UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2008
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
.
COMMISSION FILE NUMBER
1-8462
GRAHAM CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE
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16-1194720
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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20 Florence Avenue, Batavia, New York
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14020
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(Address of principal executive offices)
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(Zip Code)
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585-343-2216
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes
o
No
þ
As of November 3, 2008, there were outstanding 10,125,574 shares of the registrants common
stock, par value $.10 per share.
Graham Corporation and Subsidiary
Index to Form 10-Q
As of September 30, 2008 and March 31, 2008 and for the Six-Month Periods
Ended September 30, 2008 and 2007
2
GRAHAM CORPORATION AND SUBSIDIARY
FORM 10-Q
SEPTEMBER 30, 2008
PART I FINANCIAL INFORMATION
3
Item 1. Condensed Consolidated Financial Statements
GRAHAM CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30,
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March 31,
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2008
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2008
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(Amounts in thousands, except per share data)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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5,044
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$
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2,112
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Investments
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37,811
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34,681
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Trade accounts receivable, net of allowances ($26 and $41 at September 30, and
March 31, 2008, respectively)
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8,649
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5,052
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Unbilled revenue
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5,899
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8,763
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Inventories
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6,033
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4,797
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Income taxes receivable
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2,779
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1,502
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Prepaid expenses and other current assets
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581
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463
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Total current assets
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66,796
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57,370
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Property, plant and equipment, net
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9,458
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9,060
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Deferred income tax asset
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86
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70
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Prepaid pension asset
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6,959
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4,186
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Other assets
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19
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25
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Total assets
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$
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83,318
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$
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70,711
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Liabilities and stockholders equity
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Current liabilities:
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Current portion of capital lease obligations
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$
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27
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$
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20
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Accounts payable
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5,510
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5,461
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Accrued compensation
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4,391
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4,517
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Accrued expenses and other liabilities
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2,070
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2,114
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Customer deposits
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5,617
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5,985
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Deferred income tax liability
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2,275
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2,275
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Total current liabilities
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19,890
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20,372
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Capital lease obligations
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46
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36
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Accrued compensation
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253
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232
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Deferred income tax liability
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1,347
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315
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Accrued pension liability
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282
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271
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Accrued postretirement benefits
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932
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949
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Total liabilities
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22,750
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22,175
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Stockholders equity:
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Preferred
stock, $1 par value
Authorized, 500 shares
Common stock, $.10 par value
Authorized, 25,500 and 6,000 shares at September 30
and March 31, 2008, respectively
Issued 10,127 and 9,982 shares at September 30 and March 31, 2008, respectively
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1,013
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499
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Capital in excess of par value
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14,808
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12,674
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Retained earnings
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46,995
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37,216
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Accumulated other comprehensive loss
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(2,203
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)
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(1,820
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)
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Other
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(45
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)
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(33
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)
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Total stockholders equity
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60,568
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48,536
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Total liabilities and stockholders equity
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$
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83,318
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$
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70,711
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See Notes to Condensed Consolidated Financial Statements.
4
GRAHAM CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
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Three Months Ended
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Six Months Ended
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September 30,
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September 30,
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2008
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2007
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2008
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2007
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(Amounts in thousands, except per share data)
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Net sales
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$
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23,915
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$
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23,060
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$
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51,562
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$
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43,047
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Cost of products sold
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13,416
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13,163
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28,845
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26,471
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Gross profit
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10,499
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9,897
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22,717
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16,576
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Other expenses:
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Selling, general and administrative
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3,931
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3,438
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7,753
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6,516
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Interest income
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(172
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)
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(264
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)
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(303
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)
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(494
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Interest expense
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2
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2
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3
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8
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Total other expenses and income
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3,761
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3,176
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7,453
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6,030
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Income before income taxes
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6,738
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6,721
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15,264
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10,546
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Provision for income taxes
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2,326
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2,299
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5,168
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3,466
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Net income
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4,412
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4,422
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10,096
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7,080
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Retained earnings at beginning of period
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42,786
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25,236
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37,216
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22,675
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Dividends
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(203
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)
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(99
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)
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(354
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)
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(196
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)
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Effect of adoption of measurement date
provisions of Statement of Financial
Accounting Standards No. 158
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37
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Retained earnings at end of period
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$
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46,995
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$
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29,559
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$
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46,995
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$
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29,559
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Per share data:
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Basic:
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Net income
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$
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.43
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$
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.45
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$
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1.00
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$
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.72
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Diluted:
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Net income
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$
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.43
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$
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.44
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$
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.99
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$
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.71
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Weighted average common shares outstanding:
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Basic:
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10,169
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9,859
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10,127
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9,835
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Diluted:
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10,249
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10,029
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10,227
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10,030
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Dividends declared per share
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$
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.02
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$
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.01
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$
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.035
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$
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.02
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See Notes to Condensed Consolidated Financial Statements.
5
GRAHAM CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended
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September 30,
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2008
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2007
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(Amounts in thousands)
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Operating activities:
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Net income
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$
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10,096
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$
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7,080
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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530
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462
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Discount accretion on investments
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(293
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)
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(421
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)
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Stock-based compensation expense
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257
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78
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Loss on disposal of property, plant and equipment
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(1
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)
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Deferred income taxes
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1,267
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3,014
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(Increase) decrease in operating assets:
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Accounts receivable
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(3,591
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)
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487
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Unbilled revenue
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2,864
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(475
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)
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Inventories
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(1,236
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)
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1,231
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Income taxes receivable/payable
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(1,277
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)
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(781
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)
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Prepaid expenses and other current and non-current assets
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(117
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)
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(268
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)
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Prepaid pension asset
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(3,574
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)
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(19
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)
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Increase (decrease) in operating liabilities:
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Accounts payable
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(18
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)
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182
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Accrued compensation, accrued expenses and other current and non-current liabilities
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(176
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)
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474
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Customer deposits
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(379
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)
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(2,093
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)
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Long-term portion of accrued compensation, accrued pension liability
and accrued postretirement benefits
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50
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46
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Total adjustments
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(5,694
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)
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1,917
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|
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Net cash provided by operating activities
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4,402
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|
|
|
8,997
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|
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|
|
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Investing activities:
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Purchase of property, plant and equipment
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(795
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)
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|
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(447
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)
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Proceeds from sale of property, plant and equipment
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|
1
|
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|
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25
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Purchase of investments
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|
(61,437
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)
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|
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(37,053
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)
|
Redemption of investments at maturity
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58,600
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|
|
27,750
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|
|
|
|
|
|
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Net cash used by investing activities
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|
|
(3,631
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)
|
|
|
(9,725
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
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Proceeds from issuance of long-term debt
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2,450
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|
|
|
14
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Principal repayments on long-term debt
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|
|
(2,464
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)
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|
|
(33
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)
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Issuance of common stock
|
|
|
695
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|
|
|
273
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Dividends paid
|
|
|
(354
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)
|
|
|
(196
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)
|
Excess tax deduction on stock awards
|
|
|
1,696
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|
|
|
|
|
Other
|
|
|
(12
|
)
|
|
|
18
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,011
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|
|
|
76
|
|
|
|
|
|
|
|
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Effect of exchange rates on cash
|
|
|
150
|
|
|
|
15
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,932
|
|
|
|
(637
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)
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Cash and cash equivalents at beginning of period
|
|
|
2,112
|
|
|
|
1,375
|
|
|
|
|
|
|
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Cash and cash equivalents at end of period
|
|
$
|
5,044
|
|
|
$
|
738
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
6
GRAHAM CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008 and 2007
(Unaudited)
(Amounts in thousands, except per share data)
NOTE 1 BASIS OF PRESENTATION:
Graham Corporations (the Companys) Condensed Consolidated Financial Statements include one
wholly-owned foreign subsidiary located in China, and have been prepared in accordance with
accounting principles generally accepted in the United States (GAAP) for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, as promulgated
by the Securities and Exchange Commission. The Companys Condensed Consolidated Financial
Statements do not include all information and notes required by GAAP for complete financial
statements. The March 31, 2008 Condensed Consolidated Balance Sheet was derived from the Companys
audited Consolidated Balance Sheet as of March 31, 2008. For additional information, please refer
to the consolidated financial statements and notes included in the Companys Annual Report on Form
10-K for the year ended March 31, 2008, referred to as fiscal year 2008. In the opinion of
management, all adjustments, including normal recurring accruals considered necessary for a fair
presentation, have been included in the Companys Condensed Consolidated Financial Statements.
The Companys results of operations and cash flows for the three and six months ended
September 30, 2008 are not necessarily indicative of the results that may be expected for the year
ending March 31, 2009, referred to as fiscal year 2009.
On October 26, 2007, the Companys Board of Directors declared a five-for-four stock split of
the Companys common stock and increased the quarterly cash dividend to $.03 per share, effective
for the dividend paid on January 3, 2008 to stockholders of record on November 30, 2007. The
five-for-four stock split was effected as a stock dividend, and stockholders received one
additional share of common stock for every four shares of common stock held on the record date of
November 30, 2007. The new common shares were distributed on January 3, 2008.
On July 31, 2008, the Companys stockholders approved a proposal to increase the number of
authorized common shares from 6,000 to 25,500. Subsequently, the Companys Board of Directors
declared a two-for-one stock split of the Companys common shares and increased the post-split
quarterly cash dividend to $.02 per share, effective for the dividend paid on October 6, 2008 to
stockholders of record on September 5, 2008. The two-for-one stock split was effected as a stock
dividend, and stockholders received one additional share of common stock for every share of common
stock held on the record date of September 5, 2008. The new common shares were distributed on
October 6, 2008. The par value of the Companys common stock, $.10, remained unchanged as a result
of the above-described stock dividends. All share and per share amounts disclosed for the three
and six-month periods ended September 30, 2007 have been
adjusted to reflect both the five-for-four and
two-for-one stock splits.
7
Certain reclassifications have been made to prior year amounts to conform with the current
year presentation. In the Condensed Consolidated Statements of Operations and Retained Earnings,
interest income was reclassed from Selling, general and administrative expense to the separate
line item Interest income for the three and six months ended September 30, 2007. In the March
31, 2008 Condensed Consolidated Balance Sheet, the line items Treasury stock and Notes
receivable from officers and directors were combined and reported on the line item Other.
NOTE 2 REVENUE RECOGNITION:
The Company recognizes revenue on all contracts with a planned manufacturing process in excess
of four weeks (which approximates 575 direct labor hours) using the percentage-of-completion
method. The majority of the Companys revenue is recognized under this methodology. The
percentage-of-completion method is determined by comparing actual labor incurred to a specific date
to managements estimate of the total labor to be incurred on each contract. Contracts in progress
are reviewed monthly, and sales and earnings are adjusted in current accounting periods based on
revisions in the contract value and estimated costs at completion. Losses on contracts are
recognized immediately when evident. During the three and six months ended September 30, 2008 and
2007, respectively, no loss provisions were recorded.
Revenue on contracts not accounted for using the percentage-of-completion method is recognized
utilizing the completed contract method. The majority of the Companys contracts have a planned
manufacturing process of less than four weeks and the results reported under this method do not
vary materially from the percentage-of-completion method. The Company recognizes revenue and all
related costs on these contracts upon substantial completion or shipment to the customer.
Substantial completion is consistently defined as at least 95% complete with regard to direct labor
hours. Customer acceptance is generally required throughout the construction process and the
Company has no further material obligations under its contracts after the revenue is recognized.
NOTE 3 INVESTMENTS:
Investments consist solely of fixed-income debt securities issued by the United States
Treasury with original maturities of greater than three months and less than one year. All
investments are classified as held-to-maturity, as the Company has the intent and ability to hold
the securities to maturity. The investments are stated at amortized cost which approximates fair
value. All investments held by the Company at September 30, 2008 are scheduled to mature between
October 2 and November 13, 2008.
NOTE 4 INVENTORIES:
Inventories are stated at the lower of cost or market, using the average cost method. For
contracts accounted for on the completed contract method, progress payments received are netted
against inventory to the extent the payment is less than the inventory balance relating to the
applicable contract. Progress payments that are in excess of the corresponding inventory balance
8
are presented as customer deposits in the Condensed Consolidated Balance Sheets. Unbilled revenue
in the Condensed Consolidated Balance Sheets represents revenue recognized that has not been billed
to customers on contracts accounted for on the percentage-of-completion method. For contracts
accounted for on the percentage-ofcompletion method, progress payments are netted against unbilled
revenue to the extent the payment is less than the unbilled revenue for the applicable contract.
Progress payments exceeding unbilled revenue are netted against inventory to the extent the payment
is less than or equal to the inventory balance relating to the applicable contract, and the excess
is presented as customer deposits in the Condensed Consolidated Balance Sheets.
Major classifications of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
1,796
|
|
|
$
|
2,047
|
|
Work in process
|
|
|
9,221
|
|
|
|
5,348
|
|
Finished products
|
|
|
833
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
|
11,850
|
|
|
|
7,979
|
|
Less progress payments
|
|
|
5,817
|
|
|
|
3,182
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,033
|
|
|
$
|
4,797
|
|
|
|
|
|
|
|
|
NOTE 5 STOCK-BASED COMPENSATION:
The Amended and Restated 2000 Graham Corporation Incentive Plan to Increase Shareholder Value
provides for the issuance of up to 1,375 shares of common stock in connection with grants of
incentive stock options, non-qualified stock options, stock awards and performance awards to
officers, key employees and outside directors; provided, however, that no more than 250 shares of
common stock may be used for awards other than stock options. Stock options may be granted at
prices not less than the fair market value at the date of grant and expire no later than ten years
after the date of grant.
Stock option awards in the three and six months ended September 30, 2008 were 2 and 18,
respectively. Restricted stock awards in the three and six months ended September 30, 2008 were 0
and 4, respectively. Stock option awards vest 25% per year over a four year term. Restricted
shares vest over a four year term as follows: (i) 10% on the first
anniversary of the grant date; (ii) 20%
on the second anniversary of the grant date; (iii) 30% on the third anniversary of the grant date; and
(iv) 40% on the fourth anniversary of the grant date. All options have a term of ten years from their
grant date.
During the three and six months ended September 30, 2008, the Company recognized stock-based
compensation costs of $166 and $257, respectively. The income tax benefit recognized related to
stock-based compensation was $59 and $91 for the three and six months ended September 30, 2008,
respectively. During the three and six months ended September 30, 2007, the Company recognized
stock-based compensation costs of $45 and $77, respectively. The income tax benefit recognized
related to stock-based compensation was $16 and $27 for the three and six months ended September
30, 2007.
