Registration of Securities — Form S-2
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-2 Graham Corporation S-2 HTML 170K
2: EX-4.1 EX-4.1 Certificate of Incorporation of Graham 30 69K
Corporation
3: EX-5.1 EX-5.1 Form of Opinion of Harter Secrest & Emery 1 8K
LLP
4: EX-13.1 EX-13.1 Graham Corporation Annual Report 2005 12 50K
5: EX-23.1 EX-23.1 Consent of Deloitte & Touche LLP 1 6K
EX-13.1 — EX-13.1 Graham Corporation Annual Report 2005
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Exhibit 13.1
GRAHAM CORPORATION ANNUAL REPORT 2005
AT A POINT OF CONVERGENCE
With our global reach and engineering expertise, we can capitalize on converging
economic and environmental factors driving demand for our products.
CONVERGING DEMAND DRIVERS MEET TRANSFORMING GRAHAM PROCESSES.
TRANSFORMING
- Implementing Lean Manufacturing
- Investing in Information Management Systems
- Expanding Global Sales Network
- Automating the Design and Bid Processes
GRAHAM COMPANY PROFILE
With world-renowned engineering expertise in vacuum and heat transfer
technology, Graham Corporation is a global designer, manufacturer and supplier
of ejectors, pumps, condensers and heat exchangers. Over the past 70 years,
Graham Corporation has built a reputation for top quality, reliable products and
high-standards of customer service. Sold either as components or complete system
solutions, the principle markets for the Company's equipment are the
petrochemical, oil refining and electric power generation industries, including
cogeneration and geothermal plants. Graham equipment can also be found in
diverse applications, such as metal refining, pulp and paper processing,
shipbuilding, water heating, refrigeration, desalination, food processing,
drugs, heating, ventilating and air conditioning.
Graham Corporation's reach spans the globe. Its equipment is installed in
facilities from North and South America to Europe, Asia, Africa and the Middle
East.
www.graham-mfg.com
AMEX symbol: GHM
(Pie chart)
2005 REVENUE BY INDUSTRY
[Download Table]
Chemical Processing 31%
Other 26%
OEM 2%
HVAC 5%
Fertilizers 3%
Oil Refining 26%
Power 7%
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(Pie chart)
2005 REVENUE BY GEOGRAPHIC MARKET
[Download Table]
U.S. 61%
Asia 15%
Canada 9%
Mexico & South America 7%
Middle East 4%
Other 4%
FINANCIAL HIGHLIGHTS
[Enlarge/Download Table]
Year Ended March 31
(in thousands, -----------------------------------------------------------------------------------------------
except per share data) 2005 2004 2003 2002 2001 2000 1999 1998 1997** 1996**
---------------------- ---------- --------- --------- ------- ------- ------- ------- ------- ------- -------
continuing
operations restated* restated*
Operating Results
Revenue ........................... $41,333 $37,508 $44,511 $47,396 $44,433 $38,728 $52,978 $56,206 $14,257 $51,487
Gross profit ...................... 7,540 5,890 7,297 10,077 9,796 9,964 14,872 18,083 4,080 15,463
Selling, general and
administrative ................. 7,691 7,805 8,178 10,439 9,494 8,943 11,843 12,367 3,071 11,122
Income (loss) from continuing
operations ..................... 296 (832) 148 2,305 195 (833) 2,369 3,766 621 3,102
Diluted earnings (loss) per share
from continuing operations ..... $ 0.17 $ (0.51) $ 0.09 $ 1.38 $ 0.12 $ (0.55) $ 1.46 $ 2.21 $ 0.38 $ 1.93
Weighted average shares
outstanding - diluted .......... 1,717 1,647 1,672 1,671 1,613 1,523 1,619 1,700 1,623 1,611
Year-End Financial Position
Total assets ...................... $33,529 $35,740 $38,323 $43,704 $36,608 $34,596 $34,136 $37,030 $31,224 $30,494
Long-term debt .................... 44 93 127 150 682 1,948 505 859 2,764 1,442
Shareholders' equity .............. 16,578 18,102 18,836 19,636 17,137 17,092 16,712 17,775 12,538 11,915
Book value per share .............. $ 9.76 $ 10.92 $ 11.43 $ 11.92 $ 10.52 $ 11.36 $ 10.99 $ 10.54 $ 7.90 $ 7.52
Other Year-End Data
Working capital ................... $11,204 $11,652 $12,822 $13,812 $11,162 $12,397 $11,989 $12,459 $10,300 $ 8,239
Depreciation ...................... 768 793 797 955 926 998 983 905 249 892
Capital expenditures .............. 224 249 799 688 1,124 711 1,189 1,400 237 1,291
Backlog as of March 31 ............ $22,376 $13,482 $16,843 $26,815 $27,326 $24,302 $15,438 $28,199 $22,348 $25,578
* Restated to reflect discontinued operations and the change in accounting
for revenue recognition.
