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Executives

Deborah Pawlowski - IR

Jim Lines - President and CEO

Jeff Glajch - CFO

Analysts

Rick Hoss - Roth Capital Partners

George Walsh - Gilford Securities

Dick Ryan - Dougherty

Walter Lang - Avondale Partners

Brian Rafn - Morgan Dempsey Capital Management

Tom Spiro - Spiro Capital

Graham Corporation (GHM) F2Q2011 Earnings Call Transcript October 29, 2010 11:00 AM ET

Operator

Greetings, and welcome to the Graham Corporation second quarter fiscal year 2011 quarterly results conference call. 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, Ms. Deborah Pawlowski, IR for Graham Corporation. Thank you, Ms. Pawlowski. You may now begin.

Deborah Pawlowski

Good morning, everyone. We appreciate your joining us today on Graham's fiscal 2011 first quarter financial results call. On the call I have with me today Jim Lines, President and CEO of the company; and, Jeff Glajch, Chief Financial Officer. Jim and Jeff will be reviewing the results for the quarter and also provide a review of the company's strategy and outlook. On our Web site at www.graham-mfg.com, you will find both the press release as well as supplemental slides that are posted there, which Jim and Jeff will be referring to during the formal part of their discussion.

As you are aware, we may make some forward-looking statements during the formal 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 that could cause actual results to differ 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 Web site or at sec.gov.

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

Jim Lines

Thank you, Debbie, and good morning, everyone. As a reminder, Jeff and I will refer to slides posted on our Web site during our discussion this morning.

Beginning on slide three, as you can see revenue in the second quarter was $15.7 million. We believe the second quarter represented the end of a four-quarter in duration of steep contraction in revenues, but we anticipate the bottom is behind us. Recovery of the market is expected to be gradual. There was 17% sequential revenue growth comparing the second to the first quarter. We expect revenue will continue to expand in each quarter for the remainder of the year. Our full-year revenue guidance is unchanged at $65 to $72 million.

Turning to slide four, international markets continue to drive our business. Though there are opportunities in domestic markets, Asia, Middle East and South America are providing a greater number of opportunities. Revenue in the second quarter was driven by orders that are for Columbian, Venezuelan, and Mexican refineries. Asian market segments were more diverse with revenues coming from orders for fertilizer, ethylene, refining and power generation projects. We also are converting now backlog comprised of a number of different orders for Saudi Arabian refinery projects. Sales to domestic markets included refinery, fertilizer, power generation, primarily renewable energy markets.

Turning to slide six, we had a couple light quarters for new orders. Second quarter new orders were $10.25 million bringing first half bookings to $18.6 million. Second quarter had 30% sequential growth versus the first quarter, but $10.5 million is still a low level of bookings in a quarter. Our exceptionally strong and high backlog level is a solid foundation to build upon and to soften the effects of the low level of new orders during the past two quarters. We are projecting 60% to 70% of backlog conversion to revenue across the next 12 months.

Further to my comments about the importance of international markets, first, half bookings had 22% for South American markets, primarily for refining applications; 10% were Middle East markets, again, principally refining services; 10% were mainly to our refinery and petrochemical markets in Asia; and, 10% for Canadian refinery and renewable energy markets. In total, approximately 60% of new orders were for international markets in the quarter.

Turning to slide six, the company continues to operate well considering the steep decline of revenue stemming from the global downturn. Our managers and all employees work hard to ensure customer commitments were maintained and we continue to invest to become a faster company and always seek to improve our processes. I commend our employees on their accomplishments and for staying the course through a tough period.

Costs were addressed quickly when our markets change. But more importantly, the benefits of the actions taken during the past four years were never more evident than during the last four quarters. While controlling our markets is impossible, we did demonstrate that we could influence what is within our control to operate differently during this downturn. Specifically, productivity is considerably higher today, up about 10% to 12% from four years ago.

Rework as a percent of production hours is at about 50% of where it has historically had been. Lead times continue to shorten. We are becoming a faster company. And workforce flexibility and cross-training has helped tremendously. As we've now passed the midpoint for the year, we are narrowing our gross margin guidance to 28% to 30% for the full year, with SG&A forecasted to be between $11.8 and $12.3 million.

With that, let me turn it over to Jeff for greater detail on the quarter. Jeff?

