Karen Howard - IR Jim Lines - President and CEO Jeff Glajch - CFO.

Chase Jacobson - William Blair Jason Ursaner - CJS Securities Joe Mondillo - Sidoti & Company Brian Rafn - Morgan Dempsey Capital Management John Bair - Ascend Wealth Advisors Gabriel Birdsall - Brasada Capital Management.

Greetings, and welcome to the Graham Corporation Fourth Quarter Fiscal Year 2014 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, Melisa, and good morning everyone. We appreciate your participation in our fourth quarter fiscal 2014 financial results conference call. You should have a copy of the news detailing Graham’s results that was released earlier this morning. We also have slides associated with the commentary that we’re providing here today.

If you do not have the release or the slides, you can find them at the Company’s website at www.graham-mfg.com. On the call with me today we have Jim Lines, our President and Chief Executive Officer; and Jeff Glajch, our Chief Financial Officer.

Jim and Jeff will review the results for the quarter as well as our outlook, and then we will open up the lines for Q&A. As you are aware, we may make some forward-looking statements during this discussion as well as during the Q&A.

These statements apply to future events and are subject to risks and uncertainties, as well as other factors, which could cause actual results to differ materially from what is stated here today.

These risks and uncertainties and other factors are provided in the earnings release and the slide deck as well as with other documents filed by the company with the Securities and Exchange Commission. You can find these documents on our website or at www.sec.gov. With that, I'll turn the call over to Jim to begin.

Jim?.

Thank you, Karen, and good morning, everyone. I will begin on slide three. I would like restate our strategy for this current cycle is to grow our business to exceed $200 million in revenue. We will remain committed to be providing engineered-to-order custom fabricated products to principally the energy and related markets.

This is where our brand is exceptionally strong and we are rewarded for the differentiation that we have in our selling process,engineering knowhow and capabilities, our low volume high mix operations model and for our overall service to customers and aftermarket support. Please move to Slide four.

Orders in the fourth quarter were $23.5 million and full year orders were a record $128 million, up 34% from the prior year, year-end backlog was $112 million. Fourth quarter revenue was $26.1 million, up 6% to 10% from the previous to sequential quarters. Full year revenue was $102.2 million.

We earned $2.3 million or $0.23 per share in the fourth quarter and $10.1 million or $1 per share for the full year.We added 9.4 million to balance sheet cash and investments during the year.Top-line growth for fiscal 2015 is expected to be between 17% and 27%. This is based on order expectations and strength of our March 31st backlog.

I am referring now to Slide five. During the fourth quarter, we began to have the impact of the North American chemical industry orders that were won during the June to September timeframe last year. Chemical industry sales were $10.5 million in the quarter. It was good balance of sales among our other key markets.

On prior conference calls, it was mentioned that it was to be anticipated there would be engineering churn between us and our customers that would affect finalizing designs and getting these North American chemical industry orders into production.

This was because certain orders that were wonearly in the procurement cycle of our customer and therefore would have designed conditions not finalized until after the order.We had hoped to begin production sooner such as during the third quarter,however, many of the orders are now released into production as can be seen by the level of chemical industry sales during the quarter.

78% of sales in the quarter were for U.S. installations and for the year it was 62% of sales. With those brief remarks let me turn it over to Jeff to provide financial details.

Jeff?.

Thank you, Jim and good morning everyone. I am on Slide seven, right now. Q4 sales were $26.1 million down from $30.9 million in last year’s fourth quarter, but up from $23.4 million from the sequential quarter in fiscal 2014.

As Jim mentioned, the sales split in the quarter was 78% domestic, 22% international that compares to last year’s fourth quarter which was 53% domestic and 47% international. Gross margins in the quarter were 28.4% down from 34.1% last year, but up sequentially from 26%this sequential quarter.

EBITDA marginswere 14% in Q4, down from 20% last year, but again up from 11% in Q3 of this year. Q4 net income was $2.3 million or $0.23 per share compared with $4.1 million or $0.41 per share, but again sequentially up from $1.4 million in last quarter. Turning to slide 8. Full-year results were relatively flat compared with last year.

Sales were $102.2 million, down just under 3% from a 104.9 million last year. For the year domestic sales were 62% and international sales were 38%. This compareswith last year where domestic sales were 53% and international sales were 47%. Gross profit was flat at $31.8 million though gross margin increased to 31.1% from 30.3%.

