Graham's (GHM) CEO Jim Lines on Q1 2015 Results - Earnings Call Transcript

Jul.31.14 | About: Graham Corporation (GHM)

Graham Corporation (NYSE:GHM)

Q1 2015 Earnings Conference Call

July 31, 2014 2:00 p.m. ET

Executives

Karen Howard – Investor Relations

James R. Lines – President & Chief Executive Officer

Jeffery F. Glajch – Vice President & Chief Financial Officer

Analysts

Chase Jacobson – William Blair and Company

Jason Ursaner – CSJ Securities

Joe Mondillo – Sidoti & Company LLC

Brian Rafn – Morgan Dempsey

Gabriel Birdsall – Brasada Capital Management

Operator

Greetings, and welcome to the Graham Corporation First Quarter Fiscal Year 2015 Financial 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.

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

Karen Howard

Thank you, Brenda, and good afternoon everyone. We appreciate your participation in our first quarter fiscal 2015 financial results conference call. You should have a copy of the news detailing Graham’s results that was released this morning. We also have slides associated with the commentary that we’re 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-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 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 in 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.

With that I'm going to turn the call over to Jim to begin. Jim?

James R. Lines

Thank you, Karen, and good afternoon, everyone. I’m on slide number 3. Restating what our objectives are over this current cycle. We’re to double the size of our business from currently $100 million of revenue to exceeding $200 million of revenue at the peak of this cycle.

We will stay focused on engineered-to-order products and serving the energy markets that’s where our brand is most well recognized and where our differentiated value proposition is strongest.

First quarter highlights include, order level was $31.1 million, up 32% from the trailing quarter. As of the end of the quarter, we’ve a record backlog of $114.8 million, up sequentially a few million dollars. First quarter revenue was $28.5 million with diluted earnings per share of $0.24. Our fiscal 2015 guidance remains unchanged, revenue is expected to expand to 17% to 27% or fall between the range of $120 million to $130 million.

Sales in the quarter were driven principally by the strong North American petrochem industry sales which were just under $12 million at $11.7 million. Refining industry sales were $6.6 million. Sales to the power industry just short of $5 million and to the other commercial and industrial markets including the defense was $5.3 million, we had very strong North American sales in the quarter, which were $22.2 million representing just over three quarters of the sales in the quarter, up 48% from the prior period. Our defense sales were very strong in the quarter as well.

I’ll turn it over to Jeff now for a more detailed financial review of the quarter. Jeff?

Jeffery F. Glajch

Thank you Jim, and good afternoon everyone. I’m now on slide 7. Sales in the first quarter were $28.5 million up slightly compared with $28.3 million in the first quarter last year. As Jim mentioned sales were 78% domestic and 22% international representing the strong domestic order level that occurred in the first half of last year, last year’s first half split 53% domestic and 47% international.

Domestic sales increased $7.2 million to $22.2 million compared with $15 million last year, whereas international sales decreased to $6.3 million down from $13.3 million last year.

Gross profit decreased to $7.9 million from $10 million last year. The decrease was primarily driven by the mix of projects in this year’s first quarter compared with the much more favorable mix last year’s first quarter. Gross margin was 27.8% compared with 35.4% in the same period last year.

EBITDA margins decreased to 15% from 22% on last year’s first quarter driven completely by the lower gross margin level. Actual SG&A spending was down slightly and also down 30 basis points to 15.3% of sales in the first quarter. Net income decreased $2.4 million from $3.8 million or $0.24 down from $0.38 last year.

The comparison of last year's first quarter was challenging since nearly 40% of our earnings last year occurred in the first quarter alone. The comps for the rest of the year will be much less difficult.

Looking at slide 8, we generated $3.2 million of operating cash flow in the first quarter up from $2 million last year. Our cash and investments position increased slightly to $61.4 million. We utilized most of our operating cash to fund the Batavia expansion. We have approximately $1 million to $1.5 million remaining to spend on the expansion which will likely occur in the second quarter.

As many of you are aware, we take great pride in our cash flow metrics where we have seen approximately 90% of our net income since the start of fiscal year 2006 add to our cash position will be utilized for acquisition capital. Finally, we continue to have a strong 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 internal growth as well as future acquisition opportunities going forward.

With that Jim will complete our presentation by discussing our strong order and backlog level and the reiteration of our full year guidance.