** Data for 1997 is for the three-month transition period ending March 31,
1997. Financial data for 1996 is for respective 12 months ending December
31.
(Line graphs)
[Download Table]
Income (loss) from
Revenue Backlog Continuing Operations
$ in millions $ in millions $ in thousands
------------- ------------- ---------------------
2005 41,333 22,376 296
2004 37,508 13,482 (832)
2003 44,511 16,843 148
2002 47,396 26,815 2,305
2001 44,433 27,326 195
2000 38,728 24,302 (833)
LETTER TO THE SHAREHOLDERS
"The strength of Graham's brand, our skilled team, and the measures we are
taking to improve our business gives us confidence in our outlook."
Dear Fellow Shareholders,
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Fiscal 2005 was a year of change and progress for Graham Corporation. In the
short few months that I have been here, I have had the opportunity to personally
validate what you likely already know:
- Our brand carries significant weight with our customers around the
world.
- Our engineering know-how and solutions-oriented problem solving is
well respected in the engineering community.
- We have a strong position in the global oil refining, electrical power
generating and chemical processing markets.
- Our manufacturing expertise is relied on heavily by our customers for
the consistency and reliability we provide with our products.
- We have an excellent, talented team at Graham.
These qualities provide a solid foundation from which we can face a more
challenging, yet opportunity-filled future.
In fiscal 2005, sales increased 10% to $41.3 million. The year was a tale of two
halves. In the first half of the year, our primary markets were sluggish, and we
were still feeling the effects of higher raw material prices, such as steel, in
fixed price contracts that were being built. In the latter half of the year, we
tightened the controls necessary to mitigate the material cost escalations, and
we began to see new orders for vacuum systems and condensers pick up as a
growing demand in our key markets had translated into some sizable orders. Based
on the current level of inquiry, we anticipate this trend continuing through
2006 and into 2007.
Income from continuing operations was $296 thousand, or $0.17 per diluted share.
This was a marked improvement from a loss of $832 thousand, or $(0.51) per
diluted share, in fiscal 2004. The improvement reflected the leverage we gained
from higher sales, increased selling prices and improved product mix. We expect
margins will improve as sales improve. However, I believe we have the
opportunity to strengthen our ability to contribute to the bottom line by
improving operational efficiencies and implementing automation through
information technology throughout our operations.
CONVERGING REVENUE DRIVERS
Our markets have significantly improved over the last year as a result of
several factors:
- Global growth, especially in Asia, has raised the demand for oil and
oil products driving the need for more oil refineries.
- Higher oil prices have made heavier crude oil with higher sulfur
content more attractive as a raw material, driving the need for more
sophisticated vacuum processes to reduce the sulfur content.
- More demanding requirements for vehicle emissions that are effective
in 2006 and 2007 are adding to the need for improvements to the sulfur
reducing process in oil refineries.
- Continued global growth increases the need for electricity, therefore
driving power
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generation development.
- The demand for plastics and related products is driving capacity
expansions for ethylene plants in both Asia and the Middle East.
