NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended March 31, 2020, 2019 and 2018
(Amounts in thousands, except per share data)
Note 1 - The Company and Its Accounting Policies:
Graham Corporation, and its operating subsidiaries, (together, the "Company"), is a global designer, manufacturer and supplier of vacuum and heat transfer equipment used in the chemical, petrochemical, petroleum refining, and electric power generating industries. During the fiscal year ended March 31, 2019, the Company decided to divest of its wholly-owned subsidiary, Energy Steel & Supply Co. ("Energy Steel"), located in Lapeer, Michigan. The sale of Energy Steel was completed in June 2019 and the accompanying Consolidated Financial Statements include the results of operation of Energy Steel for the period April 1, 2017 through June 23, 2019. During the fiscal year ended March 31, 2019, the Company established Graham India Private Limited ("GIPL") as a wholly-owned subsidiary. GIPL, located in Ahmedabad, India, serves as a sales and market development office focusing on the refining, petrochemical and fertilizer markets. The Company's significant accounting policies are set forth below.
The Company's fiscal years ended March 31, 2020, 2019 and 2018 are referred to as "fiscal 2020," "fiscal 2019" and "fiscal 2018," respectively.
Principles of consolidation and use of estimates in the preparation of consolidated financial statements
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Energy Steel, located in Lapeer, Michigan, Graham Vacuum and Heat Transfer Technology (Suzhou) Co., Ltd., located in China, and GIPL, located in India. All intercompany balances, transactions and profits are eliminated in consolidation.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the related revenues and expenses during the reporting period. Actual amounts could differ from those estimated.
Translation of foreign currencies
Assets and liabilities of the Company's foreign subsidiary are translated into U.S. dollars at currency exchange rates in effect at year-end and revenues and expenses are translated at average exchange rates in effect for the year. Gains and losses resulting from foreign currency transactions are included in results of operations. The Company's sales and purchases in foreign currencies are minimal. Therefore, foreign currency transaction gains and losses are not significant. Gains and losses resulting from translation of foreign subsidiary balance sheets are included in a separate component of stockholders' equity. Translation adjustments are not adjusted for income taxes since they relate to an investment, which is permanent in nature.
Revenue recognition
The Company accounts for revenue in accordance with Accounting Standard Codification 606, "Revenue from Contracts with Customers" ("ASC 606"), which it adopted on April 1, 2018 using the modified retrospective approach.
The Company recognizes revenue on all contracts when control of the product is transferred to the customer. Control is generally transferred when products are shipped, title is transferred, significant risks of ownership have transferred, the Company has rights to payment, and rewards of ownership pass to the customer. Customer acceptance may also be a factor in determining whether control of the product has transferred. Although revenue on the majority of the Company’s contracts, as measured by number of contracts, is recognized upon shipment to the customer, revenue on larger contracts, which are fewer in number but generally represent the majority of revenue, is recognized over time as these contracts meet specific criteria in ASC 606.
Cash and cash equivalents
Cash and cash equivalents consist of cash and highly liquid, short-term investments with maturities at the time of purchase of three months or less.
Shipping and handling fees and costs
Shipping and handling fees billed to the customer are recorded in net sales and the related costs incurred for shipping and handling are included in cost of products sold.
37
Investments
Investments consist of certificates of deposits with financial institutions. All investments have original maturities of greater than three months and less than one year and are classified as held-to-maturity, as the Company believes it has the intent and ability to hold the securities to maturity. The investments are stated at amortized cost which approximates fair value. All investments held by the Company at March 31, 2020 are scheduled to mature on or before June 25, 2020.
Inventories
Inventories are stated at the lower of cost or net realizable value, using the average cost method. Unbilled revenue (contract assets) in the Consolidated Balance Sheets represents revenue recognized that has not been billed to customers on contracts in which revenue is recognized over time. All progress payments exceeding unbilled revenue are presented as customer deposits (contract liabilities) in the Consolidated Balance Sheets.
Property, plant, equipment, depreciation and amortization
Property, plant and equipment are stated at cost net of accumulated depreciation and amortization. Major additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Depreciation and amortization are provided based upon the estimated useful lives, or lease term if shorter, under the straight-line method. Estimated useful lives range from approximately five to eight years for office equipment, eight to 25 years for manufacturing equipment and 40 years for buildings and improvements. Upon sale or retirement of assets, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations.
Business combinations
The Company records its business combinations under the acquisition method of accounting. Under the acquisition method of accounting, the Company allocates the purchase price of each acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The fair value of identifiable intangible assets is based upon detailed valuations that use various assumptions made by management. Any excess of the purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. Direct acquisition-related costs are expensed as incurred.
Impairment of long-lived assets
The Company assesses the impairment of definite-lived long-lived assets or asset groups when events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that are considered in deciding when to perform an impairment review include: a significant decrease in the market price of the asset or asset group; a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction; a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50%.
Recoverability potential is measured by comparing the carrying amount of the asset or asset group to its related total future undiscounted cash flows. If the carrying value is not recoverable through related cash flows, the asset or asset group is considered to be impaired. Impairment is measured by comparing the asset or asset group's carrying amount to its fair value. When it is determined that useful lives of assets are shorter than originally estimated, and no impairment is present, the rate of depreciation is accelerated in order to fully depreciate the assets over their new shorter useful lives.
Goodwill and intangible assets with indefinite lives are tested annually for impairment as of December 31. The Company assesses goodwill for impairment by comparing the fair value of its reporting units to their carrying amounts. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value. Fair values for reporting units are determined based on a weighted combination of the market approach and the income approach using discounted cash flows. Indefinite lived intangible assets are assessed for impairment by comparing the fair value of the asset to its carrying value.
38
Assets and liabilities held for sale
The Company classifies long-lived assets (disposal group) to be sold as held for sale in accordance with Accounting Standards Update ("ASU") 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operation And Disclosures of Disposals Of Components Of An Entity," in the period in which all of the following criteria are met:
|
1.
|
Management, having the authority to approve the action, commits to a plan to sell the asset (disposal group);
|
|
2.
|
The asset (disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (disposal group);
|
|
3.
|
An active program to locate a buyer and other actions required to complete the plan to sell the asset (disposal group) have been initiated;
|
|
4.
|
The sale of the asset (disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond the Company's control extend the period of time required to sell the asset (disposal group) beyond one year;
|
|
5.
|
The asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
|
|
6.
|
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
|
A long-lived asset (disposal group) that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Gains are not recognized on the sale of a long-lived asset (disposal group) until the date of sale.
The fair value of a long-lived asset (disposal group) less any costs to sell is assessed at each reporting period it remains classified as held for sale and any subsequent changes are reported as an adjustment to the carrying value of the asset (disposal group), as long as the new carrying value does not exceed the carrying value of the asset at the time it was initially classified as held for sale. Upon determining that a long-lived asset (disposal group) met the criteria to be classified as held for sale, the Company reported the assets and liabilities of the disposal group for all periods presented in the line items "Assets held for sale" and "Liabilities held for sale," respectively, in the Consolidated Balance Sheet as of March 31, 2019. See Note 3.
Product warranties
The Company estimates the costs that may be incurred under its product warranties and records a liability in the amount of such costs at the time revenue is recognized. The reserve for product warranties is based upon past claims experience and ongoing evaluations of any specific probable claims from customers. A reconciliation of the changes in the product warranty liability is presented in Note 7.
Research and development
Research and development costs are expensed as incurred. The Company incurred research and development costs of $3,353, $3,538 and $3,211 in fiscal 2020, fiscal 2019 and fiscal 2018, respectively. Research and development costs are included in the line item “Cost of products sold” in the Consolidated Statements of Operations.
Income taxes
The Company recognizes deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using currently enacted tax rates. The Company evaluates the available evidence about future taxable income and other possible sources of realization of deferred income tax assets and records a valuation allowance to reduce deferred income tax assets to an amount that represents the Company's best estimate of the amount of such deferred income tax assets that more likely than not will be realized.
The Company accounts for uncertain tax positions using a "more likely than not" recognition threshold. The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective resolution of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. These tax positions are evaluated on a quarterly basis. It is the Company's policy to recognize any interest related to uncertain tax positions in interest expense and any penalties related to uncertain tax positions in selling, general and administrative expense.
39
The Company files federal and state income tax returns in several U.S. and non-U.S. domestic and foreign jurisdictions. In most tax jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed.
Equity-based compensation
The Company records compensation costs related to equity-based awards based on the estimated fair value of the award on the grant date. Compensation cost is recognized in the Company's Consolidated Statements of Operations over the applicable vesting period. The Company uses the Black-Scholes valuation model as the method for determining the fair value of its stock option awards. For service and performance based restricted stock awards, the fair market value of the award is determined based upon the closing value of the Company's stock price on the grant date. The fair market value of market-based performance restricted stock awards is determined using the Monte Carlo valuation model. The amount of equity-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates the forfeiture rate at the grant date by analyzing historical data and revises the estimates in subsequent periods if the actual forfeiture rate differs from the estimates.
