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• Net sales of $24.7 million in the quarter, up $4.1 million
• On track for record year: Fiscal 2009 expected to be peak of current cycle; downturn expected in fiscal 2010
• Strong balance sheet: $45.4 million in cash and investments and no long-term debt
• Reaffirms fiscal 2009 revenue and margin guidance
• Board authorizes stock repurchase program
Graham Corporation (NYSE-A: GHM), a manufacturer of critical equipment for the oil refinery, petrochemical and power industries, today reported financial results for its fiscal 2009 third quarter ended December 31, 2008. Net sales were $24.7 million in the quarter, up $4.1 million, or 19.8%, compared with net sales of $20.6 million in the prior year’s third quarter. Net income was $3.8 million, or $0.37 per diluted share, in the third quarter, approximately the same as net income in the same period the prior fiscal year. Graham’s fiscal 2009 ends March 31, 2009.
Mr. James R. Lines, President and Chief Executive Officer of Graham, commented, “Our third quarter financial results were in line with our expectations and support our previously announced outlook that fiscal 2009 would be a record year for sales and earnings. However, we believe that fiscal 2009 will represent the peak of the current cycle that began for us in the latter half of fiscal 2004. We took measured steps during the current cycle to control our growth, to maintain a solid balance sheet and to make important gains in productivity. We expect that these gains will help to reduce the effect of declining revenue as we head into fiscal 2010. Moreover, we believe that our strong balance sheet and expected operating performance during fiscal 2010 will allow us to maintain a strong financial position that will enable us to take advantage of opportunities that may present themselves during the downturn.”
Sales on Track for Record Fiscal Year
The increase in third quarter sales of ejectors, heat exchangers and pump packages was offset slightly by a decrease in sales of condensers and aftermarket products. Ejector sales were $10.3 million, or 41.6% of total net sales, in the third quarter, a 47.7% increase compared with $7.0 million, or 33.8% of total net sales, in the same period during the prior year. The increase in ejector sales reflects a greater number of oil refinery projects in the period.
Higher sales of heat exchangers were driven by more focused sales activities that targeted a wider variety of end markets. Heat exchanger sales increased 23.9% year-over-year to $3.0 million, or 12.1% of total net sales, in the third quarter compared with $2.4 million, or 11.7% of total net sales, in the same period the prior fiscal year. Pump package sales increased three-fold to $1.8 million, or 7.5% of total net sales, in the third quarter compared with $0.6 million, or 2.9% of net sales, in the third quarter of fiscal 2008. The timing of customer requirements for repair parts impacted our aftermarket product sales, which decreased 21.8% to $2.8 million, or 11.3% of total net sales, in the third quarter of fiscal 2009, compared with $3.6 million, or 17.3% of total net sales, in the prior fiscal year’s third quarter.
Sales of condensers declined in the third quarter to $6.8 million, or 27.5% of total net sales, compared with $7.1 million, or 34.3% of total net sales, in the same period the prior fiscal year, as the petrochemical industry slowed during the latter part of 2008.
U.S. sales were $14.4 million, or 58% of total sales, in the third quarter, compared with $10.7 million, or 52% of total sales, in the same quarter of fiscal 2008. International sales were $10.3 million, or 42% of total sales, in the third quarter, slightly above $9.9 million, or 48%, in the same quarter a year ago. Increased sales to Canada, the Middle East and Western Europe were mostly offset by decreases in sales to South and Central America and Asia. Fluctuations in sales among products and geographic locations can vary measurably from quarter-to-quarter based on the timing and magnitude of projects, and we generally do not believe that such fluctuations are indicative of business trends.
By industry, 46% of sales in the third quarter were to the refining industry, compared with 38% in the same period the prior fiscal year. Approximately 27% of sales were to the chemical/petrochemical industry and 21% to other industrial applications during the current quarter, as compared with 42% and 19%, respectively, in the third quarter of fiscal 2008. Power industry sales accounted for 6% of sales during the third quarter of fiscal 2009, while that industry represented approximately one percent of sales during the same period the prior year.
Additional historical information regarding sales by industry and region are contained in the tables at the end of this news release.
