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Executives

Deborah Pawlowski – IR

Jim Lines – President and CEO

Jeff Glajch – VP-Finance and CFO

Analysts

Chase Jacobson – William Blair

Dick Ryan – Dougherty

Joseph Mondillo – Sidoti and Company

Jason Ursaner – CJS Securities

Chris McCampbell – Southwest Securities

Tom Spiro – Spiro Capital

Graham Corporation (GHM) F1Q13 Earnings Call July 26, 2012 2:00 PM ET

Operator

Greetings and welcome to the Graham Corporation First Quarter Fiscal Year 2013 Financial Results. 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 begin.

Deborah Pawlowski

Thank you, Laura, and good afternoon everyone. We certainly appreciate your time here today with the Graham Corporation on our first quarter and fiscal year 2013 conference call. On the call today, 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 their conversation today. If you do not have them, you can find them and the press release at graham-mfg.com.

If 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

Thanks, Debbie. Good afternoon, and thank you for joining us for our first quarter fiscal 2013 conference call. First quarter results, if probably go along on the slides, please turn to slide four. First quarter results were in line with expectations for both revenue and income. We generated $22.5 million of revenue and $1.4 million in net income. The first quarter and for that matter the first half will be similar to last year’s third and fourth quarters. That is due to order rates during the first, second and third quarters of fiscal 2012 that averaged $21.5 million. Sales from the refining industry are down $6.8 million in the quarter, while up sequentially $800,000.

Refining market sales still have a difficult comparison during the first half of this year due to the conversion of large Middle East refining project at the same period last year. An important aspect of this sales by industry chart is the even distribution across current key markets. In the past, we were heavily weighted in refining, which is still very important to us; however with the strategies we undertook to diversify there is improved market balance.

Please turn to slide five. Sales to the U.S. are up 12.5% due to sales from energy steel which are principally for the U.S. nuclear energy market and those for the U.S. naval aircraft carrier program or U.S. based employee sales. Here two strategies implemented to diversify continue to have a positive impact on our business.

Sales in the Canada were up $2.9 million due to the conversion of oil and sands order in backlog. Middle East sales were down due to this period last year including conversion of large refinery project in that region. We do expect strong sales going forward to U.S. end users, sales to international markets such as Asia, the Middle East, South America will vary greatly from period to period due to the size and frequency of certain orders.

Please turn to slide six. We do believe growth rate this cycle would exceed that of the 2004 through 2009 period. This is due to expanded opportunities from nuclear energy and the Naval Nuclear Propulsion Program growth strategies that we undertook. Neither of these were implemented during the last cycle. We are in the early stages of this recovery, and progress toward full recovery in our markets is slow. Nonetheless, we are very positive about growth available from our markets as recovery takes firm hold. Bouncing off the bottom through to the midpoint of our current guidance, yields are 21% of compound annual growth rate. This is similar to last cycle overall; however, the current cycle is in a tepid early stage. I really like what the management has done to diversify and develop internal capacity for what I feel will provide stronger growth this cycle as we enter into a full recovery in our markets.

Please turn to slide seven. Orders in the first quarter weren’t where we expected; however, a few projects pushed into this current quarter. We had identified approximately $7 million of North American refining projects that were projected to close in the first quarter that pushed into this quarter or our third quarter. We did have one of those orders close early in July and the other two are still available to us hopefully closing this current quarter, if not by Q3. Quarter bookings were $19.7 million. I am encouraged by the level of bidding activity and the quality of bid work we are involved in. That has always been a good leading indicator for eventual new orders.

Please turn to slide eight. These charts paints a clear picture of the value in our strategy to diversify and it demonstrates its impact. At the end of the last peak March 31, 2009 backlog was $48 million, with 80% or approximately $40 million being from our – at that time two key markets of Oil Refining and Petrochemicals. Across this recent downturn, we added Naval Nuclear Propulsion and a stout Power market leg.

At the end of the first quarter of this current fiscal year, Refining and Petrochemicals comprised 48% of backlog or $44 million, just about the same as on March 31, 2009 while our power and other including the Navy are 52% of current backlog. Projecting a few years forward I believe there will be four evenly balanced market legs along with the grouping of our other markets.

Let me turn it over to Jeff, for his review of the financial results. Jeff?

Jeff Glajch

Thank you, Jim, and good afternoon everyone. Q1 sales were $22.5 million, down 10% versus last year. Sales in the first quarter were 56% domestic, and 44% international. In last year’s first quarter this CLIP was 45% domestic and 55% international. While Graham’s historical commercial markets continue to be tilted towards the international arena, Energy Steel is almost exclusively domestic and obviously the U.S. Navy work is 100% domestic. EBITDA margins in the first quarter were 12% down from 20% last year, but up sequentially from 10% in the fourth quarter of fiscal 2012. Q1 net income was $1.4 million or $0.14 per share down from $3 million or $0.30 per share in Q1 last year. Cash from operations in the quarter was positive at $5.5 million compared with a cash usage of $1.6 million in the first quarter of last year.