SG&A for the year was $17.3 million compared with 16.6 million last year. However, last year we had $975,000 one-time credit related to an earn-out adjustment. Adjusting that out SG&A was actually down by $340,000. EBITDA margins were flat at 16.5% and net income was down $0.11.

However when adjusting out last year’s one-time credit, EBITDA margins were up 90 basis points and net income was essentially flat, down just $28,000. Turning to slide 9. Our cash position as Jim mentionedincreased by $9.4 million, up to $61.1 million at year-end.

While our capital expansion in Batavia is fully on track to be completed this summer as planned, the cash outflow has been a little slower than planned. We have spent approximately half of the cash for the project. Our full-year capital spending was $5.3 million.

Therefore, as we look at fiscal 2015 we expect to spend $5.5 million to $6 million, of which approximately 60% will be to complete the capital expansion here in Batavia. We expect to continue to generate strong operating cash flow in fiscal 2015.

Much of the cash early in the year, that is generated, will be used for the capital expansion, but we expect full-year cash flow still to be very strong. 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 not only internal growth and investment opportunities but also for future acquisitions. With that, I'll -- Jim will complete the presentation and comment on our view for fiscal year 2015..

Thank you, Jeff. And I’m commenting on slide 11. I am very pleased by full year orders of $128 million. In the third and fourth quarters we observed some hesitancy, but more of what we believe to have been staging by our customers for the next wave of orders that are expected to break in fiscal 2015.

For the first quarter, there was even balance of orders by market segment; again though our U.S. markets were strong contributing 63% of orders in the quarter, by comparison orders for domestic end-users were 72% of total full-year orders. Our bid pipeline is still strong and double the size it was in the fiscal 2004 timeframe.

In the pipeline of bids is a considerable level of North American chemical industry activity along with strong amount of global refining market bids. Moving on to slide 12. Backlog was up 30% from a year earlier. I am pleased with the balance in our backlog across our key markets.

Roughly 40% of the $112 million of backlog is from markets or customers that are new since fiscal 2009. That is exciting to see and proof that our strategies to diversify, has had a positive impact on our business. 70% to 75% of backlog is projected to convert in fiscal 2015. On to slide 13. Fiscal 2015 is setup very well.

There is a terrific level of backlog entering the year with approximately $80 million of the backlog projected to convert in the year. Market fundamentals remain strong. Our bid pipeline is elevated. Margins do appear to be inching higher. And importantly, we are at business today that can execute much differently than in our past.

The year is expected to build as we move quarter-to-quarter where Q1 is a step up from the past quarter and Q2 is projected to be stronger than Q1. Full-year guidance is for revenue to be between $120 million to $130 million, gross margin at 30% to 32%, SG&A of 15% to 16% of sales, and a tax rate between 33% and 34%.

Melisa, I would like the call open for questions at this time. .

Thank you. At this time we’ll conduct a question-and-answer session (Operator Instructions). Our first question comes from the line of Chase Jacobson with William Blair. Please proceed with your question..

I have a question about the revenue guidance first. You guys had good awards this year but looking at your backlog and the expected 70% to 75% that's going to convert to revenue it assumes a pretty meaningful piece of the revenue in fiscal ’15 comes from new awards.

So am I right to think that there should be a meaningful pick up in orders in the first half of fiscal ’15?.

That’s a fair way to think about it, yes..

Okay. And I guess just related to that I mean lot of the EMC companies and it’s really just the way the margin works, projects come out with schedules and then the schedules tend to move to the right and it’s not always fundamental.

But what gives you the confidence that these prospects convert to firm orders with firm schedules in the next three to six months?.

Sure. Chase I would expect your comments relate primarily to the North American petrochem situation where there is this continued movement to the right. We are seeing that. We have, as we announced this morning, we did secure an order for the North American chemical industry new ethylene plant.

We do have confidence that others will be secured over the next Q1 and Q2 but importantly we’re just not focused on the North American chemical markets.

We do have in our pipeline some faster turn in terms of the bid work they convert more quickly and refinery upgrades are rebounds for the North American market that we are expecting to close either this quarter or next quarter and we have light of sight to those projects now.

And all in all as we look at the bid pipeline, the activity of our discussions with our customers we have this confidence that if our backlog is at $112 million 70% to 75% converts over the next 12 months that’s roughly $80 million suggesting another $40 to $50 million is needed to land within the guidance of 120 to 130 million.

