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Article by DailyStocks_admin    (05-02-08 06:59 AM)

The Daily Magic Formula Stock for 05/02/2008 is Graham Corp. According to the Magic Formula Investing Web Site, the ebit yield is 13% and the EBIT ROIC is >100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

Graham Corporation (“Graham,” the “Company,” “we,” “us” or “our”) designs, manufactures and sells custom-built vacuum and heat transfer equipment to customers worldwide. Our products include steam jet ejector vacuum systems, surface condensers for steam turbines, vacuum pumps and compressors, various types of heat exchangers, including helical coil heat exchangers marketed under the Heliflow ® name, and plate and frame exchangers. Our products produce a vacuum, condense steam or transfer heat, or perform a combination of these tasks. Our products are available in a variety of metals and non-metallic corrosion resistant materials.

Our products are used in a wide range of industrial process applications, including:


• petroleum refineries;

• chemical plants;

• power generation facilities, such as fossil fuel, nuclear, cogeneration and geothermal power plants;

• pharmaceutical plants;

• plastics plants;

• fertilizer plants;

• liquefied natural gas production facilities;

• soap manufacturing plants;

• air conditioning systems;

• food processing plants; and

• other process industries.

We were incorporated in Delaware in 1983 and are the successor to Graham Manufacturing Co., Inc., which was incorporated in 1936. Our principal business location is in Batavia, New York. We also maintain two wholly-owned subsidiaries, Graham Europe Limited in the United Kingdom and, as of May 2006, Graham Vacuum and Heat Transfer Technology (Suzhou) Co., Ltd. in Suzhou, China. As of March 31, 2007, we had 265 full-time employees, inclusive of employees of our United Kingdom and China subsidiaries.

Our Fiscal 2007 Highlights

Highlights for our year ended March 31, 2007, which we refer to as fiscal 2007, include:


• Net income and income per diluted share for fiscal 2007, were $5,761 and $1.46, respectively, including $.35 per diluted share in out-of-period research and development tax credits, compared with net income of $3,586 and income per diluted share of $0.96 for fiscal 2006. Net income for fiscal 2007 was the highest net income achieved in our seventy-one year history. This year’s earnings beat our former record set in 1989 by 37%.

• Net sales for the year of $65,822 were up 19% compared with fiscal 2006. Fourth quarter sales increased 31% to $20,810 compared with $15,911 for fourth quarter fiscal 2006.

• Orders placed with us in fiscal 2007 of $86,540 were up 31% compared with our year ended March 31, 2006, which we refer to as fiscal 2006. This represents the greatest dollar value of orders we have ever received in a one year period.

• Backlog grew significantly to $54,184 on March 31, 2007 representing a 64% increase compared with March 31, 2006. This is a historic high for our backlog.

• Gross profit and operating margins for fiscal 2007 were 26% and 10.1% compared with 29% and 10.5%, respectively, for the year ended March 31, 2006.

• Cash and short-term investments at year-end fiscal 2007 were $15,051, which we believe places us in an unprecedented position to increase the longer term value of Graham.

We believe the principal market drivers that have led to increased capital spending by our customers and that are contributing to our sales growth include:


• Global consumption of crude oil is estimated to expand significantly over the next 15 years.

• It is generally believed that there is a shortage of global oil refining capacity.

• Known supplies of sweet crude oil are being depleted. Sour crude sources are identified and believed to be plentiful.

• There is a differential in raw material prices for higher quality “sweet” and lower quality “sour” crude oil. To lower production costs, many refineries are upgrading facilities in order to be able to process sour crude oil, which requires an upgrade of vacuum and heat transfer equipment.

• The expansion of the middle class in Asia is driving increasing demand for power and petrochemical products.

• The high cost of natural gas in North America and Europe is leading to the construction of new petrochemical plants in the Middle East, where natural gas is plentiful and inexpensive.

• There is an increased need in certain regions for geothermal electrical power plants to meet increased electricity demand.

Our Customers and Markets

Our principal customers include large chemical, petrochemical, petroleum refining and power generating industries, which are end users of our products in their manufacturing, refining and power generation processes, large engineering companies that build installations for such companies, and original equipment manufacturers, who combine our products into their equipment prior to its sale to end users.