Jeff Glajch

Thank you, Jim, and good morning, everyone. We are reiterating our previous revenue guidance for fiscal 2011 of $65 to $72 million. So the full year sales are expected to increase 5% to 15% compared with last year. We expect growth in the second half of the year compared with the first half of the year with sequential growth of approximately 25% to 50%. In the second quarter, the trend towards higher international revenue continued with 52% of the total revenue coming from outside the US. The split by region in the international arena does fluctuate based on specific project timing. As Jim mentioned earlier, Latin America and South America, as well as Asia, were strong regions this past quarter.

On the next slide, you will see our backlog continued very strong at over $83 million. Although it is down 12% from the record high of March 31st, it is still 10% above the previous record achieved at the peak of the last cycle. The US nuclear carrier project is a big component of our backlog. We began limited production this past quarter a little earlier than planned. Though we expect to continue work on this project in the second half of fiscal 2011, we will recognize only a small amount of revenue for the project this fiscal year. We do, however, expect to see a more meaningful revenue recognition for the project next year. From our backlogs, 60% to 70% of it will convert to sales we believe in the next 12 months. This is less than the normal 85% to 90% that we see and the primary difference is due to the long conversion time on the navy project.

As of the end of June – the end of June, we have three projects totaling $5.4 million on hold. One of the projects, which was $3.3 million in value, was released to production in the second quarter. The remaining two projects, which total just over $2.1 million, continue to be on hold but we do believe that they will be released hopefully over the next couple of quarters. However, we don't believe they will contribute any revenue in fiscal 2011. Looking at orders, we are continuing to see the trend where more orders are coming from the international arena. A trend we have seen for most of the last year and a half.

Taking a look at Q2 performance, gross profit and operating profit were both down slightly versus last year. If you recall in last year's second quarter, we were still producing orders which came in house during the previous market up cycle and were at a better pricing level. For SG&A, we were in line with our expectations in the quarter. You can see our SG&A has leveled off over the past year subsequent to the restructuring which occurred in late fiscal 2009, and then again early in fiscal 2010.

Despite the cost reductions we made 12 and 18 months ago, we continue to invest in sales and engineering capacity and believe that this has helped us not only maintain market share, but actually gain share over the past 12 to 18 months. Thinking about costs, as we have began to see revenue growth, we are judiciously hiring both in production and in engineering.

Looking at our cash position on the next slide, you can see we continue to have a good cash stock pile to utilize for investment, specifically acquisition activity. Cash at the end of September was $70.8 million. And as you know, we have no bank debt. We continue to generate cash from operations. However, the cash generated is being offset as we begin to reduce the excess customer deposits that came in-house in late fiscal 2010. We reduced the customer deposit level by approximately $3 million in the second quarter. At this point, we believe we have customer deposits, $10 million to $12 million, above this normal level and expect over the next four to six quarters to continue to see this excess produced.

Another cash usage area is capital spending. We continue to expect to spend $2.8 million to $3.2 million in capital this year, half of which is to support the Navy project. Today, we have spent approximately $700,000 in total capital. But I can assure you, given the production, sorry – the construction activity at our plant today, capital spending has picked up in the third quarter.

With our free cash, we continue to be very focused on our acquisition program. We are pleased that we are continuing to see – to be successful in identifying strong acquisition candidates with extremely capable management teams in the markets that we have targeted.

Also in the second quarter, we repurchased 48,000 shares of stock at a cost of just over $700,000. Today in our repurchase program, we have bought 351,000 shares.

Our next slide is our outlook for the rest of the year. As mentioned earlier, we expect to see sales growth from the first half to the second half of the year and are reiterating revenue target of $65 million to $72 million. On a quarterly basis, we saw growth in revenue from Q1 to Q2 of this year. We expect sequential growth from Q2 to Q3, and then further growth from Q3 to Q4.

Normally, when you see revenue growth, we also see improvements in gross margin. However, in the short term, we expect the gross margins to decrease. The improvement generally seen by increasing utilization is fully offset, and then some by pricing pressures, which incurred 9 to 15 months ago during the depth of the downturn. Project margins won during that time period were very competitive as all competitors were chasing very few projects.

