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Graham Corporation (NYSE:GHM)

F4Q12 Earnings Call

June 1, 2012 11:00 a.m. ET

Executives

Deborah Pawlowski - Investor Relations

Jim Lines - President and Chief Executive Officer

Jeff Glajch - Chief Financial Officer

Analysts

Joe Bess - Roth Capital Partners

Chase Jacobson - William Blair & Company

Joe Mondillo - Sidoti & Company

George Walsh - Gilford Securities

Tom Lewis - High Road Value Research

Chris McCampbell - Stifel Nicolaus

Operator

Greetings, and welcome to the Graham Corporation Fourth Quarter Fiscal Year-End 2012 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. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Graham Corporation. Thank you. You may now begin.

Deborah Pawlowski

Thank you, Christine, and good morning everyone. We certainly appreciate your time here today with the Graham Corporation’s fourth quarter and fiscal year 2012 conference call. On the call, I have Jim Lines, President and CEO, and Jeff Glajch, Chief Financial Officer. Jim and Jeff will be reviewing the results of the quarter and for the full year and also provide a review of the company’s strategy and outlook. There are slides on the company website that accompany the conversation today. If you do not have them you can find them and the press release at graham-mfg.com.

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

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

Jim Lines

Thank you, Debbie. Good morning everyone and welcome. Please turn your attention to slide four, steps taken during the downturn to expand our company and diversify the markets served, has enable us to move quickly of the bottom of the cycle and generate $103 million of sales in fiscal 2012. Sales increased 39% compared to fiscal 2011, sales year-on-year increase sharply and are up $29 million by adding the nuclear energy market through the acquisition of Energy Steel and the contribution from the naval nuclear propulsion program.

Also, our traditional markets provided approximately 25% greater sales in 2012 versus 2011. The 2004 through 2009 expansion cycle, where sales compound annual growth rate was 22%, had been principally driven by oil refining and petrochemical markets. As we entered this next expansion cycle, the markets driving our growth are broader and more diverse. We believe this diversity and the projected strength in our traditional markets can yield a higher growth rate this cycle.

Please turn to slide five. The light order pattern from the second quarter of fiscal 2011 through the third quarter of fiscal 2012 due to soft market conditions inevitably shows up in future quarter sales. We began to experience this during the fourth quarter where sales were $20.3 million, and it does carry into the first half of fiscal 2013. Also an extension of the production schedule and delivery requirements for the large order for the navy has delayed conversion of that order to sales. We also will see that throughout 2013 where sales from the navy order will be below our original planning basis.

Please turn to slide six. 2012 was a terrific year demonstrating the value of the steps taken in the downturn to strengthen and diversify our company. Organic sales expanded $17 million or approximately 25%. Energy Steel added $12 million greater sales than in 2011. Sales were split fairly evenly with 54% being domestic, please recall that Energy Steel and the work we are doing for the U.S. Navy are virtually 100% domestic. And 46% of our sales were to the international markets where we had increases in sales to the Middle East.

We also had a stout power market segment that represented 28% of full year sales and with our focus in renewable energy such as geothermal and biomass to energy. And from the addition of nuclear energy with the acquisition of Energy Steel, clearly we have a very strong power market segment within our business. Our sales increased 39%. Net income expanded 80% and came in at $1.06 earnings per diluted share versus $0.59 in fiscal 2011. The two to one drop down is typical of the leverage in our company.

Let me pass it over to Jeff now for greater detail on the financial results. Jeff?

Jeff Glajch

Thanks, Jim, and good morning everyone. As Jim mentioned revenue in Q4 was down $5.6 million, partly driven by the extension of the navy project timeline as well as timing of conversion of orders from Energy Steel. The lower revenue and utilization adversely affected margins and EPS. In addition, we took a $0.04 per share charge in Q4 to resolve a disagreement with the IRS relating to R&D tax credits from fiscal 2008 and prior.

As a follow up on the R&D tax credit issues we also had tax years 2009 and 2010 separately in dispute with the IRS. Subsequent to the end of the fiscal year we have settled those two years and there will be a small charge of $37,000 in Q1 of fiscal ’13 to settle those years. Now that they are resolved, we have no further disputes with the IRS. No further items in dispute with the IRS.

Over the course of the years covered, even after the charges taken to earnings, we have benefited well over $1 million in R&D tax credits. One last point, in fiscal 2011-2012 R&D tax credit generated -- have benefitted Graham by about $0.01 to $0.02 per share. Currently the law has not been extended so we will see if we have additional benefit in fiscal ’13.

