* Second quarter orders were $48.4 million; Strong demand from petrochemical and refining markets
* Backlog at quarter-end increased to a record $114.4 million
* Net income was $2.6 million and earnings per share were $0.26 for the quarter
* Fiscal 2014 guidance updated: Expected revenue range tightened to $100 million to $110 million; Expected gross margin range increased to 31% to 33%
BATAVIA, NY, October 25, 2013 - Graham Corporation (NYSE MKT: GHM), a global business that designs, manufactures and sells critical equipment for the oil refining, petrochemical and power industries, including the supply of components and raw materials to nuclear energy facilities, today reported its financial results for its second quarter ended September 30, 2013. Graham’s current fiscal year (“fiscal 2014”) ends March 31, 2014
Net sales in the second quarter of fiscal 2014 were $24.5 million, down 5% from net sales of $25.9 million in the second quarter of the fiscal year ended March 31, 2013 (“fiscal 2013”). Second quarter sales reflected low order levels experienced during the first two quarters of fiscal 2013. However, strong gross margins in the fiscal 2014 second quarter drove net income to a comparable level with the prior year’s second quarter, at $2.6 million, or $0.26 per diluted share, for both years’ quarters.
James R. Lines, Graham’s President and Chief Executive Officer, commented, “Revenue levels reflect the scheduled timing of orders from backlog, however, margin improvements confirm that fundamentals in our markets continue to strengthen. While moderate revenue will carry into our fiscal third quarter, we are encouraged by the recent strong order levels and overall quality of what is being added to backlog.”
Shipments to Canada for Refining Projects Strong on Project Timing
Driven by the scheduled timing of projects in backlog, sales to the Company’s category of other geographic markets, primarily Canada, were strong during the quarter, up $1.8 million to $6.7 million. This helped to offset declines in the U.S. and Middle East markets in the quarter. Second quarter sales to the U.S. market were $14.1 million, down $1.2 million, while sales to the Middle East were down $2.1 million to $0.9 million. International sales represented 42% of fiscal 2014 second quarter sales.
Refining industry sales nearly doubled in the second quarter of fiscal 2014 compared with the same prior-year period on higher demand for Graham’s engineered-to-order products, primarily ejector systems and spares. Decreased sales to the chemical/petrochemical, power and other commercial and industrial markets during the quarter were a function of project timing.
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 a trailing twelve month basis.
Second Quarter Operating Performance
Gross profit was $8.3 million, or 33.8% of sales, in the second quarter of fiscal 2014 compared with $7.9 million, or 30.5% of sales, in the same period of the prior fiscal year. The second quarter’s gross profit and margin benefitted from product mix as well as a higher volume of short cycle projects.
Selling, general and administrative (“SG&A”) expenses in the second quarter of fiscal 2014 were $4.4 million, unchanged from the same prior-year period. SG&A as a percent of sales was 18.2% in the second quarter of fiscal 2014 compared with 17.1% in the same prior-year period, with the increase due to lower sales volume.
Operating profit in the second quarter of fiscal 2014 was $3.8 million, or 15.7% of sales, compared with $3.5 million, or 13.4% of sales, in the second quarter of fiscal 2013.
Earnings before interest, taxes, depreciation, and amortization (“EBITDA”) was $4.4 million, or 17.9% of sales, in the second quarter of fiscal 2014 compared with $4.0 million, or 15.4% of sales, in the same period of the prior fiscal year. Graham believes that when used in conjunction with measures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), EBITDA, which is a non-GAAP measure, helps in the understanding of its operating performance. Graham’s credit facility also contains ratios based on EBITDA. See the attached tables for additional important disclosures regarding Graham’s use of EBITDA as well as a reconciliation of net income to EBITDA.
Graham’s effective tax rate for the second quarter of fiscal 2014 was 32.7%, which compares with 32.3% in the same prior-year period.
First Half Fiscal 2014 Review
Net sales for the first half of fiscal 2014 were $52.7 million, up 9% from $48.4 million in the first six months of fiscal 2013. International sales were $23.6 million and represented 45% of total sales compared with $20.5 million, or 42% of sales, in the first half of fiscal 2013. Sales to the U.S. increased $1.2 million, or 4%, to $29.1 million during the first six months of fiscal 2014 compared with the first six months of fiscal 2013.
Gross profit for the first six months of fiscal 2014 was $18.3 million, or 34.7% of total sales, compared with $14.1 million, or 29.2% of sales, in the same prior-year period. SG&A expenses in the fiscal 2014 first half were $8.9 million, up from $8.5 million in the first six months of fiscal 2013, with the increase primarily due to compensation-related costs and sales commissions driven by higher sales volume. As a percent of sales, SG&A was 16.8% in the first half of fiscal 2014 compared with 17.6% in the same prior-year period.
EBITDA for the first half of fiscal 2014 was $10.6 million, or 20% of sales, compared with $6.7 million, or 13.8% of sales, in the first six months of fiscal 2013. See the attached tables for additional important disclosures regarding Graham’s use of EBITDA as well as a reconciliation of net income to EBITDA.
Net income for the first half of fiscal 2014 was $6.4 million, or $0.63 per diluted share, compared with net income of $4.0 million, or $0.40 per diluted share, in the first six months of fiscal 2013.