We also had a number of lower margin projects moved out of Q2 and into Q3. We were able to backfill capacity by moving a few higher margin projects into Q2. However, the net result of doing that was a stronger margin than expected in Q2, and we will see the impact of these resulting weaker margins in Q3. We do expect margins in Q4 to be better than Q3, however, not to the level that we saw in the first half of the year. We do continue to believe that when markets fully recover at the next market peak, we expect to see margins in the mid to upper 30% range.

Finally, on the final slide, we think it is important to take a look back at our business and look at how we've changed the structure of our business. This slide looks to business as EBITDA performance during the previous cycle and the most recent cycle. You'll see in the previous cycle, EBITDA margins peaked at 11.1% in 1998, with a sales revenue number of just over $50 million. And as the markets began to decline, our EBITDA margins dropped into the low single digits. Looking at our current performance, EBITDA margins well exceeded that 11% range. In fact, we're above 25% in fiscal years 2008 and 2009.

Just as important as the superior performance in the upper years, in the top of the cycle was our performance during the bottom part of the cycle. You can see in this last four-quarter period, the Q2 trailing 12-month timeframe, our EBITDA margins were 13.8%, which was actually above the peak EBITDA margins of the last cycle. We believe that restructuring our business over the last many years has put us in a different position today than we have been in previous cycles.

The reconciliation of how EBITDA was calculated is attached as supplemental slides for those of you who would like to take a look at that. With that, I would like to thank you for your interesting Graham and your time today, and would ask the operator to open the lines for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator instructions) One moment while we poll for questions. Our first question comes from the line of Rick Hoss of Roth Capital Partners. Please proceed with your question.

Rick Hoss - Roth Capital Partners

Hi. Good morning.

Jim Lines

Good morning, Rick.

Jeff Glajch

Hi, Rick.

Rick Hoss - Roth Capital Partners

Jim, reading through the press release, it seems like the booking commentary is a little bit more upbeat than it has been in the last, I don't know, say, three quarters. Am I reading this correctly or no?

Jim Lines

We continue, Rick, to see a very positive – a number of projects in our pipeline geographically and end-use market diverse, which is good; so refining, alternative energy, petrochemical, geothermal, all areas where we have strength. And the pipeline continues to expand. While having soft bookings in Q1 and Q2, we don't think the underlying demand drivers have changed. Again, we talked in the past about it being a timing issue as to when orders are won. We continue to feel bullish about the outlook based on the proposal work and the sales work that we're doing. And we do remain positive. But predicting the timing for when orders will be placed has been very, very difficult the last many quarters.

Rick Hoss - Roth Capital Partners

Does it seem like it's closer now or noticeably closer than, say, in the last two calls that we've had?

Jim Lines

It's hard to judge. I felt it was close one quarter ago. I thought it was close today. But until we get to the negotiating table, it's really hard to predict. And even the negotiations tend to be more extended than normal. When I say normal, it's going back a couple of years. In general, qualitatively, we're very optimistic about the near term. The predicting the timing of translating the pipeline into bookings is very difficult, Rick.

Rick Hoss - Roth Capital Partners

Okay. That's understandable. Now, in the third quarter and the fourth quarter of '11 you've discussed the margin – gross margin implications of the competitive environment. Are you seeing competition continue on? And do you expect to see this as below 30% type of gross margin in the projects that you're bidding on currently?

Jim Lines

That may very well be possible with the bookings over the next quarter or two. The driver that will give a number of opportunities that come to closure at a given point in time, when there are very few results in a hyper-competitive situation, which is what we saw 9 to 15 months ago, we expect it to slacken a bit in terms of margin pressure. But until we see the pipeline move toward procurement, we're expecting very competitive pricing from our Asian and European competitors just as we have seen.

Rick Hoss - Roth Capital Partners

Okay. And then looking at this productivity slide, slide 13, it says a pretty impressive difference between the two cycles. Can you give us examples of the productivity initiatives that you've implemented over the last, say, 12 months? And are these largely complete or is there – would there be enough additional projects that would increase this further, all else being equal, in other words sales being steady?

Jim Lines

Right. By no means do we think we're done with our attention on improving our business and its operating performance. We have made substantial strides and investments over the last two or three years. You could add this with our capital plan, with our continuous improvement efforts, with our IT initiatives to become a faster, more efficient company. If I were to give an indication of where we are in the race, we're probably a little bit beyond the midpoint. There's still a lot that we can do. There's a lot that we're going to do.

