Welcome to the Graham Corporation Second Quarter 2010 Quarterly Results conference call. (Operator Instructions). It is now my pleasure to introduce your host, Ms. Deborah Pawlowski Investor Relations for Graham Corporation.

We appreciate your joining us today on Graham's Fiscal 2010 Second Quarter Financial Results call. On the call with me today are Jim Lines, President and CEO of Graham and Jeff Glajch, Chief Financial Officer. Jim will briefly review the second quarter's performance and will discuss the company's strategy and outlook, as well as their perspective on the state of the industries we serve, while Jeff will be reviewing the company's performance in the recent quarter and first half of the fiscal year. You should have a copy of the earnings release that was put out this morning. And if not, you can access it at the company's website, which is www.graham-mfg.com. In addition, we have posted supplemental slides on the website to provide a visual overview of our results. As you are aware, we may make some forward-looking statements during the formal 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 that could cause actual results to differ from what was stated here today. These risks and uncertainties and other factors are provided in the earnings release, as well as other documents filed by the company with the Securities and Exchange Commission. These documents can be found both at the company's website and at www.sec.gov. So with that, let me turn it over to Jim to begin the discussion.

Welcome everyone to our conference call for the second quarter fiscal 2010. Sales in the quarter at $16 million were in line with our expectations. However, they were down sequentially 20% and down 32% year-over-year. Our margins held at relatively high levels for the amount of sales in the quarter. I believe that maintaining gross margin at 36.3% and operating margin at 17.5% demonstrates that our managers and the entire company have been able to control costs while sales have sharply declined. Steps our employees took to improve the company during the upturn that resulted in record financial performance for fiscal years 2008 and 2009 are showing through in the downturn. The Graham team demonstrated that it could execute differently than it did during prior strong markets. Now equally importantly, they are demonstrating that Graham is also a different company in a sharp downturn, arguably the worst downturn since the 1930s. I believe that the actions taken over the past few years have enabled Graham to grow during the past cycle have also been instrumental in allowing the company to execute well and remain profitable during the current downturn. These actions include an ongoing company-wide commitment to continuous improvement, investments in IT and process improvement, investment in the low volume high mix Graham production system by investing in both process flow and equipment, policy deployment and performance management, value based selling and a renewed commitment to improving customer relations. We intend to continue to invest in the company and its employees and process improvement in IT and production equipment, in eliminating waste and in becoming a faster company. We believe these steps are critical to Graham's ability to manage profitably across this sharp downturn and are essential to staying competitive in the future. I believe we can remain profitable at…

I will start with a review of sales and operations activity before moving on to our orders and backlog. Net sales in the second quarter of fiscal 2010 were $16.1 million, a $7.8 million decline compared with last year's second quarter and down $4 million from the trailing first quarter this fiscal year. As expected, Graham's sales have begun to shift toward international and away from the U.S. market. Second quarter fiscal 2010 sales were split equally between the international and U.S. market compared with 63% of sales in the U.S. in last year's second quarter. U.S. sales declined $6.8 million or 46% to $8.1 million, while international sales declined just $900,000 or 10% to $8 million. In the quarter, sales to Asia were $4 million, up from $1 million in last year's second quarter. This continues the trend from the first quarter. For the first half of this fiscal year, sales to Asia have tripled to $12.2 million up from $4 million in the first half of fiscal 2009. Sales in the Middle East in the second quarter were comparable to last year at $2.9 million off just 3% or $100,000. Sales in all other regions, South America, Europe and Canada offset the gains achieved in Asia in the second quarter. For the first half of fiscal 2010, net sales were at $36.2 million nearly 30% below last year's first half sales of $51.6 million. In this period, U.S. sales made up 51% of total sales and international sales accounted for the remaining 49%. These percentages for the prior year's first half were 65% U.S. and 35% international. Again, the increase in sales to Asia and the slower U.S. market accounted for the majority of this trend toward an increase in international sales weighting. As Jim mentioned, based on…

Thank you, Jeff. At this time we will take your questions.

(Operator instructions). Our first question comes from Rich Hoss – Roth Capital Partners. Rich Hoss – Roth Capital Partners: I'm trying to get a little bit more detail on the $16 million of that $29.3 million in bookings that you have discussed. You talked about the majority being two projects in the Middle East. Are you able to comment if one of those is associated with Jubail and/or Yanbu?

It's associated with both projects. Have a little piece of business in both projects, and more importantly, we think there's more opportunity for us on each project. Rich Hoss – Roth Capital Partners: And are you able to comment on what you think the total potential from each of these projects could be?

