Greetings, and welcome to the Graham Corporation Fourth Quarter Fiscal Year 2020 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, Mr. Chris Gordon, Investor Relations for Graham Corporation. Thank you. You may begin..

Thank you, Melisa, and good morning everyone. We appreciate you joining us today to discuss Graham's fiscal 2020 fourth quarter and full-year results. You should have a copy of the news release that was distributed across the wires 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 on the company's Web site at www.graham-mfg.com. On the call today with me are Jim Lines, our President and Chief Executive Officer; Jeff Glajch, our Chief Financial Officer; and Alan Smith, Vice President and General Manager of our Batavia New York Facility.

Jim will start with a strategic overview of our business and provide our outlook for fiscal year 2021. Jeff will review the financial results for the period, and Alan will provide an operations overview. We will then open 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 on the call.

These risks and uncertainties and other factors are provided in the earnings release and in the slide deck, as well as with other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our Web site or at www.sec.gov.

I also want to point out that during today's call, we will discuss some non financial GAAP measures, which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for the results prepared in accordance with GAAP.

We have provided reconciliations of comparable GAAP to non-GAAP measures in the tables accompanying today's earnings release. With that, it's my pleasure to turn the call over to Jim..

Thank you, Chris. Good morning, everyone. Thank you for joining us to review fourth quarter and year-end results. I begin my prepared remarks on Page 4. We took quick measures in the latter part of March to respond to COVID-19 related risks.

Graham is classified as essential workers, because we are a critical infrastructure and defense industry supplier to protect our employees and to mitigate the spread of the virus in our communities, operations were geared down to approximately 10% production capacity.

We kept such scaled back production capacity for several weeks and ramped it back to near full production capacity at the end of May, as OSHA and CDC based work procedures and recommended practices were put in place. Production capacity will average 50% for the first quarter, and will be at 100% for the second quarter of fiscal 2021.

While operations scaled back, we maintained wage and benefits continuity for all Graham employees. I am proud of the response of the management and COVID returned to work teams that admirably prepared our facilities to have employees safely back on the job full time. Please refer to Slide 5.

Disruptions such as COVID, along with the collapse of crude oil prices, had a dramatic impact on our end markets, with an exception being our U.S. Navy work. We believe that new opportunities arise during downturns for companies that are equipped to capitalize on them, and Graham is one of those companies.

We entered this disruption with a strong balance sheet and excellent high-quality backlog. We will continue to invest in long-term growth initiatives. In particular, investments to drive our install base; staffing and structuring our U.S.

Navy segment to convert current backlog and expected new orders; acquiring opportunistically assets to strengthen U.S.

Navy revenue, or broaden participation in energy and petrochemical end markets; accessing the global fabrication supply chain to expand capacity, improve cost and change market share in previously underserved end markets provides a new runway for growth.

Building out that organization to ensure broad participation, nurture the opportunities, secure new orders and to control subcontracted fabrication in order to meet quality and margin requirements is critical to the success of this initiative. We will invest in personnel in support of this initiative.

We will also continue investing in process improvement and productivity gains, and also in our employees. We don't intend to take our foot off the accelerator. We will focus on the long-term and act during this downturn to strengthen revenue growth and profitability. This disruption was indeed a black swan surprise.

Nonetheless, we want to capitalize on the opportunities that such an event creates. And now refer to Slide 6. The refining end market is expected to be weaker this year than last with regard to new orders. There is however large project work in Asia, in particular for China and India. We are actively in the flight for those projects.

National and integrated refining customers have hold in CapEx and MRO spending due to cash flow strain that stem from oil prices falling and the abrupt drop in end market demand for fuels.

Oil prices must recover and more importantly, demand for transportation fuels needs to return to more normal levels before we anticipate that significant investment by our customer returns. We understand due to the global pandemic that demand for crude oil has fallen approximately 30%.

What is a bit different this time is independent refiners also are changing CapEx and MRO plans. This is due to demand abruptly declining and a lowering of frac spreads. Just as a reminder, frac spread is the difference between selling of refined products and the purchase cost of crude oil.

As the global economy recovers, we anticipate investment by independent refiners will recover more quickly to take advantage of spreads with improved demand. Given all of this, our backlog for refining end market was negatively impacted, to-date approximately $4 million of backlog on 12/31 has been canceled.

Chemical and petrochemical markets also were impacted negatively. This was particularly evident in North America. U.S. rig count has fallen by roughly two thirds, and coal produced natural gas supply was adversely impacted. As a reminder, natural gas is a primary feedstock to the petrochemical industry in the U.S.

