Graham Corp (GHM) 2013 Q1 法說會逐字稿

Greetings, and welcome to Graham Corporation first quarter fiscal year 2013 financial results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Graham Corporation. Thank you, miss, you may begin.

Thank you, Roya, and good afternoon, everyone. We certainly appreciate your time here today with the Graham Corporation first quarter fiscal 2013 conference call.

On the call today, I have Jim Lines, President and CEO; and Jeff Glajch, Chief Financial Officer. Jim and Jeff will be reviewing the results in the quarter and for the full year and will also provide a review of the Company strategy and outlook. There are slides on the Company website that accompany the conversation today. If you do not have them, you can find them and the press release at graham-mfg.com.

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

So with that, let me turn the call over to Jim to begin the discussion. Jim?

Thanks, Debbie. Good afternoon, and thank you for joining us for our first quarter fiscal 2013 conference call.

First quarter results -- if you are following along on the slides, please turn to slide 4. First quarter results were in line with expectations for both revenue and income. We generated $22.5 million of revenue and $1.4 million in net income. The first quarter, and for that matter the first half, will be similar to last year's third and fourth quarters. That is due to order rates during the first, second, and third quarters of fiscal 2012 that averaged $21.5 million.

Sales from the refining industry are down $6.8 million in the quarter, while up sequentially $800,000. Refining market sales still have a difficult comparison -- will have a difficult comparison during the first half of this year, due to the conversion of a large Middle East refining project the same period last year. An important aspect of this sales by industry chart is the even distribution across current key markets. In the past, we were heavily weighted in refining, which is still very important to us; however, with the strategies we undertook to diversify, there is improved market balance.

Please turn to slide 5. Sales to the US are up 12.5%, due to sales from Energy Steel, which are principally for the US nuclear energy market, and those for the US naval aircraft carrier program are US-based, of course, sales. Here, too, strategies implemented to diversify continue to have a positive impact on our business. Sales into Canada were up $2.9 million, due to the conversion of an oil sands order and backlog. Middle East sales were down, due to this period last year including conversion of a large refinery project in that region. We do expect strong sales going forward to US end users. Sales to international markets such as Asia, the Middle East, South America, will vary greatly from period to period due to the size and frequency of certain orders.

Please turn to slide 6. We do believe growth rate this cycle will exceed that of the 2004 through 2009 period. This is due to expanded opportunities from nuclear energy and the naval nuclear propulsion program growth strategies that we undertook. Neither of these were implemented during the last cycle. We are in the early stages of this recovery, and progress toward full recovery in our markets is slow. Nonetheless, we are very positive about growth available from our markets as recovery takes firm hold. Bouncing off the bottom, through to the midpoint of our current guidance, yields a 21% compound annual growth rate. This is similar to last cycle overall; however, the current cycle is in a tepid, early stage. I really like what Management has done to diversify and develop internal capacity for what, I feel, will provide stronger growth this cycle as we enter into a full recovery in our markets.

Please turn to slide 7. Orders in the first quarter weren't where we expected. However, a few projects pushed into this current quarter. We identified approximately $7 million of North American refining projects that were projected to close in the first quarter that pushed into this quarter or our third quarter. We did have one of those orders close early in July, and the other two are available to us, hopefully closing this current quarter, if not, by Q3. Quarter bookings were $19.7 million. I am encouraged by the level of bidding activity and the quality of bid work we are involved in. That has always been a good leading indicator for eventual new orders.

Please turn to slide 8. These charts paint a clear picture of the value in our strategy to diversify and it demonstrates its impact. At the end of the last peak, March 31, 2009, backlog was $48 million, with 80%, or approximately $40 million, being from our, at that time, two key markets of oil refining and petrochemicals. Across this recent downturn, we added naval nuclear propulsion and a stout power market leg. At the end of the first quarter of this current fiscal year, Refining and Petrochemicals comprised 48% of backlog, or $44 million, just about the same as on March 31, 2009, while Power and Other, including the Navy, are 52% of current backlog. Projecting a few years forward, I believe there will be four evenly balanced market legs, along with a grouping of our other markets.

