Prompt:
Human: We appreciate you joining us today to discuss Graham's Fiscal 2021 First Quarter Results.
We also have slides associated with the commentary that we are providing here today.
If you do not have the release or the slides, you can find them on the company's website at www.
Jeff will start with the financial overview of the period.
We will then open the lines for Q&A.
These documents can be found on our website or at www.
I also want to point out that during today's call, we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance.
This is Jeff actually.
As Jim and I have noted on our update calls in March and June, due to COVID-19 the COVID-19 pandemic, we've reduced our facility staffing to approximately 10% in late March and after implementing new work practices, enhanced cleaning and safety procedures and educating all of our employees on these changes, we gradually began to increase our staffing.
By the end of May, we were back at near-normal on-site staffing and have continued at that level over the past two months.
I want to compliment Alan Smith and his team for ensuring a safer production environment in this difficult time as well as our human resources team for their continued focus on improving safety in our workplace.
As a result of these proactive measures, our average production staffing and capacity for the first quarter was only 50%, and hence, our first quarter results suffered accordingly.
Sales in the first quarter were $16.7 million, which included a project in China, which had been delayed by COVID from the fourth quarter of last year into the first quarter of this year.
That project made up approximately 30% of the quarter's revenue.
On a positive note, our Defense or Navy sales were 21% of this total or $3.5 million.
We will be reporting the level of our Navy sales on a quarterly basis going forward, which for this year, we expect to be approximately 25% to 30% of total sales.
In the first quarter, we had a loss of $1.8 million or $0.18 per share.
As I noted, we ran at half capacity in Batavia.
Yet as discussed on prior calls, we continue to pay all of our employees their full benefits and wages.
We did not accept any PPP funding, so we consciously realized this type of loss would occur.
As Jim will discuss later, we view Q1 as a discrete event and assuming there are no significant impacts to our business or operations, the rest of fiscal 2021, we will be operating as normal in Q2 and beyond, and would expect far better results going forward.
Cash at the end of June was $67.2 million, and our backlog was $107.2 million, split evenly between defense and Commercial.
This strong backlog level supports our guidance for the rest of fiscal 2021.
On to slide five.
Sales in the first quarter were down $3.9 million.
Please note in Q1 of last year included $1.3 million from our Energy Steel business, which was sold in that quarter.
Gross profit, EBITDA and diluted earnings per share were all down significantly due to our low capacity level, yet more normal level of operating expenses, which occurred in the quarter.
Moving on to slide six.
Our cash position decreased to $5.8 million in Q1 to $67.2 million or $6.74 per share.
We expected this to occur, as I noted during our update call in late March, if we were shut down for a month, we would expect to utilize approximately $3 million of cash per month.
At 50% capacity in the quarter, this is equivalent to 1.5 months average shutdown, hence, the reduction in cash.
As with sales and profitability, we expect cash generation to be positive for the rest of fiscal 2021.
We paid $1.1 million of dividends in the quarter and it continues to be secure and an important part of our capital allocation provided directly back to shareholders.
Capital spending in the quarter was light at $300,000.
We expect capital for the full year to be in the $2.0 million to $2.5 million range.
Finally, our business development, management team and Board continue to be focused on utilizing our strong balance sheet to opportunistically identify and close on acquisitions, which have near and long-term benefits to our shareholders.
I would ask that you refer to slide nine.
$16.7 million of sales for the first quarter were negatively impacted by how we responded to the COVID-19 outbreak, which resulted in 50% reduction of our operating capacity.
During the first quarter, we developed and implemented COVID-19 protocols, which ensures that we would not experience such a low utilization rate for the remainder of FY 2021.
I am proud of the COVID return to work team and the entire company for returning the employees back to work safely and for following our newly implemented workplace safety practices.
Everyone has stepped up and responded well to this new reality we find ourselves in.
Highlights for the first quarter were that revenue from Defense projects was $3.5 million, which represents a year-on-year increase of $1.4 million.
As Jeff mentioned, we also completed a large project in China, which was responsible for approximately 30% of the quarter's revenue.
You may recall that this project due to COVID-19 fell out of the fourth quarter.
Moving on to slide nine.
While COVID-19 has impacted the demand for our products, there are several actions that are being implemented to ensure that we maximize the margin of the work that we will be converting this fiscal year.
COVID-19 has created a buyer's market for raw material.
Our supply chain has been very successful in securing materials at reduced costs.
I'm expecting that we will be able to continue to be in this position for the rest of the for the remainder of the year.
We are also focusing on growing our skilled workforce in order to increase our production volume.
To this end, we recently completed an expansion of our Weld School.
We now have the capacity to train up to eight welders up from 4.
We established our Weld School approximately five years ago, and it has proven to be a effective means to develop and grow our workforce.
Currently, we are prioritizing improving productivity in our Navy production area.
The company has completed many first time operations.
The productivity enhancements will stem from improved build flows, employee training, creating objective fixtures, and lastly, applying lessons learnt.
The IT department is developing tools, which will improve our ability to manage our global fabrication partners.
A management dashboard is being developed to track all aspects of our outsourced project.
This dashboard will aggregate information in-store on several IT platforms and will greatly improve the productivity of our project managers.
Finally, we are continuing efforts to grow our low-cost outsourcing capabilities, which will allow us to compete on projects where cost is the main decision driver.
I see these end market disruptions as an opportunity, to be clear, I just like the disruptions.
However, our attitude is to take advantage of them, invest in ourselves, improve our processes, gain productivity so that we come out stronger and performing better.
Our attitude is let's not waste the downturn by being a victim of it, but rather let's play offense to create benefits because of it.
I am referring to slide 11.
Jeff and Alan both provided good commentary about the impact to our financial results from the pandemic and price of crude oil.
It has also impacted order patterns.
Energy and petrochemical markets began to change adversely before the pandemic.
Fourth quarter of last year and first quarter of this year each had net orders of approximately $12 million.
There were no Defense orders during those two quarters.
Included in the net orders is $4 million of canceled orders and the impact of change orders.
It was rather even with $2 million of backlog deductions in each quarter.
The underlying bookings for new orders were a bit better than what is shown, however, still down considerably.
I have been through four downturns while at Graham, and now I'm in the fifth.
The each are challenging, went in them.
However, this current downturn feels rather different.
Customer behavior is less predictable this time.
I imagine that is because no one has experienced this type of demand disruption or turmoil in the past.
A couple of examples can illustrate well what we face.
We initiated bidding to replace a 40-year-old surface condenser in 2018.
It was urgent for the end user and end-of-life situation where the customer did not know if the unit would last another year.
Schedule was critical to meet a delivery window.
Order was finally ready to be placed this last quarter.
It was about a $2 million opportunity.
Due to focus on preserving cash, the plant advised that they cannot procure the unit now.
We offered in response, very favorable cash flow terms, we worked our supply chain for better costs, as Alan had mentioned, that then resulted in a lower price to the end user.
Corporate simply would not budge.
The risk of an unplanned shutdown or reduction in plant throughput is high, but cash preservation prevailed.
Any other time this would have been an order placed, put into our backlog and be a contributor to current year revenue.
Another example is a larger project, that's about $5 million for a refinery revamp.
Here too, we've been bidding it for a couple of years.
Learned last quarter, it was to be pushed out another year.
While four weeks ago, we got reengaged with the EPC that needed our engineering and to complete their plant layout and structural design.
In response, we proposed an engineering-only order.
We did a call this week that corporate is likely to sponsor final investment decision and now the full orders back in play for fiscal '22 revenue.
The order is now projected to close this quarter, and everything is hurried to get it done.
Will it actually proceed or perhaps there might be an order placed that subsequently is canceled, like we have experienced in the recent couple of quarters?
I simply don't know.
It's difficult to predict.
I offer these two examples to convey order patterns may be unpredictable and lumpy.
We have no control over the direction of our end markets, and little influence over the decisions a customer may make regarding will a project received funding.
I can convey, though, that we are on top of the available opportunities, controlling well that which we can control which is how we support customers, manage opportunities, differentiate from the competition with our speed, our knowledge sharing, options analysis that we provide, and ultimately, get our company in a position to win should an order get placed.
We may not take an order at a particular price, but the job of our sales team and that team does it well, is to get Graham in a position to accept or decline an order.