We observed several final investment decision for petrochemical projects in our bid pipeline get suspended or delayed by a year or more. On the other hand, the next wave of global petrochemical capacity is starting to enter the early bidding phases.

This is principally for international markets, but does continue to show the decoupling of petrochemicals from the energy market. We do have a solid pipeline of bids for the U.S. Navy that we expect will close in fiscal 2021. The total amount of that pipeline is between $40 million and $50 million.

Our short cycle orders are off 15% to 20% due to the same reasons cited previously. We expect this recovers as the global economy gets back on its feet. Graham is very fortunate to have a high quality large backlog that on March 31st was $112 million. This will enable fiscal 2021 to have a sharp recovery from the first quarter results in fiscal 2021.

With our great balance sheet and terrific backlog, we are positioned well for capitalizing during this downturn. I will now turn the call over to Jeff to review the financial results.

Jeff?.

Thank you, Jim and good morning, everyone. If you could turn to Slide 8. Q4 revenue declined 2% but as Jim mentioned, we had $7 million moved out of those Q4 due to COVID-19 pandemic. Net income was $0.06 per share and net orders were $12.3 million. For fiscal 2020, revenue was $90.6 million, which is down $1.2 million from $91.8 million last year.

Net income was $1.9 million this year or $0.19 per share. Included in fiscal '20 net income was a loss of $900,000 or $0.09 per share related to the Energy Steel business, which we divested in June. Orders for the year were $80 million and our backlog at year-end was $112.4 million.

As Jim mentioned, our backlog will help us rebound from what will be a lighter Q1 where we were operating at approximately half capacity. Including Q1, we currently expect 70% to 75% of our $112 million year-end backlog to convert in fiscal 2021. The midpoint of this range would be just over $80 million plus additional in year bookings.

Alan will discuss this further. If you can move to Slide 9, sales in the fourth quarter was slightly below last year. Included in the fourth quarter of last year's numbers were $1.7 million related to Energy Steel. Gross margin was off 110 basis points and EBITDA margin was off 190 basis points. COVID-19 impacted gross margin in the quarter.

Net income was $600,000 or $0.06 per share compared with a loss last year. Last year's loss included an impairment charge. Excluding the impairment charge, last year had a net income of $800,000 or $0.08 per share. If you could move to Slide 10. For the full year, sales decreased by $1.2 million to $90.6 million.

However, please note that there was $7 million more sales last year compared with this year related to the Energy Steel business, which was divested this past June. There was only $1.3 million in Energy Steel sales in fiscal 2020 compared with $8.3 million in fiscal '19.

Gross margin was off 390 basis points, and EBITDA margin off 440 basis points, as we increased production costs for what was expected to be a strong growth in fiscal 2021 that obviously appears less likely now. The sales which push out of Q4 also adversely impacted margins. SG&A was $16.9 million for the year compared with $17.9 million last year.

Included an SG&A was $600,000 in fiscal 2020 and $2 million in fiscal 2019 for our divested business. Net income and EPS was $1.9 million and $0.19 per share respectively. In fiscal 2019, they were a loss of $300,000 and a loss of $0.03. However, included in fiscal 2019 was an after tax impairment charge of $5.3 million.

Onto Slide 11, our cash position in fiscal 2020 decreased by $4.8 million to $73 million or $7.39 per share. Our changing customer deposits swung significantly in fiscal compared with fiscal 2019. We had a swing of $10 million.

In fiscal 2020, we had a usage of $3.7 million from customer deposits compared with an increase in customer deposits of $6.3 million in fiscal 2019. We paid $4.3 million in dividends and spent $2.4 million in capital spending during the year. We expect capital spending in fiscal 2021 to be between $2 million and $2.5 million.

During our interim call in late March when we provided an update on how we were impacted by and addressing COVID-19, I noted that we estimated a monthly cash burn of $3 million if we were completely shutdown.

Although, we never completely shutdown, as Jim noted, we did reduce our staff to 10% for a few weeks and has steadily ramped back up from there. As a reference point, our current cash balance at the end of May two months into the quarter was $70 million, so down $3 million from March 31st.

We believe we are past any cash burn related to COVID-19 in Q1. As we look forward, this period of market disruption may present M&A opportunities, which may occur due to market consolidation and contraction.

Our business development, management team and Board of Directors continue to be focused on utilizing our strong balance sheet to grow our business, both short and long term. Alan Smith will complete our presentation with a look at operations and provide more insight regarding our backlog conversion in fiscal 2021.

Alan?.

