Graham Corporation (GHM) Q2 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Graham Corporation’s Second Quarter Fiscal Year 2012 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Graham Corporation. Thank you, Ms. Pawlowski. You may begin. Deborah Pawlowski – Investor Relations: Thank you, Claudia, and good morning everyone. We appreciate your time here today with the Graham Corporation’s second quarter fiscal year 2012 conference call. On the call, I have with me Jim Lines, President and CEO and Jeff Glajch, Chief Financial Officer. Jim and Jeff will be reviewing the results of the quarter and also providing review of the company’s strategy and outlook. If you did not get that via e-mail, you can find on our website the slides that they will be using with the presentation and that the website is graham-mfg.com. As you may be 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 that could cause actual results to differ materially 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 at the company’s website or at sec.gov. So with that, let me turn it over to Jim to begin the discussion. Jim? Jim Lines – President and Chief Executive Officer: Thank you, Debbie. Good morning, everyone. We appreciate your joining us for our second quarter earnings conference call. We had a very solid quarter. I wish to comment that the management teams and employees at our Batavia, New York; Houston, Texas; Lapeer, Michigan; and Suzhou, China locations. The teams executed extremely well at closed collaboration for a couple of major projects and together delivered tremendous value for our customers and terrific financial results for the business. I cannot say enough about the fine work our employees do each day to ensure we remain a supplier of choice to our customers to develop deep and lasting relations with our customers by helping to solve their challenges and by adding value during every interaction with us, and to make our businesses better by improving quality, becoming more productive, and by developing ways to improve processes. Please turn to page four in the deck. By expanding our addressable markets during the downturn, we were able to have significant revenue growth in the quarter. Revenues were $33.6 million with power including sales by Energy Steel being about 30% of total revenue. The refining market was strong at 36% of sales. Our other commercial and industrial markets which include our work for the U.S. Navy, was about 20% of sales. Chem and Petrochem markets were about 12% of sales. There was exceptional comparable period growth of 68% along with 25% sequential growth. Short cycle organic sales continued to be strong, up 30% year-on-year and up 20% sequentially. Energy Steel provided $7.2 million of revenue in the quarter. The team in Energy Steel executed extremely well on an order in excess of $2 million, one at the very end of the first quarter that was mostly completed during the second quarter. Actual shipment for that order was completed mid October. This order lifted Energy Steel revenue above $7 million. Sales were fairly evenly split between domestic and international markets with domestic sales at 53%. Please turn to page five. Terrific financial results in the quarter were achieved with net income at $5.5 million or 16% return on sales. Gross margin was 38% with EBITDA margin at 26% in the quarter. These results reflect solid execution by our teams and leverage from tight production utilization in Lapeer and Batavia operations. Added volumes through our ongoing outsourcing strategies, we had approximately 25% of the Batavia’s production that was outsourced. The benefit of increased volume from short cycle organic sales at higher margins and timing of backlog conversion related to recognizing revenue and profit, where a couple refining orders that actually were won in the third quarter and fourth quarter of fiscal 2009. Again, we achieved 16% return on sales, up from 10% year-over-year and 12% sequentially. Please turn to page six. I am very pleased by improvement, we continue to see in our markets and by order development and margin improvement on orders we are wining. The organic business increased short cycle sales year-over-year about 20%, with improved margin on those sales. Our larger orders increased substantially year-over-year about 35% comparing the periods of January through September of 2010 to January through September of 2011. And here too, margin is improving comparing the two periods. We also had $5.9 million of orders for the power market including $4.3 million from Energy Steel, $10.9 million of new booking from chemical and petrochemical markets. Just under $3 million came from the refining markets for new orders. Qualitatively, biding