Graham Reports 42% Sales Growth, Record Backlog of $63 Million for Third Quarter FY 2008

• Third quarter sales grew to $20.6 million
• Continued strong margins with gross margin of 41.9% and operating margin of 26.2%
• Earnings per diluted share expands to $0.74 compared with $0.14 in the third quarter fiscal 2007
• Several projects awarded in quarter result in orders of $26.6 million and a record backlog of $63.0 million

BATAVIA, NY, January 28, 2008 – Graham Corporation (AMEX: GHM), a critical equipment manufacturer for the oil refinery, petrochemical and power industries, today reported revenue of $20.6 million for the third quarter of fiscal 2008, a 42.2% increase compared with revenue of $14.5 million in the third quarter of fiscal 2007. Net income for the third quarter was $3.8 million, or $0.74 earnings per diluted share, compared with $666 thousand, or $0.14 earnings per diluted share, in the prior year's third quarter. All per share amounts have been adjusted to reflect a five-for-four stock split which was distributed on or about January 3, 2008.

Sales increased $6.1 million in the quarter when compared with the same quarter last year. Condenser sales accounted for $4.2 million of this increase and $1.3 million came from aftermarket sales. Condenser sales of $7.1 million were 34% of total sales in the third quarter of fiscal 2008 compared with $2.9 million, or 20%, of total sales in the prior year's third quarter. Ejector system sales of $7.0 million were 34% of total sales in the third quarter of fiscal 2008 compared with $5.7 million, or 40%, of total sales in the prior year's third quarter. Aftermarket sales were 17% and 16% of total sales in the third quarter of fiscal 2008 and fiscal 2007, respectively. Graham's product sales mix in the third quarter reflected greater export sales to the petrochemical markets, as several surface condenser orders that were booked nine to twelve months ago are now in production.

Domestic sales were 52% of total sales for the third quarter of fiscal 2008 compared with 61% in the same period the prior fiscal year.

Sales by industry in the third quarter of fiscal 2008 were 38% to the refining industry, 42% to the chemical and petrochemical industries and 20% to other industrial applications compared with 42% to the refining industry, 29% to the chemical and petrochemical industries and 29% to other industrial applications in the prior year's third quarter. Additional historical information regarding sales by industry and region are contained in the tables at the end of this press release.

Mr. James R. Lines, President and Chief Executive Officer of Graham Corporation commented, "Expansions and upgrades in the oil refining and petrochemical industry continue to drive demand for our products and services. We believe that we are able to capitalize on the current strength of the market as a result of our productivity enhancements. Not only has our use of selective outsourcing further expanded production capacity, but our ongoing initiatives in both engineering and production to expand capacity are focused on leveraging our infrastructure while being mindful of managing fixed costs."

Costs and expenses

Gross profit was $8.6 million, or 41.9% of sales, in the third quarter of fiscal 2008 compared with $3.4 million, or 23.4% of sales, in the same period in the prior fiscal year. The third fiscal quarter historically is affected by seasonality with the lowest number of production hours available, however, improved operating efficiency gains in both engineering and manufacturing contributed to the year-overyear gains. Approximately 9% of manufacturing production hours were outsourced during the third quarter of fiscal 2008.

Selling, general and administrative, or SG&A, expenses were $3.2 million, or 16% of sales, in the third quarter of fiscal 2008 compared with $2.5 million, or 17% of sales, in the same period of the prior fiscal year. The increase in year-over-year SG&A expenses resulted from higher commission and variable compensation costs related to higher sales and net income. Graham expects quarterly SG&A to be in the range of $3.5 to $3.7 million in the fourth quarter of fiscal 2008. Operating margin was 26.2% in the third quarter of fiscal 2008 compared with 5.9% in the same quarter in the prior fiscal year.

Interest income for the third quarters of fiscal 2008 and 2007 was $304 and $130, respectively. Increased interest income resulted from increases in investments.

In the third quarter of fiscal 2008, the effective tax rate was 34% compared with 33% in the third quarter of fiscal 2007, and is expected to remain at approximately 34% for the full fiscal year.

Mr. Lines continued, “Our strategy to reduce lead time, expand capacity and better leverage costs has positively affected gross margin. In addition, strong demand has allowed us to continue to apply disciplined order selection criteria and that, too, has improved gross margins.”

Nine-Month Review

Sales for the first nine months of fiscal 2008 were $63.7 million, up 41% compared with $45.0 million in the first nine months of fiscal 2007. Sales to the refining sector comprised 46% of sales through the first nine months of fiscal 2008, while chemical and petrochemical sales were 31% of total sales and the remaining 23% were to power and other industrial applications. Through the first nine months of fiscal 2007, sales to the refining sector were 34% of total sales, 40% to the chemical and petrochemical sector and 26% to the power sector and other industrial applications. Sales to the domestic market were 56% of total sales for the first nine months of fiscal 2008 compared with 48% in the first nine months of fiscal 2007. Additional historical information regarding sales by industry and location are contained in the tables at the end of this press release.

