Graham Corporation

Greetings. Welcome to the Graham Corporation Second Quarter Fiscal Year 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Karen Howard, Investor Relations for Graham Corporation, You may begin.

Thank you, Darrell, and good morning, everyone. We appreciate you joining us today to discuss Graham's fiscal 2020 second quarter and first half 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 of the slides, you can find them on the company's website at On the call with me today are Jim Lines, our President and Chief Executive Officer, and Jeff Gleick, our Chief Financial Officer. And I also want to introduce you to Alan Smith, our Vice President and General Manager of our Batavia facility. Jim will start with a strategic overview of our business and provide our outlook for the remainder of the fiscal year. 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 decks. as well as with other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at www.sdc.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 gaps and non-gap measures in the tables accompanying today's earnings release. And with that, it's my pleasure to turn the call over to Jim to begin. Jim?

Thank you, Karen. Good morning, everyone, and we appreciate you joining our second quarter earnings call. I will begin with a strategic overview of what we are focused on. My remarks start on slide four. The key element of our strategy is to strengthen and expand predictable revenue streams. This will reduce financial performance volatility caused by large capital projects typical demand within crude oil refining and chemical end markets. Refining and chemical end markets have had historical large variation in demand for our products, and that is not expected to change in the coming years. To the contrary, We observe these markets to be more volatile today, with greater variation between cycle peaks and bottoms. Our strategy to increase participation and market share within the U.S. Navy nuclear propulsion program will provide a predictable level of revenue. Navy work typically has long-lived backlog, providing vision into a multi-year revenue projection that is predictable and not subject to large variations. The Navy strategy has been successful with current backlog for this segment at approximately $60 million. We are now on each of the three nuclear propulsion vessel programs. Participation is expanding as the types of components provided increases. Over the next 12 months, we hope to secure the supply of two new components, one for carriers and the other for one of the two submarine programs. We have executed well our naval strategy. Alan Smith and his team has executed superbly. An ongoing confirmation of our success in differentiating on execution, on-time delivery, and quality is the expanding percentage of backlog that is one sole source. All our work for the first decade of the strategy was competitively bid. We now are seeing certain procurement done with sole source bidding. Moreover, many of the orders were first-time fabrications for us of very complex weldments and material combinations. This involved considerable production R&D and the development of efficient build flow methods. Productivity and process improvement will drive fabrication efficiency gains, which will be reflected in better and more predictable margin as we move into repeat fabrications. We expect revenue during the coming few years to continue to expand and also margin quality to improve as we begin repeated fabrications. This end market is an area of M&A concentration as well. We continue to actively engage in discussions with companies serving the Department of Defense and aerospace end markets. With our current portfolio of components provided to aircraft carriers and submarines, along with new components we plan to break into, This segment without M&A is expected to have revenue between $20 and $30 million annually in the next two years. Also, we are focusing more on our installed base. Graham has a sizable global installed base and a great installation record in North America. In the last 25 years, Graham supplied equipment valued at more than $650 million that was delivered into North America. Moreover, with equipment delivered in the 1970s and 80s, we estimate that our North American installed base approaches $1 billion. Here, too, the segment is not as volatile as large capital projects. Our customers generally invest to keep their plants operating well. Also, our thesis continues to play out that certain regions, such as US and Canada, will leverage their facilities to get more from them before investing in large new capacity. Regions with dense installation populations are the U.S. Gulf Coast, mid-Atlantic states, and the West Coast plus Alberta. Customers need our knowledge and expertise to identify performance risk and what may be limiting throughput or impacting product quality. We are localizing performance improvement engineers in key regions to focus on our installed base and to assist customers. This is typically high quality margin work and is not highly cyclical. We are currently building out a U.S. Gulf Coast performance improvement engineering team. Two engineers were placed there in 2018 and we expect to add two more in the next six months. These individuals focus on our customers' plans and our installed base which will be in addition to the historic focus we have had and will continue to have on EPCs and OEMs. M&A focus is also here to add products and or services. Currently, 30 to 40% of revenue is derived in some way from our installed base. When taken together, the Navy and the predictable installed base revenue segments are anticipated to approach $50 million per year in revenue in the coming two years. Upon achieving that level of predictable revenue, it will dampen the impact of our highly cyclical crude oil refining and chemical large project work. Also, trade policy and tariffs on certain materials have affected competitiveness in international markets, and in certain instances, it has impacted us in our domestic markets as well. We are also observing customer acceptance of low-cost regions for fabrication of critical components, such as our ejector systems or steam surface condensers. In response, and actually to reposition our competitiveness and to expand market share, the global fabrication supply chain is being more aggressively used by us. In the last 18 months, more than $35 million in new orders were secured by executing differently to take share where previously we were unsuccessful due to cost. Four of the projects were for international crude oil refining projects, that will add to our installed base, which will ultimately drive follow-on revenue in coming decades from revamps, retrofits, and spare parts. In the past, we approached using the global fabrication supply chain in a limited or targeted manner. Now we are proactive and aggressively attempting to change participation, create broader execution scale, and expand market share. A key element is quality control and IP protection. We are building out a supply chain management and quality surveillance organization in support of this strategy. Early successes cited just a moment ago are validating we have a good formula for success. Importantly, the unique or differentiating elements of Graham's IP will be closely controlled as we execute this strategy. I am now moving on to slide five. The success of our focus on the installed base is highlighted by this slide. Comparing the eight-year periods between 2004 to 2011 to those of 2012 to 2019, the percentage of commercial revenue derived from the installed base expanded from 28% to 41% of commercial revenue. This has come from stronger and more consistent level of spare parts revenue and also end-users investing in revamps or retrofits to improve operational reliability or gain incremental throughput capacity. When the original equipment is grams, a retrofit or revamp opportunity has a high likelihood of gram getting in order with strong margin quality. Importantly, and as shown in the second set of slides, gross profit derived from the installed base during these two comparison periods expanded from 44% to 61% of total commercial gross profit being derived from the installed base. Crude oil refining, the picture on the top right, installations are absolutely terrific for follow-on revenue after initial sale. This then market invests in revamps and retrofits, and also due to the harsh operating environment in an oil refinery, there are strong spare parts follow-on revenue. Surface condensers, the lower right, offer less replacement parts potential but do drive in-kind complete replacements after 20 to 30 years of operating life in many cases. Again, if the replacement condenser is for a gram original sale, there's a good likelihood of a high quality margin replacement order for us. Moving on to slide six. To confirm full year guidance, Revenue is expected to be between 100 and $105 million. This is predicated on securing a quick turn Navy order in this current quarter that we are anticipating. Gross margin is expected to be between 24 and 26%. SG&A spending will be between 17 and $18 million. Our effective tax rate is approximately 20%. I will now pass it over to Jeff. for a review of financial results. Jeff?

