Wall Street Transcript Interview with Jeffrey F. Glajch, the Vice President-Finance & Administration and CFO of the Graham Corporation (GHM)

67 WALL STREET, New York - November 12, 2012 - The Wall Street Transcript has just published its Industrial Equipment, Aerospace and Defense Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Commercial Aviation and Energy Expenditures - Industrial Restructuring - Emerging Markets Penetration - Heightened M&A Activity - Future Growth and Market Share Gains - Increased Commercial Aircraft Production Rate - Defense Budget Uncertainty - Growth Opportunities in Data Security -

Companies include: Graham Corp. (GHM) and many others.

In the following excerpt from the Industrial Equipment, Aerospace and Defense Report, the CFO of the Graham Corporation discusses his outlook for his company for investors:

TWST: Where do you see the largest opportunities going forward?

Mr. Glajch: We have our revenue range this fiscal year between $105 million and $115 million. So let's nominally call it $110 million, and last year was about $103 million. We've put our plan out there that we believe we can get this business to $200 million with the markets that we currently serve. We believe there's an opportunity to go beyond that in this next cycle with acquisitions, and we have a balance sheet that can clearly support acquisitions. But if you take acquisitions off the table just for a second and look at our business the way it was last year, we have approximately $80 million in, what I'll call, our core historic markets, which is refining, petrochem and the alternative energy, excluding Energy Steel. We think that that $80 million can grow pretty dramatically, certainly by more than 50% in this upcoming cycle. If you look at the Energy Steel business, which was $17 million last year, we believe that business, the related power market there, can more than double. That would get you into the $40 million-plus range.

Finally, the Navy, which was in the mid-single digit last year, of the $103 million. We think that can become 10% to 15% of our business, or $20 million to $30 million. So if you add the pieces, you take the $20 million to $30 million on the Navy side, you take the $40 million to $50 million on the power side, and you'll lay on top of that our core business that can grow well over, we believe, more than 50%, and you get a business that in aggregate brackets itself around $200 million. And again, that's without an acquisition.

The reason we think we can do an acquisition is what we have seen with Energy Steel in just about two years, but we also have a very strong balance sheet. We have about $47 million worth of cash. We have no debt. We have no long-term liabilities. Some people worry about things like underfunded pension plans. We do have a pension plan that is no longer open to new employees, but that pension plan is actually overfunded by $2 million. Again, we don't have anything nasty in our balance sheet, and this is a business that doesn't need a lot of incremental cash to operate, though the cash we're generating can more than fulfill our current needs, and so the cash we are sitting on right now, the $47 million-plus, will allow us to effectively enter the acquisition market when we so choose by the right opportunity.

TWST: Graham recently announced its second-quarter results, and net sales were down 23% for the quarter year over year. Would you give us a little bit of context on that?

Mr. Glajch: Absolutely. If you look at the second quarter of last year - in fact, you can look at the whole first half of last year - but particularly the second quarter, we had an extremely strong quarter. We had a quarter that looked like we were in the peak of a recovery at sales of $33.6 million. We had gross profit of 38%, EBITDA margin north of 26%. That was nearly the strongest we have seen - near the maximum, we saw at the peak of the last market.

What occurred in that quarter, particularly and to a lesser extent in the first half of the year, is we had a couple of very large projects, particularly one Middle East refining project, which was won at top-of-the-market pricing, and yet here we were a couple years later converting it in what, at that time, was not quite the bottom of the market, but certainly a lower point in the market.

And so what happened in that quarter between that project and one or two other high-margin projects that ran through is we showed an extraordinary amount of earnings for that time period, given where we were in the cycle. We were in a very, very early part of the recovery cycle, and yet we were showing top-of-the-market-type pricing and financial returns. We suggested at the time that it was a nice representation of what we thought the business could look like when the market was very strong, but the market wasn't very strong. It happened to be an aberration.

So the comparables for the first half of this year, particularly this past quarter, we knew were going to be a challenge; and when we came into this fiscal year, what we suggested to folks was that the first half of our year was going to be, from a revenue standpoint and profit standpoint, the lighter half. And then we're going to see a significant pickup in the second half of this year, and that our comparables the first half of the year were going to be quite frankly ugly. And in the second half, it will be much more favorable.

TWST: If you look outside the aberration, how was the quarter for Graham? What were the important elements in the quarter?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.