EXHIBIT 10.2
EARN OUT AGREEMENT
     THIS EARN OUT AGREEMENT (the “Agreement”), is entered into this 14th day of
December, 2010 by and between ENERGY STEEL ACQUISITION CORP., a Delaware
corporation (“ESAC”), Graham Corporation, a Delaware corporation (“Graham” in
its capacity of Guarantor under Section 2.3 and otherwise as expressly provided
herein as a direct party to this Agreement), and LISA D. RICE, individually and
as the Trustee of the Lisa D. Rice Revocable Trust dated June 5, 2003
(“Seller”). Capitalized terms not otherwise defined in this Agreement shall have
the meaning ascribed to them in that certain Stock Purchase Agreement by and
among Graham, ESAC, Energy Steel & Supply Co., a Michigan corporation (“Energy
Steel”) and the Seller dated on even date herewith (the “Stock Purchase
Agreement”).
     WHEREAS, the Seller beneficially owns all of the outstanding shares of
capital stock of Energy Steel, which is engaged in the manufacture and supply of
products and raw materials to the nuclear power generation industry (the “Energy
Steel Business”);
     WHEREAS, simultaneously with the execution of this Agreement, ESAC is
acquiring Energy Steel pursuant to and subject to the conditions set forth in
the Stock Purchase Agreement; and
     WHEREAS, as a condition to the consummation of the transactions set forth
in the Stock Purchase Agreement, the Stock Purchase Agreement provides that this
Agreement shall be entered into by the parties, pursuant to which Seller shall
be eligible to receive certain performance-based payments from ESAC if certain
performance conditions are satisfied (the “Earn Out Consideration”) with respect
to the Energy Steel Business.
     NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual covenants and conditions contained herein and such other consideration
the receipt and sufficiency of which is hereby acknowledged, the parties hereby
agree as follows:
ARTICLE I.
EARN OUT CONSIDERATION
     Section 1.1 Defined Terms.
     “2011 EBITDA Thresholds” and “2012 EBITDA Thresholds” mean those EBITDA
thresholds set forth in the following tables:

      2011 EBITDA Thresholds   Amount of First Year Payment ³ $3,625,000  
$250,000 ³ $3,750,000   $500,000 ³ $3,875,000   $750,000 ³ $4,000,000  
$1,000,000

 

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      2012 EBITDA Thresholds   Amount of Second Year Payment ³ $3,625,000  
$250,000 ³ $3,750,000   $500,000 ³ $3,875,000   $750,000 ³ $4,000,000  
$1,000,000

     “Catch-Up EBITDA Threshold” means, subject to the satisfaction of
conditions set forth in Sections 1.3 and 1.4, an aggregate EBITDA of Energy
Steel for Fiscal Year 2011 and Fiscal Year 2012 of $7,250,000.
     “EBITDA” means, for any period, Energy Steel’s net income from continuing
operations for such period on a stand alone basis, plus Energy Steel’s
(i) provisions for taxes based on income for such period, (ii) interest expenses
for such period, and (iii) depreciation and amortization of tangible and
intangible assets of Energy Steel for such period as determined in accordance
with GAAP and subject to the GAAP Exceptions. Further, EBITDA shall be adjusted
as described in the last sentence of this definition, and by excluding the
effects of, or otherwise taking into account, any and all of the following
accounting principles to the extent otherwise included in the determination of
earnings from operations:

  (a)   gains, losses or profits realized by Energy Steel from the sale of
assets other than in the ordinary course of business and any “extraordinary
items” of gain or loss (as determined in accordance with GAAP and subject to the
GAAP Exceptions);

  (b)   any management fees, general overhead expenses, or other intercompany
charges, of whatever kind or nature, charged by ESAC, Graham or any other
Affiliates to the Energy Steel Business, except to the extent they offset
expenses that would otherwise be incurred by Energy Steel (e.g., blanket
insurance coverage);

  (c)   any legal or accounting fees and expenses incurred in connection with
this Agreement or the Stock Purchase Agreement.

  (d)   material modifications to staffing levels and compensation packages
during the earn out period will require the reasonable agreement of the Seller
prior to the implementation of such strategy. If the Seller disagrees with the
addition, we would partition out both the costs and corresponding benefits of
such addition to be excluded from the EBITDA calculation.

  (e)   Items deemed to be outside the course of normal operations of the Energy
Steel Business which are non-recurring or non-operational shall be an adjustment
for purposes of the earn out calculation.

  (f)   For purposes of the earn out calculation, material variances in the use
of estimates, accounting methodologies, prepaid and accrued expense treatment,
and application of GAAP shall be adjustments.