I am not uneasy about that top line guidance..

Okay, that's really helpful.

And Jeff on the gross margin is the flattish gross margin year-over-year I know you had some benefit in the first half of fiscal ’14 with the aftermarket stuff coming through but when we look out is it -- does that have more to do with the pricing at this point in this cycle or is it because that outsource work is still flowing through the income statement and is this the type of thing where once that outsource work is shipped we see a meaningful step up from the I guess higher 20s into the low 30s how does that progress during the year?.

As we think about the gross margin and that’s a good observation of 30% to 32%.

What’s important to bear in mind and I will strike a comparison here let’s think about where we are in this recovery and I would argue we’re still early, we’re entering the recovery it hasn’t had -- hadn't reached its full stride yet and I would contrast where we are now to where we were in fiscal 2006 and 2007 and if you contrast the 30% to 32% gross margin we’re projecting here to fiscal 2006 and 2007 which was mid to upper 20s, I would characterize both market fundamentals to be quite similar.

And as we move forward we’re expecting margins to continue to inch up again as I mentioned in my prepared remarks we’re beginning to see that occur with a quality that’s trending into our backlog.

Thus we have to deal with the margin quality of what we booked the last 12-15 months which I don’t believe is bad, it's more representative of where the market cycle was at that point in time but as we move forward I am expecting improvement in margins as we go through a few more quarters and get into 16.

We would expect margins to continue to improve..

Okay.

And just one more, can you comment on the Navy opportunity, some of the big submarine contracts announced recently in terms of the ship builders I know their suppliers and you know you’ve had good results in your other category particularly on the award side, can you just comment where you stand with the navy as it relates to carriers or submarines at this point?.

You’re right, there have been a few announcements regarding funding appropriation for Virginia class and Ohio class programs. We are involved in those biding for activities.

We do feel that this coming year fiscal 2015 will be very important for us and invalidate the strength of our strategy as we enter more fully these programs and that's my expectation and this will be a very important year for us to demonstrate that the strategy has traction.

The navy is receptive to the value and the support we provide and we’re looking forward to bringing these orders in..

Okay. Thank you very much..

Chase, just one follow-up by the way on that, you may have noticed in our slide deck on Slide 12 that we have broken out what used to be the other backlog into defense and other and so what you’ll see in there is that of our total backlog approximate 25% of it is defense just as a reference point that’s something we started breaking out now..

I did see that. Thank you..

And just to clarify further that the comments that I made relate to the submarine programs, we do expect to begin to see activity for CV and AD the next carrier sometime during the next six to 12 months is what we would expect to see the bids come out for that..

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

Appreciate the details you provided Chase on the revenue guidance and the confidence that you’re going to generate that from the big pipeline.

Just a couple of follow-up questions, obviously you narrowed the revenue range by 5 million on both ends, in terms of taking up the top end of the range just want to make sure -- I understand it sounds like this is just the level of order activity you won to date and there is timing for how those, those shipments are going to shape out for the full year but you are not signaling any change in terms of the overall cycle opportunity and what you’re seeing over the next couple of years? Is it the right way to be thinking about it?.

That is a correct way to think of it..

Okay and the gross margin, if assuming the order activity does materialize as you’re expecting and revenue averages out to 30 million or above a quarter for the whole year, if I look back the last couple of times you have eclipsed that that threshold the average gross margin in the quarter was above 36%, so just maybe you could talk a little bit more about the pricing environment now, I guess my understanding was it really hasn’t been too different than the last couple of years and if anything maybe has gone a little better so just maybe why gross margin wouldn’t be more consistent with some of the higher levels you generated in the past?.

The key there to those two times when we popped over 30, in the one case the most recent case and we had commented on this, it was due to the strong level of short cycle quick turn aftermarket type of orders that were for the U.S. refining market, they came in and came out relatively quickly.

We didn’t anticipate and we were accurate that would have been sustained, so that was a unique case that I think was back to Q1 and then a year or so earlier we had a very strong quarter that reflected the margin of an international refining project that was actually won at the peak of the last cycle in terms of the pricing power, but was put on hold for production until fiscal ’13 and we benefited from that pricing environment and revenue conversion three or four years after the pricing was established, which was the peak of the last cycle that was not representative of the market environment at that time.