activity is improving. Outlook long-term is very positive. Short-term well see order levels vary somewhat, but all-in-all, we are seeing a much healthier market. Please turn to page seven. We do feel that recovery is upon us although it is in the early stages. The benefit of expanding our addressable markets results in full year sales projected to be between $104 million and $110 million for fiscal 2012. We won’t rely solely on the strength of refining and chem., petrochem markets this cycle it will be refining, chem., petrochem, power, navy and other industrial and commercial markets that will fuel our growth going forward. Please turn to page eight. We see continued improvement in the refining markets and the petrochemical markets. Asia, we have a lot of activity in our bid pipeline that’s for Asia; new refineries for China, new petrochemical plants in India and Southeast Asia, in China. The Middle East, we see activity there coming up, that’s not immediately in front of us, but we’re seeing it in our pipeline, which is a good sign. And equally importantly, we’re seeing improvement in the North American market. We have a number of refining projects that we’re now bidding for the U.S. or North American refining markets. And also because of the shale gas finds and lower cost natural gas, we’re seeing investments that are being considered and some have actually gone ahead and we have orders in our backlog for them of investments in new petrochemical capacity in North America. That’s all very favorably for us. The power market, we’re very optimistic about our acquisition with Energy Steel and what we see in the U.S. nuclear power market for life extension and ongoing investment in existing utilities. Also, we’re optimistic about investment in North America around new plant construction. We are bidding various projects associated with life extension for the existing plans along with new builds for North America. Alternative energy as we said on prior conference calls has been a bright spot in North America for the last several quarters and we continue to see a good amount of bid activity for alternative energy projects in North America. Our ongoing efforts with Navy for their Nuclear Propulsion Program, I’m very pleased with their progress. I’m pleased with the execution on the order that we have and where our company is currently situated for future work for the U.S. Navy. And not just carriers, but we believe we’ll be in place to win business for additional vessels in our future. Please turn to page nine. With our strong first half we’ve adjusted our outlook for the full year. Full year expectations as I said earlier are for revenue to be between $104 million and $110 million with Energy Steel providing 16% to 20% of total revenue. The organic growth rate will be 25% to 30%. Gross margins are projected for the full year to be between 32% and 33% with SG&A approximately 15% of sales. Please turn to slide 10, our priorities in fiscal 2012 remain advancing our market share and maintaining our dominant position that we hold in oil refining and petrochemical markets, continuing to improve our share in Asia, maintaining our strong positions in the Middle East and in North America, and being ready for investment that will be made in South America for new refining and petrochemical capacity. At Energy Steel our focus is to expand their capabilities to increase their sales and profit, exploit the benefit of working together with Graham. Graham brings its engineering and fabrication capabilities to the strong capabilities at Energy Steel, aggressively pursuing the U.S. nuclear utilities opportunities for both new build and investments for existing plans. We will continue to capitalize or are prepared to capitalize on investments the U.S. Navy will make around its Naval Nuclear Propulsion Program. And we will continue to evaluate acquisitions to add diversity and further expand our growth. With that, I’d like to turn it over to Jeff who will provide greater detail on the quarter. Jeff? Jeff Glajch – Chief Financial Officer: Thank you, Jim, and good morning everyone. As Jim mentioned, we had a very nice second-quarter, he said on slide 12 you can see sales were $33.6 million in the second quarter more than doubled last year's Q2 sales of $15.7 million. Of this growth we had 68% organic growth with remaining $7.2 million coming from the Energy Steel acquisition. Sales in the second quarter were 53% domestic, 47% international similar to last year the last year, although last year was slightly skewed toward international at 52% international. Graham’s historical markets continue to be tilted towards the international arena whereas Energy Steel is almost