, we expect to see smaller value projects (compared with recent years) which
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 good and weak
quarters. For example, the past five quarters saw new order levels of $8,098, $20,524, $8,838,
$29,567, and $51,644, sequentially. We believe that looking at our order level in 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.
18
Shift Back to International Growth Expected to Drive Next Industry Cycle
Over the long-term, we expect our customers markets to regain their historical 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 developing countries. 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. |
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 new power investments are expected in Asia and South America to meet
projected consumer demand increases. |
|
|
|
|
Global oil refining capacity needs are projected to increase, which are expected
to be addressed through new facilities, refinery upgrades, revamps and expansions. |
|
|
|
|
Long-term growth potential is believed to exist in emerging energy market
opportunities, such as coal-to-liquids, gas-to-liquids and other emerging
technologies, such as biodiesel, ethanol and waste-to-energy. |
We believe that all of the above factors offer long-term growth opportunity for us as major
project work will be necessary 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 increased over the past three fiscal years from 50% in fiscal 2007 to 54% in fiscal 2008 to
63% in fiscal 2009. The economic strength of the U.S., especially the U.S. refining market, drove
this trend. For the third quarter and first nine months of fiscal 2010, domestic sales had
decreased to 42% and 48% of total sales, respectively. Our order rates for the nine months ended
December 31 2009 were 52% domestic and 48% international. However, the domestic order level was
heavily impacted by the large order from Northrop Grumman for the U.S. Navy. If we exclude this
large project, the international order percentage would have exceeded 66%. As we look at the
remainder of fiscal 2010 and beyond, we believe international sales over the next few years will
likely surpass domestic sales.
19
Results of Operations
For an understanding of the significant factors that influenced our performance, the following
discussion should be read in conjunction with our condensed consolidated financial statements and
the notes to our condensed consolidated financial statements included in Part I, Item 1 of this
Quarterly Report on Form 10-Q.
The following table summarizes our results of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
December 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Net sales |
|
$ |
12,166 |
|
|
$ |
24,701 |
|
|
$ |
48,412 |
|
|
$ |
76,263 |
|
Net income |
|
$ |
764 |
|
|
$ |
3,790 |
|
|
$ |
5,750 |
|
|
$ |
13,886 |
|
Diluted income per share |
|
$ |
0.08 |
|
|
$ |
0.37 |
|
|
$ |
0.58 |
|
|
$ |
1.36 |
|
Total assets |
|
$ |
89,240 |
|
|
$ |
85,621 |
|
|
$ |
89,240 |
|
|
$ |
85,621 |
|
The Third Quarter and First Nine Months of Fiscal 2010 Compared With the Third Quarter and
First Nine Months of Fiscal 2009
Sales for the third quarter of fiscal 2010 were $12,166, a 51% decrease as compared with sales
of $24,701 for the third quarter of fiscal 2009. The decrease in the current quarters sales was
due to lower sales in all product lines, except aftermarket, which resulted from deferred
investments by our customers in major capital projects as a result of the global economic downturn,
which commenced in the fall of 2007. International sales accounted for 58% and 42% of total sales
for the third quarter of fiscal 2010 and fiscal 2009, respectively. International sales
year-over-year decreased $3,261, or 32%. International sales decreased in all markets, except
Africa, which increased $1,190. The markets with the largest dollar decreases were Canada, off
$1,517, Middle East, off $996, and South America, off $692. Domestic sales decreased $9,273, or
65% in the third quarter of fiscal 2010 compared with the third quarter of fiscal 2009.
Fluctuations in sales among products and geographic locations can vary measurably from
quarter-to-quarter based on timing and magnitude of projects. We believe the shift back toward a
higher international sales mix will continue for the remainder of fiscal 2010 and fiscal 2011.
Sales in the third quarter of fiscal 2010 were 36% to the refining industry, 44% to the chemical
and petrochemical industries and 20% to other industrial applications, including electrical power.
Sales in the third quarter of fiscal 2009 were 46% to the refining industry, 27% to the chemical
and petrochemical industries and 27% to other industrial applications, including electrical power.
Sales for the first nine months of fiscal 2010 were $48,412, a 37% decrease as compared with
sales of $76,263 for the first nine months of fiscal 2009. The decrease was due to lower sales in
all product lines, which resulted from deferred investments by our customers in major capital
projects as a result of the global economic downturn, which commenced in the fall of 2007.
International sales accounted for 52% and 37% of total sales for the first nine months of fiscal
2010 and fiscal 2009, respectively. International sales year-over-year decreased $3,389, or 12%.
