UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended~~December 31, 2010~~.

OR June 30, 2011


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to. ___________

~~COMMISSION FILE NUMBER~~Commission File Number 1-8462

GRAHAM CORPORATION

(Exact name of registrant as specified in its charter)


~~Delaware~~DELAWARE		16-1194720

(State or other jurisdiction of		~~(I.R.S. Employer~~
incorporation or organization)		(I.R.S. Employer Identification No.)

20 Florence Avenue, Batavia, New York		14020

(Address of principal executive offices)		(Zip Code)

585-343-2216

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yesoþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See ~~definitions~~definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. ~~(Check one):~~

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

As of ~~February 3,~~July 29, 2011, there were outstanding ~~9,839,994~~9,901,473 shares of the registrant’s common stock, par value $.10 per share.


~~Item 1.~~		~~Unaudited Condensed Consolidated Financial Statements~~

Item 1.

Unaudited Condensed Consolidated Financial Statements

GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

(Unaudited)


	Three Months Ended
	June 30,
	2011			2010
	(Amounts in thousands, except per share data)
Net sales	$	25,012		$	13,351

Cost of products sold		16,707			9,501
Cost of goods sold — amortization		108			—

Total cost of goods sold		16,815			9,501

Gross profit		8,197			3,850


Other expenses and income:
Selling, general and administrative		3,651			2,564
Amortization		50			3
Interest income		(21	)		(16	)
Interest expense		20			7

Total other expenses and income		3,700			2,558


Income before provision for income taxes		4,497			1,292
Provision for income taxes		1,481			414


Net income		3,016			878

Retained earnings at beginning of period		64,623			59,539
Dividends		(198	)		(198	)

Retained earnings at end of period	$	67,441		$	60,219


Per share data
Basic:
Net income	$	.30		$	.09


Diluted:
Net income	$	.30		$	.09


Weighted average common shares outstanding:
Basic		9,939			9,922
Diluted		9,981			9,962

Dividends declared per share	$	.02		$	.02

See Notes to Condensed Consolidated Financial Statements.

GRAHAM CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	December 31,			March 31,			June 30,			March 31,
	2010			2010			2011			2011
	(Amounts in thousands, except per share data)						(Amounts in thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents	$	20,718		$	4,530		$	25,204		$	19,565
Investments		27,516			70,060			15,899			23,518
Trade accounts receivable, net of allowances ($8 and $17 at December 31, and March 31, 2010, respectively)		6,065			7,294
Trade accounts receivable, net of allowances ($16 and $26 at June 30 and March 31, 2011, respectively)								14,925			8,681
Unbilled revenue		7,488			3,039			12,116			14,280
Inventories		5,502			6,098			5,642			8,257
Prepaid expenses and other current assets		1,164			651			739			424
Deferred income tax asset								1,902			1,906

Total current assets		68,453			91,672			76,427			76,631
Property, plant and equipment, net		11,723			9,769			11,860			11,705
Prepaid pension asset		7,917			7,335			6,888			6,680
Goodwill		17,326			—			7,404			7,404
Permits								10,300			10,300
Other intangible assets, net								5,102			5,218
Other assets		199			203			214			112

Total assets	$	105,618		$	108,979		$	118,195		$	118,050


Liabilities and Stockholders’ Equity
Liabilities and stockholders’ equity
Current liabilities:
Current portion of capital lease obligations	$	48		$	66		$	64		$	47
Accounts payable		5,739			6,623			7,316			9,948
Accrued compensation		3,523			4,010			3,982			4,580
Accrued expenses and other liabilities		2,916			2,041
Accrued expenses and other current liabilities								3,037			3,427
Customer deposits		14,368			22,022			11,998			12,854
Income taxes payable		758			68			2,983			1,772
Deferred income tax liability		143			138

Total current liabilities		27,495			34,968			29,380			32,628

Capital lease obligations		113			144			188			116
Accrued compensation		321			292			276			259
Deferred income tax liability		2,564			2,930			9,083			8,969
Accrued pension liability		237			246			233			234
Accrued postretirement benefits		913			880			900			892
Contingent liability		1,800			—
Other long-term liabilities		536			445			1,300			1,297

Total liabilities		33,979			39,905			41,360			44,395


Commitments and Contingencies (Note 12)
Commitments and contingencies (Note 13)