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  (g)   As of the date of closing, Graham has simultaneously entered into a real
estate lease for the premises on which Energy Steel conducts its business. The
provisions of the lease also grant Graham on option to purchase the real estate.
To the extent that Graham exercises its option to purchase the real estate,
adjustments will be made to the earn out EBITDA such that the expenses reflect
those which would have occurred under the terms of the lease had the option not
been exercised.

     In determining earnings from operations, the purchase and sales prices of
goods and services sold by Energy Steel (or ESAC) to Graham or its Affiliates,
or purchased by the Energy Steel (or ESAC) from Graham or its Affiliates, or
payment of royalties, shall be adjusted to reflect the amounts that Energy Steel
(or ESAC) would have received or paid if dealing with an independent party in an
arm’s-length commercial transaction.
     “First Year Payment” means the amount(s) specified in the chart included in
the definition of 2011 EBITDA Thresholds and 2012 EBITDA Thresholds above.
     “Fiscal Year 2011” means Energy Steel’s year ending December 31, 2011.
     “Fiscal Year 2012” means Energy Steel’s year ending December 31, 2012.
     “Fiscal Year 2011 EBITDA” means the EBITDA of Energy Steel for the Fiscal
Year 2011, based on the audited financial statements of Energy Steel, as
determined by Graham’s independent auditors in their reasonable discretion.
     “Fiscal Year 2012 EBITDA” means the EBITDA of Energy Steel for the Fiscal
Year 2012 as determined by Graham’s independent auditors in their reasonable
discretion.
     “Second Year Payment” means the amount(s) specified in the chart included
in the definition of 2011 EBITDA Thresholds and 2012 EBITDA Thresholds above.

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     Section 1.2 Generally.
          (a) On the terms and subject to the conditions set forth in this
Agreement, the Seller shall be eligible to receive the Earn Out Consideration
(as more particularly defined below). Subject to the satisfaction of the
conditions set forth herein, the Earn Out Consideration may consist of two cash
payments. The first payment shall be for and measured against the performance of
the Energy Steel Business during the Fiscal Year 2011, and it shall be known as
the “First Year Payment.” The second payment shall be for and measured against
the performance of the Energy Steel Business during the Fiscal Year 2012, and it
shall be known as the “Second Year Payment” (collectively, the First Year
Payment and the Second Year Payment shall comprise the “Earn Out
Consideration”). Except as set forth in Section 1.4 below, each payment is
intended to be separate from and independent of the other payment. Thus, the
Seller need not receive the First Year Payment in order to be eligible to
receive the Second Year Payment (and vice versa). The amount of each payment
shall be determined in accordance with Section 1.5 hereof, and no payment shall
be made unless the associated conditions to payment are satisfied in accordance
with Sections 1.3 and 1.4 hereof.
          (b) ESAC shall pay to the Seller (i) the First Year Payment that
corresponds to the 2011 EBITDA Threshold attained by Energy Steel as set forth
in the table above, and (ii) the Second Year Payment that corresponds to the
2012 EBITDA Threshold attained by Energy Steel as set forth in the table above.
     Section 1.3 Conditions to First Year Payment, Second Year Payment and
Catch-Up Payment.
          (a) ESAC shall pay to the Seller the First Year Payment if, and only
if, the Energy Steel Business as operated by ESAC (or an affiliate thereof),
generates EBITDA equal to or in excess of $3,625,000 during the Fiscal Year
2011.
          (b) ESAC shall pay to the Seller the Second Year Payment if, and only
if, the Energy Steel Business as operated by ESAC (or an affiliate thereof),
generates EBITDA equal to or in excess of $3,625,000 during the Fiscal Year
2012.
          (c) ESAC shall pay the Seller the Catch-Up Payment if, and only if,
the Energy Steel Business as operated by ESAC (or an affiliate thereof),
generates EBITDA equal to or in excess of the Catch-Up EBITDA Threshold set
forth in the table below.
     Section 1.4 Catch-Up Payment.
          (a) In the event that no First Year Payment is made during Fiscal Year
2011 as a result of Energy Steel’s failure to meet the minimum EBITDA threshold
of $3,625,000, the Seller will be entitled to receive a catch-up payment in the
amount of up to $1,000,000 (the “Catch-Up Payment”), if Energy Steel’s Fiscal
Year 2011 EBITDA plus Energy Steel’s Fiscal Year 2012 EBITDA exceeds the
Catch-Up EBITDA Thresholds, as set forth below:

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      Catch-Up Payment Thresholds   Amount of Catch-Up Payment ³ $7,250,000  
$250,000 ³ $7,500,000   $500,000 ³ $7,750,000   $750,000 ³ $8,000,000  
$1,000,000