On the next slide, you will see the gross margin in the first quarter was 27.7%, while down from 32.8% in the first quarter of last year. It was up sequentially from 25.6% in the fourth quarter of fiscal 2012. SG&A was $4.1 million in the first quarter, up from $3.7 million in last year’s first quarter as well as up from $3.6 million sequentially. This increase came from investments made in our business to support future growth. Operating margin in Q1 was 9.6%, down from 18% last year, but up sequentially from 7.7%.

On the next slide, you’ll see the orders in the first quarter were $19.7 million, up 4% from $19 million in the first quarter of last year, but down from a very strong $42.3 million last quarter. As we have discussed in the past, this type of quarterly fluctuation that we’ve seen can often be driven by a movement of a few larger orders and can dramatically impact a specific quarter.

We continue to recommend that investors view a longer period of at least four quarters and possibly longer to understand the direction of our business. To that end, you can see orders over the past four quarters have averaged nearly $27 million or a total of $107.4 million over that four-quarter period.

Backlog at the end of June was $92 million, down slightly from the record $94.9 million at the end of March. We expect to convert 70% to 80% of this backlog to sales over the next 12 months. This is lower than our normal level of conversion of approximately 90%. The reason for this lower level of conversion is that we have three large projects, The U.S. Navy project, and two domestic new build nuclear plants with a multiyear life. These projects in aggregate make up about one third of our backlog.

On the next slide, you’ll see that our cash position in the first quarter increased by nearly $5 million to $46.6 million. We continue to have a clean balance sheet with no bank debt. This allows us to focus on utilizing this cash and if necessary our untapped line of credit for future acquisition activities as well as internal growth and investment opportunities.

Jim will complete our presentation by reiterating our full year guidance and provide some commentary on our future growth opportunities.

Jim Lines

Thanks, Jeff. I am now one slide 16. As Jeff indicated, we are confirming our prior guidance. Revenue we anticipate to be between $105 million and $115 million for the full year. Gross margin is projected to be between 28% and 31% on average. SG&A is 15% to 16% of sales and we project our effective tax rate to be between 34% and 35%. Due to the bookings activity 12 months ago, we are expecting and we’ve projected the first half of the current fiscal year will be lighter than the second half. It should be comparable to our third and fourth quarter of fiscal 2012, but we do have a strong backlog and we’re expecting the second half of this current fiscal year to see sales and profitability improve.

As we look beyond this current fiscal year and reflect on the steps management took to develop internal capacity, add additional markets, we set our target to double our business over the coming cycle. With our strong Power segment, with the addition of energy steel, our traditional organic business to oil refining petrochemical and associated markets proven to us to be very strong over the next several years as the markets we cover more fully. And then fourthly the attention we’ve now paid to the U.S. Navy and our clear commitment to be a consistent supplier to the U.S. Navy, we have new avenues for growth and we believe those avenues will propel us to exceed $200 million across this next cycle.

Turning to slight 17, we do expect that order rates will begin to improve and book-to-bill to be above one as we build into a strong fiscal 2014. We are making investments ahead of the strong demand. We made them last year, we’re continuing to make them this year, we consider these two years to be positioning years to get Graham in a position to maximize the upcoming strong investment cycle we see in our markets. We will be ready for that growth.

In addition, while we’re focused on investing and developing internal capacity on the customer facing side, we do intend to expand our market share in our traditional markets and our new markets of the Nuclear Propulsion Program and power generation in particular Navy – nuclear, and advance our market share in Asia, in South America, maintain our strong dominant position in the Middle East.

We are also building our acquisition pipeline. We have a lot of capital available on our balance sheet to put to work. Capital deployment is the number one priority, investing for growth be it in operations, expanding our organic base or adding new markets or products via acquisition. We will maintain the patience and the discipline we’ve shown in the past for order selection as we’re in the early stages of this recovery to ensure our bookings aren’t too hurried and we miss opportunity to secure the right business.

With those brief remarks by Jeff and myself, Laura we’ll open the call for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Chase Jacobson with William Blair. Please proceed with your question.

Chase Jacobson – William Blair

Hi good afternoon.

Jim Lines

Hi Chase.