Income (loss) per share data
Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share is calculated by dividing net income (loss) 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 (loss) income per share is presented below:
|
|
Year ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,872
|
|
|
$
|
(308
|
)
|
|
$
|
(9,844
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted common shares outstanding
|
|
|
9,876
|
|
|
|
9,823
|
|
|
|
9,764
|
|
Basic income (loss) per share
|
|
$
|
0.19
|
|
|
$
|
(0.03
|
)
|
|
$
|
(1.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,872
|
|
|
$
|
(308
|
)
|
|
$
|
(9,844
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and SEUs
outstanding
|
|
|
9,876
|
|
|
|
9,823
|
|
|
|
9,764
|
|
Stock options outstanding
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average common and potential common
shares outstanding
|
|
|
9,879
|
|
|
|
9,823
|
|
|
|
9,764
|
|
Diluted income (loss) per share
|
|
$
|
0.19
|
|
|
$
|
(0.03
|
)
|
|
$
|
(1.01
|
)
|
None of the options to purchase shares of common stock which totaled 39 and 69 in fiscal 2019 and fiscal 2018, respectively, were included in the computation of diluted loss per share as the affect would be anti-dilutive due to the net losses in the fiscal years.
Cash flow statement
The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents.
Interest paid was $12 in each of fiscal 2020, fiscal 2019, and fiscal 2018. In addition, income taxes paid (refunded) were $139 in fiscal 2020, $(73) in fiscal 2019 and $1,916 in fiscal 2018.
In fiscal 2020, fiscal 2019 and fiscal 2018, non-cash activities included pension and other postretirement benefit adjustments, net of income tax, of $525, $348 and $(1,668), respectively. In fiscal 2018, non-cash activities included the reclassification of $1,828 from accumulated other comprehensive loss to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of
40
2017 (the "Tax Act"). Also, in fiscal 2020, fiscal 2019 and fiscal 2018, non-cash activities included the issuance of treasury stock valued at $170, $134 and $130, respectively, to the Company's Employee Stock Purchase Plan (See Note 13).
At March 31, 2020, 2019 and 2018, there were $162, $85, and $0, respectively, of capital purchases that were recorded in accounts payable and are not included in the caption "Purchase of property, plant and equipment" in the Consolidated Statements of Cash Flows. In fiscal 2020, fiscal 2019 and fiscal 2018, capital expenditures totaling $0, $100 and $0, respectively, were financed through the issuance of capital leases.
Accumulated other comprehensive loss
Comprehensive income is comprised of net income and other comprehensive income or loss items, which are accumulated as a separate component of stockholders' equity. For the Company, other comprehensive income or loss items include a foreign currency translation adjustment and pension and other postretirement benefit adjustments.
Fair value measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the "exit price") in an orderly transaction between market participants at the measurement date. The accounting standard for fair value establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2 – Valuations determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The availability of observable inputs can vary and is affected by a wide variety of factors, including, the type of asset/liability, whether the asset/liability is established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions are required to reflect those that market participants would use in pricing the asset or liability at the measurement date.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of sales and expenses during the reporting period. Actual results could differ materially from those estimates.
41
Accounting and reporting changes
In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board ("FASB"), the Securities and Exchange Commission ("SEC"), the Emerging Issues Task Force, the American Institute of Certified Public Accountants or any other authoritative accounting body to determine the potential impact they may have on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires companies to recognize all leases as assets and liabilities on the consolidated balance sheet. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous accounting guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted.
The Company adopted the new standard using the modified retrospective approach on April 1, 2019. The Company elected the available transition method that uses the effective date of the amended guidance as the date of initial application. The guidance provided for several practical expedients. The Company elected the package of practical expedients permitted under the transition guidance which allows entities to carry forward historical lease classification. The Company made an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less. The Company recognizes those lease payments in the Condensed Consolidated Statements of Income on a straight-line basis over the lease term. On April 1, 2019, the Company recognized the cumulative effect of initially applying the amended guidance which resulted in the recognition of operating lease ROU assets of $677, lease liabilities of $732 and a decrease to the opening balance of retained earnings of $80. Other current assets and the deferred income tax liability were reduced by $47 and $22, respectively. Approximately $500 of ROU assets and lease liabilities were related to the business held for sale at March 31, 2019 and subsequently sold on June 24, 2019. See Note 8 to the Consolidated Financial Statements for additional information on the Company’s leases.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326)," which replaces the current incurred loss impairment methodology for most financial assets with the current expected credit loss ("CECL") methodology. Under the CECL method, the Company will be required to immediately recognize an estimate of credit losses expected to occur over the life of the financial asset at the time the financial asset is originated or acquired. Estimated credit losses are determined by taking into consideration historical loss conditions, current conditions and reasonable and supportable forecasts. Changes to the expected lifetime credit losses are required to be recognized each period. The standard is effective for the Company on April 1, 2023. The Company does not expect the adoption of this ASU will have a material effect on its Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20)," which removes disclosures that no longer are considered cost beneficial, clarifies specific disclosure requirements and adds disclosure requirements identified as relevant for defined benefit pension and other postretirement benefit plans. This amendment is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The amendment requires application on a retrospective basis to all periods presented. The Company believes the adoption of this ASU will not have a material impact on its Consolidated Financial Statements.
In December 2019, the FASB issue ASU No. 2019-12, “Simplifying the Accounting for Income Taxes.”. The amended guidance simplifies the accounting for income taxes, eliminating certain exceptions to the general income tax principles, in an effort to reduce the cost and complexity of application. The amended guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Earlier application is permitted. The guidance requires application on either a prospective, retrospective or modified retrospective basis, contingent on the income tax exception being applied. The Company believes the adoption of this ASU will not have a material impact on its Consolidated Financial Statements.
Management does not expect any other recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company's consolidated financial statements.
Note 2 – Revenue Recognition:
The Company accounts for revenue in accordance with Accounting Standard Codification 606, "Revenue from Contracts with Customers" ("ASC 606"), which it adopted on April 1, 2018 using the modified retrospective approach.
The Company recognizes revenue on all contracts when control of the product is transferred to the customer. Control is generally transferred when products are shipped, title is transferred, significant risks of ownership have transferred, the Company has rights to payment, and rewards of ownership pass to the customer.
42
The following tables present the Company's net sales disaggregated by product line and geographic area:
|
|
Year ended March 31,
|
|
Product Line
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Heat transfer equipment
|
|
$
|
31,986
|
|
|
$
|
24,785
|
|
|
$
|
27,023
|
|
Vacuum equipment
|
|
|
33,354
|
|
|
|
34,461
|
|
|
|
22,175
|
|
All other
|
|
|
25,264
|
|
|
|
32,585
|
|
|
|
28,336
|
|
Net sales
|
|
$
|
90,604
|
|
|
$
|
91,831
|
|
|
$
|
77,534
|
|
|
|
Year ended March 31,
|
|
Geographic Area
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Asia
|
|
$
|
5,517
|
|
|
$
|
10,292
|
|
|
$
|
10,200
|
|
Canada
|
|
|
8,907
|
|
|
|
16,602
|
|
|
|
8,888
|
|
Middle East
|
|
|
13,112
|
|
|
|
2,610
|
|
|
|
3,785
|
|
South America
|
|
|
3,783
|
|
|
|
324
|
|
|
|
1,560
|
|
U.S.
|
|
|
58,042
|
|
|
|
59,441
|
|
|
|
51,950
|
|
All other
|
|
|
1,243
|
|
|
|
2,562
|
|
|
|
1,151
|
|
Net sales
|
|
$
|
90,604
|
|
|
$
|
91,831
|
|
|
$
|
77,534
|
|
The final destination of products shipped is the basis used to determine net sales by geographic area. No sales were made to the terrorist sponsoring nations of Sudan, Iran, or Syria.
A performance obligation represents a promise in a contract to provide a distinct good or service to a customer and is the unit of accounting pursuant to ASC 606. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Transaction price reflects the amount of consideration to which the Company expects to be entitled in exchange for transferred products. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized as the performance obligation is satisfied. In certain cases, the Company may separate a contract into more than one performance obligation, while in other cases, several products may be part of a fully integrated solution and are bundled into a single performance obligation. If a contract is separated into more than one performance obligation, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods underlying each performance obligation. The Company has made an accounting policy election to exclude from the measurement of the contract price all taxes assessed by government authorities that are collected by the Company from its customers. The Company does not adjust the contract price for the effects of a financing component if the Company expects, at contract inception, that the period between when a product is transferred to a customer and when the customer pays for the product will be one year or less. Shipping and handling fees billed to the customer are recorded in revenue and the related costs incurred for shipping and handling are included in cost of products sold.