And we did this with an intent, of course, to serve our customers better. But we also recognized, when we were in the middle of the last cycle, we would be facing more price pressure or margin pressure. And our response to that had to be business improvement. So we focused on this a couple of years in advance before it actually materialized, and again the benefit of it is evident the last four quarters. So we're true to this. We believe in it and we're not through – and we'll never be done improving our business.

Rick Hoss - Roth Capital Partners

Okay. And then, Jeff, one for you, tax rate. How do we look at out-year type of a tax rate, 32-ish%, is that fair?

Jeff Glajch

Yes. I think, Rick, it's – 32%, 33% is probably a fair view looking forward.

Rick Hoss - Roth Capital Partners

Okay. Thank you very much.

Jim Lines

You're welcome, Rick.

Jeff Glajch

Thanks.

Operator

(Operator Instructions) Our next question comes from the line of George Walsh with Gilford Securities. Please proceed with your question.

George Walsh - Gilford Securities

Jim, I'd also like to make just a little bit on that slide number 13, page 13, it really is a testament, as you said, to the changes that have been brought about in the company in being able to better exploit the cycle. I wonder if you could – maybe that but also waiting in the sense of the difference in the type of cycles that there may have been in pricing, in the type of business. And I'm really bringing this up in reference to how you see the next cycle coming in terms of is it the type of cycle of this job, the type of business you're doing, the type of cycles you're getting, whether it's more international versus domestic in addition to the improved deficiencies that you brought to the business.

Jim Lines

Okay. There's a lot of course that went in to the cycle-over-cycle improvement. Much of our strategy, if you go back, and George, you were with us in 2006 and 2007 when we had throughput issues, we were constrained on capacity. We really centered our sights around how do we gain incremental throughput recognizing that the incremental revenue and therefore the incremental profit, it was just substantial in our business for the amount of leverage that we have. But we focused on gaining capacity across the company to execute more orders. And that began to, of course, improve the dropdown to the bottom line, improved the EBITDA margin. But we did have a very strong cycle, this last cycle.

The waiting was largely domestic. About 60% of the revenue was for domestic markets, which would have a better transactional cost basis and a better margin potential. But we knew that would be short-lived and we focused on again improving our business to position ourselves to be cost competitive with acceptable operating performance in an environment that was not like this past operating cycle.

We don't believe going forward – going into this next cycle, it will be as heavily dependent upon the domestic markets. It will have a greater waiting toward international markets, as we've mentioned Asia and Middle East, South America. And the improvements we put in and the improvements that we plan to still put into the business, we'll counter balance it and hopefully off-set that margin pressure that we expect to face in terms of pricing – competitive pricing.

George Walsh - Gilford Securities

Okay. And can you elaborate a bit on your acquisition progress and what – how close you may be or what kind of styles and things that we might see?

Jeff Glajch

George, Jeff Glajch here. Yeah, as we've talked in the last couple of calls, we continue to meet with potential candidates and we have certainly, I'd say the past six months or so, come into a number of good opportunities. And at any point in time, we're talking to couple of fairly serious candidate and we're hoping that something moves forward in the near future. But our premise upfront was making sure we found the right company, the right markets and do it at the right price. So until we've got that all nailed down, we won't necessarily close anything. But that being said, we certainly, at any point in time, have a couple of – well, I'll call it serious or hot candidates going on.

George Walsh - Gilford Securities

Okay, and there's a likelihood these deals would be cash, all cash, or would it be some stock or stock?

Jeff Glajch

I would assume they would be all cash. There certainly could be a scenario where it could be cash and a little bit of stock. But our intent is not to delude our existing shareholders. So our going-in plan is all cash.

George Walsh - Gilford Securities

Okay. Thanks a lot.

Jeff Glajch

You're welcome.

Operator

Our next question comes from the line of Dick Ryan of Dougherty. Please proceed with your question.

Dick Ryan - Dougherty

Good morning. Say, Jeff, I think you talked about one contract being released that was on hold and there's two still on hold. Is there any commonality between those contracts whether it's in a specific industry segment or geographic region at all?

Jeff Glajch

No, Dick. There really is not and we're pretty optimistic that at least one of those will be released very soon and hopefully the other one, not too long in the future.