Gross profit margin for the first nine months of fiscal 2008 was 40% compared with 24% for the first nine months of the prior fiscal year. Improved project selection and product mix, combined with higher production capacity from internal productivity enhancements contributed to the year-over-year gains.

SG&A expenses for the first nine months of fiscal 2008 were $9.8 million, or 15% of sales, compared with $7.4 million, or 17% of total sales, in the first nine months of fiscal 2007. The absolute dollar increase was primarily a result of higher sales commissions and variable compensation costs on higher sales and net income.

For the nine months ended December 31, 2007 and 2006, interest income was $799 and $356, respectively. Increased interest income resulted from increases in investments.

Net income for the first nine months of fiscal 2008 was $10.8 million, or $2.16 earnings per diluted share, compared with $2.3 million, or $0.48 earnings per diluted share, in the first nine months the prior fiscal year.

Balance Sheet and Cash Management

Cash, cash equivalents and investments at December 31, 2007 were $33.0 million compared with $15.1 million as of March 31, 2007 and $24.1 million as of September 30, 2007. Approximately $29.9 million is invested in United States government and government-sponsored Moody's AAA rated instruments with maturity periods of 91 to 120 days.

Net cash provided by operating activities was $7.0 million and $16.0 million in the third quarter and first nine months of fiscal 2008, respectively, compared with net cash provided by operating activities of $6.2 million and $3.5 million in the third quarter and first nine months of fiscal 2007, respectively. The $12.5 million improvement in the year-over-year nine month periods was due to higher net income, greater use of deferred tax assets and less operating working capital in the current fiscal year.

Capital expenditures in the third quarter of fiscal 2008 were $0.2 million and were $0.7 million for the first nine months compared with $0.5 million and $1.2 million in the same periods of the prior fiscal year, respectively. Capital expenditures for the full fiscal year are expected to be approximately $1.5 million.

Graham entered into a new revolving credit facility with the Bank of America, N.A., in December 2007 that provides a line of credit of $30 million including letters of credit and bank guarantees. Letters of credit outstanding as of December 31, 2007 were $11.1 million compared with $7.3 million as of December 31, 2006. There were no borrowings outstanding as of December 31, 2007.

In the third quarter of fiscal 2008, Graham declared a five-for-four stock split of its common shares, increasing the number of outstanding shares from approximately 4.0 million to approximately 5.0 million. Additionally, the quarterly cash dividend was increased 50% to $0.03 per share on a post-split basis.

Outlook

Orders for the third quarter of fiscal 2008 were $26.6 million, a 56% increase compared with orders of $17.1 million in the same period in the prior fiscal year, and up sequentially from orders of $20.5 million in the second quarter of fiscal 2008. Orders for the first nine months of fiscal 2008 were $72.0 million, up 21%, or $12.7 million, compared with $59.3 million in the first nine months of fiscal 2007. Orders from the refining sector in the third quarter of fiscal 2008 were 46% of total orders compared with 45% in the third quarter of fiscal 2007. In addition, orders for fertilizer producing facilities and ethanol plants, along with a large order for a domestic refinery capital maintenance project, contributed to third quarter new orders. Domestic orders in the third quarter of fiscal year 2008 were up 101% and export orders down 5%, in each case compared with the third quarter of the prior fiscal year. For the nine-month period ended December 31, 2007, domestic orders were up 103%, or $26.3 million, compared with the same period in the prior fiscal year, while export orders declined 40%, or $13.6 million, compared with the same period in the prior fiscal 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 was at a record level of $63.0 million as of December 31, 2007, up 32% compared with backlog of $47.6 million as of December 31, 2006, and up 11% compared with $56.8 million in backlog as of September 30, 2007. Approximately 13%, or $8.2 million, of Graham's backlog is not expected to be converted to sales within the next twelve months. Approximately 50% of the orders in backlog are for refinery project work, 23% for chemical and petrochemical projects and 27% for power and other industrial and commercial applications.

Mr. Lines commented, “We expect that revenue for fiscal year 2008 will be near the upper end of the previously announced $80 to $85 million range and that gross margin will be in the high-30% range. As we look toward fiscal 2009 and beyond, we believe the favorable industry dynamics that exist in the refining industry will remain strong through fiscal 2010 and potentially beyond and will continue to spur demand for our products. We believe there are no fundamental changes in the global near-term outlook in the refining and petrochemical sectors.”

He added, “It is important to note that capacity constraints at the engineering contractors and end users, which includes skilled human resource limitations, combined with cost creep, are extending the planning and execution cycle for many projects which in turn has impacted the pace of projects and procurement patterns.  Additionally, there has been a step-up in foreign competition in our core markets which in turn may result in more competitive bid processes and lower margin potential. We continue to guide expectations for sustained gross margins to be in the mid-30% range in the next fiscal year, which incorporates the change in mix and increased competition in the market offset by productivity enhancements."

Webcast and Conference Call

Graham’s senior management team will host a conference call and live webcast today at 1:00 p.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 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 268534 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 on this website. A transcript will also be posted once available.