Each is about 400,000 barrel per day refinery in total, across both refineries. We would think in terms of $25 million to $35 million of total opportunity for us. Rich Hoss – Roth Capital Partners: Twenty-five to 30 per refinery?

No, total. Rich Hoss – Roth Capital Partners: At what revenues would you have to start adding to SG&A? I'm viewing this quarter's SG&A as probably your bottom or close to bottom. Where would you have to start adding people?

We've tried to keep in mind that we want to build this company to take advantage of the opportunities in the future. We didn't scale back appreciably in the SG&A area. There are some variable expenses in SG&A tied to the level of sales, so without personnel additions, SG&A could increase as revenue increases. There's a proportionate increase in our commission sales as revenue goes up. We think we're adequately staffed to take advantage of the opportunities that would be in front of us over the next one to two years with our staffing in the sales area. Rich Hoss – Roth Capital Partners: So expect some pretty decent leverage then on revenue growth.

We believe so, yes. Rich Hoss – Roth Capital Partners: And then, third question, can you describe the phasing of your projects, the recognition of your projects today compared to, say, a year-and-a-half ago? And what I'm trying to get at is, it seems like you're able to ship projects earlier than the last several years, and does that go from, say, a 9- to 12-month target to maybe a six- to nine-month? And this excludes that 16.9 that we've already talked about.

We segment our business a number of ways, but two key ways would be larger projects and smaller projects. We've indicated that around 40% of our sales in a given year would be smaller projects, which tend to convert within one month to three months after the order. And then for the larger projects, those that have order announcements that really will depend upon the type of project. If it is a refining project, Rich, we are still seeing schedules being between 12 and 18 months on average, for order to complete shipment, bearing in mind that revenue could occur over the last six to eight months of that timeframe. For a power generation job or a petrochemical project, that could be in the 10- to 14-months timeframe. So it really will depend on the type of order that we're winning and the value of that order with regard to how quickly it begins to convert to revenue. Rich Hoss – Roth Capital Partners: That's fair. And then last question: For Jeff, do you have any updates on the acquisition search? How are valuations looking and any change to the strategy there?

Rich, let me answer your last question first. No, there is no change to the strategy. We certainly have been spending a good deal of time looking at opportunities, and at this point we've also certainly valued a number of opportunities. We haven't come to what we've felt was the right opportunity at the right value yet. With regard to valuation, we seem to be stabilizing a little bit. Certainly in the private markets we saw a – took a little longer for the valuations to come down than in the public markets, but I think we're at a pretty good base right now. But at this point we have not identified an opportunity that strategically is the correct thing for us at a value that we're comfortable with. But we are certainly very busy.

Our next question comes from Tom Lewis – High Road Value Research. Tom Lewis – High Road Value Research: Good morning. First question, as the company gets – been through a few cycles, what can you tell us about the – you've had some orders postponed. You mentioned one that was canceled. Is this something I would think would be normal during a cyclical downturn? Is it happening at sort of a normal rate, or is it in line with your comment about a worst downturn in a very long time?

The downturns when you're in them, Tom] they always feel brutal. They tend to, from my experience – and I've been through three – seem to be pretty similar. This time around though, some of the refining work actually was canceled or put on suspension, which we would get a little bit of it, if I recall correctly, in the prior downturns, but because of the extensiveness and the swiftness of this contraction, some projects were canceled that we didn't expect to be canceled based on our historical perspective of going into a downturn. Tom Lewis – High Road Value Research: When a project canceled, do you tend to have anything in there other than some sales-type consultation, or do you book any revenues at all early on in the design process? Can you –

Our revenue cycle begins when we begin production. Negotiating contracts, we tend to negotiate cancellation schedules that protect the company, that in the event that a project is canceled we have our costs covered that we've put into the project and perhaps some opportunity cost on the future profits that we would have earned. But that really depends on the situation. Invariably, those are negotiations between us and our customer. When we look to maximize a given opportunity, we look to maximize the relationship over the long term, so we are a flexible company when we're talking about cancellations with our customers. We want them to be [long term]. Tom Lewis – High Road Value Research: And last question, you mentioned that in referring to your order pipeline activity that your perspective had improved. Were you just speaking with respect to how clear your perspective was, or were you speaking to improvement in the long-term likelihood of opportunities, or both?