International sales decreased in all markets, except Asia and Africa, which increased $7,183 and
$1,175, respectively. The markets with the largest dollar decreases were Canada, off $4,910,
Middle East, off $2,746, Western Europe, off $1,985 and South America, off $1,729. Domestic
sales decreased $24,462, or 51%, in the nine months ended December 31, 2009 compared with the
20
nine months ended December 31, 2008. Sales in the first nine months of fiscal 2010 were 43% to the
refining industry, 32% to the chemical and petrochemical industries and 25% to other industrial
applications, including electrical power. Sales in the first nine months of fiscal 2009 were 48%
to the refining industry, 24% to the chemical and petrochemical industries and 28% to other
industrial applications, including electrical power. For additional information on anticipated
future sales and our markets, see Orders and Backlog below.
Our gross profit margin for the third quarter of fiscal 2010 was 31% compared with 38% for the
third quarter of fiscal 2009. Gross profit dollars for the third quarter of fiscal 2010 decreased
59% compared with fiscal 2009. Gross profit margin and dollars decreased primarily due to a 51%
decrease in sales volume (as fixed production costs were spread across fewer sales dollars).
Our gross profit margin for the first nine months of fiscal 2010 was 37% compared with 42% for
the first nine months of fiscal 2009. Gross profit dollars for the first nine months of fiscal
2010 decreased 44% compared with the first nine months of fiscal 2009. Gross profit margin and
dollars decreased primarily due to a 37% decrease in sales volume (as fixed production costs were
spread across fewer sales dollars) as well as a change in product mix.
Selling, general and administrative (SG&A) expense as a percent of sales for the three and
nine-month periods ended December 31, 2009 was 22% and 19%, respectively. This compared with 14%
and 15%, respectively, for the same periods ended December 31, 2008. Actual costs in the three and
nine-month periods ended December 31, 2009 decreased $849, or 24%, and $2,322, or 21%,
respectively, compared with the same periods of the prior year. Lower SG&A expense reflected the
restructurings which occurred in the fourth quarter of fiscal 2009 and the second quarter of fiscal
2010 as well as lower variable costs (e.g., sales commissions and variable compensation) related to
lower sales and income.
We incurred a charge of $96 in the nine months ended December 31, 2009 related to
restructuring (i.e., severance) costs that we recorded in the second quarter of fiscal 2010 as we
reduced expenses to reflect lower sales levels. This restructuring is expected to result in an
annualized savings of $1,600 and we achieved a portion of this savings in the third quarter of
fiscal 2010.
Interest income for the three and nine-month periods ended December 31, 2009 was $11 and $44,
respectively. This compared with interest income for the same periods of fiscal 2009 of $83 and
$386, respectively. The decreased interest income resulted from the dramatic decrease in interest
rates, despite having more invested assets.
In the nine months ended December 31, 2009, we recorded a charge for unrecognized tax benefits
(including interest, net of tax benefit) of $467 related to research and development tax credits
taken in tax years 2006 through 2009. This charge was recorded in the second quarter of fiscal
2010 and no change to this charge was necessary for the third quarter of fiscal 2010. This is
managements estimate of the Companys potential exposure related to an ongoing IRS examination of
this issue. We believe our tax position is correct and will continue to vigorously defend our
position. This charge lowered earnings per share in the first nine months of fiscal 2010 by $0.05
per share.
Interest expense was $0 and $34 for the three and nine-month periods ended December 31, 2009,
respectively, compared with $1 and $4 for the same periods in fiscal 2009. The increase in
interest expense for the nine months ended December 31, 2009 was related to the interest associated
with the unrecognized tax benefit noted above.
21
Our effective tax rate in fiscal 2010, excluding the charge for unrecognized tax benefits
noted above, is projected to be between 30% and 31%, which represents the tax rate used to reflect
income tax expense in the first nine months of fiscal 2010. The actual effective tax rate for
fiscal 2009 was 35%. The decrease was due to a lower level of pre-tax income relative to our
allowable level of tax deductions.
Net income for the three and nine months ended December 31, 2009 was $764 and $5,750,
respectively, compared with $3,790 and $13,886, respectively, for the same periods in fiscal 2009.
Income per diluted share in fiscal 2010 was $0.08 and $0.58 for the three and nine month periods,
compared with $0.37 and $1.36 for the same periods of fiscal 2009.