On to slide nine. Gross margins in the fourth quarter were similar to those in the third quarter, below the levels that we have seen in the first half of the year. SG&A spending is down in Q4 driven by the lower sales level. This lower spending is despite our continued focus to add key resources in engineering to take advantage of what we believe is a long-term growth in our markets. Operating margins are down again driven by the lower revenue and utilization.

Slide ten, you can see our cash position at the end of fiscal 2012 is nearly $42 million, down slightly from the end of last year. You may recall that cash in the first half of fiscal 2012 was down due to timing and then in the third quarter as expected, cash flow was very positive making up for the first half’s cash usage. In Q4, cash flow would have been positive if not for one item. We had a prepayment of taxes of approximately $4 million in the quarter. This had on relationship with the R&D tax credit issues but was simply a timing issue on cash taxes due. We continue to have no debt and expect to be generating cash going forward, all of which can be utilized for internal capital needs as well as acquisition related opportunities.

On slide 11, you can see in Q4 our orders were $42.3 million, our second highest quarter ever only outdone by the third quarter of fiscal 2010 when we won the large U.S. Navy project. The order level in this quarter was approximately double what we have averaged over the previous five quarters. The growth comparative with the same quarter last year was almost equally driven by our organic business as it was by Energy Steel. As a side note, speaking of Energy Steel, we announced yesterday that we have secured our first nuclear order in China to provide ejector systems for four facilities currently under construction. We are quite pleased with this order as it takes advantage of Energy Steel’s capabilities and reputation in the nuclear market as well as Graham’s capabilities in China.

While quarterly order levels can be quite variable, we generally expect a book to bill ratio of above one in the near future and as we have discussed on previous calls, we would like to see an order level averaging closer to $30 million per quarter rather than the $20 million to $22 million that we have seen over the past year and a half.

On slide 12 as you can see our quarterly order levels have stepped up nicely, as have our fully ear order levels for fiscal 2012. Orders in fiscal 2012 were very similar to fiscal 2008-2010. You might recall fiscal 2008 was the peak order year in our last up cycle and fiscal 2010, as I mentioned before, included the U.S. navy order.

Slide 13, you can see our backlog on March 31 is a record for Graham at nearly $95 million. We believe our diversification strategy, namely adding Energy Steel and refocusing on the U.S. Navy and hence expanding our addressable markets, has allowed us to grow backlog despite what we feel as only being in the early stage of a recovery in our historic markets of refining and petrochemicals. The Navy project as well as two large domestics nuclear projects in our backlog in aggregate makeup over a third of our backlog. Because these projects have an extended conversion to revenue time period, we believe 70% to 80% of this backlog will convert to revenue in fiscal 2013. This is lower than our long-term average of around 90%.

On slide 14, as we have mentioned, we have expanded our addressable markets. If you look at our backlog today with that at the end of fiscal 2009 just three years ago, you can see how the addition of Energy Steel and the Navy has expanded our market opportunities. In March 2009, the last time that we exceeded $100 million in revenue for a fiscal year, we ended the year with a backlog of $48 million, and over 80% of that backlog was in the refining and petrochemical markets. Today our backlog is nearly double that level.

Of the dollar amount of the backlog and refining and petrochemical combined, is only a few million dollars large than it was in March of 2009 or about $40 million in total. The power and others segments have growth from just below $10 million in fiscal 2009 to over $50 million today. Since we believe that refining and petrochem markets appear to be in the early stage of an up cycle, we believe that there is a lot runway for growth over the next few years.

Jim will now provide the view on our end markets as well as fiscal 2013.

Jim Lines

Thanks, Jeff. It is encouraging that orders lifted back to the peak 2008 and came in at $106 million. In fiscal 2010 where orders reached $108 million, that included the large $25 million plus order for the U.S. Navy. Therefore the underlying core business was about $80 million. Quarterly order rates were soft during the past several quarters but bidding activity remained high. We had commented during the past few conference calls that the bidding pipeline had been building and we had a number of projects closed in our fourth quarter where bookings came in at $42 million.

I am pleased with where we are entering this next phase in our markets. Our traditional oil refining and petrochemical markets are improving. The benefit of a strong power market segment is clear, and the work for the U.S. navy continues to proceed well with considerable upside to take on more of that type of work. Please go the next slide. Looking at the fourth quarter in great detail, please note the power segment was approximately 30%, with Energy Steel adding just under $13 million.

