NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except per share data)
NOTE 1 – BASIS OF PRESENTATION:
Graham Corporation's (the "Company's") Condensed Consolidated Financial Statements include its (i) wholly-owned foreign subsidiary located in Suzhou, China and (ii) wholly-owned domestic subsidiary located in Lapeer, Michigan. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, each as promulgated by the Securities and Exchange Commission. The Company's Condensed Consolidated Financial Statements do not include all information and notes required by GAAP for complete financial statements. The unaudited Condensed Consolidated Balance Sheet as of March 31, 2017 presented herein was derived from the Company’s audited Consolidated Balance Sheet as of March 31, 2017. For additional information, please refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2017 ("fiscal 2017"). In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included in the Company's Condensed Consolidated Financial Statements.
The Company's results of operations and cash flows for the three months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the current fiscal year, which ends March 31, 2018 ("fiscal 2018").
NOTE 2 – REVENUE RECOGNITION:
The Company recognizes revenue on all contracts with a planned manufacturing process in excess of four weeks (which approximates 575 direct labor hours) using the percentage-of-completion method. The majority of the Company's revenue is recognized under this methodology. The Company has established the systems and procedures essential to developing the estimates required to account for contracts using the percentage-of-completion method. The percentage-of-completion method is determined by comparing actual labor incurred to a specific date to management's estimate of the total labor to be incurred on each contract or completion of operational milestones assigned to each contract. Contracts in progress are reviewed monthly by management, and sales and earnings are adjusted in current accounting periods based on revisions in the contract value and estimated costs at completion. Losses on contracts are recognized immediately when evident to management.
Revenue on contracts not accounted for using the percentage-of-completion method is recognized utilizing the completed contract method. The majority of the Company's contracts (as opposed to revenue) have a planned manufacturing process of less than four weeks and the results reported under this method do not vary materially from the percentage-of-completion method. The Company recognizes revenue and all related costs on these contracts upon substantial completion or shipment to the customer. Substantial completion is consistently defined as at least 95% complete with regard to direct labor hours. Customer acceptance is generally required throughout the construction process and the Company has no further material obligations under its contracts after the revenue is recognized.
Receivables billed but not paid under retainage provisions in the Company’s customer contracts were $873 and $971 at June 30, 2017 and March 31, 2017, respectively.
NOTE 3 – 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. Investments are stated at amortized cost which approximates fair value. All investments held by the Company at June 30, 2017 are scheduled to mature on or before May 15, 2018.
8
NOTE 4 – INVENTORIES:
Inventories are stated at the lower of cost or market, using the average cost method. Unbilled revenue in the Condensed Consolidated Balance Sheets represents revenue recognized that has not been billed to customers on contracts accounted for on the percentage-of-completion method. For contracts accounted for on the percentage-of-completion method, progress payments are netted against unbilled revenue to the extent the payment is less than the unbilled revenue for the applicable contract. Progress payments exceeding unbilled revenue are netted against inventory to the extent the payment is less than or equal to the inventory balance relating to the applicable contract, and the excess is presented as customer deposits in the Condensed Consolidated Balance Sheets.
Major classifications of inventories are as follows:
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2017
|
|
Raw materials and supplies
|
|
$
|
2,936
|
|
|
$
|
3,016
|
|
Work in process
|
|
|
9,351
|
|
|
|
12,573
|
|
Finished products
|
|
|
997
|
|
|
|
891
|
|
|
|
|
13,284
|
|
|
|
16,480
|
|
Less - progress payments
|
|
|
5,375
|
|
|
|
7,234
|
|
Total
|
|
$
|
7,909
|
|
|
$
|
9,246
|
|
NOTE 5 – INTANGIBLE ASSETS:
Intangible assets are comprised of the following:
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
At June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
2,700
|
|
|
$
|
1,177
|
|
|
$
|
1,523
|
|
Intangibles not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Permits
|
|
$
|
10,300
|
|
|
$
|
—
|
|
|
$
|
10,300
|
|
Tradename
|
|
|
2,500
|
|
|
|
—
|
|
|
|
2,500
|
|
|
|
$
|
12,800
|
|
|
$
|
—
|
|
|
$
|
12,800
|
|
At March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
2,700
|
|
|
$
|
1,132
|
|
|
$
|
1,568
|
|
Intangibles not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Permits
|
|
$
|
10,300
|
|
|
$
|
—
|
|
|
$
|
10,300
|
|
Tradename
|
|
|
2,500
|
|
|
|
—
|
|
|
|
2,500
|
|
|
|
$
|
12,800
|
|
|
$
|
—
|
|
|
$
|
12,800
|
|
Intangible assets are amortized on a straight line basis over the estimated useful lives. Intangible amortization expense for each of the three-month periods ended June 30, 2017 and 2016 was $45. As of June 30, 2017, amortization expense is estimated to be $135 for the remainder of fiscal 2018 and $180 in each of the fiscal years ending March 31, 2019, 2020, 2021 and 2022.