James R. Lines

Thanks Jeff and we are on slide 10. Order levels in the quarter as I mentioned earlier, we are strong at $32 million trailing 12 month basis, $126 million order level which is similar for the last three or four quarters. We do believe our markets are continuing to improve principally in the North American markets and we have seen a really strong order growth compared to last year.

Orders have been diverse across our end use markets, refining, petrochem and power generation as well as the defense program. This last quarter, orders were 53% domestic, 47% international and I would like to acknowledge that our bid pipeline remains as strong as it had been, which continues to be a very powerful leading indicator for the direction of our business.

Our backlog as we said earlier is at a record level, it’s diverse. It shows the strength of our diversification strategy, 23% of our backlog is for the navy or defense program, 27% for petrochem, roughly one-third refining, remainder being power and other markets. Our backlog as we talked over the last several conference calls has changed to be more protracted or elongated wherein our past it would be more normal to convert 90% to 95% of our backlog over 12 months period with our defense work and some of our nuclear work, those orders have extended conversion cycles.

Now we are looking at a backlog that converts 70% to 75% over a 12 month period. Another 15% to 20% between 12 and 24 months and the remainder of the backlog beyond two years for conversion. Also importantly and again pointing out the value of the diversification strategy about one-third of our current backlog, our current record backlog is from markets and/ or customers that company did not serve last cycle.

I would like to confirm our guidance remain revenue between $120 million and $130 million, gross margin for the full year to be 30% to 32%, SG&A as a percent of sales at 15% to 16% and our effective tax rate between 33% to 34%. This indicates our top line growth will be between 17% and 27% and our bottom line will grow more quickly than our top line growth.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Chase Jacobson with William Blair. Please go ahead with your question.

Chase Jacobson – William Blair and Company

Hi, good afternoon.

James R. Lines

Good afternoon, Chase.

Jeffery F. Glajch

Hi Chase.

Chase Jacobson – William Blair and Company

So, I guess Jeff, my first question seem to be, everybody is trying to figure out right now given the strength in chemical over the last year it seems like some of the customers are now trying to stretch out their investments further and we’ve heard of some pressure on the supply chain, just curious as to what you are seeing given how early you guys are in the project lifecycle?

James R. Lines

Chase, this is Jim. I will take the question. As we look at the North American petrochem market, and the amount of projects that has been released thus far and that we benefited from there’s six ethylene plants that have gone ahead where orders have been placed, four or five fertilizer projects, two methanol plants, we have these orders in our backlog. That's a huge amount of work and unprecedented amount of work in the North American market certainly in the last decade that's beginning to go into the supply chain and show some tightness. And more importantly to the project sponsors, again to show up as some cost creep as the supply chain tightens up.

I do think as we move forward that's putting pressure on the project sponsors to either move more quickly or to be more hesitant to allow the supply chain to give some more slack in it, it will take a bit of time. So, I do think that is occurring and we will sting that as what we have often talked about. Unfortunately, over the last several quarters is a movement to the right, the calendar right for some of this project activity. What we have in backlog however, we are not really identifying any pressure from our customers to slow down. That work really more urgent to be first to market. But it's for new orders, new project that haven’t (inaudible) critical equipment or secondary items that we are seeing this push to the right.

As it relates to the supply chain in our cost or our cogs if you will, we haven’t really seen it impact archives based on how we manage these orders and our procurement practices after we have an order. We haven’t see margin erosion or cost creep due to supply chain step up in cost. For new business of course we have, but we have been addressing that by pushing that step up in cost into the price – into the market with higher prices.

Chase Jacobson – William Blair and Company

Okay. And I guess, following up on that then, you guys had good awards this quarter. But given where your backlog is and what you expect over the next 12 months, it looks like you still need to have some pretty solid awards in the next quarter or two. So, how confident, I mean, you had that revenue guidance out there for a while, how confident are you still on that number?

James R. Lines

I am confident, we wouldn’t have confirmed the guidance if I didn’t have a high level of confidence what I would we’re lacking in an appreciable degree which is not something that I’m overly concerned about at this point in time, is the short cycle sales bookings still need to be booked to fill up the remainder of the year. In terms of our large project work and the amount of releases from engineering into production, remainder of this year is largely is about execution Chase, not about winning new business.