What you’re seeing here with the 30ish percent gross margin, 30% to 32% gross margin, very similar to the gross margin we wrapped up this past fiscal year, that truly is indicative of the market environment we’re in right now as we look back for the last 12 months.

And therefore lease through to sales, but the point I want to again make is I would compare the market environment now and last year to what it was like in fiscal 2006 and fiscal 2007. We are not into strength of the market yet..

Sorry. What I was saying, just staying with that in terms of the core pricing environment, I think you characterized it as still representing more of an early cycle and I guess what I am getting to is how much room in just the core pricing is there relative to where you had previously been in some of the top cycles.

I mean is there still a lot of margin room left relative to where you are riding these, excluding the short order work and all that stuff..

I firmly believe so, and as we’ve -- as Jeff and I have said over the last couple of years is while fiscal 2008, fiscal 2009 the white hot periods of the last cycle, we eclipsed 40% gross margin. We expect this cycle not to be quite as strong but push gross margins to the mid to upper 30s.

With that as the basis, I would expect there to to be measurable margin improvement as we go into this cycle..

And I think you mentioned you had 25% of the backlog is defense, is the expectation from military contribution as a percent of revenue pretty similar to that or a lot of that backlog is obviously multi-year..

That backlog Jason is more extended, we envision over ’15 and ’16 that our defense strategy would represent somewhere below 10% of revenue.

However as we go forward looking beyond the next two years and if we actualize and we intend to actualize our strategy here, we would expect to see the naval program, the defense program represents 15% to maybe 20% at the upper side of our revenue..

And just last question for me the cash balance, I know it’s down a little bit from last quarter just because of the investment you guys are doing. But overall I think you guys have done a really great job there and even with the higher CapEx budget for next year obviously there is still a lot of cash and excess liquidity on the balance sheet.

So maybe just could you walk through any additional details on the acquisition environment you’re seeing, price expectations from sellers pretty reasonable right now and maybe are there any specific adjacencies that you could talk about that are more interesting or less interesting than others..

Jason the acquisition environment right now, while in some areas it’s still pretty pricy, there is other areas that are more reasonable and obviously we would look in the latter category.

We have a pretty consistent pipeline at any point in time, we have opportunities and for us it comes down to finding that right company, we have a pretty wide net out there of places that we would look whether it’s in adjacent markets or it’s in areas that would leverage our sales team.

So we’re continuing to look and again, it's just funding that right company. But pricing itself is actually, there are pockets of the market that are pretty reasonable. But it does seem to be picking up a little bit..

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

The first question and I know the last two callers asked about it. But I just want to touch on gross margin if you will. It seems like to me anyways utilization fell dramatically following the ’09 recession. And we saw a bounce back in ’11, ’12. And then since then really revenue for you guys at least has been fairly flat on an annual basis.

And so I was wondering if you could just comment, because my feeling of things is that utilization, capacity utilization amongst the industry was just so low through last year and we started to see orders come back and we’re looking at mid-20% growth on the top line this year.

If we see another strong year of orders this year, you’re going to see another growth on top of that in ‘16 and so I guess my question is by the time we get to ‘16 because utilization amongst the industry as well as yourselves, are you anticipating at that point in time to see a pretty big uptick in gross margin after seeing at that point in time, two years of strong top line growth? Any comment on that would be good..

We would anticipate if what plays out, as what you described and what we believe which is year-over-year strength as the markets progress through this recovery and expansion that we would begin to garner some leverage and we also would being to be favored with a step up in pricing power.

You couple those two together and we begin to visualize that our gross margin moves into that mid to upper 30% range..

What have you guys planned for headcount this year?.

Our headcounts will likely go up by approximately 20 more people from round numbers 400 people. And we’ve been adding about that number per year for the last couple of years. .

Okay, and then also, in terms of raw material prices, how are you gauging that in terms of your gross margin expectations?.

We are anticipating as these recovery goes on that input costsgo up.

Our process though is that we tend to pass that cost directly into the customer base and our ability to lock down commodity prices after we have an order -- raw material cost after we have an order; so we are expecting material cost to increase, however, we’re not expecting it to erode our gross profit.

We'll pass that into the market as quickly as we can. And we stay on top of that very diligently. We watch that closely and so we are anticipating nickel to climb, copper to climb, probably steel to increase, and we’re already reflecting that in our bids ahead of those true cost increases..

