Net sales for the first quarter of fiscal 2013 were $22,533 a decrease of 10% compared with $25,012 for the first quarter of the fiscal year ended March 31, 2012 (the fiscal year ended March 31, 2012 is referred to as “fiscal 2012”) include:
Net sales for the third quarter of fiscal 2012 were $24,329, an increase of 27% compared with $19,215 for the third quarter of the fiscal year ended March 31, 2011, referred to as “fiscal 2011.” Net sales for the third quarter of fiscal 2012 included $3,373 attributable to Energy Steel compared with $684 for the third quarter of fiscal 2011, which only included approximately 20% of a full quarter (our acquisition of Energy Steel occurred with only 18 days remaining in the third quarter of fiscal 2011).
Net sales for the first nine months of fiscal 2012 were $82,936, up 72% compared with net sales of $48,289 for the first nine months of fiscal 2011. Organic growth contributed 60% of the growth, with the remaining portion coming from Energy Steel. Net sales for the first nine months of fiscal 2012 included $14,450 attributable to Energy Steel compared with $684 for the first nine months of fiscal 2011.
Net income and income per diluted share for the thirdfirst quarter of fiscal 20122013 were $1,640$1,390 and $0.16,$0.14, compared with net income of $759$3,016 and income per diluted share of $0.08$0.30 for the thirdfirst quarter of fiscal 2011. Included in the third quarter of fiscal 2011 was $510, or $0.05 per diluted share, of transaction costs, related to our acquisition of Energy Steel. Excluding these transaction costs, net income and income per diluted share for the third quarter of fiscal 2011 were $1,269 or $0.13, respectively.
Net income and income per diluted share for the first nine months of fiscal 2012 were $10,124 and $1.01, respectively, compared with net income of $3,194 and income per diluted share of $0.32 for the first nine months of fiscal 2011. Excluding the previously mentioned acquisition transaction costs in fiscal 2011, net income and income per diluted share for the first nine months of fiscal 2011 were $3,704 and $0.37, respectively.2012.
Orders booked in the third quarter of fiscal 2012 were $21,933, up 23% compared with the third quarter of fiscal 2011, when orders were $17,784. Orders in the third quarter of fiscal 2012 included $9,708 attributable to Energy Steel compared with $839 of orders attributable to Energy Steel in the third quarter of fiscal 2011.
Orders booked in the first nine months of fiscal 2012 were $64,440, up 77% compared with the first nine months of fiscal 2011, when orders were $36,384. Orders in the first nine months of fiscal 2012 included $19,126 attributable to Energy Steel compared with $839 of orders attributable to Energy Steel in the nine months of fiscal 2011.
| • | �� | Orders booked in the first quarter of fiscal 2013 were $19,721, up 4% compared with the first quarter of fiscal 2012, when orders were $19,043. |
Backlog decreased to $72,567$91,980 at December 31, 2011,June 30, 2012, representing a 3% decrease compared with September 30, 2011,March 31, 2012, when our backlog was $75,094. Included in backlog at December 31, 2011 was $12,795 associated with Energy Steel.
Gross profit margin and operating margin for the third quarter of fiscal 2012 were 27% and 11% compared with 25% and 6%, respectively, for the third quarter of fiscal 2011.$94,934.
Gross profit margin and operating margin for the first nine monthsquarter of fiscal 20122013 were 28% and 10%, respectively, compared with 33% and 19% compared with 29% and 10%18%, respectively, for the first nine monthsquarter of fiscal 2011.2012.
Cash and short-term investments at December 31, 2011June 30, 2012 were $44,518$46,624 compared with $37,743 at September 30, 2011 and $43,083$41,688 at March 31, 2011.2012.
Forward-Looking Statements
This report and other documents we file with the Securities and Exchange Commission include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results implied by the forward-looking statements. Such factors include, but are not limited to, the risks and uncertainties identified by us under the heading “Risk Factors” in Item 1A of our Annual Report on Form 10-K for fiscal 2011.2012.
Forward-looking statements may also include, but are not limited to, statements about:
the current and future economic environments affecting us and the markets we serve;
expectations regarding investments in new projects by our customers;
sources of revenue and anticipated revenue, including the contribution from the growth of new products, services and markets;
plans for future products and services and for enhancements to existing products and services;
our operations in foreign countries;
our ability to integrate our acquisition of Energy Steel and continue to pursue our acquisition and growth strategy;
our ability to expand nuclear power work into new markets;
our ability to successfully execute our existing contracts;
estimates regarding our liquidity and capital requirements;
timing of conversion of backlog to sales;
our ability to attract or retain customers;
the outcome of any existing or future litigation; and
our ability to increase our productivity and capacity.
Forward-looking statements are usually accompanied by words such as “anticipate,” “believe,” “estimate,” “may,” “might,” “intend,” “appear”,“appear,” “expect” and similar expressions. Actual results could differ materially from historical results or those implied by the forward-looking statements contained in this report.
Undue reliance should not be placed on our forward-looking statements. Except as required by law, we undertake no obligation to update or announce any revisions to forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.
Fiscal 20122013 and the Near-Term Market Conditions
The downturnstart of fiscal 2013 continues to see active bidding activity. We believe current market conditions are more positive than they have been in the global economy which commencedpast few years. The business environment in our fiscal year ending March 31, 2008 ledmarkets appears to reduced demand for petroleum-based products, which in turn ledbe improving and our customers seem more inclined to defer investment in major capitalmove forward with their projects. We have seen an improved business environment over the past four quarters, compared with 12 to 18 months ago,This supports our belief that our oil refining, petrochemical and continue to believe that we arerelated markets remain in the early stages of a business recovery. WhileNevertheless, there also continues to be uncertainty as to whether a sustained global economic recovery is occurring, we believe current signs are more positive than a year ago.
In addition, we believe thatwhich in turn continues to affect the significant increase in construction costs, including raw material costs, which had occurred over the four-to-five-year period prior to the economic downturn, also led to delays intiming of new commitmentsorder placement for capital equipment by our customers. The increase in costs resulted in the economics of projects becoming less feasible. While some material costs have improved, others continueThis appears to be volatile.a timing issue rather than a worsening in our markets.