Chase Jacobson – William Blair

So, Jim I guess here in the last slide, it seems like you’re pretty confident that the book-to-bill can be over one for the year, but in the press release this morning the commentary seem like you might be a little bit more cautious just given the macro environment and some cost pressures I guess. Is that just a little bit of conservatism given what’s going on in year up and curious over China, I mean, are you really seeing some delays in the orders?

Jim Lines

We are seeing some delays in orders just as we mentioned for the first quarter we have few projects $7 million push out of the quarter that we thought very strongly we’re going to close in Q1 (inaudible) North American base refining projects. So, we felt pretty confident that they would close, but in the end the investment decision by the end users they elected to delay it one quarter. Again, we secured one of the three and the other two are still available. That’s hard for us to predict, but if we move that element of uncertainty and look at the bid activity, look at the quality of the work we’re doing, how busy our sales team is, interaction we’re having with our customers, we can’t help, but feel positive. And again at this point barring slowdown for the remainder of the year, we still feel the book-to-bill can be above one, a critical quarter as this quarter, Q2.

Chase Jacobson – William Blair

Okay. So I guess when we think about the investments that you’ve been making we should – I guess we should expect that to continuing, is that right?

Jim Lines

That is correct. As we look at this macro environment run which – has some uncertainty in the near term. As the management team, we have three options. We can be conservative and worried due to the uncertainty and pullback on our investments to maximize the near-term profitability. We can do nothing because we don’t know to do or we can be offensive and recognize this is a timing-based issue. We believe in the long-term fundamentals of our energy markets. And if we miss it by a couple of quarters, be that as it may, but we will be ready to maximize the up cycle when it’s in full stride. And that’s what our strategy has been. We’re choosing not to be defensive. We’re choosing not to do anything and we’re going to be offensive-minded while we have that conviction toward the future.

Chase Jacobson – William Blair

Okay. So, it sounds like the big pipeline if we think about that sequentially has improved. Can you just maybe give us some color on how much of that is orders not going into the first quarter or how much of that is actually new demand that’s come in during this time?

Jim Lines

That’s hard for me to (inaudible) primarily because as you might recall, our sales cycle is so long and some of the work that we have been involved in is during concept or feed work that moves to EPC bid, that moves to final purchase decision, RFPs. In many cases, we have been tracking these projects in the different stages of the bidding for several months to a couple of years. It’s the direction of the progress of the bidding process going from concept to feed, feed to EPC, EPC to formal RFP for purchase that gives us some optimism. It’s not typical that we see a good deal of new work jump into the pipeline. It’s the ongoing progress of the work we’ve been working on for quite a while.

Chase Jacobson – William Blair

Okay, that’s good for me for now. Thanks.

Jim Lines

You’re welcome.

Operator

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

Dick Ryan – Dougherty

Thank you. Jim, in the backlog, have you seen anything cancelled or you pushed out of that?

Jim Lines

No, we haven’t. In terms of being pushed out, we have Jeff pointed to about a third of our backlog is U.S. Navy and the Westinghouse projects. Those are very massive projects and due to the complexity of those projects, we have seen them be placed on temporary hold by Westinghouse or the Navy that affects the conversion those orders in a particular quarter. We had that happen to us recently and the Westinghouse projects currently are on hold, pending resolution of a couple of engineering issues, not on our side, on the side of Westinghouse. Those should be resolved in the coming weeks, and we will be back into production we believe. But in terms of suspension or cancellation, we have had nothing new. We have the one order that’s – that has been on suspension since 2008 that we’re expecting to restart sometime in Q2 or Q3, but other than that, the backlog conversion has been sort of typical.

Dick Ryan – Dougherty

Okay. Along the lines of the navy, can you give us an update where you are of expanding that relationship into the submarine side of the equation?

Deborah Pawlowski

Sure. Dick, we’re extremely with our progress with our strategy. A key foundation piece is getting into to the sub programs and the work our CRs teams doing some of the initial smaller orders that we’ve gotten for engineering work, they’re suggesting to me that we’re on the right track and that we will realize the objective of being a submarine supplier – a supplier to the submarine program in the coming years. I’m very confident and I’m always seeing good signs and we’re pretty energized about that strategy. It is one that has a lot of machinery work meaning a lot of ground laying has to be done before you realize incremental revenue from it. But my view is it was the right strategy and it’s on pace if not ahead of pace where I thought we would be right now.

Dick Ryan – Dougherty

Are all the necessary certifications in place and when could you be bidding on some of these programs?

Deborah Pawlowski

I think in calendar 2013, we could expect to be bidding on some of the larger significant orders. We’re bidding on smaller projects now.

Dick Ryan – Dougherty

Okay.

Deborah Pawlowski

For submarine work.

Dick Ryan – Dougherty

Great and in the – regarding the pipeline, in the past you’ve talked about kind of the scale of the jobs there, they were getting more in number, larger in size, are you still kind of seeing that same trend and are there any cost pressures starting to creep into the ordering pattern?