Chase Jacobson – William Blair and Company

Okay that’s really helpful. Just one last one, Jeff related to CapEx, I guess, are we just about the end of this CapEx program and should we expect that CapEx I guess to be similar in the second quarter and kind of drop off in the second half of the year?

Jeffery F. Glajch

Exactly. We’re the part of the production facilities already online, the rest of it will be online very, very soon. And the cash sometimes little slower than the actual building activity, so we will have CapEx in the second quarter fairly similar to the first quarter and then in the third and fourth quarter it will drop off to a very low level.

Chase Jacobson – William Blair and Company

Okay, thank you.

James R. Lines

Thanks, Chase.

Operator

And our next question comes from the line of Jason Ursaner with CSJ Securities, please proceed with your question.

Jason Ursaner – CSJ Securities

Good afternoon. Just going back to some of the big petrochemical orders you booked last year, the market got real hard, you had some pretty significant order activity in the first half of your fiscal 13 and that facilitated the outsourcing and I think there have been commentary that the delivery times are kind of bunching for fourth quarter of last year and this current quarter. I’m just looking at the revenue, are some of those shipments, did they get pushed out at all and are those still in backlog, where you would get revenue that’s kind of additive towards orders base rate, revenue would be?

James R. Lines

The orders that we won roughly 12 months ago and through our second quarter which correspond to an $80 million bookings rate for the first half of last fiscal year, much of that snarl into conversion from our backlog into revenue. And as we acknowledged when those orders were won because they came all at one time, we didn’t think they would be executed timeline that the contracts suggested. Our customers would not be able to keep up with how quickly we could be ready and that was the case and that just maybe one or two quarter push to the right. Right now those projects are out into production generally and they’re going through the revenue conversion.

What was just booked, the larger work of course Jason doesn’t begin to hit revenue for the earliest two quarters, it begins to get into production and with a revenue recognition policy start to affect the revenue and profitability of the quarter, therefore, the $32 million that was just secured this last quarter begins to show up in our Q3 perhaps most likely our Q4.

Jason Ursaner – CSJ Securities

Right, understood. I guess, following up on Chase’s question, just because I’m looking at the midpoint of the revenue guidance and sales, the average for Q2 or Q4 it still above the order rate, so when you talk about confidence, I’m just, I guess trying to balance between, you’ve record backlog and you’re going to have some excess deliveries relative to what people are seeing come through on the order side for a couple of quarters versus, just overall confidence that you’re going to start to see improvement in order activity materialized?

James R. Lines

Jason, that’s our expectation based on how slush the pipeline, the quality of the bids and stage of the bids that we have. We’re expecting backlog to grow at year end compared to where it was at the end of fiscal 2014, suggesting them, taking the midpoint of this revenue guidance that bookings would be stronger than $125 million for the full year that’s based on our judgment of all the project activity that we have which is pretty diverse. And some timing may be worth as well that we hope to move during this timeframe.

Jason Ursaner – CSJ Securities

And the shift in mix more based in North America, you see that being helpful for margin when you look out three, four quarters as those orders begin to fall through?

James R. Lines

I do, I do. If we look at a measure which we’ve analyzed which is the margin of backlog relieved versus the margin of what was going into backlog over the last couple of quarter, we would see a richer margin going into backlog then what was relieved. Therefore, a few quarters out or if you think about what our guidance implies, we will be stronger margin as we move through the year and this worked becomes richer in margin profile then they will execute it. And I just want to clarify in all this date what we stated in our past conference calls, two or three conference calls ago, when we had the strong order intake a year ago, some of the orders we won we took attentive position to secure our market share and keep some low cost suppliers out of our key markets. That's running through, some of those decisions are running through revenue now. I don't look back on those decisions as being in prudent, but we have to deal those order selection or defensive strategies as those orders convert and we are going through that conversion now.

What I am seeing coming into the backlog, what I am seeing with our customer base is a settling to somewhat normalcy and less concerned about the low cost international supplier, competitor on our home core.

Jason Ursaner – CSJ Securities

Okay. And when you look at the longer term cycle goal of $200 million, how much do you need, some of those international projects were to kick in versus what you can really achieve with some of the growth and the domestic market and just balancing that way with margin goals going forward.?