Liquidity and Capital Resources
The following discussion should be read in conjunction with our Condensed Consolidated
Statements of Cash Flows included in our Condensed Consolidated Financial Statements and the notes
thereto contained in Part I, Item I of this Quarterly Report on Form 10-Q:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
March 31, |
|
|
2009 |
|
2009 |
Cash and investments |
|
$ |
57,700 |
|
|
$ |
46,209 |
|
Working capital |
|
|
55,233 |
|
|
|
49,547 |
|
Working capital ratio(1) |
|
|
3.8 |
|
|
|
3.1 |
|
Long-term debt (capital leases) |
|
$ |
10 |
|
|
$ |
31 |
|
Long-term debt/capitalization(2) |
|
|
0 |
% |
|
|
0 |
% |
Long-term liabilities/capitalization(3) |
|
|
4.0 |
% |
|
|
4.1 |
% |
|
|
|
1) |
|
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. |
Net cash generated by operating activities for the first nine months of fiscal 2010 was
$12,723, compared with $7,445 for the first nine months of fiscal 2009. The increase resulted from
improved working capital (primarily accounts receivable, unbilled revenue, and inventories), offset
by lower net income and deferred taxes. In addition, in fiscal 2009, a pension contribution was
made in the first nine months of the year. Based on the current funding status of our pension
plan, no contribution is currently planned in fiscal 2010.
We invest net cash generated from operations in excess of cash held for near-term needs in
marketable securities. Investments are United States government instruments, generally with
maturity periods of greater than three months and less than one year. Investments at December 31,
2009 and March 31, 2009 were $51,062 and $41,059, respectively.
Other significant non-operating sources of cash for the first nine months of fiscal 2010
included the issuance of common stock to cover stock options exercised, which raised $34, as
compared with $695 in the first nine months of fiscal 2009. We recognized a $21 increase in
capital in excess of par value for the income tax benefit realized upon exercise of stock options
in
22
excess of the tax benefit amount recognized pertaining to the fair value of stock option awards
treated as compensation expense during the first nine months of fiscal 2010. This compared with
$1,696 for the first nine months of fiscal 2009. In the current fiscal year, $229 was used to
repurchase 26 shares of stock as part of our previously disclosed stock repurchase program. All of
these share repurchases occurred in the first quarter of fiscal 2010.
Dividend payments and capital expenditures in the first nine months of fiscal 2010 were $591
and $502, respectively, compared with $557 and $1,193, respectively, for the first nine months of
fiscal 2009.
Capital expenditures for fiscal 2010 are expected to be approximately $800 to $1,000, with the
planned investment expected to be 65% for machinery and equipment, 28% for information technology
and 7% for all other items. We estimate 50% of our capital budget in fiscal 2010 will support
productivity improvements with the balance primarily used for capitalized maintenance projects.
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 December
31, 2009 and March 31, 2009 were $8,842 and $8,759, respectively. We did not otherwise utilize our
credit facility at December 31, 2009 or March 31 2009. Our borrowing rate as of December 31, 2009
was Bank of Americas prime rate minus 125 basis points, or 2.00%.
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 for the three and nine-month periods ended December 31, 2009 were $51,644 and $90,049,
respectively, compared with $8,098 and $53,349 for the same periods in the prior fiscal year.
Orders represent communications received from customers requesting us to supply products and
services. During the third quarter of fiscal 2010, orders to all major industries increased,
compared with the third quarter of fiscal 2009. Refining orders increased $12,276, orders for
chemical and petrochemical increased $4,576 and power and other industrial applications increased
$26,694. Orders for the first nine months of fiscal 2010 increased in all markets, with the
refining market up $16,313, or 82%, petrochemical market up by $444, or 3%, and power and other
industrial or commercial applications up 19,943, or 105%.
Domestic orders were 72%, or $36,981, and international orders were 28%, or $14,663, of total
orders in the current quarter compared with the third quarter of fiscal 2009, when domestic orders
were 62%, or $5,042, of total orders, and export orders were 38%, or $3,056, of total orders. The
Northrop Grumman order for the U.S. Navy heavily impacted the domestic orders. Excluding in this
order, the majority of orders in the current quarter would have been international, a pattern seen
in the previous three quarters. We believe, subject to order selection, that in the future, some
quarters will be heavily weighted toward international orders and other quarters to domestic
orders. However, we believe international orders will comprise an increasing percentage of new
orders.
For the first nine months of fiscal 2010, domestic orders were 52%, or $47,078, and
international orders were 48%, or $42,971, of total orders compared with the first nine months of
fiscal 2009, when domestic orders were 45%, or $23,802, of total orders, and international orders
were 55%, or $29,547, of total orders.
23
Although domestic orders were higher than international orders in the first nine months of
fiscal 2010, the weighting is heavily influenced by the Northrup Grumman order for the U.S. Navy,
which will not begin to translate to revenue until fiscal 2012. Excluding this order,
international orders were more than 66% of total orders in the first nine months of fiscal 2010.