Our products are sold using a combination of sales engineers we employ directly, as well as independent sales representatives located worldwide. No part of our business is dependent on a single customer or a few customers, the loss of which would seriously harm our business, or on contracts or subcontracts that are subject to renegotiation or termination by a governmental agency.

A substantial portion of our revenue is generated from foreign sales, and we believe that revenue from the sale of our products outside the United States will continue to account for a material portion of our total revenue for the foreseeable future. We have invested significant resources in developing and maintaining our international sales operations and presence, and we intend to continue to make such investments in the future. As a result of the expansion of our presence in Asia, we expect that in future years Asia will account for a greater percentage of our revenue.

A breakdown of our net sales from continuing operations by geographic area for fiscal 2007, fiscal 2006 and our fiscal year end March 31, 2005, which we refer to as fiscal 2005, is contained in Note 15 to our consolidated financial statements on page 45 to this Annual Report on Form 10-K. In fiscal 2007 and fiscal 2006, total sales to one customer amounted to 12% and 11%, respectively, of total net sales for the year. We presently have no plans to enter any new industry segments that would require the investment of a material amount of our assets or that we would otherwise consider to be material.

Our Strengths

Our core strengths are as follows:


• We have strong brand recognition. Over the past 71 years, we believe that we have built a reputation for top quality, reliable products and high standards of customer service. As a result, the Graham name is well known by both our existing customers, and many of our potential customers. We believe that recognition of the Graham brand allows us to capitalize on market opportunities in both existing and potential markets.

• We engineer and manufacture high quality products and systems that address the particular needs of our customers. With over 71 years of engineering expertise, we believe that we are well respected for our knowledge in vacuum and heat transfer technologies. We maintain strict quality control and manufacturing standards in order to manufacture products of the highest quality.

• We have a global presence. Our products are used worldwide, and we have sales representatives located in major cities throughout the world.

• We believe that we have a solid reputation and strong relationships with our existing customer base, as well as with our key suppliers.

Our Strategy

We intend to grow our business and improve our results of operations by implementing the following core strategies:


• Continue to invest in engineering resources and technology in order to advance our market penetration with our vacuum and heat transfer technologies.

• Invest resources to meet the growing demand for our products in the oil refining, petrochemical processing and power generating industries, especially in emerging markets. Specifically, establish sales, engineering and manufacturing capabilities in Asia where we believe estimates of demand for oil and oil by-products will continue to increase.

• Focus on delivering products and solutions that enable our customers to achieve their operating objectives.

• Provide products and services to our customers that differentiate us from our competitors, and win new orders based on value not price.

• Expand our margins by implementing and expanding upon our operational efficiencies through lean manufacturing processes and other cost efficiencies.

• Enhance our engineering and manufacturing capacities, especially in connection with the design of our products, in order to be able to more quickly respond to existing and future customer demands.

• Accelerate our bids on available contracts by implementing front-end bid automation and design processes.

• Expand our global sales presence in order to further penetrate our existing markets and reach additional markets.

• Capitalize on the strength of the Graham brand in order to win more business in our traditional markets and penetrate other markets.

• Examine acquisition and organic growth opportunities to expand and complement our core business, including opportunities to extend our existing product lines and opportunities to move into complementary product lines.

Competition

Our business is highly competitive and a number of companies having greater financial resources are engaged in the manufacture of products similar to ours and provide services similar to those that we provide. The principal basis on which we compete include technology, price, performance, reputation, delivery, and quality.

Intellectual Property

Our success depends in part on our proprietary technology. We rely on a combination of patent, copyright, trademark, trade secret laws and confidentiality provisions to establish and protect our proprietary rights. We also depend heavily on the brand recognition of the Graham name in the marketplace.

Availability of Raw Materials

Although shortages of certain materials can from time to time affect our ability to meet delivery requirements for certain orders, historically, we have not been materially adversely impacted by the availability of raw materials.

Working Capital Practices

Our business does not require us to carry significant amounts of inventory or materials beyond what is needed for work in progress. We do not provide rights to return goods, or payment terms to customers that we consider to be extended in the context of the industries we serve.

