Greetings, and welcome to the Graham Corporation’s Third Quarter Fiscal Year 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Karen Howard, Investor Relations. Thank you. You may begin.

Thank you, Christine, and good morning, everyone. Thank you for joining us to discuss the results of Graham’s fiscal 2017 third quarter. We certainly appreciate your time today. You should have a copy of the news release that crossed the wire this morning, detailing Graham’s results. We also have slides associated with the commentary that we’re providing here today. If you don’t have the release or the slides, you can find them at the Company’s Web site at www.graham-mfg.com. On the call with me today are 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 and year-to-date, as well as our outlook. 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-GAAP financial 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 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. And with that, I’m going to turn the call over to Jim to begin. Go ahead, Jim.

Thank you, Karen, and thank you everyone for joining our fiscal 2017 third quarter results conference call. I'll start at Slide 3 as I begin my remarks. Sales in the third quarter were $22.7 million, up 31% from the same quarter last year. Last year's third quarter was unusually low and thus not a recommended comparison for judging strength of revenue. Sequential quarterly performance may serve more useful in that regard. Diversifying into new markets has been beneficial. In this quarter, approximately one-third of sales are from the U.S naval market and the nuclear power markets. There was significant improvement to gross margin when compared to the past two quarters. In our third quarter, gross margin significantly benefited from conversion of a non-typical order. This order was secured late in our second quarter and will be completed by the end of the fiscal year. An unusual or non-typical aspect of this order is its value, its high material content, and a few production hours associated with the order. We don't expect to see such orders with any regularity. Income for the third quarter was $1.8 million or $0.19 per share. As we exited the third quarter, we have a clear view for our fourth quarter and full-year revenue expectations that now been tightened to $88 million to $92 million. Please turn now to Slide 4. You will know that we’ve a consistent revenue trend for the past four quarters and that last year's third quarter as I remarked previously had been uncharacteristically low. Global energy markets continue to be weak, notwithstanding the improvement energy stock values have had the past couple of months. Sales to our oil refining markets were $6.3 million in the quarter. Chemical industry sales were $4.3 million, and power market sales were at similar level of $4.4 million. Defense and other industrial sales in the quarter were $7.7 million. Geographic mix continues to have a high domestic sales waiting. Unfortunately year-to-date 25% to 30% of revenue is due to Navy and nuclear power diversification efforts. I will pass the call on to Jeff, and he will provide a deeper review of financial results for the quarter and for year-to-date. Jeff?

Thank you, Jim, and good morning, everyone. As Jim mentioned, our third quarter sales were $22.7 million, up 31% when compared with $17.3 million in the third quarter last year. Please note that Q3 sales last year were unusually low and easy comparable for this year. Sales in the third quarter were 77% into the domestic market, 23% international. And last year's third quarter, the sales split was 62% domestic, 38% international. As Jim mentioned, approximately one-third of our sales were in the defense and nuclear markets in this most recent quarter, which drove the strong domestic sales. Domestic sales increased 61% to $17.5 million, while international sales decreased 20% to $5.2 million. Gross profit increased $6.3 million, up from $3.5 million last year due to the higher revenue level and improved gross margin, which increased to 27.8% from 20.3% or 750 basis points. The improved margin was a combination of the benefit from the anomalous order which Jim mentioned, that partly converted in the quarter as well as below comparable margin from last year. SG&A spending dollar level was comparable to last year, but due to the higher sales level this year, it was 17% of sales versus 22% of sales last year. EBITDA margin increased to 13.6% from 12.6% in last year's third quarter. While the gross margins were significantly higher and the SG&A cost as a percent of sales was lower, you may recall last year that we had a $1.8 million of operating income due to cancellation fees recovered related to a couple of projects. That cancellation income represented most of our EBITDA in last year's third quarter. Net income in the quarter increased to $1.8 million from 1.2 million last year or $0.19 per share, up from $0.13 per share. Looking at Slide 7 on…