Thank you, Jeff. Good morning, everyone. I'd ask that you refer to Slide 13. We entered the fourth quarter with a stronger outlook than what had occurred.

Sales for the third quarter were $23.1 million and were negatively impacted by the COVID outbreak due to production interruptions at our Batavia facility, as well as at our global partners in South Korea, Europe and China.

Unfortunately, the work stoppages caused approximately $7 million of projected third quarter revenue to push into the first and second quarters of FY21. Moreover, a short cycle order for the Navy pushed from fiscal 2020 into the first half of fiscal 2021.

As of June 1st, our Batavia plant and all of our fabrication partners are operating at full capacity. Moving onto Slide 14. As Jim mentioned in his remarks, the reduction in CapEx and MRO budgets as a response to declining oil prices and the disruption of COVID-19 is causing order placement to be delayed in refining and petrochemical market.

However, we are still experiencing strong demand for our products from our naval customers. We believe that our naval backlog will increase year-on-year. As a general comment, we are observing low order level to persist in the first quarter of FY21. I will conclude my remarks on Slide 15. Our backlog remained at a healthy level at the end of FY20.

As pointed out by Jeff, 70% to 75% of our backlog will convert into sales within the next 12-months. Using a midpoint figure that implies $81 million of fiscal '21 revenue is from backlog as of March 31, 2020.

This of course assumes no additional cancellation, of which there have been $4 million of refining and market canceled orders or no conversion delays caused by our customers. As you may know, there is a level of revenue that is booked and converted during a fiscal year. Historically, that range has been between $10 million and $20 million.

I would anticipate with the current order environment to be on the lower end of that traditional range. Lastly, naval projects are 50% -- 52% of our backlog and more importantly, all naval programs are in the revenue cycle.

Operator, will you please open the line for questions?.

Thank you. At this time, we'll be conducting a question-and-answer session [Operator Instructions]. Our first question comes from line of Joe Mondillo with Sidoti and Company..

So the production shutdowns, was that mainly related to internal safety concerns or customer shutdowns, or government guidance?.

The shutdown was mainly around preparing the organization to comply with the CDC recommendations. So that we can actually provide a safe work environment for our employees, and that process took us about two weeks..

And so it sounds like May was not near 100% quite yet in terms of that….

That's correct, Joe..

So if the operations got back up and running mid-April.

Help me understand the dynamics, the fact that May was not back up and sort of fully running?.

Sure. We made the decision to bring back our employees in small groups. So that we had opportunity to train them on what we expected them to, how we expect them to follow our safety protocols and then train them on the PPE required.

So to make sure it was safe, we brought people in over three phases and that's why it took until June one to have everyone back at work..

So June should be close to 100%, is that right?.

That's correct, Joe..

Is there any way you can help us understand the effects of April and May to your, whether your profits or margins, or not sure if there's any way you can help us understand the productivity inefficiencies that are related to essentially the shutdowns?.

As we had indicated in our prepared remarks, on average for the quarter, we would anticipate that we’ll be at 50% production capacity. And that doesn't necessarily translate proportionately to, that's what the revenue level would be. However, that's a decent surrogate to how to think about the run rate.

And it wasn't so much a productivity what we were amazed as our workers returned to work and returned to the workstations after the station indoctrination protocols were behind us. They were in fact working productively and efficiently. So there really wasn't a huge dysfunction or inefficiency related to COVID other than when the team was away.

Upon returning, they got right back to work. And we saw the productivity measures and the effectiveness of their work not being materially different from a pre-COVID, if you will. So I think you're trying to maybe frame if I can, maybe ask the question differently, ask the question.

You trying to understand what the first quarter revenue might look like?.

I mean, I gathered from your comments that it's going to be, I mean, yes, sort of. I mean, it's hard to, with your business is still lumpy on a quarter to quarter basis relative to how the backlog sort of is converted on a time expectation.

And then in addition to that, the margins are also quite lumpy based on the type of work that you're working that. And then layer in the fact that you have full plant shutdowns in the first couple of weeks of April.

And then when I was talking inefficiencies I was sort of referring to the fact that the second half of April is not, your employees aren't fully backed and then the same with May.

And so all of that is really sort of hard to understand the near term way to think about [Technical Difficulty] it's going to perform?.

We're not able to give complete definition for you, but I'm going to try to frame it try to answer your question. As we were thinking about how 2021 was shaping up pre-COVID, we were modelling something in the $110 million to $120 million revenue range. This is how we were thinking how 2021 was going to shape up.