Managing Operational Effectiveness
Gross profit was $9.4 million, or 37.9% of sales, in the third quarter of fiscal 2009, compared with $8.6 million, or 41.9% of sales, in the same period the prior fiscal year. The decline in margin during the quarter occurred as a result of a contract in process requiring international fabrication that carried a lower margin than those in the same quarter of fiscal 2008. Approximately 8% of manufacturing production hours were outsourced in the third quarter of fiscal 2009.
Selling, general and administrative (“SG&A”) expenses were $3.6 million, or 14.4% of sales, in the third quarter of fiscal 2009 compared with $3.2 million, or 15.7% of sales, in the third quarter of fiscal 2008, but were below SG&A expenses of $3.9 million, or 16.4% of sales in the trailing second quarter of fiscal 2009. Costs related to Graham’s ongoing initiatives to improve manufacturing efficiencies and increased bonus and commission accruals, as a result of higher sales and net income, caused the slight increase in SG&A expenses in the current fiscal year quarter compared with the same quarter in the prior year.
Taking into account current backlog, the new order environment and the productivity gains made over the past several years, in January of 2009 Graham eliminated approximately 5% of its workforce. Graham believes that the elimination of these positions better align its operating structure and costs. A $365 thousand restructuring charge is expected to be recognized in the fourth quarter of fiscal 2009, and on-going cost savings are expected to be approximately $2.0 million per year. Excluding the restructuring charge, for the remainder of fiscal 2009, SG&A expenses are expected to be in the range of 15% to 16% of sales.
Mr. Lines noted, “We’ve reduced our cost structure as we enter a period of declining revenue. We will, however, remain disciplined about our ongoing internal improvement efforts. The personnel reductions we made in January were difficult but necessary. We believe we are prepared for the downturn and view it as an opportunity to continue to drive improvement into the company, strengthen our relationships with customers, capture additional market share, enter new markets and be able to take greater advantage of the next up-cycle.” I
nterest income in the third quarter of fiscal 2009 declined to $83 thousand compared with $304 thousand in the same period the prior fiscal year, primarily as a result of a significant decline in current treasury yields compared with a year ago.
Graham has revised its estimated fiscal 2009 effective tax rate upward by half a percentage point to 34% in light of the actual rates experienced on its recently-filed tax returns which resulted in an effective tax rate for the third quarter of fiscal 2009 of 35.5%.
Net sales for the first nine months of fiscal 2009 were $76.3 million, up 19.8% compared with $63.7 million in the first nine months of fiscal 2008. Gross margin was 42.1% for the nine-month period compared with 39.6% in the same period the prior fiscal year. Higher aftermarket sales, particularly in the first quarter, improved product mix and engineering and manufacturing operating efficiencies all contributed to the year-over-year increase. Approximately 9% of manufacturing production hours were outsourced in the first nine months of fiscal 2009. Graham expects that outsourced manufacturing hours will be between 8% and 10% for the full fiscal year 2009.
SG&A expenses were $11.3 million, or 14.8% of sales, in the first nine months of fiscal 2009 compared with $9.8 million, or 15.3% of sales, in the same period of fiscal 2008. The increase was related to higher variable compensation costs and outside consulting fees.
Net income for the first nine months of fiscal 2009 was up 28.1% to $13.9 million, compared with $10.8 million in the same period the prior year. On a per diluted share basis, net income grew to $1.36, a 25.9% increase over $1.08 in the same period the prior fiscal year.
Strong, Flexible Balance Sheet with Significant Cash Position
Cash, cash equivalents and investments at December 31, 2008 were $45.4 million, compared with $36.8 million at March 31, 2008 and $42.9 million at September 30, 2008. Net cash provided by operating activities was $7.4 million in the first nine months of fiscal 2009, compared with $16.0 million in the same period the prior fiscal year. The year-over-year decrease was a result of higher working capital requirements, primarily from an increase in Graham's accounts receivable balance due to the timing of customer billings. Approximately $41.2 million was invested in United States Treasury notes with maturity periods of 91 to 180 days at December 31, 2008. As of December 31, 2008, Graham had no borrowings and $7.5 million of outstanding letters of credit under its $30.0 million revolving line of credit facility.