Even today, our naval bid pipeline is unpredictable, more so over timing, but it's still as difficult to define within a quarter when an order is going to be placed from the U.S. Navy or their prime contractors.
Moving on to slide 12.
Just stepping through our different key end markets.
Refining is down in North America across our three segments, which would be the integrated refiner, the independent refiner and also the MRO segment, spares and parts that's down.
In Asia, we do see a pretty active pipeline for new capacity that would be for India, China or elsewhere in Asia.
For the Middle East, or Latin America, there's really nothing significant in our pipeline right now.
We think those new capacity opportunities will present themselves after fiscal 2021.
For the U.S. Navy, we have a very healthy active bid pipeline across the three programs that we are in, the carrier program, the Virginia-class submarine program and also the Columbia-class program.
What's great in certain of these bids are for new components that aren't currently in backlog that we've not done.
So our focus on expanding our share of wallet is presenting opportunities that we hadn't seen previously, and then we're going to go after those and hopefully win those.
Across the next three quarters, we anticipate somewhere between $30 million to $50 million of work would be placed by the Navy with the suppliers such as Graham, and hopefully, we will win a strong share of that.
In the chemical, petrochemical market.
As I cited with the one example of a bid opportunity, focuses on preserving cash, without demand had collapsed globally, this market is really focused on clamping down on capital spend expenditures, MRO expenditures and just conserving cash across 2021 sorry, calendar 2020 and across fiscal 2021.
We are beginning to see some early signs of the next wave of new ethylene capacity, and you might recall that we view ethylene as the as a surrogate for the overall chemical industry.
An important consideration at this point in time is we're trying to understand for the next wave, the relevance of North American investment.
It may not be as strong as this most recent wave that began in the 2012, 2013, '14 time frame.
On the short-cycle side, that seems to have pulled back 15% to 20%.
We are seeing some improvement on the spare parts side.
However, the OEM work, again, this is short-cycle work that seems to be off correlated to the global economy and end market demand collapse.
We are also involving ourselves in new markets or emerging markets, if you will, alternative energy markets, hydrogen fuel cell market plus natural gas, and also supercritical fluids.
We have certain technology.
These are high-pressure applications where our product line fits extraordinarily well.
These are not large orders.
The ASP is probably under average selling price is probably under $100,000 for that type of sale.
But it's a very nice bread and butter work.
And we're focused on our participation in securing a presence in these new emerging markets.
Let's move on to the next slide, slide 13.
Our balance sheet and also backlog position entering this downturn are both beneficial.
After the first quarter, which we do consider an event isolated to that quarter, we get back into backlog conversion in the second quarter and hit stronger conversion in the third and fourth quarters.
$107 million of backlog as of June 30 is terrific to have.
70% to 75% of that backlog is planned to convert over the next 12 months.
That implies for fiscal 2021, $81 million of fiscal 2021 revenue is in hand, either converted during the first quarter or from current backlog.
This provided us the confidence to give full year guidance that I'll speak to in a moment.
Our backlog is split roughly 50-50 between naval work and orders for our traditional end markets.
And for the naval work, as we've been saying for the last several quarters, we are in all three programs and have backlog in full conversion mode.
Again, by programs, we mean one program for the carrier, another for Virginia-class submarine and the third program is Columbia-class submarine.
Let's move on to the guidance slide.
We're coming out with full year guidance because of the confidence that we have with our backlog and how we see the remainder of the year shaping up.
Revenue guidance is expected to be between for revenue to be between $90 million and $95 million.
Gross margin is projected to be between 20% and 22%.
Our SG&A spend is projected to be between $17 million and $18 million, and the effective tax rate is 22%.
Implicit in this guidance is that we continue to run that whole sorry, implicit in this guidance is that we continue to run at high production levels and don't have work stoppage or curtailments due to another COVID-related impact to our operations or those of our supply chain fabrication partners.
This is a risk that management will address and communicate about should it alter fiscal 2021 performance.
Of course, the second risk is that a customer may place a large order on hold or cancel it, we are unaware of particular orders of backlog with that risk.
And now moving on to slide 15.
This provides a quick snapshot of what we're focused on, what our strategic goals are and a bit of a progress update.
We have been focused for a number of years on increasing what we call our predictable revenue streams, our predictable base.
A key component there is our work for the Defense because of the long live nature of that backlog that gives us a strong level of predictable revenue.
For a comparison, we are projecting that fiscal 2021 revenue compared to fiscal 2020 revenue for the Defense work will be up about 50%.
We're also focusing on our installed base.
We are an 80-plus-year-old company.
We have this massive installed base around the world, a very large installed base in North America, and we've been allocating resources toward focusing on that differently than our company had in the past.
To be candid with what's occurred with the pandemic, there's been a bit of a pause on our investment there and putting personnel into regions where the installed base is high, primarily because our customers aren't openly permitting access to their plants.
They're being very careful about admitting personnel into their facilities.
So we can't gain access to those sites.
And also, we're very mindful about worker safety and having our people travel at this point in time and the consequences of being sequestered or isolated upon return.
So therefore, our investment this is a bit of a pause.
It doesn't reflect our commitment to this strategy is just the consequence of what we're currently facing.
And of course, we're looking at M&A.
In our M&A program, we're focused on more stable revenue streams to support our expansion of the predictable base of our business.
We're also taking action and have taken action to reposition our company to be more successful in price-focused opportunities.
We participated in those opportunities before we more situationally secured those orders when it made sense to us.
We've now structured and are structuring and making investments to go in and carve-out a meaningful market share for ourselves in that underserved market previously.
We have seen these opportunities in the past.
We're still seeing them today.
The operations team is now structuring to how to go win those and execute within a lower market price at an acceptable return.
We've had a healthy level of that type of revenue in fiscal 2020, and we'll actually have a greater revenue level in fiscal 2021 compared to 2020.
So this strategy is being executed well.
And I'm very pleased with our progress there and our ability to extract and realize the margins that we targeted.
Also, we're, of course, focused on strengthening our financial results.
A key element here is to push more volume through our roof line and put less into our local supply chain with our fabrication partners.
Alan and his team are, along with the HR team, are looking to continue to add to our skilled workforce, welders, machinists, assemblers.
I'd like to see us with about 20 to 25 more direct laborers over the next one to two years, probably the next two years.
And that will be very, very helpful in lifting our margins.
In the naval program, we need to earn our position as a sole source supplier.
We have some of that work now, which can come in sole source, but there's more of that through good performance, through strong execution, through program management, risk identification, risk mitigation and cost efficiency.
We may be able to secure additional work under sole source bidding.
That's earned, that's not given.
And Alan and his team are doing a really good job to position us to be into that type of supplier category.
Also, for our naval work, Alan mentioned it in his remarks, we have had some of that work, that's first time articles for us, first time fabrications, and that has an aspect of cost structure that we've carried for that type of order.
And that has a little bit of a headwind on the gross margin side, elevated cost of goods sold.
However, as we get through those first article fabrications, and Alan and his team focus on workflow improvements, production optimization, reconfigure the operations to flow work more efficiently.
Now that we've gone through the first article that will drop down to improved financial performance from that segment of our business.
And also, we'll balance our near term realities with the reduction in demand on the order front.
With our long-term strategies to grow this business, we've chosen not to right size our costs for what was happening in our first quarter or to an extent, what's happening in our second quarter with where revenue is.
Because we believe in the long term and we believe in our strategies and we'll balance decisions we'll make around improving near term quarters that could be to the detriment of long-term value creation.
So we will be very mindful of that watch out fiscal 2022 begins to take shape.
With that, I think it's an appropriate time to open the call up for Q&A.
Devin, would you please open the line?
 Assistant:

Chosen response:
compname reports q1 loss per share $0.18.
q1 sales $16.7 million versus refinitiv ibes estimate of $14.2 million.
q1 loss per share $0.18.
fiscal 2021 revenue guidance of $90 million to $95 million from expected improved performance for remainder of fiscal 2021.
averaged about 50% of normal staffing capacity during quarter.
encouraged by pipeline activity that co is addressing in both defense industry and emerging markets, specifically india.


Prompt:
Human: We appreciate you joining us today to discuss Graham's Fiscal 2021 Second Quarter Results.
We also have slides associated with the commentary that we are providing here today.