Environmental Matters

We do not anticipate that our compliance with federal, state and local laws regulating the discharge of material in the environment or otherwise pertaining to the protection of the environment will have a material effect upon our capital expenditures, earnings or competitive position.

Seasonality

No material part of our business is seasonal in nature.

Research Activities

During fiscal 2007, fiscal 2006 and fiscal 2005, we spent approximately $3,580, $3,136 and $2,749, respectively, on research and development activities relating to the development of new products and services, or the improvement of existing products and services.

Information Regarding Our International Sales

The revenue from the sale of our products outside the United Sates has accounted for a material portion of our total revenue during our last three fiscal years. Approximately 50%, 49% and 40% of our revenues in fiscal 2007, 2006 and 2005, respectively, resulted from revenues from foreign sales. Revenues attributed to sales in Asia constituted approximately 17%, 16% and 15% of our revenues in fiscal 2007, 2006 and 2005, respectively. Revenues attributed to sales in the Middle East constituted approximately 23%, 14% and 4% of our revenues in fiscal 2007, 2006 and 2005, respectively.

Our international sales operations, including those in Asia and in other foreign countries, are subject to numerous risks. See “Risk Factors” in this annual report on Form 10-K for more information.

Former U.K. Operations

We previously had an additional subsidiary located in the United Kingdom that manufactured vacuum equipment. In March 2005, our Board of Directors approved a plan to discontinue the operations of this subsidiary and such subsidiary’s principal creditor appointed a receiver to liquidate its assets. In May 2005, the assets of this subsidiary were sold. As a result of this divestiture, the operations of our former United Kingdom subsidiary are presented as a discontinued operation in our consolidated financial statements for our year ended March 31, 2005 included in this Annual Report on Form 10-K.

CEO BACKGROUND

Jerald D. Bidlack, age 71, has served since 1992 as President of Griffin Automation, Inc., a manufacturer of special automation machinery and systems, located in West Seneca, New York. He also serves as a trustee of Keuka College, located in Penn Yan, New York. Mr. Bidlack has served as the Chairman of our Board of Directors since 1998.

James J. Malvaso, age 57, has since 1997 served as President and Chief Executive Officer of The Raymond Corporation, which is a manufacturer of electric lift trucks and is located in Greene, New York. Previously, and from 1993 to 1996, he served as Chief Operating Officer and Vice President-Operations of Raymond. He also serves as a trustee of Lemoyne College, located in Syracuse, New York.

William C. Denninger, age 56, has since 2000 served as Senior Vice President-Finance and Chief Financial Officer of Barnes Group Inc., which is an international aerospace and industrial products manufacturer and distributor and is located in Bristol, Connecticut. Since 2006 he has also served as a director of Barnes Group Inc. Before joining Barnes, and from 1993 to 2000, he served as Vice President-Finance and Chief Financial Officer of BTR, Inc., located in Stamford, Connecticut.

H. Russel Lemcke, age 67, has since 1990 served as President of H. Russel Lemcke Group, Inc., which specializes in strategic business development, including mergers, acquisitions and joint ventures. Mr. Lemcke serves as a Director of Sensus Metering Systems, Inc., located in Raleigh, North Carolina. Sensus is a global manufacturer of utility metering products and systems.

James R. Lines, age 46, became our President and Chief Operating Officer in June 2006. Mr. Lines has been with our company since 1984. Previously, and since December 2004, Mr. Lines was our Vice President and General Manager. Mr. Lines has also held the positions of Vice President of Engineering and Vice President of Sales and Marketing. Prior to his senior management positions, he was an application engineer, sales engineer and product supervisor. Mr. Lines holds a Bachelor of Science degree in Aerospace Engineering from the University of Buffalo.

Cornelius S. Van Rees, age 78, was a partner in the New York City law firm of Thacher Proffitt & Wood until his retirement in 1994. Mr. Van Rees received his law degree in 1954 from Columbia University. He also serves as our Corporate Secretary.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Our corporate offices and production facilities are located in Batavia, New York. We have two wholly-owned foreign subsidiaries, one located in the United Kingdom and the other in China. Our current fiscal year, which we refer to as fiscal 2007, began on April 1, 2006 and ended on March 31, 2007.

