Graham Corp (GHM) 2014 Q4 法說會逐字稿

Greetings, and welcome to the Graham Corporation fourth-quarter fiscal year 2014 financial results. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Karen Howard, Investor Relations for Graham Corporation. Thank you. You may begin.

Thank you, Melissa, and good morning, everyone. We appreciate your participation in our fourth-quarter fiscal 2014 financial results conference call.

You should have a copy of the news detailing Graham's results that was released earlier this morning. We also have slides associated with the commentary that we are providing here today. If you don't have the release or the slides, you can find them at the Company's website at www.graham-mfg.com.

On the call with me today we have Jim Lines, our President and Chief Executive Officer; and Jeff Glajch, our Chief Financial Officer. Jim and Jeff will review the results for the quarter as well as our outlook, and then we will open up the lines for Q&A.

As you are 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 is stated here today.

These risks and uncertainties and other factors are provided in the earnings release and the slide deck, as well as with other documents filed by the Company with the Securities and Exchange Commission. You can find these documents on our website or at www.sec.gov.

And with that, I turn the call over to Jim to begin. Jim?

Thank you, Karen, and good morning, everyone. I will begin on slide 3. I would like to restate our strategy for this current cycle is to grow our business to exceed $200 million in revenue. We will remain committed to providing engineered-to-order, custom fabricated products to principally the energy and related markets.

This is where our brand is exceptionally strong, and we are rewarded for the differentiation that we have in our selling process, engineering know-how and capabilities, our low-volume/high-mix operations model, and for our overall service to customers and aftermarket support.

Please move to slide 4. Orders in the fourth quarter were $23.5 million, and full-year orders were a record $128 million, up 34% from the prior year. Year-end backlog was $112 million. Fourth-quarter revenue was $26.1 million, up 6% to 10% from the previous two sequential quarters. Full-year revenue was $102.2 million.

We earned $2.3 million or $0.23 per share in the fourth quarter and $10.1 million or $1.00 per share for the full year. We added $9.4 million to balance sheet, cash, and investments during the year.

Top-line growth for fiscal 2015 is expected to be between 17% and 27%. This is based on order expectations and the strength of our March 31 backlog.

I am referring now to slide 5. During the fourth quarter we began to have the impact of the North American chemical industry orders that were won during the June to September time frame last year. Chemical industry sales were $10.5 million in the quarter. There was good balance of sales among our other key markets.

On prior conference calls, it was mentioned that it was to be anticipated there would be engineering churn between us and our customers that would affect finalizing designs and getting these North American chemical industry orders into production. This was because certain orders that were won early in the procurement cycle of our customer and therefore would have design conditions not finalized until after the order.

We had hoped to begin production sooner, such as during the third quarter. However, many of the orders are now released into production, as can be seen by the level of chemical industry sales during the quarter. 78% of sales in the quarter were for US installations, and for the year it was 62% of sales.

With those brief remarks, let me turn it over to Jeff to provide financial details. Jeff?

Thank you, Jim, and good morning, everyone. I'm on slide 7 right now.

Q4 sales were $26.1 million, down from $30.9 million in last year's fourth quarter, but up from $23.4 million from the sequential quarter in fiscal 2014. As Jim mentioned, the sales split in the quarter was 78% domestic and 22% international. That compares to last year's fourth quarter, which was 53% domestic and 47% international. Gross margins in the quarter were 28.4%, down from 34.1% last year but up sequentially from 26% the sequential quarter.

EBITDA margins were 14% in Q4, down from 20% last year, but again, up from 11% in Q3 of this past -- this year. Q4 net income was $2.3 million or $0.23 per share compared with $4.1 million or $0.41 per share -- but, again, sequentially up from $1.4 million in last quarter.

Turning to slide 8, full-year results were relatively flat compared with last year. Sales were $102.2 million, down just under 3% from $104.9 million last year. For the year, domestic sales were 62%, and international sales were 38%. This compares with last year, where domestic sales were 53%, and international sales were 47%.

Gross profit was flat at $31.8 million, though gross margin increased to 31.1% from 30.3%. SG&A for the year was $17.3 million compared with $16.6 million last year. However, last year we had a $975,000 one-time credit related to an earnout adjustment. Adjusting that out, SG&A was actually down by $340,000.

EBITDA margins were flat at 16.5%, and net income was down $0.11. However, when adjusting out last year's one-time credit, EBITDA margins were up 90 basis points and net income was essentially flat, down just $28,000.