Stockholders’ equity:
Preferred stock, $1.00 par value
Preferred stock, $1.00 par value -
Authorized, 500 shares
Common stock, $.10 par value
Common stock, $.10 par value -
Authorized, 25,500 shares
Issued, 10,203 and 10,155 shares at December 31 and March 31, 2010 respectively		1,020			1,016
Issued, 10,251 and 10,216 shares at June 30 and March 31, 2011, respectively								1,025			1,022
Capital in excess of par value		16,002			15,459			16,590			16,322
Retained earnings		62,219			59,539			67,441			64,623
Accumulated other comprehensive loss		(4,174	)		(4,386	)		(4,921	)		(5,012	)
Treasury stock (363 and 305 shares at December 31 and March 31, 2010, respectively)		(3,428	)		(2,554	)
Treasury stock (350 shares at June 30 and March 31, 2011)								(3,300	)		(3,300	)

Total stockholders’ equity		71,639			69,074			76,835			73,655

Total liabilities and stockholders’ equity	$	105,618		$	108,979		$	118,195		$	118,050

GRAHAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS AND RETAINED EARNINGS~~CASH FLOWS

(Unaudited)

Three Months Ended Nine Months Ended
December 31, December 31,
2010 2009 2010 2009
(Amounts in thousands, except per share data)
Net sales $ 19,215 $ 12,166 $ 48,289 $ 48,412
Cost of products sold 14,352 8,345 34,229 30,459

Gross profit 4,863 3,821 14,060 17,953

Other expenses and income:
Selling, general and administrative 3,583 2,718 9,169 8,998
Interest income (13 ) (11 ) (47 ) (44 )
Interest expense 14 — 30 34
Other expense — — — 96

Total other expenses and income 3,584 2,707 9,152 9,084

Income before income taxes 1,279 1,114 4,908 8,869
Provision for income taxes 442 350 1,636 3,119

Net income 837 764 3,272 5,750
Retained earnings at beginning of period 61,578 58,558 59,539 53,966
Dividends (196 ) (197 ) (592 ) (591 )

Retained earnings at end of period $ 62,219 $ 59,125 $ 62,219 $ 59,125

Per share data:
Basic:
Net income $ .08 $ .08 $ .33 $ .58

Diluted:
Net income $ .08 $ .08 $ .33 $ .58

Weighted average common shares outstanding:
Basic: 9,899 9,903 9,919 9,897
Diluted: 9,930 9,945 9,956 9,933

Dividends declared per share $ .02 $ .02 $ .06 $ .06


	Three Months Ended
	June 30,
	2011			2010
Operating activities:
Net income	$	3,016		$	878
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation		353			288
Amortization		158			3
Amortization of unrecognized prior service cost and actuarial losses		98			70
Discount accretion on investments		(3	)		(15	)
Stock-based compensation expense		134			59
Deferred income taxes		36			23
(Increase) decrease in operating assets:
Accounts receivable		(6,219	)		1,346
Unbilled revenue		2,164			(2,933	)
Inventories		2,588			2,354
Prepaid expenses and other current and non-current assets		(373	)		(726	)
Prepaid pension asset		(208	)		(194	)
Increase (decrease) in operating liabilities:
Accounts payable		(2,711	)		(1,526	)
Accrued compensation, accrued expenses and other current and non-current liabilities		(989	)		(1,882	)
Customer deposits		(867	)		(183	)
Income taxes payable/receivable		1,211			(381	)
Long-term portion of accrued compensation, accrued pension liability and accrued postretirement benefits		24			19

Net cash used by operating activities		(1,588	)		(2,800	)


Investing activities:
Purchase of property, plant and equipment		(340	)		(525	)
Purchase of investments		(9,698	)		(50,837	)
Redemption of investments at maturity		17,320			56,350

Net cash provided by investing activities		7,282			4,988


Financing activities:
Principal repayments on capital lease obligations		(17	)		(16	)
Issuance of common stock		66			66
Dividends paid		(198	)		(198	)
Excess tax deduction on stock awards		72			22

Net cash used by financing activities		(77	)		(126	)

Effect of exchange rate changes on cash		22			5

Net increase in cash and cash equivalents		5,639			2,067
Cash and cash equivalents at beginning of year		19,565			4,530

Cash and cash equivalents at end of year	$	25,204		$	6,597

See Notes to Condensed Consolidated Financial Statements.