The weighted average fair value of stock options granted in the three and six months ended
September 30, 2008 was $23.47 and $16.57, respectively. The weighted average fair value of
9
stock options granted in the three and six months ended September 30, 2007 was $5.09 and $3.00,
respectively. The fair value of each stock option grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Expected life
|
|
5 years
|
|
5 years
|
|
5 years
|
|
5 years
|
Expected volatility
|
|
|
64.17
|
%
|
|
|
48.67
|
%
|
|
|
61.80
|
%
|
|
|
43.86
|
%
|
Risk-free interest rate
|
|
|
3.25
|
%
|
|
|
4.51
|
%
|
|
|
3.22
|
%
|
|
|
4.83
|
%
|
Expected dividend yield
|
|
|
.23
|
%
|
|
|
.55
|
%
|
|
|
.28
|
%
|
|
|
.63
|
%
|
The expected life represents an estimate of the weighted average period of time that options
are expected to remain outstanding given consideration to vesting schedules and the Companys
historical exercise patterns. Expected volatility is estimated based on the historical closing
prices of the Companys common stock over a period of five years. The risk free interest rate is
estimated based on the United States Federal Reserves historical data for the maturity of nominal
treasury instruments that corresponds to the expected term of the option. Expected dividend yield
is based on historical trends.
The fair value of a restricted share is equal to the market value of a share of the Companys
stock on the date of grant. The weighted average fair value of the restricted shares granted in
the six months ended September 30, 2008 and 2007 was $30.88 and $6.90, respectively.
The Graham Corporation Outside Directors Long-Term Incentive Plan (the Plan) provides for
awards of share equivalent units for outside directors based upon the Companys performance. Each
unit is equivalent to one share of the Companys common stock. Share equivalent units are credited
to each outside directors account for each of the first five full fiscal years of the directors
service when the Companys consolidated net income is at least 100% of the approved budgeted net
income for the year. Share equivalent units are payable in cash or stock upon retirement.
Compensation cost for share equivalent units is recorded based on the higher of the quoted
market price of the Companys stock at the end of the period up to $3.20 per unit or the stock
price at the date of grant. The cost of share equivalent units earned and charged to pre-tax
income under the Plan was $10 and $7 in the three-month periods ended September 30, 2008 and 2007,
respectively, and $20 and $15 in the six-month periods ended September 30, 2008 and 2007,
respectively. There were 54 and 75 share equivalent units in the Plan at September 30, 2008 and
2007, respectively, and the related liability recorded was $253 and $296 at September 30, 2008 and
2007, respectively. The expense to mark to market the share equivalent units was $0 in both the
three month periods ended September 30, 2008 and 2007. The expense to mark to market the share
equivalent units was $0 and $8 in the six months ended September 30, 2008 and 2007, respectively.
10
NOTE 6 INCOME PER SHARE:
Basic income per share is computed by dividing net income by the weighted average number of
common shares outstanding for the period. Common shares outstanding include share equivalent
units, which are contingently issuable shares. Diluted income per share is calculated by dividing
net income by the weighted average number of common shares outstanding and, when applicable,
potential common shares outstanding during the period. A reconciliation of the numerators and
denominators of basic and diluted income per share is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Basic income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,412
|
|
|
$
|
4,422
|
|
|
$
|
10,096
|
|
|
$
|
7,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted common shares outstanding
|
|
|
10,108
|
|
|
|
9,785
|
|
|
|
10,060
|
|
|
|
9,760
|
|
Share equivalent units (SEUs)
|
|
|
61
|
|
|
|
74
|
|
|
|
67
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and SEUs
|
|
|
10,169
|
|
|
|
9,859
|
|
|
|
10,127
|
|
|
|
9,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
.43
|
|
|
$
|
.45
|
|
|
$
|
1.00
|
|
|
$
|
.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,412
|
|
|
$
|
4,422
|
|
|
$
|
10,096
|
|
|
$
|
7,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares and SEUs outstanding
|
|
|
10,169
|
|
|
|
9,859
|
|
|
|
10,127
|
|
|
|
9,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding
|
|
|
80
|
|
|
|
170
|
|
|
|
100
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and potential
common shares outstanding
|
|
|
10,249
|
|
|
|
10,029
|
|
|
|
10,227
|
|
|
|
10,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
.43
|
|
|
$
|
.44
|
|
|
$
|
.99
|
|
|
$
|
.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase a total of 2 shares of common stock were outstanding at September 30,
2008, but were not included in the above computation of diluted income per share as their effect
would be anti-dilutive.
NOTE 7 PRODUCT WARRANTY LIABILITY:
The reconciliation of the changes in the product warranty liability is as follows:
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Balance at beginning of period
|
|
$
|
367
|
|
|
$
|
405
|
|
|
$
|
441
|
|
|
$
|
357
|
|
Expense for product warranties
|
|
|
96
|
|
|
|
91
|
|
|
|
64
|
|
|
|
230
|
|
Product warranty claims paid
|
|
|
(106
|
)
|
|
|
(45
|
)
|
|
|
(148
|
)
|
|
|
(136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
357
|
|
|
$
|
451
|
|
|
$
|
357
|
|
|
$
|
451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8 CASH FLOW STATEMENT:
Interest paid was $3 and $8 for the six months ended September 30, 2008 and 2007,
respectively. In addition, income taxes paid were $3,483 and $1,253 for the six months ended
September 30, 2008 and 2007, respectively.
During the six months ended September 30, 2008, stock option awards were exercised and the
related income tax benefit realized exceeded the tax benefit that had been recorded pertaining to
the compensation cost recognized. This excess tax deduction has been separately reported under
Financing activities in the Condensed Consolidated Statement of Cash Flows.
Non-cash activities during the six months ended September 30, 2008 included a reclassification
from Capital in excess of par value to Common stock for $506, which represents the par value of
the additional shares issued to effect the two-for-one stock split
effected in the form of a stock dividend.
See Note 1. Non-cash
activities during the six months ended September 30, 2008 also included $543, net of income tax, in
pension and other postretirement benefit adjustments required by the adoption of the measurement
date provisions of Statement of Financial Accounting Standards (SFAS) No. 158,
Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans.
See Note 13. In addition,
capital expenditures totaling $31 were financed through the issuance of capital leases.
NOTE 9 COMPREHENSIVE INCOME:
Total comprehensive income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net income
|
|
$
|
4,412
|
|
|
$
|
4,422
|
|
|
$
|
10,096
|
|
|
$
|
7,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
2
|
|
|
|
7
|
|
|
|
141
|
|
|
|
15
|
|
Defined benefit pension and other postretirement plans
|
|
|
9
|
|
|
|
13
|
|
|
|
(524
|
)
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
4,423
|
|
|
$
|
4,442
|
|
|
$
|
9,713
|
|
|
$
|
7,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension and other postretirement plans reflect the amortization of prior
service costs and recognized gains and losses related to such plans during the periods and the
effect of the Companys adoption of the measurement date provisions of SFAS No. 158 on April 1,
2008. See Note 13.
12
NOTE 10 EMPLOYEE BENEFIT PLANS:
The components of pension cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service cost
|
|
$
|
112
|
|
|
$
|
122
|
|
|
$
|
225
|
|
|
$
|
243
|
|
Interest cost
|
|
|
309
|
|
|
|
277
|
|
|
|
618
|
|
|
|
554
|
|
Expected return on assets
|
|
|
(459
|
)
|
|
|
(408
|
)
|
|
|
(918
|
)
|
|
|
(816
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
Actuarial loss
|
|
|
50
|
|
|
|
55
|
|
|
|
100
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost
|
|
$
|
13
|
|
|
$
|
47
|
|
|
$
|
27
|
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company contributed $3,500 to its defined benefit pension plan during the six months ended
September 30, 2008. The Company does not expect to make any contributions to the plan for the
balance of fiscal year 2009.
Subsequent to March 31, 2008, conditions in the worldwide debt and equity markets have
deteriorated significantly. These conditions have had a negative effect on the fair value of the
plans investments since March 31, 2008. However, we are unable to quantify the exact effect on
the plan.
The components of the postretirement benefit income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
15
|
|
|
|
15
|
|
|
|
30
|
|
|
|
30
|
|
Amortization of prior service cost
|
|
|
(42
|
)
|
|
|
(41
|
)
|
|
|
(83
|
)
|
|
|
(83
|
)
|
Amortization of actuarial loss
|
|
|
6
|
|
|
|
6
|
|
|
|
12
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net postretirement benefit income
|
|
$
|
(21
|
)
|
|
$
|
(20
|
)
|
|
$
|
(41
|
)
|
|
$
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company paid benefits of $12 related to its postretirement benefit plan during the six
months ended September 30, 2008. The Company expects to pay benefits of approximately $117 for the
balance of fiscal year 2009.
NOTE 11 CONTINGENCIES AND COMMITMENTS:
The Company has been named as a defendant in certain lawsuits alleging personal injury from
exposure to asbestos contained in products made by the Company. The Company is a co-defendant with
numerous other defendants in these lawsuits and intends to vigorously defend itself against these
claims. The claims are similar to previous asbestos suits that named the Company as
13
defendant, which either were dismissed when it was shown that the Company had not supplied products
to the plaintiffs places of work or were settled for minimal amounts below the expected defense
costs. Neither the outcome of these lawsuits nor the potential for liability can be determined at
this time.
From time to time in the ordinary course of its business, the Company is subject to legal
proceedings and potential claims. At September 30, 2008, other than noted above, management was
unaware of any additional material litigation matters.
NOTE 12 INCOME TAXES:
The Company files federal and state income tax returns in several domestic and foreign
jurisdictions. In most tax jurisdictions, returns are subject to examination by the relevant tax
authorities for a number of years after the returns have been filed. The Company is subject to
examination by the United States Internal Revenue Service for tax years 2005 through 2008 and tax
years 2006 and 2007 are currently under examination. The Company is subject to examination in
state and international tax jurisdictions for tax years 2004 through 2008 and tax years 2006
through 2008, respectively. It is the Companys policy to recognize any interest related to
uncertain tax positions in interest expense and any penalties related to uncertain tax positions in
selling, general and administrative expense. The Company had no unrecognized tax benefits as of
September 30, 2008 and has not recorded any interest or penalties related to uncertain tax
positions for the six-month period ended September 30, 2008.
NOTE 13 ACCOUNTING AND REPORTING CHANGES:
In September 2006, the Financial Accounting Standard Board (FASB) issued SFAS No. 157,
Fair
Value Measurements
. SFAS No. 157 defines fair value, establishes a framework for measuring fair
value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 was effective
as of the beginning of fiscal year 2009, except as it relates to nonrecurring fair value
measurements of nonfinancial assets and liabilities for which SFAS No. 157 is effective for fiscal
years beginning after November 15, 2008. The adoption of all provisions of SFAS No. 157 had no
effect on the Companys financial position, results of operations and cash flows.
On April 1, 2008, the Company adopted the measurement date provisions of SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans,
utilizing the
remeasurement approach which required plan assets and benefit obligations to be remeasured as of
the beginning of fiscal year 2009. The following table presents the impact of initially applying
the measurement date provisions of SFAS No. 158 on individual line items in the Companys
Consolidated Balance Sheet as of April 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Application
|
|
|
|
|
|
After Application
|
Balance Sheet Caption
|
|
of SFAS No. 158
|
|
Adjustments
|
|
of SFAS No. 158
|
Prepaid pension asset
|
|
$
|
4,186
|
|
|
$
|
(801
|
)
|
|
$
|
3,385
|
|
Long-term deferred income tax liability
|
|
$
|
(315
|
)
|
|
$
|
260
|
|
|
$
|
(55
|
)
|
Accrued postretirement benefits
|
|
$
|
(949
|
)
|
|
$
|
35
|
|
|
$
|
(914
|
)
|
Accumulated other comprehensive loss
|
|
$
|
1,820
|
|
|
$
|
543
|
|
|
$
|
2,363
|
|
Retained earnings
|
|
$
|
(37,216
|
)
|
|
$
|
(37
|
)
|
|
$
|
(37,253
|
)
|
14
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities
. SFAS No. 159 permits entities to choose to measure various financial
instruments and certain other items at fair value in order to mitigate volatility in reporting
earnings caused by measuring related assets and liabilities differently. SFAS No. 159 was
effective as of April 1, 2008. The Company has decided not to change how it measures financial
instruments and certain other items covered under SFAS No. 159.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and
Hedging Activities,
to enhance disclosures about how and why an entity uses derivative instruments,
how derivative instruments and related hedged items are accounted for under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities,
and its related interpretations, and
how derivative instruments and related hedged items affect an entitys financial position,
financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim
periods beginning after November 15, 2008. The Company does not believe the adoption of SFAS No.
161 will have a material effect on its consolidated financial statement disclosures.
15
Item 1A. Risk Factors
Our business and operations are subject to numerous risks, many of which are discussed in Part
I, Item 1A of our Annual Report on
Form 10-K
for the year ended March 31, 2008. If any of the
events that are described in the Item 1A of such
Form 10-K
or which are described below should
occur, our business and results of operations could be harmed.
The following new risk factors should be considered in addition to those contained in our
Annual Report on Form 10-K for the year ended December 31, 2007.
We serve markets that are capital intensive. The recent volatility and disruption of the
capital and credit markets and adverse changes in the global economy will likely negatively impact our
operating results. Such volatility and disruption may
also negatively impact our ability to access additional financing.
Although we believe that the fundamentals that have driven our growth over the past few years
remain essentially unchanged and that our long-term growth prospects remain strong, we also expect
that the current economic crisis in the capital and credit markets will cause a slow-down in
spending by our customers as they evaluate the current and future economic impact of such crisis to
their project plans. If adverse economic and credit conditions persist or worsen, we would likely experience
decreased revenue from our operations attributable to decreases in the spending levels of our
customers. Adverse economic and credit conditions might also have a
negative adverse effect on our cash flows if customers demand that we accept smaller project
deposits and less frequent progress payments. In addition, adverse economic and credit conditions could also put
downward pricing pressure on us. If any of the foregoing occurs, there would be an adverse effect on our results of operations.
Moreover, the current crises in the capital and credit markets could have an adverse effect on
our ability to obtain additional financing on commercially reasonable terms, if at all, should we
determine such financing desirable to expand our business.
One of the larger markets we serve is the petroleum refining and petrochemical industries which are
both cyclical in nature and dependent on the price of oil. As a result, volatility in the price of
crude oil may negatively impact our operating results.
Although we believe that the global consumption of crude oil will increase over the course of
the next several years and that there is a shortage of global oil refining capacity, the price of
crude oil has been very volatile. Many of our products are purchased in connection with oil
refinery construction, revamps and upgrades. During times of significant volatility in the market
for crude oil, our customers may refrain from placing large orders until the market stabilizes.
During such times of high volatility, we could experience decreased revenue from our operations
attributable to decreases in the spending levels of our customers.
The following risk factor is intended to supplement and replace the risk factor with the same
heading which is contained in Item 1A of our Annual Report on Form 10-K for the year ended March
31, 2008.
The industries in which we operate are cyclical, and downturns in such industries may adversely
affect our operating results
.