Let me turn it over to Jeff for his review of the financial results. Jeff?

Thank you, Jim, and good afternoon, everyone.

Q1 sales were $22.5 million, down 10% versus last year. Sales in the first quarter were 56% domestic and 44% international. In last year's first quarter, the split was 45% domestic and 55% international. While Graham's historical commercial markets continue to be tilted toward the international arena, Energy Steel is almost exclusively domestic, and obviously the US Navy work is 100% domestic. EBITDA margins in the first quarter were 12%, down from 20% last year, but up sequentially from 10% in the fourth quarter of fiscal 2012. Q1 net income was $1.4 million, or $0.14 per share, down from $3 million, or $0.30 per share, in Q1 last year. Cash from operations in the quarter was positive at $5.5 million, compared with a cash usage of $1.6 million in the first quarter of last year.

On the next slide, you will see the gross margin in the first quarter was 27.7%. While down from 32.8% in the first quarter last year, it was up sequentially from 25.6% in the fourth quarter of fiscal 2012. SG&A was $4.1 million in the first quarter, up from $3.7 million in last year's first quarter, as well as up from $3.6 million, sequentially. This increase came from investments made in our business to support future growth. Operating margin in Q1 was 9.6%, down from 18% last year, but up sequentially from 7.7%.

On the next slide, you will see that orders in the first quarter were $19.7 million, up 4% from $19 million in the first quarter last year, but down from a very strong $42.3 million last quarter. As we have discussed in the past, this type of quarterly fluctuation that we have seen can often be driven by movement of a few larger orders and can dramatically impact a specific quarter. We continue to recommend that investors view a longer period of at least four quarters, and possibly longer, to understand the direction of our business. To that end, you can see orders over the past four quarters have averaged nearly $27 million, or a total of $107.4 million over the four-quarter period.

Backlog at the end of June was $92 million, down slightly from the record $94.9 million at the end of March. We expect to convert 70% to 80% of this backlog to sales over the next 12 months. This is lower than our normal level of conversion of approximately 90%. The reason for this lower level of conversion is that we have three large projects -- the US Navy projects and two domestic new-build nuclear plants with a multi-year life. These projects, in aggregate, make up about one-third of our backlog.

On the next slide, you will see that our cash position in the first quarter increased by nearly $5 million to $46.6 million. We continue to have a clean balance sheet with no bank debt. This allows us to focus on utilizing this cash, and if necessary, our untapped line of credit for future acquisition activities as well as internal growth and investment opportunities.

Jim will complete our presentation by reiterating our full-year guidance and provide some commentary on our future growth opportunities.

Thanks, Jeff.

I am now on slide 16. As Jeff indicated, we are confirming our prior guidance. Revenue, we anticipate to be between $105 million and $115 million for the full year. Gross margin is projected to be between 28% and 31%, on average. SG&A is 15% to 16% of sales. We project our effective tax rate to be between 34% and 35%. Due to the bookings activity 12 months ago, we are expecting and we have projected, the first half of the current fiscal year will be lighter than the second half. It should be comparable to our third and fourth quarter of fiscal '12. But we do have a strong backlog, and we are expecting, in the second half of this current fiscal year, to see sales and profitability improve.

As we look beyond this current fiscal year, and reflect on the steps Management took to develop internal capacity, add additional markets, we set our target to double our business over the coming cycle. With our strong power segment, with the addition of Energy Steel, our traditional organic business to oil refining, petrochemical, and associated markets, appearing to us to be very strong over the next several years as the markets recover more fully. Then, fourthly, the attention we have now paid to the US Navy, and our clear commitment to be a consistent supplier to the US Navy, we have new avenues for growth. We believe those avenues will propel us to exceed $200 million across this next cycle.

Turning to slide 17. We do expect that order rates will begin to improve, and book-to-bill to be above 1, as we build into a strong fiscal 2014. We are making investments ahead of the strong demand. We made them last year, and we are continuing to make them this year. We consider these two years to be positioning years to get Graham in a position to maximize the upcoming strong investment cycle we see in our markets. We will be ready for that growth. In addition, while we are focused on investing and developing internal capacity on the customer-facing side, we do intend to expand our market share in our traditional markets and our new markets of the nuclear propulsion program and power generation, in particular Navy -- nuclear. And advance our market share in Asia, in South America, maintain our strong, dominant position in the Middle East.