We are a designer, manufacturer and worldwide supplier of ejectors, liquid ring pumps, condensers and heat exchangers. The principal markets for our equipment are the petrochemical, oil refinery and electric power generation industries, including cogeneration and geothermal plants. Our equipment can also be found in diverse applications such as metal refining, pulp and paper processing, shipbuilding, water heating, refrigeration, desalination, food processing, pharmaceuticals, heating, ventilating and air conditioning.

Highlights for fiscal 2007 include:


• Net income and income per diluted share for fiscal 2007, were $5,761 and $1.46, including $0.35 per diluted share in out-of-period research and development tax credits, respectively, compared with net income of $3,586 and income per diluted share of $0.96 for fiscal 2006. Net income for fiscal 2007 was the highest net income achieved in our seventy-one year history. This year’s earnings beat our former record set in 1989 by 37%.

• Net sales for the year of $65,822 were up 19% compared with fiscal 2006. Fourth quarter sales increased 31% to $20,811 compared with $15,911 for fourth quarter fiscal 2006.

• Orders placed with us in fiscal 2007 of $86,540 were up 31% compared with the twelve-month period ended March 31, 2006. This represents the greatest dollar value of orders we have ever received in a one year period.

• Backlog grew significantly to $54,184 on March 31, 2007 representing a 64% increase compared with March 31, 2006. This is a historic high for our backlog.

• Gross profit and operating margins for fiscal 2007 were 26% and 10.1% compared with 29% and 11.1%, respectively, for the year ended March 31, 2006.

• Cash and short-term investments at year-end fiscal 2007 were $15,051, which places us in an unprecedented opportunity to increase the longer term value of our Company.

We believe the principal market drivers that have led to increased capital spending by our customers and that are contributing to our sales growth include:


• Global consumption of crude oil is estimated to expand significantly over the next decade.

• It is generally believed that there is a shortage of global oil refining capacity.

• Known supplies of sweet crude oil are being depleted. Sour crude sources are identified and believed to be plentiful.

• There is a differential in raw material prices for higher quality “sweet” and lower quality “sour” crude oil. To lower production costs, many refineries are upgrading facilities in order to be able to process sour crude oil, which requires an upgrade of vacuum and heat transfer equipment.

• The expansion of the middle class in Asia is driving increasing demand for power and petrochemical products.

• The high cost of natural gas in North America and Europe is leading to the construction of new petrochemical plants in the Middle East, where natural gas is plentiful and less expensive.

• There is an increased need in certain regions for geothermal electrical power plants to meet increased electricity demand.

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 this Annual Report on Form 10-K. 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;

• 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;

• estimates regarding our liquidity and capital requirements;

• 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,” “intend,” “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 these 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.

Critical Accounting Policies, Estimates and Judgments

The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements and the notes to consolidated financial statements included in this Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the United States.

Critical accounting policies are defined as those that reflect significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions.

Revenue Recognition. We recognize revenue on all contracts with a planned manufacturing process in excess of four weeks (which approximates 575 direct labor hours) using the percentage-of-completion method. The percentage-of-completion method is determined by comparing actual labor incurred to a specific date to our estimate of the total labor to be incurred on each contract. Contracts in progress are reviewed monthly, and sales and earnings are adjusted in current accounting periods based on revisions in the contract value and estimated material and labor costs at completion. Losses on contracts are recognized immediately when known.

Revenue on contracts not accounted for using the percentage-of-completion method is recognized utilizing the completed contract method. The majority of the contracts we enter into have a planned manufacturing process of less than four weeks and the results reported under this method does not vary materially from the percentage-of-completion method. We recognize revenue and all related costs on the completed contract method upon substantial completion or shipment of products to the customer. Substantial completion is consistently defined as at least 95% complete with regard to direct labor hours. Customer acceptance is required throughout the construction process and we have no further material obligations under the contract after the revenue is recognized. The key estimate of percentage-of-completion accounting is total labor to be incurred on each contract and to the extent that this estimate changes, it may significantly impact revenue recognized in each period.