James R. Lines

Certainly, international plays a role as we think about the $200 million and I want to segment this into three silos we sort of think about it, which is the traditional brand of the defense segment and then the power segment. Our defense segment we believe across the cycle and as part of $200 million analysis grows to 15% to 20% of the $200 million from where it is today. So, we have to actualize and realize our strategy and I am confident in us doing that from what I’ve been able to ascertain and the report hours that I get from those driving strategy.

On the power segment which is really nuclear power, we need to have a stronger focus there to access more opportunities that we currently are. I don't think we’re market limited there and we are addressing the customer facing side of energy steel to broaden the funnel that we are seeing and then what we would access and close.

On the traditional side of the business, which we think needs to grow $235ish million that's both domestic and international. Fortunately, we have strong domestic market that is pretty vibrant right now and we see some science that is going to stay that way as we move through the cycle and then we are now finding refining picking up globally with work in the Middle East, in Asia, in south America that should materialize to help round out the order mix that we have had the last year or so.

So everything is playing out as we would envision it should have. And the end market mix and the geographic mix appears to what we play out according to plan without much variation from how we thought it would be modeled.

Jason Ursaner – CSJ Securities

Okay great. That level of detail is actually very helpful. Just one last one if I can, you guys have obviously done a great job on the cash generation and the cash position. Just relative to the commentary that it might take a small step back in the first quarter, was this just better cash earnings or with the commitments you have, would you still expect some outflow in the very short term?

Jeffery F. Glajch

Jason, in the next three quarters we expect net cash generation possibly every quarter, but certainly across some of the three quarters. With regard to what happened in the first quarter we had a little more favorable working capital than we had expected. The capital spending was right in line with where we had expected.

Jason Ursaner – CSJ Securities

Okay great. I appreciate all that. Thanks.

James R. Lines

Thank you.

Operator

Our next question comes from the line of Joe Mondillo with Sidoti & Company. Please go ahead with your question.

Joe Mondillo - Sidoti & Company LLC

Hi guys, how are you doing?

James R. Lines

Hey Joe.

Joe Mondillo - Sidoti & Company LLC

I just wanted to take a little bit of a sort of the opposite approach in terms of the guidance, so the backlog, on the 12 month backlog is actually up 27% year-over-year which is at the high end of your revenue growth guidance. So having said that, is there actually a chance that we actually not only hit that guidance but surpass it?

Jeffery F. Glajch

Joe, that increase in backlog that you are referring to if you recall in the second quarter of last fiscal year, which would be in this timeframe, we had an increase, we get the time, it was our navy and other category. And so, there were some orders in the navy arena that led to that increase and the navy orders of course are much longer tenure from order to shipment. I think that’s probably what’s driving that – about half of that increase probably was due to that and so the expectations of going above the top end of the guidance based on that comment, probably now a direct correlation again because of the navy orders.

Joe Mondillo - Sidoti & Company LLC

Okay, but even I mean you guys disclosed the 12 month backlog with 70% to 75% on the total backlog, so I know 12 month obviously carries through the first quarter of next year, but even still the backlog is up significantly even with your point to the navy orders?

James R. Lines

Sure. Joe this is Jim. As we look at our guidance and as we look at our backlog and the conversion schedule of the backlog, the guidance we have given you is a high confidence level to push beyond the upper end of the guidance of $130 million. It’s really not what’s in backlog now that will drive that if we have a burst of short cycle sales that we can convert more rapidly. Conversion schedule of the big work in backlog and major work in backlog that by itself is unlikely would push us above $130 million.

Joe Mondillo - Sidoti & Company LLC

Okay. Fair enough. Just trying to look at it in the optimistic side of things.

James R. Lines

Thank you.

Joe Mondillo - Sidoti & Company LLC

So, in terms of gross margin, I was wondering the orders that you are bringing in today is that still pretty much consistent to what we have been seeing the last several quarters or any change in gross margin and new orders?

Jeffery F. Glajch

Qualitatively I would say it's been moving up, we did an analysis as I said earlier that what has converted from backlog over the last several quarters compared to what’s being booked into backlog during that same timeframe is richer in terms of margins. And we feel the order environment and the rapidness of which we saw orders being placed a year ago as subsided I think all that goes directionally to more favorable margin.