We are also building our acquisition pipeline. We have a lot of capital available on our balance sheet to put to work. Capital deployment has, as its number one priority, investing for growth. Be it in operations, expanding our organic base, or adding new markets or products via acquisition. We will maintain the patience and the discipline we have shown in the past for order selection, as we are in the early stages of this recovery, to ensure our bookings aren't too hurried, and we miss opportunity to secure the right business.

With those brief remarks by Jeff and myself, Roya, we will open the call for questions.

Thank you. We will now be conducting our question-and-answer session.

(Operator Instructions)

Chase Jacobson, William Blair.

Jim, I guess here on the last slide it seems like you are pretty confident that the book-to-bill can be over 1 for the year, but in the press release this morning, the commentary seemed like you might be a little bit more cautious, just given the macro environment and some cost pressures. Is that just a little bit of conservatism, given what's going on in Europe and fears over China? Or, are you really seeing some delays in the orders?

Well, we are seeing some delays in orders, just as we mentioned. For the first quarter we had a few projects, $7 million push out of the quarter that we felt very strongly were going to close in Q1. They were North American-based refining projects, so we felt pretty confident that they would close. But, in the end, the investment decision by the end user, they elected to delay it one quarter.

Again, we secured one of the three, and the other two are still available. That's hard for us to predict. But, if we remove that element of uncertainty and look at the bid activity, look at the quality of the work we're doing, how busy our sales team is, the interaction we are having with our customers, we can't help but feel positive. Again, at this point, barring a slowdown for the remainder of the year, we still feel the book-to-bill can be above 1. A critical quarter is this quarter, Q2.

Okay. When we think about the investments that you have been making, I guess we should expect that to continue. Is that right?

That is correct. As we look at this macro environment we are in, which indeed has some uncertainty in the near term, as the management team, we have three options -- we can be conservative and worried due to the uncertainty and pull back on our investments to maximize the near term our profitability. We can do nothing because we don't know what to do, or we can be offensive and recognize this is a timing-based issue.

We believe in the long-term fundamentals of our energy markets, and if we miss it by two quarters, be that as it may, but we will be ready to maximize the up-cycle when it's in full stride. And, that's what our strategy has been. We're choosing not to be defensive, we're choosing not to do anything, and we're going to be offensive-minded while we have that conviction toward the future.

Okay. It sounds like the bid pipeline, if we think about that sequentially, has improved. Can you just give us some color on how much of that is orders not going into the first quarter, or how much of that is actual new demand that has come in during [this time]?

That's hard for me to parse apart, primarily because, as you might recall, our sales cycle is so long, and some of the work that we've been involved in is during concept or FEED work that moves to EPC bid, that moves to final purchase decision, RFPs.

In many cases, we have been tracking these projects and in different stages of the bidding for several months to a couple of years. It is the direction of the progress of the bidding process, going from concept to FEED, FEED to EPC, EPC to formal RFP for purchase that gives us some optimism. It is not typical that we see a good deal of new work jump into the pipeline. It is the ongoing progress of the work we been working on for quite a while.

Okay. That good for me for now, thanks.

Dick Ryan, Dougherty.

Jim, in the backlog have you seen anything canceled or get pushed out of that?

No, we haven't. In terms of being pushed out, we have, Jeff pointed to about one-third of our backlog is US Navy and the Westinghouse projects. Those are very massive projects, and due to the complexity of those projects, we have seen them be placed on temporary hold by Westinghouse or the Navy. That affects the conversion of those orders in a particular quarter.

We had that happened to us recently, and the Westinghouse projects currently on hold, pending resolution of a couple of engineering issues, not on our side, on the side of Westinghouse. Those should be resolved in the coming weeks, and we will be back in into production, we believe. But, in terms of suspension or cancellation, we have had nothing new. We have the one order that has been on suspension since 2008 that we are expecting to restart some time in Q2 or Q3. But other than, the backlog conversion has been typical.