Near-term demand trends that we believe are affecting our customers’ investments include:
As the world recovers slowly from the global recession, many emerging economies continue to have relatively strong economic growth. This expansion is driving growing energy requirements and the need for more refined petroleum products. Although uncertainty in the capital and sovereign debt markets continues, there has been somewe believe that improved access to capital which has resulted in certain previously stalled projects being released.project releases.
The expansion of the economies of oil producing Middle Eastern countries, their desire to extract greater value from their oil and gas resources, and the continued global growth in demand for oil and refined products has renewed investment activity in that region. We do not believe that the ongoing political unrest in the Middle East has impacted our business. Moreover, the planned timeline of refinery projects in the major Middle Eastern countries is encouraging.
Asia,Asian countries, specifically China isand India, are experiencing renewed demand for refined petroleum products such as gasoline. This renewed demand is driving increased investment in petrochemical and refining projects. Although economic growth in ChinaAsia appears to be moderating to a lower level, we believe that it remains a fast growing area and Chinese investmentand Indian investments in refining, petrochemical and energy facilities appear to continue to be strong.
South America, specifically Brazil, Venezuela and Colombia, is seeing increased refining and petrochemical investments that are driven by their expanding economies and increased local demand for gasoline and other products that are made from oil as the feedstock.
The U.S. refining market has recently exhibited improvement, including near-term increases in orders of short cycle and spare parts. Historically, these types of orders have suggested a recovery, as delayed spending is released. We expect that the U.S. refining markets will not return to the levels experienced during the last up cycle, but that itsuch markets will improve compared with its levels over the past few years. We also expect that the U.S. refining markets will continue to be an important aspect of our business.
We are beginning to see renewed signs of planned investments in the U.S. to convert greater percentages of crude oil to transportation fuels, such as revamping distillation columns to extract residual higher-value components from the low-value waste stream. We are also seeing renewed investment to expand the flexibility of facilities to allow them to utilize multiple feed stocks.feedstocks.
Investments, including foreign investments, in North American oil sands projects have recently increased, especially for extraction projects in Alberta. Such investments suggest that downstream spending involving our equipment might increase in the next one to three years.
The recent dramatic reduction in natural gas costs in the U.S. has led to a revival in the U.S. petrochemical market and a recent interest toward potential major investment. There are numerous projects in planning or initial engineering phases for the construction of new petrochemical producing facilities, including ethylene, ammonia and urea. We historically have had strong market share within these facilities. Proposed ethylene capacity expansion and re-opening of mothballed facilities, in the U.S., as well as downstream products, are also being discussed by petrochemical producers for the first time in well over a decade. Lower natural gas costs is a relatively recent phenomena, having occurred over the past three years and is driven by technology advancements in drilling, creating a significant increase in supply. This has made the U.S. production of raw material for ethylene, ethane (which is a side product of natural gas production) globally competitive with naphtha (the alternative feedstock for ethylene used in most of the world). We believe that future investment in U.S. petrochemical markets could be significant.
Investment in new nuclear power capacity internationally may become subject to increased uncertainty due to political and social pressures, enhancedwhich were augmented by the tragic earthquake and tsunami whichthat occurred in Japan in March 2011. However, theThe need for additional safety and back up redundancies at the 104 existing domestic nuclear plants could increase demand for Energy Steel’s products in the near-term.
InvestmentInvestments in existing U.S. nuclear plants to extend their operating life and add incremental capacity are expected to continue.
Investment in new U.S. nuclear reactor projects planned for the Summer (South Carolina) and Vogtle (Georgia) facilities suggest continued growth in the domestic nuclear market.market, although such growth may be slowed by the perceptions related to the Fukushima accident in Japan and the potential impact of increased use of natural gas for power generation.
We expect that the consequences of these near-term trends, and specifically projected expansion in petrochemical and oil refining that will most likely occur outside of North America, primarily in the growing Asian and South American markets, will result in more pressure on our pricing and gross margins, as these markets historically provided lower margins than North American refining markets. A potential offset to margin pressure from international markets may come from investments in new petrochemical capacity built in North America and the timing of such investments.
Because of continued global economic and financial uncertainty and the risk associated with growth in emerging economies, we also expect that we will have continued volatility in our order pattern. We continue to expect our new order levels to remain volatile, resulting in both strong and weak quarters. As the chart below indicates, quarterlyQuarterly orders can vary significantly.significantly as indicated in the following chart which depicts our quarterly order levels for the first quarter of fiscal 2013 as well as the four quarters of fiscal 2012 and fiscal 2011.
We believe that looking at our order level in any one quarter does not provide an accurate indication of our future expectations or performance. Rather, we believe that looking at our orders and backlog over a one to two yearone-to two-year period provides a better measure of our business. ForIn the next several quarters,near future, we also expect to see smaller value projects than what we sawhad seen during the beginning of the last expansion cycle. This will require more orders for us to achieve a similar revenue level and will adversely impact our ability to realize margin gains through volume leverage.
Mix Shift: Expected Stronger International Growth in Refining and Chemical Processing with Domestic Growth in Nuclear Power and U.S. Navy Projects
We expect growth in the refining and chemical processing markets to be driven by emerging markets. We have also expanded our addressable markets through the acquisition of Energy Steel and our focus on U.S. Navy nuclear propulsion projects. We believe our revenue opportunities during the near term will be equivalent between the domestic and international markets.
Over the long-term, we expect our customers’ markets to regain their strength and, while remaining cyclical, continue to grow. We believe the long-term trends remain strong and that the drivers of future growth include:
Long-term Demand Trends
Global consumption of crude oil is estimated to expand significantly over the next two decades, primarily in emerging markets. This is expected to offset estimated flat to slightly declining demand in North America and Europe. In addition, an increased trend toward export supply of finished product from the Middle East to North America and Europe is expected.
Global oil refining capacity is projected to increase, and is expected to be addressed through new facilities, refinery upgrades, revamps and expansions.
