Graham Corp (GHM) 2015 Q4 法說會逐字稿

Greeting and welcome to the Graham Corporation fourth quarter and full fiscal year 2015 financial results conference call. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Karen Howard, Investor Relations for Graham Corporation. Thank you, please go ahead.

Thank you, Brenda, and good morning, everyone. We certainly appreciate your time today. You should have a copy of the news release detailing Graham's results across the wire this morning. 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 at the Company's website at www.Graham-MSG.com.

On the call with me today are Jim Lines, our President and Chief Executive Officer, and Jeff Glajch, our Chief Financial Officer. Jim and Jeff will review the results of the quarter and the full year of fiscal 2015 as well as our outlook. We will then open up the line 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 on the call. These risks and uncertainties and other factors are provided in earnings release and in the slide deck as well as with other documents filed by the Company with the Securities and Exchange Commission. These documents can be found on our website or at www.SEC.gov.

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

Thank you, Karen. Good morning, everyone. We are pleased to report our fourth quarter and full-year results as well as discuss our strategy. I am on slide 3.

Our results for the fourth quarter and for the full year of fiscal 2015 demonstrate the value of our strategy to leverage all of our assets to drive topline growth and expand earnings. We will continue to execute our current strategy to double revenue.

Admittedly, we are in an operating environment now that is far different from one year ago or how we projected fiscal 2015 growth at this time last year. Regardless of the immediate challenges, underlying fundamentals in our markets that create long-term demand for Graham products remain intact.

Our estimated timing for achieving our near-term objective of doubling revenue has certainly shifted, due to the dramatic interaction in our oil refining and chemical industry markets over the past two years. The strategy we are executing is straightforward.

We will leverage our capabilities and capacity to capture greater share in our key markets of refining petrochemicals, power, and naval. Expand less cyclical sales to strengthen earnings by reducing the impact of the cyclicality and our refining and petrochemical markets, and use our strong balance sheet and operating cash flow to both diversify and strengthen revenue opportunities. Please turn to slide 4.

Our fourth-quarter revenue was $37.5 million, up 44% from the prior year. The full-year revenue was $135 million, a 32% increase from fiscal 2014. This level of solely organic revenue expansion is a result of the early investments made in workforce capabilities and capacity, capital investments to expand our production facilities and add modern machine tools and rubbing equipment, and most importantly is derived from a talented, highly engaged team of employees that are committed to improving Graham in delivering exceptional quality and service to customers.

Net income for the quarter was $4.2 million or $0.41 per share. Excluding a nonrecurring restructuring charge, earnings in the quarter were $5.3 million.

Full-year earnings were $14.7 million or $15.9 million excluding the restructuring charge. Orders for the full year were $136.5 million or a book to bill of just above 1.0. We are exiting fiscal 2015 with a record year-end backlog.

I am now referring to slide 5. We continued to have strong domestic sales which were 64% in both the fourth quarter and for the full year. This is due to strong investment in new United States chemical production capacity along with our naval and nuclear strategies.

In the fourth quarter, the refining industry comprised 32% of sales, chemical industry was 36% of sales, power was just under 10%, and other markets, which includes U.S. Navy sales, were 23% of total sales. Please move to slide 6.

Dampening the impact to earnings caused by this cyclical nature of our refining and chemical markets has been a priority. Through several key initiatives, our predictable, less cyclical sales have expanded from what have been $18 million in fiscal 2005 to $51 million in fiscal 2015. We are committed to expanding these segments further in order to strengthen sustained earnings and reduce volatility in our financial performance. Aftermarket short cycle new equipment sales, naval, and nuclear MRO form what we refer to as our predictable, less cyclical sales base. I've been pleased with our progress in developing the stronger base of business.

I wish to turn the call over to Jeff for a further review of the financial details. Jeff?

Thank you, Jim, and good morning, everyone. I'm now on slide 8.

Q4 sales were $37.5 million, up 44% from $26.1 million in last year's fourth quarter. The sales split of 64% domestic and 36% international was different from last year's fourth quarter which was 78% domestic and 22% international, but still strong domestic sales because of the investment in the domestic petrochem and refining markets.