Okay, so if we see, say, raw material prices start to sort of decline throughout the year that could probably be a benefit to the guidance that you have out there, given that you record the contract and then any benefit in downside of prices, you will benefit from that at the end of the shipment..

Not really, there could be, of course and I would expect that supply chain to grab that when they can. But our process is, for volatile materials, and I would say nickel-based, copper-based and exotic alloy based material, we don’t gamble. We take the order and we commit as quickly as we can to lock in our costs.

So there might be some improvement in raw material cost with carbon, steel, and some other peripheral materials that we would buy, that we could enjoy some improvement as cost drop down, but I would not expect that to measurably change the gross margin..

Okay, shifting gears, domestic versus international; I think it’s sort of been playing out the last couple of quarters, sort of what we have been hearing just in general economic sense versus some of those international markets, but what is your sense of things internationally, do you anticipate any sort of improvement going forward here? What’s your sense to that part of the world?.

I think we will continue to see a strong North American chemical industry marketplace. However, on a global front we are seeing our bid activity for refining sector improve, and I would expect to see global refining work pickup as this year progresses.

And international Pet-Chem in Asia begin to pick up and the Middle East probably another year still out. Looking at ‘15 I would expect again the focus to be -- strong market to be North American chemical industry, North American refining upgrades and revamps, and then ongoing improvement in the international refinery markets..

Are you seeing any signs of that or bidding activity, or anything internationally?.

Yes. We are seeing it in our bids. .

Okay, and that’s just recently turned in the last quarter of two? I am just basing it offof sort of some of the weakness that you see in, I guess in Asia and Middle East the last two quarters?.

Sure. We are seeing the bidding activity, some of its early which doesn’t suggest that there is orders closing for these opportunities in the next quarter, but there is bidding activities some of the projects that had announcements that they are green-lighted to go.

Examples would be the Kuwait Clean Fuels Projects, some additional work in Oman where Sohar refinery and then in Asia, Malaysia, the PETRONAS refinery activity, and we are seeing China begin to come out of its pullback with some refining works from both Sinopec and Petro China along with CNOOC. So we’re really encouraged by all of this put together.

It doesn’t mean it’s right in front of our windshield, and it’s going to close next quarter. But the fact that we're seeing the bids come into our pipeline, we’re doing the early work. It depends that we do very well, it bodes well for coming quarters, as we look out..

Okay, and then just lastly, the 25% to 30% in the backlog that's beyond fiscal ’15; is all of that planned to be shift in ’16, or is there anything further out?.

There is about 10% of it that's more than two years out. I think that’s on slide 12 of our chart..

Okay, 10% of the total..

Correct..

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

Give me a sense, Jim you talked a little bit about, how would you kind of quantify your bid coal activity, would you say it’s robust, would you say it’s steady? And then you also spoke a little bit about, you said that since 2009, 40% of the orders are from new customers, the customers you didn’t have previous to that.

Does this new penetration of customers broaden it all your kind of base business in the future or repeat business with newer customers and may be give them, Graham, a little bit of an advantage on a workday?.

Okay. There is two questions there, the first one is the bidding activity is quite intense. Our sales guys are trying to come up there, they are very busy, a lot of coal churn, just tremendous amount of activity. So, I am pretty encouraged by that, that’s a good leading indicator from how I judge it in my chair.

And then in terms of diversifying as we've done and a little bit on that of course the defense strategy and our focus in the power market along with broadening the customers that we access in our traditional markets of refining, petchem and related markets.

We've thought about the importance of moving our fixed base higher, the predictable level of business that doesn’t have the volatility of -- or the variability of our major contract work.

Ultimately we want to dampen earnings volatility and the way we envision doing that was by diversifying into new markets power and the defense along with a strong focus on moving our fixed base, our predictable fixed base higher. And I am extremely pleased by where we've been able to move our fixed base.

I am not thinking about a downturn, I can’t tell you when that is but I know we will have, I feel strongly, we will have a stronger performance this coming downturn whenever that might be, than we had last downturn because of our diversification and our focus on the predictable base business. .

Yes, okay, okay, that’s what I thought, good, good, good. Let me ask you and again your visibility because your boot's on the ground out in these markets better than any of us on the call.

What is your sense, Jim, from the propensity of getting kind of quick turn short-cycle, I don’t want to call it book and ship business, but it is versus something you are fabricating and designing over 18 months or two years.