Okay. Along the lines of the Navy, can you give us an update where you are of expanding that relationship into the submarine side of the equation?

Sure. Dick, we are extremely pleased with our progress with that strategy. A key foundation piece is getting into the sub programs. And, the work I see our teams doing, some of the initial, smaller orders that we've gotten for engineering work, is suggesting to me that we're on the right track and that we will realize the objective of being a submarine supplier -- a supplier to the submarine program in the coming years.

I am very confident, and I am only seeing good signs. And, we're pretty energized about that strategy. It is one that has a lot of missionary work, meaning a lot of ground laying has to be done before you realize incremental revenue from it. But, my view is it was the right strategy, and it's on pace, if not ahead of pace of where I thought we would be right now.

Are all the necessary certifications in place? And, when could you be bidding on some of these programs?

I think in calendar '13 we could expect to be bidding on some of the larger, significant orders. We are bidding on smaller projects now for submarine work.

Great. Regarding the pipeline, in the past you have talked about the scale of the jobs there, that they were getting more in number, larger in size. Are you still seeing that same trend, and are there any cost pressures starting to creep into the ordering patterns?

We haven't seen cost pressure. Actually, materials seem to have retracted a bit. In terms of the project size, if I go back about two years ago, I would have pointed to the project sizes were smaller, on average, to where they were in 2007 and 2008.

Where I think we are right now is between that low ebb and the larger project status of 2007 and 2008. Still some good-size projects, but not the same abundance we saw in 2007 and 2008.

Sure, okay. Great, that's it for me, thanks.

Joe Mondillo, Sidoti & Company.

First question, just to clarify going back to the order pattern and your feeling on how things are trending. Except for the last quarter, the fourth quarter, last five quarters have been around a $20 million run rate, give or take. So essentially what you are seeing is essentially based on bidding patterns, customer commentary, and projects that you are following, and work that you are expecting, or an acceleration of orders you are expecting in the horizon. Is that fair to say?

That's accurate. If we looked at Q1 through Q3 of fiscal 2012, it averaged about $21.5 million. We don't feel today how we felt 12 months ago, even though we just had a $19.7 million bookings quarter.

Okay (multiple speakers). So, given the macro environment have you -- you mentioned one order that was pushed out. Have you gotten a sense that your customers have gotten, even with the projects that are on-hand, have gotten maybe a little more cautious, or brought back reins in terms of capital spending?

It would seem to us that they are a little more measured in making sure the investment decision timing is perfect, as opposed to being a little more flexible, as we saw them in the past. These projects have been identified as being viable, they are go-ahead projects. But, it appears to us they are waiting until the last possible moment to make the final investment decision. A little different that we saw before.

Sure. Also, in terms of the refining and petrochemical orders you received, where geographically did you receive those in the quarter?

We had a nice order from China for China-based refining work. We have had some North American projects for refining. We didn't have a very large influx of renewable or nuclear energy work in the quarter, but it was about 60% was international. So, it was China, some work for South America, a little bit for North America.

Okay. Looking at the refining business overall, your long-term growth is going to come from international still, right?

When you look at the traditional Graham, the refining petrochem; when you think of the Graham, as we re-position the Company with the nuclear energy leg and the naval propulsion leg, that's largely US-based sales. But, when you think of the refining and petrochem, that answer is correct. It will be largely international growth for those markets.

Okay. I guess what I am getting at is capacity utilization among US refineries are the highest in over five years. I was just wondering what your feeling is on the US markets, and all the oil drilling and the fracking that is going on? And, the fact that capacity utilization is so high, is there an expectation that maybe there is some more opportunity in the US?

My sense on that is it is very positive, and as the utilization levels increase -- and also, just looking at the increase in investments that are being made in the oil sands area and investments that will be made around shale oil, that's going to drive demand for our equipment in the refining sector in North America.

Then, we feel equally important, but different because it wasn't available last cycle, with low-cost natural gas. Investments in the petrochemical sector in North America will occur this cycle, and we did not have that lift last cycle. What that means is investments in fertilizer plants, ammonia urea plants, ethylene plants, petrochemical plants that have very large demand for our products in those facilities. And, we didn't see that for about a decade. Much of the 2000s had very little investment in the petrochemical space in North America.