Deborah Pawlowski

We haven’t seen cost pressure. Actually material seemed to have retracted a bit and in terms of the project size if I go back about two years ago I would point to the project sizes were smaller on average to where they were in 2007 and 2008. Where I think we are right now is between the low ebb and the larger projects that is of 2007, 2008. Still some good sized projects but not the same abundance we saw in 2007 and 2008.

Dick Ryan – Dougherty

Sure. Okay, great. That’s it for me. Thanks. Thanks Jim.

Deborah Pawlowski

You’re welcome.

Operator

Thank you. Our next question comes from the line of Joe Mondillo with Sidoti and Company. Please proceed with your question.

Joseph Mondillo – Sidoti and Company

Hey Jim, Jeff. First question just to clarify going back to sort of the ordering pattern and sort of your feeling on how things are trending – except for the last quarter, the fourth quarter and last five quarters have been sorter around $20 million run rate give or take. So, essentially what you are seeing is essentially based on bidding patterns, customer commentary and sort of projects that you are following and sort of work that you’re expecting on an acceleration of orders that you are expecting in the horizon? Is that sort of fair to say?

Jeff Glajch

That’s accurate. If we looked at Q1 through Q3 of fiscal 2012, it averaged about $21.5 million and we don’t feel today how we felt 12 months ago even though we just had a $19.7 million bookings quarter.

Joseph Mondillo – Sidoti and Company

Okay.

Jeff Glajch

Couple of projects (inaudible).

Joseph Mondillo – Sidoti and Company

And so given just the macro environment, how do you – you mentioned one order that was sort of pushed out, have you gone a sense that your customers have gone even with the projects that are on hand have gone maybe a little more cautious or sort of brought back the range in terms of capital spending?

Jeff Glajch

It would seem to us that there a little more measured in making sure the investment decision timing is perfect as opposed to being a little more flexible as we saw them in the past. These projects have been identified as being viable. They are go ahead projects, but it appears to us that they are waiting until the last possible moment to make the final investment decision.

Joseph Mondillo – Sidoti and Company

Okay.

Jeff Glajch

Well before.

Joseph Mondillo – Sidoti and Company

Sure and also in terms of the refining and petrochemical orders that you received, where geographically did you see those in the quarter?

Jeff Glajch

We had a nice order from China for China-based refining work. We have had some North American projects for refining. We didn’t have a very large influx of renewable or nuclear energy work in the quarter, but it was about 60% was international, so was China, somewhat for South America and a little bit for North America.

Joseph Mondillo – Sidoti and Company

Okay. And I guess looking at the refining business overall, your sort of long-term growth is going to come from international still, right?

Jeff Glajch

When you look at the traditional Graham, the refining petrochem, when you think of the Graham as we reposition the company with the Nuclear Energy leg and the Naval Propulsion leg that’s largely U.S. based sales, but when you think of refining in petrochem that answer is correct. It will be largely international growth for those markets.

Joseph Mondillo – Sidoti and Company

Okay, I guess what I’m getting is capacity utilization among U.S. refineries are the highest in over five years and I was just wondering sort of what your feeling is on the U.S. markets and all the oil drilling and the fracking that’s going on and the fact that capacity utilization is so high, is there an expectation that maybe there is some more opportunity in the U.S.?

Jeff Glajch

My sense on that is it’s very positive and as the utilization levels increased and also just looking at the increase in investments that are being made in the oil sands area and investments that will be made around shale oil that’s going to drive demand for our equipment in the refining sector in North America and then we feel equally important, but different because it wasn’t available last cycle with low cost natural gas. Investments in the petrochemical sector in North America will occur this cycle and we didn’t have that lift last cycle. What that means is investments in fertilizer plants, ammonia, urea plants, ethylene plants, petrochemical plants that have very large demand for our products in those facilities. And we didn’t see that for about a decade much of the 2000s had very little investment in the petrochemical space in North America. So, it wasn’t available last cycle and we have some very positive size again looking at the bid work we’re doing, the conversations with a process like (inaudible) involved in those projects that will be part of our sales mix this expansion cycle, which was very nice and beneficial and didn’t have it last time.

Joseph Mondillo – Sidoti and Company

So given all that excluding the nuclear side of the business, is that fair to say that instead of maybe 65/35 international/U.S. that the story really could be coming more like a 50/50 U.S. versus international just given all those opportunities that you just mentioned?

Jeff Glajch

I’d think of it including the navy and the power gen work coupled with what we’ve just said being around 50/50, 60/40, 40/60 depending upon where we are in a given point in time that’s where I am expecting our geographic mix to be as we go forward.

