Graham Corporation (NYSE Amex: GHM), a designer and manufacturer of critical equipment for the oil refinery, petrochemical and power industries, today reported its financial position and results of operations for its second quarter and six months ended September 30, 2009. Graham’s current fiscal year ends March 31, 2010, referred to as “fiscal 2010.”
Net sales were $16.1 million in the fiscal 2010 second quarter, a decline of $7.8 million, or 32.6%, compared with net sales of $23.9 million in the second quarter of the fiscal year which ended March 31, 2009, referred to as “fiscal 2009”. Net income in the fiscal 2010 second quarter was $1.5 million, or $0.15 per diluted share, a decline of 66.7% compared with net income of $4.4 million, or $0.43 per diluted share, in the same period last year. Excluding a $0.5 million, or $0.05 per diluted share, charge associated with previous research and development (R&D) tax credits and associated interest, net income was $1.9 million, or $0.19 per diluted share.
Mr. James R. Lines, Graham’s President and Chief Executive Officer, commented, “Sustained weakness in the U.S. and international refining and petrochemical markets continued to adversely impact our revenue during the quarter. However, our gross margin remained relatively high due both to prudent procurement practices designed to take advantage of lower material costs stemming from recession-driven reductions in component and commodity prices as well as, to a lesser degree, the fact that certain of the quarter’s shipments were for orders received near the peak of the prior energy demand cycle.”
U.S. sales declined $6.8 million, or 45.8%, to $8.1 million, representing 50% of total sales in the second quarter of fiscal 2010. By comparison, U.S. sales were $15.0 million, representing 63% of total sales, in the same quarter of fiscal 2009. International sales during the second quarter were $8.0 million, representing 50% of total sales, down from $8.9 million, or 37% of total sales, during the same quarter of fiscal 2009. Sales to Asia increased appreciably, but were more than offset by declines in sales to all other regions, with the largest sales decreases occurring in Canada and Western Europe.
In Graham’s leading industries, 44% of sales in the second quarter were to the refining industry, compared with 47% of sales in the same period of the prior fiscal year, and approximately 33% of sales were to the chemical/petrochemical industry during the second quarter, compared with 27% in the second quarter of fiscal 2009.
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 Graham believes are more visible on a trailing 12-month basis. Nevertheless, Graham expects that international sales will comprise a larger portion of future revenue both for the remainder of the current fiscal year and beyond.
Strong Margin Driven by Reduced Material Costs
Gross profit was $5.9 million, or 36.3% of sales, in the second quarter of fiscal 2010, compared with $10.5 million, or 43.9% of sales, in the same period of the prior fiscal year. During the quarter, gross profit remained at a relatively high level compared with historic quarterly gross margins at this revenue level due primarily to material cost savings as well as to the fact that certain orders completed during the quarter originated prior to the sharp reduction in market demand which commenced in the quarter ended December 31, 2008. Offsetting these positive impacts were sales volume declines and product mix changes.
Selling, general and administrative (“SG&A”) expenses in the second quarter declined to $3.0 million, or 18.8% of sales, compared with $3.9 million, or 16.4% of sales, in the second quarter of fiscal 2009. The decrease in SG&A expenses in the current year’s second quarter compared with the same quarter of fiscal 2009 was a result of decreased variable costs, such as commissions, related to the decline in sales, as well as to lower salaries and benefits reflecting the affect of the restructuring implemented by Graham in the fourth quarter of fiscal 2009. The restructuring measures taken in the fourth quarter of fiscal 2009 has produced approximately $2.7 million in annualized savings. During the second quarter of fiscal 2010, Graham further restructured the Company and recorded a charge of $0.1 million for additional severance costs which are expected to generate additional annualized savings of approximately $1.6 million beginning in the third quarter of fiscal 2010.
Mr. Lines noted, “Given our expectations for the next several quarters, we took additional restructuring steps in September, including a further headcount reduction of approximately 7%. Restructuring was accomplished both with production personnel and our indirect staff, and we believe that we still have sufficient staffing necessary to flex for capacity fluctuations, which we continue to expect. Our estimated savings from this restructuring is expected to impact manufacturing costs more than SG&A.”
Interest income in the second quarter of fiscal 2010 declined to $15 thousand compared with $172 thousand in the same period of the prior fiscal year, primarily as a result of a significant decline in current U.S. Treasury yields compared with a year ago.
Graham’s effective tax rate was 45.8% in the second quarter of fiscal 2010. The rate includes $0.4 million associated with a charge for certain R&D tax credits claimed for the tax years 2006 through 2008. Excluding this charge, the effective tax rate would have been 29.4%. This compares with an effective tax rate of 34.5% for the second quarter of fiscal 2009 and 34.7% for full-year fiscal 2009. Excluding the charge, the effective tax rate for fiscal 2010 is expected to be 30% to 31%.
Strong First Half of Fiscal 2010 Expected to be Balanced with Weaker Second Half
Net sales for the first six months of fiscal 2010 were $36.2 million, a decline of $15.3 million, or 29.7%, compared with net sales of $51.6 million in the first six months of fiscal 2009. U.S. sales represented 51% of sales for the first six months of fiscal 2010, compared with 65% in fiscal 2009, while International sales were 49% of sales during the period, compared with 35% last year. Sales to Asia advanced strongly while sales to all other regions declined.