Then of course that was materially altered. But just so I can do some simple math in my head, let's just use the 120. And that would equate to $30 million a quarter. If we were running at 50% productivity for the first quarter, half of that $30 million is probably not a bad surrogate for how to think about the revenue level.

And you've heard us indicate on our interim call in March and also here today we haven't taken actions to adjust our cost. So therefore, we have the costs that were reflective of that preparedness for that higher revenue level. Putting that all together, we're not trying to be opaque here. The first quarter is going to be rough.

And we took action or chose to maintain our capabilities and capacity, because we feel we’re going to have a sharp recovery in revenue and productivity and backlog where once we get pass this rough quarter. And it didn't make sense to try to adjust costs for an event that would be in our rearview mirror relatively quickly..

Okay, I really appreciate that that is extremely helpful. Helps give a much clearer picture, so I appreciate that a lot.

So in related to the cost side of the business and your comments in there, I mean your orders in the first quarter were obviously not surprisingly relatively pretty low considering, compared to the trend that the business has been running that and it's not a surprise given what's going on.

And I would imagine, you would expect and correct me I'm wrong, that orders are going to be quite light for the next at least quarter or two.

Given that how do you manage the business on a cost structure perspective, knowing that going forward probably from today for the next handful of months, your business is going to be running at pretty good rates, given the backlog. But then looking out, orders are going to be light.

And then at the same time, related to the same question in your SG&A if business is not really, is sort of slow out there. How are you adjusting SG&A, if at all, considering that there's just not a lot of business? I know that’s a long question….

No, it's an appropriate question. And it gets to our management philosophy. And you've heard us speak to this previously is we're not so hyper focused on maximizing a given quarter or a couple quarters’ performance. You are correct. Q4 bookings were light, as our Slide 14 shows, around $12 million.

You heard Alan Smith indicate in his prepared remarks that we're seeing order levels in our first quarter of fiscal '21 thus far persist at that softer level. However, when we look at our bid pipeline, we look at our activities from the defense sector that we have set up for hopefully to close and hopefully we are successful.

It suggests to us that let's get in, let's fight, let's fight hard for these orders that are available. Recognize we may have a tough Q1, we're going to be focused on how do we build backlog and exit 2021 with a backlog, or book-to-bill about one, if you will. And we think there's ample opportunity to do that.

And as you listen to management, the speak previously, we are in an ETO business, we are a custom fabrication business and the learning curve for the strength of our organization, our people, take some time.

So as we get these teammates to levels of productivity, we're always very reticent to quickly strip those out in respond to what you've just cited. We are mindful of it. We recognize we have to manage our business profitably. But we've chosen in our past and we're choosing to do it again. Not to necessarily try to fix a quarter and harm the long-term..

And last questions for me and I'll hop back in queue. Relative to your comments just there in that answer, so essentially a follow-up to that. The pipeline of business that you have, or the opportunity that you have for your bookings this year, I would imagine the pipeline and again, correct me if I'm wrong.

The overall pipeline would be smaller than a year ago. But is it a casing point where maybe your hit rate, your win rate, could be higher given the specific projects and your sort of, maybe vantage point for those projects.

Is that sort of what's happening? Or give me a sense of pipeline and hit rate, win rate, opportunities?.

Joe, there's really two dimensions to it. One is the end market mix of the pipeline, in our prepared remarks we've indicated that there's $40 million or $50 million of defense work in our pipeline. There's no assurance that we win any of it. But historically, we have a very good success level there and so, we're expecting to book that.

And then secondarily -- expecting to book a good amount of that. And then secondarily, there's project size that comes into the equation. So, I'm going to answer your question this way.

There are definitely fewer opportunities in the pipeline and there are some relatively significant projects in our bid pipeline that we know are going to close -- we feel very strongly they're going to close.

And these are -- we can have on our project side, our large bid work orders that could be a million dollars or orders that could be $5 million, or orders that could be $10 million.

And each of those leverage or engineering organization differently and they leverage our production assets similarly, depending upon if we're using a shared -- our global fabrication supply chain or having that work done in Batavia.

But as we look at this in totality, it didn't seem to us that the course that this business should take in light of the near term trauma, what's happening in our end markets was to strip a bunch of costs out of here that really affects negatively our capacity and our capability when opportunities arise.

And they will arise and we want to be ready and we want to be the supplier that can capitalize on that, while others that don't have that same sentiment, don't have that same conviction, don't have that same management philosophy, will be unable to do so..

Thank you. Our next question comes from the line of Theodore O'Neill with Litchfield Hills Research. Please proceed with your question..

