NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in
thousands, except per share data)
NOTE 1 BASIS OF PRESENTATION:
Graham Corporations (the Companys) Condensed Consolidated Financial Statements include (i) its
wholly-owned foreign subsidiary located in China and (ii) its wholly-owned domestic subsidiary located in Lapeer, Michigan. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally
accepted in the U.S. (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, 2014 presented herein was derived from the Companys
audited Consolidated Balance Sheet as of March 31, 2014. 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, 2014 (fiscal 2014). 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 Companys results of operations and cash flows for the three months ended June 30, 2014 are not
necessarily indicative of the results that may be expected for the current fiscal year ending March 31, 2015 (fiscal 2015).
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 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. There is no reserve for credit
losses related to unbilled revenue recorded for contracts accounted for on the percentage-of-completion method. Any reserve for credit losses related to unbilled revenue is recorded as a reduction to revenue.
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 (as opposed to revenue) 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.
Receivables billed but not paid under retainage provisions in contracts were $1,409 and $901 at June 30, 2014 and March 31,
2014, respectively.
8
NOTE
3 INVESTMENTS:
Investments consist solely of certificates of deposits with financial institutions and fixed-income debt securities issued by
the U.S. Treasury. All investments have original maturities of greater than three months and less than one year and are classified as held-to-maturity, as the Company believes it has the intent and ability to hold the securities to maturity. The
investments are stated at amortized cost which approximates fair value. All investments held by the Company at June 30, 2014 are scheduled to mature on or before October 14, 2014.
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-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 Condensed
Consolidated Balance Sheets.
Major classifications of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
|
|
March 31,
2014
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
3,091
|
|
|
|
|
$
|
3,185
|
|
Work in process
|
|
|
16,534
|
|
|
|
|
|
17,767
|
|
Finished products
|
|
|
691
|
|
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,316
|
|
|
|
|
|
21,598
|
|
Less - progress payments
|
|
|
7,499
|
|
|
|
|
|
5,080
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,817
|
|
|
|
|
$
|
16,518
|
|
|
|
|
|
|
|
|
|
|
|
|
9
NOTE
5 INTANGIBLE ASSETS:
Intangible assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
|
|
Accumulated
Amortization
|
|
|
|
|
Net
Carrying
Amount
|
|
At June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
|
|
$
|
170
|
|
|
|
|
$
|
170
|
|
|
|
|
$
|
-
|
|
Customer relationships
|
|
|
2,700
|
|
|
|
|
|
637
|
|
|
|
|
|
2,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,870
|
|
|
|
|
$
|
807
|
|
|
|
|
$
|
2,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permits
|
|
$
|
10,300
|
|
|
|
|
$
|
-
|
|
|
|
|
$
|
10,300
|
|
Tradename
|
|
|
2,500
|
|
|
|
|
|
-
|
|
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,800
|
|
|
|
|
$
|
-
|
|
|
|
|
$
|
12,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
|
|
$
|
170
|
|
|
|
|
$
|
170
|
|
|
|
|
$
|
-
|
|
Customer relationships
|
|
|
2,700
|
|
|
|
|
|
592
|
|
|
|
|
|
2,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,870
|
|
|
|
|
$
|
762
|
|
|
|
|
$
|
2,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permits
|
|
$
|
10,300
|
|
|
|
|
$
|
-
|
|
|
|
|
$
|
10,300
|
|
Tradename
|
|
|
2,500
|
|
|
|
|
|
-
|
|
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,800
|
|
|
|
|
$
|
-
|
|
|
|
|
$
|
12,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets are amortized on a straight line basis over the estimated useful lives.
Intangible amortization expense for the three months ended June 30, 2014 and 2013 was $45 and $45, respectively. As of June 30, 2014, amortization expense is estimated to be $135 for the remainder of fiscal 2015 and $180 in each of the
fiscal years ending March 31, 2016, 2017, 2018 and 2019.
NOTE 6 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.
Restricted stock awards granted in the three-month periods ended June 30, 2014 and 2013 were 28 and 32, respectively.
Restricted shares of 12 and 14 granted to officers in fiscal 2015 and fiscal 2014, respectively, vest 100% on the third anniversary of the grant date subject to the satisfaction of the performance metrics for the applicable three-year period.
Restricted shares of 11 and 12 granted to officers and key employees in fiscal 2015 and fiscal 2014, respectively, vest 33
1
⁄
3
% per year over a three-year
term. Restricted shares of 5 and 6 granted to directors in fiscal 2015 and fiscal 2014, respectively, vest 100% on the first anniversary of the grant date. No stock options were awarded in the three months ended June 30, 2014 or 2013.
