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Graham Corporation (NYSE Amex: GHM), a global designer and manufacturer of critical equipment for the oil refining, petrochemical and power industries, including the supply of components and raw materials to nuclear power plants, today reported its financial results for its fourth quarter and fiscal year ended March 31, 2011 (“fiscal 2011”). Results include Energy Steel & Supply Company, which was acquired by Graham on December 14, 2010. Energy Steel is an ASME nuclear code fabrication and specialty machining company that manufactures heat exchangers, structural weldments and valve and pump replacement parts for the nuclear power generation industry.
Net sales were $25.9 million in the fourth quarter of fiscal 2011, an 88% increase over net sales of $13.8 million in the prior year’s fourth quarter and 35% above net sales of $19.2 million in the trailing third quarter of fiscal 2011. Energy Steel contributed $5.1 million in net sales in the fiscal 2011 fourth quarter.
Net income was $2.7 million, or $0.27 per diluted share, in fiscal 2011’s fourth quarter, compared with $0.6 million, or $0.06 per diluted share, in the prior-year period.
For fiscal 2011, revenue was $74.2 million. Organic sales were $68.4 million, a 10% increase over sales of $62.2 million in the fiscal year ended March 31, 2010 (“fiscal 2010”). Through March 31, 2011, Energy Steel contributed $5.8 million in sales since being acquired by Graham in December 2010. Net income in fiscal 2011 was $5.9 million, or $0.59 per diluted share, compared with $6.4 million, or $0.64 per diluted share, in fiscal 2010. Excluding acquisition-related expenses of $0.5 million, or $0.05 per diluted share, net income was $6.4 million, or $0.64 per diluted share, remaining unchanged when compared with the prior year.
Mr. James R. Lines, Graham’s President and Chief Executive Officer, commented, “As anticipated, the first half of fiscal 2011 was the tail end of the trough of the recession for us. The second half of the year clearly demonstrated the early signs of a strengthening market. Our fourth-quarter results were a strong indication of this early recovery. We also benefitted from strong short-cycle bookings and better-than-expected performance by Energy Steel. In addition, we gained traction during the quarter with stronger margin projects beginning to flow through the business that further improved profitability. Taken together, these factors resulted in full-year revenue beyond the upper range of our prior guidance.”
International sales represented 48% of total sales in the fourth quarter of fiscal 2011 compared with 67% in fiscal 2010’s fourth quarter. Sales for Energy Steel, which was 20% of sales for the quarter, are all domestic-based.
Graham had 38% of its sales in the fourth quarter of fiscal 2011 to the refining industry compared with 34% of sales in the same period of the prior fiscal year, reflecting certain large Middle Eastern projects advancing as well as increased maintenance activity in the U.S. market. Sales to the power market were 32% of total sales, as the Energy Steel acquisition helped to strengthen opportunities in the nuclear industry and as the Company has had success with alternative energy projects, specifically geothermal power opportunities. Sales to other commercial and industrial applications accounted for 19% of sales, up from 17% in the prior fiscal year’s fourth quarter, while approximately 11% of sales were to the chemical/ petrochemical industry during the fourth quarter of fiscal 2011 compared with 45% in the prior fiscal year’s fourth 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 it believes are more apparent on at least a trailing 12-month basis.
Higher Sales and Stronger Market Drove Improved Operating Margin
Gross profit was $7.9 million, or 30.5% of sales, in the fourth quarter of fiscal 2011. Gross profit was $4.3 million, or 31.1% of sales, in the same period of the prior fiscal year and 24.7% in the trailing third quarter of fiscal 2011. Amortization of the inventory step-up adjustment and intangible assets related to the Energy Steel acquisition was $194 thousand in the fiscal 2011 fourth quarter, of which $146 thousand was included in the cost of goods sold.
Selling, general and administrative (“SG&A”) expenses in the fourth quarter of fiscal 2011 were $3.9 million, including $48 thousand of amortization expense related to Energy Steel, compared with $3.1 million in the prior year’s fourth quarter and were primarily due to the addition of Energy Steel and investments in personnel made to address growth opportunities. SG&A was 15% of sales in fiscal 2011’s fourth quarter compared with 22% in the prior year’s fourth quarter.