Our products are used by these industries for these processes. For the near
term, we are in an enviable position of being a market leader among end-users
such as ExxonMobil, Chevron and Shell, as well as with engineering procurement
contractors such as Bechtel Corporation, KBR and original equipment
manufacturers such as Elliott Ebara Turbomachinery Corporation. We cannot be
content, however, and must remain competitive while continuing to provide the
sophisticated engineering support, quality product and reliable service our
customers expect.
(Line graph)
CAPITAL EXPENDITURES
($ in thousands)
[Download Table]
Year Expenditure
----- -----------
2000 $ 711
2001 $1124
2002 $ 688
2003 $ 799
2004 $ 249
2005 $ 224
2006E $2000
(Pie chart)
2005 TOTAL CAPITALIZATION
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Total current liability 32.5%
Total long-term debt 0.1%
Accrued compensation,
pension and other 18.0%
Total Shareholder Equity 49.4%
TRANSFORMATION FOR LONG-TERM MARKET ADVANTAGE
Lean manufacturing: We have the opportunity to strengthen our margins by
improving operational efficiencies, supply chain management and inventory
reduction. By implementing lean manufacturing, we believe we can shorten cycle
times, have customer demand pull product through our facility and have suppliers
provide inventory on demand. We expect these efforts will help us to realize
higher margins during strong business cycles and reduce the severity of the
impact of down cycles.
Automated design and quote processes: We believe having the ability to quickly
engineer, manufacture, and communicate highly-customized solutions is a value
proposition which is a key attribute for growing market share. Our customers are
demanding drawings at the time of order, or within weeks of order placement.
This requires a design system capable of capturing data during the quoting phase
and delivering a near complete solution at time of quote that is closely coupled
to our manufacturing processes. We plan to reduce the time to generate designs
and better capture, retain and re-employ the wealth of customized equipment
designs we create.
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Information management: With our new technologies, we expect to be able to
create a streamlined flow of order data from initial bid to the shop floor. As a
result, we should improve the sales of our products by offering faster response
to customer inquiries with engineering details, specific cost information and
itemized delivery information. We believe that applying computer programming
technology from initial bid through to the shop floor will enable us to better
capture the real costs of our business.
Reorganized business structure: In order to focus our business and drive
efficiencies, we have reorganized the company into five business groups -
Condensers, Ejectors, Pumps, Spare Parts, Heat Exchangers. The reorganization
included an evaluation of each of the business units, and as a result, our UK
pump manufacturing operation was discontinued. We have re-engineered our
business model for pumps and have been successful in lowering our total cost to
better serve our customers and position Graham for future growth in this key
business segment. By re-engineering our business model, we believe our capture
ratio for vacuum systems and pumps will increase due to our better overall cost
position.
Expanding marketing and sales presence: We have taken steps to increase our
presence in Asia and the Middle East by adding full-time sales coverage in both
regions in order to capitalize on the enormous potential we believe is available
in these regions. Our goal is to work with local sales representatives and
fabricators to optimize the ability of Graham to serve the local customer base
and export to more markets. We are also evaluating our approach to South
America, recognizing that growing economies will demand energy and power.
CONFIDENT OUTLOOK
The strength of Graham's brand, our skilled team, and the measures we are taking
to strengthen our future gives us confidence in our outlook. Generally, a solid
industrial cycle, such as the one we are currently in, could last three to five
years. We believe there is potential for this one to last longer because of the
driving force of the growing Asian economy. The cycle itself, however, could
have major fluctuations within it. Our objective is to maximize this cycle and
position the Company for such fluctuations or a downturn.
The employees of Graham consider the Graham brand a promise to our customers and
shareholders. That promise is excellence in everything we do and a commitment to
maintaining high standards in business ethics and business integrity. We are
focused on transforming Graham into a stronger, growing business.
Sincerely,
/s/ William C. Johnson
-------------------------------------
William C. Johnson
President and CEO
June 28, 2005
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"We believe having the ability to quickly engineer, manufacture and communicate
highly customized solutions is avalue proposition which is key for growing
market share."
A CONVERSATION WITH MANAGEMENT
By transforming processes, we can improve our operational effectiveness and
reduce our cost structure while solidly positioning Graham to remain successful
in an ever-changing, competitive market.