If you do not have the release or the slides, you can find them on the company's website at www.
We will then open the lines for Q&A.
These documents can be found on our website or at www.
I also want to point out that during today's call, we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance.
As Chris mentioned, we're starting on slide four.
It was very nice to operate in Q2 a normal capacity after running at approximately 50% capacity in Q1 due to COVID-19.
Q2 sales were $28 million, up from $21.6 million in Q2 of last year.
Sales in the defense, the Navy market were $9.4 million in the quarter.
In the quarter, we had a quick turn material order, which made up approximately half -- a little over half of the revenue in the Navy.
We expected this to occur in the quarter.
While it is not a repeatable type sale, it was not a surprise.
Year-to-date, defense sales were $12.9 million or 29% of sales.
This is slightly higher than we expect for the full year.
We would expect around 25% of our sales to be for the Navy for the full fiscal year.
The quarter also benefited from an acceleration of some work at one of our Asian subcontractors.
They had available capacity and pulled some work from Q3 into Q2.
Q2 net income was $2.7 million or $0.27 per share, up from $1.2 million or $0.12 per share last year.
Stronger revenue and margins drove the improvement.
Cash is still good at nearly $68 million.
Finally, orders in the quarter were $35 million, driven by strong international refining awards in Asia and defense in the United States.
Our backlog improved to $114.9 million.
The conversion of a portion of our backlog provides the foundation for our improved guidance for the fiscal year.
Moving on to slide five.
I discussed the sale detail on the last slide with the quarter at $28 million.
Sales in the second quarter was 62% domestic, 38% in international.
Last year's second quarter was 73% domestic, 27% international.
Gross profit in the quarter was -- increased to $7.7 million, up from $4.9 million last year, primarily due to volume.
Gross margins were 27.5%, up from 22.9%.
EBITDA margins were 14.2%, up from 7.8% in last year's second quarter.
And finally, net income was $2.7 million, up from $1.2 million last year.
On to slide six.
For the first half of fiscal 2021, sales were $44.7 million compared with $42.2 million in the first half of last year.
This increase was despite the challenging Q1 when our production capacity was at 50% due to COVID-19.
Year-to-date sales are 60% domestic, 40% international compared with 71% domestic and 29% international last year.
Gross profit was $9.3 million, slightly off the $9.7 million last year, and gross margins were down 20.7% versus 22.9% last year, again, impacted by COVID-19 in the first quarter.
Year-to-date EBITDA margins were 4.9% versus 4.5% in the first half of last year, and net income was $900,000 or $0.09 per share, down from $1.3 million or $0.13 per share last year.
Again, the first quarter loss due to COVID-19 was substantial, but we have more than recovered that in the second quarter.
Finally, moving on to slide seven.
Cash is at $67.9 million, down from $73 million at the end of fiscal 2020, but this is simply timing of working capital namely accounts receivable and accounts payable.
We are expecting this to come back in the third quarter.
Our quarterly dividend remains firm at $0.11 a share.
Capital spending has been light in the first half of the year at $800,000 compared to $700,000 last year.
As we have seen in the last few years, our capital spending will increase in the second half of the year, and we still expect the total spend for the year to be between $2 million and $2.5 million.
Finally, as we continue to work on our acquisition pipeline and activities, COVID has not had an adverse effect on our efforts as we have built some very good relationships over time, and these conversations continue.
However, many of them are remote as opposed to in-person.
But there's still -- they are still occurring and still very active.
I'd ask that you refer to slide nine.
Sales for the second quarter were $28 million.
As Jeff had mentioned in his remarks, the company completed a large material-only order for a defense customer, which required very little conversion resources.
Sales to defense industry were up $6.8 million year-on-year due to prior -- due to the prior mentioned materials order and greater defense conversion as we continue to grow our naval workforce.
Lastly, and importantly, due to the strength of our backlog, annual guidance has been increased from $90 million to $95 million to $93 million to $97 million.
Please move on to slide 10.
While COVID-19 has impacted demand for our product, there are several actions that are being implemented to ensure that we maximize the margin of the work that is expected to convert during this financial year.
During the first quarter conference call, I outlined several initiatives that the company was pursuing in order to maximize the realized margins.
In particular, we are focused on reducing our material costs, hiring and quickly onboarding welders, differentiating our company from our competitors in the defense industry through superior execution and leveraging IT tools to increase the productivity of our team.
On the material procurement front, the team has had success in reducing our costs.
Graham is a relatively small buyer of carbon steel and stainless steel plate.
Therefore, we typically procure our plates from distributors.
However, we are finding in this time of low demand, the mills are willing to sell directly to us, thus reducing our cost.
We are also focused on growing our workforce in order to increase the production volume.
To this end, we have recently completed an expansion of our weld school.
We now have the capacity to train up to 10 welders up from 5.
The work for the Navy has higher welder content than does for other work.
Welding is a critical skill set for the company, and we must expand our capacity.
The welds on our campus is a terrific addition for workforce development.
Currently, we are prioritizing improving our productivity in the Navy production areas now that the company has completed many of the first-time operations.
Productivity enhancements will stem from improved bill flows, employee training, creation of jigs and fixtures, and lastly, applying lessons learned.
Our IT department continues to develop tools, which will improve our ability to manage our global fabrication partners.
A management dashboard is getting developed to track all aspects of our outsourced projects.
The dashboard will aggregate information that is stored on several IT platforms and will improve the productivity of our project managers.
I'll begin my remarks starting with slide 12.
Order level in the quarter was strong, especially given the state of crude oil refining and petrochemical markets.
The strong order level in the quarter is the result of implementing effectively diversification strategy.
We discussed during the past couple of years actions taken to be successful in the more price-conscious segment of refining and chemical markets.
Both participation and market share were low, which afforded an opportunity to address this segment differently.
Opportunity generation and bid management structure were modified and also execution strategy changed.
Replicating the success in China, a subsidiary structure was established in India.
It is necessary within India, as an example, to localize selling certain technical resources and quality control personnel.
We have the best chance to secure large project orders when they are supported and followed for a long time.
A local presence permits that.
This then allows for pulling a customer toward Graham rather than Graham having to move toward its competition.
Also, fabricating certain components locally within India is important.
As a result of this strategy, $10 million of new orders for India were secured in the quarter.
These orders were for both customers and end users that had not used Graham before.
I am pleased with our success in India.
We plan to pursue principally large project work.
And as of today, the company secured two of the three most recent large projects.
I commend the team that initiated and drove the strategy and those now executing the orders.
Another highlight was securing additional work for the U.S. Navy.
Navy find value in our engineering and fabrication capabilities, program management strengths, willingness to listen to feedback and implement improvements, our quality program and also that we will invest in facilities, modern machine tools, personnel and employee development.
General conditions in our crude oil refining and petrochemical markets is weak, while the pipeline for the U.S. Navy is strong.
This is noted by orders for our crude oil refining and petrochemicals being down compared with last year.
Let's move on to slide 13.
I want to discuss briefly market outlook and what we are seeing in our key markets.
I plan to go clockwise, beginning in the upper left quadrant.
The sales team did well to secure a significant amount of work that is for Asia.
The Indian work mentioned a moment ago, plus approximately $10 million in additional orders fiscal year-to-date that are for Asia.
The pipeline must rebuild and move from early stage activity to procurement stage.
We expect the next few quarters to be about building the pipeline.
We are seeing COVID having an impact in Asia as one large project in the bid pipeline that was teed up to be placed, in order to be placed, had to be postponed due to workforce impact from the disease.
We believe it will be activated again once the country has the spread of the disease back under control.
Our team in India, our team in China and those overseeing Southeast Asia point to COVID is on the rise again, resulting in slowing of activity along with heightened uncertainty.
In the Americas, it was quite slow for both revamp retrofit and also routine spare parts.
Refiners, they are focused on preserving cash right now and are postponing MRO or capital projects.
We don't see this picking up until demand recovers following having COVID under control.
Those projects that may proceed, we are carefully following.
On a positive note, an engineering-only order for a large crude oil refinery revamp was secured, that we hope proceeds within the next 12 months.
For that case, the refiner could fund only upfront engineering at this stage so that detailed layout is done, enabling the project to proceed quickly once it is ultimately released for fabrication.
If and when it proceeds into fabrication, we anticipate that a change order will exceed $5 million.