Thank you, Jeff. I am now discussing Slide 10. Orders in the third quarter were $17.7 million reflecting ongoing weakness in energy markets. There was a persistent low-level of available opportunities to secure new orders. The decline in trailing 12-month order levels is an indication of a shift in our competitiveness or change in our ability to successfully secure oil refining and chemical industry orders. Our success statistics for large orders one versus those lost, remains in our typical range. There simply isn't a large number of opportunities available at this time. Importantly, short cycle orders have pulled in and in particular aftermarket orders are down 20% to 30% compared to normal levels. Our are bidding pipeline did pull in roughly 20% as well, and the aggregate value of the trailing 12 months bids is between $600 million and $800 million compared to $800 million to $1 billion two years back. Please move on to Slide 11. Backlog is still very healthy at just below $100 million. You can note the naval orders or the naval backlog totaled more than half of our backlog and including backlog for nuclear power the impact of diversifying into these markets has been very important, as roughly two-thirds of current backlog is not from our traditional markets. The naval backlog in particular is long-lived with multiyear conversion. As a result, 50% to 55% of backlog will convert over the next 12 months and 35% to 40% of backlog converts two years from now or longer. Please refer to Slide 12. Guidance is tightened as we enter the fourth quarter. Revenue is expected to be between $88 million and $92 million. Gross margin between 21% and 23%. SG&A expense between $15 million and $15.5 million and the effective tax rate should be between 28% and 30% for the full-year. Christine, I'd ask that you open the call now for Q&A. Thank you.

Hi, guys. Good morning.

Good morning, Joe.

Hi, Joe.

In terms of the non-typical order that you cited, just wondering what end market was that related to?

It's in our defense markets, non-typical nature of it has to do with the short conversion cycle and the lack of high-level of production hours that would accompany that level of order value.

Okay. Any of that's going into the fourth quarter?

There will be some of that carries into the fourth quarter. We do expect to have this order completed within our fiscal year.

Okay. So the fourth quarter should maybe be a little abnormally higher than sort of normalized levels of your core business also?

I would ask you to think in the context of what our guidance is. We were projecting to have a rather light core business quarter, going back one or two quarters back. The effect of this order that we did get at the end of our second quarter will benefit the fourth quarter. But I don't believe that we will be as strong as our third quarter.

So in terms of the guidance on the gross margin side, seeing that you sort of mentioned that, I think the guidance is 21 to 23% and the low end of guidance would mean -- would translate into something sub 20% level. So I’m assuming that your sort of looking at the higher-end and if that’s the case, 23% would be benefited from this sort of non-typical order that’s following into the fourth quarter. So are you seeing normalized gross margins at this point in time, looking at your core business closer to 20% or maybe even lower, I don’t know.

Let me come at this a little different way, and we have debated internally the range of the guidance here for gross margin, because with one quarter to go it is relatively broad between 21% and 23%. We’ve talked over the past several years, Joe, that at times and in particular, its more severe as we're operating to the bottom of the cycle, work in production can't go on stop with short notice. And when we’re cycle bottoming as we are, the amount of whip [ph] that we have in production, the amount of different orders that we have in production is far larger than normal times. So we have to take into consideration that unforeseen circumstance that we can identify right now where our customer may place a large order on stop and we can't deploy our resources into other whip [ph] because not enough whip [ph]. So therefore we’ve tended to model that scenario into our range. However, to be more direct, we do expect to land near the upper end of the guidance range.

So I guess what I'm trying to sort of understand because it's only one quarter and it may be being partially affected by this non-typical order that your citing. Just trying to get an understanding of what where sort of looking as a normalized sort of run rate over the next couple quarters. So I’m just trying to get where are your sort of core business related, taking out this non-typical order? Is it lower than the higher end of this guidance? It seems like it is after this non-typical order falls off. I’m just trying to really get a sense of where your business is running at? And I know its lumpy quarter-to-quarter, so obviously taking that into account.

Sure. As we look at our backlog projection and the modeling of our quarters going into Q1 and Q2, we would expect our gross margin to be in the range as comparable to this guidance.

