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First Quarter Fiscal 2010 Earnings Report

$0.35 Earnings Per Share for 1st QTR Fiscal 2010

• Sales down 27.2% to $20.1 million, reflecting contraction in global refinery industry investment
• Strong gross margin of 41% driven by lower short-term material costs
• SG&A expenses down 15% as a result of restructuring efforts
• Strong balance sheet with $45.3 million in cash and investments and no bank debt
• Orders for quarter down to $8.8 million; backlog at $37.0 million
• Outlook for $60 million to $70 million in revenue for fiscal 2010 maintained

Graham Corporation, a manufacturer of critical equipment for the oil refinery, petrochemical and power industries, today reported financial results for its first quarter ended June 30, 2009. Graham’s current fiscal year ends March 31, 2010, and is referred to as “fiscal 2010.”

Net sales were $20.1 million in the quarter, down 27.2% compared with net sales of $27.6 million in the prior year’s first quarter. Net income in the first quarter was $3.5 million, or $0.35 per diluted share, a decline of 38.1% compared with net income of $5.7 million, or $0.56 per diluted share, in the prior year’s first quarter.

Mr. James R. Lines, Graham’s President and Chief Executive Officer, commented, “As expected during this contraction in the markets for refinery and petrochemical equipment, sales and orders are down measurably. Our unusually strong gross margin for the level of sales during the first quarter was primarily related to an unexpected and rapid short-term reduction in the cost of specialty and other materials."

For the fiscal 2010 first quarter, sales of condensers advanced 12.0% to $5.2 million, while ejector sales were down 13.6% to $8.0 million. Aftermarket, heat exchangers, and pump packages sales combined were down 49.6% to $6.9 million. Condenser sales in the first quarter of fiscal 2010 were driven by orders won in the first half of the fiscal year ended March 31, 2009, referred to as “fiscal 2009,” and resulted primarily from refinery and petrochemical projects.

U.S. sales declined $8.3 million, or 44.9%, to $10.2 million, representing 51% of total sales, in the first quarter of fiscal 2010. By comparison, U.S. sales were $18.6 million, representing 67% of total sales, in the same quarter of fiscal 2009. International sales during the first quarter were $9.9 million, representing 49% of total sales, up from $9.0 million, or 33% of total sales, during the same quarter of fiscal 2009. A significant advance in sales to Asia was more than offset by declines in sales to the Middle East, Canada, South America and Western Europe. Fluctuations in sales among products and geographic locations can vary measurably from quarter to quarter based on the timing and magnitude of projects. Graham generally does not believe that such quarter-to-quarter fluctuations are indicative of business trends, which are more visible on a Graham Corporation Reports Results for First Quarter Fiscal 2010 trailing 12-month basis. Nevertheless, Graham does believe that international sales will comprise a larger portion of future revenue in fiscal 2010 and beyond.

In Graham’s leading industries, 46% of sales in the first quarter were to the refining industry, compared with 52% of sales in the same period during the prior fiscal year. Approximately 24% of sales were to the chemical/petrochemical industry during the first quarter, compared with 19% in the first quarter of fiscal 2009.

Managing Operational Effectiveness
Gross profit was $8.3 million, or 41.1% of sales, in the first quarter of fiscal 2010, compared with $12.2 million, or 44.2% of sales, in the same period of the prior fiscal year. During the quarter, gross profit remained at a historically high level as a result of orders completed that originated prior to the sharp reduction in market demand in the quarter ended December 31, 2008. Also, the recent rapid decline in material costs resulted in significant margin improvement for the quarter.

Selling, general and administrative (“SG&A”) expenses in the first quarter were $3.2 million, or 16.1% of sales, compared with $3.8 million, or 13.8% of sales, in the first quarter of fiscal 2009. The decrease in SG&A expenses in the current year’s first quarter compared with the same quarter of fiscal 2009 was a result of decreased commission accruals related to the decline in sales, as well as to reduced salaries and benefits related to the restructuring implemented by Graham during the fourth quarter of fiscal 2009. Graham expects that SG&A will be in the range of $13 to $14 million for full-year fiscal 2010.

Mr. Lines noted, “Recognizing early in the third quarter of fiscal 2009 that we were entering the contraction phase of the oil industry cycle, we developed plans to size the organization based on our expectations and experience in prior contractions. This restructuring took place in the fourth quarter of fiscal 2009 and its results are apparent in the first quarter’s results. We do not intend, however, to impede either our capabilities to gain market share during this downturn or our ability to rapidly scale operations back up when there is improvement in our markets. In fact, we have made strategic additions to our sales staff.”