Crude oil below $40 a barrel and pandemic-driven global disruption have resulted in activity being pulled in by most national integrated and independent oil refiners.
Moving over to U.S. Navy.
Navy in particular and defense overall is active.
We have a solid pipeline of activity.
Some of it is for new components that we have not done before, while others are repeat components for upcoming vessels.
Submarine programs are vital for national defense and other strategic missions for our country.
There's terrific visibility into multiple year new vessel requirements that underpin this segment continuing to be strong.
We have identified and are pursuing $40 million to $60 million of opportunities for the Navy, and they should be placed with a selected vendor over the next nine months.
We have M&A target identification and development concentrated in the defense segment due to its strong long-term fundamentals.
As Jeff noted, relationships in certain cases were established prior to COVID, and we continue to nurture them with a combination of remote interactions along with selective visits.
Short cycle work is off 20% to 30%.
Crude oil refining and petrochemical markets are where the majority of spares revenue -- spare parts revenue was derived.
These markets, as I mentioned, are in cash preservation mode until the global economy is back on its feet and demand subsequently recovers.
On an upbeat note, there is step-up in short-cycle inquiries.
However, that has not translated into an improved order level just yet.
Chemicals and petrochemicals are also down.
Projects have been shelved or delayed.
The pandemic sent a demand shock that is not yet fully abated.
Getting COVID behind in most regions throughout the world is the catalyst for demand returning.
Let's now move on to slide 14.
Backlog is a healthy $115 million, split evenly between commercial and defense.
The staging of backlog or work in process already provides an ability to state guidance at this extraordinary time when many companies cannot.
60% to 65% of backlog is planned to convert during the next four quarters with approaching 40% of backlog planned to convert during the next two fiscal quarters.
Please go on to the next page.
As Jeff and Alan mentioned, we are updating our guidance.
We've increased the revenue range to between $93 million and $97 million, implying the second half should be between $48 million and $52 million for revenue.
Gross margin is expected to be between 21% and 23%.
SG&A spend between $17 million and $17.5 million.
And we're projecting the effective tax rate is approximately 22%.
 Assistant:

Chosen response:
compname reports q2 earnings per share $0.27.
compname reports sales grew to $28 million for fiscal 2021 second quarter.
q2 earnings per share $0.27.
q2 sales $28 million versus refinitiv ibes estimate of $23.1 million.
increasing revenue guidance for fiscal 2021.
sees fy 2021 revenue between $93 million and $97 million.
orders in q2 add to fiscal 2022 revenue potential.
expects 60% to 65% of backlog to convert to revenue within next 12 months.


Prompt:
Human: We certainly appreciate your time today and your interest in Graham Corporation.
Joining me on the call are Dan Thoren, our President and CEO' and Jeff Glajch, our chief financial officer.
If not you can access the release as well as the slides that will accompanying your conversation today at our website, www.
These documents can be found on our website or@sec.gov.
During today's call, we will also discuss non-GAAP financial measures.
We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release in the slide for your information.
The addition of Barber-Nichols contributed $16.5 million in the quarter.
Our legacy Graham manufacturing business offset part of the game.
There are two reasons; first, in the comparable quarter last year we had non-repeatable material only order.
In addition, we had a significant level of Chinese sub-contracting in the second quarter last year.
These two items made up approximately $10 million in lower revenue compared with last year.
We are pleased with our strategic expansion into the defense business evidence that with 58% of our quarterly revenue coming from this key market, while we await a recovery in the energy and petrochemical markets.
As we look to the second half of the year, we continue to expect strong performance from Barber-Nichols.
For the Batavia facility, we expect to see a significant shift toward higher profit defense jobs.
In our commercial markets, we expect to have a large increase in subcontract to production plans for both the United States and India which will measurably improve revenue and gross profit in the second half of the year.
I would caution however, that this large increase in the amount of outsourcing while set up very nicely right now is dependent on our subcontracting partners and can occasion take longer -- can allocation take longer than planned.
So there is a risk a portion of this could shift out of the fiscal year into fiscal -- into Q1 of fiscal 2023.
Orders increased to $31.4 million up from $20.9 million in Q1, orders were split evenly between the Graham manufacturing business and Barber-Nichols.
Our $233 million backlog is strong with 78% of its coming from the defense market.
In the quarter gross margins and profitability were impacted by two Batavia based defense orders which utilize a significant amount of labor but had a very low revenue per labor hour.
One project was a first article order which had been one competitively The other was a fabrication order which has a significant portion of its profit recognized in previous years when the material portion of the project was executed out of separate order.
Both of these projects will make up a significantly lower portion of the expected revenue in the second half of the year.
In addition, we expect both of these projects to be nearly complete by the end of the fiscal year.
We did have a strong quarter in Barber-Nichols.
I continue to be pleased with their performance through four months their business is at $20 million of revenue and $3 million of EBITDA.
Our expectation for the full year remain at 45 to $48 million of revenue and at an 11% EBITDA margin or $5.2 million.
So they are ahead of pace to hit the fiscal year expectations for the 10 months of the business that will be part of Graham in this fiscal year.
I do caution extrapolating in the form of numbers but I am encouraged about their performance and the integration within Graham.
In the second quarter, we have to one-time items, we had a pre-tax gain of $1.9 million related to the earned out of the Barber-Nichols acquisition.
I will discuss this in a minute.
We also had a charge an offsetting charge of $798,000 related to the termination of our prior CEO.
The net of these two items $1.1 million, or approximately $882,000 after taxes are included in the reported results.
Regarding the earn-outs adjustment for Barber-Nichols, we have made a change which we believe will further strengthen the long term incentives of the business.
The acquisition are now which was for $7 million to $14 million payout based on fiscal 2024 results -- fiscal 2024 EBITDA results has been cancelled.
This had represented a 10% to 20% addition to the original $70.1 million acquisition price.
This earn-out have been valued using a Monte Carlo accounting purchase, Monte Carlo purchase price accounting analysis at $1.9 million.
Therefore, with the cancellation of this earn-out the economic value of that earn-out is now zero and the gain had to be recognized through the income statement in the quarter.
So we have initiated a new incremental bonus pool for a broader portion of the Barber-Nichols employees.
This pool will be an annual cash bonus pool -- an incremental annual cash bonus pool based on fiscal year results 2024, 2025 and 2026.
For each year, the pool will allow for a range of at the low end $2 million, once the EBITDA threshold is met at a maximum of $4 million if the maximum EBITDA is achieved within the year.
Therefor across the three years, the maximum opportunity is $12 million.
In those years, this will be reported as a period cost.
We believe this bonus pool will be an excellent retention tool and will be in place for the third, fourth and fifth years following the acquisition of Barber-Nichols.
We can move on to Slide 4.
Much of Slide 4 and 5 I have already discussed.
I will note that Q2 last year essentially including all the profit of the full fiscal year, obviously this quarter in the current year was challenged and however the challenges were completely within the Batavia operation.
In addition, those challenges are short term and many of them are behind us or mostly behind us.
We expect the next two quarters to see a noticeable improvement in profitability.
You will note, the GAAP and adjusted earnings per share are similar for Q2 along with the $1.1 million of one-time items that I mentioned earlier.
We also have adjusted out the purchase accounting amortization of $784,000 as well as $124,000 of acquisition related costs.
The full year reconciliation of GAAP to adjusted earnings per share are in the appendix of this deck.
Moving on to Slide 5.
For the year-to-date results, the $9.6 million revenue gain came from $20 million of additional Barber-Nichols offset by the same items noted for the quarter earlier, namely last year having the benefit of a one-time material order and higher Chinese sub-contracting in the first half of the year.
As with the quarter results, the year-to-date GAAP and adjusted earnings per share are similar for the same reasons noted for the second quarter.
Again, this is reconciled in the appendix of the deck.
You may recall last year we had a big impact from COVID in the first quarter while we were shut down for approximately for three weeks and we were running at half capacity throughout the quarter.
While this year's first quarter were impacted by the same lower margin defense orders that were noted for the second quarter.
Moving on to Slide 6.
As many of you know, I was very pleased that we invested our formerly high cash balance by buying Barber-Nichols.
I'm very pleased about their performance to-date and after seeing even more of their team in action, the future at Barber-Nichols is extremely exciting.