Revenue on the majority of the Company’s contracts, as measured by number of contracts, is recognized upon shipment to the customer, however, revenue on larger contracts, which are fewer in number but generally represent the majority of revenue, is recognized over time as these contracts meet specific criteria established in ASC 606. Revenue from contracts that is recognized upon shipment accounted for approximately 30% of revenue in fiscal 2020. Revenue from contracts that is recognized over time accounted for approximately 70% of revenue in fiscal 2020. The Company recognizes revenue over time when contract performance results in the creation of a product for which the Company does not have an alternative use and the contract includes an enforceable right to payment in an amount that corresponds directly with the value of the performance completed. To measure progress towards completion on performance obligations for which revenue is recognized over time the Company utilizes an input method based upon a ratio of direct labor hours incurred to date to management’s estimate of the total labor hours to be incurred on each contract or an output method based upon completion of operational milestones, depending upon the nature of the contract. The Company has established the systems and procedures essential to developing the estimates required to account for performance obligations over time. These procedures include monthly review by management of costs incurred, progress towards completion, identified risks and opportunities, sourcing determinations, changes in estimates of costs yet to be incurred, availability of materials, and execution by subcontractors. Sales and earnings are adjusted on a cumulative catch-up basis in current accounting periods based upon revisions in the contract value due to pricing changes and estimated costs at completion. Losses on contracts are recognized immediately when evident to management.
The timing of revenue recognition, invoicing and cash collections affect trade accounts receivable, unbilled revenue (contract assets) and customer deposits (contract liabilities) on the Consolidated Balance Sheets. Unbilled revenue represents revenue on contracts that is recognized over time and exceeds the amount that has been billed to the customer. Unbilled revenue is separately
43
presented in the Consolidated Balance Sheets. The Company may receive a customer deposit or have an unconditional right to receive a customer deposit prior to revenue being recognized. Because the performance obligations related to such customer deposits may not have been satisfied, a contract liability is recorded and an offsetting asset of equal amount is recorded as a trade accounts receivable until the deposit is collected. Customer deposits are separately presented in the Consolidated Balance Sheets. Customer deposits are not considered a significant financing component as they are generally received less than one year before the product is completed or used to procure specific material on a contract, as well as related overhead costs incurred during design and construction.
Net contract assets (liabilities) consisted of the following:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
Unbilled revenue
|
|
$
|
14,592
|
|
|
$
|
7,522
|
|
|
$
|
7,070
|
|
Customer deposits
|
|
|
(26,983
|
)
|
|
|
(30,847
|
)
|
|
|
3,864
|
|
Net (over) under billings
|
|
$
|
(12,391
|
)
|
|
$
|
(23,325
|
)
|
|
$
|
10,934
|
|
Contract liabilities at March 31, 2020 and 2019 include $3,660 and $6,382, respectively, of customer deposits for which the Company has an unconditional right to collect payment. Trade accounts receivable, as presented on the Consolidated Balance Sheets, includes corresponding balances at March 31, 2020 and 2019, respectively. Revenue recognized in fiscal 2020 that was included in the contract liability balance at March 31, 2019 was $17,040. Changes in the net contract liability balance during fiscal 2020 were impacted by a $7,070 increase in contract assets, of which $20,585 was due to contract progress offset by invoicing to customers of $13,515. In addition, contract liabilities decreased $3,864 driven by new customer deposits of $13,176 offset by revenue recognized in fiscal 2020 that was included in the contract liability balance at March 31, 2019.
Receivables billed but not paid under retainage provisions in the Company’s customer contracts were $2,016 and $2,214 at March 31, 2020 and 2019, respectively.
Incremental costs to obtain a contract consist of sales employee and agent commissions. Commissions paid to employees and sales agents are capitalized when paid and amortized to selling, general and administrative expense when the related revenue is recognized. Capitalized costs, net of amortization, to obtain a contract were $45 and $133 at March 31, 2020 and 2019, respectively, and are included in the line item "Prepaid expenses and other current assets" in the Consolidated Balance Sheets. The related amortization expense was $169 in fiscal 2020.
The Company's remaining unsatisfied performance obligations represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. The Company also refers to this measure as backlog. As of March 31, 2020, the Company had remaining unsatisfied performance obligations of $112,389. The Company expects to recognize revenue on approximately 70% to 75% of the remaining performance obligations within one year, 15% to 20% in one to two years and the remaining beyond two years.
Note 3 – Assets Dispositions:
In March 2019, the Company's Board of Directors approved a plan to sell Energy Steel. Energy Steel met all of the criteria to classify its assets and liabilities as held for sale at March 31, 2019 and as a result its assets and liabilities are separately presented in the Consolidated Balance Sheet at March 31, 2019 in the captions "Assets held for sale" and "Liabilities held for sale". The disposal of Energy Steel did not represent a strategic shift that will have a major effect on the Company’s operations and financial results and was, therefore, not classified as discontinued operations in accordance with ASU 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operation And Disclosures of Disposals Of Components Of An Entity." As part of the required assessment under the held for sale guidance, the Company determined that the approximate fair value less costs to sell the operations was less than its carrying value and, as a result, an impairment loss totaling $6,449 was recorded in fiscal 2019. (See Note 6 to the Consolidated Financial Statements for further discussion.)
On June 24, 2019, the Company completed the sale of Energy Steel to Hayward Tyler, a division of Avingtrans PLC, a global leader in performance-critical pumps and motors for the energy sector. Under the terms of the stock purchase agreement, the Company received proceeds of $602, subject to certain adjustments, including a customary working capital adjustment. The purchase price was finalized within 90 days of the sale and no adjustments to the purchase price were required. In addition, $202 of Energy Steel’s net accounts receivable was retained by the Company. The Company recognized a loss on the disposal of $181 in fiscal 2020. During fiscal 2020, the Company incurred a bad debt charge of $98 and an inventory write down of $338 related to the bankruptcy of Westinghouse Electric Company. All of these items are included in the line item “Other expense” in the Consolidated Statement of Operations for fiscal 2020. As of June 24, 2019, all of the Energy Steel assets and liabilities were legally transferred, and therefore, are not included in the Company’s Consolidated Balance Sheet at March 31, 2020.
44
The following table reconciles the major classes of assets and liabilities classified as held for sale in the Consolidated Balance Sheet at March 31, 2019:
|
|
March 31, 2019
|
|
|
|
|
|
|
Major classes of assets included as held for sale
|
|
|
|
|
Cash
|
|
$
|
552
|
|
Trade accounts receivable, net of allowances
|
|
|
1,921
|
|
Unbilled revenue
|
|
|
302
|
|
Inventories
|
|
|
1,809
|
|
Prepaid expenses and other current assets
|
|
|
130
|
|
Income taxes receivable
|
|
|
10
|
|
Deferred tax asset
|
|
|
126
|
|
Total major classes of assets included as held for sale
|
|
$
|
4,850
|
|
|
|
|
|
|
Major classes of liabilities included as held for sale
|
|
|
|
|
Accounts payable
|
|
$
|
520
|
|
Accrued compensation
|
|
|
326
|
|
Accrued expenses and other current liabilities
|
|
|
746
|
|
Customer deposits
|
|
|
1,933
|
|
Total major classes of liabilities included as held for sale
|
|
$
|
3,525
|
|
Note 4 – Inventories:
Major classifications of inventories are as follows:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials and supplies
|
|
$
|
3,061
|
|
|
$
|
2,787
|
|
Work in process
|
|
|
18,018
|
|
|
|
20,553
|
|
Finished products
|
|
|
1,212
|
|
|
|
1,330
|
|
|
|
$
|
22,291
|
|
|
$
|
24,670
|
|
Note 5 – Property, Plant and Equipment:
Major classifications of property, plant and equipment are as follows:
|
|
|
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
Land
|
|
|
$
|
171
|
|
|
$
|
171
|
|
Buildings and leasehold improvements
|
|
|
|
19,393
|
|
|
|
19,263
|
|
Machinery and equipment
|
|
|
|
30,474
|
|
|
|
29,530
|
|
Construction in progress
|
|
|
|
1,360
|
|
|
|
4
|
|
|
|
|
|
51,398
|
|
|
|
48,968
|
|
Less – accumulated depreciation and amortization
|
|
|
|
33,811
|
|
|
|
31,897
|
|
|
|
|
$
|
17,587
|
|
|
$
|
17,071
|
|
Depreciation expense in fiscal 2020, fiscal 2019 and fiscal 2018 was $1,957, $1,968, and $1,986, respectively.
45
Note 6– Goodwill and Other Impairments:
Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. Intangible amortization expense was $0, $180 and $180 in fiscal 2020, fiscal 2019 and fiscal 2018.
During fiscal 2018, the Company performed its annual goodwill and intangible asset impairment review. The Company assessed impairment by comparing the fair value of its reporting units and intangible assets to their related carrying value. The Company estimated the fair value of intangible assets and goodwill of its commercial nuclear utility business related to the December 2010 acquisition of Energy Steel using the income approach. Under the income approach, the fair value of the business was calculated based on the present value of estimated future cash flows. Cash flow projections were based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used was based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected cash flows. The inputs utilized in the analyses were classified as Level 3 inputs within the fair value hierarchy. The impairment review indicated that the fair value of the intangible assets and goodwill of the business were substantially lower than the carrying value due to reduced investment from the U.S. commercial nuclear utility market, the strength of the Energy Steel brand relative to larger more vertically integrated suppliers, and the bankruptcy of Westinghouse Electric Company which resulted in the stoppage of work at the Summer, South Carolina nuclear facility. As a result, in fiscal 2018 the Company recorded impairment losses of $8,600, $500, and $5,716 for permits, tradename and goodwill, respectively.