What is the propensity across some of your end markets to get some receptivity some of that short-cycle business as kind of fill-in?.

So, from a quantitative point of view it stepped up. We've seen that segment of our business and I refer to that as our predictable base. We've seen that move up both in volume and inch up in margin again I am quite pleased with that.

And we are seeing that in our OEM sector, our work in the petrochem, some industrial sectors along with our small work that we sell to refining petrochem markets and partly and there is aftermarket and that’s been moving up well as also.

So, across the broad base market segments we serve, our strategy to drive our less cyclical portion of the business higher, is executed very well thus far, is executing very well thus far..

Okay, all right, good. You talked about 60% of the 5.5 million to 6 million property, plant and equipment CapEx budgeted will be to finish out the expansion. Can you just kind of give a little visibility relative to --is it more buildings, is it equipment installation, is it welding furnaces.

What is it specifically you are going to spend out for the next year?.

If we look at the expansion that we referenced in our remarks, that is two things, one, there is some additional roofline there but on top of that we are utilizing older roofline that had not been utilized in the past and put some manufacturing equipment under that roofline.

So, it’s really both in that regard and then the remaining capital spending that we have, the other roughly 40% or so, is just kind of normal ongoing maintenance capital as well as improvement in manufacturing of our existing product line or financial line..

Okay.

Jeff on that, the additional machinery and tooling, is that incremental tooling that gives you competencies in new areas or you are just kind of expanding the footprint of whether it’s welding or tooling that you already have?.

It’s more of the latter and it gives us much more flexibility around our production process also.

One of the issues that we have is, if you have seen any of our equipment, it’s just pretty darn large and when something is in our production line, it can sometimes block other production because you can’t move it,it was partly through through production.

So, this gives us more flexibility more floor space and the ability, at the end of the day this just gives us more capacity but it’s very similar to from a production standpoint to what we do today..

Yes, okay. That’s what I am looking for.

What -- the cash is invested where Jeff?.

Cash is invested primarily in money market accounts and some in treasury bills in the United States as well as CDs in the United States. About 5% of our cash or roughly $3 million is invested in our -- to support our entity in China but that’s the only cash that’s offshore..

Okay. And then you spoke a little Jim about the Navy side, couple of questions.

The CVN-21, I don’t know if you call it kind of preliminary sea trials but there have been some problems with the EMALS electromagnetic launch ships brand new it’s not the old steam catapults are there any issues that you’re seeing that would cause Navy from a delay standpoint having a brand new prototype carrier CVN-21 that might slowdown the John F.

Kennedy or the enterprise?.

The program is structured to be on platform centers, each carrier comes out every five years, is it conceivable Brian that the centers for 80, 79 to 80, move to a six year center, that’s possible. I remarked earlier that we anticipate sometime in the next six to 12 months to see the bidding activity begin for CVN-80 next carrier.

Bearing in mind we won that order for CVN-79 in December of 2009 so five year center would suggest approximately the end of 2014 calendar 2014 will be when procurement occurs.

We would envision a little slight to the right I don’t know if it’s pushing out fully to a six year center or longer but there is some push out and when you have a new class vessel coming out which is what 78 was they tend to take a bit longer with the launch of the first vessel as they work through the design some of that still gets worked out in the next vessel 79 and gets lined out as we move to 80.

We still are very optimistic and now we’re hearing suggest somewhere between five and six years center between 79 and 80..

Yes. Okay, yes because I think that dovetails with the some of the ship building plant. Do you have any sense from the standpoint of your business with the Navy is there any you’re looking at the Virginia-class attack sub business maybe a replacement for the Ohio class boomers.

Is the carrier business for you from a content standpoint or from an ease of bidding any different than what you anticipate on the submarine side or is the Navy pretty much the same customer?.

None of it is easy and they each feel the same..

Okay, all right. Thank you..

[Multiple Speakers] the complexity of the bid and what order of magnitude of the opportunity set for us subs are rough order of magnitude 50% to two thirds of what a carrier opportunity set is..

Okay, that’s fair enough. If you look at -- one last question, if you look at the Navy business from an engineering standpoint a lot of time you see in the airports that where you're changing specs constantly, very fluid on the engineering side.

Is the Navy from that standpoint different than your other customer end markets get energy or petrochemical or you constantly having engineering changes and drafting and design changes in all of your end markets?.