Thank you, Jim, and good morning, everyone. If you could turn to slide eight, some brief highlights on the second quarter. Sales in the quarter were $21.6 million, similar to the $21.4 million in the second quarter of last year. Q2 net income was $1.2 million, or 12 cents a share, down from $1.8 million, or 19 cents a share, last year. Included in last year's numbers were some losses related to the recently divested commercial nuclear business. If we were to exclude those, the comparable net income last year would have been 2.4 million or 24 cents a share. Borders in the second quarter were strong at $32.6 million, driven by some key refining orders in Asia and the United States. Our backlog has improved to 127.8 million. The backlog level includes a tripling of our commercial backlog over the past 24 months, and when we back out the divested nuclear business from prior periods, this is our largest backlog ever. Move on to slide nine. Again, Q2 sales were 21.6 million versus 21.4 last year. Sales in the second quarter were 73% domestic, 27% international, fairly similar to last year which was 70% domestic, 30% international. Gross profit decreased to $4.9 million from $6.2 million last year due primarily to an unfavorable mix of projects. Gross margin was 22.9% down from 29% in the second quarter last year. EBITDA margin was 7.8% down from 14.7% in last year's second quarter. And as I noted earlier, net income was 1.2 million or 12 cents a share down from adjusted level of 2.4 million or 24 cents a share. On the slide 10, looking at the first half of the year, sales in the first half were 42.2 million compared with 51 million in the first half last year. You might note that last year we had a much stronger first half than second half of the year. And clearly, per our guidance, we're expecting the opposite to occur this year. Unidate sales are 71% domestic, 29% international, compared with 56% and 44% respectively last year. You may recall in the first half of last year, we had a large, high-cost metal Canadian oil sands project, which helped push the international sales higher. Gross profit Unidate. $9.7 million, down from $13.4 million last year, and gross margins are $22.9 versus $26.2 last year due to unfavorable mix as well as the lower sales volume. Year-to-date adjusted EBITDA margins were 7.3%, down from 14.4% last year. Both periods reflect the exclusion of our commercial nuclear business, which we sold in June. Finally, adjusted net income was $2.2 million, or 22 cents a share, down from 5.1 million, or 52 cents a share last year. Again, with sales, last year's earnings were front-end loaded with minimal net income in the second half of the year. On slide 11, excuse me, our cash is $73.8 million, down $4 million in the first half of the year, but this is simply timing of working capital. may have noted that we increased our dividend in August to $0.11 per share per quarter or an annual rate of $0.44 per share. Capital spending has been light the first half of the year at $700,000 compared with $400,000 last year. As we have seen in the past few years, our capital spending will increase in the second half of the year, and we still expect to spend between $2.5 and $2.8 million in the full fiscal year. As we continue to expand our acquisition pipeline, particularly in the Navy and aerospace arenas, as Jim mentioned earlier, and we are quite pleased with the list of companies that we are considering pursuing to utilize some of the cash on our balance sheet. Alan Smith will complete our presentation by providing more depth on our operations in Q2. For those of you who have not met Alan, he is the General Manager of our Batavia business He's been with Graham approximately 27 years in various engineering and sales roles. Alan?