Joe Mondillo - Sidoti & Company LLC

Okay, good. Jim, just wondering sort of big level picture aside from sort of the petrochemical sort of orders and industries sort of being pushed out to the right, anything that makes you more positive or even negative since the last time we spoke?

James R. Lines

Nothing on the more negative, I have always felt that these point in time and cycle, the longer the delay in releasing these projects, the stronger delay it will be working. And I don't see the fundamental dynamics, the market dynamics having changed where we are going into a slowdown, an eminent slowdown and we have found that these pushes to the lot through the right and projects do release that way and work can be quite strong depending upon the duration of the delay and this delay now you’ve heard us talk through a number of quarters about pushing to the right and again the underlying demand as we see and then analyze it, it hasn’t really changed and that keeps us positive.

Joe Mondillo - Sidoti & Company LLC

And then looking at your refining piece of the business which has I guess historically been sort of your higher margin type of work but last several quarters have been fairly weak but it looks like the owners and refining were pretty strong in the quarter, anything there that indicates sort of an upturn or improving demand or anything regarding that?

James R. Lines

Indeed we did have nice refining order intake and we have talked over several conference calls about a step up in demand for what we call upgrades – the metallurgical upgrades to existing equipment. We had a very large order in this past quarter that was for an upgrade that we have provided about 10 years ago. We don’t necessarily do that as predictable or indicative of step up to the refining demand in general because of the size of the project. However if you look at our bid pipeline and projects we have biding now for China, for the Middle East for south America and even in the U.S. it gives us a sense that refining is beginning to pick up and if I think about the last cycle, the cycle 2004 to 2009, petrochem let the way and then refining turned on about two years into that cycle. And perhaps we are going to see that play out again and as you had acknowledged refining has higher margin potential in general, lower transactional cost for us to execute those orders and our brand is more strong there.

Joe Mondillo - Sidoti & Company LLC

Alright and then just lastly I was wondering if you could refresh my memory in terms of the capacity expansion that your CapEx project that you are doing, is that just additional capacity or is there a margin story behind there as well?

James R. Lines

It’s to serve the additional demand that we saw coming and also to support to diversification strategy with the defense program.

Joe Mondillo - Sidoti & Company LLC

So nothing related to instead of outsourcing the work, you are going to be all the do in-house, nothing like that or anything like that?

James R. Lines

We think and we have modeled our long term profile as being 10% to 20% of our revenue is outsourced. Right now our production always might be nearer to 25% being outsourced but that will subside because now we are dealing to such of orders 12 months ago that had an annualized rate of $160 million and it just didn’t have the horsepower to put that through the roofline, under ordinary course of business, I would expect our outsourcing strategy to be as I just acknowledged somewhere between as it had been historically in the last 12 to 15 years 10% to 20% of production hours outsourced.

Joe Mondillo - Sidoti & Company LLC

Okay and so that should a little upward pressure on gross margins, would that make sense just given last outsourcing as a percent?

James R. Lines

All things have been equal, your assertion is correct.

Joe Mondillo - Sidoti & Company LLC

Okay perfect, alright. Thanks a lot guys.

James R. Lines

You are welcome.

Operator

Thank you (Operator Instructions) our next question comes from the line of Brian Rafn with Morgan Dempsey. Please proceed with your question.

Brian Rafn - Morgan Dempsey

Good afternoon guys.

James R. Lines

Hi, Brian.

Brian Rafn - Morgan Dempsey

Give me a thought little bit about the core activity business robust strengthening, I am wondering what kind of the pricing dynamic, you talked a little about customer used differing or accelerating what is the price environment?

James R. Lines

Brian, I believe its continuing to improve not a step change but directionally I believe its becoming more favorable based on our analysis of the order intake, this period versus a prior period having stronger margin and things being more stabilized in our market. The frenzy we saw 12 months ago, Q1 and Q2 I think that have some dysfunction in it and in terms of ability to manage price going to manage the competitive environment as things have stabilized and that helps us in ability to manage margin and price and order selection.

I do think directionally it is becoming more favorable.

Brian Rafn - Morgan Dempsey

Alright, okay. You talked Jim a little bit about your kind of your short cycle bookings, give us a sense certainly I was talking about customers but what kind of segments would you be looking to source some of the short cycle business and is it just about positioning and being there for that business and are there situations where you have customers we have done work in the past, they gives you a more favorable position to pick up some of that short cycle business.