GRAHAM CORPORATION AND SUBSIDIARIES

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(Unaudited)~~

Nine Months Ended
December 31,
2010 2009
(Amounts in thousands)
Operating activities:
Net income $ 3,272 $ 5,750

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 884 751
Amortization of unrecognized prior service cost and actuarial losses 218 508
Discount accretion on investments (44 ) (40 )
Stock-based compensation expense 336 317
Loss on disposal of property, plant and equipment 18 3
Deferred income taxes (532 ) (228 )
(Increase) decrease in operating asset, net of acquisition:
Accounts receivable 2,803 (855 )
Unbilled revenue (3,852 ) 8,419
Inventories 1,149 1,027
Income taxes receivable/payable 690 629
Prepaid expenses and other current and non-current assets (271 ) (58 )
Prepaid pension asset (582 ) (184 )
Increase (decrease) in operating liabilities:
Accounts payable (1,461 ) (1,996 )
Accrued compensation, accrued expenses and other current and non-current liabilities (569 ) (945 )
Customer deposits (7,961 ) (432 )
Long-term portion of accrued compensation, accrued pension liability and accrued postretirement benefits 54 57

Net cash (used) provided by operating activities (5,848 ) 12,723

Investing activities:
Purchase of property, plant and equipment (1,435 ) (502 )
Proceeds from sale of property, plant and equipment 14 7
Purchase of investments (138,402 ) (134,673 )
Redemption of investments at maturity 180,990 124,710
Acquisition of Energy Steel & Supply Company (See Note 2) (17,882 ) —

Net cash provided (used) by investing activities 23,285 (10,458 )

Financing activities:
Proceeds from issuance of long-term debt — 821
Principal repayments on long-term debt (49 ) (841 )
Issuance of common stock 146 34
Dividends paid (592 ) (591 )
Purchase of treasury stock (874 ) (229 )
Excess tax deduction on stock awards 66 21
Other — 4

Net cash used by financing activities (1,303 ) (781 )

Effect of exchange rate changes on cash 54 4

Net increase in cash and cash equivalents 16,188 1,488
Cash and cash equivalents at beginning of period 4,530 5,150

Cash and cash equivalents at end of period $ 20,718 $ 6,638

~~See Notes to Condensed Consolidated Financial Statements.~~

~~GRAHAM CORPORATION AND SUBSIDIARIES~~

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~December 31,~~June 30, 2011 and 2010 ~~and 2009~~

(Unaudited)

(Amounts in thousands, except per share data)

NOTE 1 — BASIS OF PRESENTATION:

Graham Corporation’s (the “Company’s”) Condensed Consolidated Financial Statements include (i) its wholly-owned foreign subsidiary located in China at ~~December 31, 2010~~June 30, 2011 and March 31, ~~2010~~2011 and for the three ~~and nine~~ months ended ~~December 31,~~June 30, 2011 and 2010 and ~~2009 and~~(ii) its wholly-owned domestic subsidiary located in Lapeer, Michigan at ~~December 31, 2010~~June 30, 2011 and for the ~~period December 15, 2010 through December 31, 2010 (See~~three months ended June 30, 2011. See Note ~~2).~~2. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the ~~United States~~U.S. (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, each as promulgated by the Securities and Exchange Commission. The Company’s Condensed Consolidated Financial Statements do not include all information and notes required by GAAP for complete financial statements. The unaudited Condensed Consolidated Balance Sheet as of March 31, ~~2010~~2011 presented herein was derived from the Company’s audited Consolidated Balance Sheet as of March 31, ~~2010.~~2011. For additional information, please refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, ~~2010~~2011 (“fiscal ~~2010”~~2011”). In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included in the Company’s Condensed Consolidated Financial Statements.

The Company’s results of operations and cash flows for the three ~~and nine~~ months ended ~~December 31, 2010~~June 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, ~~2011~~2012 (“fiscal ~~2011”~~2012”).

NOTE 2 — ACQUISITION:

On December 14, 2010, the Company completed its acquisition of Energy Steel & Supply Co. (“Energy Steel”), a privately-owned nuclear code accredited fabrication and specialty machining company located in Lapeer, Michigan dedicated primarily to the nuclear power industry. The Company believes that this acquisition furthers its growth strategy through market and product diversification, broadens its offerings to the energy markets and strengthens its presence in the nuclear sector.