So, it wasn't available last cycle, and we have some very positive signs. Again, looking at the bid work we are doing, the conversations with the process-life as we are involved in those projects, that that will be part of our sales mix this expansion cycle, which was very nice and beneficial. And, we didn't have it last time.

So, given all that, excluding the nuclear side of the business, is it fair to say that instead of maybe a 65/35 international/US that the story really could becoming more like a 50/50 US versus international, just given all those opportunities that you just mentioned?

I would think of it, including the Navy and the PowerGen work, coupled with what we just said, being around 50/50; 60/40; 40/ 60, depending upon where we are at a given point time. That's what I'm expecting our geographic mix to be, as we go forward.

Okay. And, just one more question. I might have missed it, but in terms of the internal capacity increases or improvements that you made, what exactly did you do there?

Well, we are investing in people in the middle of the Company to execute more orders. The management team has been tasked to substantially increase the capacity, the execution capacity, of our middle of the Company.

And, we have made investments in operations, or production, to support that growth as well, along with continuing to perfect our outsourcing strategy. We have IT investments; we have process improvement. It is really about transactionally being able to do more within our fixed roof line and within our size of the infrastructure that we have. I think they've done a great job; there's more we're doing there. We're much farther ahead in fiscal 2013 than we were in 2004 and 2005. We are far more ready today than we were then for a recovery.

Okay. It sounds like -- is it a majority headcount and maybe some other stuff? Or, is it -- what's the breakout in terms of headco and other?

In terms of the cost, it is largely headcount. When we look at the incremental cost, it is adding the personnel. Some of it is for succession, but much of it is for growth.

Okay, great. Thank you.

(Operator Instructions)

Gabe Birdsall, Brasada Capital Management.

Just a few questions for me. One, on the quarter, the operating cash flow was very impressive. Is this a new run rate we should be thinking about?

No, Gabe, this is Jeff. The quarter cash flow was good. I think if you went back and looked at the last quarter, you would have seen it was a little less than we would have liked. It's really timing on receivables, more than anything else. So, no, it's not a new run rate for a quarterly basis, certainly. We do, on an ongoing basis, expect to be generating cash. But, this was just a bit of a spike up, where last quarter was maybe a bit of a spike down, or relatively flat, compared to where ideally it would have been.

Fair enough. Then, that leads us right into the cash. It is right around 30% of market cap at today's prices and growing. Absent any additional strategic deals like the Energy Steel, what are the prime uses? You have a dividend out there, and by your own admission, this is a -- the recovery has been uneven. It is sort of ebb and flowing.

My recommendation to you is -- I would not like you to shrink the float because your stock is so thin already; however, a dividend, you could easily pay out 50% of what you are earning right now and really put a hefty dividend out there for shareholders. Just really to buy into the thesis here to get paid to wait a little bit as the cycle is ebbing and flowing, maybe to take out some of the volatility of the stock for shareholders.

I been with you guys for three, four years now, and you guys are doing everything you possibly can to run the business in a good way. And, you are doing strategic deals. You are doing everything you possibly can to control what you can control. And, it seems like the cycle, call it the macro that's out there, just continues to drive the stock rather than what you are doing on a daily and quarterly and yearly cycle basis.

So, what are your thoughts? What would prevent you? I know your business is cyclical, I get it. But, I really would urge you to stress test your case, and what you really could jack that dividend up to, absent any additional strategic deals, like in Energy Steel. You could do both with what you are sitting on. But give -- entice shareholders to sit here, as the cycle ebbs and flows, with you a little bit longer. What's your thoughts on that?

Gabe, certainly that's something to consider. I think our current view is consistent with where we have been, which is we believe that there can be opportunities out there to invest both inorganically, the acquisitions, as well as in our existing business for growth. And, at this time, I think we're leading down the path of continuing to wait for the right opportunity.