exclusively domestic. EBITDA margin in the second quarter was 26% up from 17% last year. Q2 net income was $5.5 million or $0.55 per share up from $1.6 million or $0.16 per share in Q2 last year. As expected Energy Steel continues to be accretive to earnings in the second quarter as it has in every quarter since we purchased them and it was an important component to our earnings growth this quarter. I do want to note one item we did incur a $389,000 or $0.04 per share charge in the quarter related to the earn-out provision for the Energy Steel acquisition. This is simply a function of the improved likelihood of paying the earn-out not only for calendar year 2011, but also calendar year 2012. We are pleased to incur this charge since it correctly implies that the profitability of Energy Steel has been strong above the $4.0 million annualized EBITDA level necessary to trigger the full payout in calendar year 2011 and stronger expectations for calendar year 2012 for Energy Steel. For the first six months of fiscal 2012 sales were $58.6 million up from $29.1 million in the first half last year, organic growth was 18.4 million or 63% for the first six months and Energy Steel contributed the remaining $11.1 million increase in sales. EBITDA for the first half of the year was $13.8 million, an EBITDA margin of 24%. This is up from $4.2 million last year, which was an EBITDA margin of 15% in the first half. Net income for the first six months of the year was $8.5 million or $0.85 per share up from $2.4 million or $0.24 per shares last year. On the next slide, speaking to the backlog and the orders. Orders in the second quarter were $23.5 million up from $10.5 million in the second quarter last year. In the first six months of the year orders are $42.5 million, up from $18.6 million. Organic growth was 61% of this increase in the first half of the year, with the remaining $9.4 million coming from Energy Steel. Backlog at the end of September were $75.1 million down from $91.1 million at the end of March. This drop was not surprising given the strong revenue conversion in the first half of the year. Finally, we have one order for $1 million, which is on hold from a customer. This was the order that was put on hold on October 2008 released about a year ago with an expected delivery of December 2012 and is now back on hold. On to the next slide, gross margin in the second quarter was 38.1% up from 34% in Q2 last year and sequentially up from 32.8% in the first quarter of fiscal 2012. SG&A in the second quarter was $4.3 million, up from $3.0 million in the second quarter last year. The increase came from both investments made in our organic business as well as the addition of Energy Steel. Operating margin in the second quarter was 25% up from 14.8% last year. On the next slide, you can see our cash position continued strong with $37.7 million of cash and no debt. While you see a decline in cash in this fiscal year-to-date as mentioned on the last call this is simply timing. As our revenues have increased over the past few quarters and projects are on various stages of completion our receivables and unbilled revenues have also increased. However, as stated in the last quarter’s call we expect this will convert the cash over this quarter and possibly the fourth quarter and in fact you’ve already seen this taking place in the month of October. We are well positioned to utilize this cash and if necessary some portion of our untapped line of credit for future acquisition activities as well as internal growth opportunities. We are very pleased with the acquisition of Energy Steel its performance the strength of its management team and its nice fit into Graham. We’re continuing to look for new acquisition opportunities going forward. We intend to use the same discipline and thorough methodology as we did with Energy Steel. We believe it’s not whether we make an acquisition that is important but rather that we make the right acquisition. Finally on the last slide, the outlook, just to reiterate Jim’s comments for the full fiscal year, we expect revenue of $104 million to $110 million a growth rate of 40% to nearly 50%. Of this increase organic growth is expected to be 25% to 30% with the full year impact of Energy Steel adding the rest. We expect Energy Steel to provide 16% to 20% of Graham’s overall revenue in fiscal 2012. Gross margins for the year are expected to be between 32% and 33% SG&A at approximately 15% of sales and as we stated previously the tax rate is expected to be 33% to 35% and we expect this time $3 million to $3.5 million in capital in fiscal 2012. With that I would like to thank you for your time and interest in Graham and open the line for questions. Thank you.

Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Our first question is coming from the line of Chris McCampbell with Stifel Nicolaus. Please state your question. Chris McCampbell – Stifel Nicolaus: Great quarter guys.

Thanks Chris. Chris McCampbell – Stifel Nicolaus: Where would you say you are in the cycle now?

Chris, I would say we were into the recovery as a mentioned in the prepared remarks, but in the early stages and what that means and if we reflect back to the last cycle the recovery has and had been flow to it initially, it’s very hard to predict in the first couple of quarters, several quarters goings in the recovery, but if we look at it qualitatively around what’s in our pipeline, how the orders potentially orders are moving forward in our pipeline toward procurement and the size of the pipeline beginning to expand. A suggestion was that the worst part of the downturn is behind us and recovery is upon us. And from my view it’s just a matter of timing before the pipeline converts to orders. And we are prepared to execute on those better than I thought we executed the last cycle. Chris McCampbell – Stifel Nicolaus: And would you expect your backlog to begin to level out and maybe start working higher or how will that relate to where we’re in the cycle?

I think that’s a very good metric to look at which is where is our backlog? I just want to speak a little bit about the backlog decline. As Jeff said, we had a strong quarter $33 million, but one point I want to make is in the second quarter and third quarter of 2009, the company booked combined $80 million. At some point that gets, that has to be worked down and there will be some consumption of backlog where book-to-bill will be below one. We’re going through that right now. We were into $116 million business at that time. So consequently what you're seeing now is recurring. I think we are at a point now, where it’s going to begin the level. We’re hitting an inflection point and I think as we go forward, we begin to see backlog growth. Chris McCampbell – Stifel Nicolaus: Great, and I'll let some other folks ask question, but maybe still a little more color on the acquisition front in terms of, are you finding things maybe just a little too expensive out there or you just making sure you find the exact right set?

I think more of the latter. We’re making sure we find the right step. We’re not finding, the prices are too high at this point in time, but we want to make sure we find the right step as we did with Energy Steel. Chris McCampbell – Stifel Nicolaus: Yeah. It worked pretty well. Well thanks a lot guys. Congrats again.

Thank you.

Our next question is coming from the line of Joe Mondillo with Sidoti & Company. Please state your question. Joe Mondillo – Sidoti & Company: Good morning guys.

Good morning Joe. Joe Mondillo – Sidoti & Company: I was wondering if you could talk about what hit in the quarter that had such a high margin, was that part of the Navy orders. I’m not sure if you mentioned in your prepared remarks and also what kind of margins are you getting in your orders. Have you begun to see any improvement there or it sort of still sort of flattish, and what is pricing like these days?

Okay. A couple of things influenced the quarter. We will provide some granularity on that. I mentioned that we had won a couple of refining projects in the prepared remarks near the peak of the last cycle. Our second and our third and fourth quarters of fiscal 2009, when the projects was put on hold both were put on hold, and delayed for a couple of months several quarters and now began to run through revenues. So they had the pricing that was reflective of the environment at that point in time, which was a pricing environment superior to what we are seeing today. So we benefited from those orders pushing to backlog now. All over we also enjoyed in one of the projects the benefit of being able to lower our direct costs, because materials at the time when it was booked and materials when we actually bought, the items we’d use for fabrication were far or less with our direct costs, and that order came down by about 10% reflective of the higher margin that was realized in Q1 and Q2. So that's an event that really stays within Q1 and Q2. Also and I think this carries forward which is important, the level of our short cycle organic sales continues to expand compared to a year ago, that’s up about 30% and our margins are improving. So, we have the acceleration of the earnings that comes from improved volume and improved margins with that segment of our business. And as I said, I expect that to carry forward. To give a comparison on that if you look at the incremental revenue that came year-over-year from that segment of our business, not quite, but almost dollar-for-dollar of the delta revenue dropped to variable margin and that was an appreciable effect on earnings in the quarter. And I do believe that carry’s forward. Also in the quarter, we had the benefit of a very nice order secured by Energy Steel. At the end of the first quarter that primarily was executed across the second quarter not entirely, but a great percentage on the order was taken in the second quarter. That lifted Energy Steel from normally $5 million to $7 million and that was a good order, great execution, great co-ordination by Energy Steel in Lapeer and the team here in Batavia to step up to a very significant challenge in delivering very important products on time. So that compared within the quarter. I just wanted to talk qualitatively. We see the market environment improving and one of the things we would look at is the order rate, and we’re seeing order rates improve organically for our small business and our large business, our large order business. And in both cases, the margin is up comparatively to year ago. And then I would suggest or state that it’s the margin of what we are booking now is on average above the average margin of our backlog. Suggesting that in subsequent quarters, we’ll have some improvement in margin not compared to Q2 or Q1, but to what we might realize in Q3 and Q4. So to us that’s telling us, we are into the recovery. It might be the early innings, but the metrics we would look at would be order development, margin improvement, and the average margin in our backlog. All are positive. All are directionally in the right way. And to us thinking back about prior cycles, those are clear indicators that the worst is behind us. Okay. So, we are in the early innings and we are starting to see glimpses of margin improvement. Joe Mondillo – Sidoti & Company: Okay. The next question I wanted to ask was in terms of your end markets and in particular the power generation in chemical processing. Power generation obviously saw a big improvement, if you could talk about what you’re seeing there and if that’s sustainable secular improvement going forward. And also the chemical processing still, I mean you’re seeing improvement, but not I guess significant still and sort of in the range of where you’ve been over the last four or five quarter, if you could address that, if you expect that to maybe pickup even more going forward?