NOTE 6 – STOCK-BASED COMPENSATION:
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.
Restricted stock awards granted in the three-month periods ended June 30, 2017 and 2016 were 59 and 82, respectively. Restricted shares of 30 and 43 granted to officers in fiscal 2018 and fiscal 2017, 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 22 and 31 granted to officers and key employees in fiscal 2018 and fiscal 2017, respectively, vest 33⅓% per year over a three-year term.
9
Restricted shares of
7
and 8 granted to directors in fiscal 2018 and fiscal 2017, respectively, vest 100% on the first year anniversary of the
grant date. No stock option awards were granted in the three-month periods ended June 30, 2017 and 2016.
During the three months ended June 30, 2017 and 2016, the Company recognized stock-based compensation (income) costs related to stock option and restricted stock awards of $(67) and $29, respectively. The income tax (expense) benefit recognized related to stock-based compensation was $(23) and $10 for the three months ended June 30, 2017 and 2016, respectively.
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. During the three months ended June 30, 2017 and 2016, the Company recognized stock-based compensation costs of $0 and $13, respectively, related to the ESPP and $0 and $5, respectively, of related tax benefits.
NOTE 7 – INCOME PER SHARE:
Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted income per share is calculated by dividing net income by the weighted average number of common shares outstanding and, when applicable, potential common shares outstanding during the period. A reconciliation of the numerators and denominators of basic and diluted income per share is presented below:
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Basic income per share
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
935
|
|
|
$
|
85
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
9,748
|
|
|
|
9,675
|
|
Basic income per share
|
|
$
|
.10
|
|
|
$
|
.01
|
|
Diluted income per share
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
935
|
|
|
$
|
85
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
9,748
|
|
|
|
9,675
|
|
Stock options outstanding
|
|
|
10
|
|
|
|
5
|
|
Weighted average common and potential common
shares outstanding
|
|
|
9,758
|
|
|
|
9,680
|
|
Diluted income per share
|
|
$
|
.10
|
|
|
$
|
.01
|
|
Options to purchase a total of 11 and 54 shares of common stock were outstanding at June 30, 2017 and 2016, respectively, but were not included in the above computation of diluted income per share given their exercise prices as they would not be dilutive upon issuance.
NOTE 8 – PRODUCT WARRANTY LIABILITY:
The reconciliation of the changes in the product warranty liability is as follows:
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
538
|
|
|
$
|
686
|
|
(Income) expense for product warranties
|
|
|
(160
|
)
|
|
|
166
|
|
Product warranty claims paid
|
|
|
(87
|
)
|
|
|
(158
|
)
|
Balance at end of period
|
|
$
|
291
|
|
|
$
|
694
|
|
10
Income of $160
for product warranties in the three months ended June
30, 2017
resulted from the reversal of provisions made that were no longer required due to lower claims experience.
The product warranty liability is included in the line item "Accrued expenses and other current liabilities" in the Condensed Consolidated Balance Sheets.
NOTE 9 - CASH FLOW STATEMENT:
Interest paid was $3 and $2 in the three-month periods ended June 30, 2017 and 2016, respectively. Income taxes paid for the three months ended June 30, 2017 and 2016 were $140 and $43, respectively.
At June 30, 2017 and 2016, respectively, there were $8 and $0 of capital purchases that were recorded in accounts payable and are not included in the caption "Purchase of property, plant and equipment" in the Condensed Consolidated Statements of Cash Flows.
NOTE 10 – EMPLOYEE BENEFIT PLANS:
The components of pension cost are as follows:
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
|
$
|
149
|
|
|
$
|
150
|
|
Interest cost
|
|
|
356
|
|
|
|
362
|
|
Expected return on assets
|
|
|
(744
|
)
|
|
|
(718
|
)
|
Amortization of actuarial loss
|
|
|
253
|
|
|
|
338
|
|
Net pension cost
|
|
$
|
14
|
|
|
$
|
132
|
|
The Company made no contributions to its defined benefit pension plan during the three months ended June 30, 2017 and does not expect to make any contributions to the plan for the balance of fiscal 2018.