Orders from our traditional markets were just under $30 million, and notably approximately $9 million was for ethylene-producing facilities, suggesting that petrochemical activity appears to be picking up. I would also like to point out that with the improved health in our markets, order selection and price management discipline, did yield improved margins on average -- improved margins on average for orders won in the fourth quarter versus the margin of our backlog entering the fourth quarter.

Next slide. As we think about our markets, our traditional markets oil refining and petrochem, think about it geographically, we see a strong projected demand coming out of Asia in oil refining, petrochemicals, fertilizer, power generation. We are anticipating a strong multiyear investment program in that region by our customers. The Middle East, there are planned significant investments in the Middle East for new capacity as they monetize their natural resources in Saudi Arabia, Kuwait, Iraq, and elsewhere in the region. We have won some work for Iraq as they rebuild their refineries. That’s now in our backlog.

In North America, the change in the price of natural gas does appear to have traction towards investment in new petrochemical facilities or expanding existing petrochemical facilities. We are involved in bid work today for new fertilizer plants and new ethylene plants in North America. Something that has happened in more than a decade. So that’s very encouraging. As we look towards Canada, in particular in Alberta, we are seeing upgrading investments start to move off their stop that took place in 2008. We are involved in a number of projects that we are bidding for new upgrading capacity. So that’s very encouraging.

And in South America, as we think about the investments that are planned in Colombia, Brazil, Venezuela, elsewhere in Latin America, we are very encouraged by the outlook there. While the pace of projects in that region is particularly difficult to predict, we are encouraged by the level of bid activity. Next slide please. Power generation, the acquisition of Energy Steel has really been terrific for us. As Jeff pointed out, if we look at our backlog, how that has lifted our backlog significantly. And if we look at our sales mix from the power segment, our new orders mix for power segment, it’s very appreciable. And we have strong leg there.

As we look at Energy Steel and the nuclear market, we have shifted that business very quickly towards new construction, which we felt was an important growth leg. We have won work for new construction in North America. Energy Steel has about $15 million of work for U.S. based new construction in their backlog. Importantly, we secured early in the first quarter of fiscal 2013 an order for four nuclear power plants that are under construction in China, and that’s very encouraging. And moreover, as more Energy Steel is able to do with the existing utilities in North America by adding additional products which they have been working on. So we are very encouraged with that acquisition and the strength of the business and the strength of the market to provide a very nice level of new business and profitability into Graham.

And also, renewable energy still is active. Biomass to energy and geothermal power plant production around the world. We have a number of bids that we are working on. Last year in fiscal 2012 we had converted about $4 million of geothermal work -- almost $5 million of geothermal work was won and converted in 2012 for Asia. That’s very encouraging. Please advance to the next slide, please.

As we look at the Navy program, the current order we have which is in excess of $25 million, that is progressing extraordinarily well in our view. Yes, it is true and as we announced a few weeks back, that order has had production schedule and delivery requirements pushed out, that’s simply a timing issue and how that order converts from backlog into sales. I can share with you that we are in control of our costs, with the orders direct costs being at or below what our judgment was when we secured the order.

The navy and the shipyards continue to compliment on our execution, our ability to identify and mitigate risk for such a complex project, the quality of our people, and the quality of our workmanship has been complimented. We are also very happy with our commitment to adhering to these complex specifications that we must comply with and our strong values towards customer satisfaction. They have taken note of that and they have taken note to compliment us on that.

We have secured and completed concept engineering only orders for submarine programs. We did that in 2012. We do expect more of that type of work in fiscal 2013. I am very pleased with the work our team is doing with our naval nuclear propulsion strategy, and I am confident that in our future the company will have a very consistent and strong naval market segment.

Please go to the next slide. We really have a very strong backlog of profitable work as we enter this current fiscal year. The guidance at this point is for revenue to be between $105 million and $115 million, with Energy Steel providing about 20% of that revenue. Gross margin at this point is projected to be between 28% to 31%, SG&A between 15% and 16% of sales, and the tax rate between 34% and 35%.

As we think about the range that I’ve mentioned and the quality of our backlog and the size of our backlog, this potential to push to the upside of our guidance and perhaps beyond, and that’s centered on the conversion timeline of the Navy order and the Westinghouse orders, along, of course with the level of new orders over the next two quarters. While there is some risk to the downside, I think it’s very minimal and it’s mostly again tied to conversion of those two orders, but I think the likelihood is very low.