Gross margins were 34.1%, up from 28.4% in last year's fourth quarter, just the EBITDA margin was 23% from Q4, up from 14% last year. Q4 net income as Jim mentioned was $4.2 million or $0.41 per share, but when adjusted for the one-time restructuring charge was $5.3 million or $0.53 per share compared with $2.3 million or $0.23 per share last year. On to slide 9.

Our full-year results were quite strong compared with last year. Sales were $135.2 million, up 32% compared with $102.2 million last year. Sales for the full year were 64% domestic and 36% international, fairly similar to last year, which is 62% domestic and 38% international.

Gross profit was up $10 million at $41.8 million, but gross margin was relatively flat, down 20 basis points to 30.9%. SG&A for the year was $18.5 million, up 8% compared with $17.2 million last year. SG&A as a percentage of sales dropped 310 basis points to 13.7%. The adjusted EBITDA margin was up 240 basis points at 18.9%, and net income -- adjusted net income was up 57% to $1.57. The strong results of fiscal 2015 are a testament to all Graham employees who, as a team, performed quite admirably. On to slide 10.

Our cash position for the year was down slightly by $800,000 to $60.3 million. The decrease is simply due to timing of Accounts Receivable and unbilled revenue. We expect a very strong cash flow over the next one to two quarters and, excluding any impact of share repurchases, we would expect this cash position to be well above $70 million by midyear.

The doubling of our dividend in January and the availability of a share repurchase plan is further evidence of our confidence in long-term cash flow. Despite the use of cash for these activities in the future, this will not have any impact on our ability to continue to reinvest in our organic business as needed as well as funding potential acquisition opportunities.

I will pass it back to Jim for some commentary on fiscal 2016 and beyond.

Thank you, Jeff. I now refer to slide 12.

It is terrific to have a book to bill greater than 1.0, especially considering the abrupt contraction in our [ore] refining and chemical markets that took hold starting in our fiscal third-quarter.

A large percentage of the orders in the fourth quarter are for the U.S. Navy. That, of course, is terrific and is proof that we continue to execute well on our naval strategy to be a supplier to both surface and submarine nuclear propulsion programs. Through our restrictions regarding our ability to discuss specifics about naval orders, we have communicated that our strategy is to supply products to both of the submarine programs as well as the carrier program. We have secured work through all three programs; however, there is little further detail we can provide.

Importantly, refining and chemical markets turned down precipitously starting in our third fiscal quarter. This is best conveyed by third and fourth quarter orders totaling less than $35 million when excluding the naval orders, and factoring in the impact of $5.9 million of orders in backlog that were canceled. Consistent with sales, orders were heavily domestically weighted at 67% of total. On to slide 13.

Backlog on March 31 was $113.8 million, up slightly from last year and higher than it ever has been at year end. The value of initiatives to leverage our capabilities into new markets is clear when considering 55% of our backlog at year-end is for markets or customers not served five years earlier. Backlog conversion is projected to be 45% to 50% over the next 12 months, 5% to 10% 12 to 24 months, and 40% to 45% beyond 24 months. Please move on to slide 14.

Our guidance for fiscal 2016 is for revenue to be between $95 million and $105 million, gross margin to be between 26% and 28%, SG&A to be 17% to 18% of sales, and our effective tax rate 32% to 33%. This guidance for fiscal 2016 reflects the impact of third- and fourth-quarter depressed quarters from the refining and chemical industries, the effects of $5.9 million of backlog that had been planned for 2016 that was canceled, along with approximately $10 million of backlog where conversion to revenue has been pushed to 2017 at the request of our customers.

Also reflected in the guidance is our continued concern about the timing of our bid pipeline converting to orders and, with respect to cost management, the guidance reflects the savings anticipated from our voluntary early retirement program which is expected to be approximately 2/3 of the $3 million of the full-year annual savings in 2016 due to timing.

As I mentioned earlier, despite the short-term setback in our refining chemical markets, we remain focused on our near-term goal of exceeding $200 million in organic revenue.

Brenda, I would ask that you open the line now for questions. Thank you.

(Operator Instructions) Jason Ursaner, CJS Securities.

You mentioned achievement of the record orders in backlog but, Jim, you also talked about conversion taking longer than 24 months, at least more than normal. Aside from the Navy order, the core markets resemble basically your 12 (inaudible) more closely before we saw some of the movement in domestic investment.