The components of the postretirement benefit cost are as follows:
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Interest cost
|
|
$
|
6
|
|
|
$
|
6
|
|
Amortization of actuarial loss
|
|
|
10
|
|
|
|
10
|
|
Net postretirement benefit cost
|
|
$
|
16
|
|
|
$
|
16
|
|
The Company paid no benefits related to its postretirement benefit plan during the three months ended June 30, 2017. The Company expects to pay benefits of approximately $83 for the balance of fiscal 2018.
The Company self-funds the medical insurance coverage it provides to its U.S. based employees. The Company maintains a stop loss insurance policy in order to limit its exposure to claims. The liability of $100 and $174 on June 30, 2017 and March 31, 2017, respectively, related to the self-insured medical plan is primarily based upon claim history and is included in the caption “Accrued compensation” as a current liability in the Condensed Consolidated Balance Sheets.
NOTE 11 – COMMITMENTS AND CONTINGENCIES:
The Company has been named as a defendant in lawsuits alleging personal injury from exposure to asbestos allegedly contained in, 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 defendant, which either were dismissed when it was shown that the Company had not supplied products to the plaintiffs’ places of work or were settled for immaterial amounts.
As of June 30, 2017, 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.
11
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 reaso
nably possible loss or range of loss cannot be made, management does not believe that the outcomes, either individually or in the aggregate, will have a material effect on the Company’s results of operations, financial position or cash flows.
NOTE 12 – INCOME TAXES:
The Company files federal and state income tax returns in several domestic and international jurisdictions. In most tax jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed. The Company is subject to U.S. federal examination for the tax years 2014 through 2016 and examination in state tax jurisdictions for the tax years 2012 through 2016. The Company is subject to examination in the People’s Republic of China for tax years 2014 through 2016.
There was no liability for unrecognized tax benefits at either June 30, 2017 or March 31, 2017.
NOTE 13 – CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS:
The changes in accumulated other comprehensive loss by component for the three months ended June 30, 2017 and 2016 are as follows:
|
|
Pension and
Other
Postretirement
Benefit Items
|
|
|
Foreign
Currency
Items
|
|
|
Total
|
|
Balance at April 1, 2017
|
|
$
|
(8,439
|
)
|
|
$
|
5
|
|
|
$
|
(8,434
|
)
|
Other comprehensive income before reclassifications
|
|
|
—
|
|
|
|
54
|
|
|
|
54
|
|
Amounts reclassified from accumulated other comprehensive
loss
|
|
|
170
|
|
|
|
—
|
|
|
|
170
|
|
Net current-period other comprehensive income
|
|
|
170
|
|
|
|
54
|
|
|
|
224
|
|
Balance at June 30, 2017
|
|
$
|
(8,269
|
)
|
|
$
|
59
|
|
|
$
|
(8,210
|
)
|
|
|
Pension and
Other
Postretirement
Benefit Items
|
|
|
Foreign
Currency
Items
|
|
|
Total
|
|
Balance at April 1, 2016
|
|
$
|
(10,932
|
)
|
|
$
|
256
|
|
|
$
|
(10,676
|
)
|
Other comprehensive income before reclassifications
|
|
|
—
|
|
|
|
(138
|
)
|
|
|
(138
|
)
|
Amounts reclassified from accumulated other comprehensive
loss
|
|
|
225
|
|
|
|
—
|
|
|
|
225
|
|
Net current-period other comprehensive income
|
|
|
225
|
|
|
|
(138
|
)
|
|
|
87
|
|
Balance at June 30, 2016
|
|
$
|
(10,707
|
)
|
|
$
|
118
|
|
|
$
|
(10,589
|
)
|
The reclassifications out of accumulated other comprehensive loss by component for the three months ended June 30, 2017 and 2016 are as follows:
Details about Accumulated Other
Comprehensive Loss Components
|
|
Amount Reclassified from
Accumulated Other
Comprehensive Loss
|
|
|
|
Affected Line Item in the Condensed
Consolidated Statements of Income and
Retained Earnings
|
|
|
Three Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
Pension and other postretirement benefit items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial loss
|
|
$
|
(263
|
)
|
(1)
|
|
$
|
(348
|
)
|
(1)
|
|
Income before provision for income taxes
|
|
|
|
(93
|
)
|
|
|
|
(123
|
)
|
|
|
Provision for income taxes
|
|
|
$
|
(170
|
)
|
|
|
$
|
(225
|
)
|
|
|
Net income
|
12
(1)
|
These accumulated other comprehensive loss components are included within the computation of pension and other postretirement benefit costs. See Note 10.