Turning to slide 9, our cash position, as Jim mentioned, increased by $9.4 million, up to $61.1 million at year-end. While our capital expansion in Batavia is fully on track to be completed this summer as planned, the cash outflow has been a little slower than planned. We have spent approximately half of the cash for the project.

Our full-year capital spending was $5.3 million. Therefore, as we look at fiscal 2015, we expect to spend $5.5 million to $6 million, of which approximately 60% will be to complete the capital expansion here in Batavia. We expect to continue to generate strong operating cash flow in fiscal 2015.

Much of the cash early in the year that is generated will be used for the capital expansion, but we expect full-year cash flow still to be very strong. 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 not only internal growth and investment opportunities, but also for future acquisitions.

With that, Jim will complete the presentation and comment on our view for fiscal year 2015.

Thank you, Jeff. And I am commenting on slide 11. I am very pleased by full-year orders of $128 million. In the third and fourth quarters, we observed some hesitancy, but more what we believe to have been staging by our customers for the next wave of orders that are expected to break in fiscal 2015.

For the fourth quarter, there was an even balance of orders by market segment. Again, though, our US markets were strong, contributing 63% of orders in the quarter. By comparison, orders for domestic end-users were 72% of total full-year orders.

Our bid pipeline is still strong and double the size it was in the fiscal 2004 time frame. In the pipeline of bids is a considerable level of North American chemical industry activity along with strong amount of global refining market bids.

Moving on to slide 12: backlog is up 30% from a year earlier. I am pleased with the balance in our backlog across our key markets. Roughly 40% of the $112 million of backlog is from markets or customers that are new since fiscal 2009. That is exciting to see, and proof that our strategies to diversify have had a positive impact on our business. 70% to 75% of backlog is projected to convert in fiscal 2015.

On to slide 13. Fiscal 2015 is set up very well. There is a terrific level of backlog entering the year, with approximately $80 million of the backlog rejected to convert in the year. Market fundamentals remain strong. Our bid pipeline is elevated.

Margins do appear to be inching higher. And importantly, we are a business today that can execute much differently than in our past. The year is expected to build as we move quarter to quarter, where Q1 is a step up from the past quarter, and Q2 is projected to be stronger than Q1.

Full-year guidance is for revenue to be between $120 million to $130 million, gross margin at 30% to 32%, SG&A of 15% to 16% of sales, and a tax rate between 33% and 34%.

Melissa, I would like the call opened for questions at this time.

(Operator Instructions). Chase Jacobson, William Blair.

I have a question about the revenue guidance first. You know, you guys had good awards this year, but looking at your backlog and the expected 70% to 75% that's going to convert to revenue, it assumes a pretty meaningful piece of the revenue in fiscal 2015 comes from new awards. So am I right to think that there should be a meaningful pickup in orders in the first half of fiscal 2015?

That's a fair way to think about it, yes.

Okay. And I guess just related to that, I mean, you know, a lot of the E&C companies -- and it's really just the way the market works; projects come out with schedules, and then the schedules tend to move to the right, and it's not always fundamental. But what gives you the confidence that these prospects convert to firm orders with firm schedules in the next 3 to 6 months?

Chase, I would expect your comments relate primarily to the North American petro chem situation, where there is this continued movement to the right. We are seeing that. We have -- as we announced this morning, we did secure an order for the North American chemical industry -- a new ethylene plant.

We do have confidence that others will be secured over the next Q1 and Q2. But importantly, we're just not focused on the North American chemical markets. We do have in our pipeline some faster turn in terms of the bid work -- they convert more quickly -- and refinery upgrades or revamps for the North American market that we are expecting to close either this quarter or next quarter. And we have line of sight to those projects now.

And all in all, as we look at the bid pipeline, the activity of our discussions with our customers, we have this confidence that if our backlog is at $112 million, 70% to 75% converts over the next 12 months. That's roughly $80 million, suggesting another $40 million to $50 million is needed to land within the guidance of $120 million to $130 million. I'm not uneasy about that top-line guidance.

Okay. That's really helpful. And, Jeff, on the gross margin, is the flattish gross margin year-over-year -- I know you had some benefit in the first half of fiscal 2014 with the aftermarket stuff coming through, but when we look out, is it -- does it have more to do with the pricing at this point in the cycle? Or is it because that outsourced work is still flowing through the income statement? And is this the type of thing where once that outsourced work is shipped, we see a meaningful step up from the higher 20s into the low 30s? How does that progress during the year?

