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Graham Corporation Achieves Fourth Quarter Record Earnings and 2007 Year-End Backlog
Tuesday June 5, 7:00 am ET
-- Year-end sales of $65.8 million; fourth quarter sales of $20.8 million
-- Gross margin of 29.2% in fourth quarter
-- Record backlog of $54.2 million and orders of $27.3 million in fourth quarter
-- Net income of $5.8 million for year-end; fourth quarter net income of $3.4 million, including recognition of $1.4 million in out-of-period research and development tax credit
BATAVIA, N.Y.--(BUSINESS WIRE)--Graham Corporation (AMEX: GHM - News) today reported record earnings for its fourth quarter and year ended March 31, 2007, including recognition of a $1.4 million tax credit. Sales for the fourth quarter were $20.8 million, a 31% increase from sales of $15.9 million in the fourth quarter of the prior fiscal year. This increase was driven by continued strong demand for Graham's vacuum systems and surface condensers for refineries and petrochemical processing plants. For the full fiscal year, sales were $65.8 million compared with $55.2 million in fiscal year 2006.
Net income for the fourth quarter was $3.4 million, or $0.86 per diluted share, compared with $1.0 million, or $0.25 per diluted share, in the same period the prior year. Net income for the year ended March 31, 2007, was $5.8 million, or $1.46 per diluted share, up from $3.6 million, or $0.96 per diluted share, for fiscal year 2006. Included in net income for the fourth quarter was the recognition of an out-of-period research and development tax credit of $1.4 million, or $0.35 per diluted share. Excluding such tax credit, net income was $2.0 million for the fourth quarter of fiscal year 2007, up 110% compared with the prior year's fourth quarter net income. Excluding the aforementioned tax credit, net income for the full fiscal year would have been $4.4 million, or $1.11 per diluted share for the full year. Going forward, the tax credit is expected to be in the range of $150 to $250 thousand per year, provided the credit is extended by Congress beyond fiscal 2007.
Record revenue growth in the fourth quarter of fiscal year 2007 was the result of sales of approximately 36% for oil refining projects, 37% for petrochemical and chemical projects and the remaining 27% for other industrial and commercial applications. With the strength of these industries and the strong recognition for Graham's quality engineered vacuum systems and surface condensers, Graham has focused on capturing high quality opportunities by successfully addressing customers' needs. Domestic projects accounted for 56% of total sales in the fourth quarter of fiscal 2007, while projects in the Middle East contributed 20% of sales and Asian projects contributed 19%.
Gross margin for the fourth quarter of fiscal year 2007 was 29.2%, an increase from 27.6% during the same period the prior year, and a 580 basis point sequential increase from 23.4% in the third quarter of fiscal year 2007. Higher contract prices helped to offset the volatility of material costs, a major component of the cost of goods sold. For the year ended March 31, 2007, gross margin was 25.6% compared with 28.9% for the year ended March 31, 2006.
James R. Lines, Graham's President and COO, commented, "Our fourth quarter gross margin demonstrated the effect of our more disciplined order selection process. We concentrated earlier in the year on winning the right contracts from the right customers to best utilize engineering and manufacturing capacity in order to expand margin. During the year, we took steps to improve our production throughput and operational efficiencies by upgrading manufacturing equipment, improving production flow and successfully shifting personnel resources to areas that needed them, which we expect will help us expand our operating leverage. In addition, we increased capacity by outsourcing approximately 13% of our total production hours during the second half of the fiscal year."
Selling, general and administrative ("SG&A") expenses for the fourth quarter of 2007 were $3.1 million, or 14.9% of sales, compared with $2.3 million, or 14.4% of sales, in the same period the prior year. SG&A expenses remained relatively steady at $10.3 million, or 15.7% of sales, for fiscal year 2007 compared with $9.8 million, or 17.8% of sales in the prior fiscal year. Graham expects that the general range of fourth quarter SG&A should be representative of its ongoing SG&A costs.