Increased demand is expected for power, refinery and petrochemical products, stimulated by an expanding middle class in Asia, South America and the Middle East.
Increased development of geothermal electrical power plants in certain regions is expected to address projected growth in demand for electrical power.
Increased global regulations over the refining, petrochemical and nuclear power industries are expected to continue to drive requirements for capital investments.
Increased number ofMore refineries convertingare expected to convert their facilities to use heavier, more readily available and lower cost crude oil as a feedstock.
Shale gas development and the resulting increase in available low cost natural gas in the U.S. may change the power landscape. This may drive more future investment in natural gas or combined cycle power plants and possibly away from planned nuclear.
The lower cost of natural gas and its by-product, ethane, may lead to renewed investment in North American based chemical/petrochemical facilities to meet domestic needs. Ethane, as a feedstock to ethylene production, is expected.now at a cost advantage to naphtha, the oil-based feedstock for ethylene production used in much of the rest of the world. Because of this cost competitive position of ethane, the opportunity to invest in North American chemical/petrochemical plants is possible for the first time in well over a decade.
Construction of new petrochemical plants in the Middle East are planned to meet increased local demand.
Increased focus on safety and redundancy is anticipated in existing nuclear power facilities.
Long-term increased project development of international nuclear facilities is expected, despite the recent tragedy in Japan, including(including in the United States.
Construction of new petrochemical plants in the Middle East, where natural gas is plentiful and less expensive, is expected to continue.U.S.).
Increased investments in new power generation projects are expected in Asia and South America to meet projected consumer demand increases.
Long-term growth potential is believed to exist in alternative energy markets, such as geothermal, coal-to-liquids, gas-to-liquids and other emerging technologies, such as biodiesel, ethanol and waste-to-energy.
Shale gas development and the resulting availability of affordable natural gas as feedstock to U.S.-based chemical/petrochemical facilities is expected to lead to renewed investment in chemical/petrochemical facilities in the U.S.
We believe that all of the above factors offer us long-term growth opportunities to meet our customers’ expected capital project needs. In addition, we believe we can continue to grow our less cyclical smaller product lines and aftermarket businesses.
Emerging markets that require petroleum-based products are expected to continue to grow at rates faster than the U.S. However, because of our access to the nuclear power industry as a result of the Energy Steel acquisition and our expanding market penetration with the U.S. Navy, we believe the domestic and international markets will offer similar opportunities for us in the near term. Our domestic sales, as a percentage of aggregate product sales, whichin the first quarter of fiscal 2013 were 56%. This continues the trend from fiscal 2012 where domestic sales had increased to 54% of total sales, up from 50%45% in fiscal 2010 and 2011. The increase in domestic sales has been due to our acquisition of Energy Steel in late fiscal 2011, which primarily has a domestic customer base, and the conversion of the U.S. Navy order. The Navy activity represents our production of surface condensers for the CVN-79 Gerald R. Ford Class nuclear carrier order that was won in the third quarter of our fiscal year ended March 31, 2007 to 63% in our fiscal year ended March 31, 2009, was 52% in the first nine months of fiscal 2012.2010.
Results of Operations
For an understanding of the significant factors that influenced our performance, the following discussion should be read in conjunction with our condensed consolidated financial statements and the notes to our condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.
The following table summarizes our results of operations for the periods indicated:
| Three Months Ended December 31, | Nine Months Ended December 31, | Three Months Ended June 30, | ||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | 2012 | 2011 | |||||||||||||||||||
Net sales | $ | 24,329 | $ | 19,215 | $ | 82,936 | $ | 48,289 | $ | 22,533 | $ | 25,012 | ||||||||||||
Net income | $ | 1,640 | $ | 759 | $ | 10,124 | $ | 3,194 | $ | 1,390 | $ | 3,016 | ||||||||||||
Diluted income per share | $ | 0.16 | $ | 0.08 | $ | 1.01 | $ | 0.32 | $ | 0.14 | $ | 0.30 | ||||||||||||
Total assets | $ | 119,850 | $ | 111,192 | $ | 119,850 | $ | 111,192 | $ | 112,749 | $ | 118,195 | ||||||||||||
The ThirdFirst Quarter andof Fiscal 2013 Compared With the First Nine MonthsQuarter of Fiscal 2012 Compared With the Third Quarter and First Nine Months of Fiscal 2011
Sales for the thirdfirst quarter of fiscal 20122013 were $24,329,$22,533, a 27% increase10% decrease as compared with sales of $19,215$25,012 for the thirdfirst quarter of fiscal 2011.2012. The increasedecrease in the current quarter’s sales was due both to higherdriven by lower volume in the historic product lines as well as the benefit of our acquisition of Energy Steel. Organic growth in historic product lines was $2,425, or 13%, while the increase fromrefining market, which had a full quarter of Energy Steel being included in fiscal 2012’s results compared with 18 days of Energy Steel’s results being included in fiscal 2011 was $2,689, ($3,373 in fiscal 2012 compared with $684 in fiscal 2011). Domestic sales increased $7,055, or 103%,large Mideast project convert in the third quarterfirst half of fiscal 2012 compared with the third quarter of fiscal 2011. Approximately 62% of the growth was organic, and the remaining 38% of this growth was due to ownership of the Energy Steel business for an entire quarter compared with 18 days in the third quarter of fiscal 2011.2012. International sales year-over-year decreased $1,941,$3,851, or 16%28%, driven by lower salesdue to decreases of $5,188 in the Middle East and $2,324 in South America. SalesAmerica, partly offset by higher Canadian sales, which were up $2,940. International sales accounted for 44% and 55% of total sales for the first quarter of fiscal 2013 and fiscal 2012, respectively. Domestic sales increased $1,372, or 12%, in the three months ended December 31, 2011 were 31% tofirst quarter of fiscal 2013 compared with the refining industry, 19% to the chemical and petrochemical industries, 27% to the power industry, including the nuclear market and 23% to other commercial and industrial applications. Sales in the three months ended December 31, 2010 were 40% to the refining industry, 17% to the chemical and petrochemical industries, 23% to the power industry, including the nuclear market and 20% to other commercial and industrial applications.first quarter of fiscal 2012. Fluctuations in sales among products and geographic locations can vary measurably from quarter-to-quarter based on timing and magnitude of projects.