How are you looking at next year in the context of the cycle overall in moving toward that long-term goal? And shouldn't investors be thinking of that as an earnings trough at all?

Investors should indeed be thinking about it as an earnings trough as the consequence of very sharp and very sudden pullback in our refining and chemical markets. I think a difference from the 2012, 2013 time frame that you mentioned -- looking at the backlog, it's really comparable.

What's important, though, to bear in mind is the order environment today is different than it was in 2012, 2013. And I think there's more risk today than there was two years ago or three years ago regarding the timing of when our pipeline converts to orders and that's our most significant risk, I would say at this point, as it relates to how high we can push 2016 is new business booked and its conversion. And that is different today than the time frame you mentioned of 2012 and 2013.

Okay. And one of the things you talked about last quarter was a sense that price equilibrium that returning to the market was somewhat more important than the actual price in terms of seeing investment returns. Functionally, this kind of happened in that $50 to $60 per barrel range. Certainly it doesn't feel like it, in terms of confidence in finding a new level, though.

How do you think about that in seeing orders return to the market and some of the pipeline of conversion to orders as you think about fiscal year 2017 and beyond for you guys?

Our thesis, as it would pertain to a good price for oil or an equilibrium type price per oil is in the $70 to $90 per barrel range. While directionally it's moved from $50 up to $60, that is very positive. I still feel it has some ways to go -- our thesis -- before back to business as usual.

Having said that, what gives us strong confidence in looking at our bid pipeline, which still does remain elevated at the $800 million to $1 billion level for the trailing 12-month aggregate amount of (inaudible) very high percentage of that but less than 50%. It's in the 25% to 35% range of that pipeline is refining them.

And we do expect that to convert. We do view this as timing. I think you characterized it correctly as an earnings trough, certainly in front of us for 2016, but by no means do I think our longer term outlook is changed and we're going to manage across this downturn and come out stronger and capitalize when our markets do recover.

Okay. And with fiscal year 2016 being what it is, you are still expecting profitable -- Jeff, you mentioned confidence in the cash flow. You guys doubled the dividends. You certainly seem well-capitalized or maybe even overcapitalized for operational needs. Why wouldn't we expect you to be more aggressive on the share repurchase?

One of the things that needs to -- we'll be upfront about it, more in mind as to why there hasn't been share repurchase thus far is, we entered into a voluntary blackout. We are trading in shares because we knew we felt highly confident we were going to win the large naval order. We felt we had material inside information and we judged to conservatively to act prudently on the implementation of our share repurchase plan and we implemented a blackout and no trading of our stock by those that knew. And the Company knew about that order as being highly probable. So we entered a blackout period that doesn't open again until Tuesday.

Jason, we entered that blackout very shortly after the January earnings call in early February.

Got it, understood. All right, thanks guys.

Chase Jacobson, William Blair.

So Jim, appreciate the comments in the previous questions there about your confidence in the bid pipeline. The fact that less of the prospects are refining than they historically have. You've been doing an extremely good job; winning the Navy [carrier] obviously. That doesn't really get going for a couple years. Even if you get the next carrier coming in.

I guess -- what I'm trying to figure out is that we sit here today. We're looking at about $100 million in revenue in fiscal 2016. It seems a long way off from the $200 million. How do we get there from here? You're going to really need -- are there more initiatives that Graham can put in place to gain share or do you really need the refining and chemical and power and Navy to all be working at the same time to get to that $200 million level?

There's a couple of ways I'm going to answer this. One, certainly deploying our capital toward an acquisition would facilitate us getting there faster. We do have an active acquisition program that we have in place so that would get us there faster. We cited our strategy was to go from X to Y organically. $100 million to $200 million organically.

But that certainly is, I believe, predicated on the strength of our core markets, refining, and petrochemicals. And putting that aside for a moment, let's look at the building blocks. We started going from $100 million to $200 million really as we come from about $30 million to $35 million in that type of range for a power segment, growing from its current level today. So that, aligned with refining and petchem, that's taking market share, that's refining, that's executing our strategy to get that segment of the business to grow.