Sure. The powers – the two aspects of the power market that are currently important to us are renewable energy in the U.S. We are seeing a great deal of activity in our bid pipeline around those types of projects. And these are projects that have an ASP of $0.5 million to $1 million. And there are quite a few of those and we have won a number of those already, a great additional incremental work to our business. And we don’t see that abating right now. It looks to be fairly strong. The Nuclear segment to us that looks to only have upside from where Energy Steel was to where we think we can get to together and Graham and Energy Steel combined. And that has a component of new build associated with it and aspect related to life extension for the existing plants and just ongoing maintenance at the existing plants as well. We see only really significant potential upside there. Around petrochem our sales have been down as a percent of overall sales from the petrochem and chem markets. I would like to point you to bookings level from this market segment chem/petrochem has been about 20% of our bookings. So, while the sales are lower as a percentage wise, we are adding into our backlog from the chem/petrochem market. And the last time when we thought about the last recovery in the early 90s, chem/petrochem lead the way in advance of refining and it seems to be playing off that way again. Joe Mondillo – Sidoti & Company: Okay, great. I think that’s all I got for now. I’ll jump back in queue. Thanks a lot.

You’re welcome.

Our next question is coming from the line of Gabe Birdsall with Brasada Capital Management. Please state your question. Gabe Birdsall – Brasada Capital Management: Hey, guys thank you. Actually the previous two questions covered that for me. Thank you.

You’re welcome.

(Operator Instructions) Our next question is coming from the line of George Walsh with Gilford Securities. Please state your question. George Walsh – Gilford Securities: Jim, could you comment a bit. It’s very interesting that you are able to move forward with orders here, while there is a lot of headline risk going on between the Eurozone and changes in the price of oil, even what’s going on in nuclear. Just could you comment on you know your customers and how they’re moving ahead in the phase of some of those risks and it’s really how they feel about their projects and wanting to go ahead?

Sure, the conversations we are having with our customers. While they are worried in the immediate term next several quarters, there is some worry, but longer-term the demand continues to increase. We need to satisfy that demand and what’s great about the space we play in is the construction cycle for new capacity is three to four years to five years. So, an investment that needs to be made today to satisfy incremental demand four or five years out, doesn’t focus a whole lot around the sound bites that we all hear around the economy and the worry that’s in front of us as we read the paper and listen to the news. So, that we’re committed to the long-term fundamentals of the markets. What’s encouraging to us is we have a number of opportunities that we’re bidding right now that are from North America refining. And I would say we didn’t have those 12-18 months ago. But they’re coming through the pipeline now. They are for Feedstock diversification and rebounds to expand refining capacity in North America. There are a couple oil sands projects that are moving forward for upgrades, which is where our backend systems are used. It was a about a three-year pause in activity there, so that’s an encouraging sign. And here too these are projects that are several years to commercial operation of the new capacity or improvement, not so worried about what’s in front of them today. Around nuclear – to us that’s really exciting. As Jeff said, the acquisition of Energy Steel has been wonderful, it’s a great team, it’s a very important market that seems to have strong fundamentals to provide growth for us, not just on one front, but on multiple fronts. We believe there will be new utilities built in the U.S. and we believe we will participate in that and that’s significant – that’s a very significant opportunity for us. Around the existing 100 or so plants in the U.S. they’re not being wind down, they’re going to invest to maintain and improve power output. There is life extension, which drives high CapEx to replace existing equipment. The three legs there not counting international to us suggest a very long runway for growth and significant growth. In the Asian markets, that seems to be strong. China’s continuing with investments around new refining capacity, new petrochemical capacity. We are winning business for new petrochemical capacity in India. We won it in our backlog. We have some bids in our pipeline that hopefully we will win around there too. Middle East, I think that activity is one or two years out, but it’s early stage bidding for us which is encouraging. In South America, we have a number of bids for Brazil, for Columbia other countries in South America around refining and petrochemicals and fertilizer projects, all very promising. All markets where our brand is exceptionally strong and again to us it feels like the worst is behind us. Yes, we all listen to the worry and the doom and gloom and the sound pulse we get, but the fundamentals of our markets are strong. Long-term investments have to be made to deal with the incremental capacity and to us it’s just a great story and a great long-term growth trajectory that I think we’re going to be experiencing over a number of years. George Walsh – Gilford Securities: Okay and the customer’s capital funding, they’re all in the long-term demand is there and they are able. Nothing is holding up their funding of capital for these projects?