Dick Ryan - Dougherty

Okay. On your order activity, you've flipped the switch more towards international. Can you give a sense of what the pipeline of opportunity looks like, whether that's a qualitative or quantitative assessment? And are there challenges coming in to your bidding process with raw material prices?

Jim Lines

I'll take the second point first. We don't really see a lot of challenge with respect to raw materials. Clearly, we're seeing a run up in the cost of copper. When we think of our material mix as a business, copper is a large percentage of our material purchase. But the process that we have around bidding, bid validity, and then post-award, after we have an order, being able to secure volatile pricing and also commodity pricing. We don't see much risk there. We think we can reflect in our bid prices the current cost of the commodity. So we've been able to manage that fairly well over the last few years.

When we look at the pipeline from an end-use market standpoint, Dick, a lot of the work that we're seeing is for refining applications. We have refining opportunities, and we spoke about this in the past, in the Middle East, in China, in South America. Also, which is nice, we've seen some early stage petrochemical work. We've won recently a few ethylene projects in Asia, one for India, one for Taiwan. There are other ethylene projects in our bookings pipeline, our potential bookings pipeline. We see that as a precursor to the recovery of the petrochemical markets.

Also we're seeing a fair amount of activity in the fertilizer area, and that's mostly international work. That's an area that we've been strong in over the years. That would be ammonia plants and urea fertilizer plants. Very specialized technologies where there's fewer competitors for those application. And in the whole market, alternative energy, there's a large population of bids that we have for alternative energy in North America. Biomass energy, waste energy, and those areas were Graham has had a reputation going back to the 80s and servicing that market.

Dick Ryan - Dougherty

To move some of those projects forward, does anything have to get – get further released and more definitive plans coming out of Washington for an energy program now?

Jim Lines

I think for the alternative energy opportunities in the North American market, they do pace at a relatively slow stride. There's a permitting process. There's a public debate process around it. It's a lengthy upfront cycle to get those projects started to get some momentum going.

I think the energy policy is fairly clear around renewables and the subsidies in support for renewable energy. I think the rest is just the political environment or the administrative process of getting through the hurdles that have to be jumped over or equipment can be bought and the facility be gone.

Dick Ryan - Dougherty

Okay, good. Thank you.

Jim Lines

You're welcome.

Operator

Our next question comes from the line of Walter Lang with Avondale Partners. Please proceed with your question.

Walter Lang - Avondale Partners

Hi. Can you hear me?

Jeff Glajch

Sure.

Jim Lines

Yes.

Walter Lang - Avondale Partners

Thank you for taking my call and congratulations on your continued progress in a challenging environment. This is relative to last question as well and you mentioned as in the first question. On the press release, the opportunity in renewable energy, could you provide more insight into that? Is it limited to North America? Is there an international opportunity? The first question, you had mentioned geothermal, if I heard you correctly. And then you mentioned, in the most recent question, biomass energy, waste energy. It would seem to me intuitively it's a limited opportunity relative to petrochemical, but simply to provide more insight into that opportunity? I'd appreciate that.

Jim Lines

Okay. When we look at renewable energy, our initial focus has been in the domestic market. But to be fair, there are other opportunities globally for that. We see renewables being pushed in Asia as well. It's in Europe, where we don't have a very strong position to be fair. But we see renewables as being global oriented. But our initial focus, because of cost pressures in the local Asian markets, we feel a better probability of success in our home market initially.

For geothermal, that certainly has a very large international component to it and a satisfactory domestic component to it. Internationally, we've been successful in the Ring of Fire in Southeast Asia, Indonesia, the Philippines. We have installations in those areas. We're seeing work coming from Central America. We haven't won that yet, but we've have some bid opportunities there. And then in North America for geothermal energy on the West Coast, in the California area, we have a good install base there. We have a number of bid opportunities that were in early stage bid work on for those projects.

Walter Lang - Avondale Partners

Thank you.

Jim Lines

You're welcome.

Operator

Our next question comes from the line of Brian Rafn of Morgan Dempsey Capital Management. Please proceed with your question.

Brian Rafn - Morgan Dempsey Capital Management

Yes. Good morning, guys.

Jim Lines

Good morning.