Sales for the first nine months of fiscal 2012 were $82,936, an increase of 72% compared with sales of $48,289 for the first nine months of fiscal 2011. Organic growth contributed 60% of the growth, while the addition of Energy Steel contributed $13,766, or 40% of the increase, in sales compared with the first nine months of fiscal 2011. Domestic sales accounted for 52% and 41% of total sales for the first nine months of fiscal 2012 and fiscal 2011, respectively. Domestic sales increased year-over-year by $23,007, or 116%. Organic domestic sales increased 48%, with the rest of the domestic increase due to the impact of Energy Steel. International sales year-over-year increased $11,639, or 41%. Due to the production of a large refinery project, $7,895 or 68%, of the total increase in international sales came from the Middle East. The remaining international sales increase came from Canada, South America and Asia as well as from other regions. Sales in the first ninethree months of fiscalended June 30, 2012 were 38%23% to the refining industry, 14%25% to the chemical and petrochemical industries, 27%23% to the power industry, including the nuclear market and 21%29% to other commercial and industrial applications. Sales in the first ninethree months of fiscalended June 30, 2011 were 34%48% to the refining industry, 28%12% to the chemical and petrochemical industries, 16%23% to the power industry, and 22%17% to other commercial and industrial applications. For additional information on future anticipated sales and our markets, see “Orders and Backlog” below.
Gross profit margin for the third quarter of fiscal 2012 was 27% compared with 25% for the third quarter of fiscal 2011. Gross profit for the third quarter of fiscal 2012 increased to $6,462 from $4,751, or 36%, compared with the same period in fiscal 2011. Higher organic volume and more efficient facility utilization provided theOur gross profit gain.
Gross profit margin for the first nine monthsquarter of fiscal 20122013 was 33%28% compared with 29%33% for the first nine monthsquarter of fiscal 2011.2012. Gross profit dollars for the first nine monthsquarter of fiscal 2013 decreased 24% compared with fiscal 2012, increased 97% to $27,459$6,236 from $8,197. Gross profit percentage and dollars decreased primarily due to lower volume / capacity utilization and conversion of projects which had less favorable pricing compared with the same periodprojects converted in the first quarter of fiscal 2011,2012. Certain projects which had gross profit of $13,948. The addition of Energy Steel provided 32%converted in the first quarter of the total increase, or $4,345, with higher organic volume, more efficient facility utilization, as well asprior fiscal year were won during the conversion of certain refining projects providing the remaining gross profit gain.prior market peak, where pricing was strong.
Selling, general and administrative (“SG&A”) expense in the three and nine-month periods ended December 31, 2011 increased $181, or 5%, and $2,591, or 28%, respectively, compared with the same periods of the prior year. Excluding $666 in acquisition-related costs in the third quarter of fiscal 2011, SG&A expense increased $847, or 29%, and $3,257, or 38%, respectively, compared with the same periods of fiscal 2011. Approximately 40% of the increase for both the three and nine-month periods was organic and due to increased headcount and higher variable costs related to higher sales and income. The remaining 60% of the added SG&A costs, was due to the addition of Energy Steel.
SG&A expenseexpenses as a percent of sales for the three and nine-monththree-month periods ended December 31,June 30, 2012 and 2011 waswere 18% and 15% and 14%, respectively. ThisActual costs in fiscal 2013 were $4,084, an increase of $383, or 10%, compared with 19% for the both periods ended December 31, 2010.first quarter of fiscal 2012 SG&A of $3,701. The decrease resulted from higher sales during the current year periods.increase in SG&A expenses was primarily due to personnel additions to support growth in our business.
Interest income was $12 and $48 for the three month-periods ended June 30, 2012 and nine-month periods ended December 31, 2011 compared with $13was $11 and $47 for the same periods ended December 31, 2010. The low level$21, respectively. Low levels of interest income relative toresulted from the amount of cash invested reflects the persistentcontinuing low level of interest rates on short term U.S. government securities and bank money market funds in which we invest.rates.
Interest expense was $55 and $260$80 for the three and nine-month periodsquarter ended December 31, 2011,June 30, 2012, up from $14 and $30$20 for the same periodsquarter ended December 31, 2010.June 30, 2011. The majority of the three and nine-month period increase $30 and $159, most of which occurred in the second quarter of fiscal 2011, was relateddue to the revaluation of the expected value of the earn-out from the Energy Steel acquisition.interest recorded relating to our uncertain tax positions.
Our effective tax rate in fiscal 2012 is projected to be approximately 34%. The tax rate in the thirdfirst quarter of fiscal 20122013 was 37%. The33%, which compares with 34% in the same period last year. Included in the first quarter was a $24 charge to resolve a dispute with the IRS relating to research and development tax ratecredits claimed during tax years 2009 and 2010.
Net income for the first ninethree months of fiscal 2013 compared with the first three months of fiscal 2012 was 34%. The actual annual effective tax rate for fiscal 2011 was 33%.
Net income for the three$1,390 and nine months ended December 31, 2011 was $1,640 and $10,124, respectively, compared with $759 and $3,194, respectively, for the same periods in the prior fiscal year.$3,016, respectively. Income per diluted share in fiscal 2012 was $0.16$0.14 and $1.01$0.30 for the three and nine-month periods, compared with $0.08 and $0.32 for the same periods of fiscal 2011. Excluding $510 in Energy Steel-related acquisition transaction expenses in the three and nine months ended December 31, 2010, net income was $1,269 and $3,704, respectively, and income per diluted share was $0.13 and $0.37, respectively.respective periods.