As we think about the gross margin, that's a good observation of 30% to 32%. What's important to bear in mind, and I would start the comparison here -- let's think about where we are in this recovery. And I would argue: we're still early; we are entering the recovery. It hasn't had -- hasn't reached its full stride yet.

And I would contrast where we are now to where we were in fiscal 2006 and 2007. And if you contrast the 30% to 32% gross margin we are projecting here to fiscal 2006 and 2007, which was mid- to upper 20s, I would characterize both market fundamentals to be quite similar.

And as we move forward, we are expecting margins to continue to inch up. Again, as I mentioned in my prepared remarks, we are beginning to see that occur with the quality of what's coming into our backlog. Thus, we have to deal with the margin quality of what we booked the last 12, 15 months, which I don't believe is bad. It's more representative of where the market cycle was at that point in time.

But as we move forward, I'm expecting improvement in margins as we go through a few more quarters. And getting to 2016, we would expect margins to continue to improve.

Okay. And just one more. Can you comment on the Navy opportunity with some of the big submarine contracts announced recently -- you know, in terms of the shipbuilders and other suppliers? And you've had good results in your other category, particularly on the awards side. Can you just comment where you stand with the Navy as it relates to carriers or submarines at this point?

You are right. There have been a few announcements regarding funding appropriation for Virginia-class and Ohio-class programs. We are involved in those bidding, call it, activities. We do feel that this coming year, fiscal 2015, will be very important for us and validate the strength of our strategy as we enter more fully these programs.

That's my expectation. And this will be a very important year for us to demonstrate that the strategy has traction, that Navy is receptive to the value and the support we provide. And we're looking forward to bringing these orders in.

Okay. Thank you very much.

Chase, just one follow-up item on that. You may have noticed in our slide deck on slide 12 that we have broken up what used to be the other backlog into defense and other. And so what you'll see in there is that of our total backlog, approximately 25% of it is defense. Just as a reference point, that's something we've started breaking out now.

I did see that, thank you.

And just to clarify further, the comments that I made relate to the submarine programs. We do expect to begin to see activity for CVN-80, the next carrier, sometime during the next 6 to 12 months is what we would expect to see the bids come out for that.

Okay.

Jason Ursaner, CJS Securities.

Appreciate the details you provided Chase on the revenue guidance and the confidence that the order book -- you're going to generate that from the bid pipeline. Just a couple of follow-up questions.

Obviously, you narrowed the revenue range by $5 million on both ends. In terms of taking out the top end of the range, I just want to make sure I understand. It sounds like this is just the level of order activity you have won to date and the timing for how those shipments are going to shape up for the full year, but that you're not signaling any change in terms of the overall cycle opportunity and what you're seeing over the next couple of years? Is that the right way to be thinking about it?

That is a correct way to think of it.

Okay. And the gross margin -- assuming the order activity does materialize as you are expecting, and revenue averages out to $30 million or above a quarter for the whole year, if I look back the last couple of times you've eclipsed that threshold, the average gross margin in the quarter was above 36%.

So maybe you could talk a little bit more about the pricing environment now. I guess my understanding was it really hasn't been too different than the last couple of years, and if anything maybe has gotten a little better. So maybe why gross margin wouldn't be more consistent with some of the higher levels you've generated in the past?

The key there -- to those two times when we popped over $30 million -- in the one case, the most recent case, and we had commented on this -- it was due to the strong level of short-cycle, quick-turn, aftermarket type of orders that were for the US refining market that came in and came out relatively quickly.

We didn't anticipate, and we were accurate, that that would have been sustained. So that was a unique case that I think goes back to Q1. And then a year or so earlier, we had very strong quarter that reflected the margin of a international refining project that was actually won at the peak of the last cycle in terms of the pricing power, but was put on hold for production until fiscal 2013.

And we benefited from that pricing environment and revenue conversion three or four years after the pricing was established, which was the peak of the last cycle. That was not representative of the market environment at that time.

What you're seeing here with the 30%-ish gross margin, 30% to 32% gross margin -- very similar to the gross margin we wrapped up this past fiscal year. That truly is indicative of the market environment we're in right now, as we look back for the last 12 months, and therefore, lead through to sales. But the point I want to again make is: I would compare the market environment now and last year to what it was like in fiscal 2006 and fiscal 2007. We are not into the strength of the market yet.