Operating margin for the fourth quarter of fiscal year 2007 was up 100 basis points to 14.3% driven by higher sales. Operating margin improved sequentially from 6.8% in the third quarter of fiscal year 2007. For fiscal year 2007, operating margin was 10.1% compared with 11.1% for fiscal year 2006.
Fiscal Year 2007 Sales Review
Approximately 52% of the fiscal year 2007 sales increase was a result of greater exports to Asia and the Middle East for petrochemical and refinery projects. Sales for fiscal year 2007 by geographic region were approximately 54% to North America, 23% to the Middle East, 17% to Asia and 6% to the other regions of the world. Fiscal year 2006 sales were 60% to North America, 16% to Asia, 14% to the Middle East and 10% to the rest of the world.
Sales for fiscal year 2007 by market were approximately 39% for petrochemical and chemical projects, 35% for oil refinery projects, 5% for power projects and the remaining 21% for other industrial or commercial applications. For fiscal 2006, net sales by market were approximately 42% for oil refinery projects, 24% for chemical and petrochemical projects, 14% for power projects and the remaining 20% of net sales were for other applications.
Sales increased in all product categories in fiscal year 2007 compared with fiscal year 2006 with the largest increases coming from the ejector, heat exchanger and vacuum pump product lines. Ejector systems made up approximately 26% of the increase as a result of higher sales to the oil refining industry for plant upgrades and capacity expansion projects. Higher heat exchanger sales contributed 31% to the sales growth as a result of a broad-based internal strategic effort, including training, manufacturing improvements, supplier changes and the addition of marketing tools and an expanded agency network. Vacuum pump sales accounted for 15% of the sales growth due to higher demand for domestic refinery applications.
Balance Sheet and Cash Management
Cash, cash equivalents and investments at March 31, 2007 were $15.1 million compared with $11.0 million at March 31, 2006. Net cash provided by operating activities was $5.2 million for fiscal year 2007 compared with $6.5 million for the previous fiscal year. A higher accounts receivable balance at March 31, 2007 of $11.9 million compared with $6.0 million at March 31, 2006 reflected the timing of various progress billing stages of contracts. Customer advance payments in excess of inventory in-progress increased to $6.1 million at March 31, 2007 compared with $1.6 million at March 31, 2006.
Capital expenditures were $1.6 million for fiscal year 2007 compared with $1.0 million during fiscal year 2006. Capital expenditures were primarily used for investments in upgrading manufacturing and production equipment to increase throughput and efficiency while reducing required manpower. Additional investments were made for information technology and software improvements in engineering, marketing and administrative areas.
Orders for the fourth quarter of fiscal year 2007 were $27.3 million, a 46% increase from orders of $18.6 million in the fourth quarter the prior fiscal year. For the year, orders were $86.5 million, a 31% increase from $66.2 million in fiscal year 2006.
At March 31, 2007, backlog was at an all-time high of $54.2 million compared with $33.1 million at March 31, 2006. Backlog at March 31, 2007 consists of approximately 43% for refinery projects, 35% for the petrochemical and chemical industry and 22% for other industrial or commercial applications. Revenue is recognized on a percentage of completion basis, and approximately 85% of the orders currently in backlog are expected to contribute to revenue during the coming fiscal year.
Mr. Lines concluded, "We believe that our fourth quarter performance, from both a sales and operational perspective, was exceptionally strong and indicative of our operational strengths, the demand for our products and the robustness of both the oil refining and petrochemical markets. From what we understand in the marketplace, project pipelines in these industries are full for all critical equipment manufacturers, such as Graham, and engineering and procurement contractors. In the second half of this past fiscal year, we successfully executed on our strategy to increase our manufacturing capacity to increase our share of the existing market. We also worked to clearly define our profitability parameters for selecting future orders and expect to maintain, and even improve upon, our future earnings potential. I am excited by the progress made during the past year and the potential for improved operating performance in the coming year."