Certainly, you are right, we could do something with a larger dividend. But, we'd prefer at this point to hold off and use that -- ideally use that cash for acquisition opportunities. It gives us a lot of flexibility and quite frankly we do have a line of credit available also, but having that -- maybe, continuing to have that conservative balance sheet is something we would like to have.

I applaud you for that last statement for sure. And, I don't take that lightly. But, I am looking at your business over cycles and you could easily pay out a 2% to 3% dividend yield at current prices without really stressing anything out. My reason for really bringing it up, I'd rather you double and triple this Company, either organically or inorganically, whatever it may be. But, the volatility of the stock, it probably scares a lot of people away from buying this. ¶ I think the nice, hefty dividend would give people a little confidence to ride it out a little bit longer, rather than trading it on the macro, whatever it may be. Or, asking you how a current quarter went, I mean, your business is lumpy. It is in years, not quarters. So, that's just my thoughts, and take it for what it is worth.

Brian Rafn, Morgan Dempsey Capital Markets.

What are you guys seeing, any pressures on commodity feed stocks, steels, resins, anything on the cost of goods sold?

Brian, we have seen a little pullback, so a favorable reduction in cost. But, we don't think that's going to be long-lived. We look at the commodities continuously for large projects to make sure our cost basis is reflected properly in our bids. But, just to answer the question, we've seen a slight pullback in steel, copper, nickel-based alloys; but again, we don't think that's long-lived.

Okay. What was your headcount addition in number of employees that you have been adding? You talked about the middle of the company?

Right. When we were -- this is excluding Energy Steel, the addition of Energy Steel, that's about 55 employees. When we were in the 2010 timeframe, fiscal year 2010, our headcount was 240, 245. Our current headcount now is about 285.

Okay. I am assuming some of that -- would that be engineering? And, maybe your comment on what you guys see the scarcity of qualified engineers?

We have added to our engineering team. There were certainly, with strategic intent, additions there to prepare our business for what we're seeing as strong demand as the markets more fully recover. And, we wanted to get ahead of it while we have the opportunity. That was not something we were able to do in our past, but we're doing it now.

Okay. Jumping over to the Navy side, have you guys seen any bid work? Obviously, your naval propulsion is, I am assuming, with the CVN-78, the Gerald R. Ford. Anything on CVN-79 and the John F Kennedy?

Well, the order that we have in backlog is for CVN-79.

Oh, it is for the Kennedy?

That's Gerald R. Ford.

Okay, then the Kennedy is the 80 then, CVN-80.

We haven't seen 80, yet. They're working on 78 -- they, being the shipyards, are working on 78 and 79 now. There is more work to be awarded, and we hope to secure some additional work for CVN-79. We have not seen CVN-80 work yet.

Okay. Is there any pressure from your standpoint -- you guys talked about the submarine side, and I get. But, there's been all this kicked around with the sequestration and potential from the Navy down from John Lehman's days under Reagan at 600 ships to a target of 330, and potentially 238. And, on top of that, with the focus on littoral combat ships, correct me if I'm wrong, I don't think those are nuclear-powered.

Is there any -- if the Navy were to shrink, does that at all pressure you guys or do you see it more like just naval carriers and submarines?

I don't think it changes our strategy, Brian, in that what we are being advised now is the decision has been to maintain an 11-vessel carrier program. With carrier life being about 50 years, so therefore, every five years a new carrier is under construction. And, one in four for end-of-life.

If that were to -- and what we have heard, maybe there was a consideration of dropping that down to a 10-vessel carrier program. Regardless of it being 9, 10, or 11, the carrier program for us is an opportunity of about $40 million of addressable opportunity currently, that come along every five to seven years, whether it's 10 carriers, or 9 carriers, or 11 carriers. That is very big for us. The revenue cycles is three to five years, three years, roughly. So, that's great baseline work.

We want it, whether there is -- we don't see it dropping below, roughly, where it is at from what we are being told. But, even if it did fall back by one vessel, it is not a big worry to us. Also, our focus, which we hadn't focused on in our past, the submarine program, that has a lot more consistency to it in terms of orders are being, or work is being released every year for the two different sub programs.

