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Graham Net Income Increased 23% on 9% Revenue Growth in Fourth Quarter Fiscal 2008

• Fourth quarter sales were $22.8 million; sales increased 31% to $86.4 million for fiscal 2008
• Earnings per diluted share were $0.83 for fourth quarter and $2.98 for fiscal 2008
• Fourth quarter gross profit was 39.3%; gross profit increased to 39.5% in fiscal 2008
• Strong backlog of $75.7 million at fiscal year-end
• Graham achieves new records in revenue, net income, bookings and backlog

BATAVIA, NY, May 30, 2008 – Graham Corporation (AMEX: GHM), an equipment manufacturer critical to the oil refinery, petrochemical and power industries, today reported financial results for its fourth quarter and fiscal year ended March 31, 2008. All per share amounts contained in this press release have been adjusted to reflect a five-for-four stock split which was distributed on or about January 3, 2008.

Revenue grew $1.9 million to $22.8 million for the fourth quarter of fiscal 2008 compared with revenue of $20.8 million in the fourth quarter of the fiscal year ended March 31, 2007. Fiscal 2008 revenue was $86.4 million, and it was the fourth consecutive fiscal year that the Company achieved double digit revenue growth. Revenue for fiscal 2008 increased 31.3% when compared with revenue of $65.8 million for fiscal 2007.

Fourth quarter fiscal 2008 net income was $4.2 million, up 22.7% compared with net income of $3.4 million in the same period the prior year. On a per diluted share basis, net income increased 20.3% to $0.83 per diluted share compared with $0.69 per diluted share in the fourth quarter of fiscal 2007. In fiscal 2008, net income was $15.0 million, or $2.98 per diluted share, compared with $5.8 million, or $1.17 per diluted share, in fiscal 2007. Included in fourth quarter fiscal 2007 net income was the recognition of a research and development tax credit of $1.4 million, or $0.33 per diluted share, compared with $234 thousand, or $0.05 per diluted share, in the fourth quarter of fiscal 2008. Excluding the tax credit, net income was $2.0 million for the fourth quarter of fiscal 2007 and $4.4 million, or $0.89 per diluted share, for fiscal 2007.

Mr. James R. Lines, President and Chief Executive Officer of Graham, commented, "Our vision is to be a world-class leader in the design and manufacture of engineered-to-order products for the process industries. Fiscal 2008 reflects our efforts in achieving our vision. Beyond strong markets and significant demand for the products we manufacture, our growth reflects the recognition by our customers of the value we bring in the form of solutions, quality and reliability."

Growth in condenser and aftermarket sales contributed to the increase in sales in the fourth quarter of fiscal 2008 when compared with the same period the prior year, while sales of ejector systems declined. Fluctuations among products can vary based on the timing of customer projects around the world as well as on business cycles of the industries we serve.

Mr. Lines continued, “The investments being made around the world in refineries and petrochemical plants are planned to remain at very high levels as a result of rapidly growing economies in Asia, India, South America and Eastern Europe. We continue to have large volume of inquiries and do not believe this cycle will deteriorate anytime in the near future. It’s critical to our growth strategy to understand that we do not intend to just capitalize on the market potential available to us now, but that we are laying the groundwork we believe will allow us to capture greater share in other markets such as alternative energy or in Asia as those industries grow.”

In the fourth quarter of fiscal 2008, condenser sales were $6.8 million, or 30% of total sales, compared with $4.0 million, or 19% of total sales, in the same period the prior year. Aftermarket sales were $5.2 million, or 23% of sales, in the fourth quarter of fiscal 2008 compared with $3.1 million, or 15% of sales, in the fourth quarter of fiscal 2007. Aftermarket sales were higher than the historical 15% of total sales as a result of the recognition of revenue from a large capital order won in the second quarter of fiscal 2008. Ejector system sales were $6.3 million in the fourth quarter of fiscal 2008, or 28% of total sales, compared with $8.3 million, or 40% of sales, in the same period the prior year.

Domestic sales contributed 50% of total sales in the fourth quarter of fiscal 2008 compared with 56% in the fourth quarter of fiscal 2007. Sales to the Middle East, Asia and South America were the largest contributors behind U.S. sales.

By industry, sales in the fourth quarter of fiscal 2008 were 33% to the refining industry, 32% to the chemical and petrochemical industries and 35% to other industrial applications compared with 36% to the refining industry, 37% to the chemical and petrochemical industry, and 27% to other industrial applications in the fourth quarter of fiscal 2007. Additional historical information regarding sales by industry and region are contained in the tables at the end of this press release.