|
NOTE 14 – RESTRUCTURING CHARGE:
In the first quarter of fiscal 2017, the Company’s workforce was aligned with market conditions by eliminating certain management, office and manufacturing positions. As a result, a restructuring charge of $555 was recognized, which included severance and related employee benefit costs. This charge was included in the caption “Restructuring Charge” in the Condensed Consolidated Statement of Income and Retained Earnings for the three months ended June 30, 2016 The reconciliation of the changes in the restructuring reserve is as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
120
|
|
|
$
|
74
|
|
Expense for restructuring
|
|
|
—
|
|
|
|
555
|
|
Amounts paid for restructuring
|
|
|
(28
|
)
|
|
|
(77
|
)
|
Balance at end of period
|
|
$
|
92
|
|
|
$
|
552
|
|
The liability of $92 and $120 at June 30, 2017 and March 31, 2017 respectively, are included in the caption “Accrued Compensation” in the Condensed Consolidated Balance Sheets. June 30, 2017
NOTE 15 – ACCOUNTING AND REPORTING CHANGES:
In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), the Securities and Exchange Commission, the Emerging Issues Task Force, the American Institute of Certified Public Accountants or any other authoritative accounting bodies to determine the potential impact they may have on the Company's consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers." This guidance establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company’s contracts with customers. The guidance requires companies to apply a five-step model when recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. The guidance also includes a comprehensive set of disclosure requirements regarding revenue recognition. The guidance allows two methods of adoption: (1) a full retrospective approach where historical financial information is presented in accordance with the new standard and (2) a modified retrospective approach where the guidance is applied to the most current period presented in the financial statements. In August 2015, the FASB issued ASU No 2015-14 "Revenue from Contracts with Customers: Deferral of the Effective Date," which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," to clarify the implementation guidance on principal versus agent. In April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," which clarifies the identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients," which clarifies the implementation guidance related to collectability, presentation of sales tax, noncash consideration, contract modifications and completed contracts at transition. The Company plans to adopt these standards using the modified retrospective approach in the first quarter of its fiscal year ending March 31, 2019, however, the method of adoption is subject to change as the Company progresses through the transition. The Company has developed a project plan and is currently reviewing its contracts and evaluating the impact of the guidance on its revenue. The Company currently believes that the most significant impact of adopting the guidance is the timing of revenue recognition. The Company believes that revenue on the majority of its contracts will continue to be recognized upon shipment while revenue on its larger contracts will be recognized over time as these contracts meet specific criteria established in the new standards. The Company is in the process of implementing changes to its business processes, systems and controls to support the recognition and disclosure requirements under the new guidance. See Note 2 for a description of the Company’s current revenue recognition policy.
13
In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory," which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost
and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for public business entities for fisca
l years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted the new guidance in the first quarter of fiscal 2018. The adoption of this ASU did not have a material impact on the Company’s Consolidated Fina
ncial 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. 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 current accounting guidance. As a result, the effect of leases on the consolidated statement of comprehensive income and the consolidated statement of cash flows is largely unchanged from previous generally accepted accounting principles. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company believes the adoption of this ASU may have a material impact on its assets and liabilities due to the addition of right-of-use assets and lease liabilities to its Consolidated Balance Sheet, however, it does not expect the guidance to have a material impact on its Consolidated Statement of Income or Consolidated Statement of Cash Flows.
In March 2016, the FASB issued ASU 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. The Company adopted the new guidance in the first quarter of fiscal 2018. The adoption of this ASU did not have a material impact on the Company’s Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230)," which clarifies the presentation and classification of eight specific issues on the cash flow statement. This ASU is effective for public businesses for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect the adoption of this ASU will have a material effect on its Consolidated Financial Statements.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits (Topic 715)," which amended its guidance related to the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amended guidance requires the service cost component be disaggregated from the other components of net benefit cost. The service cost component of expense is required to be reported in the income statement in the same line item as other compensation costs within income from operations. The other components of net benefit cost are required to be presented separately from the service cost component outside of income from operations. This ASU is effective for public businesses for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of this ASU will have 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.
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