As disclosed in Note 3, in the fourth quarter of fiscal 2019, the Company’s Board of Directors approved a plan to sell Energy Steel and, as a result, the Company classified the assets and liabilities of Energy Steel as "Assets held for sale" and "Liabilities held for sale" in the Consolidated Balance Sheet as of March 31, 2019. An impairment loss totaling $6,449 was recorded in the fourth quarter of fiscal 2019 related to the disposition of Energy Steel which included impairment losses of $1,700, $2,000, $1,208, $1,222 and $319 for permits, tradename, customer relationships, goodwill and other long-lived assets. On June 24, 2019, the Company completed the sale of Energy Steel.
Note 7 – Product Warranty Liability:
The reconciliation of the changes in the product warranty liability is as follows:
|
|
Year ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Balance at beginning of year
|
|
$
|
366
|
|
|
$
|
493
|
|
Expense for product warranties
|
|
|
62
|
|
|
|
234
|
|
Product warranty claims paid
|
|
|
(69
|
)
|
|
|
(276
|
)
|
Reclassification to liabilities held for sale
|
|
|
—
|
|
|
|
(85
|
)
|
Balance at end of year
|
|
$
|
359
|
|
|
$
|
366
|
|
The product warranty liability is included in the line item "Accrued expenses and other current liabilities" in the Consolidated Balance Sheets.
Note 8 - Leases:
The Company accounts for leases in accordance with Accounting Standard Codification 842, "Leases," which it adopted on April 1, 2019 using the modified retrospective approach. See Note 1 to the Consolidated Financial Statements for further discussion of this adoption.
The Company leases certain manufacturing facilities, office space, machinery and office equipment. An arrangement is considered to contain a lease if it conveys the right to use and control an identified asset for a period of time in exchange for consideration. If it is determined that an arrangement contains a lease, then a classification of a lease as operating or finance is determined by evaluating the five criteria outlined in the lease accounting guidance at inception. Leases generally have remaining terms of one year to five years, whereas leases with an initial term of twelve months or less are not recorded on the Consolidated Balance Sheets. The depreciable life of leased assets related to finance leases is limited by the expected term of the lease, unless there is a transfer of title or purchase option that the Company believes is reasonably certain of exercise. Certain leases include options to renew or terminate. Renewal options are exercisable per the discretion of the Company and vary based on the nature of each lease. The term of the lease includes renewal periods only if the Company is reasonably certain that it will exercise the renewal option. When determining if a renewal option is reasonably certain of being exercised, the Company considers several factors, including but not limited to, the cost of moving to another location, the cost of disrupting operations, whether the purpose or location of the leased asset is unique and the contractual terms associated with extending the lease. The Company’s lease agreements do not contain any
46
residual value guarantees or any material restrictive covenants and the Company does not sublease to any third parties. As of March 31, 2020, the Company did not have any material leases that have been signed but not commenced.
Right-of-use (“ROU”) lease assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make payments in exchange for that right of use. Finance lease ROU assets and operating lease ROU assets are included in the line items “Property, plant and equipment, net” and “Operating lease assets”, respectively, in the Condensed Consolidated Balance Sheets. The current portion and non-current portion of finance and operating lease liabilities are all presented separately in the Consolidated Balance Sheets.
The discount rate implicit within the Company’s leases is generally not readily determinable, and therefore, the Company uses an incremental borrowing rate in determining the present value of lease payments based on rates available at commencement.
The weighted average remaining lease term and discount rate for finance and operating leases are as follows:
|
|
March 31, 2020
|
|
Finance Leases
|
|
|
|
|
Weighted-average remaining lease term in years
|
|
|
2.81
|
|
Weighted-average discount rate
|
|
|
9.71
|
%
|
|
|
|
|
|
Operating Leases
|
|
|
|
|
Weighted-average remaining lease term in years
|
|
|
1.98
|
|
Weighted-average discount rate
|
|
|
5.49
|
%
|
The components of lease expense are as follows:
|
|
Year Ended March 31, 2020
|
|
Finance lease cost:
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
48
|
|
Interest on lease liabilities
|
|
|
12
|
|
Operating lease cost
|
|
|
229
|
|
Short-term lease cost
|
|
|
38
|
|
Total lease cost
|
|
$
|
327
|
|
Operating lease costs during fiscal 2020 were included within cost of sales and selling, general and administrative expenses.
As of March 31, 2020, future minimum payments required under non-cancelable leases are:
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
2021
|
|
$
|
162
|
|
|
$
|
48
|
|
2022
|
|
|
48
|
|
|
|
26
|
|
2023
|
|
|
31
|
|
|
|
26
|
|
2024
|
|
|
8
|
|
|
|
10
|
|
2025
|
|
|
—
|
|
|
|
—
|
|
Total lease payments
|
|
|
249
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
Less – amount representing interest
|
|
|
14
|
|
|
|
15
|
|
Present value of net minimum lease payments
|
|
$
|
235
|
|
|
$
|
95
|
|
The Company’s future minimum lease commitments for operating leases as of March 31, 2019 for the fiscal years 2020 through 2024 were $501, $301, $37, $32, and $8, respectively. Future minimum lease commitments for finance leases as of March 31, 2019 for the fiscal years 2020 through 2024 were $62, $47, $26, $26, and $11, respectively.
ROU assets obtained in exchange for new operating lease liabilities were $223 in fiscal 2020.
47
Note 9 - Debt:
Short-Term Debt
The Company and its subsidiaries had no short-term borrowings outstanding at March 31, 2020 and 2019.
On December 2, 2015, the Company entered into a revolving credit facility agreement with JPMorgan Chase Bank, N.A. that provides a $25,000 line of credit, including letters of credit and bank guarantees, expandable at the Company's option at any time up to $50,000. The agreement has a five-year term.
At the Company's option, amounts outstanding under the agreement will bear interest at either: (i) a rate equal to the bank's prime rate; or (ii) a rate equal to LIBOR plus a margin. The margin is based on the Company's funded debt to earnings before interest expense, income taxes, depreciation and amortization ("EBITDA") and may range from 1.75% to 0.95%. Amounts available for borrowing under the agreement are subject to an unused commitment fee of between 0.30% and 0.20%, depending on the above ratio. The bank’s prime rate was 3.25% and 5.50% at March 31, 2020 and 2019, respectively.
Outstanding letters of credit under the agreement are subject to a fee of between 1.20% and 0.70%, depending on the Company's ratio of funded debt to EBITDA. The agreement allows the Company to reduce the fee on outstanding letters of credit to a fixed rate of 0.40% by securing outstanding letters of credit with cash and cash equivalents and investments. At March 31, 2020, all outstanding letters of credit were secured by a certificate of deposit. At March 31, 2020, there were $5,397 letters of credit outstanding on the JPMorgan Chase Bank, N.A. revolving credit facility. Availability under the line of credit was $19,603 at March 31, 2020.
Under the revolving credit facility, the Company covenants to maintain a maximum funded debt to EBITDA ratio, as defined in such credit facility, of 3.5 to 1.0 and a minimum earnings before interest expense and income taxes ("EBIT") to interest ratio, as defined in such credit facility, of 4.0 to 1.0. The agreement also provides that the Company is permitted to pay dividends without limitation if it maintains a maximum funded debt to EBITDA ratio equal to or less than 2.0 to 1.0 and permits the Company to pay dividends in an amount equal to 25% of net income if it maintains a funded debt to EBITDA ratio of greater than 2.0 to 1.0. The Company was in compliance with all such provisions as of and for the years ended March 31, 2020 and 2019. Assets with a book value of $128,281 have been pledged to secure borrowings under the credit facility.
At March 31, 2019 the Company had an additional letter of credit facility agreement with HSBC Bank USA, N.A. to further support its international operations. The agreement provided a $5,000 line of credit to be used for the issuance of letters of credit. On October 8, 2019, the Company entered into an agreement to amend the letter of credit facility agreement and increase the letter of credit facility to $10,000. Under the amended agreement, the Company incurs an annual facility fee of $5 and outstanding letters of credit are subject to a fee of between .75% and 0.65%, depending on the term of the letter of credit. Interest is payable on the principal amounts of unreimbursed letter of credit draws under the facility at a rate of 3% plus the bank’s prime rate. The bank’s prime rate was 3.25% at March 31, 2020. The Company's obligations under the agreement are secured by certain certificates of deposit held with the bank. At March 31, 2020 there were $7,931 letters of credit outstanding, and availability under the letter of credit facility was $2,069. Subsequent to March 31, 2020, the Company entered into an agreement to amend the letter of credit facility agreement and increase the line of credit to $14,000, among other things. See Note 19 - Subsequent Events for a discussion of this amendment.
Long-Term Debt
The Company and its subsidiaries had long-term capital lease obligations outstanding as follows:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Finance lease obligations (Note 8)
|
|
$
|
95
|
|
|
$
|
146
|
|
Less: current amounts
|
|
|
40
|
|
|
|
51
|
|
Total
|
|
$
|
55
|
|
|
$
|
95
|
|
With the exception of capital leases, the Company has no long-term debt payment requirements over the next five years as of March 31, 2020.