Well, we have engineering churn in our end markets quite commonly and we talked about that in our prepared remarks. With the naval work when there is a new generation vessel coming out there is going to be engineering churn.

Once the program is underway and it becomes more of a build to print type of production process there is a course less engineering churn but all the way through this whether it be first generation or ongoing vessels after that there is a very huge project management activity that goes around these orders more complex than our core business..

Okay, all right. That’s what I am looking for.

And then one Jeff you mentioned a little bit about that I am guessing you’re talking about capitalized multiples and EBITDA, what are you finding in the acquisition area that’s -- how would you say that real expensive gear is priced and what are you finding in some of the areas that maybe have a little less multiple? I guess I am looking for more of a numeric range?.

Sure. When we did our acquisition few years back, we at the time paid six times EBITDA and with the earn out it end up a bit lower than that.

I would say that the ranges we’re seeing now are certainly little north of that right now and some of it is in certain markets are too pricy but in the markets that we’re looking and they’re certainly north of where we were in that last acquisition but not out of line..

Yes, okay. And on that Jeff are you seeing some of that pressure, are you seeing just a number ofstrategic business buyers or are you seeing some of the financial buyers, be it private equity or whatever driving up some of those multiples..

Just before you answer, Brain I am going ask -- after Jeff answers just wondered if you can get back in queue if you have a few more questions..

Sure..

Brian we’re seeing both, we’re certainly seeing strategic buyers and we are also seeing activity in the private equity side, and that might be driving prices up a little bit but we’re seeing a mix of buyers in the market today..

Thank you. (Operator Instructions). Our next question comes from the line of John Bair, Ascend Wealth Advisors. Please proceed with your question..

My question pertains to the international area, it looks like your overall backlog orders are really well balanced.

So if that international side picks up where do you think that would predominantly come from? I know you mentioned previously to a previous question about refining areas internationally but is there any particular area that seems to be more encouraging than others? Europe versus Asia or vice versa or South America?.

The areas where there is active bidding going on for us, it's Asia, Middle East, South America and its refining in petchem and some alternative energy..

And are there any new market areas whether you’re kind of looking at either from the acquisition standpoint or as an expansion of your existing capabilities? Are there other markets that you could serve that are maybe parallel to somewhat different than what you’ve got going right now?.

Sure, there are, if we peel back then and think about what we’ve conveyed, we’re focused on engineered order products, long sales cycle; applications where product performance failure is a very extreme problem, value based decisions, we find that principally resides in the energy markets or those very closely related to those markets, very closely adjacent to those.

We’ve been looking at how can we leverage our core competencies of that sales cycle, our sales channel and our operations model. So we’re principally staying very close to our knitting..

Thank you. Our next question comes from the line of Gabriel Birdsall with Brasada Capital Management. Please proceed with your question..

Real quick, I just have a few questions. On Slide 13, it’s been out here for a while, your 200 million in organic revenue -- the cycle.

I'm curious, that’s been out there for -- when did you first put it? Two years ago or so?.

Yes, two years ago in October..

How the composition of that has changed since you’ve provided it? Meaning what end markets or geographies are now getting you to 200 million plus.

Has that changed much?.

It really hasn’t changed much, if we thought about the building blocks now versus the building blocks as we envision them two years earlier, they really haven’t changed and if you think about how we’ve diversified with our power sector strategy, our ongoing defense strategy, those are two very important building blocks.

And a rough high level view how do we get there, how do we go from 100 million to 200 million with our organic products. The naval strategy as we -- defense strategy as we mentioned, as we get into the cycle and should we be successful, we think that represents 15% to 20% of our sales mix, round numbers $30ish million.

Our power sector strategy which wasn’t part of our growth strategy in 2005 to 2009, we there too think that’s in the 15% to 20% of sales mix. And then the remainder is traditional ground, refining petchem. And that will come from taking market share, we left some share on the table last cycle, because we couldn’t execute it.

The customers wanted to work with Graham, however we were execution limited. We spent a fair amount of money, resources and time the last four years to resolve that constraint. The team has done a very good job, so as we go into this current cycle I am expecting we’ll take more share and push our core segment of our business higher.

So the building blocks basically are 25% to 30% of the 200 million comes from markets we didn’t have before. And the rest is we drive our core markets stronger and take more share, because we can execute so much differently today that we could last cycle. I don’t think we are market limited..

