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. 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, Daryl, 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 don't have the release or the slides, you can find them on the company's website at www.graham-msg.com. On the call with me today are Jim Lines, our President and Chief Executive Officer; and Jeff Glajch, 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 deck, 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.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, 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. Our 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 cyclical 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 observed 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 variation. 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 have 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 involves 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 million 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, this 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 U.S. 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 we'll 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 of 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 for 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. Really, its success was 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 period between 2004 and 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 Graham's, a retrofit or revamp opportunity has a high likelihood of Graham getting an order with strong margin quality. Importantly, 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 right top right. Installations are absolutely terrific for follow-on revenue after initial sale. This end 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 at 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. Moving on to Slide 6, we confirm full year guidance. Revenue is expected to be between $100 million 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 million 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 8, I’d like to highlight a few points from the second quarter. Sales for the quarter were $21.6 million, which is comparable to $21.4 million in the same period last year. The net income for Q2 was $1.2 million or $0.12 per share, down from $1.8 million or $0.19 per share last year. Last year’s figures included losses related to the recently divested commercial nuclear business; if we exclude those losses, the net income for comparison would have been $2.4 million or $0.24 per share. We saw strong orders in the second quarter totaling $32.6 million, spurred by key refining orders in Asia and the United States. Our backlog has increased to $127.8 million, which includes a tripling of our commercial backlog over the past 24 months. When excluding the divested nuclear business from previous periods, this is our largest backlog ever. Moving on to Slide 9, again, Q2 sales were $21.6 million compared to $21.4 million last year. In the second quarter, sales were 73% domestic and 27% international, which is similar to last year’s 70% domestic and 30% international split. Gross profit declined to $4.9 million from $6.2 million last year, primarily due to an unfavorable project mix. Gross margin was 22.9%, down from 29% in the same quarter last year. The EBITDA margin was 7.8%, down from 14.7% last year. As mentioned earlier, net income was $1.2 million or $0.12 per share, a decrease from the adjusted level of $2.4 million or $0.24 a share. On to Slide 10, for the first half of the year, sales totaled $42.2 million compared to $51 million in the first half of last year. It's worth noting that last year we had a much stronger first half compared to the second half, and this year we expect the opposite based on our guidance. Year-to-date sales compose 71% domestic and 29% international, in contrast to last year’s 56% and 44%, respectively. You may recall that in the first half of last year, we had a large high-cost Canadian oil sands project that pushed international sales higher. Year-to-date gross profit is $9.7 million, down from $13.4 million last year, with gross margins at 22.9% compared to $26.2 million last year, influenced by an unfavorable mix and lower sales volume. Year-to-date adjusted EBITDA margins were 7.3%, down from 14.4% the previous year. Both periods reflect the exclusion of our commercial nuclear business, which we divested in June. Lastly, adjusted net income was $2.2 million or $0.22 per share, a decrease from $5.1 million or $0.52 per share last year. Similar to sales, last year's earnings were front-loaded, resulting in minimal net income during the second half of the year. On to Slide 11, our cash position is $73.8 million, a decrease of $4 million in the first half of the year, which is simply a result of timing in working capital. We previously announced an increase in our dividend in August to $0.11 per share per quarter, translating to an annual rate of $0.44 per share. Capital expenditures have been modest in the first half of the year at $700,000 compared to $400,000 last year. Historically, our capital spending tends to increase in the second half of the year, and we still expect to spend between $2.5 million and $2.8 million for the entire fiscal year. We are actively expanding our acquisition pipeline, particularly in the Navy and aerospace sectors, as Jim mentioned earlier, and we are excited about the potential companies we are considering to utilize the cash on our balance sheet. Alan Smith will conclude our presentation with additional insights on our Q2 operations. For those who haven't met Alan, he is the General Manager of our Batavia business and has been with Graham for approximately 27 years in various engineering and sales positions.

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 watermark 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 one for FY 2020 implying that the order pattern is anticipated to be strong in the second half. There's 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 for our oil refining end markets. 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 at September 30th was $127.8 million with approximately $60 million for the Navy and roughly $40 million for crude oil refining customers. It is also important to know that excluding Energy Steel, the backlog reported on September 30th represents a record high for our ongoing business. Our diversification efforts for the U.S. Navy have been effective and provide a strong level of multiyear baseload for our operation, 55% to 60% of our backlog is anticipated to convert within the next 12 months and 25% to 35% convert within two years and beyond. Daryl, can you please open the line for questions? Thank you.

At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Theodore O'Neill from Litchfield Hills Research. Please proceed with your question.

Thank you. Congratulations on a good quarter.

Thanks, Theo.

Thank you, Theo.

I just have a question here about Slide 5, 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 the profit aspect of it, profit ought to be better. But does this imply that there's some kind of change in construction and new building of equipment or building of facilities that you would serve us? 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 towards 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 our installed base gets focused on first before new global capacity starts to be invested. 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.