Historically, a substantial portion of our revenue has been derived from the sale of our
products to companies in the chemical, petrochemical, petroleum refining and power generating
industries, or to firms that design and construct facilities for these industries. The core
industries in
16
which our products are used are, to varying degrees, cyclical and have historically experienced
severe downturns. Although we believe we are in a long-term expansion of demand for our products in
the petrochemical, petroleum refining and power generating industries, a downturn in one or more of
these industries could occur at any time. We have no way to predict or control the length or
severity of any such downturn. A sustained deterioration in any of the cyclical industries we serve
would materially harm our business and operating results because our customers would not likely
have the resources necessary to purchase our products nor would they likely have the need to build
additional facilities or improve existing facilities.
17
|
|
|
Item 2.
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
(Dollar amounts in thousands, except per share data)
Overview
We are a global designer and manufacturer of custom-engineered ejectors, liquid ring pump
packages, condensers and heat exchangers. Our equipment is for critical applications in the
petrochemical, oil refinery and electric power generation industries, including cogeneration and
geothermal plants. Our equipment can also be found in diverse applications such as metal refining,
pulp and paper processing, shipbuilding, water heating, refrigeration, desalination, food
processing, pharmaceuticals, heating, ventilating and air conditioning.
Our corporate offices and production facilities are located in Batavia, New York.
Additionally, we have a wholly-owned foreign subsidiary in China. Our Chinese subsidiary supports
sales orders from Asia and provides engineering support and supervision of subcontracted
fabrication.
Highlights for the three and six months ended September 30, 2008 are set forth below. Our
current fiscal year, which we refer to as fiscal 2009, ends March 31, 2009.
|
|
|
Net income and income per diluted share for the current quarter were $4,412 and
$0.43, compared with net income of $4,422 and income per diluted share of $0.44 for
the quarter ended September 30, 2007. Net income and income per diluted share for
the six months ended September 30, 2008 were $10,096 and $0.99, compared with net
income and income per diluted share for the six-month period ended September 30,
2007 of $7,080 and $0.71.
|
|
|
|
|
Net sales for the second quarter of $23,915 were up 4% compared with the second
quarter of the fiscal year ended March 31, 2008, referred to as fiscal 2008, when
sales were $23,060. Net sales for the first six months of fiscal 2009 were
$51,562, an increase of 20%, compared with $43,047 for the six months ended
September 30, 2007.
|
|
|
|
|
Orders placed with us in the three and six-month periods of fiscal 2009 were
$17,451 and $45,251, respectively, compared with the three and six-month periods of
fiscal 2008 of $20,528 and $45,371, respectively. We believe orders for the
current quarter were down 15% compared with the same period of the prior fiscal
year as a result of a hesitation in
the capital construction markets caused by the current global
economic crises. For the comparative six month-periods, orders
were level.
|
|
|
|
|
Backlog grew to $69,673 at September 30, 2008, representing a 23% increase
compared with September 30, 2007, when backlog was $56,839. However, as a result
of the second quarter decline in new orders, backlog was down from $75,971 at the
end of the first quarter of fiscal 2009.
|
|
|
|
|
Gross profit margin was 44% for both the three and six-month periods ended
September 30, 2008 compared with 43% and 39% for the three and six-month periods
ended September 30, 2007, respectively.
|
|
|
|
|
Operating margins for the quarter and six-month periods ended September 30, 2008
were 27% and 29%, respectively, compared with 28% and 23%, respectively, for the
quarter and six-month periods ended September 30, 2007.
|
18
|
|
|
Cash and short-term investments at September 30, 2008
were $42,855, up 16% as compared with $36,793 at March 31, 2008.
|
We
expect that the current global economic crisis has caused a slow-down in spending by our
customers as they evaluate the current and future economic impact to their project plans. However,
we believe the principal market drivers that have driven our growth over the last two years are unchanged
and that ultimately they will continue to drive long-term growth.
We believe the principal market drivers that have led to increased capital spending by our
customers and that are contributing to our sales growth include:
|
|
|
Global consumption of crude oil is estimated to expand over the next decade.
|
|
|
|
|
There is a shortage of global oil refining capacity, which is being addressed
through refinery upgrades, revamps, new builds and expansions.
|
|
|
|
|
There is a differential in raw material prices for higher quality sweet and
lower quality sour crude oil. To lower production costs, many refineries are
upgrading facilities in order to be able to process sour crude oil, which requires
an upgrade of vacuum and heat transfer equipment of the types we design and
manufacture.
|
|
|
|
|
The expansion of the middle class in Asia is driving increasing demand for
power, refinery and petrochemical products.
|
|
|
|
|
The high cost of natural gas in North America and Europe is leading to the
construction of new petrochemical plants in the Middle East, where natural gas is
plentiful and less expensive.
|
|
|
|
|
There is an increased demand for geothermal electrical power plants to meet
increased electricity demand.
|
|
|
|
|
Refineries in the United States are being upgraded to process synthetic crude
oil from oil sands located in Alberta, Canada.
|
Forward-Looking Statements
This report and other documents we file with the Securities and Exchange Commission include
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements involve known and unknown risks, uncertainties and other factors that may
cause actual results to be materially different from any future results implied by the
forward-looking statements. Such factors include, but are not limited to, the risks and
uncertainties identified by us under the heading Risk Factors in Item 1A of our Annual Report on
Form 10-K for fiscal 2008 and in Item 1A of this Report. Forward-looking statements may also include, but are not limited to,
statements about:
|
|
|
the current and future economic environments affecting us and the markets we
serve;
|
|
|
|
|
sources of revenue and anticipated revenue, including the contribution from the
growth of new products, services and markets;
|
19
|
|
|
plans for future products and services and for enhancements to existing products
and services;
|
|
|
|
|
estimates regarding our liquidity and capital requirements;
|
|
|
|
|
our ability to attract or retain customers;
|
|
|
|
|
the outcome of any existing or future litigation; and
|
|
|
|
|
our ability to increase our productivity and capacity.
|
Forward-looking statements are usually accompanied by words such as anticipate, believe,
estimate, may, intend, project, expect and similar expressions. Actual results could
differ materially from historical results or those implied by the forward-looking statements
contained in this report.
Undue reliance should not be placed on these forward-looking statements. Except as required
by law, we undertake no obligation to update or announce any revisions to forward-looking
statements contained in this report, whether as a result of new information, future events or
otherwise.
Results of Operations
For an understanding of the significant factors that influenced our performance, the following
discussion should be read in conjunction with our Condensed Consolidated Financial Statements and
the notes to our condensed consolidated financial statements included in Item 1 of this Quarterly
Report on Form 10-Q.
The following table summarizes our results of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Net sales
|
|
$
|
23,915
|
|
|
$
|
23,060
|
|
|
$
|
51,562
|
|
|
$
|
43,047
|
|
Net income
|
|
|
4,412
|
|
|
|
4,422
|
|
|
|
10,096
|
|
|
|
7,080
|
|
Diluted income per share
|
|
|
0.43
|
|
|
|
0.44
|
|
|
|
0.99
|
|
|
|
0.71
|
|
Identifiable assets
|
|
|
83,318
|
|
|
|
54,878
|
|
|
|
83,318
|
|
|
|
54,878
|
|
The Second Quarter of Fiscal 2009 Compared With the Second Quarter of Fiscal 2008
Sales for the second quarter of fiscal 2009 were $23,915, a 4% increase as compared with sales
of $23,060 for the second quarter of fiscal 2008. A $2,058 increase in sales of pumps combined
with a $996 and $806 increase in sales of condensers and heat exchangers, respectively, more than
offset the $3,314 decline in sales of ejectors. The second quarter of fiscal 2008 included two
large ejector orders for the refinery market. Aftermarket sales were up $309 in the current
quarter compared with the same period last year.
Sales for the six-month period ended September 30, 2008 were $51,562, up 20%, compared with
$43,047 for the first six months of fiscal 2008. Heat exchanger sales increased $1,484, condenser
sales increased $2,957, pump package sales increased $3,410 and aftermarket sales increased $6,335
for the first half of fiscal 2009. The increases in pump package and aftermarket sales were due to
three large refinery projects. These increases more than offset the $5,671 decrease in ejector
sales in the six month-period ended September 30, 2008 compared with the first half of our prior
fiscal year.
20
International sales accounted for 37% and 33% of total sales for the second quarters of fiscal
2009 and fiscal 2008, respectively. International sales increased $1,450 in the current
quarter compared with the three-month period ended September 30, 2007 with increases of $2,498
and $1,242 from the Middle East and Western Europe, respectively, more than offsetting declines in
Asia, South America and other areas. We believe this trend of international sales comprising a
larger percentage of our total sales will continue into fiscal 2010. For the six months ended
September 30, 2008, international orders were 35% of total sales compared with 43% for the
six-month period ended September 30, 2007. International sales dollars of $18,026 for the current
six-month period compared with the six months ended September 30, 2007 were relatively unchanged.
Fluctuations in sales among products and geographic locations can vary measurably from period
to period based on timing and magnitude of projects. Sales in the three months ended September 30,
2008 were 47% to the refining industry, 27% to the chemical and petrochemical industries, 8% to the
power industry and 18% to other industrial applications. Sales in the three months ended September
30, 2007 were 52% to the refining industry, 28% to the chemical and petrochemical industries, 2% to
the power industry and 18% to other industrial applications. Increased sales to the power industry
included applications for fossil fuels while other industrial applications included heating,
ventilation and air conditioning requirements and sales to the pulp and paper industry. For the
six-month periods ended September 30, 2008 and 2007, sales were, respectively, 50% and 50% to the
refinery industry, 23% and 26% to the chemical and petrochemical industries, 6% and 3% to the power
industry and 21% and 21% to other industrial applications. For additional information on future
sales and our markets, see Orders and Backlog below.
Our gross profit percentage for the second quarter of fiscal 2009 was 44% compared with 43%
for the second quarter of fiscal 2008. Gross profit percentage for the six-month periods ended
September 30, 2008 and 2007 was 44% and 39%, respectively. Gross profit dollars for the first half
of fiscal 2009 increased 37% compared with fiscal 2008, primarily as a result of a 20% increase in
sales. The higher gross profit percentage and dollars were due mostly to improved product mix
achieved by increased selectivity on orders accepted and higher volume. We were able to increase
our sales volume through productivity improvements made in engineering and manufacturing by process
improvements, technology and new equipment. The efficiencies we have gained have enabled us to
control our fixed cost structure on higher sales volumes.
Selling, general and administrative (SG&A) expenses, expressed as a percent of sales, for
the three-month periods ended September 30, 2008 and 2007 were 16% and 15%, respectively. SG&A
expense, expressed as a percent of sales, was 15% for both the six-month periods ended September
30, 2008 and 2007. Actual costs for fiscal 2009 for the three and six-month periods ended
September 30, 2008, compared with the same respective periods in fiscal 2008, increased $493, or
14%, and $1,237, or 19%, respectively. Higher SG&A expenses were due to increased sales
commissions related to higher sales and to increased variable compensation as a result of a 43%
increase in net income for the six-month period. In addition, we incurred consulting costs for
information technology, engineering and manufacturing projects which we believe will lead to
reduced cycle time, greater efficiencies and capacity expansion.
Interest income for the three month-periods ended September 30, 2008 and 2007 was $172 and
$264, respectively. For the six-month periods ended September 30, 2008 and 2007, interest income
was $303 and $494, respectively. Decreased interest income was due to lower interest rates and
investing in lower risk and yield instruments. Our investments at
September 30, 2008 consisted
solely of fixed income debt securities issued by the United States Treasury.
21
Interest
expense was $2 for each of the quarters ended September 30, 2008 and 2007. For the
six-month periods ended September 30, 2008 and 2007, respectively, interest expense was $3 and $8. The decrease
was due to lower interest rates and a decline in capital lease obligations outstanding.
Our effective income tax rate in fiscal 2009 is projected to be 33%. However, for the six
months ended September 30, 2008, our actual effective income tax rate was 34% due to our Chinese
subsidiarys taxable loss at September 30, 2008 for which the related tax benefit was recognized at
the lower foreign statutory rate. Our effective tax rate for fiscal 2008 was 33%.
Net
income for the fiscal 2009 second quarter was $4,412, relatively unchanged from $4,422 for
the fiscal 2008 second quarter as increased expenses offset the effect of higher sales. For the
six-month period of fiscal 2009, net income was up 43% to $10,096 compared with $7,080 for the six
month-period of fiscal 2008. Income per diluted share was $0.43 and $0.99 for the three and six
month-periods ended September 30, 2008, respectively, compared with $0.44 and $0.71 for the three
and six-month periods ended September 30, 2007, respectively. The increase in the weighted average
shares outstanding in the fiscal 2009 second quarter resulted in slightly lower diluted earnings
per share.
Liquidity and Capital Resources
The following discussion should be read in conjunction with our Condensed Consolidated
Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2008
|
|
2007
|
Cash and investments
|
|
$
|
42,855
|
|
|
$
|
24,137
|
|
Working capital
|
|
$
|
46,906
|
|
|
$
|
30,425
|
|
Working capital ratio
(1)
|
|
|
3.4
|
|
|
|
3.0
|
|
Long-term debt (capital leases)
|
|
$
|
46
|
|
|
$
|
45
|
|
Long-term debt/capitalization
(2)
|
|
|
0
|
%
|
|
|
0.1
|
%
|
Long-term liabilities/capitalization
(3)
|
|
|
4.7
|
%
|
|
|
4.5
|
%
|
|
|
|
1)
|
|
Working capital ratio equals current assets divided by current liabilities.
|
|
2)
|
|
Long-term debt/capitalization equals long-term debt divided by stockholders equity
plus long-term debt.
|
|
3)
|
|
Long-term liabilities/capitalization equals total liabilities minus current liabilities
divided by stockholders equity plus long-term debt.
|
Net cash provided by operating activities for the first six months of fiscal 2009 was $4,402,
compared with $8,997 for the six months ended September 30, 2007. The decrease was due to an
increase in working capital, decreases in net operating losses and research and development credits
available to reduce current taxes payable, and a contribution we made to our pension plan. The
contribution to the pension plan in the current six-month period was $3,500 compared with $0 for
the six months ended September 30, 2007. Expressed as a percent of income before taxes, the
current income tax provision for the first half of fiscal 2009 was 26% compared with 4% for the
first half of fiscal 2008. Our working capital rose due to an increase in our accounts receivable
balance. The higher accounts receivable balance at September 30, 2008 does not represent a change
in collection terms, but was due to the timing of billings to customers.
We invest net cash generated from operations in excess of cash held for near-term needs in
marketable securities. Investments are United States government instruments, generally with
maturity periods of 91 to 120 days. Investments at September 30, 2008 and March 31, 2008 were
22
$37,811 and $34,681, respectively. Other investing activities in the first six months of fiscal
2009 included capital expenditures of $795.