James R. Lines

Brian about half of our short cycle business, is what we call aftermarket or spare parts. So that is an area that can come up on the radar screen very quickly and as we have talked about four quarters ago which was the top comp of first quarter of ’14 so this quarter we have had a very high influx of aftermarket replacements units from the refining sector. And that lifted the margins that lifted a revenue comparatively to where it should have been at that point in time and that’s hard to sometimes predict because it pops up in the quarter and it’s closing the quarter it chips shortly thereafter. And we do still see the refining market as an example, continuing around the discussion, still focused on on-stream operation. When I started with Graham, for about the first 20 years in Graham refineries would run four years between unscheduled turnarounds.

Now they want to try to run the refineries between 6 and 8 years and that leading step up in demand for metallurgic upgrades, the (inaudible) equipment that we have provided 10 years ago, 15 years ago. We have seen the phenomenon the last couple of years and they can’t be quite impactful in the quarter for orders or can be impactful in the quarter for sales and profit because of the nature of those types of orders. So that was short cycle type opportunity, another short cycle opportunity is in our heat transfer area or small products area, the average selling price here is $10,000 to $50,000. We are focused on growing that segment of our business and we can have some very nice orders to the OEM market that serves the energy market and those can come in, those are on our radar screen and it depends on the timing and when our customers want them.

And then of course the energy steel business, there is about a third of that business is in the short cycle type of sale which comes in and out three to six months and that comes down to order timing and then customer need it but all in all I am encouraged about the level of our short cycle opportunities those are hard to project, they are not doing the basis because they can come up very quickly and have an impact on a quarter that is very appreciable and I just want us people be quantitatively here.

Brian Rafn - Morgan Dempsey

I think you have answered that rule off. The spare parts is that a function of a proactive repair of something that is failing or you talking about fires and explosions and things that are more of a machine critical, it’s some kind of a rupture.

James R. Lines

From the discussions that we have had with the refiners, it’s more around on stream performance staying on line longer, not subjecting the refiner to an unscheduled shut down and trying to extend the operating interval between scheduled shut down because moneys made being on stream and they want to be on stream longer and what we were doing as we looking at the installed equipments, looking at it’s operating life for the next 6 to 8 years and perhaps buying sooner than they otherwise would have replacements with the metallurgical upgrade to assure when they go on to the start up it is less likely they would have an unscheduled shut down because of our equipment. Because of the erosive nature of the application that we sold within our equipment.

Brian Rafn - Morgan Dempsey

It’s a good color. Let me ask you more about strategic question, given these really Hamas rocket attacks and China moving into the south China sea with its anti-axis, axis denial string approval strategy, Russia is waiting the Ukraine lot of volatility, how does that impact the scheduling of orders business development and can you divorce the work therein politics from the general course of business?

James R. Lines

Great question. We have to watch how that unfolds. Obviously there is a lack of tranquility in the global market and that could have an effect on project schedule. At this point, we haven’t seen it, however it’s a very unclear picture for all us and I am not at a point nor am I knowledge enough to be definitive, all I could say is what’s in my windshield right now which is nothing alarming.

Brian Rafn - Morgan Dempsey

Okay alright, yes no fair enough. I missed your opening comment, anything on navy work with the, I think you guys would be looking at John F. Kennedy CBN 79?

James R. Lines

That’s what we are executing now. And we are gearing up to hopefully participate and the bidding process for 80.

Brian Rafn - Morgan Dempsey

Yes, so for CVN-80 enterprise, I don’t think they are cutting steel yet, how far is the bidding process out on that, is that something that you would expect the, the navy or DOD to be – is there something within the next 6 to 8 months, is it a year or two out, from the standpoint of war and that’s everything?

James R. Lines

I got it. Our judgment on that is the order we want was December 2009. The carrier schedules are to be built on the five year centers. So it just the order of December 2014.

Our prospective on that is, that’s unlikely. So I think its between somewhere six months to 18 months.

Jeffery F. Glajch

Okay, I think that’s fair. We have got another analyst so there is a question here is Ryan Hamilton.

Brian Rafn - Morgan Dempsey

I was wondering specifically about refining, is there a more of longer or short cycle, you do orders there?