Thanks, Jeff. If you could please turn to slide 13. Second quarter revenue was comparable to the same period last year. However, there was some end market variation. Refining industry sales in the quarter were down $3.4 million. This was due to a number of North American revamp or retrofit projects which were under execution last year. This does not signal any change in our end market fundamentals. On the other hand, chemical industry sales were considerable relative to the same period last year. This was driven by domestic new capacity and investments in retrofit. Power industry sales are down due to the divestiture of energy steel, whose revenue was in 2019 and is no longer part of the ongoing mix. We continue to have a high concentration of domestic revenue. It is 73% of our overall revenue. Such a high concentration is due to Navy revenue, the strength of the domestic and chemical end markets, and the revamped investments that are routinely occurring in the U.S.-based refineries. Please turn your attention to slide 14. The highlight here is the strength and improvement in order levels from Graham's commercial end markets that are principally crude oil refining and the chemical markets. From the low water mark about two years ago, the level of trailing 12-month orders are up approximately 100%. We are expecting a book-to-bill ratio greater than 1 for FY20, implying that the order pattern is anticipated to be strong in the second half. There is a nice pipeline of bids for the U.S. Navy and our international crude oil refining market. Chemicals are expected to be stable, but not as strong as orders from the U.S. Navy or our oil refining end market. I'm now referring to slide 15. We have a terrific high-quality backlog, and the profitability of our backlog continues to strengthen. The backlog on September 30th was $127.8 million dollars. with approximately $60 million for the Navy and roughly $40 million for crude oil refining customers. It is also important to note that excluding energy steel, the backlog reported on September 30th represents a record high for our ongoing business. Our diversification efforts with the U.S. Navy have been effective and provide a strong level of multi-year base load for our operations. 55 to 60% of a backlog is anticipated to convert within the next 12 months, and 25 to 35% converts within two years and beyond. Darryl, can you please open the line for questions? Thank you.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Our first question comes from the line of Theodore O'Neill from Litchfield Hills Research. Please proceed with your question.