Pension and Postretirement Benefits. Defined benefit pension and other postretirement benefit costs and obligations are dependent on actuarial assumptions used in calculating such amounts. These assumptions are reviewed annually and include the discount rate, long-term expected rate of return on plan assets, salary growth, healthcare cost trend rate and other economic and demographic factors. We base the discount rate assumption for our plans on Moody’s or Citigroup Pension Liability Index AA-rated corporate long-term bond yield rate. The long-term expected rate of return on plan assets is based on the plan’s asset allocation, historical returns and expectations as to future returns that are expected to be realized over the estimated remaining life of the plan liabilities that will be funded with the plan assets. The salary growth assumptions are determined based on long-term actual experience and future and near-term outlook. The healthcare cost trend rate assumptions are based on historical cost and payment data, the near-term outlook, and an assessment of the likely long-term trends.

Income Taxes. Deferred income tax assets and liabilities for the expected future tax consequences of events have been recognized in our financial statements or tax returns.

Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using current tax rates. We evaluate available information about future taxable income and other possible sources of realization of deferred income tax assets and record valuation allowances to reduce deferred income tax assets to an amount that represents our best estimates of the amounts of such deferred income tax assets that more likely than not will be realized. At March 31, 2007 and 2006, no valuation allowance was recorded.

Results of Operations

For an understanding of the significant factors that influenced our performance, the following discussion should be read in conjunction with our consolidated financial statements and the notes to consolidated financial statements included in this Annual Report on Form 10-K.


Fiscal 2007 Compared with Fiscal 2006

Sales for fiscal 2007 were $65,822, a 19% increase, as compared with $55,208 for fiscal 2006. Fifty-two percent of this increase came from greater export sales. The growth in export sales primarily came from the Middle East and Asia and involved both petrochemical and refinery projects. Sales in all product categories (e.g., heat exchangers, ejectors, condensers, vacuum pumps and aftermarket) increased compared with fiscal 2006, but the greatest dollar value increases came from sales of ejectors, heat exchangers and vacuum pumps.

Our heat exchanger products are: Heliflows, plate exchangers, desuperheaters and water heaters. Increased heat exchanger sales accounted for 31% of the increased sales. Heat exchanger sales were led upward by Heliflows and plate exchanger sales. Heat exchanger sales grew due to a broad based strategic effort, which included training, changing the supplier who provided the basic materials used to build plate exchangers, manufacturing efficiencies gained through the implementation of lean procedures, the introduction of software marketing tools and the addition of an expanded agency network. Increased ejector sales accounted for 26% of the increased sales and were due to the increased activity we continue to see from the refinery industry for oil refinery upgrades and capacity expansion projects. Increased vacuum pump sales accounted for 28% of the increased sales and came from domestic refinery applications. The remaining 15% increase in sales, compared with fiscal 2006, came from single digit gains in the other products we sell. We believe the demand for our products, and especially those applicable to the refinery sector, will continue to be strong at least through our fiscal year ending March 31, 2008, which we refer to as fiscal 2008. For additional information, see “Orders and Backlog” below.

Our gross profit percentage (i.e., sales, less costs of sales, divided by sales) for fiscal 2007 was 26% compared with 29% for fiscal 2006. Gross profit percentage decreased primarily due to greater material costs in fiscal 2007. Material costs, expressed as a percent of sales, were 43% and 37% for fiscal years 2007 and 2006, respectively. Gross profit dollars increased 5% compared with fiscal 2006, as a result of greater sales volume. Although we project continued pressure on gross margins because of increasing labor and benefit costs and our longer term strategic decision to expand into new geographic markets, we believe gross profit margin percentages will increase in fiscal 2008 compared with fiscal 2007. We believe such increase will occur because we have been able to be more selective on orders we accept and realized benefits from productivity gains in manufacturing that expanded engineering and manufacturing capacity.

Selling, general and administrative (SG&A) expenses for fiscal 2007 were 16% of sales compared to 18% for fiscal 2006. The decline, expressed as a percentage of sales, was due to greater sales in the current fiscal year. Actual costs increased $520 or 5% compared with fiscal 2006. SG&A expense increased due to the additional costs of our Company in China.

Interest expense was $10 for fiscal 2007 compared with $17 for fiscal 2006. Interest expense decreased due to reduced debt and a reduction in the applicable interest rate under our banking facility on a year over year basis.

Other expense for fiscal 2007 was $100 compared with $371 for fiscal 2006. Other expense for the current year represented a $100 provision made to cover the possible costs of an asbestos litigation suit currently in progress. We estimate the range of the possible expense, including legal costs, to be $25 to $375. Other expense for fiscal 2006 was incurred in conjunction with the settlement of litigation whereby we sued a foreign pump competitor that had adopted the name “Graham.” Pursuant to the settlement agreement, such competitor agreed to discontinue using our name by the fall of 2006 in exchange for certain inventory items with a recorded amount plus packaging costs of $252. We incurred $119 in legal costs pertaining to this settlement.

Other income for fiscal 2007 was $148 compared with $0 for fiscal 2006. Royalty income of $148 was earned under a license agreement we entered into in October 2005 that allows the licensee to use, market and sell specific products we manufacture. Future royalty income earned by us under this agreement will depend upon the sale of licensed products by the licensee.

In fiscal 2007, our effective tax rate was 12% compared with an effective tax rate of 38% for fiscal 2006. The fiscal 2006 rate approximated the statutory rate. The fiscal 2007 effective tax rate reflects the benefit of $1,607 in research and development (“R&D”) credits. The total credit recognized this fiscal 2007 represents qualifying expenditures for the fiscal years 1999 to 2007. Remaining federal loss carryforwards, significantly reduced to eliminate current federal taxes in fiscal 2007 and 2006, are projected to be fully utilized in fiscal 2008. Tax planning strategies leading to R&D credits recognized in the current year will be used to reduce current federal taxes payable in fiscal 2008 and after. Provided the R&D tax credit is extended by Congress beyond the current year and under the current formula, we expect the R&D credit for engineering applications in those years to be in the range of $150 to $250 per annum.

Net income for fiscal 2007 and 2006 was $5,761 and $3,586, respectively. Income per diluted share was $1.46, including $0.35 for non-recurring research and development tax credits, and $0.96 for the respective periods.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

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 condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