Our customer-facing groups, our sales team and our application engineering group, they've been very, very pleased with the level of activity and the quality of the activity that they're seeing coming from our customers. Now, we have remained very busy over the last 12, 18, 24 months, not too different from how busy we were in those areas two years ago and beyond. But the quality of the work, the perception that the projects are beginning to advance, our customer-facing groups feel the quality of that work is improving, and they're very optimistic about the nearer term than they were, say, six to nine months ago. Tom Lewis – High Road Value Research: So based on that, if we think about your sense of the business over the next five or so years, two years ago it was probably well above normal. The next – right in here, the next few quarters as well, below normal. Do you think that however normal ends up over five years is closer to the one or to the other?

Inherently, being a provider of equipment to the energy markets, we will be a cyclical business. What we're projecting, and it's our belief, that our company can grow. We believe we can grow more rapidly than we did during the last up cycle and our expectation, Tom, is that we can grow beyond where we reached last cycle. But we're not saying that we won't have this cyclical pattern. Hopefully not as extreme as what we just went through but we will be cyclical so it's hard to give you a comment on what is a normal level of business. But I can state that it's our expectation that our company is prepared to grow when the markets recover. We believe we can grow more quickly than we grew in the last cycle and it's our expectation that we'll grow beyond where we grew in the last cycle.

Your next question comes from the line of Chris McCampbell – Stifel Nicolaus & Co. Chris McCampbell – Stifel Nicolaus & Co.: Congrats on managing the business in this environment guys, it's really impressive. Rich answered or Rich asked a lot of the questions I wanted to ask, but should cash generation be I guess more muted for the remainder of the year in comparison to the second half or would that be similar?

We would expect that cash generation will be more muted in the second half of the year. If you look at our cash generation the first half it was driven primarily by our earnings in the first half as well as some improvements in working capital. We would think the improvements in working capital probably will not be repeated. But on the earnings side if you run out the guidance that we provided you'd see that our second half earnings would be significantly lower than the first half earnings. So we don't expect a lot of cash to be generated in the second half of the year, although we also do not expect to be using cash for operations. Chris McCampbell – Stifel Nicolaus & Co.: And could you give any additional color on acquisition candidates out there? I mean are you looking at, are you leaning more towards things that would diversify a little bit away from the business that you have going on now or are we looking to focus on adding to what we have already?

We are looking really at two avenues. One avenue is looking at expanding our product line and potentially expanding into some markets that we currently play in but maybe aren't as strong in as we are in say refining in petrochemical. So in that avenue would be really expanding the breadth of our product line and giving us some additional opportunities and potentially being less cyclical or somewhat countercyclical to our existing business. The second opportunity is looking at geographic expansion which would be to have fabrication and engineering capabilities somewhere outside the U.S., and that's really to take advantage of some specific markets that are out there. So that would be more in line with our existing business but it would also by focusing on other markets and potentially being able to get deeper into some of those other markets that could also help with the cyclicality a little bit, too. Chris McCampbell – Stifel Nicolaus & Co.: From the geographic perspective would you say that domestically things are – are you having any conversations with your customers in regards to cap and trade and potential environment that that would have here? I mean are people actually postponing decisions based on the regulatory rhetoric or is that having any effect at all?

Well, I think the domestic market we have viewed even without the cap and trade legislation have viewed the domestic market as being slow certainly in the next couple of years. It was very strong for a number of years. We believe it's slowed down now and I think the cap and trade legislation is putting a level of uncertainty right now into the process because it's not clear exactly where that's going to land. But we don't think it's really affecting near term decisions but it certainly could have an impact on longer term decisions.

Our next question comes from the line James Bank – Sidoti & Company. James Bank – Sidoti & Company: The first is did that cancelled project I'm sorry that was just $500,000, $700,000?

Correct it was $500,000. James Bank – Sidoti & Company: And then the one that's on hold was there a particular reason for that, maybe pricing? Are they trying to renegotiate the contract or anything like that?

No, it has to do with some engineering activity that they have to complete. [Site] engineering and it's working with the EPC contractor to finalize that. An important point I want to make there is that it's not a project for transportation. It is a refining project, not for transportation fuel but for high quality lubricating oils for improving engine efficiency. So it's not a project tied to supply and demand per se. James Bank – Sidoti & Company: Now with raw material inching up a little bit 33%, 35% gross margin is that sustainable as we kind of get into next year or are we going to need to see a big uptick in volume do you think?