Liquidity and Capital Resources
The following discussion should be read in conjunction with our condensed consolidated statementsCondensed Consolidated Statements of cash flows:Cash Flows:
| December 31, 2011 | March 31, 2011 | June 30, 2012 | March 31, 2012 | |||||||||||||
Cash and investments | $ | 44,518 | $ | 43,083 | $ | 46,624 | $ | 41,688 | ||||||||
Working capital | $ | 54,099 | $ | 44,493 | 54,241 | 52,730 | ||||||||||
Working capital ratio(1) | 3.4 | 2.4 | 3.6 | 3.2 | ||||||||||||
| Working capital ratio equals current assets divided by current liabilities. |
Net cash generated by operating activities for the first nine monthsquarter of fiscal 20122013 was $3,914,$5,477, compared with $5,848$1,588 used by operating activities for the first nine monthsquarter of fiscal 2011.2012. The increase in cash generation came primarily from earningsgenerated was due to improvements in unbilled revenue and lower inventory levels. This generation wasaccounts receivable, partly offset by usage of cash for a decrease inlower customer deposits and lower accounts payable and tax payments. Cash generated by operations was $7,877 in the third quarter of fiscal 2012, as compared with cash usage of $3,579 in the first six months of fiscal 2012.net income.
Dividend payments and capital expenditures in the first nine monthsquarter of fiscal 20122013 were $594$200 and $2,621,$300, respectively, compared with $592$198 and $1,435,$340, respectively, for the first nine monthsquarter of fiscal 2011. 2012.
Capital expenditures for fiscal 20122013 are expected to be between $3,000 and $3,500. Over 85%Approximately 68% of our fiscal 20122013 capital expenditures are expected to be for machinery and equipment, with the remaining amounts to be used for information technology and other items.
Cash and investments were $44,518$46,624 on December 31, 2011June 30, 2012 compared with $43,083$41,688 on March 31, 2011, up 3%. Our cash and investments increased by $6,775 in the third quarter of fiscal 2012, up from $37,743 on September 30, 2011. During the first six months of fiscal 2012, we saw a significant increase in accounts receivable as projects were completed and shipped to customers. As expected, we experienced a strong improvement in our cash and investments position in the third quarter and believe we will see a further increase in cash and investments during the last quarter of fiscal 2012.$4,936, or 12%.
We invest net cash generated from operations in excess of cash held for near-term needs in either a money market account or in U.S. government instruments, generally with maturity periods of up to 180 days. Our money market account is used to securitize our outstanding letters of credit and allows us to pay a lower cost on those letters of credit.
Our revolving credit facility with Bank of America, N.A. provides us with a line of credit of $25,000, including letters of credit and bank guarantees. In addition, the agreement allows us to increase the line of credit, at our discretion, up to another $25,000, for total availability of $50,000. Borrowings under our credit facility are secured by all of our assets. Letters of credit outstanding under our credit facility on December 31, 2011June 30, 2012 and March 31, 20112012 were $8,295$12,425 and $13,751,$9,920, respectively. There were no other amounts outstanding on our credit facility at December 31, 2011June 30, 2012 and March 31, 2011.2012. Our borrowing rate as of December 31, 2011June 30 and March 31, 20112012 was Bank of America’s prime rate, or 3.25%. Availability under the line of credit was $16,705$12,575 at December 31, 2011.June 30, 2012. We believe that cash generated from operations, combined with our investments and available financing capacity under our credit facility, will be adequate to meet our cash needs for the foreseeableimmediate future.
Orders and Backlog
Orders for the three monththree-month period ended December 31, 2011June 30, 2012 were $21,933,$19,721 compared with $17,784$19,043 for the same period last year, an increase of 23%4%. Orders from our traditional product lines were down $4,696, or 28% to $12,249. Orders attributable to Energy Steel were $9,684, up from $839 in the same quarter last year (which quarter represented only the 18-day period we owned Energy Steel during the quarter). For the three months ended December 31, 2011, orders increased to $10,858 in power, including the nuclear market, up from $1,525 in the same quarter last year and $4,682 in chemical and petrochemical, up from $2,191 last year. These gains were offset by lower orders in refining, which were $1,988, down from $8,199, and in orders from other commercial and industrial applications of $4,405, which were down from $5,869 in the same quarter last year. Orders represent written communications received from customers requesting us to supply products and services.
During the first nine months of fiscal 2012, Domestic orders were $64,440, compared with $36,384 for the same period of fiscal 2011, an increase of 77%. Organic growth accounted for $9,769, or 35% of the growth, with Energy Steel accounting for the remaining $18,287, or 65% of the growth. For the first nine months of fiscal 2012, orders increased in power, up $21,634 (with $18,297 attributable to Energy Steel), chemical and petrochemical, up $11,199, other commercial and industrial represented applications, up $211. During the nine-month period, refining decreased $4,988.
During the three-month period ended December 31, 2011, domestic orders represented 80%, or $17,598,41% of total orders, whileor $8,006, and international orders represented 20%, or $4,335,were 59% of total orders, or $11,715, in the current quarter compared with the same period in the priorfirst quarter of fiscal year,2012, when domestic orders were 50%66%, or $8,953,$12,654, of total orders, and international orders were 50%34%, or $6,389, of total orders, or $8,831.orders.
For the first nine months of fiscal 2012, domestic orders were 66% of total orders or $42,532, while international orders were 34%, or $21,908. During the first nine months of fiscal 2011, domestic orders were 46%, or $16,696, and international orders were 54% of total orders, or $19,688.
Backlog was $72,567$91,980 at December 31, 2011,June 30, 2012, compared with $75,094 on September 30, 2011 and $91,096$94,934 at March 31, 2011. Included in the backlog is $12,795 attributable to Energy Steel.2012, a 3% decrease. Backlog is defined as the total dollar value of orders received for which revenue has not yet been recognized. All orders in backlog represent orders from our traditional markets in established product lines. Approximately 85%70% to 90%80% of orders currently in backlog are expected to be converted to sales within the next twelve months. This is lower than our normal conversion, which is approximately 85% to 90% over an upcoming 12-month period. The difference in our current backlog includes the carrier project for the U.S. Navy and two orders for new U.S. nuclear plants. These projects have a multi-year conversion cycle and significant stops and starts during the manufacturing process. At December 31, 2011, 14%June 30, 2012, 30% of our backlog was attributable to equipment for refinery project work, 22%18% for chemical and petrochemical projects, 24%26% for power projects, including nuclear, and 40%26% for other industrial or commercial applications (including the carrier order for the U.S. Navy order)Navy). At December 31, 2010, 38%June 30, 2011, 30% of our backlog was attributed to equipment for refinery project work, 8%10% for chemical and petrochemical projects, 16%21% for power projects, and 38%39% for other industrial or commercial applications.