Secondarily, the naval strategy, clearly we're having some traction there and some success. Regrettably it takes a period of time to get those wins into revenue conversion. However, it's clear to us that strategy is being actualized and should meet our expectations of being mid 20s type level of revenue, so put those two together -- I will pick an easy number that my head can do the math with. 35 and 25, that's $60 million of the $200 million. That would leave us with $140 million of the core work and I don't have much apprehension about us being able to do that but it is predicated, Chase, on strong market fundamentals.

We can create demand. But also inside the market we are playing in to take share to outmaneuver our competition, but if there is a market, we can't make the market. So therefore, the remainder of our growth as it pertains to organic does hinge on market fundamentals, but I did want to qualify that we can also get there faster from $100 million to $200 million via acquisition.

Okay, so the natural question is -- and I guess for Jeff, can you talk about the acquisition pipeline a little bit? It's something that you always mention but now if we might be entering a period with lower revenue for at least this year, and see if the orders turn. But can you talk about the acquisition pipeline a little bit?

Sure, Chase. We have -- there are quite a number of opportunities in the pipeline. You've seen some activity within our markets recently and we have accelerated our activity there recently and, as the energy markets have gotten a little soft, some of the pricing perhaps has got a little more favorable also or will get more favorable I think is probably a better way to look at it, particularly for the type of companies that we're looking at. So we are pretty encouraged about what's out there and the pricing of what we think is out there, but it will take some time as it always does to get that level of equilibrium where we are comfortable. But be assured, we are being active right now.

And just to go further on Jeff's comments, earlier, this pullback in our traditional markets has elevated the importance on our agenda of the acquisitions. We're not pleased that there's a market pullback. However, it has occurred and we need to respond to it and we are elevating the importance of our acquisition strategy. However, that doesn't mean we will move hastily or move them imprudently and we will follow our same discipline but I can share with you that it's at the Board level -- at the senior management level, it's more topical than it was when we envisioned several successive years of strong organic growth.

Okay. And on the -- on a gross margin guidance for next year, I understand about the pricing pressure and the lower volume. Up until a couple of quarters ago, you talked about better pricing. You are doing more of the work on your own like outsourcing. I guess with 400 basis point decline next year, just is greater than we expected. Can you maybe break that down at all as to how much of the decline comes from volume pricing and other -- and how does their restructuring offset that? How does that play into the guidance? Does that provide upside or is that baked in already?

The restructuring is baked in. In the prepared remarks, we looked at the restructuring as of an annualized savings of $3 million due to the timing of that flowing into our income statement; about two thirds of that restructuring savings will impact positively and is reflected in our guidance in 2016. And in rough numbers, it's about two-thirds COGS and about one-third of SG&A on an annualized basis.

Most importantly, there's two things that we -- clearly, there's going to be margin trending down. The two drivers for that are one, management's discretionary decision to not take the easy path of aligning our capacity and cost with demand. So that's formulaic, we know how to do that. To me, that would be wrong.

We have a naval strategy that's taking off. We have embedded cost in our business well ahead of revenue and corresponding profit that are necessary to be able to execute that strategy. We're not going to unwind those, but there in our COGS and they are affecting what you are speaking to here.

Secondly, we built this credibly strong value-based brand and there is immense unpriced value in how we support our customers in this down cycle. If we begin to unwind that, we begin to take the luster off of our brand. That could be irreparably harming our long-term pricing power. We are electing not to do that.

Thirdly, we need to have the capacity and flexibility to be opportunistic when aftermarket orders come in. And it can be large. $1 million, $2 million, $3 million is not uncommon, and if we strip back our cost basis to aligned with our projected demand, we won't be ready to do that service to our customers or take opportunistically orders.

And then lastly, and most importantly, we probably got a little too aggressive in the 2009 time frame. In retrospect, we were very fortunate that the recovery limped along and we could build our infrastructure and I'm not willing to limp into the next recovery because we stripped out our capabilities in our business.

So one is an intentional decision by management to keep the horsepower, support our value proposition, deal with this downturn, and this earnings [fraud] and that's reflected in our margins.

Secondly, and equally impactful is we're in a very harsh pricing environment. The scarcity of orders and the competitiveness of pricing is one we haven't seen in quite some time. And we've got to step in, we're going to depend on market share, we're not going to let people enter into our core counts, and that's going to have a short-term impact on margin, but again, that's the right decision, a discretionary decision, but it's the right decision.