Capital expenditures were $398 thousand in the third quarter of fiscal 2009 and $1.2 million for the ninemonth period, compared with $212 thousand and $659 thousand in the third quarter and nine-month period of fiscal 2008, respectively. Capital expenditures for the full-year fiscal 2009 are expected to be in the range of $1.8 to $2.0 million, of which approximately 50% will be allocated for machinery and equipment, 40% for information technology and 10% for other expenditures. An estimated 75% of the fiscal 2009 capital spending is expected to be used for productivity improvements and the remaining 25% for capitalized maintenance and other general purposes.
Addressing the Down Slope of a Cycle
Orders began to slow during September and October as the world reacted to the unprecedented worldwide financial crisis and the seizure of capital markets, and we experienced a rapid and severe decline in order activity in November and December. While we maintain our strong market position, orders received in the third quarter of fiscal 2009, net of cancellations, were an unusually low $8.1 million compared with orders of $26.6 million in the same period the prior fiscal year. Oil refiners have curtailed or cancelled many projects as they evaluate the changing outlook on demand for oil and its many by-products resulting from the worldwide economic slowdown. Because of the magnitude of certain individual orders and shipment timing, there can be significant variability in sales and orders from quarter-to-quarter. Graham does not believe such fluctuations are indicative of business trends.
Graham’s backlog was $52.5 million at December 31, 2008, down 16.7% compared with $63.0 million at December 31, 2007. Backlog was reduced by $1.6 million due to the cancellation of an order for a refinery project. Included in backlog is approximately $5.7 million in orders for refinery projects that customers have currently suspended subject to their further review of the related projects.
Approximately 45% of projects in backlog are for refinery projects, 33% for chemical and petrochemical projects and 22% for power and other industrial commercial applications, compared with 50%, 23% and 27%, respectively, at the end of the third quarter of fiscal 2008. Approximately 90% of backlog is expected to ship in the next twelve months.
“The significant decline during the quarter is the most severe quarter-over-quarter swing that I have seen in the 25 years I have been with Graham. Since we may experience significant variability in sales and orders from quarter-to-quarter, we analyze business trends over multiple quarterly periods. For the ninemonth period ended December 31, 2008, we received $53.4 million in new orders. Nonetheless, we expect that we will be near $100 million in sales for fiscal 2009, as we had previously projected, and expect gross margins will be consistent with our previous guidance of approximately 39% to 42%.” stated Mr. Lines.
He added, “What is not clear is the extent or duration of the down slope of this new cycle. Oil companies are reducing capital budgets by an estimated 12% for 2009 and many higher cost projects, such as oil sands, have been cancelled. Petrochemical companies are facing difficult times and investment in new capacity has been dramatically scaled down. Consequently, we are prepared for a measurably lower level of sales in fiscal 2010. Notwithstanding current conditions, we continue to believe that longer-term overall global growth will continue to drive demand for our products."
He concluded, “Strategically, our goal remains to double the size of Graham over the next three to five years. Moreover, we see this downturn and our financial strength as an opportunity for us to be very selective and effective with our acquisition strategy.”
Stock Buyback Program Authorized
On January 29, 2009, Graham's Board of Directors authorized a stock repurchase program, permitting Graham to repurchase up to 1,000,000 shares of its common stock in open market and privately negotiated transactions. Graham's repurchase program will continue until the earlier of July 29, 2009, until such time that all 1,000,000 shares have been repurchased or until the Board of Directors terminates the program. Graham intends to use cash on hand to fund any stock repurchases under the program.
Webcast and Conference Call
Graham will host a conference call and live webcast today at 11:00 a.m. ET. During the conference call and webcast, James R. Lines, President and Chief Executive Officer, and Jennifer Condame, Chief Accounting Officer, will review Graham’s financial and operating results for the third quarter and first nine months of fiscal 2009 as well as Graham’s strategy and outlook. A question-and-answer session will follow.
Graham’s conference call and live webcast can be accessed as follows:
The conference call and webcast will be archived and can be reviewed as follows: