Graham Corp. chief executive James R. Lines is expecting a steep downturn this year, but he's not sure exactly how bad it will be or how long it will last.

Yet Lines also said Friday his long-term optimism isn't wavering, believing that the increased demand for energy will help the Batavia manufacturer sell more of its condensers and ejector systems over then next five years.

In the short term, though, the plunge in oil prices and the shrinking economy could cut deeply into Graham's sales to the energy industry. While the company's sales have continued to rise and are expected to approach $100 million during the fiscal year that ends in March, Graham's new order bookings -- an important sign of future revenues -- dropped to less than a third of what they were a year ago during the fourth quarter.

While Lines wasn't willing to forecast sales for the fiscal year that begins in April, he said on a conference call that the decline could mirror the energy market's last collapse in 1998, which led to a roughly 35 percent drop in revenues.

That would put fiscal 2010 sales at around $65 million, but Lines said the company still would be able to turn a profit on those reduced revenues. One analyst estimated that the company's operating profit margin at that sales level could be around 8 percent, or about a third of its third-quarter profitability.

To prepare for the downturn, Graham cut 5 percent of its work force, or about 14 jobs, during the final three months of last year, a move that will save an estimated $2 million a year, Lines said. The company also has reduced its use of subcontractors and is doing more of its work in-house.

"This has been a very quick change," Lines said. "The last quarter, it seemed like the entire market went into gridlock."

Graham's third-quarter profits were flat, despite a nearly 20 percent increase in sales. Graham, which makes equipment for the oil refinery, petrochemical and power industries, said its profits held steady at $3.8 million, or 37 cents per share, during the quarter that ended in December, even as revenues jumped to $24.7 million from $20.6 million a year earlier.

In a sign that the slumping economy is hurting Graham's business, the company said its new order flow slumped to "an unusually low" $8.1 million, less than a third of the $26.6 million in new business it booked during the same period year ago.

Lines blamed the drop on plunging oil prices, which prompted oil refiners to curtail or cancel many projects as they adjust their operations to the drop in demand for oil and its byproducts. He said the drop in new orders was the most severe he'd seen in the last 25 years, with one order worth $1.6 million canceled outright and five or six others put on hold.

"What is not clear is the extent or duration of the down slope of this new cycle," Lines said, noting that oil companies are reducing their capital spending by an estimated 12 percent this year, while many higher-cost projects, such as oil sands developments, have been scrapped altogether.

With Graham's share price down 81 percent from its August peak of $54.10, the company's directors have authorized it to buy back up to 1 million shares of its stock, which if completed, could reduce the number of shares in circulation by almost 10 percent. The buyback program will run through late July.

The company said its operations were less profitable during the quarter, partly because of a lower-margin contract that required international fabrication work.

Graham's stock rose 37 cents Friday to close at $9.85.

e-mail: drobinson@buffnews.com

Originally published by NEWS BUSINESS REPORTER.

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