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Graham Corporation (NYSE Amex: GHM), a designer and manufacturer of critical equipment for the oil refinery, petrochemical and power industries, today reported its financial position and results of operations for its first quarter ended June 30, 2010. Graham’s current fiscal year ends March 31, 2011, and is referred to as “fiscal 2011.”
Net sales were $13.4 million in the first quarter of fiscal 2011, a decline of 34% when compared with net sales of $20.1 million in the prior year’s first quarter. Net income in the first quarter was $0.9 million, or $0.09 per diluted share, a decline of 75% compared with net income of $3.5 million, or $0.35 per diluted share, in the same period last year.
Mr. James R. Lines, Graham’s President and Chief Executive Officer, commented, “We continued to execute profitably on revenue that was relatively low as expected for the bottom of the trough in our cycle. This validates that we effectively and efficiently structured appropriately for the severe decline in sales typical in our industry during an economic downturn. At the same time, we are continuing our investment in customer relationships that we believe will provide us with a competitive advantage as the markets begin to improve.”
Industry Cycle Impacts Sales; Shift to International Markets Continues
International sales, which represented 59% of total sales in the first quarter of fiscal 2011 compared with 49% in fiscal 2010’s first quarter, were $7.9 million, down from $9.9 million during the same quarter of fiscal 2010. Sales to Western Europe, Canada, South America and the Middle East increased, but were more than offset by lower sales to Asia due to the timing of projects. U.S. sales in the first quarter of fiscal 2011 declined $4.7 million, or 46%, to $5.5 million compared with $10.2 million in the prior year’s period. U.S. sales comprised 41% of total sales in the current quarter compared with 51% in last year’s first quarter. The decline in U.S. sales was the result of the significant slowdown in the U.S. refining industry as demand for petroleum products and gasoline were dampened by the weak economy and sustained high levels of unemployment.
Twenty-five percent of Graham’s sales in the first quarter of fiscal 2011 were to the refining industry compared with 46% of sales in the same period of the prior fiscal year. Approximately 40% of sales were to the chemical/petrochemical industry during the first quarter of fiscal 2011 compared with 23% in the prior year’s first quarter. Fluctuations in Graham’s sales among geographic locations and industries can vary measurably from quarter to quarter based on the timing and magnitude of projects. Graham does not believe that such quarter-to-quarter fluctuations are indicative of business trends, which the Company believes are more apparent on a trailing 12-month basis. Nevertheless, Graham expects that international sales will continue to comprise a larger portion of future revenue in fiscal 2011 and beyond.
Gross profit was $3.9 million, or 29% of sales, in the first quarter of fiscal 2011 compared with $8.3 million, or 41% of sales, in the same period of the prior fiscal year. Lower gross profit margin in the fiscal 2011 first quarter reflects the more competitive operating environment, geographic mix of sales, and lower volume.
Selling, general and administrative (“SG&A”) expenses in the fiscal 2011 first quarter declined to $2.6 million compared with $3.2 million in the prior year’s period due to decreased variable costs, such as commissions related to the decline in sales, timing of expenses, as well as lower salaries and benefit costs as the full contribution of Graham’s fiscal 2009 and fiscal 2010 restructuring initiatives was realized. As a percentage of sales, SG&A was 19% in the first quarter of fiscal 2011 compared with 16% in the 2010 first quarter, reflecting the lower level of sales, but improved from 22% in the trailing fourth quarter of fiscal 2010 on comparable sales.
Operating profit in the first quarter of fiscal 2011 was $1.3 million, or 10% of sales. This compares with operating profit of $5.0 million, or 25% of sales, in the first quarter of fiscal 2010. The decrease reflects lower sales from more competitive and less profitable orders generated after the peak business cycle.
Interest income in the first quarter of fiscal 2011 declined slightly to $16 thousand compared with $18 thousand in the same period of the prior fiscal year primarily as a result of lower U.S. Treasury yields compared with a year ago.
Graham’s effective tax rate in the first quarter of fiscal 2011 was 32% and reflects the expected annual effective tax rate for fiscal 2011 of 30% to 33%. The effective tax rate for the first quarter of fiscal 2010 was 30%.