48
Note 10 - Financial Instruments and Derivative Financial Instruments:
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, investments, and trade accounts receivable. The Company places its cash, cash equivalents, and investments with high credit quality financial institutions, and evaluates the credit worthiness of these financial institutions on a regular basis. Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of customers comprising the Company's customer base and their geographic dispersion. At March 31, 2020 and 2019, the Company had no significant concentrations of credit risk.
Letters of Credit
The Company has entered into standby letter of credit agreements with financial institutions relating to the guarantee of future performance on certain contracts. At March 31, 2020 and 2019, the Company was contingently liable on outstanding standby letters of credit aggregating $13,328 and $8,503, respectively.
Fair Value of Financial Instruments
The estimates of the fair value of financial instruments are summarized as follows:
Cash and cash equivalents: The carrying amount of cash and cash equivalents approximates fair value due to the short-term maturity of these instruments and are considered Level 1 assets in the fair value hierarchy.
Investments: The fair value of investments at March 31, 2020 and 2019 approximated the carrying value and are considered Level 2 assets in the fair value hierarchy.
Note 11 – Income Taxes:
An analysis of the components of income (loss) before provision (benefit) for income taxes is presented below:
|
|
Year ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
United States
|
|
$
|
2,405
|
|
|
$
|
(256
|
)
|
|
$
|
(12,861
|
)
|
Asia
|
|
|
(93
|
)
|
|
|
111
|
|
|
|
7
|
|
|
|
$
|
2,312
|
|
|
$
|
(145
|
)
|
|
$
|
(12,854
|
)
|
The provision (benefit) for income taxes consists of:
|
|
Year ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
547
|
|
|
$
|
181
|
|
|
$
|
6
|
|
State
|
|
|
176
|
|
|
|
141
|
|
|
|
72
|
|
Foreign
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
727
|
|
|
|
322
|
|
|
|
78
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(694
|
)
|
|
|
(3,993
|
)
|
|
|
(3,276
|
)
|
State
|
|
|
8
|
|
|
|
(84
|
)
|
|
|
61
|
|
Foreign
|
|
|
(12
|
)
|
|
|
41
|
|
|
|
12
|
|
Changes in valuation allowance
|
|
|
411
|
|
|
|
3,877
|
|
|
|
115
|
|
|
|
|
(287
|
)
|
|
|
(159
|
)
|
|
|
(3,088
|
)
|
Total provision (benefit) for income taxes
|
|
$
|
440
|
|
|
$
|
163
|
|
|
$
|
(3,010
|
)
|
49
The reconciliation of the provision (benefit) calculated using the U.S. federal tax rate with the provision (benefit) for income taxes presented in the consolidated financial statements is as follows:
|
|
Year ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Provision (benefit) for income taxes at federal rate
|
|
$
|
486
|
|
|
$
|
(30
|
)
|
|
$
|
(3,958
|
)
|
State taxes
|
|
|
120
|
|
|
|
45
|
|
|
|
118
|
|
Charges not deductible for income tax purposes
|
|
|
55
|
|
|
|
89
|
|
|
|
48
|
|
Research and development tax credits
|
|
|
(211
|
)
|
|
|
(177
|
)
|
|
|
(102
|
)
|
Valuation allowance
|
|
|
411
|
|
|
|
3,877
|
|
|
|
(80
|
)
|
Difference in federal rate
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
(2,799
|
)
|
Impairment of goodwill and intangible assets
|
|
|
—
|
|
|
|
257
|
|
|
|
1,760
|
|
Foreign-derived intangible income deduction
|
|
|
(95
|
)
|
|
|
(69
|
)
|
|
|
—
|
|
Capital loss from sale of Energy Steel
|
|
|
(325
|
)
|
|
|
(3,848
|
)
|
|
|
—
|
|
Stranded tax effects in accumulated other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
1,828
|
|
Mandatory repatriation of post-1986 undistributed foreign
subsidiary earnings and profits
|
|
|
—
|
|
|
|
—
|
|
|
|
185
|
|
Other
|
|
|
—
|
|
|
|
16
|
|
|
|
(10
|
)
|
Provision (benefit) for income taxes
|
|
$
|
440
|
|
|
$
|
163
|
|
|
$
|
(3,010
|
)
|
In fiscal 2018 the impact on the valuation allowance of the difference in the federal rate as a result of the Tax Cuts and Jobs Act which became law in December 2017 (the "Tax Act") discussed below is reflected in the line item "Difference in federal rate" in the reconciliation above.
The net deferred income tax liability recorded in the Consolidated Balance Sheets results from differences between financial statement and tax reporting of income and deductions. A summary of the composition of the Company's net deferred income tax liability follows:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Depreciation
|
|
$
|
(1,707
|
)
|
|
$
|
(1,714
|
)
|
Accrued compensation
|
|
|
206
|
|
|
|
230
|
|
Prepaid pension asset
|
|
|
(783
|
)
|
|
|
(935
|
)
|
Accrued pension liability
|
|
|
169
|
|
|
|
145
|
|
Accrued postretirement benefits
|
|
|
143
|
|
|
|
150
|
|
Compensated absences
|
|
|
402
|
|
|
|
355
|
|
Inventories
|
|
|
(13
|
)
|
|
|
14
|
|
Warranty liability
|
|
|
81
|
|
|
|
80
|
|
Accrued expenses
|
|
|
366
|
|
|
|
267
|
|
Equity-based compensation
|
|
|
385
|
|
|
|
359
|
|
Operating lease assets
|
|
|
(58
|
)
|
|
|
—
|
|
Operating lease liabilities
|
|
|
60
|
|
|
|
—
|
|
New York State investment tax credit
|
|
|
1,108
|
|
|
|
1,069
|
|
Net operating loss carryforwards
|
|
|
75
|
|
|
|
50
|
|
Capital loss related to sale of Energy Steel
|
|
|
4,211
|
|
|
|
3,848
|
|
Other
|
|
|
1
|
|
|
|
(20
|
)
|
|
|
|
4,646
|
|
|
|
3,898
|
|
Less: Valuation allowance
|
|
|
(5,319
|
)
|
|
|
(4,917
|
)
|
Total
|
|
$
|
(673
|
)
|
|
$
|
(1,019
|
)
|
The foreign deferred income tax asset of $48 and $37 at March 31, 2020 and 2019, respectively, is included in the caption "Other assets" in the Consolidated Balance Sheet. Deferred income taxes include the impact of state investment tax credits of $314, which expire from 2021 to 2034 and state investment tax credits of $794, which have an unlimited carryforward period.
Foreign net operating losses at March 31, 2020 were $301 and expire between 2022 through 2024.
50
In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the consideration of the weight of both positive and negative evidence, management determined that a portion of the deferred tax assets as of March 31, 2020 and 2019 related to certain state investment tax credits and the capital loss related to Energy Steel would not be realized, and recorded a valuation allowance of $5,319 and $4,917, respectively. The deferred tax asset of $126 included in the caption "Assets held for sale" in the Consolidated Balance Sheet at March 31, 2019 included a valuation allowance of $34 related to net operating loss carryforwards for city 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 U.S. federal examination for tax years 2016 through 2019 and examination in state tax jurisdictions for tax years 2015 through 2019. The Company is subject to examination in the People's Republic of China for tax years 2016 through 2019 and in India for tax year 2019. The liability for unrecognized tax benefits was $0 at each of March 31, 2020 and 2019.
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act into law. The CARES Act includes several significant business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses and allow businesses to carry back net operating losses arising in 2018, 2019 and 2020 to the five prior tax years, accelerate refunds of previously generated corporate alternative minimum tax credits, change the business interest limitation under IRC section 163(j) from 30% to 50%, and fix qualified improvement property from the Tax Act. These provisions did not have a material impact on the Company’s consolidated financial statements.
On December 22, 2017, the Tax Act was signed into law. The Tax Act significantly revised the U.S. tax code by, among other changes, lowering the corporate income tax rate from 35% to 21%, requiring a one-time transition tax on accumulated foreign earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes on certain foreign sourced earnings. The Company remeasured certain U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, and recorded an income tax benefit of $971 related to such re-measurement in fiscal 2018.
The one-time transition tax was based on the total post-1986 earnings and profits (“E&P”) of our foreign subsidiary that has previously been deferred from U.S. income taxes. The Company recorded its one-time transition liability of its foreign subsidiary resulting in additional income tax expense of $185 in fiscal 2018. The transition tax was based in part on the amount of those earnings held in cash and other specified assets.
The Tax Act also included two new U.S. tax base-erosion provisions, the global intangible low-taxed income ("GILTI") provisions and the base-erosion and anti-abuse tax ("BEAT") provisions, beginning in 2018. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company has elected to account for GILTI tax in the period in which it is incurred and recorded $ (1) and $11 of tax (benefit) related to GILTI in fiscal 2020 and fiscal 2019, respectively. The BEAT provisions in the Tax Act eliminate the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater than regular tax. The Company was not subject to this tax, and therefore has not included any tax impacts of BEAT in its consolidated financial statements.