Just two questions. Jim, you said in your prepared remarks that you're expecting a V-shaped recovery.

And then, wondering if sort of the assumptions behind that is that, are there some assumptions beyond that like the price of oil, or is that -- or are you're hearing that from your customers basically that that's what you're going to experience?.

It's actually a low hanging fruit question for us because of our backlog. The context of that remark is because of our backlog, after we get through the first quarter event, we have such a great backlog. It will appear as though from a revenue and profitability we're back.

The question really arises around how does the order book build while we're going through that backlog, which then manifests in how does 2022 shape up.

So the comment and the context was around backlog conversion, near term revenue and a benefit that Graham has because of a long cycle business or long conversion cycle business is we have several quarters of cover, typically when something like this happens because of the strength of our backlog.

And again, that comment was around the backlog, not end market..

And Jeff, you mentioned about M&A activity. Are you seeing any more opportunities there? And can you give us a little color on the level of activity..

Yes, Theo, we're certainly keeping our focus on what's going on in our markets. And we are hearing about some possibilities of companies who may be looking to offload a portion of their business for strategic reason. So there's a little more activity right now.

But again, it's fairly early since, certainly since the COVID-19 has hit our markets but we think that will continue to pick up..

Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question..

Alan, a follow-up questions for you, if I may, on your -- good comments on detail on expected revenue -- backlog conversion this year. I missed one element. You mentioned $81 million of revenue from backlog in fiscal year '21, provided no more cancellations and then there was another category that you discussed. What was that please….

There's another component, which is revenue derived from jobs booked within financial year. And what I was sharing was that historically that range has been between $10 million to $20 million. And the thought now with the current environment we're in, we would be towards the lower range of, lower end of that range..

And then following up earlier comments, and I understand keeping employees and the skilled employees in your company.

But did you mention, can you convert employees that were working on refining orders to what you can do for the Navy or you mention having to hire new types of workers, you know workers with different skills for Navy work in the future?.

Both in our production areas and in our engineering areas, we are able to move staff from our commercial work to our Navy work and to the extent that we can take those actions we will..

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

I want to ask you a couple different questions. The first one, you mentioned several times during the conference call, your plan to capitalize on the current downturn.

I think, I would like to hear you expand on exactly what that means? Sounds like the M&A, but anything else you missed on that?.

Certainly, Gabe that is one of the elements with our balance sheet and opportunities that we envision could arise through this pandemic and the consequence of the pandemic, and also the opportunities that we've been nurturing through our M&A activities. We definitely are sending and want to put our capital to work in an external growth strategy.

So that is one. And that's clearly focused on by Jeff and Chris Johnston, our Board and myself, to take that type of action during this opportunity that might arise. And then secondarily, there are projects that are in our bid pipeline that we feel strongly that will close.

And we want to be able to use our balance sheet with respect to with saying -- one of the things we see right now is cash flow strain with our customers, not necessarily we would define as credit risk but how they're being affected by demand changes for the price of crude oil.

They're asking for more, or they might be asking for more customer-oriented cash flow terms. With our balance sheet strength that creates an opportunity for us that others without the financial firepower that we have are unable to do so, so we think that creates an advantage.

And then the last one is, as these projects that can arrive sometimes very quickly in our pipeline, a spare part, a large spare part and these can be $1 million $2 million or a revamp.

It's so imperative that we retain our capacity and our capabilities to execute those, because even in a tough downturn like we likely will be in for a period of time, those bluebirds do arise.

And if you take actions to strip out your capabilities, you actually drive a self-fulfilling process of how far you can push revenue or how you might be able to capitalize on those opportunities.

We've chosen to be prepared with the dry powders to capitalize on those, rather than try to govern it down our costs to more align with near term revenue that corresponds to the bookings. It just didn't make sense to us.

What you have as for us a benefit as a management team, I wish I didn't have to have these experiences but we're now on our fourth downturn going back from the late-90s. And we understand how these play out, we understand customer behavior. One thing our customer cares little about is what we've chosen to do to respond to the downturn.

What they care about as can we stand up, can we support them when they need us. And they need us a lot during a downturn with engineering support, to be ready for that bluebird, handle the crisis situation.

When you lose a customer, because if you're ill prepared for that support and I've lived the consequences of being ill prepared and we're very reticent to be ill prepared now..

And I just wanted to ask, I mean, I know the stock and the market cap that you have, but 54% of the market cap is in cash, your multi -- going back 12, 15 year lows of equity given the environment.

Do you guys try to balance M&A versus your own company stock in that equation?.