Okay. I also wanted to ask in terms of the refining business, which is your higher-margin typically and historically. Is the orders were the strongest in about five quarters, yet your sort of commentary continues to be very cautious and probably rightfully so, but I’m just wondering -- just in regard to the fact that the orders were the strongest in some time, maybe it's one-off quarter and we see it tick down again, just -- wondering -- your sort of tone sounds like things are at least as bad, if not, maybe getting worse. So I’m just trying to get an understanding of taking into account the orders that we saw on refining, where are we here? Are we sort of -- you think sort of bottoming and that you are optimistic that maybe over the next couple of quarters we start to see improvement or have you not even seeing a glimpse of the light at the end of the tunnel and for whatever reason this quarter being sort of strong quarter and our finding, those may be a reason why you're thinking that things may stay low for a while?

If we telegraphed a more dire outlook, then we have intended -- that wasn’t our intension. I generally don't see it at this point in time too much different than we would have characterized our markets in the past from a quantitative point of view. Qualitatively, as we think about our conversations with our customers, and as they begin to discuss with us their investment plans for '18 and '19, we feel more positive. However, it's not expected to translate into near-term orders. Now for the level of orders that we had in our past quarter, that are for the refining market, we did fortunate to secure a midsize order for the Middle East with new capacity, it was very aggressively bid, there is very tight margin, but our team was able to pull that order in and that could have easily have gone the other way. It was not much like that in front of us as we look at our bid pipeline. And then another nice order that came in, which we’ve seen no repeatability in the short interval is -- was an oilsands replacement project that popped up and we secured it. We have a nice installation base up in the oilsands. You could envision, the oilsands was not really investing heavily at this point with the price of oil. However, they do have a repair or replacement cycle that’s every four or five years, and we benefited from that cycle fitting us just perfectly in the last quarter. I don't envision that carries anything like that into our fourth quarter or Q1 and Q2 as it would relate to the oilsands market.

Okay. That’s great.

[Multiple speakers] to speak to what happened in the third quarter.

Okay, perfect. Thanks for clarifying that. Just one or two questions left, and I will let someone else have a chance here. In terms of the $6.5 million order in the refining that’s still on hold, just wondering if you can comment on sort of what your confidence level was that, eventually becoming active? And then additionally any sort of -- I know it's only been 30 days essentially in this fourth quarter that we are in, but any sort of things that you’ve seen activity wise that make you a little more optimistic or less optimistic at all?

Okay. For the $6.5 million of orders that are on hold, we do a quality check of those orders throughout the quarter. And certainly as we enter the end of the quarter, we will do that again as we go through the fourth quarter. One is for -- I’m sorry, the bulk for Latin America and we have concern about the timing of when those orders to proceed and should they proceed and we will update our perspective on the quality of those orders in our backlog throughout the fourth quarter. At this point, our judgment through the exercising of our due diligence in the third quarter was there on hold and the project sponsors plan to proceed.

Okay.

Joe, you may note that there was a smaller order of about $400,000 that had been on hold that we did released to be active. So to Jim's point, we do a thorough review of these every quarter and our judgment is still the same at this point on those two larger ones, but on this -- the one small one, we did actually release that into an active project.

Yes, I do see that. Thank you.

Joe, for your second question, as we're behind January now, the level of activity in the January quarter -- I’m not going to quantify it, I would just say more qualitatively, it was no different and feels no different to us than the past few quarters. We're not expecting to see a blowout quarter by any measure in our traditional markets.

Okay. Thanks a lot. I appreciate you taking my questions.

You’re very welcome.

Our next question comes from the line of Rich Ryan with Dougherty & Company. Please proceed with your question.

Thank you. Hey, Jeff I had to step off for just a second. Did you talk about the impact of the non-typical order or how much that was in the top line impact and gross margin impact?

No, Rich, we did not and its such that we can't really speak to it at any level of detail, unfortunately.

Okay. You said some was going to carry in Q4, is that a smaller percentage in Q4 than you saw in Q3?