The Tax Act also provided tax incentives to U.S. companies to earn income from the sale, lease or license of goods and services abroad in the form of a deduction for foreign-derived intangible income ("FDII"). FDII is taxed at an effective rate of 13.125% for taxable years beginning after December 31, 2017. The incremental U.S. tax savings on FDII in fiscal 2020 and fiscal 2019 was $95 and $69, respectively.
The U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and included the amount in its consolidated financial statements in fiscal 2018 and during fiscal 2019 there were no significant changes made to the provisional amounts recorded in fiscal 2018.
Note 12 – Employee Benefit Plans:
Retirement Plans
The Company has a qualified defined benefit plan covering U.S. employees hired prior to January 1, 2003, which is non-contributory. Benefits are based on the employee's years of service and average earnings for the five highest consecutive calendar
51
years of compensation in the ten-year period preceding retirement. The Company's funding policy for the plan is to contribute the amount required by the Employee Retirement Income Security Act of 1974, as amended.
The components of pension cost (benefit) are:
|
|
Year ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Service cost during the period
|
|
$
|
496
|
|
|
$
|
571
|
|
|
$
|
598
|
|
Interest cost on projected benefit obligation
|
|
|
1,290
|
|
|
|
1,339
|
|
|
|
1,423
|
|
Expected return on assets
|
|
|
(2,657
|
)
|
|
|
(3,062
|
)
|
|
|
(2,977
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss
|
|
|
969
|
|
|
|
847
|
|
|
|
1,013
|
|
Net pension cost (benefit)
|
|
$
|
98
|
|
|
$
|
(305
|
)
|
|
$
|
57
|
|
The components of net pension cost (benefit) other than the service cost component are included in “Other income” in the Consolidated Statements of Operations.
The weighted average actuarial assumptions used to determine net pension cost are:
|
|
Year ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Discount rate
|
|
|
3.83
|
%
|
|
|
3.95
|
%
|
|
|
4.08
|
%
|
Rate of increase in compensation levels
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
Long-term rate of return on plan assets
|
|
|
7.00
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
The expected long-term rate of return is based on the mix of investments that comprise plan assets and external forecasts of future long-term investment returns, historical returns, correlations and market volatilities.
The Company does not expect to make any contributions to the plan during fiscal 2021.
Changes in the Company's benefit obligation, plan assets and funded status for the pension plan are presented below:
|
|
Year ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Change in the benefit obligation
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
34,149
|
|
|
$
|
34,441
|
|
Service cost
|
|
|
496
|
|
|
|
468
|
|
Interest cost
|
|
|
1,290
|
|
|
|
1,339
|
|
Actuarial loss (gain)
|
|
|
2,368
|
|
|
|
462
|
|
Benefit payments
|
|
|
(1,100
|
)
|
|
|
(972
|
)
|
Liability released through annuity purchase
|
|
|
(1,420
|
)
|
|
|
(1,589
|
)
|
Projected benefit obligation at end of year
|
|
$
|
35,783
|
|
|
$
|
34,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
38,416
|
|
|
$
|
38,810
|
|
Employer contribution
|
|
|
—
|
|
|
|
30
|
|
Actual return on plan assets
|
|
|
3,347
|
|
|
|
2,266
|
|
Benefit and administrative expense payments
|
|
|
(1,100
|
)
|
|
|
(972
|
)
|
Annuities purchased
|
|
|
(1,420
|
)
|
|
|
(1,718
|
)
|
Fair value of plan assets at end of year
|
|
$
|
39,243
|
|
|
$
|
38,416
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
3,460
|
|
|
$
|
4,267
|
|
Amount recognized in the Consolidated Balance Sheets
|
|
$
|
3,460
|
|
|
$
|
4,267
|
|
52
The weighted average actuarial assumptions used to determine the benefit obligation are:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Discount rate
|
|
|
3.44
|
%
|
|
|
3.83
|
%
|
Rate of increase in compensation levels
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
During fiscal 2020 and fiscal 2019, the pension plan released liabilities for vested benefits of certain participants through the purchase of nonparticipating annuity contracts with a third-party insurance company. As a result of these transactions, in fiscal 2020 and fiscal 2019, the projected benefit obligation decreased $1,420 and $1,589, respectively, and plan assets decreased $1,420 and $1,718, respectively. The projected benefit obligation is the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated future pay increases. The accumulated benefit obligation reflects the actuarial present value of benefits attributable to employee service rendered to date, but does not include the effects of estimated future pay increases. The accumulated benefit obligation as of March 31, 2020 and 2019 was $31,715 and $30,380, respectively. At March 31, 2020 and 2019, the pension plan was fully funded on an accumulated benefit obligation basis.
Amounts recognized in accumulated other comprehensive loss, net of income tax, consist of:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net actuarial loss
|
|
$
|
9,285
|
|
|
$
|
8,737
|
|
The increase in accumulated other comprehensive loss, net of income tax, consists of:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net actuarial loss arising during the year
|
|
$
|
1,298
|
|
|
$
|
1,080
|
|
Amortization of actuarial loss
|
|
|
(750
|
)
|
|
|
(712
|
)
|
|
|
$
|
548
|
|
|
$
|
368
|
|
The estimated net actuarial loss for the pension plan that will be amortized from accumulated other comprehensive loss into net pension cost in fiscal 2021 is $1,039.
The following benefit payments, which reflect future service, are expected to be paid during the fiscal years ending March 31:
2021
|
|
$
|
1,219
|
|
2022
|
|
|
1,271
|
|
2023
|
|
|
1,289
|
|
2024
|
|
|
1,358
|
|
2025
|
|
|
1,363
|
|
2026-2030
|
|
|
8,209
|
|
Total
|
|
$
|
14,709
|
|
The weighted average asset allocation of the plan assets by asset category is as follows:
|
|
|
|
|
|
March 31,
|
|
Asset Category
|
|
Target Allocation
|
|
|
2020
|
|
|
2019
|
|
Equity securities
|
|
|
30
|
%
|
|
|
30
|
%
|
|
|
49
|
%
|
Debt securities
|
|
|
70
|
%
|
|
|
70
|
%
|
|
|
51
|
%
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
The investment strategy of the plan is to generate a consistent total investment return sufficient to pay present and future plan benefits to retirees, while minimizing the long-term cost to the Company. Target allocations for asset categories are used to earn a reasonable rate of return, provide required liquidity and minimize the risk of large losses. Targets are adjusted when considered necessary to reflect trends and developments within the overall investment environment. In fiscal 2020, the target allocation was adjusted to 30% from 50% for equity securities and to 70% from 50% for debt securities.
53
The fair values of the Company's pension plan assets at March 31, 2020 and 2019, by asset category, are as follows:
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Asset Category
|
|
At
March 31, 2020
|
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
Cash
|
|
$
|
82
|
|
|
$
|
82
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. companies
|
|
|
9,409
|
|
|
|
9,409
|
|
|
|
—
|
|
|
|
—
|
|
International companies
|
|
|
2,327
|
|
|
|
2,327
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bond funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
27,425
|
|
|
|
27,425
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
39,243
|
|
|
$
|
39,243
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Asset Category
|
|
At
March 31, 2019
|
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
Cash
|
|
$
|
87
|
|
|
$
|
87
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. companies
|
|
|
15,130
|
|
|
|
15,130
|
|
|
|
—
|
|
|
|
—
|
|
International companies
|
|
|
3,795
|
|
|
|
3,795
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bond funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
19,404
|
|
|
|
19,404
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
38,416
|
|
|
$
|
38,416
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The fair value of Level 1 pension assets is obtained by reference to the last quoted price of the respective security on the market which it trades. See Note 1 to the Consolidated Financial Statements.
On February 4, 2003, the Company closed the defined benefit plan to all employees hired on or after January 1, 2003. In place of the defined benefit plan, these employees participate in the Company's domestic defined contribution plan. The Company contributes a fixed percentage of employee compensation to this plan on an annual basis for these employees. The Company contribution to the defined contribution plan for these employees in fiscal 2020, fiscal 2019 and fiscal 2018 was $406, $325 and $284, respectively.
The Company has a Supplemental Executive Retirement Plan ("SERP") which provides retirement benefits associated with wages in excess of the legislated qualified plan maximums. Pension expense recorded in fiscal 2020, fiscal 2019, and fiscal 2018 related to this plan was $85, $97 and $115, respectively. At March 31, 2020 and 2019, the related liability was $747 and $662, respectively, and is separately presented in the caption "Accrued Pension Liability" in the Consolidated Balance Sheets.
The Company has a domestic defined contribution plan (401k) covering substantially all employees. The Company provides matching contributions equal to 100% of the first 3% of an employee's salary deferral and 50% of the next 2% percent of an employee’s salary deferral. Company contributions are immediately vested. Contributions were $1,000 in fiscal 2020, $1,135 in fiscal 2019 and $805 in fiscal 2018.
Other Postretirement Benefits
In addition to providing pension benefits, the Company has a plan in the U.S. that provides health care benefits for eligible retirees and eligible survivors of retirees. The Company's share of the medical premium cost has been capped at $4 for family coverage and $2 for single coverage for early retirees, and $1 for both family and single coverage for regular retirees.