Costs and expenses

Gross profit in the fourth quarter of fiscal 2008 was $8.9 million, or 39.3% of sales, compared with $6.1 million, or 29.2% of sales, in the same period the prior year. Gross profit was $34.2 million, or 39.5% of sales, in fiscal 2008 compared with $16.8, or 25.6% of sales, in fiscal 2007. The quarter-overquarter and year-over-year improvements were achieved through operating efficiency gains in both engineering and manufacturing, improved operating leverage as well as greater selectivity in order acceptance. Approximately 5% of manufacturing production hours were outsourced in the fourth quarter of fiscal 2008 and 9% to 10% in the full fiscal year.

Selling, general and administrative (“SG&A”) expenses were $3.3 million, or 15% of sales, in the fourth quarter of fiscal 2008 compared with $3.4 million, or 16% of sales, in the same period the prior year. SG&A expenses were $13.1 million, or 15.1% of sales, in fiscal 2008 compared with $10.8 million, or 16.4% of sales, in fiscal 2007. The absolute dollar increases were due to higher variable costs, such as sales commission and incentive compensation, as a result of the higher sales volume and net income.

Operating margin was 24.7% in the fourth quarter of fiscal 2008 compared with 13.1% in the same period the prior year. Fiscal 2008 operating margin was 24.4% compared with 9.1% in fiscal 2007. Higher sales and operating leverage gains contributed to the improvement quarter-over-quarter and year-over-year.

Mr. Lines stated, “Capital investments made over the last two years to improve productivity, expand capacity and shorten lead times has produced benefits already, as was evidenced by our fiscal year 2008 operating performance. We believe there is still significantly more we can do to improve operating performance and expand production capacity.”

Interest income for the fourth quarter of fiscal 2008 was $227 thousand compared with $160 thousand in the same period the prior year. Fiscal 2008 interest income was $1.0 million, an increase compared with $516 thousand in fiscal 2007 as a result of a 144% increase in investments.

The effective tax rate was 28.3% in the fourth quarter of fiscal 2008 compared with a tax benefit of 18.6% in the same period the prior year. The effective tax rate for fiscal 2008 was 32% compared with 12% for fiscal 2007. The fiscal 2007 tax rate reflects the benefit of a $1.6 million research and development (“R&D”) tax credit, which recognized qualifying expenditures for fiscal years 1999 through 2007. The R&D tax credit recognized in fiscal 2008 was $234 thousand, which represents the level of credit expected each fiscal year going forward under the current tax law.

Fiscal 2008 Sales Review

Sales in fiscal 2008 increased to most major markets throughout the world. Sales by geographic region in fiscal 2008 were approximately 54% to the U.S., 15% to Asia, 12% to the Middle East, 9% to South America and the remaining 10% to other international markets. In fiscal 2007, sales were 50% to the U.S., 17% to Asia, 23% to Middle East and the remaining 10% to other international markets.

High demand for the Company’s product in the refining sector drove sales growth in fiscal 2008. Approximately 43% of sales were for the refining market in fiscal 2008 compared with 35% in fiscal 2007. Sales to the chemical and petrochemical industry contributed 31% to total sales in fiscal 2008 compared with 39% in the prior fiscal year. Other sales, which include spare parts, were 24% of total sales in fiscal 2008 compared with 21% in fiscal 2007. The power sector contributed 2% of sales in fiscal 2008 compared with 5% in fiscal 2007.

The continued strength of the refining market resulted in an increase in sales of ejector systems, which are critical components to the refining process. Ejector system sales were 42% of total sales in fiscal 2008, up from 33% in fiscal 2007. Condenser sales were 25% of total sales in fiscal 2008 compared with 29% in fiscal 2007. Spare parts sales contributed 18% of total sales in fiscal 2008 compared with 17% in fiscal 2007, while heat exchanger and pump sales were 15% of sales in fiscal 2008, down from 21% in fiscal 2007.

Balance Sheet and Cash Management

Cash, cash equivalents and investments at March 31, 2008 were $36.8 million compared with $15.1 million as of March 31, 2007. Approximately $34.7 million is invested in United States treasury notes with maturity periods of 91 to 120 days.

Net cash provided by operating activities was $3.7 million and $19.7 million in the fourth quarter of fiscal 2008 and fiscal 2008, respectively, compared with net cash provided by operating activities of $1.7 million and $5.2 million in the fourth quarter of fiscal 2007 and fiscal 2007, respectively. The $14.5 million improvement in net cash provided by operating activities was due to higher net income, greater utilization of deferred tax assets, and less operating working capital in fiscal 2008. Operating working capital was lower due to a reduction in the cash conversion cycle to 31 days as of March 31, 2008, down from 51 days as of March 31, 2007 and from lower accounts receivable and inventory balances. The average operating working capital was 3% of sales in fiscal 2008 compared with 8% in fiscal 2007.