Sources of cash from financing activities for the six months ended September 30, 2008 included
the issuance of common stock for stock options exercised, which raised $695, compared with $273 in
the first six months of fiscal 2008. In the six-month period ended September 30, 2008, we also
recognized a $1,696 increase in capital in excess of par value for the income tax benefit realized
upon exercise of stock options in excess of the tax benefit amount recognized pertaining to the
fair value of stock option awards treated as compensation expense.
Uses of cash for financing activities for the six months ended September 30, 2008 included
dividend payments of $354 compared with $196 for the six-month period ended September 30, 2007. In
the first half of fiscal 2009, we borrowed and repaid $14 to finance working capital needs compared
with $19 for the first half of fiscal 2008.
We have a credit facility with Bank of America, N.A. that provides a line of credit up to
$30,000, including letters of credit and bank guarantees. Borrowings under our credit facility are
secured by all of our assets. Borrowings and standby letters of credit outstanding under our
credit facility on September 30, 2008 were $0 and $8,796, respectively. Our borrowing rate as of
September 30, 2008 was the banks prime rate minus 125 basis points, or 3.75%. We believe that
cash generated from operations, combined with our investment and available financing capacity under
our credit facility will be adequate to meet our cash needs in the foreseeable future.
Capital expenditures for fiscal 2009 are projected to be approximately $1,800 to $2,200.
Planned investment is expected to be about 33% in machinery and equipment, 53% for information
technology and 14% for all other capital expenditures. We estimate 68% of our capital expenditure
budget for fiscal 2009 will support productivity improvements, while the balance will be primarily
used for capitalized maintenance projects. Capital expenditures in fiscal 2008 were 60% for plant
machinery and equipment and 40% for all other capital expenditures. Fifty-six percent of our
capital spending was for productivity improvements, while the balance was primarily for capitalized
maintenance.
Orders and Backlog
Orders for the three and six-month periods ended September 30, 2008 were $17,451 and $45,251,
respectively. Orders for the three and six-month periods ended September 30, 2007 were $20,528 and
$45,371, respectively. Orders represent communications received from customers requesting us to supply products
and services and can fluctuate significantly quarter to quarter by industry and product lines and,
therefore, we do not believe quarter to quarter comparisons reflect
business trends. Orders in
the second quarter of fiscal 2009 were down $3,077 from the prior
years second quarter. A $2,076
increase in ejector orders in the fiscal 2009 second quarter did not offset a $3,013 decline in
pump package orders and a $1,618 decline in condenser orders compared with the fiscal 2008 second
quarter.
We experienced a significant increase in orders for surface condensers in the first half of
fiscal 2009 of $3,488, or 33%, compared with the first half of fiscal 2008. Surface condenser
orders represented 31% of our orders in the six-month period ended September 30, 2008 compared with
24% in the six-month period ended September 30, 2007. Condenser orders were for refinery,
petrochemical and electric power applications. Offsetting the increase in condenser orders for the
first half of fiscal 2009 was a decrease in pump package orders for the six-month period ended
September 30, 2008 compared with the six months ended September 30, 2007 of $4,843. The large pump
package orders received last fiscal year were for refinery projects and approximately half of the
total order value was converted to sales in the first six months of fiscal 2009. We
23
believe any of
our product categories in any given period could constitute a significant percentage of the orders
for that period and do not necessarily represent business trends.
Domestic orders for the fiscal 2009 second quarter were 52% of total orders, or $9,104. They
were down $2,732, or 23%, compared with domestic orders of $11,836, or 58% of total orders, in the
second quarter of fiscal 2008. International orders were 48% of total
orders, or $8,347, in the
second quarter of fiscal 2009 compared with the second quarter of fiscal 2008, when international
orders were 42%, or $8,692. Declines by industry were in the refining and power markets.
For the six month-period ended September 30, 2008, international orders were 59% of total
orders, or $26,491, compared with 29% of total orders, or $13,221, in the first six months of 2008.
The increase in international orders for the first six months of fiscal 2009 came primarily from
Asia, up $16,174, which represented 36% of our total orders for fiscal 2009 through the second
quarter. Our domestic orders in both periods were comprised mostly of refinery projects.
International orders were for refinery, petrochemical and power generation applications. We
believe, subject to order selection, that in the future, some periods can be heavily weighted
toward international orders and other periods to domestic orders, but that the emerging trend in
the foreseeable future will result in a greater weighting toward international orders. By
industry, the $5,170 increase in orders from the chemical and petrochemical industry and the $3,999
increase in orders from other industrial and commercial applications were not enough to offset the
decline in orders from the refining industry and the power industry of $6,478 and $2,814,
respectively, in the first half of fiscal 2009 when compared with the same period in fiscal 2008.
We believe that the rapid decline in oil prices in the quarter ended September 30, 2008 and the
current global economic crisis caused our customers to hold orders until markets become more stable.
Backlog was $69,673 at September 30, 2008, compared with $56,839 at September 30, 2007, a 23%
increase. Backlog is defined as the total dollar value of orders received for which revenue has
not yet been recognized. All orders in backlog represent orders from our traditional markets in
established product lines. Substantially all of our current backlog is expected to be converted to
sales within the next twelve months, and represents orders from traditional markets in our
established product lines. At September 30, 2008, approximately 51% of our backlog was
attributable to equipment for refinery project work, 30% to chemical and petrochemical projects,
and 19% to other industrial or commercial applications. At September 30, 2007, approximately 50%
of our backlog was attributable to equipment for refinery project work, 26% to chemical and
petrochemical projects, and 24% to other industrial or commercial applications, including
electrical power.
Contingencies and Commitments
We have been named as a defendant in certain lawsuits alleging personal injury from exposure
to asbestos contained in our products. We are a co-defendant with numerous other defendants in
these lawsuits and intend to vigorously defend against these claims. The claims are similar to
previous asbestos lawsuits that named us as a defendant. Such previous lawsuits either were
dismissed when it was shown that we had not supplied products to the plaintiffs places of work or
were settled by us for amounts below expected defense costs. Neither the outcome of these lawsuits
nor the potential for liability can be determined at this time.
From time to time in the ordinary course of business, we are subject to legal proceedings and
potential claims. As of September 30, 2008, other than noted above, we were unaware of any
pending material litigation.
24
Critical Accounting Policies, Estimates and Judgments
Our unaudited condensed consolidated financial statements are based on the selection of
accounting policies and the application of significant account estimates, some of which require
management to make significant assumptions. We believe that the most critical accounting
estimates used in the preparation of our condensed consolidated financial statements relate to
labor hour estimates used to recognize revenue under the percentage-of-completion method,
accounting for contingencies, under which we accrue a loss when it is probable that a liability has
been incurred and the amount can be reasonably estimated, and accounting for pensions and other
postretirement benefits. For further information, refer to Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations and Item 8 Financial Statements and
Supplementary Data in our Annual Report on Form 10-K for our fiscal year ended March 31, 2008.
New Accounting Pronouncements
In September 2006, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurements
. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS No. 157 was effective as
of the beginning of fiscal 2009, which commenced April 1, 2008. The impact of adopting all
provisions of SFAS No. 157 had no effect on our financial position, results of operations and cash
flows when adopted.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans.
In our fiscal year ended March 31, 2007, we adopted the
provisions of SFAS No. 158 which were effective for that year. Effective April 1, 2008 we
recognized the effects of changing our measurement dates for our defined benefit plans from a
December 31 to a March 31 date. Under the approach we selected, we remeasured our plan assets and
benefit obligations as of the beginning of fiscal 2009. Our adoption of SFAS No. 158 had the
effect of reducing our prepaid pension asset by $801, reducing our deferred income tax liability by
$260, reducing stockholders equity by $506 and decreasing accrued postretirement benefits by $35.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities
. SFAS No. 159 permits entities to choose to measure certain financial
instruments and certain other items at fair value in order to mitigate volatility in reported
earnings. SFAS No. 159 was effective as of April 1, 2008. We have determined not to change how we
measure financial instruments and certain other items covered under SFAS No. 159.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and
Hedging Activities
to enhance disclosures about how and why an entity uses derivative instruments,
how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its
related interpretations and how derivative instruments and related hedged items affect an entitys
financial position, financial performance and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008. We do
not believe the adoption of SFAS No. 161 will have a material effect on our consolidated financial
statement disclosures.
Off Balance Sheet Arrangements
We did not have any off balance sheet arrangements as of September 30, 2008 or 2007, other
than operating leases.
25
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks (i.e., the risk of loss arising from changes in market rates and
prices) to which we are exposed is foreign currency exchange rates and price risk.
The assumptions applied in preparing the following qualitative and quantitative disclosures
regarding foreign currency exchange rate risk are based upon volatility ranges experienced by us in
relevant historical periods, our current knowledge of the marketplace, and our judgment of the
probability of future volatility based upon the historical trends and economic conditions of the
markets in which we operate.
Foreign Currency
International consolidated sales for the first six months of fiscal 2009 were 35% of total
sales compared with 43% for the first six months of fiscal 2008. Operating in markets throughout
the world exposes us to movements in currency exchange rates. Currency movements can affect sales
in several ways, the foremost being our ability to compete for orders against foreign competitors
that base their prices on relatively weaker currencies. Business lost due to competition for
orders against competitors using a relatively weaker currency cannot be quantified. In addition,
cash can be adversely impacted by the conversion of sales made by us
in a foreign currency to United States dollars. In the six-month periods ended September 30, 2008 and 2007, we had no sales for which we
were paid in foreign currencies.
We have limited exposure to foreign currency purchases. In the three and six-month periods
ended September 30, 2008 and 2007, our purchases in foreign currencies represented 2% and 3%, and
2% and 4%, respectively, of the cost of products sold.
At certain times, we may utilize forward foreign currency exchange contracts to limit currency
exposure. Forward foreign currency exchange contracts were not used in the periods being reported
on and, as of September 30, 2008 and September 30, 2007, we held no forward currency contracts.
Price Risk
Operating in a global marketplace requires us to compete with other global
manufacturers which, in some instances, benefit from lower production costs and more
favorable economic conditions. Although we believe that our customers differentiate
our products on the basis of our manufacturing quality and engineering experience and
excellence, among other things, such lower production costs and more favorable economic
conditions mean that certain of our competitors are able to offer products similar to
ours at lower prices. Moreover, the cost of metals and other materials used in our products
have experienced significant volatility. Currently, we are experiencing a decline in the
cost of metals and other materials. Such factors, in addition to the global effects of the
recent volatility and disruption of the capital and credit markets, make it likely that
we will encounter downward pricing pressure for our products in the near term.
Item 4. Controls and Procedures
Conclusion regarding the effectiveness of disclosure controls and procedures
Our president and chief executive officer (principal executive officer) and controller and
chief accounting officer (principal accounting officer) each have evaluated the effectiveness of
our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, and as of such date, our president and chief executive officer and controller and
chief accounting officer concluded that our disclosure controls and procedures were effective in
all material respects.
26
Changes in internal control over financial reporting
There has been no change to our internal control over financial reporting during the quarter
covered by this Quarterly Report on Form 10-Q that has materially affected, or that is reasonably
likely to materially affect, our internal control over financial reporting.
27
GRAHAM CORPORATION AND SUBSIDIARY
FORM 10-Q
September 30, 2008
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On July 31, 2008, the Companys stockholders voted on the following proposals at the Companys
2008 Annual Meeting of Stockholders:
Proposal 1
:
To elect each of Gerard T. Mazurkiewicz and Cornelius S. Van Rees as a director of the
Company, each to serve for a three-year term expiring in 2011 or until his respective successor is
elected and qualified:
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Nominees
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Votes For
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Votes Withheld
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Gerard T. Mazurkiewicz
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4,356,845
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93,397
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Cornelius S. Van Rees
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4,332,969
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117,273
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The other directors, whose terms of office continued after the annual meeting, were Helen H.
Berkeley, Jerald D. Bidlack, James R. Lines and James J. Malvaso. Subsequent to the annual meeting, Alan Fortier was appointed as a director.
Proposal 2
:
To approve the amendment to the Companys Amended Certificate of Incorporation to increase the
number of authorized shares of common stock from 6,000,000 to 25,500,000 and to increase the number
of total authorized shares from 6,500,000 to 26,000,000.
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Votes for:
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2,845,517
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Votes against:
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1,570,992
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Votes abstained:
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33,733
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Proposal 3
:
To ratify the selection of Deloitte & Touche LLP as the Companys independent registered
public accounting firm for the fiscal year ending March 31, 2009
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Votes for:
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4,337,895
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Votes against:
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92,277
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Votes abstained:
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20,070
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28
Item 5. Other Information
On July 31, the Companys stockholders approved an amendment to the Companys Amended Certificate
of Incorporation to increase the number of authorized shares of common stock, having a par value of
$0.10 per share, from 6,000,000 to 25,500,000 and to increase the number of total authorized shares
from 6,500,000 to 26,000,000. Such amendment became effective with the State of Delaware Secretary
of State as of July 31, 2008.
Item 6. Exhibits
See index to exhibits on page 31 of this report.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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GRAHAM CORPORATION
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By:
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/s/ Jennifer R. Condame
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Jennifer R. Condame
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Controller and Chief Accounting Officer
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Date:
November 5, 2008
30
INDEX OF EXHIBITS
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(3)
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Articles of Incorporation and By-Laws
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3.1 Certificate of Incorporation, as amended, of Graham Corporation
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(10)
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Material Contracts
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# 10.1 Form of Director Non-Qualified Stock Option Agreement
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# 10.2 Form of Employee Non-Qualified Stock Option Agreement
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# 10.3 Form of Employee Restricted Stock Agreement
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(31)
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Rule 13a-14(a)/15d-14(a) Certifications
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31.1 Certification of Principal Executive Officer
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31.2 Certification of Principal Financial Officer
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(32)
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Section 1350 Certifications
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32.1 Section 1350 Certifications
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# Management contract or compensatory plan.
31
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
GRAHAM CORPORATION
* * * * * *
FIRST: The name of the Corporation is GRAHAM CORPORATION.
SECOND: The address of its registered office in the State of Delaware is No. 100 West Tenth
Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or promoted is:
To engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
FOURTH: The total number of shares of all classes of stock which the Corporation shall have
authority to issue is 2,500,000 shares, of which 500,000 shares shall be shares of Preferred Stock
having a par value of $1.00 each (hereinafter called Preferred stock) and 2,000,000 shares shall be
shares of Common Stock having a par value of $0.10 each (hereinafter called Common Stock).