I'm not happy with the pullback in gross margin, but they are for the reasons that I've just mentioned and in the long-term value creation from this business, it's the right call.

Okay. That was very helpful. Thank you very much.

Joe Mondillo, Sidoti & Company.

First off, I wanted to ask just if you could give us some perspective on how you are looking at where we are in this temporary or mini down cycle or however you want to phrase it. Do you think you seen the worst in terms of cancellations, weak orders? Are we sort of -- I know it's happened really fast and it's been very severe over the last nine months. Are we sort of at the bottom and you think maybe a flatline for the quarter or two and then possibly progress or do you think starting, even in this quarter, we are continuing to see weaker results and there could be more risk of cancellations or how are you looking at it where we are?

Our view is our refining and petrochemical customers have exercised their immediate judgment for how they were going to react to the downturn and I think that judgment plays out for much of 2016. Is there a possibility of further cancellation? I think there certainly would be a possibility. That depends on how our customers view next year, the year after this year. Right now, I think though, the [pains] already been put into the supply chain, in the adjustments have been made. $10 million of our backlog has been pushed from conversion in 2016 to conversion in 2017. Not at our desire, but at the requirement of our customer.

We don't want to cancel those orders because they feel we will get back to business as usual about a year out. We will watch with careful attention is this year unfolds are those projects becoming more risky or is the market environment becoming more favorable?

This is a very unsettled time. I wish I could be more definitive. I think businesses are exercising their judgment. I think the judgment that was exercised rolls out for the next few quarters, and then there's a more informed perspective as we exit calendar 2015.

In terms of the orders, it's going to be unpredictable. If you strip away the naval order from the second half bookings, the underlying business is bookings, we are pretty rough. In the prepared remarks, we noted they were roughly $35 million for the second half of the year. I don't feel that is necessarily sustainable. I think the markets will provide more opportunity than that.

As an example, through the month to date bookings were right about $15 million -- not month today, sorry, quarter to date bookings are at about $15 million, so we have had some positive signs. Again, I like our pipeline. It's largely weighted toward refining. That's always been our strongest hand to play, and to me it's just timing.

Again, I wish I could be more definitive, but what gives us the enthusiasm and why we still feel we can execute our growth strategy from going from $100 million to $200 million subject to market fundamentals is the enormity of our pipeline. It's just massive and it's in our sweet spot. Refining, petchem, and we always do well. When that pipeline is bulging, it translates to orders at some point.

Okay, so a couple of follow-ups mainly on the oil refining part of the business. You saw about $700,000 of orders and refining in the quarter. It feels like not just from your business but it feels like from the sector altogether that the first quarters may be -- at least the first half is going to be -- it feels like that's going to be the worst of it at this point anyways. Do you anticipate a couple of quarters of that $700,000 of orders? That type of -- that week of orders or does that feel like everything came to a head and everything froze and it pushed out a little bit and that was not really a normal -- even considering the extremity of the environment right now. That's really not what you are anticipating on a quarter to quarter basis or is it? Is it that bad that that could be the new normal for a quarter or two at least?

No, I certainly don't think that's the case and I just want to clarify. In the quarter, that math is actually accurate, but it reflects roughly $6 million of refining orders that were canceled. If those orders were canceled, new bookings would have appeared stronger from that sector. Of course net of those cancellations is that result -- or a depressed result, but that did not convey the underlying bookings pattern from that segment of our business.

I will answer it -- I feel much more confident (technical difficulty) depressed refining orders that were reported in the fourth quarter because they reflected $9.9 million been canceled from backlog.

Okay. So the orders in that finding was really about $7 million, but then you take out $6 million of cancellations and it really looks like net net.

I don't recall the actual number but I do know whatever the number was, it reflected deducting $5.9 million of refining orders from our backlog.

Okay. And the $10 million of backlog that pushed into fiscal 2017, is that mainly all oil refining?

Yes, it is.

Okay. So the big part of the gross margin for fiscal 2016 -- I would imagine a large part, if not the number one factor, is that oil refining is going to be maybe 20% to 25% of total sales as opposed to 30% to 35% in the past couple of years and that generally carries higher-margin, so has that been a [more in] factor?