Operating profit in the fourth quarter of fiscal 2011 was $4.0 million, more than three times greater than operating profit of $1.2 million in the prior year’s fourth quarter. Operating margin was 15.4% in the reported period compared with 8.6% in the prior fiscal year’s fourth quarter.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) was $4.7 million in the fourth quarter of fiscal 2011 compared with $1.6 million in the same period of the prior fiscal year. The Company believes that when used in conjunction with GAAP measures, EBITDA, which is a non-GAAP measure, helps in the understanding of operating performance. Graham’s credit facility also contains ratios based on EBITDA.
Interest income in the fourth quarter of fiscal 2011 was $30 thousand compared with $11 thousand in the same period of the prior fiscal year. The increase was due to a higher rate of return on the invested cash.
Fiscal 2011 Review
International sales were 55% of sales in each of fiscal 2011 and fiscal 2010. By market, sales to the refining industry accounted for 35% of revenue in fiscal 2011, down from 41% in fiscal 2010. Sales to the power industry were 22% of revenue, up from just 1% the prior year. Of the $15.4 million growth in sales to the power market, Energy Steel accounted for $5.8 million while other alternative energy projects drove the remainder of the increase. Chemical/petrochemical sales were 22% of revenue in fiscal 2011, compared with 35% in the prior year. Sales to other commercial and industrial applications represented 21% of sales in fiscal 2011 compared with 23% in fiscal 2010.
Gross profit for fiscal 2011 was $21.9 million, or 29.4% of sales, compared with $22.2 million, or 35.7% of sales, in the prior fiscal year. The reduction in gross profit percentage resulted from margin compression, as orders received at the downcycle in our markets converted into sales, and the amortization of acquired assets from Energy Steel.
SG&A expenses were $13.1 million in fiscal 2011 compared with $12.1 million in fiscal 2010. Excluding the $0.7 million of transaction costs associated with the Energy Steel acquisition, SG&A increased by approximately 3%, or $0.3 million, in fiscal 2011. The increase stemmed from the addition of Energy Steel and investments in personnel to drive future growth. SG&A, excluding acquisition transaction costs, was approximately 16.7% of sales in fiscal 2011 compared with 19.4% in the prior-year period.
Earnings before interest, taxes, depreciation, amortization, and acquisition-related expenses (Adjusted EBITDA) were $11.2 million in fiscal 2011 consistent with $11.2 million in the prior fiscal year.
Balance Sheet Remains Strong with Significant Cash Position
Net cash used in operating activities in the fourth quarter fiscal 2011 was $4.2 million compared with $17.5 million generated from operations in the prior year’s fourth quarter and $4.0 million used in the third quarter of fiscal 2011. For fiscal 2011, cash used in operations was $10.4 million compared with cash generated from operations of $30.3 million during the prior fiscal year. The use of cash in both the quarter and 12-month periods ended March 31, 2011 was the result of an increase in unbilled revenue, due to the timing of shipments of a couple of large orders, and the utilization of customer deposits to purchase inventory for the related customer projects as they enter production.
Cash, cash equivalents and investments at March 31, 2011 were $43.1 million compared with $48.2 million at December 31, 2010 and $74.6 million at March 31, 2010. The acquisition of Energy Steel on December 14, 2010, required $17.9 million in cash. The remaining decrease was due to an increase in unbilled revenue driven by timing of billings for a small number of projects and a decrease in customer deposits used to procure raw materials.
Capital expenditures were $544 thousand in the fourth quarter and $2.0 million in fiscal 2011, compared with $501 thousand for the fourth quarter and $1.0 million in fiscal 2010. Higher capital expenditures during fiscal 2011 were related to capital equipment requirements associated with the large U.S. Navy program order that Graham won in the third quarter of fiscal 2010.
Capital expenditures in fiscal 2012 are expected to be approximately $3.0 million to $3.5 million, above Graham’s historic annual level of capital spending of $1.5 to $2.0 million. Approximately 85% of capital spending is planned for machinery and equipment.
In December 2010, Graham established a new credit facility with its bank that provides a $25 million revolving credit line, expandable to up to $50 million, with interest based on the bank’s prime rate or LIBOR plus a margin. Graham had no borrowings outstanding at the end of the quarter, excluding $13.8 million in outstanding letters of credit, against this revolving line of credit facility.