Joseph Mondillo – Sidoti and Company

Okay. And then just one more question, I might have missed it, but in terms of the internal capacity increases or improvements that you made what exactly did you do there?

Jeff Glajch

Well, we are investing in people in the middle of the company to execute more orders. The management team has been tasked to substantially increase the capacity – the execution capacity of our middle of the company and we’ve made investments in operations or production to support that growth as well along with continuing to perfect our outsourcing strategy. We have IT investments. We have process improvement. It’s really about transitionally being able to do more within our fixed roofline and within our size of the infrastructure that we have, and I think they have done a great job. There is more of we are doing there. We much further head in 2013 than we were in 2004 and 2005. We are far more ready today than we were then for a recovery.

Joseph Mondillo – Sidoti and Company

Okay. So it sounds like, is a majority head count and maybe some other stuffs or is it what’s the breakout I guess in terms of head count and other? Is that majority...

Jeff Glajch

In terms of the cost, it’s largely head count. When we look at the incremental cost, it’s adding the personnel, some of that is for succession, but much of it’s for growth.

Joseph Mondillo – Sidoti and Company

Okay, great. Thank you.

Jeff Glajch

You’re welcome.

Operator

Thank you. (Operator Instructions) Thank you. Our next question comes from the line of Dave (inaudible) Capital Management. Please proceed with your question.

Unidentified Analyst

Hi guys, how are you doing?

Deborah Pawlowski

Good.

Jeff Glajch

Hi Dave.

Unidentified Analyst

Just few questions for me. One on the quarter – the operating cash flow is very impressive. Is this sort of new run rate we should be thinking about?

Deborah Pawlowski

No. Dave, this is Jeff. It’s the quarter cash flow was good. I think if you went back and look at the last quarter you would have seen it was a little less than we would have like. It’s really timing on receivables more than anything else. So, it’s not a new run rate on a quarterly basis certainly. We do on an ongoing basis expect to be generating cash. But, this was just a bit of spike up where last quarter was maybe a bit of spike down or relatively flat compared to where ideally it would have been.

Unidentified Analyst

Fair enough. And then (inaudible) right into the cash right around 30% of market cap at today’s prices and growing, absent any additional strategic deals like the energy steel. What are the prime uses, you have a dividend out there and by your own admission, this is a – recovery has been uneven just it sort of ebbing and flowing. And a recommendation to you is, I wouldn’t like you to shrink the flow because your stocks out already; however, a dividend you could easily pay out 50% of what you’re earning right now, and can really put a hefty dividend out there for shareholders, just really to – fine to compete this year to get paid to wait a little bit as the cycle is, at in-flowing maybe to take out some of the volatility of the stock for shareholders, I’ve been with you guys for three, four years now and you guys are doing everything you possibly can to run the business in a good way, and you’re doing strategic deals, you’re doing everything you possibly can to control what you can control, it seems like the cycle (inaudible) macro that’s out there just continues to drive the stock rather than what you’re doing on a daily and quarterly and yearly in cycle basis. So, what are your thoughts, what would prevent you, I know your business is cyclical, I get it, but I really would urge you to stress test your pace and what you really conjunct the dividend up to, absent any additional strategic deal like an energy deal, you could do both of which you’re sitting on, but give entire shareholders to sort of fit here has the cycle ebbs and flow with you a little bit longer, what’s your thoughts on that?

Deborah Pawlowski

Dave, certainly that’s something that I consider, I think our current view is consistent with where we have been which is we believe if there – there can be opportunities out there to invest both inorganically via acquisition as well as in our existing business for growth, and at this time I think we’re leading down the path of continuing to wait for that right opportunity. Certainly, you’re right, you could do something with a larger dividend but we’d prefer at this point to hold off and use that – ideally use that cash for acquisition opportunities. It gives us a lot of flexibility and quite frankly we do have a line of credit available also, but having that may be continue to have that conservative balance sheet is something we would like to have going forward?

Unidentified Analyst

I apology for that last statement for sure and don’t take that lightly, but I am looking into your business over cycles here. You could easily pay out like 2%, 3% dividend yield at current prices without really stressing anything out. I don’t know – my reason of really bring it up, as we’ve (inaudible) double and triple this company either organically or inorganically whatever it might be, but the volatility of the stock. I mean it’s probably scares a lot of people away from buying this and I think the nice healthy dividend will give people a little confidence that sort of ride it out little bit longer rather than trading on the macro whatever it might be or asking you just how a current quarter went and your business is lumpy. It’s years, not quarters, that’s just my thoughts and taking forward.

Deborah Pawlowski

Thanks Jig.