They are executing very well and the early returns which can often be a risk for an acquisition have been stellar.
Our balance sheet with the term loan that was taken as part of the acquisition provides us flexibility for future investments.
We will continue to be willing to use our strong balance sheet for future internal and external growth opportunities.
Dan will talk further about our backlog, our strategy and our guidance for the full year.
I'm starting on Slide 7.
We had a nice mix of orders in the second quarter, $12.5 million came from our defense customers almost $19 million from our commercial customers.
Defense orders were for both new and existing programs and new and overhaul equipment, giving us full lifecycle exposure.
Space related orders were around $2 million and advanced energy orders were close to $2 million.
Our commercial balance orders or spares are trending upwards.
The big change in backlog from fiscal year '21 to fiscal year '22 was mostly from the acquisition of Barber-Nichols.
Of the $233 million backlog 78% or $182 million is in defense.
From a backlog perspective, Graham has certainly made the transition from an energy and chemical business with some defense work to a defense company with an important contribution from energy and chemical.
About one half the backlog is expected to convert to revenue in the next 12 months.
The remaining 12-month order graph does not include BN orders prior to the acquisition on June 1 to 2021.
Moving to Slide 8; Graham's strategy started many years ago, has been realized through both organic and inorganic means.
The organic defense business supplying vacuum and heat transfer equipment on Navy carriers and submarines has been very successful.
The acquisition of Barber-Nichols has added more defense business that helps to offset the cyclicality in the heritage energy and chemical business.
Our second quarter revenue in defense was $20 million, up $12.7 million from the first quarter where BNI contributed for one month.
The really nice thing about defense business is the visibility.
Ships and submarines take a long time to build.
So budgeting and plans are in place long before orders come.
In some cases, the Navy will place orders for multiple strategic assets at one time, giving us a large backlog that converts over several years.
These long-term orders provide good value for our customer and allows us to continually improve margins as the projects repeat in our shops.
Revenue remains unchanged in the $130 million to $140 million range.
As discussed by Jeff, we started slow in the first half with $54 million of revenue and we are ramping up each quarter.
BN is expected to contribute $45 million to $48 million for the year.
Our gross margin will be 17% to 18%, reflecting lower margin maybe work at Batavia with SG&A around 15% or 16% of revenue.
We have tightened adjusted EBITDA from $7 million to $9 million to $7 million to $8 million.
Capital expenditures remain unchanged at $3.5 million to $4 million.
Certainly, we continue to track supply chain and COVID-19 related disruptions.
The biggest potential impact to our projections that we are tracking now is the executive order on ensuring adequate COVID safety protocols for federal contractors.
This requirement would be flowed down contractually to Graham manufacturing in Barber-Nichols.
And would require that all of our employees that do not have exemptions, be vaccinated against COVID-19 effective December 8, 2021.
Slide 10 summarizes how we are driving value for our shareholders.
The defense strategy has been successful and we see additional growth available.
In the energy market that refining and petrochem, we are seeing leading indicators of an upcycled expansion.
We are preparing our company and our supply base for the increase in business there.
We have several initiatives to enhance our market positions and brand recognition.
These range from marketing, so there's a one of the things we're doing is an upside -- website upgrade and also resuming our successful academics training program.
We're also taking different approaches to our markets.
We're leveraging our installed base, we're redeveloping our relationships with license or as customers and EPCs that has been strained through this COVID environment that we've been in.
We have made excellent progress with balance sheet efficiency over the last six months as Jeff has discussed.
Finally, we're developing a multi-year strategic plan that will generate cash to enable more growth.
I shared our first strategic plan iteration with our board yesterday and had some great feedback.
They are encouraged with what we're planning.
 Assistant:

Chosen response: qtrly orders increased to $31.4 million, up 50% sequentially.


Prompt:
Human: This is Ramesh Shettigar, Vice President of ESG, Investor Relations and Corporate Treasurer.
On the call today to present our thirds quarter results are Dante Parrini, Glatfelter's Chairman and Chief Executive Officer and Sam Hillard, Senior Vice President and Chief Financial Officer.
These statements speak only as of today and we undertake no obligation to update them.
The third quarter marks an important milestone in Glatfelter's ongoing transformation with the successful acquisition of Jacob Holm.
This business will significantly enhance the scale and diversification of our product and technology portfolio by introducing premium quality spunlace nonwovens to our offerings.
We also completed the first full quarter with Mount Holly under Glatfelter's ownership, which contributed to record operating profit for the Airlaid segment.
Slide 3 of the investor deck provides the key highlights for the third quarter.
We reported adjusted earnings per share of $0.21 and adjusted EBITDA of $32 million.
Airlaid Materials performed well above expectations, driven by the higher than anticipated demand for our tabletop and wipes products.
This strong demand positively impacted segment profitability in the quarter.
We also experienced sequential volume growth of 10% in our hygiene products category after being negatively affected in the first half of the year as consumers destocked.
Consistent with our previous guidance, customer buying patterns in this category returned to more normalized levels during the quarter.
Also our contractual pass-through arrangements with customers allowed us to offset elevated raw material costs and maintain solid margins during this volatile inflationary period.
Composite Fibers was challenged in the third quarter by significantly higher energy prices that were well above our expectations, along with continued inflation for raw materials and logistics.
For example, electricity prices more than doubled during the quarter in key European countries like Germany and the UK, where we have significant manufacturing operations.
In order to mitigate this unprecedented escalation of input costs, we announced in mid September an incremental 12% price increase across the Composite Fibers product portfolio.
This action was an addition to the 8% price increase announced earlier in the year.
We believe these price actions appropriately reflect the current market conditions as we continue to provide our customers security of supply of high quality products and responsive service during this very dynamic business environment.
In addition, we successfully executed a $500 million bond offering that is primarily being used to finance the Jacob Holm acquisition.
This transaction marks another significant step forward in our transformation by further broadening our Engineered Materials product and technology offerings, enhancing enterprise wide innovation capabilities with a focus on sustainability and adding meaningful scale to the company.
We will begin the process of enabling close collaboration and technology sharing among this expanded group of industry leading nonwovens experts.
Our near-term priorities for this acquisition will be focused on successfully integrating Jacob Holm into Glatfelter's operating model, achieving the targeted $20 million of annual synergies and actively de-levering the balance sheet.
Sam will now provide a more detailed review of our third quarter results, as well as additional comments on the Jacob Holm acquisition.
Third quarter adjusted earnings from continuing operations was $9.5 million or $0.21 per share, an increase of $0.05 versus the same period last year, driven primarily by strong earnings in the Airlaid segment and a favorable tax rate for the quarter.
Also noteworthy is that Q3 results included the first full quarter of the Mount Holly acquisition under Glatfelter's ownership.
Slide 4 shows a bridge of adjusted earnings per share of $0.16 from the third quarter of last year to this year's third quarter of $0.21.
Composite Fibers results lowered earnings by $0.05, driven primarily by higher inflationary pressures experienced in raw materials, energy, logistics and operations.
Airlaid Materials results increased earnings by $0.02, primarily due to strong volume recovery in wipes and tabletop product categories, as well as from the addition of a full quarter of Mount Holly results.
Corporate costs were $0.02 favorable from ongoing cost control initiatives and interest, taxes and other items were $0.06 favorable driven by a lower tax rate this quarter of 27% versus 48% in the same quarter last year.
Slide 5 shows a summary of the third quarter results for the Composite Fibers segment.
Total revenues for the quarter were 3.4% higher on a constant currency basis, mainly driven by higher selling prices of approximately $6 million to mitigate the elevated inflationary pressures in energy, raw materials and logistics.
Shipments were 6% lower, primarily driven by softer demand in our wallcover product category from unexpected customer downtime in the middle of the quarter, although buying patterns began to stabilize as we exited the quarter.
We continued to see firm demand in our composite laminates and food and beverage categories, which were up 17% and 2% respectively.
Prices of wood pulp, energy and freight continue to escalate in the third quarter and negatively impacted results by approximately $12.5 million versus the same quarter last year.
Sequentially from Q2 of 2021 this impact was $5.7 million, creating significant headwinds for this segment.
Although we expected some inflationary pressures to continue into the third quarter, our pricing actions announced earlier in the year were unable to fully offset the magnitude of inflation.