54
On February 4, 2003, the Company terminated postretirement health care benefits for its U.S. employees. Benefits payable to retirees of record on April 1, 2003 remained unchanged.
The components of postretirement benefit expense are:
|
|
Year ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Interest cost on accumulated benefit obligation
|
|
$
|
22
|
|
|
$
|
25
|
|
|
$
|
26
|
|
Amortization of actuarial loss
|
|
|
28
|
|
|
|
28
|
|
|
|
37
|
|
Net postretirement benefit expense
|
|
$
|
50
|
|
|
$
|
53
|
|
|
$
|
63
|
|
Net postretirement benefit expense is included in “Other income” in the Consolidated Statements of Operations.
The weighted average discount rates used to develop the net postretirement benefit cost were 3.37%, 3.63% and 3.23% in fiscal 2020, fiscal 2019 and fiscal 2018, respectively.
Changes in the Company's benefit obligation, plan assets and funded status for the plan are as follows:
|
|
Year ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Change in the benefit obligation
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
682
|
|
|
$
|
723
|
|
Interest cost
|
|
|
22
|
|
|
|
25
|
|
Actuarial loss (gain)
|
|
|
(3
|
)
|
|
|
2
|
|
Benefit payments
|
|
|
(67
|
)
|
|
|
(68
|
)
|
Projected benefit obligation at end of year
|
|
$
|
634
|
|
|
$
|
682
|
|
Change in fair value of plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
—
|
|
|
$
|
—
|
|
Employer contribution
|
|
|
67
|
|
|
|
68
|
|
Benefit payments
|
|
|
(67
|
)
|
|
|
(68
|
)
|
Fair value of plan assets at end of year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(634
|
)
|
|
$
|
(682
|
)
|
Amount recognized in the Consolidated Balance Sheets
|
|
$
|
(634
|
)
|
|
$
|
(682
|
)
|
The weighted average actuarial assumptions used to develop the accrued postretirement benefit obligation were:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Discount rate
|
|
|
3.01
|
%
|
|
|
3.37
|
%
|
Medical care cost trend rate
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
The medical care cost trend rate used in the actuarial computation ultimately reduces to 4.5% in 2025 and subsequent years. This was accomplished using 0.5% decrements for the years ended March 31, 2020 through 2025.
The current portion of the accrued postretirement benefit obligation of $77 and $78, at March 31, 2020 and 2019, respectively, is included in the caption "Accrued Compensation" and the long-term portion is separately presented in the Consolidated Balance Sheets.
Amounts recognized in accumulated other comprehensive loss, net of income tax, consist of:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net actuarial loss
|
|
$
|
187
|
|
|
$
|
210
|
|
55
The decrease in accumulated other comprehensive loss, net of income tax, consists of:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net actuarial (gain) loss arising during the year
|
|
$
|
(2
|
)
|
|
$
|
1
|
|
Amortization of actuarial loss
|
|
|
(21
|
)
|
|
|
(21
|
)
|
|
|
$
|
(23
|
)
|
|
$
|
(20
|
)
|
The estimated net actuarial loss for the other postretirement benefit plan that will be amortized from accumulated other comprehensive loss into net postretirement benefit income in fiscal 2021 is $27.
The following benefit payments are expected to be paid during the fiscal years ending March 31:
2021
|
|
$
|
77
|
|
2022
|
|
|
72
|
|
2023
|
|
|
67
|
|
2024
|
|
|
62
|
|
2025
|
|
|
57
|
|
2026-2030
|
|
|
216
|
|
Total
|
|
$
|
551
|
|
Assumed medical care cost trend rates could have a significant effect on the amounts reported for the postretirement benefit plan. However, due to the caps imposed on the Company's share of the premium costs, a one percentage point change in assumed medical care cost trend rates would not have a significant effect on the total service and interest cost components or the postretirement benefit obligation.
Self-Insured Medical Plan
Effective January 1, 2014, the Company commenced self-funding the medical insurance coverage provided to its U.S. based employees. The Company has obtained a stop loss insurance policy in an effort to limit its exposure to claims. The Company has specific stop loss coverage per employee for claims incurred during the year exceeding $100 per employee with annual maximum aggregate stop loss coverage of $1,000. The Company also has total plan annual maximum aggregate stop loss coverage of $2,592. The liability of $124 and $150 on March 31, 2020 and 2019, respectively, related to the self-insured medical plan is primarily based upon claim history and is included in the caption "Accrued Compensation" in the Consolidated Balance Sheets.
Note 13 - Equity Compensation Plans:
The Amended and Restated 2000 Graham Corporation Incentive Plan to Increase Shareholder Value, as approved by the Company's stockholders at the Annual Meeting on July 28, 2016, 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 467 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.
In fiscal 2020, fiscal 2019 and fiscal 2018, 83, 53 and 59 shares, respectively, of restricted stock were awarded. Restricted shares of 40, 27 and 30 granted to officers in fiscal 2020, fiscal 2019 and fiscal 2018, 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 28, 20, and 22 granted to officers and key employees in fiscal 2020, fiscal 2019, and fiscal 2018 respectively, vest 33⅓% per year over a three-year term. The restricted shares granted to directors of 15, 6 and 7 in fiscal 2020, fiscal 2019 and fiscal 2018, respectively, vest 100% on the first anniversary of the grant date. The Company recognizes compensation cost over the period the shares vest.
During fiscal 2020, fiscal 2019, and fiscal 2018, the Company recognized $945, $1,069, and $577, respectively, of stock-based compensation cost related to stock option and restricted stock awards, and $208, $237 and $125, respectively, of related tax benefits.
The Company received cash proceeds from the exercise of stock options of $24, $307 and $0 in fiscal 2020, fiscal 2019 and fiscal 2018, respectively.
56
The following table summarizes information about the Company's stock option awards during fiscal 2020, fiscal 2019 and fiscal 2018:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Average
|
|
|
Weighted
|
|
Aggregate
|
|
|
|
Under
|
|
|
Exercise
|
|
|
Average Remaining
|
|
Intrinsic
|
|
|
|
Option
|
|
|
Price
|
|
|
Contractual Term
|
|
Value
|
|
Outstanding at April 1, 2017
|
|
|
69
|
|
|
|
20.26
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
69
|
|
|
|
20.26
|
|
|
|
|
|
|
|
Exercised
|
|
|
(19
|
)
|
|
|
15.89
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(11
|
)
|
|
|
33.02
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
39
|
|
|
|
18.76
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2
|
)
|
|
|
15.25
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
37
|
|
|
|
18.92
|
|
|
2.07 years
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at March 31, 2020
|
|
|
37
|
|
|
|
18.92
|
|
|
2.07 years
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2020
|
|
|
37
|
|
|
|
18.92
|
|
|
2.07 years
|
|
|
—
|
|
The following table summarizes information about stock options outstanding at March 31, 2020:
Exercise Price
|
|
Options Outstanding
at March 31, 2020
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining
Contractual Life
(in years)
|
|
$18.65
|
|
|
33
|
|
|
$
|
18.65
|
|
|
|
2.17
|
|
$21.19
|
|
|
4
|
|
|
|
21.19
|
|
|
|
1.17
|
|
$18.65-21.19
|
|
|
37
|
|
|
|
18.92
|
|
|
|
2.07
|
|
The total intrinsic value of the stock options exercised during fiscal 2020, fiscal 2019 and fiscal 2018 was $10, $161 and $0, respectively. As of March 31, 2020, there was $2,318 of total unrecognized stock-based compensation expense related to non-vested restricted stock. The Company expects to recognize this expense over a weighted average period of 1.38 years.
The outstanding options expire between May 2021 and May 2022. Options, stock awards and performance awards available for future grants were 202 at March 31, 2020.
The following table summarizes information about the Company's restricted stock awards during fiscal 2020, fiscal 2019 and fiscal 2018:
|
|
Restricted Stock
|
|
|
Weighted Average
Grant Date Fair Value
|
|
|
Aggregate
Intrinsic Value
|
|
Non-vested at April 1, 2017
|
|
|
120
|
|
|
|
21.96
|
|
|
|
|
|
Granted
|
|
|
59
|
|
|
|
23.03
|
|
|
|
|
|
Vested
|
|
|
(25
|
)
|
|
|
20.44
|
|
|
|
|
|
Forfeited
|
|
|
(28
|
)
|
|
|
25.27
|
|
|
|
|
|
Non-vested at March 31, 2018
|
|
|
126
|
|
|
|
22.02
|
|
|
|
|
|
Granted
|
|
|
53
|
|
|
|
30.08
|
|
|
|
|
|
Vested
|
|
|
(28
|
)
|
|
|
20.38
|
|
|
|
|
|
Forfeited
|
|
|
(2
|
)
|
|
|
22.83
|
|
|
|
|
|
Non-vested at March 31, 2019
|
|
|
149
|
|
|
|
25.19
|
|
|
|
|
|
Granted
|
|
|
83
|
|
|
|
22.95
|
|
|
|
|
|
Vested
|
|
|
(38
|
)
|
|
|
23.17
|
|
|
|
|
|
Forfeited
|
|
|
(45
|
)
|
|
|
22.52
|
|
|
|
|
|
Non-vested at March 31, 2020
|
|
|
149
|
|
|
|
25.26
|
|
|
$
|
—
|
|
57
The Company has an Employee Stock Purchase Plan (the "ESPP"), which allows eligible employees to purchase shares of the Company's common stock at a discount of up to 15% of its fair market value on the (1) last, (2) first or (3) lower of the last or first day of the six-month offering period. A total of 200 shares of common stock may be purchased under the ESPP. In fiscal 2020, fiscal 2019 and fiscal 2018, 9, 6 and 7 shares, respectively, were issued from treasury stock to the ESPP for the offering periods in each of the fiscal years. During fiscal 2020, fiscal 2019 and fiscal 2018, the Company recognized stock-based compensation cost of $30, $0 and $0, respectively, related to the ESPP and $7, $0 and $0, respectively, of related tax benefits.