Sales to the refining industry accounted for 45% of revenue in the first six months of fiscal 2010, down from 50% in same period of fiscal 2009. Chemical/petrochemical sales were 28% of revenue, compared with 23% last year, and 27% of fiscal 2010 six-month sales were to other industrial applications, unchanged from the same period in fiscal 2009.
SG&A expenses were $6.3 million, or 17.3% of sales, in the fiscal 2010 six-month period compared with $7.8 million, or 15.0% of sales, in the first six months of fiscal 2009. The decrease in absolute dollars was due primarily to reduced commissions on lower sales as well as to the effects of the Company’s restructuring initiatives. Graham expects that SG&A will be in the range of $12.5 to $13.0 million for full-year fiscal 2010 as variable costs such as commissions are expected to adjust based on the geographic location of sales.
Strong Balance Sheet with Significant Cash Position
Cash, cash equivalents and investments at September 30, 2009, were $54.7 million compared with $45.3 million at June 30, 2009 and $46.2 million at March 31, 2009. The increase resulted primarily from the timing of accounts receivable. Approximately $50.1 million was invested in U.S. Treasury notes with maturity periods of 91 to 180 days at September 30, 2009. As of September 30, 2009, Graham had no borrowings against its $30.0 million revolving line of credit facility.
Net cash provided by operating activities for the second quarter of fiscal 2010 was $9.8 million, compared with $2.5 million in net cash used in operating activities in the prior year’s second quarter. The increase was a result of the timing of receivables and the impact of a $3.6 million pension contribution that was made in last year’s quarter. For the first six months of fiscal 2010, cash provided by operations was $9.3 million compared with $4.4 million in cash provided by operations in the comparable fiscal 2009 period.
Capital expenditures were $202 thousand in the second quarter and $282 thousand for the first six months of fiscal 2010, compared with $576 thousand for the second quarter and $795 thousand for the first six months of fiscal 2009. Capital expenditures in fiscal 2010 are expected to aggregate approximately $1.0 million, of which approximately 65% are planned to be used for machinery and equipment, 28% are planned to be used for information technology and 7% for other anticipated expenditures. Approximately 50% of Graham’s planned capital expenditures for fiscal 2010 are associated with productivity improvements and the balance for capitalized maintenance and other general purposes.
Strengthened Backlog Extends into Fiscal 2012
Orders during the second quarter of fiscal 2010 were $29.6 million compared with orders of $17.5 million and $8.8 million in the prior year’s second quarter and the trailing first quarter of fiscal 2010, respectively. Included in orders in the fiscal 2010 second quarter were orders related to increased refinery activity in the Middle East. International orders were $23.4 million, or 79% of total orders, while domestic orders were $6.2 million, or 21% of total orders. This compares with last year’s second quarter domestic orders of $9.1 million and international orders of $8.3 million, 52% and 48% of total orders, respectively.
Graham’s backlog was $50.5 million at September 30, 2009, down 27.6% from $69.7 million at the end of last year’s fiscal second quarter, but 36.2% above backlog of $37.0 million at June 30, 2009. At September 30, 2009, there were four orders in backlog with a value of $7.0 million remaining on hold. During the fiscal 2010 second quarter, a $3.3 million order that was scheduled to ship by the end of fiscal 2010 was put on hold and is now expected to ship in the first half of fiscal 2011, while a $0.5 million order that was previously put on hold was cancelled.
Approximately 55% of projects in Graham’s backlog as of the end of the second quarter are for refinery projects, 33% for chemical and petrochemical projects and 12% for power and other industrial commercial applications, compared with 51%, 31% and 18%, respectively, at September 30, 2008. The large refinery order received in the second quarter is not expected to be delivered until the latter half of fiscal 2011 and into fiscal 2012. Consequently, Graham expects only about 65% of its current backlog to ship in the next twelve months as opposed to the typical 85% to 90% of backlog that would normally ship in the twelve-month period.
Mr. Lines concluded, “Although we recorded the highest level of orders since the fourth quarter of fiscal 2008, our markets remain erratic and we may not begin to return to a normalized level of orders for several quarters. Based on the delay in shipment until next fiscal year of a $3.3 million order, we now believe our fiscal 2010 revenue will be from $60 to $65 million, or at the lower end of our projected range. Yet, given the strength of the first half of the year, fullyear gross margin is expected to be in the range of 33% to 35%.
“Our strategy is to grow beyond our recent historic record level of revenue by capturing a greater percentage of the market through investments in customer relationships and personnel that we are making during this recession, by expanding our product line and markets through acquisitions, and by taking advantage of growth opportunities in emerging markets. Our acquisition strategy targets companies with engineered-to-order products for the energy industries that can either expand Graham’s geographic footprint or expand our product offerings.”
Stock Buyback Program
Graham maintains a stock repurchase program which permits it to repurchase up to one million shares of its common stock through July 30, 2010. Since the initiation of the program in January 2009, Graham has repurchased 303,000 shares at a cost of $2.5 million. There were no repurchases of shares during the second quarter of fiscal 2010.
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 Glajch, Vice President - Finance & Administration and Chief Financial Officer, will review Graham’s financial and operating results for the second quarter of fiscal 2010 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 live webcast can be found at the Company 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 334947 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 at the Company website and a transcript will be posted, once available.
A replay is available by calling 1-201-612-7415, and entering account number 3055 and conference ID number 334947. The replay will be available from 2:00 p.m. on October 30, 2009, through November 6, 2009, at 11:59 p.m. Eastern Time.