As we assess our markets and their projected strength coupled with our capital available to drive organic and acquisition growth, management believes doubling again the size of our company across the coming expansion cycle as a reasonable target. And that is what we are planning to do. Please go to the next slide.

Our priorities and challenges for the coming year. We are making investments today in personnel ahead of strong demand. We did that last year, we are continuing that through fiscal ’13. I think that’s important because what we don’t want to do is what happened in the last cycle, is grow more slowly than the market demand because we weren’t ready to execute that level of business. So we brought in the resources, we are still bringing those resources in ahead of demand. That does have an effect on profitability. It did in fiscal ’12, it will in fiscal ’13. But that’s an acceptable trade-off to capitalize on the strong demand we are expecting in years ’14, ’15, and ’16.

Another challenge as I indicated just a moment ago is the conversion timeline for the Navy and the Westinghouse orders. That can have an impact on fiscal 2013, but if you look at it as a -- in whole, its’ really just a timing issue. Those orders are very profitable. They are good business for us and the backlog conversion to sales can be difficult to predict, but our team is focused on staying on track, keeping our customers on track and converting that high quality backlog to sales and profits according to our timelines.

Our priorities are to advance market share in our traditional markets of oil refining and petrochemical markets, maintain our strong position in China in oil refining and elsewhere in Asia, continue to have a very strong if not a leading position in the Middle East with those investments in Saudi Arabia, Iraq, Kuwait, markets that Graham historically has had a very strong position in, and also dominate the North American market with the applications that we serve. Also, continue with our strategy to strengthen Energy Steel and expand the addressable opportunities that they are going after.

Continue and remain committed to the naval nuclear propulsion program. As I said earlier, I am extremely excited about that. That’s not a program that brings business in very quickly, but the investments we are making now are clear to me they are right, and we will in our future have a very strong navel leg in our business. Also, we have an active acquisition program, and again a good amount of available capital on our balance sheet to deploy in that manner. And we will continue to look for acquisitions to strengthen Graham, broaden Graham, and expand our level of sustained earnings, and also be patient. It’s very important at start of recovery. We didn’t necessarily do this well last time. We got a little eager in the 2005 timeframe and we saw a dip in our gross margins because of the aggressiveness with which we took new business . We had not focused on margin and order selection. We are being more disciplined this time to ensure the orders we are winning, we are keeping an eye on the pipeline and what's coming to ensure we are not dilutive and using our resources, and we are going to maximize the value we can create for our customers and the value we can create within the business.

With that, Christine, please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Mark Tobin with Roth Capital Partners. Please proceed with your question.

Joe Bess - Roth Capital Partners

Good morning, this is Joe Bess filing in for Mark. My first question, Jim, is in your press release you talked about first half of 2013 kind of mirroring what the back half of 2012 looked like. That would imply that the back half of 2013 would see a meaningful growth. Can you speak a little bit more about that and is that due primarily to some larger naval shipments being expected in the back half?

Jim Lines

Not so much tied to that. If you look at the order pattern and going back to the first and second quarters of fiscal 2012, that begins to bleed through as revenue in Q4, Q1 and Q2. Again, inevitably, softer bookings show up in lighter sales and that’s showing up in the first half of the year. The strong bookings we had in our fourth quarter supplemented with the conversion of the navy order, began to expand sales and profitability of the business in the second half. But we are expecting levelized revenue from the Navy orders throughout the year and principally the third and fourth quarters have benefitted by what we see it in our pipeline of new orders to win and also the strong fourth quarter bookings that we had of $42 million.

Joe Bess - Roth Capital Partners

Okay. And then with regards to your guy’s margin that you, or with the pricing of contracts that we received in fourth quarter, is that what you are seeing right now in the first quarter of 2013 and you are expecting these sort of levels to continue from here on or do you think this is just sort of irregular?

Jim Lines

No, I don’t necessarily think it was a point in time pick up in margins. I do believe our markets as a whole are becoming more active, are becoming healthier and more projects are available at any given point in time. That provides the opportunity to be a little more discerning on order selection and also stick with our firm priced discipline because there is options to select the better of the orders that are available. And that’s how we saw 2005, ’06 and ’07 play out. So we are applying that same discipline and experiences that we had and anecdotally the fourth quarter did have a step up in margins and I don’t necessarily feel that was just an occurrence in the fourth quarter.

Joe Bess - Roth Capital Partners

Okay. And then last question. You talk about the opportunities in your pipeline, can you give a little bit of more color around that and any sort of size around the contract that you are bidding on right now and any potential timing of any key orders that could fall into 2013.