Just staying with that, in terms of the core pricing environment, I think you characterized it as still representing more of an early cycle. I guess what I'm getting to is: how much room in just core pricing is there relative to where you had previously been in some of the top cycles? Is there still a lot of margin room left relative to where you are writing these, excluding the short-order work and all that stuff?

I firmly believe so. And as we've -- as Jeff and I have said over the last couple of years, is -- while fiscal 2008 and fiscal 2009, the white-hot periods of the last cycle, we eclipsed 40% gross margin, we expect this cycle not be quite as strong, but push gross margins to the mid- to upper 30s. With that as the basis, I would expect there to be measurable margin improvement as we go into this cycle.

Okay. And I think you had mentioned you had -- 25% of the backlog is defense. Is the expectation for military contribution as a percent of revenue pretty similar to that? Or a lot of that backlog is obviously multiyear?

That backlog, Jason, is more extended. We envision over 2015 and 2016 that our defense strategy would represent somewhere below 10% of revenue. However, as we go forward, looking beyond the next two years, and if we actualize -- and we intend to actualize -- our strategy here, we would expect to see the Naval program, the defense program, represent 15% to maybe 20% at the upper side of our revenue.

Okay. And just last question for me: the cash balance -- I know it's down a little bit from last quarter, just because of the investment you guys are doing. But overall, I think you guys have done a really great job there. And even with the higher CapEx budget for next year, obviously there's still a lot of cash and excess liquidity on the balance sheet. So maybe just -- could you walk through any additional details on the acquisition environment you're seeing? Are price expectations from sellers pretty reasonable right now? And, maybe, are there any specific adjacencies that you could talk about that are more interesting or less interesting than others?

Jason, the acquisition environment right now -- while in some areas it's still pretty pricey, there is other areas that are more reasonable. And obviously, we would look in the latter category. You know, we have a pretty consistent pipeline at any point in time with opportunities, and for us it comes down to finding that right company.

We have a pretty wide net out there of places that we would look, whether it's in adjacent markets or it's in areas that would represent our sales team. So we are continuing to look. And again, it's just finding the right company. But the pricing itself is actually -- there are pockets of the market that are pretty reasonable. But it does seem to be picking up a little bit.

Okay, great. Appreciate all the commentary. Thanks, guys.

Joe Mondillo, Sidoti and Company.

My first question -- and I know the last two callers asked about it, but I just want to touch on gross margin, if you will. It seems like -- to me, anyway -- utilization fell dramatically following the 2009 recession. And we saw a bounceback in 2011/2012.

And then since then, really, revenue for you guys at least has been fairly flat on an annual basis. And so I was wondering if you could just comment, because my feeling of things is that capacity utilization amongst the industry was just so low through last year -- and we have started to see orders come back, and we are looking at mid-20% growth on the top line this year.

If we see another strong year of orders this year, you're going to see another growth on top of that in 2016. And so I guess my question is: by the time we get to 2016, because utilization amongst the industry as well as yourselves -- are you anticipating at that point in time to see a pretty big uptick in gross margin after seeing at that point in time two years of strong top-line growth? Any comment on that would be good.

We would anticipate, if what plays out is what you described and what we believe -- which is year-over-year strength as the markets progress through this recovery and expansion -- that we would begin to garner some leverage. And we also would begin to be favored with a step up in pricing power. You couple those two together, and we begin to visualize that our gross margin moves into that mid- to upper-30% range.

What are your guys' plans for headcount this year?

Our headcount will likely go up by approximately 20 more people from, round numbers, 400 people. And we've been adding about that number per year for the last couple of years.

Okay. And then, also, in terms of raw material prices, how are you gauging that in terms of your gross margin expectations?

We are anticipating as the recovery goes on that input costs go up. Our process, though, is that we tend to pass that cost directly into the customer base, with the short validities that we have and our ability to lock down commodity prices after we have an order -- or raw material costs after we have in order. So we are expecting material costs to increase. However, we are not expecting it to erode our gross profit.

We will pass that into the market as quickly as we can. And we stay on top of that very vigilantly. We watch that closely, and so we are anticipating nickel decline, copper decline, carbon steel to increase. And we are already reflecting that in our bids ahead of those true cost increases.

Okay. So if we see, say, raw material prices start to sort of decline throughout the year, that could probably be a benefit to the guidance that you have out there, given that you record the contract? And then any benefit and downside of prices, you'll benefit from that at the end of the -- at the shipment?