At December 31, 2011,June 30, 2012, one project with a value of $1,010 was on hold. The project was placed back on hold in the second quarter of fiscal 2012. This project was originally won in September 2008, placed on hold in November 2008 and removed from being on hold by the customer in October 2010. The project was placed back on hold in the second quarter of fiscal 2012. The projectAlthough it had a scheduled delivery of December 2012.
Full Year Outlook
We believe that we areremain in the early stages of a recovery in the refinery and petrochemical markets. However, as we anticipated, the recovery is not linear. We also believe the improved strength of the alternative energy markets, and revived activity inincluding the U.S. nuclear industrymarket, will continue through fiscal 2012 and beyond.2013. We experienced significant organic order growth beginning in the second halffourth quarter of fiscal 2011,2012, with orders of $42,269, which growth has continuedwas approximately double the average order level for each of the first three quarters. The first quarter of fiscal 2013 saw a drop in orders to $19,721 partly due to near-term timing of orders. Despite this reduction, we continue to see significant activity in our pipeline and remain optimistic that we will experience stronger order levels in the first nine months of fiscal 2012. We have also added tonear future. Our backlog is $91,980, just 3% below our businesses with the acquisition of Energy Steel.March 2012 level, which represented our record high at $94,934.
We believe that with our current backlog and projects currentlyexpect revenue to increase to $105 to $115 million, a gain of 2-11%, in production, our revenue will be between $105 and $108 million for fiscal 2012, an increase of 41%2013. Approximately, 18% to 45% over the prior fiscal year. Approximately, 16% to 20%22% of our revenue in fiscal 2012 is expected to come from Energy Steel. In fiscal 2011,2012, Energy Steel contributed 8%17% of our revenue, as we completed our acquisition laterevenue. In fiscal 2012, sales in the third quarterfirst half of fiscal 2011. We expect thatthe year were $58,607, while they decreased to $44,579 in the near term order levels will continue to be variable, similar to the second half of the year. Conversely, in fiscal 2011 and2013, we expect stronger sales in the second half of the year compared with the first nine monthshalf of the fiscal year.
Normally, we convert 85% to 90% of our existing backlog to sales within a 12-month period. However, we have three large projects which are converting over a multi-year time period. Although the U.S. Navy project and two large projects for the new nuclear reactors being built in the southeast U.S. will partially convert in fiscal 2013, we expect all three projects to continue into subsequent fiscal years. These three projects make up approximately one third of our current backlog. Therefore, our June 30, 2012 backlog will extend beyond our historical conversion level. We expect to convert approximately 70% to 80% of our March 31, 2012 backlog to sales in fiscal 2013.
For fiscal 2013, we expect sales to be lower in the first half of the year than during the second half of the year. This is a result of the lower level of orders received in the first three quarters of fiscal 2012 relative to the stronger fourth quarter orders achieved in fiscal 2012. Our expected growth range for fiscal 2013 assumes conversion of backlog as well as continued market improvement and investment by our customers. The upper end of the range may be achieved by acceleration of projects by refining, petrochemical and alternative energy end users, our historical customer base. We believe increased focus on safety and redundancy projects at U.S. nuclear facilities may provide near term opportunities at Energy Steel. The U.S. Navy and two large nuclear projects are also expected to contribute significantly to sales in fiscal 2013. Any unexpected delay in any of these projects could negatively impact fiscal 2013 revenue and earnings.
We expect gross profit margin in fiscal 20122013 to be in the 32%28% to 33%31% range. The full year expectedThis margin level represents an increasea decrease from the fiscal 2011, but reflects a lower2012 gross margin of 32%, which included some higher margin projects, especially in the fourth quarterfirst two quarters. Gross margin was 36% in the first half of fiscal 2012 compared with the 33% achievedand 26% in the first nine monthssecond half of fiscal 2012. Typically, earlyWhile we still have a few lower margin projects in a recovery, pricing is not as strong as it can be onceour backlog, the recovery is fully underway. Grossoverall margin within our backlog has improved over the past few quarters. We expect gross margins in the first nine monthshalf of fiscal 2013 to be comparable or slightly higher to the currentsecond half of fiscal year, especially2012, with margin improvement in the firstsecond half of the fiscal year, were similar to the marginsyear. We also believe that we expect atare experiencing a stronger point in a recovery, primarily because we converted certain refining projects that had been in backlog for some time, which were won in a better pricing environment during the end of the prior upcycle. During the first half of the year, Energy Steel also had a higher than normal facility utilization, along with a favorable product mix.
Looking forward, we also expect that the shift of ordersbusiness in the refining and petrochemical market toward international markets, where margins are generally lower than domestic project margins. Moreover, we are investing in operations and engineering personnel to prepare for current and future growth opportunities.
Gross profit margins will have the effect of reducing our margins as comparedare expected to improve with the last upcycle.anticipated volume increases, which are expected to occur during fiscal 2013 and beyond. Due to these changes in geographicalgeographic and end use markets,market mix, we expect gross margins are unlikely to reach the 40% range that we achieved in the prior up cycle. We believe long-termlong term up cycle gross profit margin percentage in the mid-to-upper 30% range30’s is a more realistic expectation. Moreover, weWe also expect this recovery will continue to be more focused on emerging markets, which historically have lower margins and more competitive pricing than developed markets.
We believe achievement of the upper end of our margin projections can occur if we experience: (i) increased volume that utilizes excess capacity; (ii) continued improvements in our manufacturing productivity; and/or (iii) expanded margin opportunities at Energy Steel.