Authority is hereby expressly granted to the Board of Directors from time to time to issue the
Preferred Stock as Preferred Stock of one or more series and in connection with the creation of any
such series to fix by the resolution or resolutions providing for the issue of shares thereof the
designation, powers, preferences, and relative, participating, optional, or other special rights of
such series, and the qualifications, limitations, or restrictions thereof. Such authority of the
Board of Directors with respect to each such series shall include, but not be limited to, the
determination of the following:
(a) the distinctive designation of, and the number of shares
comprising, such series, which number may be increased (except
where otherwise provided by the Board of Directors in creating
such series) or deceased (but not below the number of shares thereof
then outstanding) from time to time by like action of the Board of
Directors;
(b) the dividend rate or amount of such series, the conditions
and dates upon which such dividends shall be payable, the relation
which such dividends shall bear to the dividends payable on any other
class or classes or any other series of any class or classes of
stock, and whether such dividends shall be cumulative, and if so,
from which date or dates for such series;
(c) whether or not the shares of such series shall be subject to
redemption by the Corporation and the times, prices, and other terms
and conditions of such redemption;
(d) whether or not the shares of such series shall be subject to
the operation of a sinking fund or purchase fund to be applied to the
purchase or redemption of such shares and if such a fund be
established, the amount thereof and the terms and provisions relative
to the application thereof;
(e) whether or not the shares of such series shall be
convertible into or exchangeable for shares of any other class or
classes, or of any other series of any class or classes of stock of
the Corporation and if provision be made for conversion or exchange,
the times, prices, rates, adjustments, and other terms and conditions
of such conversion or exchange;
(f) whether or not the shares of such series shall have voting
rights, in addition to the voting rights provided by law, and if they
are to have such additional voting rights, the extent thereof;
(g) the rights of the shares of such series in the event of any
liquidation, dissolution, or winding up of the Corporation or upon
any distributions of its assets; and
(h) any other powers, preferences, and relative, participating,
optional, or other special rights of the shares of such series, and
qualifications, limitations, or restrictions thereof, to the full
extent now or hereafter permitted by law and not inconsistent with
the provisions hereof.
All shares of any one series of preferred Stock shall be identical in all respects except as
to the dates from which dividends thereon shall be cumulative. All series of the Preferred Stock
shall rank equally and be identical in all respects except as otherwise provided in the resolution
or resolutions providing for the issue of any series of Preferred Stock.
Whenever dividends upon the Preferred Stock at the time outstanding, to the extent of the
preference to which such stock is entitled, shall have been paid in full or declared and set apart
for payment for all past dividend periods, and after the provisions for any sinking or purchase
fund or funds for any series of Preferred Stock shall have been complied with, the Board of
Directors may declare and pay dividends on the Common Stock, payable in cash, stock, or otherwise,
and the holders of shares of Preferred Stock shall not be entitled to share therein, subject to the
provisions of the resolution or resolutions creating any series of Preferred stock.
In the event of any liquidation, dissolution, or winding up of the Corporation or upon the
distribution of the assets of the Corporation, all assets and funds of the Corporation remaining,
after the payment to the holders of the Preferred Stock of the full preferential amounts to which
they shall be entitled as provided in the resolution or resolutions creating any series thereof,
shall
be divided and distributed among the holders of the Common Stock ratably, except as may otherwise
be provided in any such resolution or resolutions. Neither the merger or consolidation of the
Corporation with another corporation nor the sale or lease of all or substantially all the assets
of the Corporation shall be deemed to be a liquidation, dissolution, or winding up of the
Corporation or a distribution of its assets.
Except as otherwise required by law or provided by a resolution or resolutions of the Board of
Directors creating any series of Preferred Stock, the holders of Common Stock shall have the
exclusive power to vote and shall have one vote in respect of each share of such stock held and the
holders of Preferred Stock shall have no voting power whatsoever. Except as otherwise provided in
such a resolution or resolutions, the authorized shares of any class or classes may be increased or
decreased by the affirmative vote of the holders of a majority of the outstanding shares of stock
of the Corporation entitled to vote.
FIFTH: The name and mailing address of each incorporator is as follows:
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NAME
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MAILING ADDRESS
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Cornelius S. Van Rees
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40 Wall Street, New York, NY 10005
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Edward A. Bacon, Jr.
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40 Wall Street, New York, NY 10005
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SIXTH: Elections of directors need not be by written ballot unless the by-laws of the
corporation shall so provide.
SEVENTH: The books of the corporations may be kept (subject to any provision contained in
the statutes) outside the State of Delaware at such place or places as may be designated from time
to time by the board of directors or in the by-laws of the corporation.
EIGHTH: Any or all of the Directors may be removed at any time, but only for cause, by the
Shareholders at any meeting of Shareholders, called for the purpose, by the affirmative vote of 75%
of the shares of the Corporation entitled to vote and, if a corporation, person or other entity
owns more than 50% of the shares of the Corporation entitled to vote, by
the affirmative vote of the holders of a majority of the shares of the Corporation entitled to vote
and not owned by the majority shareholder.
NINTH: The percentage of the votes cast at any meeting of shareholders that shall be necessary
for the transaction of any business shall be as required by law and by the following provisions,
and any purported shareholder action not in compliance herewith and any purported transaction not
in compliance herewith, shall be void.
(a) Except as set forth in paragraph (b) of this Article NINTH:
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(i)
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any merger or
consolidation of the Corporation with or into any other
corporation;
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(ii)
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any sale, lease,
exchange or other disposition of all or substantially
all of the assets of the Corporation to or with any
other corporation, person or other entity; or
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(iii)
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the issuance or
disposition by the Corporation of any of its securities
to any other corporation, person or other entity in
exchange for cash, securities or other assets, or a
combination thereof
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shall require the affirmative vote of the holders of
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(iv)
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75% of the shares
of the Corporation entitled to vote, and
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(v)
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a majority of the shares of the Corporation entitled to vote which are not
owned by such other corporation, person or entity,
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if, as of the record date for the determination of shareholders entitled to notice thereof and to
vote thereon, such other corporation, person or entity which is a party to such transaction is the
owner
of 5% or more of the shares of the Corporation entitled to vote. Such affirmative vote shall be
required notwithstanding the fact that no vote may be required or that some lesser percentage may
be specified by law or in any agreement with any national securities exchange
.
(b) The provisions of paragraph (a) of this Article NINTH shall
not apply to any transaction in which the Corporation and one or more
subsidiaries of the Corporation are the only parties, nor to any
other transaction described in clauses (i), (ii) or (iii) of
paragraph (a) of this Article if
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(i)
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the Board of
Directors of the Corporation shall have approved the
transaction between the Corporation and the other
corporation, person or entity with whom the transaction
is proposed prior to the time such other corporation,
person or entity shall have become the owner of 5% of
the shares of the Corporation entitled to vote; or
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(ii)
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the transaction
is approved prior to its consummation by the affirmative
vote of two-thirds of the Directors who are not involved
with or representing the corporation, person or entity
with whom the transaction is proposed.
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TENTH: The By-laws of the Corporation may not be amended except (a) by the Board of Directors, (b)
by the Shareholders voting upon a proposal recommended by the affirmative vote of 75% of the entire
Board of Directors, or (c) by the affirmative vote of (i) the holders of 75% of the shares of the
Corporation entitled to vote and (ii) if any corporation, person, or other entity owns more than
50% of the shares of the Corporation entitled to vote, the
holders of a majority of the shares of the Corporation entitled to vote and not owned by the
majority shareholder.
ELEVENTH: Unless recommended to the Shareholders by the affirmative vote of 75% of the entire
Board of Directors, the affirmative vote of the holders of 75% of the shares of the Corporation
entitled to vote shall be required for any amendment of this Certificate of Incorporation by the
Shareholders, and, if a corporation, person or other entity owns more than 50% of the shares of the
Corporation entitled to vote, such amendment shall also require the affirmative vote of the holders
of a majority of the shares of the Corporation entitled to vote and not owned by the majority
shareholder.
TWELFTH:
(a) The Board of Directors of the Corporation shall have the
power and duty to determine, on the basis of information then known
to it, (i) whether any corporation, person or other entity owns 5% or
more of the shares of the Corporation entitled to vote, or is an
affiliate or an associate (as defined below) of another, (ii)
whether any proposed sale, lease, exchange, or other disposition of
part of the assets of the Corporation involves substantially all of
the assets of the Corporation, and (iii) whether any approval by
Shareholders or Directors of the Corporation, purporting to comply
with the requirements of
this Certificate of Incorporation, the By-Laws of the Corporation, or applicable law, is
substantially consistent with the transaction to which it relates. Any such determination by the
Board of Directors shall be conclusive and binding for all purposes of this Certificate of
Incorporation.
(b) For purposes of determining ownership of the Corporations shares under Articles EIGHTH through TWELFTH of this Certificate of Incorporation,
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(i)
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a corporation,
person or other entity shall be deemed to be the owner
of any shares of the Corporation registered in its name
on the books of the Corporation and of any shares of the
Corporation (1) which it has the right to acquire
pursuant to any agreements, or upon exercise of
conversion rights, warrants or options or otherwise, or
(2) which are beneficially owned, directly, or
indirectly (including shares deemed owned through
application of clause (1) above), by any other
corporation, person or other entity (x) with which it or
its affiliate or associate (as defined below) has
any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of
shares of the Corporation or (y) which is its
affiliate or associate as those terms were defined
in rule 12b-2 of the General Rules and Regulations of
the Securities Exchange Act of 1934 as in effect on
March 25, 1976,
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(ii)
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shares of the
Corporation entitled to vote shall mean such shares as
are entitled to vote generally in the election of
Directors, considered as one class, and
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(iii)
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the shares of the Corporation entitled to vote
shall include any shares deemed owned through the
application of clauses (1) and (2) of paragraph (i)
above but shall not include any other shares that may
be issuable by the Corporation pursuant to any
agreement, or upon the exercise of conversion rights,
warrants, options, or otherwise.
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THIRTEENTH: Whenever a compromise or arrangement is proposed between this corporation and its
creditors or any class of them and/or between this corporation and its stockholders or any class of
them, any court of equitable jurisdiction within the State of Delaware may, on the application in a
summary way of this corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this corporation under the provisions of Section 291 of
Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or
receivers appointed for this corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of this corporation, as the case may be, to be summoned in such manner as the
said court directs. If a majority in number representing three-fourths in value of the creditors
or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as
the case may be, agree to any compromise or arrangement and to any reorganization of this
corporation as consequence of such compromise or arrangement and to any reorganization of this
corporation as consequence of such compromise or arrangement, the said compromise or arrangement
and the said reorganization shall, if sanctioned by the court to which the said application has
been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or
class of stockholders, of this corporation, as the case may be, and also on this corporation.
WE, THE UNDERSIGNED, being each of the incorporators hereinbefore named, for the purpose of
forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make
this certificate, hereby declaring and certifying that this is our act and deed and the facts
herein stated are true, and accordingly have hereunto set our hands this 4
th
day of
March, 1983
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INCORPORATOR:
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/s/ Cornelius S. Van Rees
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(Signature)
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Cornelius S. Van Rees
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40 Wall Street
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New York, New York 10005
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INCORPORATOR:
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/s/ Edward A. Bacon, Jr.
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(Signature)
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Edward A. Bacon, Jr.
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40 Wall Street
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New York, New York 10005
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CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
Graham Corporation, a corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
FIRST: That a meeting of the Board of Directors of Graham Corporation held on March 14, 1986,
resolutions were duly adopted setting forth a proposed amendment to the Restated Certificate of
Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting
of the stockholders of said corporation for consideration thereof. The resolution setting forth
the proposed amendment is as follows:
RESOLVED, that the Restated Certificate of Incorporation of
this corporation be amended by changing Article 4, paragraph 1
thereof so that, as amended said Article shall be and read as
follows:
The total number of shares of all classes of stock which the
corporation shall have authority to issue is 3,500,000 shares, of
which 500,000 shares shall be shares of Preferred Stock having a par
value of $1.00 each (hereinafter called Preferred Stock) and
3,000,000 shares shall be shares of Common Stock having a par value
of $0.10 each (hereinafter called Common Stock).
SECOND: That thereafter, pursuant to resolution of its Board of Directors, an annual meeting
of the stockholders of said corporation was duly called and held on May 27, 1986, upon notice in
accordance with Section 222 of the General Corporation Law of the State of Delaware at which
meeting the necessary number of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said Graham Corporation has caused this certificate to be signed by
Frederick D. Berkeley its Chairman of the Board of Directors, and attested by Cornelius S. Van
Rees, its Secretary, this 1
st
day of July, 1986.
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By:
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/s/ Frederick D. Berkeley
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Chairman of the Board of Directors
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ATTEST:
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By:
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/s/ Cornelius S. Van Rees
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Secretary
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CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
Graham Corporation, a corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
FIRST: That a meeting of the Board of Directors of Graham Corporation held on February 26,
1987, resolutions were duly adopted setting forth a proposed amendment to the Restated Certificate
of Incorporation of said corporation, declaring said amendment to be advisable and calling a
meeting of the stockholders of said corporation for consideration thereof. The resolution setting
forth the proposed amendment is as follows:
RESOLVED, that the Restated Certificate of Incorporation of
this corporation be amended by adding an Article Fourteen, said
Article to be as follows:
FOURTEENTH
Section 1. To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or may hereafter be amended, a
director of this corporation shall not be liable to the corporation
or to any of its stockholders for monetary damages for breach of
fiduciary duty as a director.
Any repeal or modification of the foregoing paragraph by the
stockholders of the corporation shall not adversely affect any right
or protection of a director of the corporation existing at the time
of such repeal or modification.
Section 2. A director or officer of this corporation shall be
indemnified by the corporation against any liabilities incurred in
his capacity as a director or officer, such indemnification to
include payment by the corporation of expenses incurred in defending
a proceeding in advance of its final disposition, to the fullest
extent permitted by the Delaware General Corporation Law or as may
be provided by written agreement with the corporation.
The right to indemnification conferred in this Section, including
the payment of expenses incurred in defending a proceeding in
advance of its final disposition, shall not be exclusive of any
other right which a director or officer may have or hereafter
acquire under any statute, provision of the Certificate of
Incorporation, by-law, agreement, vote of stockholders or
disinterested directors or otherwise.
SECOND: That thereafter, pursuant to resolution of its Board of Directors, an annual meeting
of the stockholders of said corporation was duly called and held on June 29, 1987, upon notice in
accordance with Section 222 of the General Corporation Law of the State of Delaware at which
meeting the necessary number of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said Graham Corporation has caused this certificate to be signed by
Frederick D. Berkeley, its Chairman of the Board of Directors, and attested by Cornelius S. Van
Rees, its Secretary, this 20th day of July, 1987.
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GRAHAM CORPORATION
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By
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/s/ Frederick D. Berkeley
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Frederick D. Berkeley
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Chairman of the Board of Directors
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ATTEST:
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By:
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/s/ Cornelius S. Van Rees
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Cornelius S. Van Rees
Secretary
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CERTIFICATE FOR RENEWAL AND REVIVAL
OF
CERTIFICATE OF INCORPORATION
OF
GRAHAM CORPORATION
* * * * *
GRAHAM CORPORATION, a corporation organized under the laws of Delaware, the Certificate of
Incorporation of which was filed in the office of the Secretary of State on the 7th day of March,
1983, the Certificate of Incorporation of which was voided for non-payment of taxes, now desires to
procure a restoration, renewal and revival of its Certificate of Incorporation, and hereby
certifies as follows:
1. The name of this corporation is
GRAHAM CORPORATION
2. Its registered office in the State of Delaware is located at Corporation Trust Center, 1209
Orange Street, City of Wilmington, County of New Castle and the name of its registered agent at
such address is The Corporation Trust Company.