Gabe, we certainly have that discussion frequently. At this time, we believe that there's a good amount of opportunity, particularly in this downturn in the M&A pipeline that we want to keep as much dry powder as we can in the immediate term..

No, I get that.

I'm just wondering if it does come into the equation?.

Absolutely, we discussed it off, every board meeting, it is a topic of discussion with management and the board..

Is any of the cash restricted?.

Very, very small amount, couple million dollars is restricted, about $2 million of our roughly $73 million at year-and or $70 million at the end of May. And almost all of us in the United States is about $3.5 million, about 5% of it is outside of the United States..

And the kind of assuming that we see you guys were active on M&A during this downturn. Is it caution on you all point or is it caution on the sellers point given the environment they think price is too low or something.

What would be the hold up at this point on potential M&A, given you’re fairly cash flow, you're going to have -- you're not as strong as you were going to be. But I mean you get 100% booked pretty much in revenue. So what we're looking for it looks like we're going to be slightly positive on the year from an EBIT standpoint.

What would be the triggers to get to see an M&A in your standpoint?.

I mean, you need two parties to cover an agreement if you want to buy someone, but there's really nothing that will hold us up as long as we can find that right, the company that fits, not just today or tomorrow but for the long-term that's in line with our strategic growth areas.

If we can find that right company, we'd certainly move forward quickly..

But it sounds like there's a potential pipeline of deals that you're looking out?.

Absolutely, there's always a pipeline of deals, it's just a matter of where things are in the pipeline. Part of our process, Gabe, is to build a relationship with a potential company that we're looking to acquire.

And those aren't things that typically happen over a couple of months or a quarter or two, they often can take many quarters or quite frankly a couple of years.

And as we're going through this process, there are companies that we may have been talking to a year or two, three years ago that maybe weren't ready at that time to be acquired, but might be more interested now. So we're looking back at not just companies that we spoke with recently, but also companies we spoke with over the past few years.

And hopefully between them and us we’ve built some trust and some open communication and we'll continue to pursue things that are there. But we always have a pipeline of opportunities. It's just a matter of where companies are in that pipeline and where we are in that relative to that..

And Gabe, just an add on to further what Jeff had said. Where these have broken down when we've been in the pursuit of trying to get a deal done has been the valuation gap. And we're focused on not in accretive type of deal, we're focused on an equity based return deal structure.

And it's getting the owner and us to be aligned with year one, year two, year three and perhaps year four revenue projections. And we found very often the owners are far more ambitious in the outlook than we think the reality of the market is, and that's translating into a valuation gap.

And we're not keen on, let's figure out how to close that gap through creative synergies, because they're definitely manifest in the end. So we have been very focused on this.

We have had a number of deals that have nurtured through the process that have unwound and in the end, Jeff you can confirm this business really come down to a valuation gap and how our process evaluates revenue growth and result in profitability of the combined entity versus [Multiple Speakers] effective, and it's really been typically a valuation gap.

We have some great nice strategic fits. However, we weren't able to convince ourselves moving forward would return appropriately what was necessary to us and our shareholders, and it caused those deals to unwind. We're not going to really [Multiple Speakers]….

But correct me if I’m wrong, the last deal was 2010, right? Was that Energy Steel supply, was that the last one?.

That's correct, Gabe. But I can assure you, as Jim has mentioned, that there were quite a number in the interim that unfortunately, we decided to pass it on even though we had gone far down a path with them. But as we got closer to the end, we decided to pass.

And while we were disappointed that they didn't move forward in retrospect understanding how those companies performed subsequent to us moving forward and moving on, we're happy we passed on..

But it just seems like the odds of a deal getting done is going to be difficult, it always is.

Did you always often buyback that was in place from 2015, the $18 million?.

Yes, it is still technically active but we've not bought back shares in quite a few years..

I mean, reason I mean I know you want the business to settle and it makes all the sense cash is seeing right now, we totally understand that. But any reason why? I mean it sounds like business is starting to stabilize, you're back to almost 100% on utilization of your workforce. And you have the healthy backlog.

Any reason why you wouldn't accelerate that down here with you overcame your low in equity?.

Again, we're focused on using our cash to grow inorganically..

Thank you. Our next question comes from line of Ross Taylor with ARS. Please proceed with your question..

I'm sure just on you guys giving us more background into how you see the navy business shaping up. Is it developing as you expected it to earlier this year? And how do you see the cycle playing out? It seems like we're probably in a fairly early stage of that cycle. And I'd love to get more color from you on how you see that..