Not really. There could be -- of course, and I would expect our supply chain to grab that when they can, but our process is for volatile materials. And I would say a nickel-based, a copper-based, an exotic alloy-based material -- we don't gamble. We take the order, and we commit as quickly as we can to lock in our costs.

So there might be some improvement in raw material costs with carbon steel or some other peripheral materials that we would buy, that we could enjoy some improvement as costs drop down; but I would not expect that to measurably change the gross margin.

Okay. Shifting gears, domestic versus international: I think it's sort of been playing out the last couple of quarters, sort of what we've been hearing just in general economic sense, versus of some of those international markets. But what is your sense of things internationally? Do you anticipate any sort of improvement going forward here? What's your sense of that part of the world?

I think we will continue to see a strong North American chemical industry marketplace. However, on the global front, we are seeing our bid activity for refining sector improve. And I would expect to see global refining work pick up as this year progresses.

And international pet chem in Asia begin to pick up, and the Middle East probably another year or so out. Looking at 2015, I would expect, again, the focus to be -- strong market to be North American chemical industry, North American refining upgrades and revamps, and then ongoing improvement in the international refining markets.

Are you seeing any signs of that? Bidding activity or anything internationally?

Yes. We are seeing it in our bids.

Okay. And that's just recently turned in the last quarter or two, or --? I'm just basing it off of sort of some of the weakness that you've seen, I guess, in Asia and Middle East the last two quarters.

Sure. We are seeing the bidding activity -- some of it is early, which doesn't suggest that there is orders closing for these opportunities in the next quarter. But there's bidding activity. Some of the projects have had announcements that they are greenlighted to go.

Examples would be the KNPC -- I'm sorry, Kuwait Clean Fuels Projects; some additional work in Oman, for Sohar refinery; and then in Asia, Malaysia, the Petronas refinery activity; and we are seeing China begin to come out of its pullback with some refining work from both Sinopec and PetroChina, along with CNOOC.

So we are really encouraged by all of this put together. It doesn't mean it's right in front of our windshield and it's going to close next quarter. But the fact that we are seeing the bids come into our pipeline -- we are doing the early work, things that we do very well. It bodes well for coming quarters as we look out.

Okay and just lastly, the 25% to 30% on the backlog that's beyond fiscal 2015 -- is all of that planned to be shipped in 2016? Or is there anything further out?

There is -- Jeff?

There is about 10% of it that is more than two years out. I think that's on slide 12 of our charts.

Okay. 10% of the total?

Correct.

Okay. All right. Thanks a lot.

Brian Rafn, Morgan Dempsey Capital Management.

Give me a sense -- Jim you talked a little bit about -- how would you kind of quantify your bid quote activity? Would you say it's robust? Would you say it steady?

And then you also spoke a little bit about -- you said that since 2009, 40% of the orders are from new customers or customers you didn't have previous to that. Does this new penetration of customers broaden at all your kind of base business in the future for repeat business with newer customers? Maybe give Graham a little bit of an advantage on award day?

There's two questions there. That the first one is the bidding activity is quite intense. Our sales guys are trying to come up for air. They are very busy. A lot of quote churn. Just a tremendous amount of activity, so I'm pretty encouraged by that. That's a good leading indicator from how I judge it in my chair.

And then in terms of diversifying, as we've done, and a little bit on that -- of course, the defense strategy and our focus in the power market, along with broadening the customers that we access in our traditional markets of refining, pet chem, and related markets -- we've thought about the importance of moving our fixed base higher. The predictable level of business that doesn't have the volatility of or the variability of our major contract work.

Ultimately, we want to dampen earnings volatility. And the way we envisioned doing that was by diversifying into new markets -- power and the defense -- along with a strong focus on moving our fixed base, our predictable fixed base, higher. And I'm extremely pleased by where we've been able to move our fixed base.

I'm not thinking about a downturn. I can't tell you when that is, but I know we will have -- I feel strongly we will have a stronger performance this coming downturn, whenever that might be, than we had last downturn because of our diversification and our focus on the predictable base business.

Yes, okay. Okay. That's what I thought. Good, good, good.

Let me ask you -- and again, your visibility, because you're boots on the ground out in these markets, is better than any of us on the call. What is your sense, Jim, from the propensity of getting kind of quick-turn, short-cycle -- I don't want to call it book-and-ship business, but it is, versus something you're fabricating, designing over 18 months or two years. What is the propensity across some of your end markets to get some receptivity, some of that short-cycle business as kind of fill-in?