SG&A spending which was $11,745 for the nine-month period induring fiscal 2012,2013 is expected to be between $15,600 and $16,500, representing approximately 15%-16% of anticipated full year revenue. This is down from 18% of sales in fiscal 2011 as we leverage our revenue growth with less incremental SG&A. The increase in dollars spent, up from $13,076 in fiscal 2011, includes both the full year impact of Energy Steel (compared with 3 1/2 months in fiscal 2011) as well as continued investmentsales. We continue to invest in personnel as we prepare for additionalincreased opportunities in fiscal 20122013 and beyond. Our effective tax rate during fiscal 20122013 is expected to be approximatelybetween 34% and 35%.
Cash flow in fiscal 20122013 is expected to continue to be positive, as the cash usage which occurred in the first half of the year was replaceddriven primarily by cash generation in the third quarter and we expect the fourth quarter to continue this trend. We expect to see reductions in accounts receivable and unbilled revenue in the fourth quarter of fiscal 2012,net income, partly offset by capital spending as well as less change in customer deposits, which has been declining since the fourth quarter of fiscal 2010.a minimal need for additional working capital.
Contingencies and Commitments
We have been named as a defendant in certain lawsuits alleging personal injury from exposure to asbestos contained in our products. We are a co-defendant with numerous other defendants in these lawsuits and intend to vigorously defend ourselves against these claims. The claims are similar to previous asbestos lawsuits that named us as a defendant. Such previous lawsuits either were dismissed when it was shown that we had not supplied products to the plaintiffs’ places of work or were settled by us for amounts below expected defense costs. Neither the outcome of these lawsuits nor the potential for liability can be determined at this time.
From time to time in the ordinary course of business, we are subject to legal proceedings and potential claims. As of December 31, 2011,June 30, 2012, other than noted above, we were unaware of any other material litigation matters.
Critical Accounting Policies, Estimates, and Judgments
Our unaudited condensed consolidated financial statements are based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make significant assumptions.We believe that the most critical accounting estimates used in the preparation of our condensed consolidated financial statements relate to labor hour estimates used to recognize revenue under the percentage-of-completion method, accounting for business combinations, goodwill and intangible asset impairment, accounting for income taxes, accounting for contingencies, under which we accrue a loss when it is probable that a liability has been incurred and the amount can be reasonably estimated, and accounting for pensions and other postretirement benefits. For further information, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 “Financial Statements and Supplementary Data” included in our Annual Report on Form 10-K for fiscal 2011.the year ended March 31, 2012.
Off Balance Sheet Arrangements
We did not have any off balance sheet arrangements as of December 31, 2011June 30, 2012 or March 31, 2011,2012, other than operating leases and letters of credit.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The principal market risks (i.e., the risk of loss arising from changes in the market) to which we are exposed are foreign currency exchange rates, price risk and project cancellation risk.
The assumptions applied in preparing the following qualitative and quantitative disclosures regarding foreign currency exchange rate, price risk and project cancellation risk are based upon volatility ranges experienced by us in relevant historical periods, our current knowledge of the marketplace, and our judgment of the probability of future volatility based upon the historical trends and economic conditions of the markets in which we operate.
Foreign Currency
International consolidated sales for the first nine monthsquarter of fiscal 2012 were 48%44% of total sales compared with 41%55% for the same period of fiscal 2011. Operating in markets throughout the world exposes us to movements in currency exchange rates. Currency movements can affect sales in several ways, the foremost being our ability to compete for orders against foreign competitors that base their prices on relatively weaker currencies. Business lost due to competition for orders against competitors using a relatively weaker currency cannot be quantified. In addition, cash can be adversely impacted by the conversion of sales made by us in a foreign currency to U.S. dollars. In the first quarter of each of fiscal 2012 and fiscal 2011, all sales by us and our wholly-owned subsidiaries, for which we were paid, were denominated in the local currency (U.S. dollars or Chinese RMB). At certain times, we may enter into forward foreign currency exchange agreements to hedge our exposure against potential unfavorable changes in foreign currency values on significant sales contracts negotiated in foreign currencies.
We have limited exposure to foreign currency purchases. In each of the first nine monthsquarter of fiscal 20122013 and 2011,2012, our purchases in foreign currencies represented 1% and 1%, respectively, of the cost of products sold. At certain times, we may utilize forward foreign currency exchange agreementscontracts to limit currency exposure. Forward foreign currency exchange contracts were not used in the periods being reported on in this Quarterly Report on Form 10-Q and as of December 31, 2011June 30, 2012 and March 31, 2011,2012, we held no forward foreign currency agreements.contracts.
Price Risk
Operating in a global marketplace requires us to compete with other global manufacturers which, in some instances, benefit from lower production costs and more favorable economic conditions. Although we believe that our customers differentiate our products on the basis of our manufacturing quality and engineering experience and excellence, among other things, such lower production costs and more favorable economic conditions mean that certain of our competitors are able to offer products similar to ours at lower prices. Moreover, the cost of metals and other materials used in our products have experienced significant volatility. Such factors, in addition to the global effects of the recent volatility and disruption of the capital and credit markets, have resulted in downward demand and pricing pressure on our products.
Project Cancellation and Project Continuation Risk
Economic conditions over the past few years have led to a higher likelihood of project cancellation by our customers. Currently, we have one project on hold with a value of $1,010. We attempt to mitigate the risk of cancellation by structuring contracts with our customers to maximize the likelihood that progress payments made to us for individual projects cover the costs we have incurred. As a result, we do not believe we have a significant cash exposure to projects which may be cancelled.
Open orders are reviewed continuously through communications with customers. If it becomes evident to us that a project is delayed well beyond its original shipment date, management will move the project into “placed on hold” (i.e., suspended) category. Furthermore, if a project is cancelled by our customer, it is removed from our backlog.