As Jim has mentioned, it’s a proportion of going into Q4 and it will impact -- it will certainly help Q4, however, the underlying core business in Q4 we had expected to be very light in the quarter. So it's not dramatically different, but it's going to have a -- the overall quarter I think we would not expect to be at a level we had this quarter.

Okay. And Jim, looking at the navy, you talked about navy and the other nuclear power being a third of sales. Can you poise [ph] that out what -- how much was navy and how much was your other nuclear power business from the quarter, rough percentage?

We had power -- we reported power sales were $4.4 million. So that’s an indication of roughly 20% …

Okay.

… with power, largely that’s nuclear.

Okay. And looking at the navy backlog, I know you kind of quantified how the backlog generally should flow over the next year and two year period. Can you give us maybe a little perspective how you see the navy's backlog flowing through in fiscal '18 and '19?

Sure. We have a couple of orders that we’ve been working through the engineering aspect of getting those projects ready to launch into production, as with the naval work that has a measured pace that's not a go fast. Marketplace, if you will, and we see those slipping one or two quarters for technical reasons that are outside of our influence. However, the work is there. Our team is focused on it. We have to just work through some procedural aspects of order execution that we cannot influence or move fast. And we are expecting to have a strong naval year, growth above what our highest naval year had been.

Okay. And what’s the current status of the bid pipeline for the Navy? How do you see that timeline?

We have some work that we expect to have closed in the next quarter or so. I think on a prior call, maybe two quarters ago, we would project that our navy backlog which is now round numbers of $60-ish million is somewhere between $70 million and $80 million as we exit next year.

Okay. Great. Thank you.

Does that help?

Yes, sure it does. Thanks, Jim.

[Operator Instructions] Our next question comes from the lines of John Sturges with Oppenheimer. Please proceed with your question.

Thank you. Actually decent quarter, nice surprise. I’m just curious at looking back three quarters, is there a trend you can discern? I see the short delivery has come up about 5%, which would suggest that more maintenance spending going on as a proportion of the overall [indiscernible]. And then it looks to me -- could you see some time to recover the oil and gas in the refining industry, that your percentage has been creeping up a little bit from [indiscernible] quarter. So I was just curious if there's any kind of a trend, you stand with like probably no surprises, but I was just curious if you could discern some kind of change?

For our short cycle work, which is definitely something that would be one chip [ph] in a quarter or two, four or five months. On the order side, which is of course a lead to the revenue side, that has called in about 20%, and for aftermarket as a whole which has some short cycle and some long cycle work in it, that’s pulled in 20% to 30%, which we have been mentioning that we don't believe that it is a enduring pullback at that point in time discretionary decisions by the owner operators to stay on stream as opposed to do the ordinary shutdowns for repair and maintenance. That cannot -- in our view go on without correction, so we're expecting although nothing is in front of us to tell us that that's happening yet. To see improvement in that short cycle work, in particular the aftermarket work, as we work our way through and into FY18, fiscal '18 starting in April. I can share though the quantitative measures of what actual orders are in the bid pipeline is, it's not necessarily providing a discernible change in the past pattern of that market over the last couple of quarters.

All right. I was just curious. Thank you.

You’re welcome.

Our next question comes from the line of John Bair with Ascend Wealth Advisors. Please proceed with your question.

Thank you. Good morning, Jim, and Jeff. Two questions. One is your effective tax rate, you show on the slides have been 28% to 30%. So wondering if -- this talk about lowering the corporate tax rate to pick a number 15%, 20% or whatnot. I would assume that would benefit you quite a bit and wondering if you looked at all or tried to model that in your outlook?

John, I think it's too early at this point. Clearly, if there is tax reform, if the statutory rates go down that would be beneficial to us, since we’re a pretty [indiscernible] taxpayer. One doesn’t know is what happens to other deductions and so forth, we will take advantage. There is not a lot of things, so we are able to take advantage. Obviously the R&D tax credit is one of them and most of the information is out there, if that would remain, so surely that would be beneficial. What we don't know is what else could be affected around the tax reform, but the general concept of lowering rates, would that help us? Yes absolutely, because we do a pay pretty full rate and we’ve not really modeled that to any of our guidance certainly -- we certainly considered internally and we will continue to do so, but have to wait to see the structure of the actual tax reform should it occur in 2017.