From a quantitative point of view, it's stepped up. We've seen that segment of our business -- and I refer to that as our predictable base -- we've seen that move up, both in volume and inch up in margin.

Again, I'm quite pleased with that. We are seeing that in our OEM sector. Our work in the petro chem, some industrial sectors, along with our small work that we sell to refining petro chem markets; and partly in there is aftermarket, and that's been moving up well also.

So across the broad base market segments we serve, our strategy to drive our less-cyclical portion of the business higher has executed very well thus far. It is executing very well thus far.

All right, good. You talked about 60% of the $5.5 million to $6 million property, plant, and equipment CapEx budgeted will be to finish out the expansion. Can you just kind of give a little visibility relative to -- is it more buildings? Is it equipment installation? Is it welding furnaces? What is it specifically you're going to spend out for -- you know, in the next year?

If we look at the expansion that we referenced in our remarks, that is two things. One, there is some additional roofline there, but on top of that, we are utilizing older roofline that had not been utilized in the past, and put some manufacturing equipment under that roofline. So it's really both in that regard.

And then the remaining capital spending that we have, the other roughly 40% or so, is just kind of normal ongoing maintenance capital, as well as improvement in manufacturing of our existing product line or project line.

Yes, okay. Jeff, on that new -- the additional machinery and tooling, is that incremental tooling that gives you confidence in new areas? Or are you just kind of expanding the footprint of -- whether it's welding or tooling that you already have?

It's more the latter. And it gives us much more flexibility around our production process, also. One of the issues that we have is, if you've seen any of our equipment, it's just pretty darn large. And when something is in our production line, it can sometimes block other production, because you can't move it when it's partway through production.

So this gives us more flexibility, more floor space, and the ability -- at the end of the day, just gives us more capacity. But it's very similar from a production standpoint to what we do today.

Yes, okay. That's all I'm looking for. What -- the cash is invested where, Jeff?

Cash is invested primarily in the money market accounts and some in Treasury bills in the United States, as well as CDs in the United States. About 5% of our cash or roughly $3 million is invested in our -- to support our entity in China. But that's the only cash that's offshore.

Okay, okay. And then you spoke a little, Jim, about the Navy side. A couple of questions.

The USS Gerald R. Ford, CVN-78, is still in -- I don't know if you would call it kind of preliminary sea trials, but there have been some problems with the EMALS, electromagnetic launch. It's brand-new. It's not the old steam catapults.

Are there any issues that you are foreseeing that would cause the Navy from a delay standpoint having a brand-new prototype carrier, CVN-21, that might slow down the John F. Kennedy or the Enterprise?

The program is structured to be on five-year centers. Each carrier comes out every five years. Is it conceivable, Brian, that the centers for 80 -- 79 to 80 move to a six-year center? That's possible. And I remarked earlier that we anticipate sometime in the next 6 to 12 months to see the bidding activity to begin for CVN-80, the next carrier.

Bearing in mind we won that order for CVN-79 in December of 2009, so a five-year center would suggest approximately the end of 2014 -- calendar 2014 -- would be when procurement occurs. We would envision a little slide to the right. I don't know if it's pushing out fully to a six-year center or longer, but there is some push-out.

And when you have a new class vessel coming out, which is what 78 was, they tend to take a bit longer with the launch of the first vessel as they work through the design. Some of that still gets worked out in the next vessel, 79, and it gets lined out as we move to 80. We still are very optimistic, and everything we are hearing suggests somewhere between a five- and a six-year center between 79 and 80.

Yes. Okay, yes, I think that that dovetails with the shipbuilding plans. Do you have any sense from the standpoint of your business with the Navy -- is there any -- you're looking at the Virginia-class attack sub business, maybe a replacement for the Ohio-class boomers. Is the carrier business for you, from a content standpoint or from an ease of bidding, any different than what you anticipate on the submarine side? Or is the Navy pretty much the same customer?

None of it is easy, and they each feel the same. In terms of how you prepare a bid, and the complexity of the bid, and the rough order of magnitude of the opportunity set for us, subs are -- rough order of magnitude -- 50% to two-thirds of what a carrier opportunity set is.

Okay, okay, that's fair enough. If you look at the -- one last question. If you look at the Navy business from an engineering standpoint, a lot of times you see in the Air Force and that where you're changing specs constantly, being very fluid on the engineering side. Is the Navy from that standpoint different than your other customer end markets, be it energy or petrochemical? Or are you constantly having engineering changes and drafting and design changes in all of your end markets?