Economic conditions over the past few years have led to a higher likelihood of project cancellation by our customers. At June 30, 2012, one project with a value of $1,010 was on hold. We attempt to mitigate the risk of cancellation by structuring contracts with our customers to maximize the likelihood that progress payments made to us for individual projects cover the costs we have incurred. As a result, we do not believe we have a significant cash exposure to projects which may be cancelled.
| Item 4. | Controls and Procedures |
Conclusion regarding the effectiveness of disclosure controls and procedures
Our President and Chief Executive Officer (principal executive officer) and Vice President-Finance & Administration and Chief Financial Officer (principal financial officer) each have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, and as of such date, our President and Chief Executive Officer and Vice President-Finance & Administration and Chief Financial Officer concluded that our disclosure controls and procedures were effective in all material respects.
Changes in internal control over financial reporting
There has been no change to our internal control over financial reporting during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or that is reasonably likely to materially affect our internal control over financial reporting.
GRAHAM CORPORATION AND SUBSIDIARIES
FORM 10-Q
December 31, 2011June 30, 2012
PART II - OTHER INFORMATION
| Item |
The below disclosure is being made pursuant to the instruction contained in Item 5 of Form 10-Q. The item numbers below refer to the applicable Current Report on Form 8-K Item numbers.
Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
On July 25, 2012, the Compensation Committee of the Board of Directors approved increases to the base salaries of our named executive officers, as follows:
| Named Executive Officer | Previous Base Salary | New Base Salary | ||||||
James R. Lines, | $ | 292,778 | $ | 340,000 | ||||
Jeff Glajch, | $ | 229,473 | $ | 240,000 | ||||
Alan Smith, | $ | 194,713 | $ | 205,000 | ||||
Robert A. Platt | $ | 163,000 | $ | 175,000 | ||||
Jennifer Condame, | $ | 140,689 | $ | 150,000 | ||||
Item 5.07 Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Stockholders held on July 26, 2012, our stockholders voted on the matters described below.
| 1. | Our stockholders elected three directors, each for a three year term expiring in 2015. The number of |
Director Nominee | Votes For | Votes Withheld | Broker Non-Votes* | |||||||||
Helen H. Berkeley | 6,851,303 | 120,195 | 1,804,347 | |||||||||
Alan Fortier | 6,869,784 | 101,714 | 1,804,347 | |||||||||
James R. Lines | 6,869,406 | 102,092 | 1,804,347 | |||||||||
| 2. | On an advisory basis, our stockholders approved the compensation of the our named executive officers as such compensation information is disclosed in our definitive proxy statement filed with the Securities and |
Under
Votes For | Votes Against | Abstentions | Broker Non-Votes* | |||
| 6,778,783 | 100,768 | 91,947 | 1,804,347 |
| 3. | Our stockholders ratified the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending March 31, 2013. The number of shares that voted for, against and abstained from voting for the ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending March 31, 2013 is summarized in the table below. |
Votes For | Votes Against | Abstentions | ||
| 8,701,273 | 45,125 | 29,447 |
| * | Broker non-votes represent shares held by broker nominees for beneficial owners that were not voted with respect to a non-routine proposal because the broker nominee did not receive voting instructions from the beneficial owner and lacked discretionary authority to vote the shares. If a broker does not receive voting instructions from the beneficial owner, a broker may vote on routine matters but may not vote on non-routine matters. Broker non-votes are counted for the purpose of determining the presence of a quorum but are not counted for the purpose of determining the number of shares entitled to vote on non-routine matters such as an election of directors and the advisory vote on our named executive officer compensation. |
Item 8.01 Other Events.
On July 26, 2012 the Board of Directors extended our previously announcedexisting stock repurchase program. The stock repurchase program, we may make repurchases from timeas extended, permits us to timerepurchase up to 1,000,000 shares of our Common Stock either in the open market or through privately negotiated transactions and fund such repurchases with current cash on hand and cash generated from operations. Our stock repurchase program terminates at the earlier of the expiration of the program inon July 2012,29, 2013, when all 1,0001,000,000 shares authorized thereunder arehave been repurchased or when ourthe Board of Directors otherwise determines to terminateterminates the program. CommonWe intend to use cash on hand to fund any stock repurchases inunder the quarterly periods set forth below were as follows:program. 623,000 shares of Common Stock remain available for repurchase under the stock repurchase program.
Period | (a) Total Number of shares Purchased | (b) Average Price Paid Per Share | (c)(1) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs | ||||||||||||
10/1/2011 – 10/31/2011 | 14 | 14.84 | 377 | 623 | ||||||||||||
11/1/2011 – 11/30/2011 | — | — | 377 | 623 | ||||||||||||
12/1/2011 – 12/30/2011 | — | — | 377 | 623 | ||||||||||||
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Total | 14 | $ | 14.84 | 377 | 623 | |||||||||||
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| Item 6. | Exhibits |
See index to exhibits on page 3532 of this report.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GRAHAM CORPORATION | ||||
| By: | ||||
| Jeffrey Glajch | ||||
Vice President-Finance & Administration and | ||||
Chief Financial Officer | ||||
Date: February 1,July 31, 2012
| (10) | Material Contracts | |||
| # | 10.1 | Compensation information, including information regarding stock option and restricted stock grants made to the Company’s named executive officers under the Amended and Restated Graham Corporation Incentive Plan to Increase Shareholder Value and named executive officer cash bonus information, previously filed on the Company’s Current Report on Form 8-K dated May 30, 2012, is incorporated herein by reference. | ||
| (31) | Rule 13a-14(a)/15d-14(a) Certifications | |||
| + | 31.1 | Certification of Principal Executive Officer | ||
| + | 31.2 | Certification of Principal Financial Officer | ||
| (32) | Section 1350 Certification | |||
| + | 32.1 | Section 1350 Certifications | ||
| (101) | Interactive Date File | |||
| *+ | 101.INS | XBRL Instance Document | ||
| *+ | 101.SCH | XBRL Taxonomy Extension Schema Document | ||
| *+ | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||
| *+ | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||
| *+ | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||
| *+ | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||
| + | Exhibit filed with this report. |
| * | Pursuant to Rule 406T of Regulation S-T, the information in this exhibit shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement, prospectus or other document filed under the Securities Act of 1933, or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filings. |
| # | Management contract or compensation plan. |
3532