Graham Corporation (NYSE MKT: 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 energy facilities, today reported financial results for its fourth quarter and fiscal year ended March 31, 2012 (ďfiscal 2012Ē). Reported results include Energy Steel & Supply Co., which was acquired by Graham on December 14, 2010. Year-over-year comparisons include the results of Energy Steel from the date of acquisition for prior year periods. Energy Steel is a nuclear code-accredited 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 in the fourth quarter of fiscal 2012 were $20.3 million, down 22% from net sales of $25.9 million in the fourth quarter of the fiscal year ended March 31, 2011 (ďfiscal 2011Ē). Net income was $0.4 million, or $0.04 per diluted share, in fiscal 2012ís fourth quarter compared with $2.7 million, or $0.27 per diluted share, in the same prior-year period. As announced on May 8, 2012, negatively impacting the year-over-year comparison in sales and net income were an extension of the fabrication and delivery schedule for a multi-year naval nuclear propulsion program order and a $433 thousand, or $0.04 per diluted share, research and development tax credit adjustment.
Fiscal 2012 net sales increased $29.0 million, or 39%, to $103.2 million from $74.2 million in fiscal 2011. The increase was due to $17.5 million in organic growth combined with the full year contribution from Energy Steel. The acquisition accounted for $17.3 million of net sales in fiscal 2012 compared with $5.8 million over the three and a half months that Graham owned Energy Steel in fiscal 2011. Net income in fiscal 2012 was $10.6 million, up 80% from $5.9 million in fiscal 2011, and diluted earnings per share for the full year periods were $1.06 and $0.59 in fiscal 2012 and 2011, respectively.
Mr. James R. Lines, Grahamís President and Chief Executive Officer, commented, ďFiscal 2012 was an excellent year for Graham. Our acquisition of Energy Steel in late 2010 has gone very well and was a major contributor to our improved sales, operating profit, and net income. This was also our second year of a tale of two halves. The first part of fiscal 2012 was driven by solid Middle East refinery projects that had been in backlog for some time while the second half reflected the weak order pattern from the prior 12 to 18 months, and the extended fabrication and delivery schedule on the naval nuclear propulsion program order. Our business typically lags industrial recoveries by one to two years.Ē
Certain planned fabrication and deliveries for fourth quarter pushed into future quarters
Fourth quarter sales to the U.S. market were $12.5 million, or 62% of total sales, compared with $13.5 million, or 52% of total sales, in the prior year period. Sales for Energy Steel, which are substantially all in the
In the fourth quarter of fiscal 2012, sales to the chemical/petrochemical market increased to $6.1 million, or 30% of total sales, from $2.8 million, or 11% of total sales, in the same prior-year period. Also in the fourth quarter of fiscal 2012, sales to the power market, including nuclear power, were $5.8 million, or 29% of total sales, compared with $8.3 million, or 32% of total sales, in the fourth quarter of fiscal 2011. Fourth quarter sales of $4.4 million, or 21% of total sales, were to the refining industry, down from $9.8 million, or 38% of total sales, in the same period of the prior year. Sales to other commercial and industrial applications, including the naval nuclear propulsion program, in the fourth quarter were $4.0 million compared with $5.0 million in the prior yearís fourth quarter.
Fluctuations in Grahamís 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 a trailing twelve to twenty-four month period.
Fourth quarter operating performance
Gross profit was $5.2 million, or 25.6% of sales, in the fourth quarter of fiscal 2012 compared with $7.9 million, or 30.5% of sales, in the fourth quarter of fiscal 2011. The change in gross profit and margin reflect the loss of leverage from the aforementioned delays on the naval project.
Selling, general and administrative, or SG&A, was $3.6 million in the fourth quarter, down from $3.9 million in the prior-year period. As a percent of sales, SG&A was 17.9% and 15.0% in the fourth quarter of fiscal 2012 and 2011, respectively.