The naval end market has shaped up strategically with what we wanted to do. We entered the strategy pretty narrowly in one program, which was the carrier program. And then we shortly thereafter were able to enter an additional program, which our company had never been in before, which was a submarine program.

And then following that, we entered into another submarine program and now it’s about diversifying components within those programs. So, we're quite pleased, while it's been a long process but that's the nature of the defense market.

We like it for the stable revenue, the predictability of it and our bid pipeline, as Alan has cited, is $40 million to $50 million of opportunities that are expected to close in 2021. We won't have that level of revenue burned in 2021. So, therefore, we're expecting our naval backlog to continue to expand if we compare entering 2021 to exit in 2021.

So, we're quite thrilled and an area of that, I'm going to go back to the other caller, so I'm going to do that on your call here, but it's important.

An area of focus for us is that more predictable, stable revenue end market for M&A and defense provides that, which is different from the energy market, which has been highly cyclical, highly unpredictable.

And getting a deal done and then the [Technical Difficulty] of that market and getting the projections of revenue and valuation correct have been extraordinarily challenging. We’re finding that to be less challenging in the defense sector, because of the stability of the revenue and we're looking at how do we do deals in more stable end markets..

So historically, the Navy submarine programs have had runs that went in decades. So how do you see, is your winning business and you’ve got two submarine programs, I would imply that you have the Columbia Class SSBN and the Virginia Class Attack submarine.

Both of which, I believe the Columbia Class is just moving into basically revenue generating right in here maybe this year and the Virginia Block V is what I assume you're talking about. So that also there’s a roll out just starting this year. Talk about, you've understood that these are stable.

Is my read of the space that basically you're getting in someplace where you’re going to see production runs that are going to go on for a decade to two decades. I think the Los Angeles class attack submarine had an over two decade build cycle..

Your perspective is accurate. There are some components where, say a Block B order is placed, which covers 10 submarines and you have that level of predictability. The way our components are being awarded, we're not getting a Block of 10 subs book, we're getting an annual release of components by year.

And the Columbia class, we don't see that as a Block V like Virginia is again, Block V was 10 subs for Virginia. And again, where we are with our prime contractor, we're getting more of an annual award for components for say block sub six and seven, eight and nine on an annual basis.

So we don't have that classic predictability but we have predictability and that we know the timing of those orders. We feel good about our position with those components. Although, they can be competitively bid.

And it provides us with a level of confidence and predictability that goes beyond our current backlog with how we see the procurement patterns of the defense contractors, the primes for carriers, for Columbia and for Virginia. It's a great business unit for us, because it has high levels of predictability.

Even though we may not have that classic 10-year production run of a Block V for Virginia that some companies have, we don't have that..

And that's because of the nature of how they ordered.

And generally, although, they could really compete a product, my assumption would be that unless you want to end up like the German army in World War 2, you don't want to have a lot of different products inside your boats overtime you want to, if it’s already as good you want to be able to keep and retain that quality, I would say.

Is that something that you see?.

Sure, quality is paramount, on time performance is paramount, predictability is paramount, this is customer feedback to us. And management's focus to get back on track if something arises and that can happen with these projects. So when we do our blocking and tackling correctly and I feel we do that well, we deliver strong value to our customer.

And someone can always displace us but I don't believe it would be due to performance..

But it sounds like you've got a really, I see your business is two different industries and the like. And when you look at it, you got one on the early stage of a ramp up.

And how do you see the energy space playing out versus the defense oriented business?.

We think about it in a kind of comparable way. We serve the energy markets. We're going to continue to serve the energy market. We're going to look to grow organically in underserved segments of the energy market that we didn't do as well in the past. And we have thoughts, strategies in place on how to capitalize in those underserved markets.

And then I think you heard me say, you heard us say we’re intent on growing our more predictable revenue streams and of course, that's defense and that could also be a focus on the install base.

I also commented that we're looking at M&A in the defense and say aerospace market because of the predictability there, and the barrier to entry that are there.

So once you're in, you don't have to necessarily, you never can rest on your laurels, but you don't have the international low cost price leaders to contend with in the defense area, because of the barrier of entry, the nature of that fabrication and some of the energy sectors, prices can be in the bid process..

Yes, and I think I want to congratulate you all on what looks like an excellent job transitioning and working through this whole COVID situation. It looks like, I have to be honest, I was -- I'm surprised by the strength that you guys have shown and the nimbleness that you've shown, and I think it states your ability to manage your business long run.

Congratulations..

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

Jim, I imagine you and your competitors are going to be quite hungry for business over the next several quarters.