Jim Lines

Sure. One of the things that we had experienced, it happens during the downturn, is the order sizes were smaller on average. We are seeing the order size began to become larger and that does have a benefit of getting more leverage out of our engineering resources per dollar of order value. So we are seeing larger orders and more of them. If we think about just stepping through the markets we are serving, we are expecting some business to be awarded in 2013 for the naval nuclear propulsion program. They can vary between $0.5 million to $3 million or $4 million. And there is a couple of those that we’re hoping we will break and we will be successful on in the coming year.

In the refining space there is a lot of good opportunities in the $2 million to $5 million value range. China, U.S., South America, Middle East, areas that we have been successful in securing that work. For our condenser business there is a lot of activity in the renewable energy, as well as in the petrochem and refining market. And if I would point to the fourth quarter bookings of $42 million, within that was $9 million of condenser orders that were for ethylene plants. An ethylene plant has an average selling price of the condenser orders of somewhere between $2 million and $5 million. So as we see that begin to become more active, we can expect more of that type of opportunity to become available and hopefully we can secure it. So a long-winded answer to an easy question. We are seeing the order size increase and the number of orders expand, both very good.

Operator

Our next question comes from the line of Chase Jacobson with William Blair. Please proceed with your question.

Chase Jacobson - William Blair & Company

Hi, good morning. Just quickly, Jim, you mentioned when you were talking about the guidance to reach the high end, it would be pretty critical to see the conversion of the Navy project and the Westinghouse project. I just want to make sure that that’s just based -- that comment is based on the natural progression of those projects and has nothing has to do with either regulatory or funding issues. Is that correct?

Jim Lines

That’s correct.

Chase Jacobson - William Blair & Company

Okay.

Jim Lines

We are not seeing anything in the marketplace to suggest those orders are at risk. It’s just the pace at which they are -- the pace that which we are allowed to execute them.

Chase Jacobson - William Blair & Company

Okay. Good. And then I would just take my shot here at the margin and pricing question. Can you may be just give a little bit of color on how the pricing had looked in the last six months, in the second half of the year compared to the first quarter of the year, you know long-term are getting better like U.S. petrochem. I know you can be more selective but at the same time are you seeing your competitors maybe be more aggressive to take advantage if markets that have been weaker?

Jim Lines

One -- just general comment I will make about our competitors. They disappoint me in that they don’t recognize the market environment and they don’t change their pricing patterns. We are different from our competition and we do that. So we have seen our competition really change in regard to bottom of the cycle, top of the cycle. It appears to us they have standard pricing formulas that they use, whereas we don’t allow a standard pricing formula, we price situationally and opportunistic where we can. In general we are seeing the profitability of our smaller business, the business that we refer to as short-cycle which is about one third of our business on average, that margin has begun to improve. That’s particularly through price strategy. Those are quick turn orders and we put in place some price strategies there that have helped.

In regard to the larger projects, the two-thirds of our business, and that’s our situational price discipline, understanding what the situation is, being opportunistic where we can and being aggressive where we must. But on average we are seeing that come up compared to six to 12 months ago in terms of the average margin of what we are winning versus what's in backlog. At the start of the fourth quarter what we won is a bit up from what the average of the backlog was going into the fourth quarter.

Chase Jacobson - William Blair & Company

Okay. That’s helpful. When you look at your pipeline, can you give us any color around how much of the pipeline is related to, I guess Greenfield projects versus upgrades or expansions or changing feedstock or replacement, anything like that?

Jim Lines

Sure. It does get a little foggy with respect to Brownfield, Greenfield, particularly in Asia. And quite honestly, we don’t really care because the size of the opportunity is really no different. Whether they are expanding a Brownfield site for additional 200,000 barrels per day or they are building a Greenfield. What tends to come in play is one moves faster than the other. The expansion moves faster than the Greenfield. But if I thought about it just in an overall comment, and China in particular is new capacity with some expansion, so some Brownfield. And elsewhere in Asia and in South America they are really expansions of existing sites but I would categorize them as new capacity. They are not revamps in a classic sense, they are added capacity. I guess that’s a better way to describe it.

Chase Jacobson - William Blair & Company

Okay. That’s helpful. And then the last question I will ask is just about Energy Steel. You know it’s good to see you break into the China nuclear market. It looks like there is a lot more opportunities there. Any opportunity in any other international markets for that business at this point?