And, our strategy is to get into those programs and become a supplier, consistently, to the sub programs. We started that journey about a year ago. I'm very pleased with where we are at. I'm very confident that we will be a player in that segment of the Navy business. And, our team has just done a great job to get us to this point.

Specifically on that submarine, are you talking about new work on new Virginia-class submarines? Are you talking about retrofits on the Seawolf and Los Angeles-class fast attack boats?

Talking about the next generation of Ohio-class sub, the [ORP].

(Multiple speakers) Okay.

Ohio-class replacement program, and then breaking into the Virginia-class program.

Okay.

The Virginia-class program, I don't have these numbers exactly right, but there's planned to be 40 vessels, 45 vessels. 18 have been let, so there's another -- whatever the math is, 25, 30 to get to be a part of and that's very good work that we want to be part of.

Okay. And, with the Ohio class, the SLB and Boomer boats and the subsequent on that, most of -- if you look at the Congressional research service, most of that is a lot talk. Are you guys actually getting hard discussions on that replacement? Or, is it a little like the Air Force and the ICBM next generation, where it is a lot of skepticism, but you don't really see hard designs?

I would say we are seeing activity on the latter.

Okay. I know you talked, too, about your bid quote activity. If you break it out by your mix, your refining, petrochemical, power and other, any bid quote activity in one area of business any heavier than another?

Fortunately, we see it pretty balanced across a good amount of work in refining; a good amount of work for petrochemical markets; the Navy activity is very steady much more than it had been in our history, in terms of the bidding activity; and the nuclear market having Energy Steel for just 18 months now, it is hard to draw some time-based comparisons. But, we are pretty busy with bid work that we are doing in the nuclear market. Then renewable energy, biomass energy, that's very active for us as well.

So, across key growth markets of power, Navy, oil refining, petrochem, it's a pretty balanced amount of bid work, and we are very busy. I think about the last cycle, and might play out this cycle as well, petrochem led the way initially and ahead of refining. And, that made play out again this time.

Jason Ursaner, CJS Securities.

I just want to follow-up on those last questions to make sure I understand the work on the Navy. Was there a specific reason you didn't win content on the 78?

Yes, our price was high.

Okay.

It was competitively bid and we weren't the low bidder, and that happens sometimes. But, I can say, in my experience, sometimes the best order is the one you lost and what you have been able to capitalize on with that lost order. And, as I reflect upon losing that and what we've done in response to that, I think we are much farther ahead.

Okay. And, the $25 million order on the CVN-79, how much has been delivered to date versus what's left in backlog?

Through Q1, we have about between 25% and 30% of that project has been completed.

Okay. At the time you won the contract, what would you have estimated your maximum potential dollar content was at that point versus the $40 million addressable content today?

The same. There's three or four components that we hope to provide. We've gotten one of the components for CVN-79, the $25 million order that you spoke to just a moment ago. There is two or three other items that we would hope to provide that have not been awarded yet that we are pursuing that would then expand our supply from where we are at to perhaps $40 million in total. The other components have not been released yet.

And those components, have those been awarded on the 78? Is the 78 completely done at this point for you, from an order perspective?

For what we can address, yes.

So on the CVN-80, there's been nothing awarded at all?

That's right. That's correct.

Has there been any talk for the last two to three components about a potential block purchase at all, given that they pushed, they lengthened the construction period on the 79?

I don't think they will group them together. I think they will award them individually. I would project that, perhaps, one item closes this fiscal year. And hopefully, we will be successful on that.

Okay. I appreciate the commentary. Look forward to seeing you guys at our conference.

You are very welcome, and thanks for inviting us to the conference.

Chris McCampbell, Southwest Securities.

Can you maybe give a little bit more color on where we are on acquisition pipeline? I thought Gabe's points on cash flow, and maybe doing something for long-term shareholders was right on. I certainly agree that you guys need as big a war chest as possible, but wow, some help would be awesome. I would love to hear the answer.

Sure, Chris. As we did with our process around Energy Steel, that acquisition, we will look at a lot of companies. And, we are currently looking at a good number of companies, and weed through that, and make sure that we find somebody that's a long-term strategic fit. As much as sitting on the cash right now, we would love to be able to put it to use immediately, on an acquisition. We want to make sure that the acquisition we make is the right one.