By way of examples: (i) if the Fiscal Year 2011 EBITDA is $3,500,000 (an event
in which the First Year Payment would not be earned) and the Fiscal Year 2012
EBITDA is $4,500,000, ESAC shall make pay Seller the Second Year Payment of
$1,000,000 plus a Catch-Up Payment in the amount of $1,000,000; and (ii) if the
Fiscal Year 2011 EBITDA is $3,500,000 (an event in which the First Year Payment
would not be earned) and the Fiscal Year 2012 EBITDA is $4,000,000, ESAC shall
pay Seller a Catch-Up Payment in the amount of $500,000.
          (b) Notwithstanding the aforementioned subsection (a), Seller’s right
to receive the Catch-Up Payment is conditioned upon Energy Steel’s Fiscal Year
2011 EBITDA being in excess of $3,000,000. For example, if the Fiscal Year 2011
EBITDA is $2,900,000 (an event in which the First Year Payment would not be
earned) no Catch-Up Payment would be made regardless of the Fiscal Year 2012
EBITDA attained.
     Section 1.5 Calculation and Payment of Earn Out Consideration.
          (a) Within a period of ten (10) calendar days following ESAC’s receipt
of final financial statements for Energy Steel for Fiscal Year 2011 and Fiscal
Year 2012 (which shall be prepared not more than one hundred twenty (120) days
following the end of such fiscal year), ESAC will deliver to Seller (i) a
calculation of the EBITDA for each such year, and (ii) a statement as to whether
the Seller is entitled to the First Year Payment, Second Year Payment or
Catch-Up Payment, as applicable. If ESAC determines that any payment is due
hereunder, each such payment shall be made within ten (10) business days of the
delivery of the calculation of such payment to the Seller. When payments are due
hereunder, in each case, ESAC shall make the payment to the Seller by issuing a
check in the payment amount. If any payment date hereunder falls on a day that
is a Saturday, Sunday or holiday on which ESAC is closed, such payment shall be
due on the next day on which ESAC is open for business.
          (b) The parties agree that any dispute as to whether Earn Out
Consideration is earned hereunder shall be resolved in accordance with the
procedures set forth in Section 2.2 of the Stock Purchase Agreement.
ARTICLE II.
ADDITIONAL COVENANTS AND ACKNOWLEDGMENTS
     Section 2.1 Commercially Reasonable Efforts. In consideration of the
opportunity pursuant to this Agreement to earn the Earn Out Consideration,
Seller agrees to use her commercially reasonable efforts to promote the
interests of Graham, ESAC and the Energy Steel Business during the periods of
time covered by this Agreement. ESAC and Graham agree that

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they will use commercially reasonable efforts to promote the interests and
EBITDA of the Energy Steel Business and in carrying out its obligations under
this Agreement. In this regard, Graham and ESAC shall ensure that the Energy
Steel Business has adequate working capital and other resources necessary to
carry on the business and affairs consistent with past practice in the ordinary
course of business throughout Fiscal Year 2011 and 2012.
     Section 2.2 Right of Setoff. The Seller acknowledges and agrees that any
and all amounts of Earn Out Consideration owed to her pursuant to this Agreement
shall be subject to the right of setoff in favor of Graham and ESAC contained in
the Stock Purchase Agreement.
     Section 2.3 Guarantee of Graham. Graham hereby unconditionally and
irrevocably guarantees each and every obligation of ESAC under this Agreement as
if Graham was the direct party obligated for all payments due hereunder to
Seller, as Graham will benefit directly and indirectly from the transactions
contemplated by this Agreement and the Stock Purchase Agreement. Graham hereby
waives all defenses afforded a guarantor or surety under applicable Laws.
Graham’s obligations hereunder shall be binding upon its successors and assigns
and shall not be extinguished by any bankruptcy or reorganization of ESAC.
     Section 2.4 Covenants of ESAC as to Operation During Earn Out Periods.
          (a) ESAC and Graham will maintain the Energy Steel Business as a
separate enterprise within their corporate structure;
          (b) ESAC and Graham will provide sufficient working capital for
operation of the Energy Steel Business throughout Fiscal Years 2011 and 2012;
          (c) ESAC shall utilize reasonable commercial efforts to maintain Key
Employees of Energy Steel throughout the Fiscal Years 2011 and 2012;
          (d) ESAC shall operate and market the Energy Steel Business using the
name “Energy Steel” (or any derivative thereof deemed appropriate by Graham)
throughout Fiscal Years 2011 and 2012; and
          (e) ESAC and Graham shall direct all new orders in the same product
line as the Energy Steel Business to Energy Steel and shall not otherwise divert
opportunities of Energy Steel to its Affiliates.
     Section 2.5 Acceleration and Early Termination. The payment obligations of
ESAC and Graham hereunder shall be subject to acceleration upon the occurrence
of any one (1) of the following events:
          (a) ESAC determines in its discretion to terminate this Agreement for
its business purposes;
          (b) The sale (subsequent to the date hereof) of all or substantially
all of the assets of Energy Steel, ESAC and/or Graham;
          (c) A change in control of Energy Steel, ESAC and/or Graham occurs; or