Operating profit in the fourth quarter was $1.6 million, down from $4.0 million in the prior yearís fourth quarter. Operating margin contracted to 7.7% in the fourth quarter compared with 15.4% in the prior yearís fourth quarter.
Earnings before interest, taxes, depreciation, and amortization, or EBITDA, was $2.1 million, or 10.5% of sales, in the fourth quarter compared with $4.6 million, or 17.9% of sales, in the same period of the prior fiscal year. Graham believes that when used in conjunction with GAAP measures, EBITDA, which is a non-GAAP measure, helps in the understanding of its operating performance. Grahamís credit facility also contains ratios based on EBITDA. The attached tables provide important disclosures regarding Grahamís use of EBITDA as well as a reconciliation of net income to EBITDA.
Graham announced on May 8, 2012, that it recorded a $433 thousand after-tax charge in the fourth quarter of fiscal 2012 related to the adjustment of research and development tax credit claims generated during the tax years ended March 1999 through 2008. The aggregate research and development tax credit adjustment, agreed to following an IRS audit finalized in the fourth quarter of 2012, totaled $859 thousand after tax and including interest. Of such amount, Graham had previously recorded $426 thousand. The remaining $433 thousand, or $0.04 per diluted share, was recognized in the fourth quarter of fiscal 2012. The tax credit adjustment, excluding interest, represents approximately 40% of the $1.87 million in credits claimed in the subject tax years.
Fiscal 2012 Full Year Review
Graham achieved strong sales in each of its markets in fiscal 2012. When compared with fiscal 2011, sales to the refining industry increased 39% to $36.1 million in fiscal 2012; sales to the power industry, including nuclear power, increased 73% to $28.2 million; and sales to the chemical/petrochemical industry were $18.0 million, up 10%. Sales to all other industries, including the Navy program, were up by 34% to $20.9 million in fiscal 2012 compared with fiscal 2011.
Gross profit for fiscal 2012 was $32.6 million, or 31.6% of sales, compared with $21.9 million, or 29.4% of sales, in the prior-year period. The 220 basis point improvement in margin was the result of higher utilization in Grahamís Batavia facility and improved pricing and margin on short-cycle orders as well as on certain other key projects that were fabricated during fiscal 2012.
SG&A expenses increased to $15.5 million in fiscal 2012 from $13.1 million in fiscal 2011. The higher SG&A was the result of the addition of Energy Steel and investments in personnel whom Graham believes are necessary to execute on its growth strategy. As a percentage of sales, SG&A was 15.1% in fiscal 2012 compared with 17.6% in the prior year.
Interest expense increased in fiscal 2012 to $0.5 million from $0.1 million with approximately
$204 thousand of the increase related to the Energy Steel acquisition earn-out and $259 thousand due to the interest charges for the research and development tax credit adjustment.
EBITDA in fiscal 2012 was $19.1 million, or 18.5% of sales, compared with $11.1 million, or 15% of sales, in the prior fiscal year. See the attached tables for important disclosures regarding Grahamís use of EBITDA as well as a reconciliation of net income to EBITDA.
Strong, flexible balance sheet with significant cash position and no debt
Net cash provided by operating activities in fiscal 2012 was $2.6 million compared with cash used in operations of $10.4 million in the prior year. The increase in cash provided by operations was primarily related to growth in net income and working capital requirements.
Cash, cash equivalents and investments at March 31, 2012 were $41.7 million compared with $43.1 million at March 31, 2011.
Capital expenditures were $3.2 million in fiscal 2012 compared with $2.0 million in fiscal 2011 and were primarily related to investments in machinery and equipment to improve productivity, expand production operations, and enhance information technology. Capital spending for fiscal 2013 is expected to be in the range of $3.0 million to $3.5 million.
Graham has a credit facility that provides a $25 million revolving credit line, which is expandable to up to $50 million. Graham had no borrowings outstanding under the credit facility at the end of fiscal 2012, excluding $9.9 million in outstanding letters of credit as of March 31, 2012.