Would you be impacted to any extent by the support -- the proposed or bantered about idea of a border tax on certain material that you might import or did you mostly source your materials in domestically?

Sure. John that’s a good question. I will try not to be get too complicated and the answer though, the answer is a bit complicated. We do import some of our material. There is a subset of our material that is imported and as a subset of that, that there are not domestic suppliers, so we continue to have to import. But at the same time, if they go through the path that has been laid out for those sales that we export there would be a benefit to us obviously, because you wouldn’t be paying a tax on the profit and you will have a benefit on the domestic content that was exported, again following what’s been laid out at least in the Republican plan. The challenge to all that is independently that there sounds, potentially favorable, but then there's been a lot of talk or that were to occur you could see an effect there. You should see an effect to the strengthening of the U.S dollar which would make our sales a little less competitive internationally. So when you throw that all in one basket it is hard to say what's the true impact of all this, I think unfortunately we probably have to wait and see a little bit, there's a lot of moving parts that would likely occur, should something similar to the cross-border tax people into [indiscernible] that. Again, I hate to be a little evasive by the answer but there's too many things you just don’t know how they’re going to move.

Right. I understand that. There is curious whether that was in your kind of looking out there -- what potentially might go on and having benefit or not from what’s [indiscernible]. The other question is [indiscernible] but can you give us any update on potential acquisition.

John, we continue to be very active in the acquisition arena. I think we mentioned in our last couple of calls, we brought out a Director of Business Development late last spring and he is doing a very good job of building out, our M&A pipeline is, well, It's looking at there is looking at some internal organic development opportunities. Building that pipeline takes some time and unfortunately we’ve not seen the significant reduction in what [indiscernible] are looking for this. Now little bit of an improvement, but that’s in the levels of one wont expect at this point in Time. All that being said, we’ve got a pretty good pipeline. Looking across all of our existing markets as well as some ancillary markets and I can assure you there is a lot activity going out, but a lot of activity doesn’t immediately lead to a result. You’ve got -- you need some time to build that in, but all in we’re pleased with the direction of our M&A activities. So it's take some time.

Do you think some of the -- what tends to lower ask prices for businesses is a function of a -- hope for turnaround in the manufacturing sector given the outcome of the election and so on and so forth and at least the apparent direction are more pro business outlook in that regards. I think that’s -- have an impact.

I don’t know if we could touch, certainly could be contributing, I think there was also a lot of available cash on the sidelines, particularly in the private equity world that are looking at an opportunity to chose that, that has the key [indiscernible] little bit higher.

Okay. Very good. Thank you much. Good luck to the rest of way.

Hey, John. Thank you.

Our next question is a follow-up question from Joe Mondillo with Sidoti. Please proceed with your question.

Hi, guys. Just a couple of follow-up questions. So, first, I was wondering if you have any sort of insight on potential expansion of any of your navy businesses? I think there has been some talks of going to three submarines per year as opposed to the two in plan right now. Any insight or anything you’re hearing regarding potential opportunities like that?

Regarding our naval strategy more broadly, the team driving that strategy has a charter to expand and diversify our participation across the different vessels we’re currently in, which would be a carrier in two different submarine programs. So we’re intend on utilizing our capabilities, and how we differentiate our offer from the typical naval supplier to participate more fully in those areas that we feel we can. Whether or not there will be an acceleration with how they procure the submarine program. As an example, my sense would be that will be paced by the supply chains capability to execute, and I think the supply chain is pretty stretched once there was a Virginia Class submarine and Ohio class submarine. Moving forward, along with the carrier, so my sense is while there is desire, perhaps to move faster, the supply chain is not built out in any way to be able to do that.

Okay. You’re talking more or so the entire supply chain or more so, your sort of capacity.

I was speaking more broadly of the entire supply chain to those programs.