The single biggest driver of the sequential inflation impact was energy prices, which increased sharply in Europe during the third quarter.
As Dante noted energy prices in the spot market more than doubled during the quarter.
In addition, we experienced higher inflationary pressures in raw materials, particularly wood pulp and in logistics cost driven by global supply chain disruptions.
This had a combined unfavorable impact sequentially of approximately $2.7 million.
As a result, we announced an additional 12% price increase in the middle of September for all product categories in Composite Fibers to offset the spiraling inflationary movements.
We expect input costs to remain relatively volatile in the near term and we'll continue to closely monitor these developments.
We will continue to assess a variety of mitigating actions in addition to our ongoing focus on managing costs, operational efficiencies and leveraging our global scale and integrated supply chain.
Operations were favorable by $2.4 million, driven by strong production on our inclined wire machines to meet the growing customer demand.
Currency and related hedging activity unfavorably impacted results by $1.2 million.
Looking ahead to the fourth quarter of 2021, we expect shipments to be flat on a sequential basis.
Selling prices are expected to be $6 million higher versus Q3 of 2021.
Raw materials and energy prices are projected to be $1 million to $2 million higher sequentially and operations are expected to be in line with the third quarter.
Slide 6 shows a summary of third quarter results for Airlaid Materials.
Revenues were up about 40% versus the prior year quarter on a constant currency basis, supported by the addition of a full quarter of Mount Holly and strong recovery in the tabletop and wipes categories.
Shipments of tabletop and wipes almost doubled when compared to the third quarter of last year.
However, demand for hygiene products was 5% lower versus last year, although improved by 10% versus the second quarter of this year.
All Airlaid product categories returned to more normalized demand patterns in the third quarter after a trough in the first half of this year related to customer destocking.
Selling prices increased meaningfully from contractual cost pass-through arrangements where we passed raw material price increases along to customers.
However, energy is not part of most pass-through arrangements, which reduced earnings by $1.3 million.
And we recently introduced a 10% price increase to those Airlaid customers that did not have cost pass-through arrangements to cover the additional inflation.
Operations were lower by $2.5 million compared to the prior year, mainly due to relatively lower output this quarter as production rates last year were elevated to meet the high demand during the peak of the pandemic.
And foreign exchange was unfavorable by $1.2 million, driven by the FX pass-through provisions in our customer contracts.
For the fourth quarter of 2021, we expect shipments to be 3% lower on a sequential basis with unfavorable mix, thereby impacting operating profit by $1 million.
Selling prices are expected to be higher, but fully offset by higher raw material prices and energy prices are expected to unfavorably impact profitability by $1 million to $1.5 million compared to the third quarter.
Slide 7 shows corporate costs and other financial items.
For the third quarter, corporate costs were favorable by $1.7 million when compared to the same period last year, driven by continued spend control.
We expect corporate costs for full year 2021 to be approximately $22 million, which is an improvement from our previous guidance of $23 million.
Interest and other income and expense are now projected to be approximately $15 million for the full year, higher than our previous guidance of $11 million.
The increase is driven by the recently executed bond offering of $500 million, which was used to finance the Jacob Holm acquisition, as well as to pay down our existing revolver borrowings.
Our tax rate for the third quarter was 27% lower than previously expected and driven by the release of certain tax valuation allowances.
We expect the fourth quarter tax rate to be approximately 42%, while our full-year 2021 tax rate is estimated to be between 38% and 40%, in line with our previous guidance.
With regard to guidance on our new spunlace segment, which is how we will be referring to and reporting results for the Jacob Holm acquisition.
For the two remaining months of the fourth quarter under Glatfelter's ownership, we expect shipments to total approximately 13,000 metric tons and operating profit to be approximately $1 million.
This includes D&A of approximately $3.5 million.
Please note these estimates are subject to change upon completion of purchase accounting.
Slide 8 shows our cash flow summary.
Third quarter year-to-date adjusted free cash flow was higher by approximately $9 million, mainly driven by lower working capital usage.
We expect capital expenditures for the year to be approximately $30 million to $35 million including the two months for Jacob Holm.
Depreciation and amortization expense is projected to be approximately $63 million including Jacob Holm.
Slide 9 shows some balance sheet and liquidity metrics.
Our leverage ratio decreased to 2.8 times as of September 30, 2021 versus 3.0 times at the end of June, but higher compared to year-end 2020, mainly driven by the Mount Holly acquisition.
Our pro forma leverage including the recent bond offering and Jacob Holm financials, synergies and transaction costs is approximately 4 times.
We still have ample available liquidity of more than $280 million.
Looking ahead, we're optimistic about the prospects for the business as we continue building the new Glatfelter.
Demand for Composite Fibers products is expected to remain robust in most categories and we expect that to continue for the foreseeable future.
Our most recent pricing actions were implemented to mitigate additional inflation and should be a meaningful contributor to earnings during the fourth quarter.
Airlaid Materials demand is steadily improving to pre-COVID levels as wipes and tabletop significantly improved in the third quarter, while destocking in the hygiene products is beginning to abate.
Our continued aggressive stance on cost control is contributing to maintaining an efficient cost structure, thereby improving EBITDA and free cash flow.
And we have significant value creation opportunities as we continue to optimize Mount Holly and begin the integration process for Jocob Holm.
So we're building scale and momentum as we accelerate the pace of expansion for the new Glatfelter.
This concludes my closing remarks.
 Assistant:

Chosen response: qtrly adjusted earnings per share from continuing operations $0.21.


Prompt:
Human: These factors are detailed in the company's financial reports.
You should also note that we will be discussing our consolidated results using core performance measures, unless we specifically indicate our comments relate to GAAP data.
Our core performance measures are non-GAAP measures used by management to analyze the business.
For the first quarter, the largest difference between our GAAP and core results stemmed from noncash mark-to-market gains associated with the company's currency hedging contracts.
With respect to mark-to-market adjustments, GAAP accounting requires earnings translation hedge contracts and foreign debt settling in future periods to be mark-to-market and recorded at current value at the end of each quarter even though those contracts will not be settled in the current quarter.
For us, this increased GAAP earnings in Q1 by $308 million.
To be clear, this mark-to-market accounting has no impact on our cash flow.
Our currency hedges provide us -- protect us economically from foreign exchange rate fluctuations and provide higher certainty for our earnings and cash flow, our ability to invest for growth and our future shareholder distributions.
Our non-GAAP or core results provide additional transparency into operations by using a constant currency rate aligned with the economics of our underlying transactions.
We're very pleased with our hedging program and the economic certainty it provides.
We received $1.7 billion in cash under our hedge contracts since their inception more than five years ago.
A reconciliation of core results to the comparable GAAP value can be found in the investor relations section of our website at corning.com.
You may also access core results on our website with downloadable financials in the interactive analyst segment.
We encourage you to follow along.
They're also available on our website for downloading.
Today, we reported a strong start to what we expect to be an outstanding year.
For the first quarter, we grew sales 29% year over year to $3.3 billion.
We grew earnings per share by 125% to $0.45.
Free cash flow of $372 million builds on the momentum we established in the second half of 2020.
All five of our segments delivered double-digit sales and net income growth year over year, with sales growth rates ranging from 15% for display to 38% for environmental.
But last year was an easy compare.
So I think it's worth noting that total company sales are up 14% since the first quarter of 2019.
No question, we're in a strong position.
I'll frame my remarks around three points.
First, invention is fundamental to our long-term strategy.
Through our relentless commitment to R&D, we developed category-defining products that transform industries and enhance lives.
Second, as we partner closely with our customers to move their industries forward, we unlock new ways to integrate more Corning content into their ecosystems.
This is a powerful growth mechanism.
And finally, we continue to build a stronger, more resilient company, one that is committed to rewarding shareholders while supporting our customers, our people and our communities.
Now let me expand on my first point.
We're living in a world that Corning anticipated exactly a decade ago in our video, A Day Made of Glass.
It's a world where technology underpins every facet of human life; a world of communication and connection, where massive bandwidth facilitates real-time information and on-demand connections and people stay connected through a virtual environment that is literally at their fingertips.
Let's think about what it means as displays and touchscreen devices make their way to the very center of daily life.
The demands we're putting on today's screens and the expectations we have for tomorrow's imply a very specific set of properties.
The requirements for precision glass and ceramics become more and more exacting.