~~This~~The transaction was accounted for under the ~~purchase~~acquisition method of accounting. Accordingly, the results of Energy Steel were included in the Company’s ~~Condensed~~ Consolidated Financial Statements from the date of acquisition. The purchase price was ~~$17,882~~$17,899 in cash. ~~Acquisition-related costs of $666 were expensed in the third quarter of fiscal 2011 and are included in~~

will be payable in fiscal ~~2011~~2012 and fiscal ~~2012~~2013. A liability of $1,498 was recorded for the contingent earn-out and iswas treated as additional purchase price. In addition, the Company and Energy Steel entered into a five year lease agreement with ESSC Investments, LLC for Energy Steel’s manufacturing and office facilities located in Lapeer, Michigan which lease includes an option to renew the lease for an additional five year term. The Company and Energy Steel also have an option to purchase the leased facility for $2,500 at any time during the first two years of the lease term. ESSC Investments, LLC is partly owned by the President and former sole shareholder of Energy Steel.

The cost of the acquisition was preliminarily allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition and the amount exceeding the fair value of ~~$17,326~~$7,404 was recorded as goodwill, which is not deductible for tax purposes. As the values of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained, including, but not limited to, settlement of the contingent payment ~~the finalization of the valuation of intangible assets,~~ and the final reconciliation and confirmation of tangible assets. The ~~valuation of acquisition-related intangible assets~~valuations will be finalized within twelve months of the close of the acquisition. The fair value of acquisition-related intangible assets includes customer relationships, teaming partner agreements, permits and certificates. It is estimated that a significant portion of the goodwill will be allocated to acquisition-related intangible assets, some of which may have an indefinite life. ChangesAny changes to the preliminary valuation ~~will~~may result in material adjustments to the fair value of the assets and liabilities ~~acquired. Adjustments to record intangible assets~~ acquired, ~~will result in a reduction of~~as well as goodwill.

The following table summarizes the preliminary allocation of the cost of the acquisition to the assets acquired and liabilities assumed as of the close of the acquisition:


	December 14,		December 14,
	2010		2010
Assets acquired:
Current assets	$	2,768	$	2,827
Property, plant & equipment		1,390		1,295
Backlog				170
Customer relationships				2,700
Tradename				2,500
Permits				10,300
Goodwill		17,326		7,404
Other assets		32		14

Total assets acquired		21,516		27,210
Liabilities assumed:
Current liabilities		1,834		1,899
Deferred income tax liability				5,924

Total liabilities assumed		1,834		7,813

Purchase price	$	19,682	$	19,397

The fair values of the assets acquired and liabilities assumed were preliminarily determined using one of three valuation approaches: (i) market; (ii) income; and (iii) cost. The selection of a particular method for a given asset depended on the reliability of available data and the nature of the asset, among other considerations. The market approach, which estimates the value for a subject asset based on available market pricing for comparable assets, was utilized for work in process inventory. The income approach, which estimates the value for a subject asset based on the present value of cash flows projected to be generated by the asset, was used for certain intangible assets such as permits, tradename and backlog. The projected cash flows were discounted at a required rate of return that reflects the relative risk of the Energy Steel transaction and the time value of money. The projected cash flows for each asset considered multiple factors, including current revenue from existing customers, the competition limiting effect of nuclear permits due to the time and effort required to obtain them, and expected profit margins giving consideration to historical and expected margins. The cost approach was used for the majority of personal property, raw materials inventory and customer relationships. The

cost to replace a given asset reflects the estimated replacement cost for the asset, less an allowance for loss in value due to depreciation or obsolescence, with specific consideration given to economic obsolescence if indicated.

The fair value of the work in process inventory acquired was estimated by applying a version of the market approach known as the comparable sales method. This approach estimates the fair value of the asset by calculating the potential sales generated from selling the inventory and subtracting from it the costs related to the sale of that inventory and a reasonable profit allowance. Based upon this methodology, the Company recorded the inventory acquired at fair value resulting in an increase in inventory of $196. During the first quarter of fiscal 2012, the Company expensed as cost of sales $38 of the step-up value relating to the acquired inventory sold during the first quarter of fiscal 2012. As of June 30, 2011, there was $11 of inventory step-up value remaining in inventory to be expensed. Raw materials inventory was valued at replacement cost.

The purchase price was allocated to specific intangible assets as follows:


	Fair Value		Weighted average
	assigned		amortization period
Intangibles subject to amortization
Backlog	$	170	6 months
Customer relationships		2,700	15 years

	$	2,870	14 years


Intangibles not subject to amortization
Permits	$	10,300	indefinite
Tradename		2,500	indefinite

	$	12,800

Backlog consists of firm purchase orders received from customers that had not yet entered production or were in production at the date of the acquisition. The fair value of backlog was computed as the present value of the expected sales attributable to backlog less the remaining costs to fulfill the backlog. The life was based upon the period of time in which the backlog is expected to be converted to sales.