I wonder if that implied that this is that we win over the next several quarters and have unusually low margins?.

You're astute. You recognize what's happening in the marketplace. We are seeing some recklessness on price management by others. We don't try to break our discipline. But we will look to defend our position or make sure we expand our market share. Well, we are seeing some very unusual behaviors that we don't think are enduring.

But obviously it might speak to their appetite to get whatever's available at whatever price they can. And I think there's enough out there that we don't necessarily have to race to the bottom with them. But I can attest to you, there's likely going to be some skinnier projects that come into our backlog..

And just one other question on China, moving away from COVID and shifting over to China, tensions between China and our country seems to be growing rapidly.

I was curious whether you think that will affect your ability to win business in China to work with supply partners in China? Generally, how do you think it will affect our activities in China, if at all?.

No, we had discussions at the leadership level about that potential risk. At this point, we haven't seen it manifest in any way in an adverse manner. With respect to our ability to win we've won some work recently for China, that was our typical type of work, refining work, happened in this current quarter rather sizable refining pet chem project.

And so that didn't feel any different to us. We haven't seen a change in sentiment at the seller to buyer level..

And your ability to work with the partners over there, I think you may have supply partners over there that’s unchanged?.

That is unchanged..

And that one, the China project that was delayed, I think your press release mentioned a $4 million or $5 million job was delayed.

Do you think that was delayed for economic reasons, or perhaps in reaction to some of these growing tensions?.

It was delayed solely because of COVID and that province shutdown its workforce, that was teed up to be completed. We were at the 15 yard line and we couldn't get them all across the 15 yard line until May job's done. It's 100% complete.

It was just a seven or eight week stoppage of work tied to shutdown of an industry in China, nothing to do with anything other than how they manage COVID..

Our next question comes from line of Bill Baldwin with Baldwin Anthony Securities. .

I'll make it brief since I know it's running long but Jim just looking for an update as to how the initiatives that you've had in place I guess now for a year or two on the, putting engineers out closer working with the end user customer to generate, I guess a lot of the MRO business and also revamp business.

Can you kind of bring us up to date as to how that's progressing and how many of those jobs you now have in effect, and what the plan is for 2020 for those positions?.

It's been hit with a headwind near-term, because of COVID and our customers shutdown access to their plants. Our folks weren't permitted to go into the sites at the customers controls, if you will.

They need us to help them unlock capacity, improved performance reliability strategies, a long-term strategy, we're continuing to invest in adding resources to that strategy, relocating people to densely populated installation areas.

And it's the right strategy for us, especially if we think about the reshaping of the refining demand curve over the next couple decades, there's going to be ever increasing focus on getting the most out of what they currently have. The refiner, getting the most out of what they currently have. Same is true of a pet chem operator.

And that's what the install base strategy really is focusing on is helping them leverage those assets they currently have, and not have an unscheduled shutdown or not have some form of performance calamity. They need us to help do that, it's a great long-term strategy.

But to be candid, the last three or four months, while in COVID, it changed our ability to have customer intimacy in the manner that we want, but that will change that will shift. We'll all get behind, we'll all get through this within a rearview mirror than hopefully not too long..

Right.

that business, excuse me Jim, I would assume that business there will, probably come back quicker perhaps than the bigger project business in refinery area?.

From our historical perspective that is indeed what happens. It takes a fair amount of calendar time to gear up on a strategic investment, say new capacity or a large revamp, but MRO and quick turn work that comes back first. .

And, Jim, is that business like that? Is that less price sensitive than the big project business?.

It has a different margin potential that that's more favorable..

Is there any less competition out there for that business based on what you're doing going directly to the end user?.

Typically, if you're able to provide equipment for your original installed components, it creates an advantage, because you're providing a part or a reconfiguration of your system, perhaps that doesn't mean competition doesn't find their way in somehow but it's less competitive..

Right. Okay, well best of luck on that program. I think that will pay big dividends long-term, so..

We're excited by it. It's great..

Glad to see you continue to develop resources there. And I'll ditto the previous gentleman's comment regarding your management through this difficult period..

Well, thank you. We appreciate that. thanks so much..

Thank you, ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any final comments..

Thank you for your time this morning. We have some really good Q&A that delved in more deeply than we ordinarily would. So, we appreciate the thoughtfulness with which you questioned Alan, Jeff and myself. And we look forward to updating you sometime mid-August or next mid-July, late July. So, we look forward to updating you.

And again, thanks for your time today and your ongoing interest in Graham. Have a good day..

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..