Solid Balance Sheet with No Debt
Cash, cash equivalents and investments at September 30, 2013 increased to $54.9 million compared with $53.2 million at June 30, 2013. When compared with September 30, 2012, cash, cash equivalents and investments were up $8.0 million from $46.9 million.
Cash provided by operations in the second quarter and first half of fiscal 2014 were $2.3 million and $4.3 million, respectively, compared with $0.8 million in the second quarter of fiscal 2013 and $6.2 million in the first six months of fiscal 2013. The increase in cash provided by operations in the second quarter of fiscal 2014 was primarily related to timing of both collections on accounts receivable as well as customer progress payments.
Capital expenditures were $0.9 million in the first half of fiscal 2014, up from $0.6 million in the first half of fiscal 2013. As previously indicated, capital expenditures in fiscal 2014 are expected to be in the $6 million to $7 million range, including the recently announced production expansion at the Company’s Batavia, NY facility. The expansion is expected to be completed by September 2014.
Graham had neither borrowings under its credit facility nor any long-term debt outstanding at September 30, 2013.
Robust Pipeline Converting to Orders
Orders during the second quarter of fiscal 2014 were $48.4 million, up $22.8 million, or 89%, from $25.6 million in the second quarter of fiscal 2013.
Orders from the chemical/petrochemical, refining and other commercial and industrial markets all drove the growth in orders for the quarter when compared with the same period in fiscal 2013. When compared with the trailing first quarter of fiscal 2014, orders increased 48% from $32.8 million, with $13.7 million from the refining market, $7.1 million from the other commercial and industrial market, and $0.8 million from the power market, offset by a decrease of $6.0 million from the chemical/petrochemical market following a high level of orders from that market in the first quarter.
Mr. Lines noted, “Our customers released orders at a brisk pace during the first half of the fiscal year. The past two quarters have strengthened our degree of confidence in the fundamentals of our markets during this capacity expansion cycle. The chemical/petrochemical market in the U.S. has been especially strong and we anticipate continued strength for the latter half of this fiscal year. As a Company, we have invested in additional execution capacity so that we would be positioned to respond to significant increases in new business without lengthening lead times and while maintaining the high quality performance our customers expect from Graham. As a result, we believe we are capturing a greater share of new orders this cycle as our customers are committing to investments around the globe.”
Orders from U.S. customers represented 61%, or $29.6 million, of total orders received during the second quarter of fiscal 2014, while orders from international markets accounted for $18.8 million of total orders. Although the first half of fiscal 2014 included 72% of orders from the U.S., the Company does not believe that this is indicative of a long-term trend or shift toward the U.S. market. Graham expects that sales will ultimately reflect the geographic diversity related to orders experienced during the past few years. Over the long term, Graham expects that orders will continue to be variable between quarters and ultimately will be relatively balanced between domestic and international markets.
Graham’s backlog was a record $114.4 million at September 30, 2013 compared with $90.4 million at June 30, 2013 and $91.8 million at September 30, 2012. Approximately 28% of projects in backlog as of the end of the second quarter were for refinery projects, 27% were for chemical and petrochemical projects, and 14% were for power projects, including nuclear. All other industries served by Graham, including the U.S. Navy, accounted for 31% of backlog.
Approximately 70% to 75% of orders currently in backlog are expected to be converted to sales within the next 12 months, approximately 15% to 20% are expected to be converted within the next twelve to 24 months, and approximately 10% are expected to be converted beyond 24 months.
The Company is tightening its sales guidance for fiscal 2014 to a range of $100 million to $110 million. Gross margin guidance for fiscal 2014 is now expected to be between 31% and 33%, up from the previously announced range of 29% to 31%, driven by project timing and product mix. SG&A expense is now expected to be between 16% and 17% of sales for fiscal 2014, compared with the previously announced range of 15% to 16%. Graham expects its fiscal 2014 full year tax rate to be between 33% and 34%, which is unchanged from prior guidance.
Mr. Lines concluded, “At this juncture of our fiscal year, we have better clarity on our expectations for fiscal 2014 and are refining our guidance in order to reflect current customer scheduling and the product mix in our backlog. With a longer-term view, we are pleased with our positioning as we continue to progress into this investment cycle. While uncertainty still exists in some international markets, we believe we are building our global opportunities and intend to capture further orders as they are released from the pipeline. Given our backlog and visibility looking forward to fiscal 2015, based on early indications we anticipate topline revenue of approximately $115 million to $135 million.”
Webcast and Conference Call
Graham management will host a conference call and live webcast today at 11:00 a.m. Eastern Time to review Graham’s financial condition and operating results for its second quarter and first half of fiscal 2014, as well as its strategy and outlook. The review will be accompanied by a slide presentation which will be made available immediately prior to the conference call on Graham’s website at www.graham-mfg.com under the heading “Investor Relations.” A question-and-answer session will follow the formal presentation.
Graham’s conference call can be accessed by calling (201) 689-8560. Alternatively, the webcast can be monitored on Graham’s website at www.graham-mfg.com.
To listen to the archived call, dial (858) 384-5517, and enter replay pin number 10000305. A telephonic replay will be available from approximately 2:00 p.m. Eastern Time on the day of call through Friday, November 1, 2013. A transcript of the call will be placed on Graham’s website, once available.