The 33% to 35% which is our full year number and includes the year-to-date gross margin which is at a higher level than that. So if you were to do the math you'd get into somewhere in mid to high 20s for a gross margin in the second half of the year. And recognize that's also on a lower level of sales in the second half of the year to the first half of the year. We would think at that level of quarterly or half year sales the mid to high 20s is probably the price that we would be if and when we get to the point or when we get to the point where the revenue number starts increasing, there's a significant amount of leverage there from the margin standpoint and we would thing that we would start seeing the margin going up from that mid to high 20s range. We think the mid to high 20s is the trough margin at this point in time. And again, we expect that to be the range we're in in the second half of this fiscal year. James Bank – Sidoti & Company: And then on the backlog side it looks like some shipment of some higher margin stuff's helped just a little bit more I guess here in the quarter. Not so much from the – we're down a lot from what had helped in the first quarter. Is that pretty much it for those price-inflated projects from last cycle?

Yes, that pretty much, James, works through the backlogs. Going back to what we mentioned on the last conference call an appreciable portion of the margin lift that we saw in Q1 and the margin we had in Q2 I would say has been attributed to lower cost materials and being able to take advantage in how we procured materials during this downturn. That appreciably lifted our margins. James Bank – Sidoti & Company: Well, why wouldn't we see that same type of success in the back half here? Has raw material moved I guess too quickly at this point to continue to take advantage?

We'll continue to be as disciplined as we were in Q1 and Q2. It's hard to suggest that you should model the business around continuing to have those savings because it really will depend on how the market recovers and how the supply chain tightens up. Our team has been able to find opportunities where there's been available capacity, aggressive negotiations and flexible suppliers. That really we would attribute to where the supply chain is at that point in time. James Bank – Sidoti & Company: Now on the cost savings on the COGS side I – Jeff I'm sorry I think you said 3.4 but 2.7 and 1.6 is 4.3?

That's correct. If I misspoke I apologize. James Bank – Sidoti & Company: So and I'm sorry 75% of that has been realized and you would say most of that is going to be in the manufacturing cost end?

No ,of the 4.3 about 75% will be in the cost of goods sold side. And what has been realized is that of the 2.7 million annualized number that we did in the restructuring that we did in the fourth quarter of fiscal 2009 were certainly, that has been realized on an annualized basis. The 1.6 million which was related to the restructuring that we just did within the last fiscal quarter, we're just starting to realize that now. So we really did not realize any of that 1.6 million in the second fiscal quarter but you'll start seeing it in the third fiscal quarter. James Bank – Sidoti & Company: Now moving to the SG&A, I think earlier in the year there was some marketing for some international inroads and some other costs in the SG&A line that might have bumped up this year a little bit more than it might have or should have been I guess. So with everything going forward and looking on the out year, let me stop. Jim let me ask you this, if you did $100 million in sales what do you think your SG&A would be?

Comparable to what it was when we did $100 million last time.

Which was around $15 million. James Bank – Sidoti & Company: So no leverage benefit in the SG&A?

We actually, to be candid, we have a little more SG&A expense now but that's necessary to take advantage of where the sales will come which would be the emerging markets. We need it to strengthen our sales organization to take advantage of those opportunities, not appreciable change, but there is more cost in our SG&A to go after the business where it is going to come from in the future. James Bank – Sidoti & Company: Okay so for modeling purposes we should drive it with whatever hypothetical sales number would be and just assume okay it's up commission dollars up and if it's down commission dollars are down and just run it through that way.

That's a good way to model it. James Bank – Sidoti & Company: And last question, $30 million in orders I understand it's volatile, but that's quite a big number. You can almost assume a $38 million run rate the first half which could give you a pretty good run rate full year. Are you guys not issuing press releases for these orders anymore into quarter?

No we – excuse me. Yes we are. The orders came in at the end of the quarter near the last half of September a good amount of them came in. And it was timing of wrapping up the quarter and getting ready to release the announcements.

Typically those larger orders came in late in the quarter.

But to be clear we haven't changed our philosophy on announcing larger projects. James Bank – Sidoti & Company: Right. And I think on the last conference call at the end of July I think you gave us a rough aggregate of the orders that you had booked. Could you do that for us for October, the month of October?

The orders that have been won in October are between $5 million and $6 million.

Our next question comes from the line of George Walsh – Gilford Securities. George Walsh – Gilford Securities: I'd like to add my congratulations to you, Jim, and the whole team for doing a very good job of marketing during the entire business cycle. It's quite a feat in a very, very volatile market you've had to deal with. But I'd also like to look forward a little bit and you touched on it there in the last question. It really looks like it would be a foreign sales-led recovery that you're looking at. And you partially touched on the idea that there would be some more sales and marketing type of investment you'd need for those type to fully exploit that. I wonder if you could just go into other expenses or how that cycle might be different for you because I think this would be the first that I've notice a really foreign-led sales cycle potentially in terms of dominate in revenues for Graham. So would that mean that you'd be outsourcing more in Batavia, some Batavia versus doing the manufacturing there as you would other type of investment you do in ramping up your sales in marketing or any other factors you might see?