Mr. Ronald Hansen, Vice President Finance and Administration and CFO, noted, “We have made many fundamental changes in how we do business to strengthen our ability to generate cash. We are focused on reducing our cash conversion cycle time. In addition, we are realigning our people processes to engage everyone in building a better Graham, growing our business, and maintaining strong financial performance.”

Capital expenditures in the fourth quarter of fiscal 2008 were $0.4 million and $1.0 million for fiscal 2008 compared with $0.5 million and $1.6 million in the fourth quarter of fiscal 2007 and fiscal 2007, respectively. Approximately $600 thousand of the capital expenditures in fiscal 2008 were for plant machinery, with approximately 56% of the plant machinery expenditures used for productivity improvements and 44% for maintenance. Fiscal 2009 capital expenditures for the fiscal year ending March 31, 2009, are expected to be approximately $2.0 million with approximately 34% for machinery, 53% for information technology and 13% for other expenditures. An estimated 68% of the fiscal 2009 spending will be for productivity improvements and the remaining 32% for maintenance.

Graham entered into a new revolving credit facility with the Bank of America, N.A., in December 2007. Such facility provides a line of credit of $30.0 million, including letters of credit and bank guarantees. Letters of credit outstanding as of March 31, 2008 were $11.3 million compared with $8.6 million as of March 31, 2007. There were no borrowings outstanding as of March 31, 2008.

Outlook

Orders for fourth quarter of fiscal 2008 were at a record level of $35.1 million, a 29% increase compared with orders of $27.3 million in the fourth quarter of fiscal 2007. For fiscal 2008, orders were $107.1 million, up 24% compared with orders of $86.5 million of fiscal 2007. Fiscal 2008 orders were driven by higher demand for condensers in the oil refining and petrochemical markets in the Middle East, Canada and China. Orders from the refining sector were 48% of total orders in fiscal 2008 compared with 38% in fiscal 2007, while orders for the chemical and petrochemical sector were 26% and 35%, respectively.

Domestic orders were 63% in fiscal 2008 and international orders were 37% compared with 47% and 53%, respectively, in fiscal 2007. The increase in domestic orders was primarily a result of oil refinery capacity expansions and revamps as well as a more selective internal order criteria process. Although overall international order volume was down in fiscal 2008, orders from China, South America and Canada were up year-over-year.

Due to the size of ejector and condenser orders, timing of order acceptance can significantly impact any particular reporting period. Graham does not believe that quarter-to-quarter comparisons are indicative of future business trends.

Backlog increased 40% to $75.7 million at March 31, 2008 compared with $54.2 million at March 31, 2007. Approximately 49% of the orders in the backlog are for oil refinery projects, 28% for chemical and petrochemical projects and 23% for other industrial or commercial applications. Approximately 11% of orders, or $8.3 million, of the backlog is not expected to be converted to sales within the next twelve months.

Mr. Lines concluded, “Our goal is to more than double our revenue over the next few years through a combination of organic growth and potential acquisitions, among other options. Driving our vision is a simple theme of understanding and satisfying the current and future needs of existing and potential customers. I am confident that through company-wide investment and continuous improvement initiatives, we can reshape and redefine Graham to become the preferred supplier of our products and services for our customers, a challenging and rewarding place to work for our employees and a solid investment for our shareholders.”

The Company expects fiscal 2009 revenue to grow 15% to 20% year-over-year and anticipates gross margin to be in the range of 37% to 40% for the year.

Webcast and Conference Call

Graham’s senior management team will host a conference call and live webcast today at 11:00 a.m. EST. During the conference call and webcast, James R. Lines, President and CEO, and J. Ronald Hansen, Vice President Finance and Administration and CFO, will review Graham’s financial and operating results as well as its strategy and outlook. A question-and-answer session will follow.

Graham’s conference call and live webcast can be accessed as follows:

�� The live webcast can be found on this website . Participants should go to the website 10 -15 minutes prior to the scheduled conference in order to register and download any necessary audio software.
�� The teleconference can be accessed by dialling 1-201-689-8560 and referencing conference ID number 283989 approximately 5 - 10 minutes prior to the call.

The conference call and webcast will be archived and can be reviewed as follows:

�� The webcast will be archived at and a transcript will be posted once available. The webcast and transcript will remain available on the website for approximately 30 days.

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Graham Corporation
20 Florence Avenue. Batavia, NY 14020
Phone: 585.343.2216 // Fax: 585.343.1097
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