Brian Rafn - Morgan Dempsey Capital Management

A question for you on the Gerald R. Ford aircraft carrier, a new class replacing a Nimitz carriers, are you guys seeing where the pressure that Gates is talking with DoD? Are you seeing any ongoing pressures to cut costs relative to your deal with new partners?

Jim Lines

We haven't seen pressure with respect to the order that we have in-house on CVN-79 carrier, the Gerald R. Ford carrier. We are aware of the cost pressures for the Department of Defense, the Navy program, and certainly everyone sensitive to costs creep and driving down purchase prices. But for the order we have in backlog now, we haven't had any pressure on that.

Brian Rafn - Morgan Dempsey Capital Management

Are there any incentives built into that to recover a lower cost?

Jim Lines

No.

Brian Rafn - Morgan Dempsey Capital Management

Okay, okay. Given the fact that this is the first carrier of this class, does your being a vendor on this supplier, does that help you guys at all in winning business on the next carrier?

Jim Lines

The order that we won for CVN-79 is the second carrier in that class of carrier. We did not – we did the first carrier about five years ago, we did not win that project. But we actually won that the order for the second carrier.

Brian Rafn - Morgan Dempsey Capital Management

Okay.

Jim Lines

We think success going forward with the Navy really stands from executing well the contract, maintaining schedule, and above most importance is the quality of the fabrication of the product. And we think Graham executes extremely well and delivers a super product. And we will deliver a super product to the Navy that positions us well for future work. At this point, we've had a very satisfactory interaction with the Navy. They've been very pleased with our first year progress on the order. And we're trying to position our company to be a larger supply to the Navy for their Naval nuclear propulsion program.

Brian Rafn - Morgan Dempsey Capital Management

Okay. Does that go beyond – just specifically carriers into – you're not doing battleships anymore, but certainly cruisers and frigates?

Jim Lines

It does go beyond carriers. There are other vessels that this would apply to, submarine in particular. There's more work on the carriers as well that Graham could provide as products for, not just the order that we want. So we see additional opportunities for carrier work. And we see different classes of vessels where we can provide our products as well.

Brian Rafn - Morgan Dempsey Capital Management

Okay. If you look back over your past cycles, can you give us a sense – in the conversion of the number of bid quotes to actually converting to an order booking, are you – is it ten to one, six to one, five to one? And as get into a new up cycle, what are you seeing on bid quota activity versus what order bookings are?

Jim Lines

With our sales cycle, Brian – our bid cycle, we are normally involved very early in projects. We want to be. We're involved sometimes 12, 18, 24 months before the equipment is going to be bought. And we do track what we call our raw capture ratio, which is the number of orders versus the raw bids that we did. That's not a clear indication of success. But that really hasn't changed a whole lot over the last 20 years or so that we've been looking at it. It's fairly flat.

What we tend to look at is a real capture ratio, which is the wins versus the losses for those projects that actually went ahead. And as the projects begin to move through the pipeline, gets towards purchasing, that's the real metric that we want to look at; how successful have we been in closing. If I look back over the 12 to 15 months ago when where we were in at a tough economic period, we saw our real capture ratio go up. As we were aggressively focused on where the opportunities were, we had our sales team and our business position to win the orders. But I believe we took market share because of our strategy to be close to the customers through the downturn so we can identify where the pockets of business was and we could win it. We actually moved forward – moved up our real capture ratio.

Brian Rafn - Morgan Dempsey Capital Management

Can you talk and put a numeric – a quantitative number on what the raw capture was over the last 20 years?

Jim Lines

It varies by product. But to give you an average number, it's about one, and eight to one, and ten.

Brian Rafn - Morgan Dempsey Capital Management

Okay, okay. And then, how has the real capture ratio from a quantitative standpoint changed or upgraded?

Jim Lines

I don't want to get into too many specifics, but it's somewhere between one out of two to three out of four.

Brian Rafn - Morgan Dempsey Capital Management

Okay, okay. And then finally, you guys talked about – and I picked this up. Correct me if I'm wrong. You talked about hiring engineers or hiring labor, what specifically?

Jim Lines

Yes, we did. As we're seeing our revenues expand, working through our backlog, we are in a position now where we are judiciously hiring both from the direct labor area as well as in our engineering group. We did make some reductions during the last – during the downturn when our revenues were at the bottom. More of the reductions are on the direct labor side as well as some of the support staff. As we're moving forward, we are essentially rehiring in the direct labor side and continuing to enhance our engineering organization.