Well, we have engineering churn in our end markets quite commonly, and we talked about that in our prepared remarks. With the Naval work, when there's a new-generation vessel coming out, there's going to be engineering churn.

Once the program is underway, and it becomes more of a build-to-print type of production process, there is, of course, less engineering churn. But all the way through this, whether it be first-generation or ongoing vessels after that, there is a very huge project management activity that goes around these orders. More complex than our core business.

Oh, okay. Right. That's what I'm looking for. And then one, Jeff, you mentioned about a little bit about -- I'm guessing you're talking about capitalized multiples of EBITDA. What are you finding in the acquisition area that's -- well, how would you say that real expensive tier is priced? And what are you finding in some of the areas that maybe have a little less multiple? I guess I'm looking for more of a numeric range.

Sure. You know, when we did our acquisition a few years back, we at the time paid 6 times EBITDA, and with the earnout it ended up a bit lower than that. I would say that the ranges we are seeing now are certainly a little north of that right now.

And some of it in certain markets are too pricey. But in the markets that we are looking in, they are certainly north of where we were in that last acquisition. But not out of line.

Yes, okay. And on that, Jeff, are you seeing some of that pressure? Are you seeing just a number of strategic business buyers? Or are you seeing some of the financial buyers, be it private equity or whatever, driving up some of those multiples?

Just before you answer -- Brian, I'm going to ask, after Jeff answers this one, could you get back in queue if you have a few more questions?

Sure.

Brian, we are seeing both. We are certainly seeing strategic buyers, and we are also seeing activity on the private equity side. And that might be driving prices up a little bit, but we are seeing a mix of the buyers in the market today.

Okay. Thanks, guys.

(Operator Instructions). John Bair, Ascend Wealth Advisors.

My question pertains to the international area. It looks like overall backlog orders are really well-balanced. So if that international side picks up, where do you think that would predominantly come from? I know you had mentioned previously -- to a previous questioner about refining areas internationally. But is there any particular area that seems to be more encouraging than others? Europe versus Asia, or vice versa? Or South America?

The areas where there is active bidding going on for us -- it's Asia, Middle East, South America. And it's refining, and pet chem, and some alternative energy.

Okay. And are there any new market areas that you're kind of looking at, either from the acquisition standpoint, or as an expansion of your existing capabilities? Or are there markets that you could serve that are maybe parallel to or somewhat different than what you have got going right now?

Sure. There are. If we peel back, though, and think about what we've conveyed, we are focused on engineered-to-order products, long sales cycle, applications where product performance failure is a very extreme problem, value-based decisions.

We find that principally resides in the energy markets or those very closely related to those markets, very closely adjacent to those. We've been looking at how can we leverage our core competencies of that sales cycle, our sales channel, and our operations model so that we are principally staying very close to our knitting.

Okay. Very good, thank you.

Gabriel Birdsall, Brasada Capital Management.

Real quick, I just have a few questions. On slide 13, it's been out there for a while -- your exceed $200 million in organic revenue this cycle. I'm curious. That's been out there for -- when did you first put it -- two years ago or so?

Yes. Two years ago in October.

How the composition of that has changed since you provided it? Meaning, what end markets or geographies are now getting you to $200 million plus? Has that changed much?

It really hasn't changed much. If we thought about the building blocks now versus the building blocks as we envisioned them two years earlier, they really haven't changed. And if you think about how we've diversified with our power sector strategy, our ongoing defense strategy -- those are two very important building blocks.

So in a rough, high-level view, how do we get there? How do we go to from $100 million to $200 million with our organic products? The Naval strategy as we -- defense strategy, as we mentioned, as we get into the cycle, and should we be successful, we think that represents 15% to 20% of our sales mix. Round numbers, $30 million-ish.

Our power sector strategy, which wasn't part of our growth strategy in 2005 through 2009, we there, too -- we think that's in the 15% to 20% of sales mix. And then the remainder is traditional ground. Refining, pet chem. And that will come from taking market share. We left some share on the table last cycle because we couldn't execute it. The customers wanted to work with Graham. However, we were execution-limited.

We spent a fair amount of money, resources, and time the last four years to resolve that constraint. The team has done a very good job. So as we go into this current cycle, I am expecting we'll take more share and push our core segment of our business higher.

So the building blocks, basically, are 25% to 30% of the $200 million comes from markets we didn't have before. And the rest is -- we drive our core markets stronger and take more share, because we can execute so much differently today than we could last cycle. I don't think we are market-limited.