Jim Lines

Well, certainly yes. And I will just take us back to a few conference calls ago. There is a lot of opportunity in the nuclear market. What we have elected to do is focus on where we thought we could win, where we could win quickly and win profitably. So we are taking our usual disciplined and measured approach. But to answer your question, there is a lot of opportunity out there globally. We still need to develop strategies to be successful for some of those opportunities.

Operator

(Operator Instructions) Our next question comes from the line of Joe Mondillo with Sidoti. Please proceed with your question.

Joe Mondillo - Sidoti & Company

Good morning, Jim and Jeff. First question, just real quick, in terms of the Navy orders, how much of that $25 million is left and what are expecting in ’13?

Jim Lines

Of the Navy order about, in rough numbers, 70% to 75% is left. Well, we have -- and our financial plan is converting about 25% to 30% of that order. We are aware there could potentially be a change order coming from the Navy. That could slow that down. No impact other than delayed revenue conversion. We would expect to change order for that and additional money for the change order because there’s different scope, change in scope. But that gives you a sense for what our plan is, but as we indicated, conversion of that backlog to sales has been no predictable.

Joe Mondillo - Sidoti & Company

Okay. And in terms of the Navy potentially coming in and changing the order, how are you looking at that 20% to 30% versus that possibility of them coming in. If they do come in, will there we downside to the guidance or?

Jim Lines

Well, we have modeled some of that into our planning scenarios and reflect that generally in our guidance that we have given. So we have not -- I guess I will phrase it differently, our guidance is not overly aggressive and isn’t necessarily predicated on the Navy order according to plan. The Navy order going to plan or maybe above plan pushes us up to the upside through the upside. But we have come out with a balanced initial guidance that reflects all the moving parts that are in our business.

Joe Mondillo - Sidoti & Company

Okay. And just switching to oil refining opportunities. Where has a lot of that being coming from or at least, I guess, the orders in the fourth quarter seem to be pretty strong. Where are you seeing the strength there?

Jim Lines

Well, we have picked up a couple of nice orders in the fourth quarter that were for China. And we announced yesterday another order for China for the refining market. So we have picked up $8-$9ish million of new orders for the Chinese refinery market in the last two months. We have some work coming up outside of the China market as well as inside the China market over the next six months. In Alberta in the U.S., for revamps. There is some bid activity in South America and in the Middle East and elsewhere in Asia that we would expect to see closed over the next six to nine months. So geographically in the refining market we are seeing a pretty healthy environment for project activity.

Joe Mondillo - Sidoti & Company

Okay. Sort of all around geographically?

Jim Lines

Yes.

Joe Mondillo - Sidoti & Company

All right. And then in terms of, could you just address -- and I don’t know if you have opinion on this or sort of a viewpoint, but in terms of oil prices coming down so aggressively over the last month or so, how are you sort of looking in that affecting your refining customers and what are they saying?

Jim Lines

Well, we are watching that and so is our customer base. I would sort of draw a contrast to where we were in 2003 and 2004. And if we thought about where oil was at that point in time, it was between $25 and $30 per barrel. And we had the strongest investment wave in refining space in my career at Graham which is almost 30 years, as oil went from that start point up to the 60s and go to about where it is today. You know as we hear from our refining customers depending upon what they are refining, you don’t necessarily need a $100 per barrel to be profitable. They model their investments for the long-term and what we are hearing, the modeling below the market price today in general. So I am not overly -- this is a long viewed answer, not a this week answer. What's happening, demand is increasing globally. Investments have to be made to keep up with that demand. Feedstock is less expensive for low cost, obviously low cost poor quality crude, that drives investments by our refiners to be able to process the crude oil that’s less expensive. So I think as oil vacillates, it may move down further. I am not overly concerned about it because the long-term view is demand has to be satisfied through incremental capacity, and that’s not abating, demand is not abating globally.

Joe Mondillo - Sidoti & Company

Okay. Great. And then last question just in terms of, you know the balance sheet is still pretty strong with a healthy cash position. I am just wondering sort of your updated thoughts on the cash position and potential uses of cash.

Jim Lines

Well, we have two principal uses of our capital. While we have one use, which is grow our business. The two avenues to grow our business are to invest to drive organic growth and to invest to drive growth through acquisition. We have an acquisition program that’s active. We will be as methodical and as disciplined as we were with the Energy Steel acquisition. And with regard to investments for organic growth, we will make those as we feel appropriate and we are assured of the demand profile from the markets we are expanding into. But a use of our capital is to grow our business with improved levels of sustained earnings -- to provide improved level of sustained earnings.