Customer relationships represent the estimated fair value of customer relationships Energy Steel has with nuclear power plants as of the acquisition date. These relationships were valued using the replacement cost method based upon the cost to obtain and retain the limited number of customers in the nuclear power market. The Company determined that the estimated useful life of the intangible assets associated with the existing customer relationships is 15 years. This life was based upon historical customer attrition and management’s understanding of the industry and regulatory environment.

Nuclear permits are required and critical to generate all of the revenue of Energy Steel, due to the strict regulatory environment of the nuclear industry. The permits are inherently valuable as a result of their competition-limiting effect due to the significant time, effort and resources required to obtain them. The Company intends to continually renew the permits and maintain all quality programs and processes, as well as abide by all required regulations of the nuclear industry, therefore, an indefinite life has been assigned to the permits. The permits will be tested annually for impairment. In the first quarter of fiscal 2012, the Company renewed the permits.

The ~~Condensed Consolidated Statement~~tradename represents the estimated fair value of ~~Operations for~~ the ~~three and nine months ended December 31, 2010 includes net sales~~corporate name acquired from Energy Steel ~~of $684.~~which will be utilized by the Company in the future. The ~~following unaudited pro forma information presents~~Company believes the ~~consolidated results of operations~~use of the tradename, which the Company ~~as if~~expects will be instrumental in enabling it to maintain or expand its market share, is inherently valuable. The Company currently intends to utilize the ~~Energy Steel acquisition had occurred at~~tradename for an indefinite period of time, therefore, the ~~beginning of each~~intangible asset is not being amortized but will be tested for impairment on an annual basis.

The excess of the ~~fiscal periods presented:~~

Three Months Ended Nine Months Ended
December 31, December 31,
2010 2009 2010 2009
Sales $ 21,274 $ 19,596 $ 57,355 $ 64,520
Net income 361 2,166 3,701 6,676
Earnings per share
Basic $ .04 $ .22 $ .37 $ .67
Diluted $ .04 $ .22 $ .37 $ .67

~~The unaudited pro forma information presents~~purchase price over the ~~combined operation results~~preliminary fair value of ~~Graham Corporation~~net tangible and ~~Energy Steel, with the results prior~~intangible assets acquired of $7,404 was allocated to goodwill. Various factors contributed to the ~~acquisition date adjusted to include~~establishment of goodwill, including the ~~pro forma impact~~value of the adjustment of depreciation of fixed assets based on the preliminary purchase price allocation, the adjustment to interest income reflecting the cash paid in connection with the acquisition, including acquisition-related expenses, at the Company’s weighted average interest income rate,Energy Steel’s highly trained assembled workforce and management team and the ~~impact of income taxes on the pro forma adjustments utilizing the applicable statutory tax rate.~~

~~The unaudited pro forma results are presented for illustrative purposes only. These pro forma results do not purport~~expected revenue growth over time that is attributable to be indicative of the results that would have actually been obtained if the acquisition occurred as of the beginning of each of the periods presented, nor does the pro forma data intend to be a projection of results that may be obtained in the future.increased market penetration.

NOTE 3 — REVENUE RECOGNITION:

The Company recognizes revenue on all contracts with a planned manufacturing process in excess of four weeks (which approximates 575 direct labor hours) using the percentage-of-completion method. The majority of the Company’s revenue is recognized under this methodology. The percentage-of-completion method is determined by comparing actual labor incurred to a specific date to management’s estimate of the total labor to be incurred on each contract. Contracts in progress are reviewed monthly, and sales and earnings are adjusted in current accounting periods based on revisions in the contract value and estimated costs at completion. Losses on contracts are recognized immediately when evident. There is no reserve for credit losses related to unbilled revenue recorded for contracts accounted for on the percentage of completion method. Any reserve for credit losses related to unbilled revenue is recorded as a reduction to revenue.

Revenue on contracts not accounted for using the percentage-of-completion method is recognized utilizing the completed contract method. The majority of the Company’s contracts have a planned manufacturing process of less than four weeks and the results reported under this method do not vary materially from the percentage-of-completion method. The Company recognizes revenue and all related costs on these contracts upon substantial completion or shipment to the customer. Substantial completion is consistently defined as at least 95%

complete with regard to direct labor hours. Customer acceptance is generally required throughout the construction process and the Company has no further material obligations under its contracts after the revenue is recognized.