Thank you for that. My next question just is on the backlog. It's just so strong and so robust. I think when you've had calls in the past, you've talked about investments that you were already making in anticipation of this cycle. Is that correct?

Yes, yes.

So you've already pre-spent dollars, so to speak, for future business?

We did. We got ahead of it. The last three -- I'd say we were at it very actively the last three years, while revenue was flat, basically $100 million; and income was flat, basically $10 million to $11 million, we poured a lot of investment into our business in anticipation for what we firmly felt would be a strong growth cycle.

And I still feel that's going to play out. And it does begin to show itself in 2015 with a growth between 17% and 27%. And we're expecting growth after 2015 into 2016, of course. So I feel very happy that we made those bold decisions two or three years ahead of demand so we have the dry powder.

Very fortuitous. We agree. So everything in your backlog you would characterize as good-margin business. Is that fair?

Yes.

And I know this was asked earlier. Help us understand how conservative you are being on your margin assumptions going forward, given good margin in the backlog already; you've already been investing for the last three years in anticipation of this ramp. How conservative are these margins for 2015?

At this point they are what our belief is: that they range between 30% to 32% on average. What are we doing? What are we doing to eke that higher? What can happen?

We've mentioned that our $112 million backlog, about 70% to 75% of it converts this year. Roughly $80 million. Therefore, another $40 million to $50 million has to be won yet.

We are aggressively pursuing that, but we are seeing an improvement in the pricing environment and the margin coming into the backlog with new orders. So it depends on what we win, the margin profile of that, and how quickly we can get that into production. So that's not unusual. And, also, the ongoing execution and the benefit we have from our strategies around the short-cycle business -- the more predictable, less variable business. As we see that grow in volume and inch up in margin, that has an impact.

And then our operations team, their committed focus on productivity, lead time reduction, leveraging the assets we have. You couple all of these strategies together: is there upside? Yes. Are we conservative in the 30% to 32%? Not with what we see right now. However, we are going after making that stronger. We're not happy with that.

And a question I've asked numerous times in the past: correct me if I'm -- correct my math. You generated roughly $10 million of free cash flow for the trailing 12 months?

Correct, right.

That's right? Okay. So you're left with over -- call it, just round numbers, 20% of market cap and cash and no debt. What is considered excess cash to you guys?

I would say from an operations standpoint, the vast majority of that would probably fall into that category of our $60 million from an operations standpoint. However, as we look to utilize that cash for investments, as well as particularly on the acquisition side, we'd like to certainly use that cash in that regard.

So we don't need $20 million, $25 million to operate the business. Certainly probably 15% to 20% of our cash flow would be more than sufficient. But we would like -- we certainly want to keep the dry powder available for acquisitions.

Sure. And it looks like, on my numbers, you're going to -- are you going to -- is there any one-time additional things that you'll spend in CapEx for this next 12 months, over and above what you've already been spending, call it $2 million to $3 million per annum?

Just the completion of our expansion here in Batavia, which, again, about half of it has been spent so far. And the rest of it will be spent, quite frankly, over this quarter and maybe the second quarter of the fiscal year. And then it should be done. And beyond that, we've got our normal kind of $2 million to $3 million of maintenance capital and improvement capital.

So another year, you're going to come in generating another $10 million to $15 million of free cash, when it's all said and done. So you'll be at $70 million plus in free cash flow.

So you've talked about acquisitions, and you've done some great ones in the past. And you do have a small dividend. It would just be nice to see you get a little more aggressive on doing something with this cash, particularly where you are in the cycle. I mean, you have said before you are at the, what, 2004, 2005 type time period.

You are right in the front of this big lift here. It just seems like -- you've been great stewards of it in the past, but it would be nice, just from my standpoint, to see something a little more aggressive.

Sure, Gabe, we certainly understand. Getting the yields that we are getting on our cash right now is not something that we are particularly pleased with.

Okay. Thank you very much for your time.

Thank you. Mr. Lines, there are no further questions at this time. I'd like to turn the floor back to you for any closing or final comments.

Thank you, Melissa. We appreciate your time this morning and the questions that you did have. Hopefully you share the enthusiasm that I have as we go into fiscal 2015: that we are moving forward well; we are going to have strong growth; and the market fundamentals and the investments we've made in our business are coming together at the right time. And Graham is a good story as we go forward.

We look forward to updating you end of July. Thank you.

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