Good question to a large extent the same EPC contractors that we work with for domestic work are pursing the international work and we'll get orders from for example [FLOR] or KBR just as we did in the past cycle that were for the U.S. market, but now it's for the international market. So managing that same sales channel hasn't really changed. As international contractors begin to take more of the market share, Japanese contractors, Korean contractors even some Chinese contractors then that changes how we have to manage those relationships. But within our cost structure that we have now I think to a large extent we thought this was going to occur. We could see it coming in our future and we've organized our sales team both from a headcount and a structure perspective to be prepared for this. We felt the recovery would be coming from the emerging markets which would be China, Middle East, South America. Our proposal activity for the last 12, 18, 24 months has been largely for those areas and I think our channel management and our opportunity management we prepared the company well I believe to be in a position to take advantage of those opportunities when our customers are ready to place orders. George Walsh – Gilford Securities: And Jim, just to clarify for my own mind, if I understand it correctly, a lot of your domestic sales anyway will end up with overseas customers so is the difference with foreign sales that, as you explained, that you're dealing more with a foreign contract as opposed to a Jacobs Engineering a domestic contractor?

The way we define an international sale it's based on the end use location. George Walsh – Gilford Securities: Oh it is? Okay.

Not necessarily order origin. George Walsh – Gilford Securities: And the other would be a question regarding cap and trade which you addressed earlier but the other side would be is this something that would be potentially good for your business in that it could create demand because of regulatory emission issues with your customers?

Yes there have been in the past when legislation came down from the government whether it be [HM TBE] or ultra low sulfur diesel that created mandatory CapEx for the refiners to comply with those requirements, that then created demand for Graham's products whether it be our heat transfer products or ejector systems or our surface condensers so here, too, cap and trade could provide an opportunity for us depending upon what processes have to added to the refinery to comply or to try to manage their costs under that new legislation. George Walsh – Gilford Securities: And anything that would affect you personally or just in any way that you could think of so far that any these carbon credit would have an impact on Graham either for your customers or your customers dealing with you or for Graham itself?

Nothing that jumps out at us, as Jeff indicated, there is some uncertainly around the how this is going to be applied what the actual carbon tax will be, what the amount of it will be, how it's actually going to be applied. You couple that with the reduction in the consumer demand in the U.S. market, utilization rate for the refiners being down appreciably and then the differential between sweet and sour crude closing. These have all had an impact on near term investment decisions in the U.S. When we look beyond the U.S. there's still investment going on clearly in the Middle East, in China and then we think there will be investments coming out of South America shortly that will be for new refining capacity. And as I said earlier we've been managing that sales opportunity for 12, 18 months in anticipation of when those opportunities would move toward purchase.

(Operator Instructions) Our next question comes from the line of James Bank – Sidoti & Company. James Bank – Sidoti & Company: Just a quick follow-up, I think I think in the first series of questions. Jim, you mentioned Jubail I'm sorry what was the other refinery?

Yanbu. James Bank – Sidoti & Company: Yanbu?

Yes, Y-A-N-B-U. James Bank – Sidoti & Company: Okay and I think Jubail had been a $12 billion contract and it's now 9.6 due to some raw material stuff. Do you know what the total aggregate of the Yanbu project is?

I do not offhand. Both are 400,000 barrel per day refineries. I would assume it's in that $10 billion to $12 billion range. I don't know for certain but both are 400,000 barrel per day refineries. James Bank – Sidoti & Company: And, Jim, you mentioned there are $30 million to $35 million in total opportunity?

[Forty-five] to 35 million. James Bank – Sidoti & Company: And then also South American markets you mentioned I had written down here I think that's the first I've heard you guys talk about South America unless I'm mistaken. What type of work are you seeing down there?

It would be refining and petrochemical work we've had a long history with the state-owned refiners in Colombia, Ecopetrol; Brazil, Petrobraz; PDVSA in Venezuela. We have equipment in those refineries for decades and we have actually our sales team – some of our sales guys are in South America this week interacting with our state-owned refining customers.

Thank you ladies and gentleman we have no more questions at this time. I'd like to turn the floor back to management.

Well, thank you for your time this morning and we look forward to updating you after the end of the third quarter in January. Have a good weekend.

Ladies and gentleman this concludes today's teleconference and you may disconnect your lines at this time. Thank you for your participation.