Okay. Okay. And then just to clarify, in terms of the aftermarket business, the trend that you’re sort of seeing, have you seen sort of slight the crimes in the last several quarters or that 20% decline is up more of a year-over-year and things have been sort of more stable though --last couple of quarters?

There has been stable at a contracted level over the last three quarters compared to normal.

Okay. So it's good, down 20% from a year-ago, but in the last couple of quarters they’re sort of stable. Is that …?

… in the last couple of quarters are stable and they’re down about 20% from the ordinary level that we actually had seen one year-ago, two years ago, three years ago.

Okay, got you. And then just lastly I was wondering If you could comment on the nuclear. The power gen market that you supply into, what’s sort of any thoughts on your outlook where the orders have been pretty light in the last couple of quarters. And the backlog has been declining in the last several quarters. Just wondering sort of what your take is and what’s going on there and sort of what the -- your outlook is?

We’ve talked on the last couple calls, Joe, about the nuclear market and what is experiencing as a whole. The market is looking to contract its supply chain and reduce its procurement costs, that’s called the nuclear promise which is an endeavor to lower the cost of procurement by 15% across the supply chain. We've also seen because of the uncertainty about the direction of natural gas and the use of that for power generation, the willingness of the utilities to best as they had previously. So there is a slowing down we’ve seen. I don't necessarily assigned what you witnessed as a decline in our backlog to a change in our competitiveness, we're changing our ability to win. I think the market is always tightened its per strings, and is trying to reallocate and shorten its supply chain down to two or three suppliers per different commodities as a way to reduce costs. And I think that's what we're experiencing, longer-term and I don’t want speak more broadly, because we spend a lot of time -- truly we spend a lot of time talking about our energy markets, which already -- very significant percentage of our sales, historically and we go forward and we will always be important, but I want to make sure it's understood that we are here waiting for the energy markets to recover. We know that they will. We are taking action within the energy markets to be prepared to capitalize when I do begin spending. Our sales force, Alan, General Manager of our business, [indiscernible] sales force spending much more time being plant centric plant focused as opposed to EPC focused because that's where we believe the money will be spent first. Also we're looking to reposition our brand and how we drive value…

Thanks, I appreciate. Just want to clarify, that’s all. Just lastly sort of tied into your answer there. In terms of going back to the question on acquisitions. So now that you’ve sort of broaden the Company, a lot more compared to sort five plus years ago with nuclear power and the navy. Has this changed your sort of strategy or maybe at least broadened your sort of appeal in terms of M&A market and your strategy on how to sort of expand the Company strategically with -- just given the growth and more exposure to these other sort of markets. Just wondering sort of a higher level sort of strategy, how you’re looking at M&A? Maybe compared to how you were looking at seven or eight years ago. Great question. Thanks for setting me up with this.

We’ve a tremendous [indiscernible] the diversification that we under took. And the beneficial impact has had had, and there is downturn and we’ve not done that. This would have been disastrous. So therefore we’re looking to also invest in our core markets with M&A, and also further diversified too. Long-term change nearing its volatility of those company and the best way to do that is to take more of what’s in the markets that we’re currently in, and also diversified revenue streams, so we’re looking more broadly than we had. part of that looking four years ago and again quite clearly I’m very fond of what we did over last four, five years and beneficial impact of naval and nuclear. At this point in time, it would be a rough rocky ride with audit rather more of it.

Okay. Thanks a lot. I appreciate it.

We’ve no further questions at this time. I’d now like to turn the floor back over to Management for closing comments.

Thank you, Christine. Well, I probably made my closing remark one comment previous to this. So I just want to thank everybody for the time. I wanted you to the thinking about the initiatives that we have and appreciate that we're not just waiting for the markets to recover. That we are urgently trying to take action during this downturn to reposition our business for stronger growth and the capitalize grocery share when our core markets begin to recover, and I’m very pleased with where we’re in that Journey and the steps that we had taken and I think our future still remains very bright as we work through this rough patch in the energy sector. Again, thank you for your time. Jeff and I will update you during our May or June call. Thank you.

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