10
During the three months ended June 30, 2014 and 2013, the Company recognized
stock-based compensation costs related to restricted stock awards of $106 and $180, respectively. The income tax benefit recognized related to stock-based compensation was $37 and $63 for the three months ended June 30, 2014 and 2013,
respectively.
The Company has an Employee Stock Purchase Plan (the ESPP), which allows eligible employees to
purchase shares of the Companys common stock on the last day of a six-month offering period at a purchase price equal to the lesser of 85% of the fair market value of the common stock on either the first day or the last day of the offering
period. A total of 200 shares of common stock may be purchased under the ESPP. During the three months ended June 30, 2014 and 2013, the Company recognized stock-based compensation costs of $17 and $15, respectively, related to the ESPP and $6
and $5, respectively, of related tax benefits.
NOTE 7 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
June 30,
|
|
|
|
2014
|
|
|
|
|
2013
|
|
Basic income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$ 2,392
|
|
|
|
|
|
$ 3,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Weighted common shares outstanding
|
|
|
10,105
|
|
|
|
|
|
10,014
|
|
Share equivalent units (SEUs) outstanding
|
|
|
-
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and SEUs outstanding
|
|
|
10,105
|
|
|
|
|
|
10,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
|
$0.24
|
|
|
|
|
|
$0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$ 2,392
|
|
|
|
|
|
$ 3,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and SEUs outstanding
|
|
|
10,105
|
|
|
|
|
|
10,057
|
|
Stock options outstanding
|
|
|
22
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and potential common shares outstanding
|
|
|
10,127
|
|
|
|
|
|
10,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
|
$0.24
|
|
|
|
|
|
$0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase a total of 12 and 14
shares of common stock were outstanding at June 30, 2014 and 2013, 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
8 PRODUCT WARRANTY LIABILITY:
The reconciliation of the changes in the product warranty liability is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
2014
|
|
|
|
|
2013
|
|
|
|
|
|
Balance at beginning of period
|
|
|
$308
|
|
|
|
|
|
$408
|
|
Expense (income) for product warranties
|
|
|
97
|
|
|
|
|
|
(20
|
)
|
Product warranty claims paid
|
|
|
(32
|
)
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
$373
|
|
|
|
|
|
$331
|
|
|
|
|
|
|
|
|
|
|
|
|
The income of $20 for product warranties in the three months ended June 30, 2013 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 current liabilities in the Condensed Consolidated Balance Sheets.
NOTE 9 CASH FLOW STATEMENT:
Interest paid was
$3 in each of the three months ended June 30, 2014 and 2013. Income taxes refunded for the three months ended June 30, 2014 and 2013 were $29 and $61, respectively.
During the three months ended June 30, 2014 and 2013, respectively, stock option awards were exercised and restricted
stock awards vested. In connection with such stock option exercises and vesting, the related income tax benefit realized exceeded the tax benefit that had been recorded pertaining to the compensation cost recognized by $34 and $61, respectively, for
such periods. This excess tax benefit has been separately reported under Financing activities in the Condensed Consolidated Statements of Cash Flows.
At June 30, 2014 and 2013, respectively, there were $61 and $10 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.
12
NOTE
10 EMPLOYEE BENEFIT PLANS:
The components of pension cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
2014
|
|
|
|
|
2013
|
|
Service cost
|
|
$
|
136
|
|
|
|
|
$
|
144
|
|
Interest cost
|
|
|
359
|
|
|
|
|
|
340
|
|
Expected return on assets
|
|
|
(758
|
)
|
|
|
|
|
(682
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost
|
|
|
1
|
|
|
|
|
|
1
|
|
Actuarial loss
|
|
|
145
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension (benefit) cost
|
|
$
|
(117
|
)
|
|
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company made contributions to its defined benefit pension plan during the three months
ended June 30, 2014 of $55. The Company does not expect to make any contributions to the plan for the balance of fiscal 2015.
The components of the postretirement benefit income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
2014
|
|
|
|
|
2013
|
|
Service cost
|
|
$
|
-
|
|
|
|
|
$
|
-
|
|
Interest cost
|
|
|
8
|
|
|
|
|
|
8
|
|
Amortization of prior service benefit
|
|
|
(26
|
)
|
|
|
|
|
(41
|
)
|
Amortization of actuarial loss
|
|
|
10
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
Net postretirement benefit income
|
|
$
|
(8
|
)
|
|
|
|
$
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The Company did not pay benefits related to its postretirement benefit plan during the three
months ended June 30, 2014. The Company expects to pay benefits of approximately $98 for the balance of fiscal 2015.
The Companys self-funds the medical insurance coverage it provides to its U.S. based employees. The Company has obtained
a stop loss insurance policy in an effort to limit its exposure to claims. The liability of $305 and $221 on June 30 and March 31, 2014, respectively, related to the Companys self-insured medical plan is primarily based upon claim
history and is included in the caption Accrued compensation in the Condensed Consolidated Balance Sheets.