Yes, it was a very influential factor. The summation of all this is the capacity utilization is under our -- underloading our asset through a discretionary decision that we have chosen to make. We're keeping our asset base strong and therefore it's impacting our gross margin, bringing it down. Again as I responded to Chase, I feel the wrong call for the value creation capability of this business is to align capacity more closely with demand, that will be wrong.

Right, okay.

Okay, we elected not to do that. So it's more of an absorption overheads because of the embedded cost for the naval strategy and the fact that we will not take the luster off of our value-based brand.

Great, I understand. In regard to, say, a two-year outlook of refining, these refineries, at least in the US are run at the highest rate that they've been at in at least five to 10 years, over 90%. I understand that a lot of these oil companies are just cutting across the board trying to save any cost whatsoever. But at a point, because the refineries are actually running at very high levels, your customer actually should be -- their production is very high, capacity utilization is very high. The environment should be actually strong but because the other side of the business, the upstream, and the rest of their business is struggling, they are making cuts across the board.

So do you anticipate at a point they can't put off this sort of work forever and maybe in a matter of the year, the story could be actually completely different with your particular customers.

We tend to reason through the market in a similar way that you just described. It is possible to discretionarily early delay maintenance and ongoing CapEx. Much of our US-based refining activity can be a little bit of new capacity but it mainly goes under maintenance and debottlenecking and revamps.

I've always been excited about the refining market. It does have intermittent pullbacks like we are seeing here, but as you said. Joe, there's a point in time when they have to get back to investing and keeping those refineries going and we're excited about that. We will be ready for that and they can't underinvest for too much longer.

Okay. Just two more questions. Regarding SG&A, in terms of the top line guidance that you were given, it's sort of comparable to fiscal 2014 and when I look at fiscal 2014, SG&A as a percent of sales was 16.8%. The guidance that you are providing -- the midpoint is 17.5%. Just wondering why that would be higher given a similar sales base of back in fiscal 2014. Is that related to the additional capacity expansion that you built, regarding overhead and more labor and such? What is -- how -- ?

Joe, as Jim has mentioned, we have kept some cost embedded in the business to be able to take advantage of growth in the future. And that's really that difference between what you are referring to two years going today.

Okay. So you are maybe a little bit leaner would you say in 2014, but you are still anticipating a lot more work in a year or two and you'd rather keep that capacity on hand?

Well, the interesting part about our business which is fantastic but also can be troubling as you try to look at our cost basis. We have this fantastic big pipeline that has to be served. We need the SG&A assets the asset set really, supporting that big pipeline of being there even though our customers are spending money, doing the bid iteration, helping them develop the cost basis for their planned investments. And we are prepared to keep that sum cost in our business support pipeline management.

So when they are ready to buy, we're the one most likely to win it. And 2014 versus 2016, the pipeline is fairly similar, maybe up a little bit, but again, ultimately, I am -- we are reluctant to align costs perfectly with current demand because we're not that type of business model.

Okay, okay. And then just lastly, in terms of the petrochem part of your business -- the chemical processing, petrochem, the orders in that business have been relatively stable for the last five quarters and it's been a while since we saw that surge in early fiscal 2014, in the first half of 2014. Just wondering what you are seeing within that business. Any opportunities in the next few quarters, do you think, amongst that buildout down in the Midwest in the US -- the whole utilizing net flow natural gas prices and all that?

Sure. The first wave of work that we saw during that time frame you were referring to, good amount of that came from new gasoline capacity. (inaudible) proceeded, six proceeded, we got four of them.

What we're seeing now and we've been anticipating this is those plants are built to feed downstream derivative plants. We are beginning to see the inquiries where the downstream derivative plants that require all of our equipment, not just our surface condensers. And we secured a little bit of that work already, but we are seeing that begin to enter into our bid pipeline. It's been a little long in coming, but we are beginning to see it now and then secondarily, we also are tracking between four to six new ethylene projects in South America.

Having said that, I don't expect all of them to go ahead, but I do expect a few of them to go ahead and I'm expecting our sales team to get us in a position to win those orders. So we are seeing the next wave of activity begin to show up in our bid pipeline and we're positive about that. We secured a little bit of that work now and there's more to come. We always felt that this North American petchem first wave would be in two phases and I think we're entering the second phase now.

Okay, great. Okay, thanks a lot. Appreciate it.