At March 31, 2010, the Company’s backlog included four orders with a value of $6,655 that had been placed on hold (suspended) pending further customer evaluation. During the nine months ended December 31, 2010, two orders valued at $4,278 were returned to active status and one order valued at $1,588 was cancelled. Production had started on the cancelled project prior to such order being put on hold and the customer requested shipment of the partly completed project on an “as is” basis. At December 31, 2010, one order included in backlog with a value of $1,130 remained on hold (suspended).

NOTE 4 — INVESTMENTS:

Investments consist solely of fixed-income debt securities issued by the ~~United States~~U.S. Treasury with original maturities of greater than three months and less than one year. All investments are classified as held-to-maturity, as the Company has the intent and ability to hold the securities to maturity. The investments are stated at amortized cost which approximates fair value. All investments held by the Company at ~~December 31, 2010~~June 30, 2011 are scheduled to mature between ~~January 6,~~July 7, 2011 and ~~April 7,~~September 1, 2011.

NOTE 5 — INVENTORIES:

Inventories are stated at the lower of cost or market, using the average cost method. For contracts accounted for on the completed contract method, progress payments received are netted against inventory to the extent the payment is less than the inventory balance relating to the applicable contract. Progress payments that are in excess of the corresponding inventory balance are presented as customer deposits in the Condensed Consolidated Balance Sheets. Unbilled revenue in the Condensed Consolidated Balance Sheets represents revenue recognized that has not been billed to customers on contracts accounted for on the percentage-of-completion method. For contracts accounted for on the percentage-of—completion method, progress payments are netted against unbilled revenue to the extent the payment is less than the unbilled revenue for the applicable contract. Progress payments exceeding unbilled revenue are netted against inventory to the extent the payment is less than or equal to the inventory balance relating to the applicable contract, and the excess is presented as customer deposits in the Condensed Consolidated Balance Sheets.

Major classifications of inventories are as follows:


	December 31,		March 31,		June 30,		March 31,
	2010		2010		2011		2011
Raw materials and supplies	$	2,184	$	1,843	$	2,108	$	2,293
Work in process		10,788		5,365		10,702		12,983
Finished products		424		573		621		543

		13,396		7,781		13,431		15,819
Less — progress payments		7,894		1,683		7,789		7,562

Total	$	5,502	$	6,098	$	5,642	$	8,257
							��

NOTE 6 — INTANGIBLE ASSETS:

Intangible assets are comprised of the following:


	Gross				Net
	Carrying		Accumulated		Carrying
	Amount		Amortization		Amount
At June 30, 2011
Intangibles subject to amortization:
Backlog	$	170	$	170	$	—
Customer relationships		2,700		98		2,602

	$	2,870	$	268	$	2,602


Intangibles not subject to amortization:
Permits	$	10,300	$	—	$	10,300
Tradename		2,500		—		2,500

	$	12,800	$	—	$	12,800


At March 31, 2011
Intangibles subject to amortization:
Backlog	$	170	$	99	$	71
Customer relationships		2,700		53		2,647

	$	2,926	$	158	$	2,768


Intangibles not subject to amortization:
Permits	$	10,300	$	—	$	10,300
Tradename		2,500		—		2,500

	$	12,800	$	—	$	12,800

Intangible assets are amortized on a straight line basis over the estimated useful lives. Intangible amortization expense for the three months ended June 30, 2011 and 2010 was $116 and $0, respectively. As of June 30, 2011, amortization expense is estimated to be $135 for the remainder of fiscal 2012 and $180 in each of fiscal 2013, fiscal 2014, fiscal 2015 and fiscal 2016.

NOTE 7 — STOCK-BASED COMPENSATION:

The Amended and Restated 2000 Graham Corporation Incentive Plan to Increase Shareholder Value provides for the issuance of up to 1,375 shares of common stock in connection with grants of incentive stock options, non-qualified stock options, stock awards and performance awards to officers, key employees and outside directors; provided, however, that no more than 250 shares of common stock may be used for awards other than stock options. Stock options may be granted at prices not less than the fair market value at the date of grant and expire no later than ten years after the date of grant.

~~There were no stock~~Stock option awards granted in the three months ended ~~December 31,~~June 30, 2011 and 2010 were 9 and ~~2009. Stock option awards granted in the nine months ended December 31, 2010 and 2009 were~~ 20, ~~and 24,~~ respectively. The stock option awards vest 33¹/₃33⅓% per year over a three-year term. All stock options have a term of ten years from their grant date.