For the projects that we are working on, which at this stage are in the recovery going to argue for a moment are little smaller than the megaprojects that we would like to see moving forward. But those smaller projects are great. We like them a lot. And the multibillion dollar projects are $10 million or $15 million orders for us, those aren’t moving into the pipeline toward procurement just yet, but they will. George Walsh – Gilford Securities: Okay. Do you just have a growth rate for Energy Steel revenues year-over-year?

I’m sorry, what was the question? George Walsh – Gilford Securities: The growth rate of Energy Steel and it’s down year-over-year its revenue growth rate?

George, its revenue growth rate Energy Steel actually I had quite a good – particularly the first half of 2010, they had a couple of large orders that work their way through so, the growth rate is actually not that significant year-over-year, but it’s really due to timing of a couple of projects they had pre-acquisition. George Walsh – Gilford Securities: Okay.

I’m going to come out in a different way, when we look at Energy Steel as a business we brought in the mid to upper teens for revenue. We see a business that together with the Energy Steel team and the Graham team that $40 million to $50 million of run rate is not out of the question over the next several years, not this year, not next year. But we think there is that much demand that we are going to go after, we are going to do the right things. We are going to position our companies to win that business and I think it’s that strong. George Walsh – Gilford Securities: And do you see that being in the same way clearly domestic not holding internationally?

Internationally gives us opportunity and as I’ve said on the prior calls I believe that’s third in our priorities. We want to take care of our home market and go after the great opportunities that we see their again with investment in the existing plants and we believed there will be investment in new construction. We want to win their first, well; we develop our strategy to win internationally. George Walsh – Gilford Securities: Yeah, but that’s a nice healthy domestic market target. Okay, but that’s good. Thanks a lot Jim.

You are welcome, George.

Our next question is coming from the line of Joe Mondillo with Sidoti & Company. Please state your question. Joe Mondillo – Sidoti & Company: Hi, guys just a couple of follow-up questions. First on the short cycle business, how much does that make above your business and it seems like last call you would sort of think that you were thinking that may subside from the strong levels that you saw in the first quarter that obviously continued through the second quarter here. And you’re sort of thinking that continues. Could you just give a little more color on your thinking about piece of the business?

Sure. Prior to the acquisition of Energy Steel, the short cycle business was roughly one–third of our revenue mix. With the addition of Energy Steel, I would call it roughly 20% of our revenue mix. What’s great about our business model with respect to large projects as we have clear vision into the pipeline that suggests we know it’s coming 12, 18 months before it arrives is bookings. And we have visibility in our backlog of 12ish months. So we have about 24 to 30 months of visibility with our large project work. For the short cycle business, we don’t have that visibility. In terms of it doesn’t have the same long sales cycle as our larger work, so it’s hard to judge to direction of that in the near–term, but we do remain positive again because we are seeing order development improve and most importantly margins improve over comparable periods for the short cycle business again suggesting we are into the recovery and spending is being freed up. Joe Mondillo – Sidoti & Company: Okay, great. And then two other questions, first, I was wondering if you could talk a little bit about the nuclear business market. Have you started to hear anything in terms of rules and regulations, increased safety regarding what the regulators have been talking about, over the last six months is there anything sort of progress there that you may benefit from?