Chris McCampbell, Southwest Securities.

As a long-term shareholder, I'm thankful for your ability to manage through these cycles. But in regards to the M&A environment with pricing still relatively high, does it ever makes sense to go the other way and solicit interest for Graham from larger companies?

Good question. We think the value-creating capability of Graham is still very strong. Is that a topic of discussion that we do have? Of course -- we think we have not run out of runway to create value. We are all frustrated by the very abrupt and quick pull back from our core markets. We don't view though that has disrupted or transformed our value creating model and we think remaining independent is the best way at this point to maximize the value of this business.

What would be the conditions that you would think you'd need to see to make that more likely?

A suitor willing to pay the right price.

Chris, to Jim's point on our value creation, I think if you look at our results in fiscal year 2015, they are a very good example of the kind of value that we can create in a good market and quite frankly, unfortunately, as Jim mentioned in the prepared remarks the market turned pretty significantly over the last six to nine months and we have to work our way through that. So we're positioning ourselves -- we are positioned, we believe, to create that type of value creation and quite frankly quite a bit more as the markets recover as well as taking advantage of the inroads that we made with the U.S. Navy and the power side and then over the next few years, with the (inaudible) energy side as well as starting to see some additional conversion on the Navy side, additional growth on the power side, we think our shareholders would be quite happy with what we've done.

I appreciate it, guys. Thanks.

John Bair, Ascend Wealth.

Wondering if the order cancellations -- were those domestic or international or combination? And likewise with the $10 million of push-out orders.

They are North American so somewhere US in both cancellations and delays. Some are Canadian. To be clear, they are all under our refining umbrella.

Right. Well, the reason I am asking that. Some of the trade publications I've read in the last month, I've seen just jotted these down in anticipation of the cost. Mostly international. But I saw roughly six announcements of some fairly -- what I thought fairly significant refining and petrochemical projects that have been set to go -- Nigeria, India, Iraq, Peru. And so I'm wondering if these other international areas perhaps are not suffering as badly as what appears to be happening domestically or let's say North America. Could you elaborate some on that?

Sure. In the international market, most of the refiners are state-owned enterprises and in some cases, they are part of OPEC and take the KNPC work -- I'm sorry, Kuwait activity, some upcoming Saudi Arabian activity, but that is being impacted by their incoming cash flow from the selling of crude oil and that's changing the pace at which they are investing in capacity.

We are aware of the Iraqi projects. We also aware of [PetroPeru]. We're aware of the projects in India. So we have activity in those different areas and again, our pipeline for all of our bids is heavily weighted toward refining. And to me, that's a nice deployment for future success.

Okay. Then can some of those -- some of you anticipate or is it possible that some of these cancellations could possibly be resurrected down the road or was that a pretty strong decision that they're not going to go forward with that? Regardless of how you feel, it's obviously had -- they weren't just pushed out by somebody -- I guess the --

I was stretched to --

We're not going forward, done.

One, I think, was due to extreme need to preserve cash. It is an expenditure that has to happen, but it was discretionary expenditure to occur right now. So I do expect that project to be active again at some point when the market stabilizes.

The second order of that was canceled, was the second half of a larger order, phase A, phase B. And because that customer couldn't project when they would commence phase B, they are proceeding with phase A, they elected to cancel the second half of the order, but the long-term view is they'll reactivate that, but they couldn't tell us if it was 16, 17, or 18 and, therefore, they elected to just cancel it.

That would require a full rebid process then (multiple speakers) --

Yes, yes.

Very good. My last really more of a comment than anything and that is given the rather small amount of shares outstanding from a personal standpoint, I would rather see you use your cash to increase the dividend a little bit. I know you just did or probably even better and I think to some of the comments previously, the acquisition -- and I know over the years, that's been a point that's come out repeatedly why you're sitting on some us cash and why you're using it but I would rather see it go towards a good acquisition rather than reducing share count. So that's just a comment on my behalf.

John, just a response on your comment. With regard to the share repurchase, as you are aware it's up to $18 million. There is no requirement to spend that. So we can spend anywhere from up to $18 million or as little as zero. So just so you are aware, that --

Well I understand that, but that would knock your share count down by almost 10% as it is. I look at it as -- I would hope you've been able to put that money to work better with a good acquisition that's going to increase your overall sales in maybe a new market or whatever. So --

John, this is Jim.