Brian Rafn - Morgan Dempsey Capital Management

Would that be tens of individuals or in the hundreds? But it will–

Jim Lines

No, no, no. It's a relatively small number. It's a handful each quarter, handful being three to five each quarter after the last quarter and maybe a couple of quarters going forward.

Brian Rafn - Morgan Dempsey Capital Management

Okay. And then, if you guys just talk a little bit about what kind of capitalized multiple assignments on EBITDA are you seeing in the M&A side? Are they coming down? And where are they today?

Jim Lines

Sure. EBITDA is certainly better today than they were, say, 12 months ago. I would say we're in a – 12 months ago, they were looking at – people were looking at peak earnings of the past cycle and putting the multiples that were, in my view, out of range 9, 10, 11, 12. We're certainly in a range now, where we're in a four to five to seven range. And I'm certainly much more enthusiastic not only where the pricing is, but at the quality of the companies that we're able to talk to right now. So we're much more enthusiastic about the opportunities that are out there today than, say, 9 to 12 months ago.

Brian Rafn - Morgan Dempsey Capital Management

Good. Thanks, guys. Keep up the good work.

Jim Lines

You're welcome. Thank you.

Operator

Your next question comes from the line of Tom Spiro with Spiro Capital. Please proceed with your question.

Tom Spiro - Spiro Capital

Yes, Tom Spiro, Spiro Capital. Good morning.

Jim Lines

Hello, Tom.

Tom Spiro - Spiro Capital

Hi. Jim, I noticed in the 8-K filing today that yesterday, the Board made a number of changes to the company's by-laws. And I was curious what led to those changes and what the thinking was.

Jeff Glajch

Hi, this is Jeff Glajch. Actually, the changes, most of them were more – by-laws have not been updated in a little while, and really to be more in line with some of the Delaware corporation laws, and nothing really substantial in there. It was cleanup activity.

Tom Spiro - Spiro Capital

Okay. Thanks you very much.

Jeff Glajch

Sure. You're welcome.

Operator

Your next question comes from the line of Rick Hoss with Roth Capital Partners. Please proceed with your question.

Rick Hoss - Roth Capital Partners

Hi, a couple of follow-ups. First, Jeff, your SG&A commentary three to five per quarter, would that add, say, maybe $1.5 million to SG&A on a full year basis if we're thinking about fiscal '12?

Jeff Glajch

With regard to headcount additions?

Rick Hoss - Roth Capital Partners

Correct.

Jeff Glajch

Again, that's three to five in the next couple of quarters. A good number of them are in the production area, so they would really fall under cost of goods sold. While we're definitely hiring in engineering, but it's just a couple of individuals, and some of those costs would follow into SG&A. And then the piece of that, the engineering cost that is in the gross, but in the cost of goods sold category. So it's not a significant increase to SG&A.

Rick Hoss - Roth Capital Partners

Okay, okay. And then, Jim, no mention of China, I think in the press release here. I know historically you've had a very good success rate in China. And certainly, there's a lot of – you have a lot of headline with refinery expansion, new builds, and (inaudible), et cetera. Can you give us an update on what you're seeing in that market, and your role there and your position?

Jim Lines

Sure. We're still very positive about the long-term prospects in the Chinese refining market. It had been relatively slow for several quarters. We're seeing new bid work coming up now that hopefully will result in orders over the next few quarters. The pipeline of refinery expansions and grass roots facilities is quite large and multi-year. So we're very pleased with our success rate and our position going forward to capitalize on that opportunity. And the lack of comment now stemmed from there wasn't much that's happening over the last few quarters.

Rick Hoss - Roth Capital Partners

Okay, okay. Thank you. That's it. Thanks, Jim.

Jim Lines

You're welcome.

Operator

Our next question comes from the line of Dick Ryan with Dougherty. Please proceed with your question.

Dick Ryan - Dougherty

Say, Jim, just to follow-on to the Navy opportunity, you mentioned specifically submarines, can you give us a sense of what that market might look like versus carriers and what you need to do to start going after some of that business?