~~There were no restricted stock awards granted in the three months ended December 31, 2010 and 2009.~~

Restricted stock awards granted in the ~~nine-month~~three-month periods ended ~~December 31,~~June 30, 2011 and 2010 were 27 and ~~2009 were~~ 24, ~~and 15,~~ respectively. Performance-vested restricted stock awards granted to officers in fiscal 2012 and fiscal 2011 vest 100% on the third anniversary of the grant date, subject to the satisfaction of the performance metrics established for the applicable three-year period. Time-vested restricted stock awards granted to officers in fiscal ~~2010~~2012 vest 50% on the second anniversary of the grant date and 50% on the fourth anniversary of the grant date. Time-vested restricted stock awards granted to directors in ~~the~~fiscal 2012 and fiscal 2011 ~~and fiscal 2010~~ vest 100% on the first anniversary of the grant date.

During the three ~~and nine~~ months ended ~~December 31,~~June 30, 2011 and 2010, the Company recognized stock-based compensation costs related to stock option and restricted stock awards of ~~$124~~$116 and ~~$307,~~$59, respectively. The income tax benefit recognized related to stock-based compensation was ~~$43~~$42 and ~~$106~~$20 for the three ~~and nine~~ months ended ~~December 31,~~June 30, 2011 and 2010, respectively. During the three and nine months ended December 31, 2009, the Company recognized stock-based compensation costs of $119 and $317, respectively. The income tax benefit recognized related to stock-based compensation for the three and nine months ended December 31, 2009 was $41 and $110, respectively.

On July 29, 2010, the Company’s stockholders approved the Graham Corporation Employee Stock Purchase Plan (the “ESPP”), which allows eligible employees to purchase shares of the Company’s common stock on the last day of a six-month offering period at a purchase price equal to the lesser of 85 percent of the fair market value of the common stock on either the first day or the last day of the offering period. A total of ~~200,000~~200 shares of common stock may be purchased under the ESPP. During the three ~~and nine~~ months ended ~~December 31, 2010,~~June 30, 2011, the Company recognized stock-based compensation costs of ~~$29~~$18 related to ~~this Plan.~~the ESPP and $6 of related tax benefits.

NOTE 78 — INCOME PER SHARE:

Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Common shares outstanding include share equivalent units, which are contingently issuable shares. Diluted income per share is calculated

NOTE 910 — CASH FLOW STATEMENT:

Interest paid was $4$3 and $2$1 for the ~~nine~~three months ended ~~December 31,~~June 30, 2011 and 2010, ~~and 2009,~~ respectively. In addition, income taxes paid for the ~~nine~~three months ended ~~December 31,~~June 30, 2011 and 2010 were ~~$1,319. For the nine months ended December 31, 2009, income taxes paid were $2,697, which was net of a $3,426 refund of an overpayment of taxes in the fiscal year ended March 31, 2009.~~$162 and $715, respectively.

During the ~~nine~~three months ended ~~December 31,~~June 30, 2011 and 2010, ~~non cash activities included the recording of a $1,800 contingent liability for the contingent earn-out related to the acquisition of Energy Steel, which was treated as additional purchase price.~~

~~During the nine months ended December 31, 2010 and 2009,~~ stock option awards were ~~exercised.~~exercised and restricted stock awards vested. In connection with such stock option exercises and vesting, the related income tax benefit realized exceeded the tax benefit that had been recorded pertaining to the compensation cost recognized by ~~$66~~$72 and ~~$21,~~$22, respectively, for such periods. This excess tax deduction has been separately reported under “Financing activities” in the Condensed Consolidated Statements of Cash Flows.

At ~~December 31,~~June 30, 2011 and 2010, ~~and 2009,~~ there were ~~$34~~$63 and $7$23 of capital purchases that were recorded in accounts payable and are not included in the caption “Purchase of property, plant and equipment” in the Condensed Consolidated Statements of Cash Flows. In the three months ended June 30, 2011 and 2010, capital expenditures totaling $105 and $0, respectively, were financed through the issuance of capital leases.