James R. Lines

In the context of what we have spoke about the metallurgical upgrades. We did throw a new term out last conference call which was the middle cycle, there is sort of between our long cycle sales and our short cycle sales, conversion can be four months to eight months typically as oppose to in and around three months but they are far easier to transact less engineering activity goes on with those and the designers throws in relatively quickly because it’s a in kind of replacement or metallurgic upgrade with exact dimensions to what we have provided initially.

Brian Rafn - Morgan Dempsey

And what about petrochemical?

James R. Lines

On short cycle sales or…

Brian Rafn - Morgan Dempsey

Yes just the kind of the term length.

Jeffery F. Glajch

Sure. The petchem work that we move on about 12 months ago, that will generally have a 12 to 13 months conversion cycle. Certainly if it all comes in a short burst it will be more toward 15 months if it comes to the ordinary course of the more standard flow of order placement, we think in terms of 12 month conversion cycle.

Brian Rafn - Morgan Dempsey

And then just one final question Jim, any more discussions with the navy, any developments chatter, cross-talk relative to some of the work that you guys were looking at the fast-tech, probably the Virginian class (inaudible).

James R. Lines

We have as we acknowledged on the prior conference calls, we at a point now where the bidding activity is beginning for the ORP – Ohio Replacement Program the ballistic missile subs and we are doing some bidding activity there or we plan to be doing some bidding activity and we would envision Brian there would be order placed with someone over the next six to nine months.

Brian Rafn - Morgan Dempsey

Okay. Thanks so much, thank you guys.

Operator

And your next question comes from the line of Jason (inaudible) Capital. Please proceed with your questions.

Gabriel Birdsall - Brasada Capital Management

Hey guys its actually Gabriel, how are you?

James R. Lines

Hey, Geb.

Gabriel Birdsall - Brasada Capital Management

Thanks for your time. Really quick, I think I heard this clearly earlier but I want to make sure, the hit your full year numbers on your gross margin targets achieved in fourth, Q1 was obviously the low point for margin, is that correct?

James R. Lines

We would expect the gross margins to continue to improve. As we move across Q2 to Q3 and Q4.

Gabriel Birdsall - Brasada Capital Management

And then I think asked this last quarter and the quarter before but on the cash usage, excess cash usage any additional considerations or the use of the cash?

James R. Lines

We are steadfast to our capital deployment policy which is growth, growth and growth and organic or acquisition growth, secondarily CapEx to support the growth and the third would be fourth would be considering dividend changes and then lastly would be share repurchase.

Gabriel Birdsall - Brasada Capital Management

How closer are you on any growth opportunities?

James R. Lines

The organic growth side growing 20%.

Gabriel Birdsall - Brasada Capital Management

No, no I didn’t mean about, more on M&A front, I mean I know you have great growth in front of us on standalone basis, I mean it just the deployment cash for M&A activity.

James R. Lines

We are still in the active assessment mode of looking at targets. We have not identified one that fits our metrics and that’s where we are. I personally don’t like the evaluations right now.

Jeffery F. Glajch

The pricing has gotten a little high Gab.

Gabriel Birdsall - Brasada Capital Management

And that’s coming from private equity or is that coming from competitors?

Jeffery F. Glajch

I think it’s coming just in general expectation in the markets that we are looking at, as thinking of got little bit better, hopes you got a little more aggressive in their price expectations.

Gabriel Birdsall - Brasada Capital Management

Okay guys, thank you.

James R. Lines

You are welcome Gab.

Jeffery F. Glajch

Yes.

Operator

(Operator Instructions) okay and it seems that we have no further questions at this time, so I would like to turn the floor back to management for closing remarks.

James R. Lines

Thank you Brenda and thank you everyone for your attention, for your interest and for the questions that we had a moment ago. We are very pleased with our businesses with our ability to execute the near-term strategy and as I said earlier fiscal 2015 is now about execution, its not about giving you orders and I have a high confidence level in our ability to execute what’s in our house, that’s in our backlog.

We will update you as the year progresses on the next conference call in terms of order intake and to conversion and our guidance. Thank you again have a good night.

Operator

Thank you ladies and gentlemen. This does conclude our teleconference and you may disconnect your lines at this time and thank you for your participation.

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Graham (NYSE:GHM): FQ1 EPS of $0.24 misses by $0.04. Revenue of $28.5M (+0.8% Y/Y) misses by $0.6M.