Sales for the third quarter of fiscal 2008 were $20,625, a 42% increase, as compared with sales of $14,500 for the third quarter of fiscal 2007. Sales for the nine months ended December 31, 2007 of $63,672 were up 41%, compared with the nine-month period ended December 31, 2006, when sales were $45,011. The increase in sales in fiscal 2008 compared with fiscal 2007 came primarily from ejector sales to the refinery markets, which reflect the demand for our products from both the North American and global refinery markets. Ejector sales for the nine-month period ended December 31, 2007, compared with the nine months ended December 31, 2006, increased 122% and accounted for 87%, or $16,327, of the total increased sales in fiscal 2008. Sixty-nine percent of the increased sales for the three months ended December 31, 2007, compared with the three months ended December 31, 2006, came from increased sales of condensers, largely to the petrochemical market, while 21% of the increase in the current quarter came from aftermarket sales. Export sales accounted for 48% and 44% of total sales for the quarter and nine months ended December 31, 2007, compared with 39% and 52% for the three and nine-month periods ended December 31, 2006. The increase in export sales of $4,614 for the nine-month period came from Asia, South America and Canada for oil projects. Sales in the third quarter of fiscal 2008 and for the nine months ended December 31, 2007 were, respectively, 38% and 46% to the refining industry, 42% and 31% to the chemical and petrochemical industries and 20% and 23% to other industrial applications, including electrical power. Sales in the third quarter and nine-month periods ended December 31, 2006 were, respectively, 42% and 34% to the refining industry, 29% and 40% to the chemical and petrochemical industries and 29% and 26% to other industrial applications, including electrical power. For additional information, see “Orders and Backlog” below.
Our gross profit percentage for the third quarter and nine months ended December 31, 2007 was 42% and 40%, compared with 23% and 24% for the third quarter and nine month months ended December 31, 2006. Gross profit dollars for the third quarter of fiscal 2008 increased 155%, compared with the third quarter of fiscal 2007 and 135% for the nine-month period ended December 31, 2007, compared with the first nine months of fiscal 2007. Gross profit percentage and dollars increased primarily due to improved product mix achieved by increased selectivity on orders accepted, manufacturing outsourcing and improved engineering and manufacturing efficiencies. Our use of manufacturing outsourcing and our improved operating efficiencies enabled us to achieve greater sales volume during the first nine months of fiscal 2008. We believe we will continue to increase capacity through outsourcing and improving operating efficiencies and that these efforts will contribute to sales trending upward in fiscal 2009 compared with the current fiscal year.
Selling, general and administrative (“SG&A”) expenses for the third quarter of fiscal 2008 and 2007 were 16% and 17% of sales, respectively. SG&A expenses for the nine months ended December 31, 2007 and 2006 were 15% and 17%, respectively, of sales. The decline, expressed as a percentage of sales, was due to greater sales in the current fiscal year. Actual costs for the third quarter of fiscal 2008 increased $709, or 28%, compared with the third quarter of fiscal 2007. For the nine months ended December 31, 2007, actual costs increased $2,315, or 31%, compared with the nine-month period ended December 31, 2006. SG&A expenses increased due to greater variable costs (e.g., sales commissions, variable compensation) related to higher sales and net income.
Interest income for the third quarters of fiscal 2008 and 2007 was $304 and $130, respectively. For the nine months ended December 31, 2007 and 2006, interest income was $799 and $356, respectively. Increased interest income followed increases in investments.
Interest expense was $1 and $2 in the third quarter of fiscal 2008 and 2007, respectively. For the nine-month periods ended December 31, 2007 and 2006, interest expense was $9 and $8, respectively. Interest expense increased slightly in fiscal 2008 due to more capital equipment leasing activities.
Our effective tax rate in the third quarter of fiscal 2008 was 34%, compared with an effective tax rate of 33% for the third quarter of fiscal 2007. The increase was due to greater annual projected taxable income compared with fiscal 2007, resulting in a higher blended statutory tax rate. Our effective tax rate used for the nine months ended December 31, 2006 was 36%, compared with 33% for the nine months ended December 31, 2007. Our projected effective tax rate for fiscal 2008 is 34%. The current year’s rate is lower due to anticipated research and development tax credits in fiscal 2008.
Net income for the third quarter of fiscal 2008 and 2007 was $3,763 and $666, respectively. Income per diluted share was $0.74 and $0.14 for the respective periods. For the nine months ended December 31, 2007 and 2006, net income was $10,843 and $2,345, respectively, and income per diluted share was $2.16 and $0.48 for the same respective periods.

Net cash provided by operating activities for the first nine months of fiscal 2008 was $16,014, compared with $3,500 for the nine months ended December 31, 2006. The increase was due to greater net income as well as the greater use of deferred tax assets in the nine-month period ended December 31, 2007 (i.e., net operating losses and research and development credits), which was enabled by greater income and less operating working capital. Operating working capital was lower due to continued reduction in our cash conversion cycle.
We invest net cash generated from operations in excess of cash held for near-term needs in marketable securities. Investments are United States government and government-sponsored Moody’s Investor Service, Inc. AAA rated instruments, generally with maturity periods of 91 to 120 days. Investments at December 31, 2007 and March 31, 2007 were $29,890 and $13,676, respectively.
Other sources of cash for the nine-months ended December 31, 2007 included the issuance of common stock to cover stock options exercised, which raised $970, as compared with $413 in the first nine months of fiscal 2007, sales of equipment, which raised $44 as compared with $15 for the nine months ended December 31, 2006, and repayments of notes outstanding for purchases of common stock granted under our Long-Term Stock Ownership Plan of $39, compared with $13 for the nine months ended December 31, 2006. In the current quarter, under financing activities, we recognized a $1,198 increase in capital in excess of par value for the income tax benefit realized upon exercise of stock options in excess of the tax benefit amount recognized pertaining to the fair value of stock option awards treated as compensation expense.
Other uses of cash for the nine months ended December 31, 2007 included dividend payments of $344 and capital expenditures of $659, compared with $290 and $1,152, respectively, for the first nine months of fiscal 2007. In the current nine-month period, we borrowed and repaid $69 to finance working capital needs, as compared with $3,073 for the nine months ended December 31, 2006. In the nine months ended December 31, 2007, we contributed $2,000 into our defined benefit pension plan, compared with $2,500 for the nine months ended December 31, 2006.