Theodore O' Thank you. Congratulations on the good quarter.

Thanks, Theo. Thank you, Theo.

I just have a question here about slide five, where you're showing that the commercial revenue has grown in the last seven years relative to the previous seven years. And I understand that profit is the profit aspect of it. Parts of profit ought to be better. But does this imply that there's some kind of change in construction and new building? of equipment, building of facilities that you would service? Is there a cyclical component to this where there's not as much new equipment anymore, they're just retrofitting and buying parts? And is this at all cyclical?

No, it doesn't signal in our mind a long-term change. What we had identified or what our thesis was coming out of this downturn that expansion would be driven initially off of investment in the installed base. We thought that would come first, and that actually played out as we had expected, and we began to shift our customer-facing resources more toward the installed base because that's where the revenue would come first. As we look at our bid pipeline, however, Theo, from a global perspective, we are beginning to see our bid pipeline fill with more new capacity work It's more of a timing, and it's typically how we come out of a downturn where installed base gets focused on first before new global capacity starts to be invested in. Now, we have won some orders in the last year or so for new global capacity, but as we look at our bid pipeline, it's beginning to expand and be more filled with global new refining capacity.

Okay. Thanks very much.

You're welcome.

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

Hi, thank you. A couple follow-ups on your conversation about Navy work and aerospace and defense work in general. First, what do you refer to when you mention the quick turn Navy order? Can you give more context to that, please?

Yeah, that's an order if you track back a type of order, if you track back to fiscal 17 or fiscal 18, We had acknowledged that there can be some quick-turn naval work that comes in and out in one or two quarters that can be rather significant. We are anticipating there might be one of those in fiscal 2020, but I would ask you to maybe step back to the 2017 fiscal year, 2018, where we had a similar type of order happen and affect both those years. We are expecting that to occur again. It's more of a... a material-type order versus a fabrication.

Okay. And then with your – and I pardon if I misphrase it, but you mentioned an annual revenue target, and you referred to it as aerospace defense of $20 million to $30 million annually in the next two years. Does that imply moving beyond equipment work just for the submarine and aircraft programs, or is that all still sub and aircraft programs?

No, Tate, that's a great question. That's with our current component mix that we're providing to carriers and the two submarine programs, plus we hope to win additional components for those vessels. But that comment really reflects where our current backlog is and its conversion schedule, plus what we anticipate to win that, as I said, is for carriers and submarines. So it's not branching into aerospace at all.

Okay, okay. And then have you – I can back into it, but I think on your revenue and how you break it out, there's a line for other commercial, industrial, and defense work. I mean, relative to that $20 million to $30 million annual target, is trailing Navy work about $18 million, or can you give that number?

You know, we haven't been definite about that. It's been – between 10% and 15% of sales in a given year. That's been the range. And other elements, other end markets that go into that other segment could be edible oils, could be pharma, but by far the most meaningful and what we group in other right now is Navy.

Okay, thank you. And then And you sound optimistic on more future Navy orders and just based on other companies talking about the submarine and aircraft program. Are orders subject to the procurement cycle? I mean, do you have visibility that you have them, but you're waiting for the allocation and the procurement until you put it into backlog? Or how will that work potentially?

Well, we have visibility into the bids that we've already made. We have dialogue with the counterparty of when they would begin to negotiate. It can be difficult to predict when they actually settle on the supplier and release a purchase order. However, we have a view based on the dialogue that we're having, the bids are already very mature, that a good book of opportunities should close in the next six months for the U.S. Navy.

And last one for me, and sorry if I missed it earlier, in the prior quarter, SG&A dropping to $3.8 million from $4.6 in the prior quarter and keeping guidance unchanged. Did you talk about some timing in that expense, and why should that increase in the second half of the year, please?