Note 14 – Changes in Accumulated Other Comprehensive Loss:
The changes in accumulated other comprehensive loss by component for fiscal 2020 and fiscal 2019 are:
|
|
Pension and Other Postretirement
Benefit Items
|
|
|
Foreign
Currency
Items
|
|
|
Total
|
|
Balance at April 1, 2018
|
|
$
|
(8,599
|
)
|
|
$
|
349
|
|
|
$
|
(8,250
|
)
|
Other comprehensive loss before reclassifications
|
|
|
(1,081
|
)
|
|
|
(235
|
)
|
|
|
(1,316
|
)
|
Amounts reclassified from accumulated other
comprehensive loss
|
|
|
733
|
|
|
|
—
|
|
|
|
733
|
|
Net current-period other comprehensive loss
|
|
|
(348
|
)
|
|
|
(235
|
)
|
|
|
(583
|
)
|
Balance at March 31, 2019
|
|
|
(8,947
|
)
|
|
|
114
|
|
|
|
(8,833
|
)
|
Other comprehensive loss before reclassifications
|
|
|
(1,296
|
)
|
|
|
(198
|
)
|
|
|
(1,494
|
)
|
Amounts reclassified from accumulated other
comprehensive loss
|
|
|
771
|
|
|
|
—
|
|
|
|
771
|
|
Net current-period other comprehensive loss
|
|
|
(525
|
)
|
|
|
(198
|
)
|
|
|
(723
|
)
|
Balance at March 31, 2020
|
|
$
|
(9,472
|
)
|
|
$
|
(84
|
)
|
|
$
|
(9,556
|
)
|
The reclassifications out of accumulated other comprehensive loss by component are as follows:
Year ended March 31, 2020
Details about Accumulated Other
Comprehensive Loss Components
|
|
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
|
|
|
|
Affected Line Item in the
Consolidated Statements of
Operations
|
Pension and other postretirement benefit items:
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service
benefit
|
|
$
|
—
|
|
|
|
|
Amortization of actuarial loss
|
|
|
(997
|
)
|
(1)
|
|
|
|
|
|
(997
|
)
|
|
|
Income before provision for income taxes
|
|
|
|
(226
|
)
|
|
|
Provision for income taxes
|
|
|
$
|
(771
|
)
|
|
|
Net income
|
Year ended March 31, 2019
Details about Accumulated Other
Comprehensive Loss Components
|
|
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
|
|
|
|
Affected Line Item in the
Consolidated Statements of
Operations
|
Pension and other postretirement benefit items:
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service
benefit
|
|
$
|
—
|
|
|
|
|
Amortization of actuarial loss
|
|
|
(875
|
)
|
(1)
|
|
|
|
|
|
(875
|
)
|
|
|
Income before provision for income taxes
|
|
|
|
(142
|
)
|
|
|
Provision for income taxes
|
|
|
$
|
(733
|
)
|
|
|
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 12.
|
58
Note 15 - Segment Information:
The Company has one reporting segment as its operating segments meet the requirement for aggregation. The Company and its operating subsidiaries design and manufacture heat transfer and vacuum equipment for the chemical, petrochemical, refining and electric power generating markets. Heat transfer equipment includes surface condensers, Heliflows, water heaters and various types of heat exchangers. Vacuum equipment includes steam jet ejector vacuum systems and liquid ring vacuum pumps. These products are sold individually or combined into package systems. The Company also services and sells spare parts for its equipment.
See Note 2 to the consolidated financial statements for net sales by product line and geographic area.
In fiscal 2020 and fiscal 2019, total sales to one customer amounted to 13% and 12%, respectively, of total consolidated net sales. The single customer representing such sales was a different customer in each of fiscal 2020 and fiscal 2019. There were no sales to a single customer that amounted to 10% or more of total consolidated net sales in fiscal 2018.
Note 16 – Purchase of Treasury Stock:
On January 29, 2015, the Company’s Board of Directors authorized a stock repurchase program. Under the stock repurchase program the Company is permitted to repurchase up to $18,000 of its common stock either in the open market or through privately negotiated transactions. Cash on hand has been used to fund all stock repurchases under the program. No shares were purchased under this program in fiscal 2020, fiscal 2019 or fiscal 2018.
Note 17– Commitments and Contingencies:
The Company has been named as a defendant in lawsuits alleging personal injury from exposure to asbestos allegedly contained in, or accompanying, products made by the Company. The Company is a co-defendant with numerous other defendants in these lawsuits and intends to vigorously defend itself against these claims. The claims in the Company’s current lawsuits are similar to those made in previous asbestos-related suits that named the Company as a defendant, which either were dismissed when it was shown that the Company had not supplied products to the plaintiffs’ places of work or were settled for immaterial amounts. The Company cannot provide any assurances that any pending or future matters will be resolved in the same manner as previous lawsuits.
As of March 31, 2020, the Company was subject to the claims noted above, as well as other legal proceedings and potential claims that have arisen in the ordinary course of business.
Although the outcome of the lawsuits, legal proceedings or potential claims to which the Company is, or may become, a party to cannot be determined and an estimate of the reasonably possible loss or range of loss cannot be made for the majority of the claims, management does not believe that the outcomes, either individually or in the aggregate, will have a material adverse effect on the Company’s results of operations, financial position or cash flows.
Note 18 - Quarterly Financial Data (Unaudited):
A capsule summary of the Company's unaudited quarterly results for fiscal 2020 and fiscal 2019 is presented below:
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
Year ended March 31, 2020
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
Net sales
|
|
$
|
20,593
|
|
|
$
|
21,643
|
|
|
$
|
25,286
|
|
|
$
|
23,082
|
|
|
$
|
90,604
|
|
Gross profit
|
|
|
4,714
|
|
|
|
4,948
|
|
|
|
4,044
|
|
|
|
4,442
|
|
|
|
18,148
|
|
Net income
|
|
|
82
|
|
|
|
1,205
|
|
|
|
9
|
|
|
|
576
|
|
|
|
1,872
|
|
Per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.01
|
|
|
$
|
.12
|
|
|
$
|
—
|
|
|
$
|
.06
|
|
|
$
|
0.19
|
|
Diluted
|
|
$
|
.01
|
|
|
$
|
.12
|
|
|
$
|
—
|
|
|
$
|
.06
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price range of common stock
|
|
$18.96-22.84
|
|
|
$17.70-23.25
|
|
|
$19.03-23.77
|
|
|
$11.07-21.90
|
|
|
$11.07-23.77
|
|
59
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
Year ended March 31, 2019
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
Net sales
|
|
$
|
29,551
|
|
|
$
|
21,441
|
|
|
$
|
17,198
|
|
|
$
|
23,641
|
|
|
$
|
91,831
|
|
Gross profit
|
|
|
7,142
|
|
|
|
6,227
|
|
|
|
3,742
|
|
|
|
4,798
|
|
|
|
21,909
|
|
Net (loss) income
|
|
|
2,323
|
|
|
|
1,827
|
|
|
|
95
|
|
|
|
(4,553
|
)
|
(1)
|
|
(308
|
)
|
Per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.24
|
|
|
$
|
.19
|
|
|
$
|
.01
|
|
|
$
|
(0.46
|
)
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
.24
|
|
|
$
|
.19
|
|
|
$
|
.01
|
|
|
$
|
(0.46
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price range of common stock
|
|
$20.75-27.51
|
|
|
$22.55-28.98
|
|
|
$19.48-28.73
|
|
|
$19.00-24.90
|
|
|
$19.00-28.98
|
|
(1) In the fourth quarter of fiscal 2019, the Company recorded goodwill and other impairment losses of $6,449 related to the commercial nuclear utility business that was held for sale at March 31, 2019. As a result, net income in the fourth quarter of fiscal 2019 includes the impairment loss net of an income tax benefit of $1,129.
Note 19 – Subsequent Events:
On May, 1, 2020, the Company entered into an agreement to amend the letter of credit facility agreement with HSBC Bank USA, N.A. and increased the Company’s line of credit to $14,000. Under the amended agreement, the Company incurs an annual facility fee of $5 and outstanding letters of credit are subject to a fee of between 0.75% and 0.85%, depending on the term of the letter of credit. Interest is payable on the principal amounts of unreimbursed letter of credit draws under the facility at a rate of 3% plus the bank’s prime rate.
60