3. The date when the restoration, renewal, and revival of the Certificate of Incorporation of
this company is to commence is the 29th day of February, 1988, same being prior to the date of the
expiration of the Certificate of Incorporation. This renewal and revival of the Certificate of
Incorporation of this corporation is to be perpetual.
4. This corporation was duly organized under the Laws of the State of Delaware and carried on
the business authorized by its Certificate of Incorporation until the 1st day of March, 1988, at
which time its Certificate of Incorporation became inoperative and void for non-
payment of taxes and this Certificate for Renewal and Revival is filed by authority of the
duly elected directors of the corporation in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, said GRAHAM CORPORATION, in compliance with Section 312 of Title 8 of the
Delaware Code, has caused this Certificate to be signed by Alvin L. Snyder, its last and acting
Vice President, and attested by Cornelius S. Van Rees, its last and acting Secretary, this
thirtieth day of August, 1988.
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GRAHAM CORPORATION
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By
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/s/ Alvin L. Snyder
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Its Last and Acting Vice President
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ATTEST:
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By:
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/s/ Cornelius S. Van Rees
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Its Last and Acting Secretary
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CERTIFICATE OF AMENDMENT
OF RESTATED CERTIFICATE OF INCORPORATION OF
GRAHAM CORPORATION
Graham Corporation, a corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
FIRST: That a meeting of the Board of Directors of Graham Corporation held on February 23,
1990, resolutions were duly adopted setting forth a proposed amendment to the Restated Certificate
of Incorporation of said corporation, declaring said amendment to be advisable and calling a
meeting of the stockholders of said corporation for consideration thereof. The resolution setting
forth the proposed amendment is as follows:
RESOLVED, that the Restated Certificate of Incorporation of
this corporation be amended by changing Article 4, paragraph 1
thereof so that, as amended said Article shall be and read as
follows:
The total number of shares of all classes of stock which the
corporation shall have authority to issue is 6,500,000 shares, of
which 500,000 shares shall be shares of Preferred Stock having a par
value of $1.00 each (hereafter called Preferred Stock) and 6,000,000
shares shall be shares of Common Stock having a par value of $0.10
each (hereinafter called Common Stock).
SECOND: That thereafter, pursuant to resolution of its Board of Directors, an annual meeting
of the stockholders of said corporation was duly called and held on May 17, 1990 upon notice in
accordance with Section 222 of the General Corporation Law of the State of Delaware at which
meeting the necessary number of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said Graham Corporation has caused this certificate to be signed by
Frederick D. Berkeley, its Chairman of the Board of Directors, and attested by Cornelius S. Van
Rees, its Secretary, this 17th day of May, 1990.
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GRAHAM CORPORATION
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By
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/s/ Frederick D. Berkeley
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Frederick D. Berkeley
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Chairman of the Board of Directors
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ATTEST:
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By:
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/s/ Cornelius S. Van Rees
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Secretary
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CERTIFICATE OF MERGER
OF
GRAHAM MANUFACTURING CO., INC.
INTO
GRAHAM CORPORATION
The undersigned corporation DOES HEREBY CERTIFY:
First:
That the name and state of incorporation of each of the constituent
corporations of the merger is as follows:
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Name
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State of Incorporation
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GRAHAM MANUFACTURING CO., INC.
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New York
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GRAHAM CORPORATION
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Delaware
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Second:
That an Agreement of Merger between the parties to the merger has been
approved, adopted, certified, executed and acknowledged by each of the constituent corporations in
accordance with the requirements of section 252 of the General Corporation Law of Delaware.
Third:
That the name of the surviving corporation of the merger is GRAHAM
CORPORATION, a Delaware corporation.
Fourth:
That the Certification of Incorporation of GRAHAM CORPORATION, a Delaware
corporation which is surviving the merger, shall be the Certificate of Incorporation of the
surviving corporation.
Fifth:
That the executed Agreement of Merger is on file at an office of the surviving
corporation, the address of which is 20 Florence Avenue, Batavia, New York 14020.
Sixth:
That a copy of the Agreement of Merger will be furnished by the surviving
corporation, on request and without cost, to any stockholder of any constituent corporation.
Seventh:
The authorized capital stock of each foreign corporation which is a party to
the merger is as follows:
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Par Value per Share
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Or statement that
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Number of
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shares are without
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Corporation
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Class
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Shares
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par value
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Graham Manufacturing Co., Inc.
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Common
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1,000
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$
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0.10
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Eighth:
That this Certificate of Merger shall be effective on January 1, 1999.
Dated: December 22, 1998
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GRAHAM CORPORATION
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By
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/s/ A. Cadena
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A. Cadena
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President & Chief Executive Officer
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CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES A
JUNIOR PARTICIPATING PREFERRED STOCK OF GRAHAM CORPORATION
Pursuant to Section 151 of the General Corporation Law of the State of Delaware
We, Alvaro Cadena, and Cornelius S. Van Rees, being the President and Chief Executive Officer
and the Secretary, respectively, of
Graham Corporation
, a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
Corporation
), in
accordance with the provisions of Sections 103 and 151 thereof,
Do Hereby Certify
:
That, pursuant to the authority conferred upon the board of directors of the Corporation (the
Board
) by the Certificate of Incorporation of the Corporation, the Board at a meeting duly called
and held on July 27, 2000, at which a quorum was present and acting throughout, duly adopted the
following resolution creating a series of sixty thousand (60,000) shares of Preferred Stock, par
value ONE DOLLAR ($1.00) per share, designated Series A Junior Participating Preferred Stock:
Resolved
, that, pursuant to the authority vested in the Board in
accordance with the provisions of its Certificate of Incorporation, a series of
preferred stock of the Corporation to be designated Series A Junior Participating
Preferred Stock, par value ONE DOLLAR ($1.00) per share (the
Preferred Stock
),
be, and it hereby is, created, the designations and amount thereof and the voting
powers, preferences and relative, participating, optional and other special rights
of the shares of such series, and the qualifications, limitations and restrictions
thereof, to be as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
SECTION 1.
Designation and Amount
. The shares of such series shall be designated as
Series A Junior Participating Preferred Stock, par value ONE DOLLAR ($1.00) per share, and the
number of shares constituting such series shall be sixty thousand (60,000). Such number of shares
may be increased or decreased by resolution of the Board; provided, that no decrease shall reduce
the number of shares of Series A Junior Participating Preferred Stock to a number less than the
number of shares then outstanding plus the number of shares reserved for issuance upon the exercise
of outstanding options, rights or warrants or upon the conversion of any outstanding securities
issued by the Corporation convertible into Series A Junior Participating Preferred Stock.
SECTION
2.
Dividends and Distributions
.
Subject to the rights of the holders of any shares of any series of preferred stock (or any
similar stock) ranking prior and superior to the Series A Junior Participating Preferred Stock with
respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock, in
preference to the holders of Common Stock, par value TEN CENTS ($0.10) per share (the
Common
Stock
), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as
and if declared by the Board out of funds legally available for the purpose, quarterly dividends
payable in cash on the first day of March, June, September and December in each
year (each such
date being referred to herein as a Quarterly Dividend Payment Date)
, commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of
Series A Junior Participating Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) ONE DOLLAR ($1.00) or (b)
subject to the provision for adjustment hereinafter set forth, one hundred (100) times the
aggregate per share amount of all cash dividends, and one hundred (100) times the aggregate per
share amount (payable in kind) of all non-cash dividends or other distributions, other than a
dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock since the immediately
preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series A Junior Participating
Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of
Common Stock, then in each such case the amount to which holders of shares of Series A Junior
Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(b) The Corporation shall declare a dividend or distribution on the Series A Junior
Participating Preferred Stock as provided in paragraph (a) of this Section immediately after it
declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of
Common Stock); provided, that in the event no dividend or distribution shall have been declared on
the Common Stock during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of ONE DOLLAR ($1.00) per share on the
Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior
Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of
issue of such shares, unless the date of issue of such shares is prior to the record date for the
first Quarterly Dividend Payment Date, in which ease dividends on such shares shall begin to accrue
from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment
Date or is a date after the record date for the determination of holders of shares of Series A
Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and
be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not
bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an
amount less than the total amount of such dividends at the time accrued and payable on such shares
shall be allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board may fix a record date for the determination of holders of shares of Series A
Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be not more than sixty (60) days prior to the date fixed
for the payment thereof.
SECTION 3.
Voting Rights
. The holders of shares of Series A Junior Participating
Preferred Stock shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth, each share of Series A
Junior Participating Preferred Stock shall entitle the holder thereof to one hundred (100) votes on
all matters submitted to a vote of the stockholders of the Corporation. In the event the
Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number
of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were
entitled immediately prior to such event shall be adjusted by multiplying such number by a
fraction, the numerator of which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) Except as otherwise provided herein, in any other resolution creating a series of
preferred stock or any similar stock, in any amendment to the Certificate of Incorporation of the
Corporation or bylaw, the holders of shares of Series A Junior Participating Preferred Stock and
the holders of shares of Common Stock and any other capital stock of the Corporation having general
voting rights shall vote together as one class on all matters submitted to a vote of stockholders
of the Corporation.
(c) Except as set forth herein, or as otherwise provided by law, holders of Series A Junior
Participating Preferred Stock shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
SECTION
4.
Certain Restrictions
.
(a) Whenever quarterly dividends or other dividends or distributions payable on the Series A
Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until
all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A
Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation
shall not:
(i) declare or pay dividends, or make any other distributions, on any shares of stock ranking
junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A
Junior Participating Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking
on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series
A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior
Participating Preferred Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such shares are then
entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking
junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A
Junior Participating Preferred Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock
of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or
winding up) to the Series A Junior Participating Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Junior
Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior
Participating Preferred Stock, except in accordance with a purchase offer made in writing or by
publication (as determined by the Board) to all holders of such shares upon such terms as the
Board, after consideration of the respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in good faith will result in fair
and equitable treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation to purchase or
otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation
could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such
time and in such manner.
SECTION 5.
Reacquired Shares
. Any shares of Series A Junior Participating Preferred
Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired
and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of preferred stock and may be reissued as part of a new
series of preferred stock subject to the conditions and restrictions on issuance set forth herein,
in a resolution of the Board, in the Certificate of Incorporation of the Corporation, or in any
other Certificate of Amendment creating a series of preferred stock or any similar stock or as
otherwise required by law.
SECTION 6.
Liquidation, Dissolution or Winding Up
. Upon any liquidation, dissolution
or winding up of the Corporation, no distribution shall be made (a) to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the
Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of
Series A Junior Participating Preferred Stock shall have received the greater of (i) ONE HUNDRED
DOLLARS ($100.00) per share, plus an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment, or (ii) an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to one hundred (100)
times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (b)
to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Junior Participating Preferred Stock, except
distributions made ratably on the Series A Junior Participating Preferred Stock and all such parity
stock in proportion to the total amounts to which the holders of all such shares are entitled upon
such liquidation, dissolution or winding up. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to
which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately
prior to such event under the provison in clause (a) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
SECTION 7.
Consolidation, Merger, Etc
. In case the Corporation shall enter into any
consolidation, merger, combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other property, then in
any such case each share of Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to one hundred (100) times the aggregate amount of stock, securities,
cash and/or any other property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the amount set forth in
the preceding sentence with respect to the exchange or change of shares of Series A Junior
Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
SECTION 8.
No Redemption
. The shares of Series A Junior Participating Preferred Stock
shall not be redeemable, except as otherwise provided herein.
SECTION 9.
Rank
. The Series A Junior Participating Preferred Stock shall rank, with
respect to the payment of dividends and the distribution of assets, junior to all other series of
the Corporations preferred stock.
SECTION 10.
Amendment
. At any time that any shares of Series A Preferred Stock are
outstanding, the Certificate of Incorporation of the Corporation shall not be amended in any
manner, nor shall the Board take any action, which would materially alter or change the powers,
preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect
them adversely without the affirmative vote of the holders of at least three-fourths (3/4) of the
outstanding shares of Series A Junior Participating Preferred Stock, voting together as a single
class.
SECTION 11.
Fractional Shares
. Series A Junior Participating Preferred Stock may be
issued in fractions of a share, which shall entitle the holder, in proportion to such holders
fractional shares, to exercise voting rights, receive dividends, participate in distributions and
to have the benefit of all other rights of holders of Series A Junior Participating Preferred
Stock.
In Witness Whereof
, Graham Corporation has caused this certificate to be executed by
its President and Chief Executive Officer and by its Secretary this 29th day of August, 2000.
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Graham Corporation
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By:
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/s/ Alvaro Cadena
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Name:
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Alvaro Cadena
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Title:
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President and Chief Executive Officer
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By:
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/s/ Cornelius S. Van Rees
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Name:
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Cornelius S. Van Rees
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Title:
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Secretary
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CERTIFICATE
OF AMENDMENT
TO
THE CERTIFICATE OF INCORPORATION
OF
GRAHAM CORPORATION
Pursuant to Section 242 of the General Corporation Law of the State of Delaware, Graham
Corporation, a corporation organized and existing under and by virtue of the General Corporation
Law of the State of Delaware,
DOES HEREBY CERTIFY
:
FIRST
: That the Board of Directors of said corporation, at a meeting duly convened and held on May
29, 2008, adopted a resolution proposing and declaring advisable the following amendment to the
Certificate of Incorporation of said corporation:
RESOLVED, that the Certificate of Incorporation of Graham
Corporation be amended by restating the Fourth Article so that, as
amended, said Article shall read as follows:
The total number of shares of all classes of stock which the
corporation shall have authority to issue is 26,000,000 shares, of
which 500,000 shares shall be shares of Preferred Stock having a par
value of $1.00 each (hereafter called Preferred Stock) and
25,500,000 shares shall be shares of Common Stock having a par value
of $0.10 each (hereinafter called Common Stock).
SECOND
: That such amendment has been duly adopted by the affirmative vote of the holders of a
majority of the stock entitled to vote at the annual meeting of stockholders in accordance with the
provisions of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF
, the above mentioned corporation has caused this certificate to be signed by
James R. Lines, its President and Chief Executive Officer, this 31st day of July, 2008.
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By:
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/s/ James R. Lines
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James R. Lines, President and Chief
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Executive Officer
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EXHIBIT 10.1
FORM OF
NON-QUALIFIED STOCK OPTION AGREEMENT (Directors)
This NON-QUALIFIED STOCK OPTION AGREEMENT (Agreement) is made and entered into as of the
day of
, by and between Graham Corporation, a corporation organized and
existing under the laws of the State of Delaware and having an office at 20 Florence Avenue,
Batavia, New York 14020 (Company) and
(Option Holder).