Sure. A couple of things, Tate. This is Jeff. First off, we did have energy steal in the numbers in the first quarter, so that's a piece of the drop-off. There was also some timing of some things that did not occur in the second quarter that got pushed, will get pushed to the second half of the year. And so there will be a little bit of a – that's part of what's driving the increases. We just had a very light quarter in the second quarter relative to what I would call a normal quarter. That happens on occasion. Sometimes it tends to happen more in the first quarter this year. The lightness happened to occur in the second quarter.

Okay, thank you for all that detail. I'll have a good rest of the day. Thank you.

Our next question comes from the line of Brian Lau of Sidoti. Please proceed with your question.

Hey, good morning, everybody. Brian on for Joe this morning. Congrats on a solid quarter.

Thank you, Brian.

Just real quick, wanted to touch on the gross margin a little bit more. When you raised the guidance for the gross margin in the first quarter, did you kind of anticipate the result this quarter? And if not, by reaffirming it, are you kind of implying maybe there could be some surprise in the back half? And then also, how does that gross margin compare on some of the more recent orders, maybe in the backlog compared to some recent shipments?

So, a couple of questions there. The first one is, did we anticipate the the margin in this quarter relative to the guidance that we gave. And we did. This quarter was pretty much in line with what our expectations had been. So that was inherent in the guidance we gave before here. Secondly, I believe your question was around the margin in backlog. We talked about this quarter having a bit of an unfavorable mix in it. What's in backlog, what's going in the backlog is We're continuing to see an improvement in margin in what's going into backlog versus what's coming out. So I think Alan mentioned the high quality or the improving quality of our backlog, and part of that comment was clearly a better margin profile than what's recently come out of backlog.

All right, great. Thank you. And then just as far as the bidding activity, it sounds like everything is still on track for that kind of $30 million bid. dollars in orders, kind of that cadence going forward. Has anything really changed since the last time we spoke, or does that sound about right?

Nothing has really changed, Brian, other than we thought we could have booked one or two of the orders that are now pushed out last quarter. It's just a typical customer delay. We do have some rather large projects, so it might look chunky in terms of how the order flow could be quarter to quarter because of the size of some of these projects in our pipeline. between $5 and some $15 million. However, our overall view is unchanged from complementary last quarter.

All right. And then last but not least, just on the M&A pipeline, sounds like you guys are kind of honing in on some targets there. Have multiples come down at all, just kind of with the general environment?

Not really, unfortunately. In the space that we're looking in, the defense market as well as in some of the aftermarket on the commercial side. The multiples are still pretty frothy. But we'll manage our way through that. But no, they really have not come down.

Okay. Well, appreciate it. And again, good job on the quarter.

Thank you. Thank you, Brian. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Bill Baldwin of Baldwin Anthony Securities. Please proceed with your question.

Thank you, and good morning. Bill, I was looking to see what cover you can offer regarding the initiative you've undertaken to – I guess, secure more of a global fabricating supply chain, you know, using third-party fabricators. Can you offer us some insight there, Jim, as to what that entails? Are you expanding relationships with existing fabricators, or are you adding new fabricators? If so, how do you do your due diligence and vet, you know, and vet those new fabricators to qualify for it? A great question.

We do have a group of historic international fabrication partners that we will continue to leverage, and we furthermore intend to expand and add more fabrication partners. We do a very deliberate due diligence process around financial capabilities, quality, customer-centric organization, similar sensibilities to Graham. Once we select a vendor and move them on to our fabrication ABL, that doesn't mean we detach ourselves. Once we have an order that we'll put into that business, our quality control, our manufacturing specialists are surveilling and in those businesses fairly regularly to ensure fit, form, and function, quality, contractual adherence, and that it has the grand badge and we're proud of what's being delivered. So we're very deliberate. and very measured in that. If I thought about the strategy from a historical perspective, we were more opportunistic and we would snipe at this work when it suited us. Now, how we thought about it the last 24 to 30 months is we want to aggressively reshape our position in certain segments of the market, change our market share, drive down our cost basis for that type of work by using a more aggressively the global fabrication supply chain. And really, end of the day is to take more global share within a different market pricing expectation while driving an acceptable return for ourselves. So we're thinking about it differently. Ultimately, the linchpin is let's change our position. Let's take more share. Let's beat the installed base. And so far, as I said in the prepared remarks, Bill, We've had half a dozen contracts in the last 18 months. That totals something north of $30 million, $35 million. We are executing with some of those contracts with old partners, and we're executing some of those contracts with new partners.