Fiscal 2013 Outlook: Orders expected to continue to strengthen
Orders during the fourth quarter of fiscal 2012 were $42.3 million, up 58% from $26.8 million in the fourth quarter of fiscal 2011. Approximately 30% of the total order value, or $12.7 million, in the fourth quarter of fiscal 2012 was won by Energy Steel. Excluding Energy Steel, organic orders increased 37%, or $8.0 million, in the fourth quarter compared with the same period in the prior year. Total orders for the power market, which includes nuclear energy, were $13.3 million in the fourth quarter, up from $10.4 million in the same prior year period. For the organic business, in the fourth quarter orders from the refining market more than tripled to $18.9 million, orders from the chemical/petrochemical industry increased 50% to $7.6 million, while orders from all other industries declined to $2.4 million.
Orders from U.S. customers represented 48%, or $20.4 million, of total orders during the fourth quarter of fiscal 2012. Energy Steel, which primarily does business in the U.S., represented approximately 62% of these domestic orders in the quarter. Graham expects that orders will continue to be variable between quarters, but in the long run will be relatively balanced between domestic and international markets given both the addition of Energy Steel and the anticipated continued growth in the Asian and Latin American markets.
Grahamís backlog was $94.9 million at March 31, 2012, up from $72.5 million at the end of the trailing third quarter and also up from $91.1 million at March 31, 2011. Included in backlog was $22.9 million associated with Energy Steel, which improved when compared with Energy Steelís backlog of $12.8 million at December 31, 2011. At March 31, 2012, 26% of backlog was related to refinery projects, 26% for power projects, including nuclear, and 18% for chemical and petrochemical projects. The remaining 30% of backlog was related to all other industries Graham services. Graham expects about 70% to 80% of its March 31, 2012 backlog to ship in the fiscal year ending March 31, 2013 (ďfiscal 2013Ē).
Mr. Lines concluded, ďWe expect that the first half of fiscal 2013 will mirror the last half of fiscal 2012 and believe as we move into the latter half of the year that the strength of the orders we have seen recently will be demonstrated in sales growth and operating leverage. I believe that our pipeline is solid and that bid activity is robust. Moreover, it appears our customers are more ready to release orders. I believe that our addressable market is larger than it has been historically and that our long term outlook remains very positive.Ē
Graham expects sales will be in the range of $105 million to $115 million in fiscal 2013, an improvement of approximately 2% to 11% from fiscal 2012. Approximately 18% to 22% of the sales are expected to be generated from Energy Steel. Graham expects that gross margin for fiscal 2013 will be in the 28% to 31% range while SG&A expense for fiscal 2013 is expected to be between 15% and 16% of sales.
The annual effective tax rate for fiscal 2013 is expected to be between 34% and 35%. In May 2012, Graham reached an agreement with the IRS regarding its aggregated research and development tax credits of $373 thousand claimed in fiscal years 2009 and 2010 reducing the credits claimed by 30%, or $112 thousand. Graham had previously recorded a portion of this amount. Graham plans to record the remaining $37 thousand after tax charge in the first quarter of fiscal 2013 related to this agreement. With this agreement, there are no known remaining outstanding items with the IRS.
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 Grahamís financial and operating results for the fourth quarter and fiscal year 2012, as well as Grahamís strategy and outlook for fiscal 2013. Their review will be accompanied by a slide presentation which will be available on Grahamís website at www.graham-mfg.com. A question and answer session will follow the formal discussion.
Grahamís conference call can be accessed by dialing 1-201-689-8560. The webcast can be monitored on Grahamís website at www.graham-mfg.com.
A telephonic replay will be available from 2:00 p.m. Eastern Time on the day of release through Friday, June 8, 2012. To listen to the archived call, dial (858) 384-5517, and enter conference ID number 392775. A transcript will also be available on Grahamís website, once available.