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

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

Yes, that's an order. If you track back to fiscal 2017 or fiscal 2018, 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 or 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 material type order versus a fabrication.

Okay. I apologize if I misphrase this, but you mentioned the annual revenue target? You stated that for aerospace and defense, it is expected to be between $20 million and $30 million annually over the next two years. Does this suggest that you are expanding beyond equipment work solely related to submarine and aircraft programs, or is it still focused only on those 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, I can figure it out, but regarding your revenue breakdown, there is a line for other commercial, industrial, and defense work. In relation to the $20 million to $30 million annual target, is the Navy work trailing at about $18 million? Can you provide that number?

We haven't been specific about that. It's typically between 10% and 15% of sales in a given year. That's the range we've observed. Other elements from additional end markets that contribute to that segment could include edible oils or pharmaceuticals, but the most significant component currently in that category is Navy work.

Thank you. Are there future Navy orders that you feel optimistic about? Given discussions about the submarine and aircraft programs, are there orders that are pending due to the procurement cycle? Do you have visibility on these orders, or are you waiting for allocation and procurement before adding them to your backlog? How might that process work?

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's a good book of opportunities should close in the next six months for the U.S. Navy.

Okay. And lastly, did I miss a discussion about the SG&A dropping to $3.8 million from $4.6 million in the previous quarter while keeping guidance unchanged? Can you explain if there is some timing involved in that expense and why it is expected to increase in the second half of the year?

Sure. A couple of things, Tate. This is Jeff. First off, we do have energy steel included in the numbers for the first quarter, which is part of the drop-off. There were also some timing issues with things that did not occur in the second quarter and have been pushed to the second half of the year. That’s contributing to the increases. We experienced a very light second quarter compared to what I would consider a normal quarter. This sometimes happens, and in this case, the lightness occurred in the second quarter instead of the first quarter.

Okay, thank you for your last detail. Happy to address…

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.

Thanks, Brian.

Thank you, Brian.

Just real quick I 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 whether we anticipated the margin this quarter in relation to the guidance we provided. This quarter was largely aligned with our expectations, which were reflected in the guidance we issued for the full year. Secondly, I believe your inquiry was about the margin and backlog. We mentioned that this quarter had a somewhat unfavorable mix. However, we are seeing ongoing improvements in margin concerning what's going into the backlog versus what's being fulfilled. Alan highlighted the high quality and improving nature of our backlog, and part of that remark indicated a more favorable margin profile compared to recent outputs from the backlog.

Okay, great. Thank you. Regarding the bidding activity, everything seems to be on track for that $30 million in orders moving forward. Has anything changed since we last 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 million and some $15 million. However, our overall view is unchanged from commentary last quarter.

All right. And then last, but not least just on the M&A pipeline. It 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 defense market and some of the aftermarket on the commercial side, the multiples are still quite high. We will manage our way through that, but no, they really have not come down.

Okay, well. Appreciate it. And again, good job on quarter.

Thank you, Brian.

Our next question comes from Bill Baldwin of Baldwin Anthony Securities. Please proceed with your question.

Thank you and good morning. I was looking to see what the color you can offer regarding the initiatives you've undertaken to, I guess secure more of a global fabricating supply chain 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? And if so, how do you do your due diligence and vet those new fabricators?

Thank you for your question. We have a group of historic international fabrication partners that we will continue to use, and we plan to expand by adding more partners. We have a careful due diligence process that assesses their financial capabilities, quality, customer orientation, and ensuring they share similar values with Graham. Once we select a vendor for our fabrication approved vendor list, we remain involved even after placing an order. Our quality control and manufacturing specialists regularly monitor these businesses to ensure that everything meets our standards for quality, compliance, and the Graham brand. Our approach has evolved from being opportunistic in the past to actively reshaping our position in certain market segments. Over the last 24 to 30 months, we have focused on increasing our market share and reducing costs by more effectively utilizing the global fabrication supply chain. Ultimately, our goal is to capture more global market share with new pricing expectations while ensuring a satisfactory return. We are committed to changing our position and gaining market share. As mentioned earlier, we have secured several contracts in the last 18 months worth over $30 million to $35 million, which we are currently executing with both long-standing and new partners.

Are you using these fabricators primarily for the global refining and petrochemical 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 refining budget. So I want to make sure we maintain that dominant position, but 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 prepared remarks, four of those are refining projects and two of those are chemical industry projects.

Okay, very good. You have such strict tolerances to meet for some of your products. Do you sometimes send your own staff on-site to ensure the quality of the work? Do these fabricators have qualified personnel to perform the type of work that you and your clients expect in New York?