Joe Mondillo - Sidoti & Company

And what is the -- how is the pipeline for acquisitions and just how, I guess, challenging maybe, in these sort of volatile and uncertain times?

Jeff Glajch

Joe, this is Jeff. I guess, I will contrast it to when we were looking for Energy Steel which was during the calendar year 2009-2010 period, which for other reasons was volatile. It’s not a big issue from a volatility standpoint. We are not overly concerned about everything else that is going on. There are a number of opportunities in the pipeline as they were in that time period. And it’s really just a matter of making sure that we work our way through those opportunities, understand what makes sense for Graham and make sure we get a fit as we did with Energy Steel. We feel that the extra time that we took to ensure that we found the right candidate in Energy Steel has proven itself very nicely since we have acquisition them, and we would like to go down the same path with the next opportunity.

Operator

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

George Walsh - Gilford Securities

Jim, I wonder if I could amplify the previous question on a macro besides the oil but also with the current outlook for more of a slowdown on a global basis and concerns of financial institutions in Europe etcetera and banks. Do you see that having any impact on the type of orders that you are building up here in terms of their execution? And anything about how that could affect financing relative to the clients you are doing these big projects for?

Jim Lines

I think that factors into the overall equation. It hasn’t been an impediment at this point in time. Many of our customers, certainly in international markets, are state owned businesses. And of the multinationals that we work with, they are well capitalized, although they do need financing for their projects. The fundamentals for making the investments are right. The demand is not changing. So we are very optimistic about that. And what I can share you with you is we have a very strong conviction in the direction of our markets. While in the middle of the downturn still today, with some uncertainty as you spoke to, we are still making investments in our infrastructure to capitalize on what we firmly believe will be a strong wave of opportunity over a multiyear expansion and we are getting out in front of it. We weren’t able to do that last time but we are able to do it this time. So we are quite, with conviction, going forward with our investment. We are keeping our eye on the fragility of our markets and the investment climate, the credit market, but we are certain that the underlying macroeconomics of demand are expanding and that demand has to be satisfied. And to us it’s just a timing issue but we are going to be ready for that time.

George Walsh - Gilford Securities

Yeah. Well, I agree with that, Jim, and I think you are -- I think two interesting slides relative to the presentation in that, for a small company you’re positioned to take advantage of the backlog that you have built up and also relative to be able to handle any delays or changes in the demand outlook, you know short-term effect in the cycle. But slide 14 was very interesting relative to your backlog growth, that speaks well to your positioning of the company and also the balance sheet. That’s remained very strong for “small company.” And I think that speaks well for your position to take advantage in the future what you are looking at as you are saying there, you can eventually get to that $200 million level. And just with reference to that, if and when you get to that type of level, do you see a significant margin expansion or you’d more or less be at this kind of 30% gross margin level when you get up to that kind of revenue stream?

Jim Lines

I would expect, George, it would be bounded as it’s currently bounded as it’s currently bounded today. I think about our margins as bottom of the cycle, being in mid to upper 20s. Top of the cycle mid to upper 30s, I would expect just to be bounded by that. Sure the cycle of the market is on a trough to peak. I don’t -- where we are looking and what we think the operating model and the sales model require for the strategies that we have to acquire or expand into new markets, provides a similar profile to what Graham historically or what Graham has been in the last four or five years.

George Walsh - Gilford Securities

Okay. And just one specific question, your depreciation and amortization for fiscal year 2013, any estimate on that?

Jim Lines

In fiscal ’12 it was, our depreciation and amortization was about $2 million. Over $2 million. I wouldn’t expect a dramatic change in that. Maybe a little bit up in depreciation and amortization perhaps down a little bit. We have a little bit of amortization related to the Energy Steel acquisition slip into fiscal ’12 so that will go -- there will still be some there but some of it will go away. So I don’t see a huge change there, maybe a little bit of a step-up, but relatively small.

George Walsh - Gilford Securities

Okay. But still good EBITDA and cash flow there?

Jim Lines

Absolutely.

Operator

Our next question comes from the line of Tom Lewis with High Road Value Research. Please proceed with your question.

Tom Lewis - High Road Value Research

Hey, good morning. Just wanted to ask one question, kind of follow-up on your comment about corrective pricing behavior at this point in the cycle. I was wondering if you could elaborate on the extent to which it -- how important is it to have the low -- to be the low bidder. I would think that with some of the particular, some of the more highly engineered things that you do, you don’t necessarily have to be the low bidder to win the business. Could you talk, flesh that out for us?