Jim Lines, Vice President and General Manager
EXPANDING OUR GLOBAL PRESENCE
Our geographic sales growth strategy is designed to address expanding
opportunities in our export markets. We are the beneficiaries of the current
surge in planned capital spending by refining, petrochemical and power companies
in both our domestic and export markets. Historically, our success has been
built on the oil refining, petrochemical and power generation markets, which
represent approximately 60-70% of our sales. These industries are seeing
significant activity, particularly in Asia, the Middle East, Western Canada and
the Latin America region. Graham has a rich history of proven installations in
these regions. We believe we have a competitive advantage with these industries
because of our 'engineering answers' sales strategy.
Although China is not a new market for us, we are expanding our presence there.
We have established a sales office in China and are aggressively pursuing the
development of a strong sales representative network throughout the region. Our
objective is to establish effective and broad-reaching sales channels, develop
relationships with key decision-makers and local fabricators, and win a greater
share of the business. In Europe, we appointed a sales management team to
reconnect with engineering, procurement and construction contractors and process
licensors following a recent decision to discontinue our UK pump business.
European contractors, process licensors and turbomachinery equipment
manufacturers are active in the Asian, Middle East and Latin American planned
expansions. Maintaining our presence and developing a network of sales
representatives will help extend Graham's reach into these regions.
We are also evaluating other regions including South America, South Africa and
Canada. In South America, we have the potential to establish an office and
improve our sales representative network, similar to our approach in China and
Europe.
Our ultimate goal is to grow the business beyond our current customer base in
order to maximize sales during the up cycles and have a broader, global sales
presence to minimize the down cycles, which capital equipment businesses are
subject to endure.
Steve Northrup, Vice President and Chief Technology Officer
TRANSFORMING PROCESSES THROUGH INFORMATION SYSTEMS
The seed for the development of Graham's strong brand name in the markets it
serves is its top-notch engineering expertise, which through the years,
consistently developed and delivered complex system solutions to meet each
customer's unique requirements.
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Our job-specific approach to the design and development of engineered solutions
in an engineer-to-order environment has evolved in sophistication as our
engineering skills have advanced over more than 70 years. However, we have not
historically employed computer systems that fully capture, leverage and improve
our intellectual property and expertise. That is why we have embarked on an
ambitious program to automate the bid proposal and job design processes to fully
engage a lean manufacturing philosophy.
To automate the sales and design processes, we are scrutinizing every internal
process by completing detailed workflow analysis and process mappings. We are
looking at every aspect of the sales and engineering processes, from initial
customer contact and proposal preparation to job drawings and production design.
The detailed information captured for each job will feed into our manufacturing
processes. With this automation, we can optimize our inventory control program
and improve our production planning and scheduling system.
We expect the impact to the customer experience to be great. We can increase our
value for our customers by reducing cycle times, leveraging our expertise and
providing superior project management through increased consistency and accuracy
for each job.
This investment in our information management systems should measurably improve
our operational effectiveness and reduce our cost structure while solidly
positioning Graham to remain successful in an ever-changing, competitive market.
Ron Hansen, Vice President of Finance and Administration and Chief Financial
Officer
ACCOUNTABILITY AND ENHANCED UNDERSTANDING
As Graham is undergoing significant transformation in its processes through
automation, we are defining the characteristics we must have for us to grow and
succeed well beyond this current strong cycle. The upgrade of our systems and
increased use of automation in our processes from bid through delivery is
designed to give us an improved ability to define the metrics that will keep us
on track with our vision for growth. Going forward, we recognize that we cannot
be dependent only on the industrial cycle to achieve profitability.
Transformation includes accountability. Internally, we are defining specific
metrics to monitor and objectives to achieve that are associated with leaning
our manufacturing process and improving cash management. These include the level
of inventory turn, which has room for improvement, and shortened cycle time from
purchase order to delivery. The automation efforts should help to strengthen our
material procurement functions by better defining material needs at the time of
submitting a proposal.