Operator

Thank you. Our next question comes from the line of Brian (inaudible) Capital Markets. Please proceed with you question.

Unidentified Analyst

Good afternoon, guys.

Deborah Pawlowski

Hi Brain.

Jim Lines

Hi Brain.

Unidentified Analyst

What are you guys seeing any pressures on commodity feedstock, steels, resins anything on the cost of goods sold?

Deborah Pawlowski

Brain, we’ve seen a little pullback, a favorable reduction in cost, but we don’t think that’s going to be long-lived. We look at the commodities continuously for large projects to make sure our cost basis is reflected properly in our bids, but just to answer the question we have seen a slight pullback in steel, copper, nickel-based alloys, but again we don’t think it’s long lived.

Unidentified Analyst

Okay. What – you guys said what was kind of your head count addition in number of employees that you guys have been adding, you talked about the middle of the company.

Deborah Pawlowski

Right. When we were – this is excluding energy steel, the addition of energy steel, that’s about 55 employees. When we were in the 2010 timeframe – fiscal year 2010, our head count was 240, 245. Our current head count now is about 285.

Unidentified Analyst

Okay, okay. I am assuming some of that, would that be engineering and maybe your comment on what you guys see the scarcity of qualified engineers?

Deborah Pawlowski

We have added to our engineering team. There were certainly with strategic intent additions there to prepare our business for what we’re seeing as strong demand as the markets more fully recover and we wanted to get ahead of it while we have the opportunity. That was not something we’re able to do in our past, but we are doing it now.

Unidentified Analyst

Okay, all right. And then kind of jumping over to the Navy side, have you guys seen any bid work – obviously your naval propulsions, I am assuming with the CVN 78, the GLR 4, anything on CVN 79 in the John F. Kennedy?

Deborah Pawlowski

Well, the order that we have in backlog is for CVN 79.

Unidentified Analyst

Or it is within Kennedy?

Deborah Pawlowski

It’s – that’s GLR 4.

Unidentified Analyst

Okay, then the Kennedy is the 80, the CVN 80.

Deborah Pawlowski

We haven’t seen 80 yet.

Unidentified Analyst

Okay.

Deborah Pawlowski

We’re working on 78, they being the shipyard so working on 78 and 79 now. There is more work to be awarded and we hope to secure some additional work for CVN 79. We’ve not seen CVN’s 80 work yet.

Unidentified Analyst

Okay, okay. Is there any pressure from your standpoint? You guys talked about submarines side and I get but it’s been all this kicked around with the sequestration and potential from Nany down from John Lehman’s days on the rig and at 600 ships that kind of targeted 330 and potentially going to 238. And on top of that with the focus on Littoral combat ships, correct me if I’m wrong – I don’t think those are nuclear powered, is there any – if the Navy were to shrink, is that at all pressure you guys or do you see it more like just Naval carriers, submarines?

Deborah Pawlowski

I don’t think that changes our strategy Brian and that what we’re being advised now is the decision has been to maintain 11 vessel carrier program with carrier life being about 50 years. Therefore, every five years a new carrier is under construction and one in four for end of life. If that were to what we’ve heard maybe there was consideration of dropping that down to a 10 vessel carrier program, regardless of that being 9, 10 or 11, the carrier program for us is an opportunity of about $40 million of addressable opportunity currently that would come along every five to seven years whether it’s 10 carriers or 9 carriers or 11 carriers that’s’ very big for us. And the five cycle is – revenue cycle is three to five year, three years roughly, so that’s great baseline work we wanted whether there’s – we don’t see it dropping below roughly where is that from what are being told. But even if it did fall back by one vessel, it’s not a big worry to us.

Unidentified Analyst

Sure, sure.

Deborah Pawlowski

And also our focus which hadn’t focused on in our past submarine program that has a lot more consistency to it in terms of orders are being – or works being released every year for the two different sub programs, and our strategy is to get into those programs and become a supplier consistently to the sub programs. We started that journey about a year ago. I am very pleased with where we are at. I am very confident that we’ll be a player in that segment of the navy business and our team has just done a great job to be close to this point.

Unidentified Analyst

Specifically on that submarine contract, are you talking about new work or new Virginia Class submarines or are you talking about retrofits on the Seawolf and Los Angeles class (inaudible)?

Deborah Pawlowski

Talking about the next generation of Ohio class sub, the OSP.

Unidentified Analyst

(Inaudible) side. Okay. Okay.

Jim Lines

Ohio class replacement program and then breaking into the Virginia class program.

Unidentified Analyst

Okay.

Jim Lines

The Virginia class program, I don’t have these numbers exactly right, but there is planned to be 40 vessels, 45 vessels. 18 have been let, so there is another – therefore the math is 25 to 30 to get to be a part of and that’s very good work that we want to be part of.