Are you using these fabricators then primarily for the – global refining and sector chemical markets, or is it primarily refining?

It's actually both. From a declarative point of view, we want to own and be the dominant player in refining. Our attitude is we never want to lose a refining project, so we want to make sure we maintain that dominant position. We also want to shift higher our market share in chemicals. So of those six projects that I cited just a moment ago, as I said in the prepare remarks, four of those are refining projects and two of those are chemical industry projects.

Okay. Very good. When you've got such extreme tolerance that you have to meet, you know, in terms of some of your products, it's just – Do you have some of your own people sometimes that have to go on board, you know, have to go on site there to make sure that the quality of the work is being, you know, I mean, do these fabricators have the quality of people on board to do the kind of work you can do there and make your plants there in New York?

Well, no one builds it like Ram. Let me start with that. We are an exceptionally capable fabricator. However, we can push our our expertise into certain fabricators. Not every fabricator is a good fit for us. We're not looking for optimizing price. We're looking for the right balance between outstanding quality fabrication capabilities at an acceptable price. So we're not going to the secondary or tertiary fabrication supply chain. They're sort of what you're citing here as a risk. They won't fit us. They won't they won't match our brand and our quality requirements. So we are going into the top tier fabricators, if you will, or the upper tier, where their capabilities are strong, their ability to fabricate to our tolerances and quality criteria, and the criterion of our customers is acceptable. So we're striking this balance of we're not chasing lowest cost. We're putting quality first, execution, execution and quality and delivering something consistent with our brand is the priority at an acceptable price. So hopefully that answers the question.

Yeah. It gives a good insight. Are there any IT issues involved here that you have to protect when you're working with fabricators like this, Jim? I mean, are you giving them access to certain of your practices that you consider to be proprietary? Sure.

Certainly anytime you embark on a strategy such as this, that's the first thing that comes to mind. That's the first thing that came to the mind of the management team of how do we execute this and moat the critical IP that is unique and differentiates us. And we have methodologies to do that. What we're imparting into the fabricators is less critical IP and more commercially available technology that that's not the secret differentiators of the ramp. We preserve that, we hold that, we moat that, and we don't put that into the fabricator's wheelhouse. A key criterion is we do this with a clear vision that we will not create a competitor.

Exactly. Exactly. Yeah, that's the last thing you want to do there. And lastly, are you finding the sufficient... number of these folks to talk to? I mean, are there people out there to meet those criteria you have, pretty much where you want to be located or if you need them?

You know, it's a process. You know, we've just gone in and did an audit in a pretty large country that has a massive supply chain base of this type of fabricator, and we've added five to our AVL. in that particular, AVL, sorry, is an acronym for Approved Vendors List. So they've met our audit standards and they've passed the mustard and we envision putting work into one, two, three, four, five of those shops. We found fabricators that want to associate with our brand because our brand gives market access. Our brand gives expanded opportunity. So we're finding a really keen receptiveness to work with us because They don't have the global market access that Graham does. And we don't have the execution scalability that they provide. So it's a great partnership where we're both sides to figure out how to do something together that neither can do independent of each other.

Right. Yeah, I would think they'd be knocking on your door with the install base you've got out there and your reputation. Well, I'll tell you, it's – As you execute this, it's going to be exciting to see what happens to your market share globally.

Yeah, we're very excited by it.

Yes, it's a very interesting initiative. Very good. Thank you.

Thank you, Bill.

Our next question comes from the line of Jerry Heffernan of Walt Housen & Company. Please proceed with your question.