No one fabricates like Graham, so let me start by saying that. We excel as a fabricator, but we can only partner with certain fabricators since not every one of them is suitable for us. Our focus isn't on minimizing costs; rather, we aim to find the right balance between exceptional quality and fabrication capabilities at a reasonable price. Thus, we aren't engaging with secondary or tertiary fabrication supply chains, as they don't align with our standards and brand quality. Instead, we work with top-tier fabricators, those with strong capabilities that can meet our tolerances and quality criteria as well as those of our customers. We prioritize execution and quality, ensuring we deliver consistent results that reflect our brand at an acceptable price for us. I hope that answers your question.

Yes. It's a good insight. Are there any IP 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?

No certainly any time 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 parting into the fabricators is less critical IP and more commercially available technology that's not the secret differentiators of Graham. We reserve that we hold that, we moat that, and we don't put that into the fabricators' wheelhouse. A key criterion is, we do this with a clear vision that we will not create a competitor.

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

We recently conducted an audit in a large country with a significant supply chain of fabricators and have added five to our approved vendors list. These vendors met our audit standards, and we plan to initiate work with several of them. We discovered that many fabricators are eager to partner with our brand because it offers them market access and expanded opportunities. They appreciate the collaboration since they lack the global market reach that we have, while we benefit from their execution and scalability. This partnership allows both parties to achieve goals that neither could accomplish alone.

Right. Yes I would think they'd be knocking on your door with the installed base you got out there in 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.

Yes, we're very excited by it.

Our final question comes from the line of Gerry Heffernan of Walthausen & Co.

Good morning everybody and thank you for taking the time to take my call here.

Hi, Gerry.

Jim, I was very interested in the question set out by the last caller and it spud a couple of questions in my mind. In regards to the statement that you made of M&A. now we've been talking for many years here in M&A it's 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 Graham, 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. We have identified five key differentiators or core competencies that we believe our customers value. Firstly, our customer-facing platform allows us to partner with customers on the conceptual and facility design, helping them integrate our equipment into their processes to achieve operational results. They rely on us, and this platform facilitates significant knowledge transfer, information sharing, and design optimization, which helps them meet their operational objectives. Secondly, our focus on a specific segment of the market, which involves complex equipment, enhances our engineering capabilities. After receiving an order, we work closely with customers through an iterative design process, which necessitates a flexible operations model to accommodate design changes without burdening our customers. This adaptability is crucial in our field. The third differentiator is our custom fabrication of large, complex weldments, which are created to precise tolerances. We have skilled artisans at Graham who excel in fabricating large components with intricate details and this expertise has been honed over time. Even during the fabrication stage, designs may still evolve, requiring our operations to maintain enough flexibility to manage production effectively despite any changes. Our model is uniquely suited for low-volume, high-mix production, distinguishing us from high-volume, low-mix competitors. The fourth differentiator is our commitment to our installed base and the operational reliability of our equipment. We see ourselves as lifelong partners with our clients, ensuring that their facilities operate efficiently throughout their lifecycle. In contrast, many competitors prioritize initial sales over building long-term relationships. Our aftermarket organization has expanded significantly over the past decade to provide ongoing technical support and to enhance operational reliability, which sets us apart from those focused solely on initial sales. Finally, our willingness to invest in our business, over the last 20 years, we have invested nearly $30 million to enhance our capabilities, improve productivity, and develop our workforce with advanced tools and skilled personnel. We adopt a long-term perspective on our financial management, which reflects our value to customers. As we seek partnerships, we look for firms that share our competencies in fabrication and the ability to meet our specific requirements for executing orders and developing complex weldments. We approach mergers and acquisitions with an eye toward flexibility rather than simply acquiring international operations, focusing instead on a strategy that addresses current demand and capacity needs through a global fabrication supply chain. I will now hand it over to Jeff to discuss our M&A focus and the criteria we consider.

Thanks, Jim. Yes, Gerry, as we consider potential acquisition targets, our emphasis is not merely on acquiring capacity. Instead, we're looking for a business that aligns with our operating model, one that shares our customer and quality focus. It's important for us to find a strong management team that intends to stay with the company. We’re not just purchasing a business; we're investing in the people as well, which is crucial for us. We seek attributes similar to those of Graham, but we're also focused on how to expand in areas of our markets that might be less cyclical than our core energy sector. Earlier, we discussed the Navy sector and included aerospace since many of the firms we are considering have significant Navy operations and also dabble in aerospace, even if to a lesser extent. This connection is appealing if their products relate to Navy operations. Additionally, we are exploring opportunities in the aftermarket within our commercial markets, as we believe and have experienced that while large refining and petrochemical customers often have capital investment volatility of 50% or more, the aftermarket or short-cycle business is typically less volatile, around 15% to 20%. This makes it a more sustainable option during downturns. Therefore, our acquisition focus is on finding well-managed companies that possess attributes similar to Graham’s and have a management team willing to stay post-acquisition. I hope that clarifies our approach. If you need further clarification, 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 concerned about the custom fabrication competency that you have. 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 picked out and the other four are very much people-oriented as opposed to be just the artistry of working with the metallurgy.

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

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 to 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.