Backlog was $89,769 at December 31, 2009, compared with $50,469 at September 30, 2009, a 78%
increase. Backlog is defined as the total dollar value of orders received for which revenue has
not yet been recognized. All orders in backlog represent orders from our traditional markets in
established product lines. We believe 50% of our current backlog will convert to sales in the next
12 months. Normally, 85-90% of orders in backlog are expected to be converted to sales within the
subsequent twelve-month period. The large Northrop Grumman order for the U.S. Navy we received in
the current quarter is not expected to begin to convert to sales until fiscal 2012 (and will
continue to generate revenue through fiscal 2013 and into fiscal 2014). In addition, the Saudi
Arabian refinery orders we received in the second and third quarters are not expected to begin to
convert to sales until the middle of our fiscal 2011. These projects are the primary cause for
such deviation from our historical backlog conversion. At December 31, 2009, approximately 40% of
our backlog was attributable to equipment for refinery project work, 20% to chemical and
petrochemical projects, and 40% to power and other industrial or commercial applications. At
December 31, 2008, approximately 45% of our backlog was attributed to equipment for refinery
project work, 33% to chemical and petrochemical projects, and 22% to power and other industrial or
commercial applications.
During the third quarter of fiscal 2010, no orders were cancelled or put on hold. For the
nine months ended December 31, 2009, one order for $519 was cancelled. The aggregate value of
orders included in backlog remaining on hold (i.e., suspended) was $6,987 at quarter end.
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. The outcome of these lawsuits cannot
be determined at this time.
From time to time in the ordinary course of business, we are subject to legal proceedings and
potential claims.
Critical Accounting Policies, Estimates and Judgments
Our unaudited condensed consolidated financial statements are based on the selection of
accounting policies and the application of significant accounting estimates, some of which require
management to make significant assumptions. We believe that the most critical accounting estimates
used in the preparation of our condensed 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
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postretirement benefits. For further information, refer to Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations and Item 8 Financial Statements and
Supplementary Data included in our Annual Report on Form 10-K for fiscal 2009.
New Accounting Pronouncements
On April 1, 2008, we were required to transition to a fiscal year end measurement date for the
plan assets and benefit obligations of our defined benefit pension and other postretirement plans.
We utilized the re-measurement approach which required plan assets and benefit obligations to be
re-measured as of the beginning of fiscal 2009. The re-measurement had the effect of reducing our
prepaid pension asset by $801, reducing our deferred income tax liability by $260, reducing our
stockholders equity by $506 and decreasing our accrued postretirement benefits by $35.
Effective for fiscal 2010, we will be required to include additional disclosures about our
postretirement benefit plan assets. The disclosures required include the following: (i)
information about how investment allocation decisions are made; (ii) the fair value of each major
category of plan assets for defined benefit pension plans and other postretirement benefit plans;
(iii) information that enables financial statement users to assess the inputs and valuation
techniques used to develop fair value measurements of plan assets; and (iv) information about
significant concentrations of risk in plan assets. We are currently evaluating the effect these
requirements may have on our consolidated financial statement disclosures.
Off Balance Sheet Arrangements
We did not have any off balance sheet arrangements as of December 31, 2009 or March 31, 2009
other than operating leases.
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Item 3. |
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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 the three and nine-month periods ended December 31, 2009
were 58% and 52% of total sales, respectively, compared with 42% and 37% for the same periods of
the prior fiscal year. 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 the first
nine months of each of fiscal 2010 and fiscal 2009, we had no sales for which we were paid in
foreign currencies. 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.
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We have limited exposure to foreign currency purchases. In the first nine months of
fiscal 2010 and 2009, our purchases in foreign currencies represented 1% and 3%, 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
the periods being reported on in this Quarterly Report on Form 10-Q and as of December 31, 2009 and
March 31, 2009, we held no forward foreign currency contracts.
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 the second quarter of fiscal 2010. There were
no projects cancelled or put on hold in the third quarter of 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.
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Item 4. |
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Controls and Procedures |
Conclusion regarding the effectiveness of disclosure controls and procedures
Our President and Chief Executive Officer (principal executive officer) and Vice President -
Finance & Administration and Chief Financial Officer (principal accounting officer) each have
evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on
Form 10-Q. Based on such evaluation, and as of such date, our President and Chief Executive
Officer and Vice President-Finance & Administration and Chief Financial Officer concluded that our
disclosure controls and procedures were effective in all material respects.
Changes in internal control over financial reporting
There has been no change to our internal control over financial reporting during the quarter
covered by this Quarterly Report on Form 10-Q that has materially affected, or that is reasonably
likely to materially affect, our internal control over financial reporting.
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GRAHAM CORPORATION AND SUBSIDIARY
FORM 10-Q
December 31, 2009
PART II OTHER INFORMATION
See index to exhibits on page 31 of this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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GRAHAM CORPORATION |
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By:
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/s/ Jeffrey Glajch
Jeffrey Glajch
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Vice President Finance & Administration and
Chief Financial Officer |
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Date: February 3, 2010
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INDEX OF EXHIBITS
(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
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