And certainly happy that you have a nice wad of cash that's there so. Thanks very much.

Yes Sir. Just wanted to follow on to your question. I just want to share with you that the Board of Directors, management, each of us collectively together we are solely focused on long-term value creation, putting our -- all of our assets to work to create improved shareholder return. Very disappointed in how 2016 is going to shape up.

We understand how we got here, but virtually every conversation we're having is how do we create value more quickly than we otherwise are going to be able to do it in this pull back? And it's top of mind for management, it's top of the mind for the Board, and we're thinking of the shareholder everyday.

I have no doubt. Thank you.

Jason Ursaner, CJS.

I know the call is running long so I appreciate you taking the follow-up. And Jim, appreciate all the details on the discretionary decisions impacting gross margin for what it's worth. I agree that -- I think it's definitely the correct move for long-term sustaining the brand.

The one factor I wanted to ask more about was that of, you mentioned the harsh pricing environment. Is that all or mostly coming top down from the producers and EV teasers that's also any reflection on the changing competitive landscape?

Actually it's on both sides of the table. This is more anecdotal, so I don't want it to come across as being broad-based, but it's of sufficient frequency that's impacting margin. From the customer side, you seeing heightened attention on cost base decisions and being willing to wait and let the suppliers burn through backlog to become a little hungrier to get a more favorable price. We had not necessarily seen that in our past, so we are seeing the customer be different than their behavior on focused on getting the best price.

So that has an impact and then on the other side of the table, again, more anecdotally, so please don't consider this as the brand model is broken. We have some near-term headwinds where our competition is seemingly being reckless on their pricing decisions. And we have to decide, are we going to let them take share or are we going to stand up and serve our customers and get through this and make sure we retain that customer and experience our value and they don't get exposed to our competition. So we are situationally aggressive in what we are prepared to accept.

We've had to shift when it's logical. We had to shift from more focus on quality of order selection to driving volume, utilizing our capacity, leveraging the assets and defending our market share. And again I think that's the right decision for the long-term health of our business, but it has some near-term implications for margin.

Aside from price though, in terms of technical capabilities in quality are some of your competitors -- is that changing, or they are getting better? Are you seeing any new competitors internationally or is it mainly just this price issue?

It's mainly just price. We don't typically bump into the competition. It's outpolled composition with greater assertiveness and their willingness to dive on price.

Okay. And the Navy order in the quarter, I don't remember if there was any original press release, but it's now positive. It's about $35 million. Was that entirely CBN 80 and how does that compare with the $25 million from the surface condenser order for 79 or maybe with just total adjustable content that you could have on a carrier order? (technical difficulty)

It was not related to the carrier order.

Okay. And just following up on the questions you had before on acquisition pipeline, how active in the process or maybe how far along would you be before it might lead to a blackout on the share repurchase. Is it going to be one of those things where every quarter, there's enough going on that it's going to be difficult to get anything done there?

Jason, this is Jeff. For an acquisition to have an impact on the share repurchase, and I will think back to when we bought Energy Steel, we did put a blackout on our management team and our Board for a period of time, but it was not -- it was more of a four to six weeks before the acquisition closed. In that case, it would not be a situation where we have a blackout for many months. Just like the blackout that we put in for the -- around the Navy order, that just coincidently happened to hit -- it would've been an open window of approximately six weeks ended happened to hit right near the beginning of that six-week window and the blackout related to the Navy quarter ended just after the window closed, but unfortunately then we had a blackout on because of our earnings.

So, in that particular case or the Navy case, it was coincidental in timing but to your question around an acquisition, we would not put a blackout on -- we would likely not put a blackout on it until we were fairly certain that an acquisition were to close as we did with Energy Steel back in 2010.

Okay. Appreciate the follow-ups. Thanks, guys.

Ladies and gentlemen, this concludes today's Q&A session. I would like to turn the call back to management for closing remarks.

Thank you, Brenda, and thank you, everyone, for listening in to our fourth-quarter fiscal year-end 2015 conference call. We are very pleased to have updated you and to go through a pretty detailed review of prospect of the business and development in the near term and we look forward to updating you on our next call. Thank you very much.

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