We fully recognize the need to be accountable to our shareholders. The markets
in which we operate tend to be highly cyclical, leaving us vulnerable on the top
line. Increasing our emphasis on spares and broadening our sales network is
intended to help to mitigate this problem. Where we can provide greater
understanding for our investors is in our earnings power and its sustainability.
Our goal in 2006, as we implement our new systems and transform our business, is
to expand our disclosure in order to improve transparency for the investment
community.
ENGINEERING ANSWERS
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[Enlarge/Download Table]
BUSINESS UNIT PRODUCT DESCRIPTION APPLICATION
------------- ------------------- -----------
Condensers Surface and direct contact condensers which - Oil refineries
handle steam from a turbine that drives a - Petrochemical processing
compressor or pump. Also manages steam from a - Power plants
turbine-generator for power generation. - Cogeneration power plants
- Geothermal power plants
Ejectors Ejectors are placed in single or multiple stages - Oil refineries
with process condensers to create vacuum in - Petrochemical processing
order to change pressure in a process. - Fertilizer production plants
- Steel mills
- Edible oil production plants
Pumps Mechanical vacuum pumps can be independent or - Pharmaceutical production plants
part of an ejector system to create vacuum for a - Seawater deaeration
process. - Food production plants
- Petrochemical processing
- Power generation plants
- Ground water remediation
Heat Exchangers: Used to heat, cool, condense or boil fluids - Clean steam generators
Heliflow(R), - Compressors
Plate Exchangers, - Seal cooling device
MicroMix - Vent condensers
- Natural gas heaters
- Boiler blowdown
- Process sample coolers
- Supercritical water oxidation
- Cryogenic vaporization
- Waste heat recovery
- Water heaters
- Cooling tower isolation
- Heat pumps
- Thermal storage systems
After-Market: Consultative problem solving and replacement All heat transfer and vacuum and
Spare Parts part supplier. products systems.
EXPANDING MARKET CHANNELS
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GEOGRAPHIC MARKETS MARKET STRATEGY
------------------ ---------------
North America - Provide consultative engineering
- Maximize broad distribution and representative network
- Pursue new opportunities in these mature markets, such
as: refinery revamps due to EPA ultra low sulfur
regulations; refinery revamps
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[Download Table]
due to low quality high sour crude; and large
after-market opportunities that few competitors serve
well
- Develop acquisition opportunities
Europe and the - Expand sales operations in Europe and the Middle East
Middle East - Provide on-site, in-country consultative engineering
service for Engineer Procurement Contractors who
represent customers and projects located throughout
the world
Asia - Expand Graham presence in Asia
- Build equipment representation network in rapidly
developing regions
- Target new customers who are designing and building
oil refineries and power generation facilities
South America - Evaluate representative network potential
- Identify new customer potential
GRAHAM CORPORATION MANAGEMENT
WILLIAM C. JOHNSON
President and Chief Executive Officer
Mr. Johnson joined Graham Corporation in November 2004. Previously, he was
Senior Vice President and General Manager for ESAB Welding and Cutting
Equipment, a global welding and cutting equipment manufacturer. His career has
included extensive experience in the manufacturing sector, including General
Manager of the ABB Distribution Transformer Division from 1996 to 1999 as well
as other senior management positions within the ABB organization. Mr. Johnson
earned his Bachelor of Science degree in Ceramic Engineering from Alfred
University in Alfred, New York and his MBA from Rollins College in Winter Park,
Florida. He was an officer in the United States Navy from 1985 to 1990, serving
in the submarine fleet.
JAMES R. LINES
Vice President and General Manager
Mr. Lines joined Graham Corporation in May 1984. Other management positions at
Graham previously held by Mr. Lines included Vice President of Engineering and
Vice President of Sales and Marketing. Prior to his various senior management
roles, Mr. Lines was an application engineer, sales engineer and product
supervisor. Mr. Lines has had numerous articles published regarding the use,
operation and troubleshooting of vacuum and heat transfer equipment. He earned a
Bachelor of Science degree in Aerospace Engineering from University of Buffalo
in Buffalo, New York.