Unidentified Analyst

Okay and would the Ohio class SLB and Boomer boats and the subsequent on that, most of it – if you look at the congressional research service (inaudible), most of that kind of a lot of part, are you guys actually getting hard discussions on that replacement or is a little like the air force and the ICBM next generation or it’s a lot of skepticism, but you don’t really see hard designs?

Jim Lines

I’d say we are seeing activity on the latter.

Unidentified Analyst

Okay, okay, and you have talked to about kind of your big quote activity if you kind of break it up by your mix refining, petrochemical, power and other any bid quote activity in one area of business is any heavier than another?

Jim Lines

Fortunately, we see a pretty balanced across a good amount of work in refining, a good amount of work for petrochemical markets. The Navy activity is very steady much more than it had been in our history in terms of the bidding activity, and nuclear market having energies deal for just 18 months now it’s hard to draw some time based comparisons. But we’re pretty busy with the bid work that we’re doing in the nuclear market. And then renewable energy, biomass energy that’s very active for us as well. So across our key growth markets of power, Navy, oil refining, petrochem, it’s a pretty balanced amount of bid work and we’re very busy. I think about the last cycle when it might play up this cycle as well, petrochem led the way initially ahead of refining and that may play out again this time.

Operator

Thank you. Our next question comes from the line of Jason Ursaner with CJS Securities. Please proceed with your question.

Jason Ursaner – CJS Securities

Good afternoon. I just want to follow-up on those last question to make sure I understand the work on the Navy, was there a specific reason you didn’t win content on the (inaudible)?

Jim Lines

Yes, our price was high.

Jason Ursaner – CJS Securities

Okay.

Jim Lines

It was a competitively bid and we weren’t the low bidder and that happen sometimes, but I can say in my experience sometimes the best orders the one you lost, and what you’ve been able to capitalize on with that lost order, and as I reflect up on losing that and what we’ve done in response to that, I think we’re much farther ahead.

Jason Ursaner – CJS Securities

Okay. And the $25 million order on the CVN 79, how much is been delivered to date versus what’s left in backlog?

Jim Lines

Through Q1, we have about between 25% and 30% of that project has been completed.

Jason Ursaner – CJS Securities

Okay. And at that time you won that contract, what would you have estimated your maximum potential dollar content, was at that point versus the $40 million addressable content today?

Jim Lines

The same.

Jason Ursaner – CJS Securities

Okay.

Jim Lines

There’re four – there’re three or four components that we hope to provide. We’ve got one of the components for CVN 79, the $25 million order that you spoke to just a moment ago. There’re two or three items that we would hope to provide that have not been awarded yet, that we’re pursuing, that were then extend our supply from where we are at, to perhaps $40 million in total.

Jason Ursaner – CJS Securities

Okay.

Jim Lines

The other components have not been released yet.

Jason Ursaner – CJS Securities

And those components, have those been awarded on the 78, is the 78 completely done at this point for you from an order perspective?

Jim Lines

Well, what we can address, yes.

Jason Ursaner – CJS Securities

Okay. And then on the, okay, so, on the CVN 80 there’s been nothing awarded at all.

Deborah Pawlowski

That’s right. That’s correct.

Jason Ursaner – CJS Securities

Has there been any talk for these, the last two to three components about a potential block purchase at all given that they pushed their length in the construction period on the 79?

Deborah Pawlowski

I don’t think they will group them together. I think they will award them individually. I would project that perhaps one item closes this fiscal year and hopefully we will be successful on that.

Jason Ursaner – CJS Securities

Okay, I appreciate the commentary, look forward to seeing you guys at our conference.

Deborah Pawlowski

You’re welcome and thanks for inviting us to the conference.

Operator

Thank you. Our next question comes from the line of Chris McCampbell with Southwest Securities. Please proceed with your question.

Chris McCampbell – Southwest Securities

Hi Jim, Jeff.

Deborah Pawlowski

Hi Chris.

Chris McCampbell – Southwest Securities

Can you maybe give a little bit more color on where we are on the acquisition pipeline that gives points on cash flow and maybe doing for long-term shareholders was right. I certainly agree that you guys need as bigger work test as possible, but well somehow would be awesome, but yeah I would love to hear the answer?

Deborah Pawlowski

Sure. Chris, yeah, we – as we did with our process around Energy Steel in that acquisition, we will look at a lot of companies that we are currently looking at a good number of companies and kind of read through that and make sure that we find some of these that’s had a long-term strategic fit as much as sitting on the cash right now, we’d love to be able to put it to use immediately on an acquisition. We want to make sure that the acquisition we make is the right one and as the Energy Steel, we took our time and we believe we are being rewarded for taking our time and the right opportunity fell on our lap today, great, but usually with this kind of process it will take some time. So there is a lot of companies out there that are kind of looking at where they are, what the cycle is and good number of them will be willing to sell themselves and we just have to find the one that’s a right fit. So, I guess patience is a virtue in this particular case.

