Graham Corp (GHM)

Q2 2010 Earnings Call

July 29, 2010 02:00 pm ET

Executives

Deborah Pawlowski, IR

Jim Lines - President & CEO

Jeff Glajch - VP-Finance & Administration & CFO

Analysts

Rick Hult - ROTH Capital Partners

Chris McCampbell - Stifel Nicolaus

George Walsh - Gilford Securities

Presentation

Operator

Greeting and welcome to the Graham Corporation first quarter 2011 quarterly results conference call. (Operator Instructions). As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Ms. Deborah Pawlowski, IR for Graham Corporation. Thank you, Ms. Pawlowski. You may now begin.

Deborah Pawlowski

Thank you, and good afternoon, everyone. We appreciate your joining us today on Graham's fiscal 2011 first quarter financial results call.

On the call I have with me today Jim Lines, President and CEO of Graham and Jeff Glajch, Chief Financial Officer. Jim and Jeff will be reviewing the results for the quarter and also provide a review of the company's strategy and outlook during this contraction in the business cycle.

You should have a copy of the earnings release that was put out this morning, and if not, you can access at the company's website which is www.graham-mfg.com. In addition, we have posted supplemental slides on the website to provide a visual overview of our results.

As you are aware, we may make some forward-looking statements during the formal discussion as well as during the Q&A. These statements apply to future events and are subject to risks and uncertainties as well as other factors that could cause actual results to differ from what was stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as other documents filed by the company with the Securities and Exchange Commission. These documents can be found at the company's website or at sec.gov.

So with that let me turn it over to Jim to begin the discussion.

Jim Lines

Thank you, Debbie and good afternoon everyone. I am pleased by our operating performance in the quarter. Our team continues to execute well and profitably across the trough of this downturn. We have seen a low level of revenue across the past three quarters, down 30% to 40% from the same quarters twelve months earlier. We continue to maintain a cost structure that is in line with this lower revenue level to realize the benefit of productivity gains from prior investments and people, equipment and processes and most importantly to invest in internal development so we are ready when our market is recovering.

We believe we are nearing the end of the tunnel with respect to low quarterly revenue levels. It can be expected that the second quarter will be in a similar range as the prior three but nearer to the upper end of the range. Moreover, there is opportunity to exceed that level. This will depend on the number of smaller, short cycle orders one in the quarter along with our ability to pull forward and convert existing backlog to revenue.

In keeping with our full-year expectations of revenue in the $65 million to $72 million range, we therefore expect higher revenue levels commencing in the second half of the year. We've had a strong level of new orders over the past four quarters with trailing twelve month bookings at $107 million and approximately $80 million if the navy aircraft carrier order is excluded.

New orders in the first quarter were down and came in at $8.1 million. We have projected a light quarter for new orders because much of the immediately available major project work was awarded previously as is evidenced by our exceptionally high multi-year backlog level.

Backlog remains elevated and is just over $89 million. Graham is fortunate to have such a high level of good quality backlog during this period of immediate near-term uncertainty. While our markets flutter across what we believe is an early stage of recovery where erratic quarterly order levels are expected. Our backlog provides an exceptional base of business to work from and to build on to.

We expect new quarterly orders to vary quarter to quarter just as they have over the past two years. And looking at the pipeline of available opportunities, we are encouraged by how strong it appears. Understanding when orders will ultimately be awarded for projects in the pipeline remains difficult, but that is simply a timing issue. Macroeconomic drivers that spur demand for our products have not fundamentally changed.

We have identified opportunities in power generation, while alternative energy projects such as a biomass to energy and geothermal power generation. There was considerable refining activity planned for emerging economies in Asia and South America along with investments planned for the Middle East.

Moreover, we have North American refining opportunities albeit not to the 2007 to 2009 levels. Petrochemical project work appears to be picking up as we are involved in early bidding work for ethylene, fertilizer and other petrochemical processes.

There certainly has been a rough downturn, but I am pleased with how we are operating and how well we are positioned for when our markets recover. Our sales team has identified a number of areas that provide potential for organic growth including additional work for the navy, the expanding investment in the domestic market for alternative energy, nuclear power generation and there is of course additional market expansion in Asia and in South America.

Our proven ability to generate strong operating cash flow as markets recover along with existing funds available from our exceptionally strong balance sheet are allowing us to seek additional growth via acquisitions. Acquisition strategy is centered on geographic expansion and market expansion.

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