W I
T N E S S E T H
:
WHEREAS, by action of its Board of Directors (Board), the Company has adopted the 2000
Graham Corporation Incentive Plan to Increase Shareholder Value (Plan), pursuant to which
Non-Qualified Stock Options with respect to shares of common stock of the Company (Shares) may be
granted to the Companys eligible officers, employees and directors; and
WHEREAS, pursuant to Article III of the Plan, a Compensation Committee (Committee) has been
appointed to select the individuals to whom Non-Qualified Stock Options shall be granted and to
prescribe the terms and conditions of such grants; and
WHEREAS, the Committee has determined that the Option Holder is eligible to be granted a
Non-Qualified Stock Option and desires to grant a Non-Qualified Stock Option to the Option Holder,
and the Option Holder desires to accept such grant, on the terms and conditions hereinafter set
forth;
NOW, THEREFORE, the Company and the Option Holder hereby agree as follows:
Section 1.
Grant of Non-Qualified Stock Option
. The Company hereby grants, and the
Option Holder hereby accepts the Companys grant of, a Non-Qualified Stock Option to purchase
Shares (Optioned Shares), on the terms and conditions hereinafter set forth.
Section 2.
Option Period
. Subject to the vesting and other limitations contained in
Section 4, elsewhere in this Option Agreement and in the Plan, the Option Holder shall have the
right to purchase all or any portion of the vested Optioned Shares at any time during a period
(Option Period) which shall commence on the date six months and one day following the date first
above written and shall end on the earliest to occur of the following dates:
(a) the last day of the one-year period commencing on the date the Eligible Outside Director
ceases to be a member of the Board for reasons other than on account of death, Disability or
retirement as a member of the Board after age 65;
(b) the last day of the three-year period commencing on the date the Eligible Outside Director
ceases to be a member of the Board on account of death, Disability or retirement as a member of the
Board after age 65; or
(c) the last day of the ten year period commencing on the date on which the Option was
granted.
Section 3.
Exercise Price
. The Option Holder shall have the right to purchase all or
any portion of the vested Optioned Shares at a price per Share equal to $
(Exercise
Price) payable (a) in United States dollars in cash or by certified check, money order or bank
draft payable to the order of Graham Corporation, (b) in Shares duly endorsed for transfer and with
all necessary stock transfer tax stamps attached, already owned by the Option Holder and having a
fair market value equal to the Exercise Price, such fair market value to be determined in such
manner as may be provided by the Committee or as may be required in order to comply with or conform
to the requirements of any applicable laws or regulations, or (c) in a combination of United States
dollars and such Shares.
Section 4.
Vesting;
Limitations on Exercise
.
(a) The shares underlying this Option shall vest and become exercisable 25 percent per year,
commencing one year following the date this Option was granted to the Option Holder (e.g., if this
Option is for an aggregate of 2,000 shares, 500 of such shares shall vest and become exercisable
one year following the date of this Option, 500 of such shares shall vest and become exercisable
two years following the date of this Option, 500 of such shares shall vest and become exercisable
three years following the date of this Option and 500 of such shares shall vest and become
exercisable four years following the date of this Option). Except as otherwise provided by Section
4(b), upon the Option Holder ceasing to be a member of the Companys Board of Directors, Optioned
Shares which have not previously vested shall not thereafter vest or become exercisable under the
Option. In addition, shares underlying this Option and this Option itself shall be subject to
Section 2 and as well as to all other requirements imposed by applicable laws, rules or
regulations.
(b) Notwithstanding Section 4(a), the Option shall immediately vest and become exercisable
with respect to all Optioned Shares upon the death, Disability or Retirement of the Option Holder.
For purposes of this Agreement, Retirement shall mean a voluntary separation from service by an
Option Holder who is at least age 60 and who has been a member of the Companys Board of Directors
for ten or more years.
Section 5.
Method of Exercise
. The Option Holder may, at any time during the Option
Period, exercise his right to purchase all or any part of the Optioned Shares then available for
purchase; provided, however, that the minimum number of Optioned Shares which may be purchased
shall be one hundred (100) or, if less, the total number of Optioned Shares then available for
purchase. The Option Holder shall exercise such right by:
(a) giving written notice to the Compensation Committee of the Board of Directors of Graham
Corporation (Committee), in the form attached hereto as Exhibit A with such form completed and
delivered to the Companys Chief Accounting Officer; and
(b) delivering to the Committee full payment of the Exercise Price for the Optioned Shares to
be purchased.
As soon as is practicable following the date on which the Option Holder has satisfied the
requirements of this section 5, the Committee shall take such action as is necessary to cause the
Company to issue a stock certificate evidencing the Option Holders ownership (or the ownership of
such other person as the Option Holder may, by written notice to the Committee, designate) of the
Optioned Shares that have been purchased. The Option Holder or other person shall have no right to
vote or to receive dividends, nor have any other rights with respect to Optioned Shares, prior to
the date as of which such Optioned Shares are transferred to him on the stock transfer records of
the Company, and no adjustments shall be made for any dividends or other rights for which the
record date is prior to the date as of which such transfer is effected, except as may be required
under Section 8.
Section 6.
Registration and Delivery of Optioned Shares
. The Companys obligation to
deliver Shares under this Agreement shall, if the Committee so requests, be conditioned upon the
receipt of a representation as to the investment intention of the Option Holder to whom such Shares
are to be delivered, in such form as the Committee shall determine to be necessary or advisable to
comply with the provisions of applicable federal, state or local law. It may be provided that any
such representation shall become inoperative upon a registration of the Shares or upon the
occurrence of any other event eliminating the necessity of such representation. The Company shall
not be required to deliver any Shares under this Agreement prior to (a) the admission of such
Shares to listing on any stock exchange on which Shares may then be listed, or (b) the completion
of such registration or other qualification under any state or federal law, rule or regulations as
the Committee shall determine to be necessary or advisable.
Section 7.
Effect of Exercise of Appreciation Right
. In the event that the Option
Holder shall be granted an Appreciation Right with respect to all or any portion of the Optioned
Shares, the exercise of such Appreciation Right shall automatically result in a reduction of the
number of Optioned Shares available for purchase hereunder by the number of Shares as to which such
Appreciation Right is exercised.
Section 8.
Adjustments in the Event of Reorganization
.
(a) In the event of any merger, consolidation, or other business reorganization in which the
Company is the surviving entity, and in the event of any stock split, stock dividend or other event
generally affecting the number of Shares held by each person who is then a shareholder of record,
the number of Optioned Shares shall be adjusted to account for such event. Such adjustment shall
be effected by multiplying:
(i) such number of Optioned Shares by
(ii) an amount equal to the number of Shares that would be owned after such event by a person
who, immediately prior to such event, was the holder of record of one Share;
and the Exercise Price shall be adjusted by dividing the Exercise Price by the amount determined
under section 8(a)(ii); provided, however, that the Committee may, in its discretion, establish
another appropriate method of adjustment.
(b) In the event of any merger, consolidation, or other business reorganization in which the
Company is not the surviving entity:
(i) Any Non-Qualified Stock Options granted under this Agreement that remain outstanding may
be canceled by the Board upon at least thirty days written notice to each Option Holder in advance
of the effective date of such merger, consolidation, business reorganization, liquidation or sale;
and
(ii) Any Non-Qualified Stock Option which is not canceled pursuant to section 8(b)(i) shall be
adjusted in such manner as the Committee shall deem appropriate to account for such merger,
consolidation or other business reorganization.
Section 9.
No Right to Continued Board Membership
. Nothing in this Agreement, nor
any action of the Board or Committee with respect to this Agreement, shall be held or construed to
confer upon the Option Holder any right to a continuation of membership on the Board of the Company
or any of its affiliates. The Option Holder may be dealt with in the same manner as if this
Agreement had not been entered into.
Section 10.
Taxes
. Where any person is entitled to receive Shares pursuant to the
exercise of the Non-Qualified Stock Option granted hereunder, the Company shall have the right to
require such person to pay to the Company the amount of any tax which the Company is required to
withhold with respect to such Shares, or, in lieu thereof, to retain, or to sell without notice, a
sufficient number of Shares to cover the amount required to be withheld.
Section 11.
No Assignment
. The Non-Qualified Stock Option granted hereunder shall
not be subject in any manner to anticipation, alienation or assignment, nor shall such
Non-Qualified Stock Option be liable for or subject to debts, contracts, liabilities, engagements
or torts, nor shall it be transferable by the Option Holder other than by will or by the laws of
descent and distribution. During the lifetime of the Option Holder, the Non-Qualified Stock Option
granted hereunder shall be exercisable only by him.
Section 12.
Notices
. Any communication required or permitted to be given under the
Plan, including any notice, direction, designation, comment, instruction, objection or waiver,
shall be in writing and shall be deemed to have been given at such time as it is delivered
personally or five (5) days after mailing if mailed, postage prepaid, by registered or certified
mail, return receipt requested, addressed to such party at the address listed below, or at such
other address as one such party may by written notice specify to the other party:
(a) If to the Committee:
Graham Corporation
20 Florence Avenue
Batavia, New York 14020
Attention:
Chief Accounting Officer
(b) If to the Option Holder, to the Option Holders then current residential address.
Section 13.
Successors and Assigns
. This Agreement shall inure to the benefit of and
shall be binding upon the Company and the Option Holder and their respective heirs, successors and
assigns.
Section 14.
Construction of Language
. Whenever appropriate in the Agreement, words
used in the singular may be read in the plural, words used in the plural may be read in the
singular, and words importing the masculine gender may be read as referring equally to the feminine
or the neuter. Any reference to a section shall be a reference to a section of this Agreement,
unless the context clearly indicates otherwise. Capitalized terms not specifically defined herein
shall have the meanings assigned to them under the Plan.
Section 15.
Governing Law
. This Agreement shall be construed, administered and
enforced according to the laws of the State of New York without giving effect to the conflict of
laws principles thereof, except to the extent that such laws are preempted by federal law.
Section 16.
Amendment
. This Agreement may be amended, in whole or in part and in any
manner not inconsistent with the provisions of the Plan, at any time and from time to time by
written agreement between the Company and the Option Holder.
Section 17.
Plan Provisions Control
. This Agreement and the rights and obligations
created hereunder shall be subject to all of the terms and conditions of the Plan. In the event of
any conflict between the provisions of the Plan and the provisions of this Agreement, the terms of
the Plan, which are incorporated herein by reference, shall control. By signing this Agreement,
the Option Holder acknowledges receipt of a copy of the Plan.
Section 18.
Acceptance by Option Holder
. By executing this Agreement and returning a
fully executed copy hereof to the Committee at the address specified in section 12, the Option
Holder signifies his acceptance of the terms and conditions of this Non-Qualified Stock Option. If
a fully executed copy of this Agreement is not received by the Committee within forty-five days
after the date when it is presented to the Option Holder, the Committee may revoke the
Non-Qualified Stock Option granted, and thereby avoid all obligations, hereunder.
IN WITNESS WHEREOF, the Option Holder has executed, and the Company has caused its duly
authorized representative to execute, this Agreement as of the date first above written.
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GRAHAM CORPORATION
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By:
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James R. Lines
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President and Chief Executive Officer
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Date:
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ATTEST:
[SEAL]
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OPTION HOLDER:
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Name:
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Date:
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Exhibit A to Non-Qualified Stock Option Agreement (Directors)
2000 Graham Corporation Incentive Plan to Increase Shareholder Value
Instructions
. Use this Notice to inform the Compensation Committee of Graham
Corporation (Company) that you are exercising your right to purchase shares of common stock
(Shares) of the Company pursuant to a non-qualified stock option (Option) granted under the
2000 Graham Corporation Incentive Plan to Increase Shareholder Value (Plan). If you are not the
person to whom the Option was granted (Option Holder), you must attach to this Notice proof of
your right to exercise the Option granted under the Non-Qualified Stock Option Agreement entered
into between the Company and the Option Holder (Agreement). This Notice should be personally
delivered or mailed by certified mail, return receipt requested, to: Compensation Committee,
Graham Corporation, 20 Florence Avenue, Batavia, New York 14020, Attention: Chief Accounting
Officer The effective date of the exercise of the Option shall be the date this Notice is
personally delivered or post marked by the United States Post Office if mailed. Except as
specifically provided to the contrary herein, capitalized terms shall have the meanings assigned to
them under the Plan. This Notice is subject to all of the terms and conditions of the Plan and the
Agreement.
Graham Corporation
20 Florence Avenue
Batavia, NY 14020
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Attention:
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Chief Accounting Officer
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Re:
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Notice of Exercise of Non-Qualified Stock Option (Directors)
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Dear Sirs:
This shall constitute my irrevocable direction and authorization to exercise options with
respect to
shares of Graham Corporation stock previously granted to me under the
2000 Graham Corporation Incentive Plan to Increase Shareholder Value (Plan) at $
per
share. I further authorize you to issue my shares in my name and deliver them to
(Broker) for my account.
By copy of this letter, I authorize the Broker to issue a check from my account maintained
with the Broker payable to Graham Corporation in the amount of $
.
I represent that the above shares are not subject to any encumbrance or other claim and that
you, the Broker, and Graham Corporations transfer agent (Transfer Agent) may rely upon this
exercise notice as a representation and authorization for this purpose.
By copy of this letter, I further authorize the Broker to:
o
Exercise and Sell
o
Exercise and Hold
You
are hereby directed and instructed to issue
shares of common stock in
my name for my account maintained with the Broker. Please:
o
(a) Arrange for electronic transfer of the shares on this date via the Depository Trust to
the Broker, whose DTC Number is
;
or
o
(b) Expedite the overnight delivery of said certificate by express mail to:
I understand that the difference between the Fair Market Value of the Shares to be issued to
me pursuant to this Notice and the Exercise Price of such Shares will be taxable income to me, and
that I must consult with my own tax advisor regarding when such income will be reportable. I
understand that, under the Plan and Agreement, I am responsible for the amount of any federal,
state and local taxes that are required to be paid with respect to the Shares to be issued pursuant
to this Notice.
I have been advised by my legal counsel that my acquisition of shares pursuant to this notice
and my sale of the shares so acquired is not a transaction to which Section 16(b) of the Securities
Exchange Act of 1934 (short swing profit rule) applies. I acknowledge that under the short swing
profit rule I may be liable to the Corporation in the event of a sale occasioned by a margin
deficiency in my account.
I understand that I must rely on, and consult with, my own legal counsel (and not the Company)
regarding the application of all laws particularly tax and securities laws to the
transactions to be effected pursuant to this Notice.