We believe so, we haven’t heard much from the utility yet, but the NRC report is clearly indicating that investments need to be made to improve safety around cooling of the equipment during extended power outage, we provide cooling equipment. And the metallurgical upgrades we think also is part of the life extension of the existing plants. And that will affect our product -- potential products supply as well. We thought it was going to be 12 to 18 months before we saw the effects of Fukushima coming to the supply chain, at this point I’m still feeling that way. Joe Mondillo – Sidoti & Company: Okay. Has there been any initiation from the NRC report or is it sort of still on the stalemate in terms of initiating regulation?

I think it’s going through a laborious process, which is the 12 to 18 months. Joe Mondillo – Sidoti & Company: Okay, okay. And then the last question I just wanted to ask about was are there any opportunities specifically, domestically but I know you also had some in India, but maybe even elsewhere within the fertilizer industry, there's a lot of capacity coming on line with that -- in that industry and I was wondering if there was any opportunities there?

That’s a market sector that’s keeping us extremely busy with bid work. In Asia, some in South America there’s a little bit North America, but in terms of our bidding pipeline there is a lot of work for fertilizer. And fertilizers, two aspects to it, there is an ammonia plant and a fertilizer plant, both plants require our products. There is a very specialized technology in the fertilizer plant, where only three companies in the world, Graham being one of them are the allowed suppliers. So, we like the fertilizer market and very actively pursuing those sales opportunities now. Although our Sales Managers is over with a licensor in Europe right now having conversations around upcoming projects and how we can position ourselves to take advantage of those opportunities as they come forward. Joe Mondillo – Sidoti & Company: It seems like just hearing from you guys over the last I don't know 9 to 12 months or so you've really started to begin being able to get some traction within overseas markets, is the U.S. market just much more competitive, because I know the nitrogen-based fertilizer, there is a lot of capacity coming on line, if it’s just a lot more competitive here on?

I don’t necessarily think that’s the case. One of the views we had as we went into the downturn and then around 2009 as we’re right in the heart of the downturn, we had felt recovery for Graham, absent of the addition of Energy Steel, would be led by the Asian, Middle East and South American markets first, followed by North American market based on how we saw recovery in the North American market materializing. It’s moving more slowly than the recoveries we’ve seen in the emerging markets. That’s what we projected, that’s how it’s playing out, that doesn't suggest in any way that the North American market is more competitive than the international market. It's just the way that the recovery we felt would play out and how it is playing out, but we are seeing some improvement of course, as we’ve said in the earlier remarks about the North American market becoming healthier those timing of the recovery to put it more succinctly Joe. Joe Mondillo – Sidoti & Company: All right, great thanks a lot.

Our next question is coming from George Walsh with Gilford Securities. Please state your question. George Walsh – Gilford Securities: Jim, when you have your section in the news release about sales by region. Is that, I guess particularly in line with the United States, is that final customer for the project or what is it?

The way we define our geographic sales mix is by end use location. George Walsh – Gilford Securities: Okay. Okay, good. So that’s final end customer, all right. Also, just any update, you have, there is a good balance sheet and just focused in terms of your little more specifically regarding your acquisition strategy?

George, this is Jeff. I think we’ve talked about in the last couple of calls, we certainly took our, I wanted to make sure we took the right amount of time to integrate Energy Steel before looking to the next potential acquisition. So we are relatively early in that process. We took a little bit of a pause for six or eight months post Energy Steel. So we’re really early in that process, so not a lot to report at this point. George Walsh – Gilford Securities: Okay, right. Thanks.

Thank you.

There are no further questions at this time. I’ll now turn the floor back over to Jim Lines for any closing remarks. Jim Lines – President and Chief Executive Officer: Thank you. We appreciate your time this morning and for your questions. Again, we felt we had a very solid quarter. The credit goes to the management team and all the employees of Graham for great execution and their focus on meeting our customer requirements, improving our businesses, reducing lead time, focus on quality and defect reduction. And it’s really taking hold and you’re seeing it in our financial results, coupled with an improvement in our markets. We look forward to updating you on the January call regarding our progress. Thanks again, have a good weekend.

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.