Jim Lines

Sure. In general, I think your observation is on the mark. Where we focus our reference is where the application of our equipment is very specialized, the cost of failure to the user is extraordinarily high. The execution of the contracts are extremely complex. And that tends to drive a value-based purchase decision. That’s where we believe we will stay because of, we create a lot of value and we believe we can extract a lot of value through our selling process. But there are times, in particular during the bottom of the cycle where buyers aren’t as discerning as we see them ordinarily. And we saw that the last couple of years, and we saw that in prior down cycles. So it wasn’t a surprise to us. We do smart things to navigate through that down cycle, to fend our market position to expand the market share where we can. But we get through the down cycle into the recovery, buyer behavior tends to normalize to what we like and what we typically do well at. I hope that answers your question.

Operator

Our next question comes from the line of Chris McCampbell with Stifel Nicolaus. Please proceed with your question

Chris McCampbell - Stifel Nicolaus

I am struck by the tone and the confidence you all have relative to where the stock price is right now. And I know that you have tended to keep your powder dry in terms of acquisitions but where are we on share repurchase at this point?

Jeff Glajch

Sure. Chris, this is Jeff. We have a share repurchase program that is in place, it’s been authorized for a couple of years. It has the ability to repurchase up to a million shares, we have repurchased about 360,000 or so. It is a potential use of cash. As Jim mentioned, our main use of cash is to grow the business but it is certainly something that we consider at times particularly if we see, as we have seen here recently a bit of dip in the stock price, we potentially can be opportunistic.

Chris McCampbell - Stifel Nicolaus

Okay. Well, congrats on the progress guys.

Operator

Our next question is a follow up question from George Walsh with Gilford Securities. Please proceed with your question.

George Walsh - Gilford Securities

Jim, could you just update, just in general or how you are looking at the potential mergers or what you are looking at? And it’s something where you are really not that active at this point or is it something that you are eager to do with the current environment?

Jim Lines

It will be fair to indicate over the last four to five quarters, we digested Energy Steel. But we have kept our eyes open, we do have our acquisition programs still active. Now that we have tucked in Energy Steel and we are about a year into that, year and a half into that, we are now more focused on looking externally for growth. But we do have a lot of opportunity with the businesses that we have to grow them. But acquisitions are still, as we had said previously, centered around, engineered to order businesses serving the energy market. Businesses that have a long sales cycle. Businesses that enable us to create what we believe is a lot of value for our customer. And that we believe in exchange we will be rewarded through that with margin or capture ratio. And we are looking again at businesses that are in the size of -- revenue size of $20 million to $60 million. We have looked above that and we have looked below that but we tend to think of that as the right spot for the next acquisition. And it could be in North America or it could expand our footprint outside of North America. But the typical attributes that we are looking for are as I just described which are consistent with as we had described them over the last several years.

George Walsh - Gilford Securities

Just how -- you know on a, I don’t know, 1 to 10 scale, I am just trying to pin you down a little bit about the emotional factors or the conditions that, is it right, is it just you guys like you said, you just integrated Energy Steel. Are you just really kind of laying back and just, well, if something comes along you will do it or is it something you feel a little bit more the atmosphere is good to pick something up in here?

Jeff Glajch

George, this is Jeff. We are certainly looking, as we deal with Energy Steel, it’s a long process. And I wouldn’t say that we are waiting for something to drop in our lap and I also wouldn’t say that we are urgently feeling like we have to do something immediately. As it was with Energy Steel, it will take some time I suspect, just because we want to make sure we find the right company. Or if the right company were there today then we would move forward very quickly, or we want to make sure we find the right fits for Graham.

Operator

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

Jim Lines

Thank you, Christine, and thank you everyone for your time and attention today. Again, we are very pleased with our results for fiscal 2012. We feel our team did a great job to execute a tough business environment and delivered very fine operating results. We are very excited about where we are as we enter fiscal 2013 and in particular as we look beyond 2013 into the height of the recovery a couple of years out. Our company is positioned extraordinarily well, I feel. We are different from where we were when we entered the last expansion cycle in 2005, and we are expecting to capitalize strongly on that growth cycle. And again our intent and our planning is to again double the size of our company. And I look forward to updating you end of July at our annual meeting. Thank you for time, have a great day.

Operator

Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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