J. RONALD HANSEN
Vice President of Finance and Administration, and CFO
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Mr. Hansen joined Graham Corporation in May 1993. Previously, he was the Vice
President of Finance and CFO of Al Tech Specialty Steel Corporation. He was
employed with Al Tech Specialty Corporation since October 1979. Following
graduation from the University of Notre Dame, with honors, Mr. Hansen began his
career with Deloitte & Touche, LLP and became a partner with Alpern, Rosenthal &
Company, a large regional CPA firm. Mr. Hansen is a certified public accountant.
STEPHEN P. NORTHRUP
Vice President and Chief Technology Officer
Mr. Northrup began his career with Graham Corporation in 1973 working in the
Engineering and R&D departments designing large heat exchangers for nuclear
power plants and developing new products. In 1981, he became the Plant Manager
of the Batavia, New York facility and Vice President Operations in 1986. He
expanded Graham's heavy fabrication and machining facilities to streamline large
fabrication operations, introducing advanced CNC machinery and large multiple
spindle drilling machines. In 1995, he held the position of Vice President
Engineering and is currently Vice President and Chief Technology Officer. Mr.
Northrup graduated from Clarkson University with a BSME degree. He has been a
member of ASME for over 30 years and involved in a number of other professional
organizations.
BOARD OF DIRECTORS
Jerald D. Bidlack (1,2,3,4,5)
Chairman
Director since 1985
President
Griffin Automation, Inc.
Helen H. Berkeley (2,3,4)
Director since 1998
Private Investor
William C. Denninger (2,3)
Director since 2003
Senior Vice President-Finance and Chief Financial Officer
Barnes Group, Inc.
William C. Johnson (1)
Director since 2004
President and Chief Executive Officer
Graham Corporation
H. Russel Lemcke (1,3,4)
Director since 1996
President
H. Russel Lemcke Group, Inc.
James J. Malvaso (4,5)
Director since 2003
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President and Chief Executive Officer
The Raymond Corporation
Cornelius S. Van Rees (1,2,4,5)
Corporate Secretary
Director since 1969
Retired Partner
Thacher Proffitt & Wood, Attorneys-at-Law
1 - Executive Committee
2 - Employee Benefits Committee
3 - Audit Committee
4 - Compensation Committee
5 - Nominating Committee
GRAHAM CORPORATION SHAREHOLDER INFORMATION
ANNUAL MEETING
The 2005 Annual Meeting of shareholders will be held on Thursday, July 28, 2005
at 11:00 a.m. at the Holiday Inn-Airport, 911 Brooks Avenue, Rochester, NY.
TRANSFER AGENT AND REGISTRAR
For services such as change of address, replacement of lost certificates, and
changes in registered ownership, or for inquiries to your account, contact:
Mellon Investor Services LLC
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 288-9541
www.melloninvestor.com
INVESTOR RELATIONS
Investors, stock brokers, security analysts and others seeking information about
Graham Corporation should contact:
J. Ronald Hansen
Vice President of Finance and Administration, and CFO
Phone: (585) 343-2216
Email: rhansen@graham-mfg.com
Additional information is available on our website at: www.graham-mfg.com
INDEPENDENT AUDITORS
Deloitte & Touche LLP
2200 Chase Square
Rochester, NY 14604
Stock Exchange Listing
11
AMEX: GHM
FORWARD LOOKING STATEMENT
Certain statements contained in this report, including, without limitation,
statements containing the words "believes," "anticipates," "intends," "expects"
and words of similar import, constitute "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements may include projections of revenues, income or loss, capital
expenditures, capital structure, or other financial items, statements regarding
our plans and objectives for future operations, statements of future economic
performance, statements of the assumptions underlying or relating to any of the
foregoing statements, and other statements which are other than statements of
historical fact.
Statements made through this report are based on current estimates of future
events, and we have no obligation to update or correct these estimates. Readers
are cautioned that any such forward looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially as a result of these various factors.
Graham Corporation
20 Florence Avenue
Batavia, NY 14020
(585) 343-2216
www.graham-mfg.com
12
Dates Referenced Herein and Documents Incorporated by Reference
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