Jim Lines

Sure. To the qualified as a supplier for the submarine program, there are a number of things that have to occur. We've begun many of them. We've had meetings with the contractors and the procurement companies that will qualify us as an approved manufacturer. We also have some security clearances. We have individuals in the facility to complete. And that's a process that doesn't happen – it doesn't happen quickly, but we're moving on that.

And it really comes down to the belief of the contractor, in this case it will be Electric Boat and Northrop Grumman; and the procurement company that does the purchasing of the vessels being satisfied with Graham's quality control, their production capability; and our commitment to a long-term strategy to support the Navy. And we've been very, very clear that we have a long-term vision to be a supplier to the Naval nuclear propulsion program. We have our assurances that we're going to be in it a long time. And we want to build a strong leg in our business supporting the Navy. And that was – that's all part of our process. It just takes a little bit of time.

Dick Ryan - Dougherty

What's the build cycle of a submarine versus carrier? I mean is there more in the budget for those platforms versus carriers or the Wasps, or–?

Jim Lines

In general numbers, there's a carrier that starts construction about every five or six years depending upon Congressional budgeting. But that's roughly what the timeline is. One comes along every five or six years. The submarine has a greater frequency. There's one or two every two years. And the fleet per submarine is to be – what we're reading about 30 of a particular class of submarine; and the carrier, the fleet is about 10.

Dick Ryan - Dougherty

Okay. And your dollar opportunity, how do you splice that, one versus the other?

Jim Lines

Quite honestly, I think in terms of all in, if we look at the opportunities for carriers and subs, I think the carrier provides a little bit more. But I think they're comparable in terms of the accessible opportunity for grab if we can look at what we can provide with engineering know-how or fabrication know-how and our sub parts contacts administration capabilities.

Dick Ryan - Dougherty

Okay. Thanks, Jim.

Jim Lines

You're very welcome.

Operator

(Operator Instructions) Our next question comes from the line of George Walsh with Gilford Securities. Please proceed with your question.

George Walsh - Gilford Securities

Jim, is there any update at all in the oil sands market that has been mentioned or talked about previously is a potential area that could be a big area for the company, anything going on there?

Jim Lines

That hasn't changed in the context of what we have voiced previously, and that we continue to see investment that's happening on the SAGD side, the production. And that has to occur first before investments will be made in new upgrading capacity. We see the new upgrading bid opportunities are moving forward. We're in some early stage bidding now for a few different upgraders. And we think it's moving at a pace that we had predicted, which we thought was around 2012 is where we'd see much on the upgrader side. But investment is happening on the production side, which has to occur first.

George Walsh - Gilford Securities

Okay. But it's 2012 forward in terms of being more meaningful for you?

Jim Lines

That's our expectation. We hope it's sooner, but that's our expectation. And our planning is around that.

George Walsh - Gilford Securities

And obviously, it's influenced by the general price of oil anyway.

Jim Lines

That has an effect.

George Walsh - Gilford Securities

Right. Okay. Thanks, Jim.

Jim Lines

Thank you, George.

Operator

Our next question comes from the line of Brian Rafn with Morgan Dempsey Capital Management. Please proceed with your question.

Brian Rafn - Morgan Dempsey Capital Management

Yes, just a follow-up – clarification question, you mentioned one or two submarines a year, I think what you're referring to are attack subs. Would you guys also be looking at talking to the Navy about their next – the ballistic missile subs that are replacing the Ohio class Trident?

Jim Lines

Yes, our focus is on the submarine program. There's a Virginia class. There's the Ohio class. And then, there's the next generation of subs. And we hope to participate in all of it.

Brian Rafn - Morgan Dempsey Capital Management

Okay. And of the work that you're doing on the carriers and you talked about other vessels, would either the amphibious carriers, the Wasp class or Tarawa, or the Littoral combat ships, would they also be in that broader vessel nuclear propulsion?

Jim Lines

At this point, Brian, we're focusing on the Naval nuclear propulsion side of the fleet, which is where there's specialized engineering know-how, specialized manufacturing, not that the other vessels don't require specialized production of products. But we're making our focus in that area, around the Naval propulsion program.

Brian Rafn - Morgan Dempsey Capital Management

Okay. Thanks much.

Jim Lines

You're welcome.

Operator

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Jim Lines

Thank you. We appreciate your time this morning and your interest in the company. And we look forward to updating you again in January. Bye.

Operator

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

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