Good morning, everybody, and thank you for taking the time to take my call here. Hi, Jerry. Hey, Jim. I was very interested in the question set of the last caller, and it spurred a couple of questions in my mind in regards to the statement that you made of M&A. We've been talking for many years here, and M&A has always been discussed, though it's never been a real big part of the picture. So my question is, it sounds as though there's perhaps a little bit more interesting news in that area of your efforts than in the past, and it had me thinking, what is Graham's core competency? When you think of ground core, what is your core competency? And in regards to M&A, are you looking for someone that has that same core competency? Or are you looking to add a new competency?

Good question. There are five critical differentiators or core competencies that we possess. that we believe we possess and that our customers value. First and foremost is our customer-facing platform in which we applicate and serve as a partner in the conceptual design and the facility design for our customers of how our equipment integrates into their process and how they're able to achieve their operating results. They need us, and we've built a customer-facing platform to provide immense amount of knowledge transfer, information sharing, and optimization of their designs. So when they run their plans, they'll meet their operating objectives. So we think we differentiate on that front. Secondly, because of the segment of the market that we've chosen to serve, which is this highly complex, critical piece of equipment that integrates into a very complex process, a second differentiator is the engineering organization, the process know-how, of how after we have an order, we're able to, when we get an order, and you probably have heard this before, all on the call have heard this before, designs rarely are frozen for a large project work. We go through a process with the customer to actually finalize the design, and it's highly iterative, so we have to have an adaptive and flexible ops model in the office portion for executing these orders that Something always arises. There's design churn, design iteration. We have to have an adeptness and a vision that that's the nature of this work and we don't make every problem a customer's problem. And they need us for that. So that's a second differentiator. A third differentiator is the custom fabrication of these complex, very large weldments to exacting tolerances. A bit like what Bill Baldwin had questioned as we think about our fabrication partners. and their capabilities of doing that. We have incredible artisans and craftspersons at Graham that can fabricate these complex things as big as a house to watch tolerances with massive amounts of metal and welding done to the metal and material movement, and that's a unique capability that our company has and has developed over a long period of time. And here, too, even when something's in fabrication, design might not be frozen. So we have to have, Alan and his team have to have an operations model where there's ample whip on production floor when jobs go on stop. When there's design change, we can fluidly move and then resource other orders to keep production flowing while an order goes on stop. That's a particular uniqueness of a low-volume, high-mix ops model that We feel we've perfected. That's what our market demands. And that's a key differentiator for us versus a high-volume, low-mix ops model. A fourth differentiator is the fact that we care about our installed base. We care about operational reliability. We're just not an initial sale partner. We're a life partner. We make sure that the facilities will operate for the life of the facility where they're using our equipment. Most of our competition, I'm not being disrespectful, they're focused on the initial sale. We're focused on the value of the life of the relationship, not on the initial sale solely. We've built out a post-award organization that provides technical services, knowledge transfer, helps our customer with operational reliability, unlock latent capability, And there's a strong pull on that organization. We gave that organization an identity about 10, 12 years ago. We've added to it. It's probably doubled in size since we started the aftermarket team providing field service. So that's a key differentiator for most of our competition that's concentrating on the initial sale. That's four. The fifth one is we will invest in ourselves. We will deploy our capital into our business And then aggressively, the last 20 years, we've put approaching $30 million of capital into this facility here to expand our capabilities, to drive productivity improvements, to do more with our roofline. And then we've also invested in our workforce, in IT tools, in productivity tools, in high-caliber change agents being brought into the business. So we think differently about managing the income statement in in the near-term versus the long-term value creation of all of those four other differentiators. I think that's how the customers think about us. That's why they value working with us. And now when we think about a partner, we're looking for someone that has really the fabrication chops, that middle part, the two and three differentiators, because that's what we need from them, where they have an ability to execute these orders. And then an ability to fabricate these complex weldments to our fit, form, and function criterion. And that's not no casual chore. So that's what we're looking for. And as we're thinking about M&A, I'll turn it over to M&A in just a moment with respect to Jeff. But I want to be clear as it pertains to M&A on the strategy that we're talking about just a moment ago. We're not necessarily thinking of M&A there with an operations-led strategy of buying something in international markets. I very much favor, because of the cyclical nature of these end markets, a flexible cost basis and a way in which we can address burst demand or burst capacity needs for the global fabrication supply chain. And I'm reluctant to, and Jeff is as well, to focus M&A resources on buying bricks and mortar in the international markets because I don't think that solves anything in the short term or the long term. It creates long-term issues. I'll turn it over to Jeff for a more broad discussion of our M&A focus and the criteria that we're looking at.