ON BEHALF OF THE COMMITTEE
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Received [check one]:
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By Hand
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o
By Mail Post Marked
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By
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Authorized Signature
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Date
of Receipt
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EXHIBIT 10.2
FORM OF
NON-QUALIFIED STOCK OPTION AGREEMENT (Employees)
This NON-QUALIFIED STOCK OPTION AGREEMENT (Agreement) is made and entered into as of the
day of
, by and between Graham Corporation, a corporation organized and
existing under the laws of the State of Delaware and having an office at 20 Florence Avenue,
Batavia, New York 14020 (Company) and
(Option Holder).
W I
T N E S S E T H
:
WHEREAS, by action of its Board of Directors (Board), the Company has adopted the 2000
Graham Corporation Incentive Plan to Increase Shareholder Value (Plan), pursuant to which
Non-Qualified Stock Options with respect to shares of common stock of the Company (Shares) may be
granted to the Companys eligible officers and employees; and
WHEREAS, pursuant to Article III of the Plan, a Compensation Committee (Committee) has been
appointed to select the individuals to whom Non-Qualified Stock Options shall be granted and to
prescribe the terms and conditions of such grants; and
WHEREAS, the Committee has determined that the Option Holder is eligible to be granted a
Non-Qualified Stock Option and desires to grant a Non-Qualified Stock Option to the Option Holder,
and the Option Holder desires to accept such grant, on the terms and conditions hereinafter set
forth;
NOW, THEREFORE, the Company and the Option Holder hereby agree as follows:
Section 1.
Grant of Non-Qualified Stock Option
. The Company hereby grants, and the
Option Holder hereby accepts the Companys grant of, a Non-Qualified Stock Option to purchase
Shares (Optioned Shares), on the terms and conditions hereinafter set forth.
Section 2.
Option Period
. Subject to the vesting and other limitations contained in
Section 4, elsewhere in this Option Agreement and in the Plan, the Option Holder shall have the
right to purchase all or any portion of the Optioned Shares at any time during a period (Option
Period) which shall commence on the date six months and one day following the date first above
written and shall end on the earliest to occur of the following dates:
(a) the tenth anniversary of the date first above written;
(b) the third anniversary of the Option Holders termination of employment with the Company
due to his death, Disability or retirement; and
(c) the first anniversary of the date of the Option Holders termination of employment with
the Company for any reason not described in section 2(b).
Section 3.
Exercise Price
. The Option Holder shall have the right to purchase all or
any portion of the vested Optioned Shares at a price per Share equal to $
(Exercise
Price) payable (a) in United States dollars in cash or by certified check, money order or bank
draft payable to the order of Graham Corporation, (b) in Shares duly endorsed for transfer and with
all necessary stock transfer tax stamps attached, already owned by the Option Holder and having a
fair market value equal to the Exercise Price, such fair market value to be determined in such
manner as may be provided by the Committee or as may be required in order to comply with or conform
to the requirements of any applicable laws or regulations, or (c) in a combination of United States
dollars and such Shares.
Section 4.
Vesting;
Limitations on Exercise
.
(a) The shares underlying this Option shall vest and become exercisable 25 percent per year,
commencing one year following the date this Option was granted to the Option Holder (e.g., if this
Option is for an aggregate of 6,000 shares, 1,500 of such shares shall vest and become exercisable
one year following the date of this Option, 1,500 of such shares shall vest and become exercisable
two years following the date of this Option, 1,500 of such shares shall vest and become exercisable
three years following the date of this Option and 1,500 of such shares shall vest and become
exercisable four years following the date of this Option). Except as otherwise provided by Section
4(b), upon the Option Holder ceasing to be an employee of the Company, Optioned Shares which have
not previously vested shall not thereafter vest or become exercisable under the Option. In
addition, shares underlying this Option and this Option itself shall be subject to Section 2 and as
well as to all other requirements imposed by applicable laws, rules or regulations.
(b) Notwithstanding Section 4(a), the Option shall immediately vest and become exercisable
with respect to all Optioned Shares upon the death, Disability or Retirement of the Option Holder.
For purposes of this Agreement, Retirement shall mean a voluntary separation from service by an
Option Holder who is at least age 60 and who has been employed by the Company on a full-time basis
for ten or more years.
Section 5.
Method of Exercise
. The Option Holder may, at any time during the Option
Period, exercise his right to purchase all or any part of the Optioned Shares then available for
purchase; provided, however, that the minimum number of Optioned Shares which may be purchased
shall be one hundred (100) or, if less, the total number of Optioned Shares then available for
purchase. The Option Holder shall exercise such right by:
(a) giving written notice to the Compensation Committee of the Board of Directors of Graham
Corporation (the Committee), in the form attached hereto as Exhibit A with such form completed
and delivered to the Companys Chief Accounting Officer; and
(b) delivering to the Committee full payment of the Exercise Price for the Optioned Shares to
be purchased.
As soon as is practicable following the date on which the Option Holder has satisfied the
requirements of this section 5, the Committee shall take such action as is necessary to cause the
Company to issue a stock certificate evidencing the Option Holders ownership (or the ownership of
such other person as the Option Holder may, by written notice to the Committee, designate) of the
Optioned Shares that have been purchased. The Option Holder or other person shall have no right to
vote or to receive
dividends, nor have any other rights with respect to Optioned Shares, prior to the date as of which
such Optioned Shares are transferred to him on the stock transfer records of the Company, and no
adjustments shall be made for any dividends or other rights for which the record date is prior to
the date as of which such transfer is effected, except as may be required under section 8.
Section 6.
Registration and Delivery of Optioned Shares
. The Companys obligation to
deliver Shares under this Agreement shall, if the Committee so requests, be conditioned upon the
receipt of a representation as to the investment intention of the Option Holder to whom such Shares
are to be delivered, in such form as the Committee shall determine to be necessary or advisable to
comply with the provisions of applicable federal, state or local law. It may be provided that any
such representation shall become inoperative upon a registration of the Shares or upon the
occurrence of any other event eliminating the necessity of such representation. The Company shall
not be required to deliver any Shares under this Agreement prior to (a) the admission of such
Shares to listing on any stock exchange on which Shares may then be listed, or (b) the completion
of such registration or other qualification under any state or federal law, rule or regulations as
the Committee shall determine to be necessary or advisable.
Section 7.
Effect of Exercise of Appreciation Right
. In the event that the Option
Holder shall be granted an Appreciation Right with respect to all or any portion of the Optioned
Shares, the exercise of such Appreciation Right shall automatically result in a reduction of the
number of Optioned Shares available for purchase hereunder by the number of Shares as to which such
Appreciation Right is exercised.
Section 8.
Adjustments in the Event of Reorganization
.
(a) In the event of any merger, consolidation, or other business reorganization in which the
Company is the surviving entity, and in the event of any stock split, stock dividend or other event
generally affecting the number of Shares held by each person who is then a shareholder of record,
the number of Optioned Shares shall be adjusted to account for such event. Such adjustment shall
be effected by multiplying:
(i) such number of Optioned Shares by
(ii) an amount equal to the number of Shares that would be owned after such event by a person
who, immediately prior to such event, was the holder of record of one Share;
and the Exercise Price shall be adjusted by dividing the Exercise Price by the amount determined
under section 8(a)(ii); provided, however, that the Committee may, in its discretion, establish
another appropriate method of adjustment.
(b) In the event of any merger, consolidation, or other business reorganization in which the
Company is not the surviving entity:
(i) Any Non-Qualified Stock Options granted under this Agreement that remain outstanding may
be canceled by the Board upon at least thirty days written notice to each
Option Holder in advance
of the effective date of such merger, consolidation, business reorganization, liquidation or sale;
and
(ii) Any Non-Qualified Stock Option which is not canceled pursuant to section 8(b)(i) shall be
adjusted in such manner as the Committee shall deem appropriate to account for such merger,
consolidation or other business reorganization.
Section 9.
No Right to Continued Employment
. Nothing in this Agreement nor any
action of the Board or Committee with respect to this Agreement shall be held or construed to
confer upon the Option Holder any right to a continuation of employment by the Company or any of
its affiliates which employ the Option Holder. The Option Holder may be dismissed or otherwise
dealt with as though this Agreement had not been entered into.
Section 10.
Taxes
. Where any person is entitled to receive Shares pursuant to the
exercise of the Non-Qualified Stock Option granted hereunder, the Company shall have the right to
require such person to pay to the Company the amount of any tax which the Company is required to
withhold with respect to such Shares, or, in lieu thereof, to retain, or to sell without notice, a
sufficient number of Shares to cover the amount required to be withheld.
Section 11.
No Assignment
. The Non-Qualified Stock Option granted hereunder shall
not be subject in any manner to anticipation, alienation or assignment, nor shall such
Non-Qualified Stock Option be liable for or subject to debts, contracts, liabilities, engagements
or torts, nor shall it be transferable by the Option Holder other than by will or by the laws of
descent and distribution. During the lifetime of the Option Holder, the Non-Qualified Stock Option
granted hereunder shall be exercisable only by him.
Section 12.
Notices
. Any communication required or permitted to be given under the
Plan, including any notice, direction, designation, comment, instruction, objection or waiver,
shall be in writing and shall be deemed to have been given at such time as it is delivered
personally or five (5) days after mailing if mailed, postage prepaid, by registered or certified
mail, return receipt requested, addressed to such party at the address listed below, or at such
other address as one such party may by written notice specify to the other party:
(a) If to the Committee:
Graham Corporation
20 Florence Avenue
Batavia, New York 14020
Attention:
Chief Accounting Officer
(b) If to the Option Holder, to the Option Holders then current residential address.
Section 13.
Successors and Assigns
. This Agreement shall inure to the benefit of and
shall be binding upon the Company and the Option Holder and their respective heirs, successors and
assigns.
Section 14.
Construction of Language
. Whenever appropriate in the Agreement, words
used in the singular may be read in the plural, words used in the plural may be read in the
singular, and words importing the masculine gender may be read as referring equally to the feminine
or the neuter. Any reference to a section shall be a reference to a section of this Agreement,
unless the context clearly
indicates otherwise. Capitalized terms not specifically defined herein shall have the meanings
assigned to them under the Plan.
Section 15.
Governing Law
. This Agreement shall be construed, administered and
enforced according to the laws of the State of New York without giving effect to the conflict of
laws principles thereof, except to the extent that such laws are preempted by the federal law.
Section 16.
Amendment
. This Agreement may be amended, in whole or in part and in any
manner not inconsistent with the provisions of the Plan, at any time and from time to time by
written agreement between the Company and the Option Holder.
Section 17.
Plan Provisions Control
. This Agreement and the rights and obligations
created hereunder shall be subject to all of the terms and conditions of the Plan. In the event of
any conflict between the provisions of the Plan and the provisions of this Agreement, the terms of
the Plan, which are incorporated herein by reference, shall control. By signing this Agreement,
the Option Holder acknowledges receipt of a copy of the Plan.
Section 18.
Acceptance by Option Holder
. By executing this Agreement and returning a
fully executed copy hereof to the Committee at the address specified in section 13, the Option
Holder signifies his acceptance of the terms and conditions of this Non-Qualified Stock Option. If
a fully executed copy of this Agreement is not received by the Committee within forty-five (45)
days after the date when it is presented to the Option Holder, the Committee may revoke the
Non-Qualified Stock Option granted, and thereby avoid all obligations, hereunder.
IN WITNESS WHEREOF, the Option Holder has executed, and the Company has caused its duly authorized
representative to execute, this Agreement as of the date first above written.
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GRAHAM CORPORATION
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By:
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James R. Lines
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President and Chief Executive Officer
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ATTEST:
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[SEAL]
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OPTION HOLDER:
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Date:
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Exhibit A to Non-Qualified Stock Option Agreement (Employees)
2000 Graham Corporation Incentive Plan to Increase Shareholder Value
Instructions
. Use this Notice to inform the Compensation Committee of Graham
Corporation (Company) that you are exercising your right to purchase shares of common stock
(Shares) of the Company pursuant to a non-qualified stock option (Option) granted under the
2000 Graham Corporation Incentive Plan to Increase Shareholder Value (Plan). If you are not the
person to whom the Option was granted (Option Holder), you must attach to this Notice proof of
your right to exercise the Option granted under the Non-Qualified Stock Option Agreement entered
into between the Company and the Option Holder (Agreement). This Notice should be personally
delivered or mailed by certified mail, return receipt requested, to: Compensation Committee,
Graham Corporation, 20 Florence Avenue, Batavia, New York 14020, Attention: Chief Accounting
Officer. The effective date of the exercise of the Option shall be the date this Notice is
personally delivered or post marked by the United States Post Office if mailed. Except as
specifically provided to the contrary herein, capitalized terms shall have the meanings assigned to
them under the Plan. This Notice is subject to all of the terms and conditions of the Plan and the
Agreement.
Graham Corporation
20 Florence Avenue
Batavia, NY 14020
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Attention:
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Chief Accounting Officer
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Re:
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Notice of Exercise of Non-Qualified Stock Option (Employees)
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Dear Sirs:
This shall constitute my irrevocable direction and authorization to exercise options with respect
to shares of Graham Corporation stock previously granted to me under the 2000
Graham Corporation Incentive Plan to Increase Shareholder Value (Plan) at $
per share.
I further authorize you to issue my shares in my name and deliver them to
(Broker) for my account.
By copy of this letter, I authorize to the Broker to issue a check from my account maintained
with the Broker payable to Graham Corporation in the amount of $
.
I represent that the above shares are not subject to any encumbrance or other claim and that
you, the Broker, and Graham Corporations transfer agent (Transfer Agent) may rely upon this
exercise notice as a representation and authorization for this purpose.
By copy of this letter, I further authorize the Broker to:
o
Exercise and Sell
o
Exercise and Hold
You are hereby directed and instructed to issue
shares of common
stock in my name for my account maintained with the Broker. Please:
o
(a) Arrange for electronic transfer of the
shares on this date via the Depository
Trust to the Broker, whose DTC Number
is
;
or
o
(b) Expedite the overnight delivery of
said certificate by express mail to:
I understand that the difference between the Fair Market Value of the Shares to be issued to
me pursuant to this Notice and the Exercise Price of such Shares will be taxable income to me, and
that I must consult with my own tax advisor regarding when such income will be reportable. I
understand that, under the Plan and Agreement, I am responsible for the amount of any federal,
state and local taxes that are required to be paid with respect to the Shares to be issued pursuant
to this Notice.
I have been advised by my legal counsel that my acquisition of shares pursuant to this notice
and my sale of the shares so acquired is not a transaction to which Section 16(b) of the Securities
Exchange Act of 1934 (short swing profit rule) applies. I acknowledge that under the short swing
profit rule I may be liable to the Corporation in the event of a sale occasioned by a margin
deficiency in my account.
I understand that I must rely on, and consult with, my own legal counsel (and not the Company)
regarding the application of all laws particularly tax and securities laws to the
transactions to be effected pursuant to this Notice.
ON BEHALF OF THE COMMITTEE
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Received [check one]:
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o
By Hand
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o
By Mail Post Marked
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By
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Authorized Signature
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Date
of Receipt
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