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          (d) ESAC and/or Graham have committed a material breach of any of
their payment obligations, covenants, or agreements under this Agreement;
provided Seller has notified Graham and ESAC of the breach, and the breach has
continued without cure for a period of thirty (30) days after the written notice
of breach.
     In the event of an acceleration under this Section 2.5, Seller shall be
entitled to immediate payment of the maximum payments available for each Fiscal
Year. Seller acknowledges that the maximum payments hereunder shall not exceed
$2,000,000 in the aggregate.
ARTICLE III.
GENERAL PROVISIONS
     Section 3.1 Amendment and Waiver. Only a writing executed by each of the
parties hereto may amend this Agreement. No waiver of compliance with any
provision or condition hereof, and no consent provided for herein, will be
effective unless evidenced by an instrument in writing duly executed by the
party sought to be charged therewith. No failure on the part of any party to
exercise, and no delay in exercising, any of its rights hereunder will operate
as a waiver thereof, nor will any single or partial exercise by any party of any
right preclude any other or future exercise thereof or the exercise of any other
right.
     Section 3.2 Assignment. No party will assign or attempt to assign any of
its rights or obligations under this Agreement without the prior written consent
of each of the other parties hereto and any attempted assignment will be null
and void; provided, however, that without such consent, but upon notice to
Seller, ESAC may assign all of its rights and obligations hereunder to any
subsidiary of Graham so designated by Graham, it being agreed that such
assignment will not relieve ESAC from its obligations hereunder.
     Section 3.3 Notices, Etc. Each notice, report, demand, waiver, consent and
other communication required or permitted to be given hereunder will be in
writing and will be sent in accordance with Section 9.2 of the Stock Purchase
Agreement.
     Section 3.4 Binding Effect. Subject to the provisions of Section 3.2, this
Agreement will be binding upon and will inure to the benefit of the parties and
their respective successors and assigns. This Agreement creates no rights of any
nature in any Person not a party hereto.
     Section 3.5 Governing Law. This Agreement will be governed by and construed
in accordance with the Laws of the State of New York without regard to its
principles of conflicts of laws. The parties agree that the sole and exclusive
forum for any Claim related to this Agreement, the interpretation or
construction hereof and the transactions contemplated hereby will be the Supreme
Court of and for the County of Monroe, State of New York. Each party
unconditionally and irrevocably agrees not to bring any Claim in any other forum
and not to plead or otherwise attempt to defeat the trial of such a matter in
such court whether by asserting that such court is an inconvenient forum, lacks
jurisdiction (personal or other) or otherwise. Each party hereby waives the
right to a trial by jury.

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     Section 3.6 Entire Agreement. This Agreement sets forth the entire
understanding of the parties, and supersedes any and all prior agreements,
arrangements and understandings, written or oral, relating to the subject matter
hereof.
     Section 3.7 Headings; Counterparts. The headings of this Agreement are for
convenience of reference only and do not form a part hereof and do not in any
way modify, interpret or construe the intention of the parties. This Agreement
may be executed in one or more counterparts, each of which will be deemed an
original, but all of which together will constitute one and the same instrument.
The parties agree that facsimile copies of signatures will be deemed originals
for all purposes hereof and that a party may produce such copies, without the
need to produce original signatures, to prove the existence of this Agreement in
any proceeding brought hereunder.
     Section 3.8 Independent Counsel; Seller Taxes. The parties state that they
have carefully read this Agreement, know its contents, and freely and
voluntarily agree to all of its terms and conditions. Each party acknowledges
that it has been represented by independent legal counsel of its choice
throughout all the negotiations that preceded the execution of this Agreement,
and this Agreement has been executed with the consent and upon the advice of
such independent legal counsel. Each party shall bear its own legal fees
incurred as a result of the preparation, review and negotiation of this
Agreement. Seller shall be responsible for all taxes incurred by Seller as a
result of this Agreement and neither ESAC not Graham shall be required to
withhold any payments made hereunder except as may be required by law.
[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date first written above.

            ESAC:

ENERGY STEEL ACQUISITION CORP.,
a Delaware corporation
      By:  /s/ Jeffrey F. Glajch         Jeffrey F. Glajch      Its:  Chief
Financial Officer        GRAHAM:

GRAHAM CORPORATION, a Delaware
corporation
      By: /s/ James R. Lines         James R. Lines      Its: President and
Chief Executive Officer        SELLER:       /s/ Lisa D. Rice       LISA D.
RICE, individually and as the Trustee of the Lisa D. Rice Revocable Trust
dated June 5, 2003    

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