Chris McCampbell – Southwest Securities

Would you say it’s a factor of price or is it just finding the right fit in terms of geography and countercyclical to what you’re doing in other places?

Deborah Pawlowski

It’s more the latter. I don’t think its price. I think it’s whether we’ve seen some pricing increases on the M&A side. I don’t think anything is out of range at this point. It’s really flying the right company that’s a right fit for us from – long-term strategic fit.

Chris McCampbell – Southwest Securities

Okay. Thanks guys.

Operator

Thank you. Our next question comes from the line of Joe Mondillo with Sidoti & Company. Please proceed with your question.

Joseph Mondillo – Sidoti and Company

Hey guys, I just had one quick follow-up question. In terms of pricing and margins, I’m wondering if you could just talk about the trends that you’re seeing over the last couple of quarters or so, anything changed I guess from six months ago where things really improving six months ago and things are flat total a little bit here just given the uncertainty or just talk about like what you’re seeing there?

Deborah Pawlowski

That’s a great question and that’s one of the leading indicators that we look at as management to as an indication of market health. We have began to see the profitability of our new wins over the last six months continue to improve comparing the same period the last 24 months. So, we’re seeing a healthier marketplace. We’re seeing a healthier pricing environment. We would attribute that to a couple of things. One is our price strategies. But outside of that, we’ve also seen a larger number of project opportunities at a given point in time being available to the market to the equipment suppliers. So, we’re not competing against our competition for scarce few big projects, so that has helped and also preferentially we’ve seen the EPCs, Engineering Procurement Construction contractors that are less price sensitive in the purchase decisions win work. So we’re very encouraged by as we watch the backlog of CB&I, Floor, KBR, Jacobs. Those can be improved pricing environments then if we are waiting work from Asian EPCs.

Joseph Mondillo – Sidoti and Company

So when you think about your gross margin range, has that sort of changed at all in terms of one end or the other over the last six months?

Deborah Pawlowski

I think with respect to the guidance as it relates to fiscal 2013, a big factor there is capacity utilization. We have some capacity we still need to fill to get the right leverage. This quarter is pivotal for that in terms of the order intake that we receive this quarter and the timing of what our customers need shipment and that can have a large influence on the actual realized margin, in addition to the pricing power that we might be able to garner. So I view this quarter really as a very important staging quarter for the less of the year.

Joseph Mondillo – Sidoti and Company

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Tom Spiro of Spiro Capital. Please proceed with your questions.

Tom Spiro – Spiro Capital

Tom Spiro, Spiro Capital. Good afternoon.

Jim Lines

Hi Tom.

Deborah Pawlowski

Hi Tom.

Tom Spiro – Spiro Capital

Hello. Jim, I was a little curious about the Canadian oil sands market. I wondered whether the tone of the market may have shifted in the last few months as prices have come down, growth is sluggish, lot more oil coming out of fracking process in the United States, do you find your customers up there looking at the future with as much enthusiasm as they might have been six to 12 months ago?

Deborah Pawlowski

We have seen some increased tentativeness and a slowing of a couple of projects and sledging of one or two. I’m not certain that was attributed to the direction of oil or the increased availability of shale oil, but we have seen over the last two quarters some change and more towards a tentative change being more cautious. We still see though that is going to be considerable investment there. And while some projects have fallen to the side for a moment, we think they will be reactivated in one or two years. So, it’s a timing issue and in any respect though we have always seen the oil sands marketplace for us never really be more than one or two big projects in an 18 months period. That’s just a pacing of those projects. There is huge human resource need for those projects and they don’t really move larger cluster. They move one at a time or two at a time over an 18 months period. So, it seems to be who gets our first.

Tom Spiro – Spiro Capital

Thanks very much.

Deborah Pawlowski

You are welcome.

Operator

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

Jim Lines

Well, thank you very much. We appreciate your time this afternoon and your interest in Graham. I am very pleased with where we are, as we look at the steps we took the last two years to get Graham ready to grow more aggressively in the coming cycle with the diversity we’ve added through the addition of Energy Steel with the focus we on the Naval Nuclear Propulsion Program and the strength we see in our traditional markets of oil refining and petrochemicals gives us strong indications that being given to double our business over the next cycle is very possible. And we look forward to updating you on our progress during the next call in 90 days. Thank you.

Operator

Thank you this concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.

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