13
NOTE
11 COMMITMENTS AND CONTINGENCIES:
The Company has been named as a defendant in lawsuits alleging personal injury from exposure to asbestos allegedly contained
in our products. 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 immaterial amounts.
As of June 30, 2014, the Company was subject to the claims noted above, as well as other legal proceedings and potential
claims that have arisen in the ordinary course of business.
Although the outcome of the lawsuits to which the Company is
a party cannot be determined and an estimate of the reasonably possible loss or range of loss cannot be made, management does not believe that the outcomes, either individually or in the aggregate, will have a material effect on the Companys
results of operations, financial position or cash flows.
NOTE 12 INCOME TAXES:
The Company files federal and state income tax returns in several domestic and international jurisdictions. In most tax
jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed. The Company is subject to examination in U.S. federal and state tax jurisdictions for the tax year 2013 and
tax years 2009 through 2013, respectively. The Company is subject to examination in the Peoples Republic of China for tax years 2011 through 2013.
The liability for unrecognized tax benefits was $0 at both June 30 and March 31, 2014. It is the Companys
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. During the three months ended June 30, 2014 and 2013,
the Company recorded $0 and $2, respectively, for interest related to its uncertain tax positions. No penalties related to uncertain tax positions were recorded in the three-month periods ended June 30, 2014 or 2013.
14
NOTE
13 CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS:
The changes in accumulated other comprehensive loss by component for the three months ended June 30, 2014 and 2013 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and
Other
Postretirement
Benefit Items
|
|
|
|
|
Foreign
Currency
Items
|
|
|
|
|
Total
|
|
Balance at April 1, 2014
|
|
|
$(6,168)
|
|
|
|
|
|
$ 403
|
|
|
|
|
|
$(5,765)
|
|
Other comprehensive income before reclassifications
|
|
|
-
|
|
|
|
|
|
5
|
|
|
|
|
|
5
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
84
|
|
|
|
|
|
-
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income
|
|
|
84
|
|
|
|
|
|
5
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2014
|
|
|
$(6,084)
|
|
|
|
|
|
$ 408
|
|
|
|
|
|
$(5,676)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and
Other
Postretirement
Benefit Items
|
|
|
|
|
Foreign
Currency
Items
|
|
|
|
|
Total
|
|
Balance at April 1, 2013
|
|
|
$ (8,443)
|
|
|
|
|
|
$ 410
|
|
|
|
|
|
$ (8,033)
|
|
Other comprehensive income before reclassifications
|
|
|
-
|
|
|
|
|
|
7
|
|
|
|
|
|
7
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
143
|
|
|
|
|
|
-
|
|
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income
|
|
|
143
|
|
|
|
|
|
7
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013
|
|
|
$ (8,300)
|
|
|
|
|
|
$ 417
|
|
|
|
|
|
$ (7,883)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reclassifications out of accumulated other comprehensive loss by component for the three
months ended June 30, 2014 and 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other
Comprehensive Loss
Components
|
|
Amount Reclassified from
Accumulated Other
Comprehensive Loss
|
|
|
Affected Line Item in the Condensed
Consolidated Statements of Operations and
Retained Earnings
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Pension and other postretirement benefit items:
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service benefit
|
|
$
|
25
|
(1)
|
|
$
|
40
|
(1)
|
|
|
Amortization of actuarial loss
|
|
|
(155
|
)
(1)
|
|
|
(261
|
)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(130
|
)
|
|
|
(221
|
)
|
|
Income before provision for income taxes
|
|
|
|
(46
|
)
|
|
|
(78
|
)
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(84
|
)
|
|
$
|
(143
|
)
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These accumulated other comprehensive loss components are included within the computation of net periodic pension and other postretirement benefit
costs. See Note 10.
|
15
NOTE
14 ACCOUNTING AND REPORTING CHANGES:
In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting
Standards Board (FASB), the Securities and Exchange Commission, 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 Companys consolidated financial statements.
In May 2014, the FASB issued guidance related to the
accounting for revenue from contracts with customers. This guidance establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a companys contracts with customers.
The guidance requires companies to apply a five-step model when recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in
exchange for those goods and services. The guidance also includes a cohesive set of disclosure requirements regarding revenue recognition. The provisions of the guidance are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2016. The Company is currently evaluating the impact this guidance will have on its financial position, results of operations and cash flows. See Note 2 for a description of the Companys current revenue
recognition policy.
Management does not expect any other recently issued accounting pronouncements, which have not
already been adopted, to have a material impact on the Companys consolidated financial statements.
16