Thank you for that. My next question just is on the backlog, I mean it’s just so strong and so robust, I think when you've had calls in the past, you've have talked about investments that you were already making in anticipation of the cycle.

Is that correct?.

Yes, yes. .

So, you have already pre-spend dollars so to speak for future business?.

We did. We got ahead of it in the three -- I would say we were added very actively the last three years while revenue was flat at basically $100 million and income was flat basically $10 million to $11 million.

We poured a lot of investment into our business in anticipation for what we firmly felt would be a strong growth cycle and I still feel that’s going to play out and it does begin to show itself in '15 with a growth between 17% and 27%. And we are expecting growth after '15 into '16 of course.

So I feel very happy that we made those bold decisions two to three years ahead of demand, so we have the dry powder..

Very fortuitous, we agree.

So, everything in your backlog you would characterize as good margin business, is that fair?.

Yes..

And I know this was asked earlier, help us understand, how conservative you are being on your margin assumptions going forward, given good margin in your backlog already. You've already been investing for last three years in anticipation of this ramp.

How conservative are these margins for '15?.

At this point what our belief is that they range between 30% to 32% on average. What are we doing, what are we doing to keep that higher, what can happen? We have mentioned that our $112 million backlog about 70% to 75% of it converts this year, roughly $80 million. Therefore, another 40 million to 50 million has to be won yet.

We are aggressively pursuing that, but we are seeing an improvement in the pricing environment and the margin coming into the backlog with new orders. So, it depends on what we win, the margin profile of that and how quickly we can get into production.

So that’s not unusual and also the ongoing execution and the benefit we have from our strategies around the short-cycle business, the more predictable less variable business as we see that grow in volume and inch up in margin that has an impact.

And then our operations team, their committed focus on productivity, lead-time reduction, leveraging the assets we have. You couple all of these strategies together, is there upside? Yes. Are we conservative in the 30% to 32%? Not with what we see right now, however we are going after making that stronger, but I'm happy with that..

And a question have been asked numerous times in the past, correct me if I am -- correct my math.

You generated roughly 10 million of free cash flow for the trailing 12 months?.

Yes, right. .

That’s right, okay. So, you're left with over, call it just around numbers 20% of market cap in cash and no debt.

What is considered excess cash to you guys?.

I would say from an operations standpoint, the vast majority of that would probably fall into that category of our $60 million from an operations standpoint. However as we look to utilize that cash for investments as well as particularly on the acquisition side, we would like to certainly use that cash in that regard.

So, we don’t need $20 million, $25 million to operate the business. Certainly probably 15% to 20% of our cash flow would be more than sufficient, but we would like, certainly want to keep the dry powder available for acquisitions..

Sure.

And it looks like on my numbers, you're going to -- is there any one-time additional thing that you are spending CapEx for next 12 months over and above which you have already been spending for 2 million to 3 million per annum?.

Just the completion of our expansion here in Batavia, which again about half of it has been spent so far and the rest of it will be spent quite frankly over this quarter and may be the second quarter of the fiscal year and then it should be done.

And beyond that we've got our normal kind of $2 million to $3 million of capital, maintenance capital and improvement capital..

Another year you are going come and generating another 10 million to 15 million of free cash and when it’s all set and done, so you will be at 70 plus million in free cash flow. And so, you have talked about acquisitions and you've done some great ones in the past and you do have a small dividend.

It'd just be nice to see you get a little more aggressive on doing something with this cash, particularly where you are on the cycle.

I mean you've said before you're with '04 - '05 type time period, you're right in the front of this big lift here, it just seems like you've been great stewards over in the past, but it'd be nice just from my standpoint to see something little more aggressive?.

Sure, Gabriel. We certainly understand getting the yields that we are getting on our cash right now is not something that we’re particularly pleased with..

Okay. Thank you very much for your time..

Thank you..

Thank you, Gabe..

Thank you. Mr. Lines there are no further questions at this time. I’d like to turn the floor back to you for any closing or final comments..

Thank you, Melisa. We appreciate your time this morning and the questions that you did have.

Hopefully, you shared the enthusiasm that I have as we go into fiscal 2015 that we’re moving forward well, we’re going to have strong growth and the market fundamentals and the investments we’ve made in our business are coming together at the right time and Graham is a good story as we go forward. We look forward to updating you end of July.

Thank you..

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful weekend..