And, as with Energy Steel, we took our time we believe we are being rewarded for taking our time. If the right opportunity fell on our lap today, great. But, usually with this kind of process, it will take some time. There's a lot of companies out there that are looking at where they are, where the cycle is, and a good number that they would be willing to sell themselves, and we just have to find the one that's a right fit. So, I guess patience is a virtue in this particular case.

Would you say it's a factor of price? Or, is it just finding the right fit in terms of geography and countercyclical to what you all are doing in other places?

It's more the latter. I don't think it is price, I think it is we've seen some pricing increases on M&A side, I don't anything is out of range at this point. It's really finding the right company that's the right fit for us for the long-term strategic fit.

Okay. Thanks, guys.

Joe Mondillo, Sidoti & Co.

I just had one quick follow-up question. In terms of pricing and margin, was wondering if you could talk about the trends that you are seeing over the last 2 quarters or so? Anything changed from six months ago? Were things really improving six months ago and things have plateaued a little bit here just given the uncertainty? Or, just talk about what you are seeing there?

That's a great question, and that is one of the leading indicators that we look at as management to give us an indication of market health. We have begun to see the profitability of our new wins, over the last six months, continue to improve comparing the same period the last 24 months.

So we are seeing a healthier marketplace. We are seeing a healthier pricing environment. We would attribute that to a couple of things. One is our price strategies, but outside of that, we have also seen a larger number of project opportunities at a given point in time being available to the market, to the equipment suppliers. So, we are not competing against our competition for a scarce few big projects, so that has helped.

Also, preferentially, we have seen the -- in EPCs, engineering, procurement, and construction, contractors that are less price sensitive in their purchase decisions win work. So, we are very encouraged by it as we watch backlog of CB&I, Fluor, KBR, Jacobs, those can be improved pricing environments then, if we are winning work from Asian EPCs.

When you think about your gross margin range, has that changed at all in terms one end or the other over the last six months?

I think with respect to the guidance as it relates to fiscal 2013, a big factor there is capacity utilization. We have some capacity we still need to fill to get the right leverage. This quarter is pivotal for that in terms of the order intake that we received this quarter and the timing of when our customers need shipment, and that can have a large influence on the actual realized margin, in addition to the pricing power we might be able to garner. So, I view this quarter really as a very important staging quarter for the rest of the year.

Okay, great. Thank you.

Tom Spiro, Spiro Capital.

Jim, I was a little curious about the Canadian oil sands market. I wonder whether the tone of that market may have shifted in the last few months as prices have come down, growth is sluggish, a lot more oil coming out of the fracking process in the United States. Do you find your customers up there looking at the future with as much enthusiasm as they might have been 6 to 12 months ago?

That's very astute. We've seen some increased tentativeness, and a slowing of a couple projects, and a shelving of one or two. I am not certain if that was attributed to the direction of oil, or the increased availability of shale oil, but we have seen over the last two quarters some change, and more toward a tentative change, being more cautious. We still see, though, that there's going to be considerable investment there; and while some projects have fallen to the side for a moment, we think they will be reactivated in one or two years. So, it is a timing issue.

In any respect, though, we have always seen the oil sands marketplace for us never really be more than one or two big projects in an 18-month period. That's just the pacing of those projects, there's huge human resource need for those projects, and they don't really move in a large cluster. They move one at a time or two at a time over an 18-month period. So, it seems to be who gets there first.

Thanks very much.

Gentlemen, we have no further questions at this time. I would like to turn the floor back over to you for closing comments.

Well, thank you very much. We appreciate your time this afternoon, and your interest in Graham. I am very pleased with where we are. As we look at the steps we took the last two years to get Graham ready to grow more aggressively in the coming cycle.

With the diversity we have added, through the addition of Energy Steel, with the focus we have on the naval nuclear propulsion program, and the strength we see in our traditional markets of oil refining and petrochemicals gives a strong indication that being able to double our business over the next cycle is very possible. We look forward to updating you on our progress during the next call in 90 days. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.