Orders during the fourth quarter of fiscal 2011 were $26.8 million, up 47% over orders in the fourth quarter of fiscal 2010, and up 51% from $17.8 million in the trailing third quarter of fiscal 2011. Approximately 20% of the total order value in the fourth quarter of fiscal 2011 was won by Energy Steel. For fiscal 2011, total orders received were $63.2 million, including $6.1 million associated with Energy Steel. There continued to be excellent diversity in geography and markets with the large projects booked in the fourth quarter. Strong activity in the alternative energy markets enabled Graham to secure orders for geothermal and biomass power-generating facilities in Asia and the U.S. The Company also secured ejector system orders for oil refining projects in the U.S. and Asia. Moreover, there were robust order levels for short-cycle products that led to bookings in the fourth quarter. The fourth quarter saw roughly 35% more short-cycle orders than the average of the first three quarters of fiscal 2011.
Orders from international and U.S. customers were balanced at 50% of total orders during the fourth quarter of fiscal 2011. International orders comprised 52% of total orders in fiscal 2011. For the next few years, Graham expects an increase in orders to come from international customers in its traditional oil refinery and petrochemical markets. At the same time, the addition of Energy Steel is expected to improve U.S. order rates from the nuclear power-generation market.
Graham’s backlog was $91.1 million at March 31, 2011 compared with $90.5 million at December 31, 2010 and $94.3 million at March 31, 2010. Included in backlog is $8.4 million associated with Energy Steel.
Approximately 34% of projects in Graham’s backlog as of the end of the fourth quarter are for refinery projects, 11% for chemical and petrochemical projects and 55% for power and other markets, compared with 37%, 15% and 48%, respectively, at March 31, 2010. Included in Graham’s power and other backlog is the U.S. Navy’s carrier program order, which began to be recognized in revenue according to the percentage of completion method in the last quarter of fiscal 2011. Shipments of the majority of the project are expected to occur in fiscal years 2012 and 2013 with the smaller remaining portion shipping in fiscal 2014. Graham expects about 80% to 85% of its current backlog to ship in the next 12 months of which approximately one quarter is related to the carrier program and a large Middle East refinery. Typically, approximately 85% to 90% of backlog would ship in a 12-month period.
Graham expects sales will be in the range of $95 million to $105 million in fiscal 2012, an improvement of approximately 30% to 40% from fiscal 2011. Gross margin expectations for fiscal 2012 are 29% to 32% while SG&A expense for fiscal 2012 is expected to be around $16.5 million to $17.5 million. The expected annual effective tax rate for fiscal 2012 is between 33% and 35%.
Mr. Lines concluded, “Energy Steel has started off strong under Graham and has surpassed our expectations to date. We anticipate Energy Steel will be approximately 16% to 20% of our consolidated revenue in fiscal 2012. Overall, our pipeline remains robust and we are strongly encouraged by the long-term outlook of the industries we serve. Nonetheless, the strength of the second half of fiscal 2012 will be determined by the consistency in orders received over the first half of the fiscal year. Our guidance is also quite dependent upon the two major orders in our backlog remaining on schedule. Consequently, while we expect strong growth in fiscal 2012, the health of our markets and the strength and sustainability of the economic recovery can impact our results.”
Stock Buyback Program
Graham maintains a stock repurchase program which permits it to repurchase up to 1,000,000 shares of its common stock through July 29, 2011. Since the initiation of the program in January 2009, Graham has repurchased 362,000 shares at a cost of $3.4 million.
Webcast and Conference Call
Graham will host a conference call and live webcast today at 11:00 a.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 fourth quarter and fiscal 2011, as well as Graham’s strategy and outlook. Their review will be accompanied by a slide presentation which will be available on Graham’s website at www.graham-mfg.com. A question-and-answer session will follow the formal discussion.
Graham’s conference call can be accessed by dialing 1-201-689-8560. Alternatively, the webcast can be monitored on Graham’s website.
To listen to the archived call, dial 1-858-384-5517, and enter the Replay Pin Number 369510. A telephonic replay will be available from 2:00 p.m. Eastern Time on the day of release through June 3, 2011. A transcript of the call can be found on Graham’s website, once available.