Strong Balance Sheet with Significant Cash Position
Cash, cash equivalents and investments at June 30, 2010 were $71.2 million compared with $74.6 million at March 31, 2010 and $45.3 million at June 30, 2009. The notably higher cash balance compared with last year was from cash generated from operations during the 12 months ended June 30, 2010, as well as a significant increase in negotiated customer deposits which occurred near the end of fiscal 2010. These deposits will be used to procure materials for the related projects from fiscal years 2011 through 2013. Approximately $64.6 million was invested in U.S. Treasury notes with maturity periods of 91 to 180 days at June 30, 2010. As of June 30, 2010, Graham had no borrowings, excluding letters of credit, against its $30.0 million revolving line of credit facility.
Net cash used in operating activities for the first quarter of fiscal 2011 was $2.8 million compared with $0.5 million used in the prior year’s first quarter. Graham used cash in its operations during the quarter primarily due to capital spending and timing associated with compensation, unbilled revenue and accounts payable. Capital expenditures were $525 thousand in the fiscal 2011 first quarter compared with $80 thousand for the first quarter of fiscal 2010.
Capital expenditures in fiscal 2011 are expected to be approximately $2.8 million to $3.3 million, above the historic level of capital spending of $1.5 to $2.0 million. Approximately $1.5 million in equipment will be purchased in order to complete the large U.S. Navy program order that Graham won in the third quarter of fiscal 2010. Approximately 80% of capital spending is expected to be for machinery and equipment. Information technology and other anticipated expenditures will each account for approximately 10% of estimated capital spending.
Orders during the first quarter of fiscal 2011 were $8.1 million compared with orders of $8.8 million in the prior year’s first quarter. Orders from international customers were $3.8 million, or 47% of total orders, while U.S. customers represented $4.3 million, or 53% of total orders. Last year’s first quarter had international orders of $4.9 million and U.S. orders of $3.9 million, or 55% and 45% of total orders, respectively. Graham believes the shift toward a higher percentage of orders from U.S. customers in the quarter is temporary and is not indicative of any longer-term trend.
Graham’s backlog was $89.1 million at June 30, 2010 compared with $37.0 million at June 30, 2009 and $94.3 million at March 31, 2010. At June 30, 2010, there were three orders in backlog with a value of approximately $5.2 million which remained on hold. A $1.6 million order was cancelled during the first quarter of fiscal 2011. Graham believes it is well-positioned to convert existing backlog to meet customer demand.
Approximately 38% of projects in Graham’s backlog as of the end of the first quarter are for refinery projects, 13% for chemical and petrochemical projects and 49% for power and other markets compared with 36%, 49% and 15%, respectively, at June 30, 2009. Included in Graham’s backlog are several large orders, including an order related to the U.S. Navy’s carrier program, that are not expected to begin to be delivered until fiscal 2012 and beyond. Consequently, Graham expects only about 50% to 60% of its current backlog to ship in the next twelve months, as opposed to the 85% to 90% of backlog that would normally ship in a twelvemonth period.
Graham continues to believe that the first half of fiscal 2011 will represent the trough of the current business cycle with sales similar to the second half of fiscal 2010. Although the current order environment is highly competitive, Graham continues to expect revenue for fiscal 2011 will be in the range of $65 million to $72 million. Gross margin is expected to be in the range of 27% to 31% as geographic mix and competitive pressures offset expected increases in volume in the second half of the year. SG&A is projected to be in the range of $12.5 million to $13.0 million as increased volume affects commissions and travel requirements.
Mr. Lines concluded, “We continue to believe that our high quality backlog and prospects for increased worldwide demand for energy, both for conventional and alternative energy sources, bode well for Graham’s future. Although we are very encouraged by our excellent pipeline of projects, we remain somewhat circumspect as the many uncertainties in the global economy can cause delays in capital investments in the worldwide energy infrastructure that drives our business. We continue to remain close to our customers and pursue acquisition targets that will enhance our product or market position as the global economy strengthens.”
Webcast and Conference Call
Graham will host a conference call and live webcast today at 2:00 p.m. Eastern Time. During the conference call and webcast, James R. Lines, President and Chief Executive Officer, and Jeffrey F. Glajch, Vice President - Finance & Administration and Chief Financial Officer, will review Graham’s financial condition and operating results for the first quarter of fiscal 2011, as well as Graham’s strategy and outlook. A question-and-answer session will follow.
Graham’s conference call can be accessed by dialing 1-201-689-8560 and requesting conference ID number 353734. The webcast can be monitored on Graham’s website on the company's website.
To listen to the archived call, dial 1-858-384-5517, and enter conference ID number 353734. A telephonic replay will be available from 5:00 p.m. Eastern Time on the day of release through August 5, 2010, at 11:59 p.m. Eastern Time. A transcript will also be posted, once available.