Thanks, Jim. Jerry, as we're looking at potential acquisition candidates, one of the things we're focused on is As Jim mentioned, we're not trying to buy capacity per se. We're actually trying to buy – we're looking for a business that fits our type of operating model, so has the customer and quality focus that we believe we have for our customers, and that has a good management team that wants to remain with the organization. That's key to us. We're not buying a – We're buying a business, but we're buying the people in the business as well, and that's critical for us. We want someone who has a lot of the same attributes that Jim conveyed about Graham, but we're looking to how do we grow this business in parts of our markets that we believe are perhaps less cyclical than our core energy markets. We talked earlier about the Navy space, and we threw in aerospace because many of the companies that we're looking at that have a large Navy component also have an aerospace component. Maybe not as big, but it certainly exists, and that is interesting to us if it product-wise ties into what they do with the Navy. Okay. We're also looking at opportunities in the aftermarket, in our commercial markets, because we believe, and our experience has been, while the volatility of our capital investment by our large refining and petrochemical customers can vary 50%, 60-plus percent, the volatility of the aftermarket or short-cycle business tends to be much less volatile, perhaps less. more like 15% to 20%. So in a down cycle, it's a business that's more sustainable. So that's really our focus on the acquisition side. But key for us is we want to find the companies that are well-run, that have a lot of the same attributes as Graham, and have a management team that wants to remain in that business post-acquisition. I hope that's helpful. If I can clarify it further, please let me know.

That was all very helpful, both Alan and Jim. Jim, it strikes me when you go through those core competencies and going to the previous question of Mr. Baldwin there that, you know, concerned about the custom fabrication competency that you have and are you giving anything away if you're starting to utilize international players for that aspect of your service, that that is just one of five items that you've picked out and the other four are very much people-oriented as opposed to just the artistry of working with the metallurgist.

That's correct. While there is risk in doing this, we think we've moated the most critical elements of our success factors.

Thank you very much.

You're welcome. Our final question comes from the line of Tate Sullivan of Maxim Group. Please proceed with your question.

Oh, thank you. Thanks for taking a quick follow-up. Just on numbers-wise, for orders in the most recent quarter of 32.6 million, and then earlier in September, I think, was when you announced most of the refining orders. What are other orders in the quarter? Is it design modifications that you mentioned before or maintenance or aftermarket? What usually are the other orders besides the large equipment orders?

We had some chemical industry orders that came in, and then, of course, our usual basket of short cycle work, spare parts, small product new equipment sales that typically come in and out in one, two, three, or four months. So that represented the remainder of it. There wasn't so much change orders, but more of the large project works where we have the order announcement, about $20 million of that. And then we didn't announce several million dollars, a few million dollars of chemical industry and market sales. And then our short cycle business makes up the rest.

Just to also clarify, a couple of the larger orders that Jim had mentioned, We announced the one, the $19 million or so, in early September. We had a couple that came in fairly late in the quarter, and our practice is they come in that late. If we would have put an announcement out, it might confuse whether it was a second quarter order or a third quarter order if we announced it in early October. And we believe that it just makes sense to hold off on any kind of announcement like that and just talk about it on the – on a quarterly call like this. Great. Okay. Thank you.

We have reached the end of our question and answer session. I will now turn the call back over to management for any closing remarks.

Well, thank you, Daryl. And thank you, everyone, for your time this morning and for your questions of the three of us. We appreciate your engagement and the interest with which you thought about the questions And we look forward to updating you on our progress in executing our strategies and our financial performance in January. Have a great day. Thank you.