We need a material that is strong, yet thin and lightweight, flexible and conformable, durable, damage-resistant and impermeable, stable enough to withstand hostile weather, extreme temperatures and cleaning agents.
It needs to be touch-friendly and look elegant.
It must scale for very large applications and yet be useful in the palm of your hand or on your wrist.
The material must also be operable with a world of technical capabilities that lie just below the surface, enabling complex electronic circuits and nano scale structure.
And it must be mindful of the environment.
When it comes to the critical components that enable high-technology systems in multiple markets that we serve, the bar just keeps getting higher.
This leads to a world where precision glass and ceramics win.
And we have been winning.
When we examine the growth in all our business today, we see key trends converging around our capabilities at a very exciting pace.
In short, we're vital to progress.
We succeed through sustained investments in R&D and years of material science and process engineering knowledge.
Everything begins with our cohesive portfolio.
Corning is one of the world's most proficient innovators in materials science.
We combine our unparalleled expertise in glass science, ceramic science and optical physics with our proprietary manufacturing and engineering platforms to develop category-defining products that transform industries and enhance lives.
Today, our inventions clean the air we all breathe, connect people to information and each other, provide the window through which we access information and entertainment.
And they help facilitate the discovery and delivery of new medicines.
And we're building in each of these areas.
We're helping our customers move toward a world with nearly infinite and ubiquitous bandwidth; with large lifelike displays, where cars are cleaner, autonomous and connected; where medicines are individualized, effective and safe; and where you can do more right from your mobile device, protected by cover materials that can withstand even greater reviews.
That leads me to my second point.
As we work closely with our customers to advance these visions, we find ways to solve their toughest technology challenges.
Our probability of success increases as we apply more of our world-class capabilities, and our cost of innovation declines as we reapply talent and repurpose our existing assets.
As we apply our focused portfolio, we invent solutions that add even more value to our customers' offerings, and this provides a powerful growth mechanism.
We aren't exclusively relying on people just buying more stuff.
We're putting more Corning into the products that people are already buying.
Now through that lens, let's look at our progress across our market access platforms.
In mobile consumer electronics, we continue to help transform the way people interact with and use their devices.
And we are capturing significant growth by increasing the value we offer on each of those devices.
As we advance state-of-the-art for cover materials, we drive sustained outperformance across up and down markets.
We've grown specialty sales every year from 2016 to today despite smartphone unit sales being roughly flat or down each year.
Over that five-year period, we've added more than $750 million in sales on a base of more than $1 billion.
Fast Company recently recognized our achievements in this space.
Noting both Ceramic Shield and Gorilla Glass Victus, the magazine named Corning, The Most Innovative Company in Consumer Electronics for 2021.
We see a similar growth story playing out in automotive since 2017, the peak year for car sales.
Our auto sales are up more than 40%, while global car sales are down 20%.
We're helping customers navigate an industry that is expected to change more in the next 10 years than it has in the past 50.
And as we do, we're working to capture and expand $100 per car content opportunity across emissions, auto glass solutions and other technical glass products, including our patented 3D ColdForm technology.
We were thrilled to see the world premier event for the all-electric EQS for Mercedes.
Its hyper screen features a Gorilla Glass cover almost five-feet wide.
We've also launched a new generation of GPS.
They're helping vehicles, including hybrids, achieve even lower levels of fine particulate emissions.
And they're helping us exceed a $500 million GPF business ahead of our original time frame.
In life sciences, we are delivering growth on two fronts.
First, demand is growing based on COVID-19 vaccines and diagnostics.
Second, we're becoming increasingly relevant as we help the industry move toward cell- and gene-based therapies, and that shift translates into more of our content per drug sold.
Looking longer term, we're making significant strides toward building a valor glass franchise, addressing a multibillion-dollar content opportunity in pharmaceutical packaging markets.
We doubled valor vial production in Quarter 1 versus Quarter 4.
And to date, the company has shipped enough valor vials for hundreds of millions of doses of COVID-19 vaccines.
Corning also expanded its agreement with the U.S. government to boost capacity for vials to $261 million, a $57 million increase from our initial June 2020 agreement.
We're leveraging our competitive advantages to deliver stable returns.
I'm pleased to note that in Quarter 1, we experienced the most favorable first-quarter pricing environment in more than a decade.
And we announced a moderate increase to our display glass substrate prices for the second quarter.
Stepping back, we are the lowest-cost producer of display glass, which makes us significantly more profitable than our competitors.
Our superior products, innovation capabilities and deep customer relationships enable us to maintain our leadership position.
And our flexible fusion manufacturing platform allows us to match operating capacity with demand.
Meanwhile, the emergence of Gen 10.5 has given us a unique opportunity.
Demand for large-sized TVs continues to grow.
75-inch sets were up more than 60% last year.
These TVs are most efficiently made on the largest fabs, and Corning is well-positioned to drive more content into the market in 2021 with its Gen 10.5 plants in China.
Finally, let's look at optical.
I'm energized by the outlook for this business.
We gauge the market by three indicators.
First is network need, and we can all see that demand on the network is only increasing.
Second is customer statements.
Broadly, network operators are making encouraging announcements on capital investment for 5G and hyperscale data center deployments.
And there's also good news on fiber to the home.
AT&T's CEO, John Stankey recently said that fiber underpins the connectivity we deliver, serving both wired and wireless.
His company announced plans to increase its fiber-to-the-home footprint by an additional 3 million customer locations across more than 90 metro areas in 2021.
Verizon CFO Matt Ellis said the fiber serves as the critical backbone to our 5G deployment.
Our commitments with our vendor partners, such as Samsung, Nokia, Ericsson, and Corning, represent key strategic agreements to drive innovation in 5G.
And finally, the third indicator that we watch is our order book.
We're seeing orders and sales increase.
And we're also seeing multiple governments starting to shape policy that asserts broadband is a basic right.
They're developing action plans to take optical solutions to many more homes.
The White House is calling for more than $120 billion to bring high-speed Internet to every American.
Just looking at the two biggest efforts, the Rural Opportunity Development Fund and the President's Infrastructure Plan, we see a multibillion-dollar opportunity for Corning.
launched its GBP 5 billion Project Gigabit.
The plan is to bring next-generation broadband to more than 1 million hard-to-reach homes and businesses.
And the European Commission is calling for EUR 135 billion to support the rollout of rapid broadband services to all regions and households starting in 2021.
In addition, we remain the unquestioned technology and market leader.
We consistently create new products and extend our lead by delivering solutions that help our customers realize their network visions faster, better and cheaper.
Simultaneously, we're driving productivity improvements to increase capacity and lower our cost.
In total, we're feeling very good about optical.
So I've talked about how we invest to create and make innovations that solve tough challenges, deliver for our customers and grow.
Now I want to add on my final point.
As we effectively build our strength as a company, we will continue to reward our shareholders.
The strength of our businesses results in significant cash generation.
Our first priority is to invest for growth.
And we are committed to return excess cash to shareholders in the form of dividends and opportunistic buybacks.
In the first quarter, we announced a 9% increase to our dividend.
And earlier this month, we seized a great opportunity to resume share buybacks.
Through our recent transaction with Samsung display, we repurchased 4% of our outstanding shares.
This is a great deal for our shareholders, and it's great news for Corning that Samsung retained a 9% long-term ownership stake in the company.
We see their investment as validation of Corning's innovation road map and the value of our capabilities.
As we look ahead, this only adds to our confidence.
Shifting to a broader view of our stakeholder base, we are committed to sharing resources and leadership on a range of important issues.
We continue to support vital human services and emergency relief in our communities around the world.
Our Office of Racial Equality & Social Unity has made significant strides.
In North Carolina, we've established a five-year partnership with N.C. A&T, the largest historically black university in the United States to provide scholarships through 2026.
The funding focuses on enhancing STEM education, helping students become community classroom teachers and boosting the number of graduates in other fields critical to the nation's workforce.
In New York, we're providing hands-on support on police reform.
We're also energized around our sustainability efforts.
EPA has once again named Corning an ENERGY STAR Partner of the Year.
Recently, Verizon publicly recognized our sustainable practices.
And I am pleased to announce that we'll publish our first sustainability report in the coming months.
On all dimensions, Corning is operating exceptionally well, and our capabilities are vital to progress on multiple fronts.