Capital expenditures for fiscal 2008 are projected to be $1,500 and to consist largely of continuing plant productivity and information technology enhancements.
On December 5, 2007, we entered into a new revolving credit facility with Bank of America, N.A. that provides a line of credit of $30,000 including letters of credit and bank guarantees. Borrowings under our banking facility are secured by all of our assets. Letters of credit outstanding under our credit facility on December 31, 2007 and 2006 were $11,121 and $7,280, respectively.
The new revolving credit agreement includes several changes compared with our former credit facility, including an increase in the facility capacity limit from $20,000; a maximum annual dividend payout of $1,200 compared with $600; elimination of facility sub-limits for borrowings, the issuance of letters of credit or the issuance of bank guarantees on the obligations of our Chinese subsidiary by Bank of America’s Shanghai China branch; expanded use of borrowings; and a reduction in pricing. Under the new revolving credit agreement, we covenant to maintain a ratio of total liabilities, excluding non-current portion of subordinated liabilities, to tangible net worth not to exceed 1.35 to 1.
We had no borrowings outstanding on either December 31, 2007 or 2006. Our borrowing rate as of December 31, 2007 was Bank of America’s prime rate minus 125 basis points, or 6%. 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 immediate future.
Orders and Backlog
Orders for the three-month periods ended December 31, 2007 and 2006 were $26,647 and $17,127, respectively, up 56%. Orders for the nine-month period ended December 31, 2007 of $72,018 were up 21%, compared with the nine months ended December 31, 2006, when orders were $59,284. Orders represent communications received from customers requesting us to supply products and services. We experienced a significant increase in orders for vacuum pump systems, surface condensers and aftermarket orders in the three-month period ended December 31, 2007, compared with the three-month period ended December 31, 2006. This business included orders received outside of the oil refinery sector, largely for fertilizer and ethanol applications as well as for significant capital maintenance projects in the domestic refinery sector. As a result of expanded capacity in the third quarter of fiscal 2008, we accepted orders from a broader industry group.
Domestic orders were up 101%, or $9,877, and export orders were down 5% in the third quarter ended December 31, 2007, in each case compared with the third quarter of fiscal 2007. For the nine months ended December 31, 2007, compared with the nine months ended December 31, 2006, domestic orders were up 103%, or $26,310, and export orders were down 40%, or $13,576. Domestic refinery orders are attributed to refinery capacity expansion, revamping of refineries to process “heavier” feed stocks, and requirements to meet cleaner fuel standards. Export refinery orders from South America and China were up in the nine months ended December 31, 2007 as compared with the nine months ended December 31, 2006. This increase was driven by greater use of unconventional fuels and by capacity expansion projects in Asia. Petrochemical and other process industry business was driven largely from the global need to increase capacity and the expansion of emerging alternative energy technologies.
The geographic origination of orders is largely a matter of order selection by us. Looking ahead to fiscal 2009, we believe the global refinery and petrochemical markets we serve will continue to be strong and could remain strong for the next several years. Our revenue is driven significantly from major project work. As a result, the timing of when two or three orders within a six-month period are released can have a significant impact on a future quarterly period. In general, we believe the revenue outlook for our business remains on an upward trend for the current and next few years, as we continue to expand our capacity to address growing demand, however, we believe quarterly sales, orders, net income and other financial information, compared on a year-over-year basis, will result in both increases and decreases, and decisions on upward or downward financial trends from this data should not be reached because our quarterly financial results can be very sensitive to a limited number of transactions.
Backlog was $62,974 at December 31, 2007, compared with $47,597 at December 31, 2006, a 32% increase. 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 13% of orders currently in backlog are not expected to be converted to sales within the next twelve months. Approximately 50% of our backlog can be attributed to equipment for refinery project work, 23% to chemical and petrochemical projects, and 27% to other industrial or commercial applications.

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