Interest income in the first quarter of fiscal 2010 declined to $18 thousand compared with $131 thousand in the same period of the prior fiscal year, primarily as a result of a significant decline in current treasury yields compared with a year ago.

Graham’s effective tax rate was 30.3% in the first quarter of fiscal 2010, which reflects the expected annual effective tax rate for full-year fiscal 2010 of approximately 30% to 31%. This compares with an effective tax rate of 33.3% for the first quarter of fiscal 2009 and 34.7% for full-year fiscal 2009. The lower expected rate for fiscal 2010 reflects the allowable level of tax deductions on lower expected pre-tax income.

Strong Balance Sheet with Significant Cash Position
Cash, cash equivalents and investments at June 30, 2009, were $45.3 million, compared with $46.2 million at March 31, 2009, and $45.0 million at June 30, 2008. The decline resulted primarily from the timing of accounts receivable. Approximately $42.1 million was invested in U.S. Treasury notes with maturity periods of 91 to 180 days at June 30, 2009. As of June 30, 2009, Graham had no borrowings against its $30.0 million revolving line of credit facility.

Net cash used in operating activities for the first quarter of fiscal 2010 was $0.5 million, compared with $6.9 million in net cash provided by operating activities in the prior year’s first quarter. The decrease was a result of the decline in net income and the timing of receivables. Capital expenditures were $80 thousand in the first quarter compared with $219 thousand in the prior year’s first quarter.

Capital expenditures in fiscal 2010 are expected to aggregate approximately $1.0 million, of which approximately 65% will be used for machinery and Graham Corporation Reports Results for First Quarter Fiscal 2010 equipment, 28% will be used for information technology and 7% used for other expenditures. Approximately 50% of Graham’s planned capital expenditures are expected to be used for productivity improvements and the balance for capitalized maintenance and other general purposes. Spending is expected to occur primarily in the latter half of the year.

Outlook
Orders during the first quarter of fiscal 2010 were $8.8 million, down from $27.8 million in orders received in the prior year’s first quarter and $20.5 million in the trailing fourth quarter of fiscal 2009. The decline in orders occurred in all product categories. Graham expects orders to fluctuate measurably on a quarter to quarter basis as the industries and customers it serves evaluate their pipeline of projects and their changing economics based on project costs, commodity prices, global demand for refined products and the global economy.

Separately, Graham announced today that early in its fiscal second quarter it was awarded a $3.4 million ejector system order for a refinery in China. Graham has won seven ejector system orders out to bid in the last three years for Chinese refineries.

Graham’s backlog was $37.0 million at June 30, 2009, down 23.3% from $48.3 million at March 31, 2009. During the first quarter of fiscal 2010, a $235 thousand order that had been on hold was returned to active status. At June 30, 2009, there were four remaining orders with a value of $4.2 million remaining on hold. No orders were cancelled in the first quarter of fiscal 2010.

Approximately 36% of projects in Graham’s backlog are for refinery projects, 49% for chemical and petrochemical projects and 15% for power and other industrial commercial applications, compared with 49%, 28% and 23%, respectively, at June 30, 2008. Approximately 85% of backlog is expected to ship in the next twelve months.

Mr. Lines stated, “Although the pipeline of projects remains strong, there is still a ‘wait and see’ attitude among our customers. We expect that our markets will recover first in Asia, specifically China, and the Middle East. Along with our financial results, we believe that our announcement today that we won a $3.4 million order for a refinery in China is indicative that investment in new capacity is ongoing in international markets. Another indicator of where we believe our markets will recover first is the announcement made in June by Saudi Aramco/Total that they are moving forward with their large project in Jubail, Saudi Arabia. The request for bid for our type of equipment on that project would likely be seen in the next six to twelve months.”

Mr. Lines concluded, “We expect to be profitable and to generate cash in fiscal 2010 and we continue to forecast fiscal 2010 revenue in the range of $60 million to $70 million. We also continue to expect that gross margin for the full year will be in the range of 28% to 31%, although likely in the upper end of that range.”

Stock Buyback Program
On January 29, 2009, Graham's Board of Directors authorized a stock repurchase program, permitting the Company to repurchase up to 1.0 million shares of its common stock through July 30, 2009. On July 30, 2009, the Board of Directors extended its stock repurchase program through July 30, 2010. Graham repurchased 26 thousand shares under this program in the first quarter of fiscal 2010 at a cost of $229 thousand. Since the initiation of the program, the Company has repurchased 303,000 shares at a cost of $2.5 million.

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