We're succeeding at building a stronger, more resilient company.
And I look forward to updating you on our progress throughout the year.
I am pleased to reiterate that Corning had another excellent quarter.
We closed 2020 with strong momentum and built on that momentum by delivering sales, earnings per share and cash flow above our expectations.
We are off to a great start, and we expect that strong demand and positive momentum to continue throughout the year.
Now let me walk you through our first-quarter performance.
Sales were $3.3 billion, which translates to a year-over-year increase of 29%.
We posted double-digit sales and net income growth year over year across all of our segments.
Environmental technologies and specialty materials delivered particularly strong year-over-year growth, posting sales increases of 38% and 28%, respectively, and net income gains of 111% and 78%, respectively.
Optical communications posted its second quarter of year-over-year growth, and we expect to see that trend continue.
And notably, display experienced the most favorable first-quarter pricing environment we've seen in more than a decade.
During the quarter, multiple events disrupted global supply chains.
Like many other companies, we experienced elevated freight and logistics costs across our businesses, and we expedited shipments to meet our customers' expanding demand.
This ultimately reduced profits by approximately $50 million.
As a result, our margins were below normalized levels.
This was most pronounced in our environmental technologies, optical communications and display businesses.
We will continue to do what it takes to deliver for our customers.
But we'll also take steps to mitigate these costs, and we expect to see them begin to decline in the second quarter and normalize longer term.
Operating margin was 17.1%.
That's an improvement of 730 basis points on a year-over-year basis.
We grew operating income 125% year over year.
EPS came in at $0.45, which is more than double year over year.
Free cash flow of $372 million was up $691 million versus first-quarter 2020, and it equates to 39% of our 2020 total.
This adds to our confidence that we will generate significantly more free cash flow than 2020.
So even with the disruptions from the Suez to storms, to continued COVID challenges, it was a very strong quarter.
Now let's take a closer look at the performance of each of our businesses.
In display technologies, first-quarter sales were $863 million, up 3% sequentially and up 15% year over year.
Net income was $213 million, up 40% year over year.
Now net income declined slightly sequentially because of the timing and flows of incentives associated with expansions in China.
Corning's volume grew by a low single-digit percentage sequentially, and Q1 sequential prices remain consistent with Q4 levels.
Now we continue to see strong in-market demand.
Retail demand for large-sized TVs and IT products, including notebook PCs, are both on track for another year of double-digit growth.
As a reminder, growth in large-sized TVs is the most important driver for us as we are well-positioned to capture that growth with Gen 10.5, which is the most efficient gen size for large TV manufacturing.
Panel makers are running at high utilizations, and glass demand is robust.
And we continue to expect the glass market to grow by a mid-single-digit percentage in 2021.
Against this backdrop, issues at our competitors have created glass shortages in an already tight supply environment.
Our primary operational focus is to supply our customers' demand.
Corning experienced the most favorable first-quarter glass pricing environment in more than a decade.
And we have increased cost in logistics, energy, raw materials and other operational expenses.
As a result, we are moderately increasing glass prices in the second quarter.
We believe the pricing environment will remain favorable going forward.
Three factors will continue to drive this.
First, we expect glass supply to remain short to tight in the upcoming quarters.
Second, our competitors continue to face profitability challenges at current pricing levels.
And third, display glass manufacturing requires periodic investments in existing capacity to maintain operations.
Looking ahead, we expect that glass supply will continue to be short to tight, and we will continue to partner with our customers to maximize our glass supply.
In optical communications, first-quarter sales were $937 million, up 18% year over year.
Sales were up in both enterprise and carrier networks, driven by the accelerated pace of data center builds and increased capital spending on network capacity expansion and fiber-to-the-home projects.
Net income was $111 million, up 283%.
The improvement was driven by incremental volume and strong cost performance.
There are some extremely encouraging announcements coming from leading network operators, as well as governments around the world that point to the start of a strong investment phase across the industry.
Clearly, there is a lot of excitement surrounding network deployment and optical fiber's role in delivering both basic and next-generation services to end customers.
We are well-positioned to capture a significant amount of that upside in the market.
Corning is the industry leader and the only large-scale end-to-end manufacturer of optical solutions, which allows us to innovate on important dimensions not available to competitors.
This puts us squarely at the center of growth trajectories in fiber to the home, 5G and hyperscale data centers.
We've returned to growth in optical communications, and we remain confident that we will continue to grow.
In environmental technologies, first-quarter sales were $441 million, up 38% year over year.
Net income was $74 million, up 111% year over year.
Diesel sales grew 44% year over year, driven by customers continuing to adopt more advanced after-treatment in China and by a stronger-than-expected North America heavy-duty truck market.
Automotive sales were up 34% year over year as the global auto market improved and GPF adoption continued in Europe and China.
And we are well on our way and ahead of our original time frame to build a $500 million gas particulate filter business.
European regulations are in full effect, and adoption in China continues as China's 6a implementation of the regulations began during the first quarter.
In specialty materials, first-quarter sales of $451 million were up 28% year over year due to strong demand for premium cover materials, strength in the IT market and demand for semiconductor-related optical glasses.
Net income was $91 million, up 78% from 2020 as a result of higher sales volumes and lower manufacturing costs.
Connectivity and computation continues to grow in importance, creating strength and resilience in the smartphone, IT and semiconductor markets.
And we outperformed that strong market.
Our premium glasses and surfaces supported new phones and IT launches, including more than 25 smartphones and 12 laptops and tablets featuring Gorilla Glass.
And we are capturing high demand for our industry-leading advanced optics materials, which are essential for deep and extreme ultraviolet or EUV lithography.
In 2020, EUV systems accounted for more than 30% of all semiconductor lithography equipment expenditures.
Our customers believe these systems will grow significantly over the next five years.
So we see growth for our semiconductor-related materials well beyond resolution of the current and well-publicized capacity tightness.
Life sciences first-quarter sales were $300 million, up 16% year over year and 9% sequentially, driven by continued strong demand for diagnostics, growth in bioproduction and recovery in lab research markets.
Net income was $48 million, up 26% year over year and 14% sequentially, driven by the higher sales and solid operating performance.
Now I'd like to turn to our commitment to financial stewardship and capital allocation.
Our fundamental approach remains the same.
We will continue to focus our portfolio and utilize our financial strength.
We generate very strong operating cash flow, and we expect to continue going forward.
We will continue to use our cash to grow, extend our leadership and reward shareholders.
Our first priority for our use of cash is to invest in our growth and extend our leadership.
We do this through RD&E investments, capital spending and strategic M&A.
Our next priority is to return excess cash to shareholders in the form of dividends and opportunistic share repurchases.
In February, we announced a 9% increase to our quarterly dividend.
In April, share -- we resumed share buybacks by repurchasing 4% of our outstanding common shares from Samsung display.
We are pleased that Samsung will remain a significant shareholder.
Their ownership demonstrates confidence in the value of Corning's capabilities, our ongoing technology collaborations and our combined innovation leadership.
The repurchases will be immediately accretive to earnings per share starting in Q2.
We will remain opportunistic during the year surrounding additional share repurchases.
In closing, we had an excellent quarter relative to both 2020 and to 2019.
Demand is high across our businesses.
Our more Corning strategy is working, and we are operating very well with all segments growing year over year.
We are growing our top and bottom line and generating strong free cash flow.
For the second quarter, we expect core sales of $3.3 billion to $3.5 billion and earnings per share of $0.49 to $0.53.
And for the rest of the year, we expect that momentum to continue.
I look forward to sharing our progress with you as the year goes on.
With that, let's move to Q&A.
Operator, we're ready for the first question.
 Assistant:

Chosen response:
sees q2 core earnings per share $0.49 to $0.53.
q1 core earnings per share $0.45.
sees q2 core sales $3.3 billion to $3.5 billion.
display technologies, first-quarter sales were $863 million, up 3% sequentially and 15% year over year.
optical communications, first-quarter sales were $937 million, up 18% year over year.
anticipates strong demand and positive momentum across its businesses to continue throughout 2021.
corning - continuing to innovate to reduce cost and speed deployment of 5g, hyperscale data centers, and fiber-to-home.
expects freight & logistics costs will normalize longer term and will begin to decline in q2 as co takes mitigating actions.