NOTE 1011 — COMPREHENSIVE INCOME:

Total comprehensive income was as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	December 31,				December 31,				June 30,
	2010		2009		2010		2009		2011		2010
Net income	$	837	$	764	$	3,272	$	5,750	$	3,016	$	878

Other comprehensive income:
Foreign currency translation adjustment		26		—		69		3		27		10
Defined benefit pension and other postretirement plans		47		108		143		325		63		46

Total comprehensive income	$	910	$	872	$	3,484	$	6,078	$	3,106	$	934

From time to time in the ordinary course of business, the Company is subject to legal proceedings and potential claims. At ~~December 31, 2010,~~June 30, 2011, other than noted above, management was unaware of any other material litigation matters.

NOTE 1314 — INCOME TAXES:

The Company files federal and state income tax returns in several domestic and ~~foreign~~international jurisdictions. In most tax jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed. The Company is currently under examination by the ~~United States~~U.S. Internal Revenue Service (the “IRS”) for tax ~~year~~years 2009 and ~~is subject to examination for tax year~~ 2010. The IRS has completed its examination for tax years 2006 through 2008. In June 2010, the IRS proposed an adjustment, plus interest, to disallow substantially all of the research and development tax credit claimed by the Company in tax years 2006 through 2008. The Company filed a protest to appeal the adjustment in July 2010. The Company believes its tax position is correct and will continue to take appropriate actions to vigorously defend its position.

The cumulative tax benefit related to the research and development tax credit for the tax years ended March 31, 1999 through March 31, 2011 was ~~$2,383.~~$2,381. The liability for unrecognized tax benefits related to this tax position was $477 ~~and $455~~ at ~~December 31~~June 30 and March 31, ~~2010, respectively,~~2011, which represents management’s estimate of the potential resolution of this issue. Any additional impact on the Company’s income tax liability cannot be determined at this time. The tax benefit and liability for unrecognized tax benefits were recorded in the Company’s Consolidated Statement of Operations as follows:


	Year Ended March 31,															Year Ended March 31,
	2007		2008		2009		2010			2011			Total			2007		2008		2009		2010			2011			Total
Tax benefit of research and development tax credit	$	1,653	$	218	$	238	$	137		$	137		$	2,383		$	1,653	$	218	$	238	$	135		$	137		$	2,381

Unrecognized tax benefit		—		—		—		(445	)		(32	)		(477	)		—		—		—		(445	)		(32	)		(477	)


Net tax benefit of research and development tax credit	$	1,653	$	218	$	238	$	(308	)	$	105		$	1,906		$	1,653	$	218	$	238	$	(310	)	$	105		$	1,904

~~NOTE 14 — DEBT:~~

On December 3, 2010, the Company entered into a new revolving credit facility agreement that provides a $25,000 line of credit, including letters of credit and bank guarantees, expandable at the Company’s option at any time to up to $50,000. There are no sublimits in the agreement with regard to borrowings, issuance of letters of credit or issuance of bank guarantees for the Company’s Chinese subsidiary. The agreement has a three year term, with two automatic one year extensions.

At the Company’s option, amounts outstanding under the agreement will bear interest at either (i) a rate equal to the bank’s prime rate; or (ii) a rate equal to LIBOR plus a margin. The margin is based upon the Company’s funded debt to earnings before interest expense, income taxes, depreciation and amortization (“EBITDA”) and may range from 2.00% to 1.00%. Amounts available for borrowing under the agreement are subject to an unused commitment fee of between 0.375% and 0.200%, depending on the above ratio.

Outstanding letters of credit under the agreement are subject to a fee of between 1.25% and ..75%, depending on the Company’s ratio of funded debt to EBITDA. The agreement allows the Company to reduce the fee on outstanding letters of credit to a fixed rate of .55% by securing outstanding letters of credit with cash and cash equivalents. At December 31, 2010, outstanding letters of credit were secured by cash and cash equivalents.

Under the new revolving credit facility, the Company covenants to maintain a maximum funded debt to EBITDA ratio of 3.5 to 1 and a minimum earnings before interest expense and income taxes to interest ratio of 4.0 to 1. The agreement also provides that the Company is permitted to pay dividends without limitation if it maintains a maximum funded debt to EBITDA ratio equal to or less than 2.0 to 1 and permits the Company to pay dividends in an amount equal to 25% of net income if it maintains a maximum funded debt to EBITDA ratio of greater than 2.0 to 1.2010.


~~Item 2.~~		~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollar amounts in thousands, except per share data)

Overview

We are a global designer and manufacturer of custom-engineered ejectors, vacuum systems, condensers, liquid ring pump packages and heat exchangers to the refining and petrochemical industries, and a nuclear code accredited supplier of components and raw materials to the nuclear power generating market. Our equipment is used in critical applications in the petrochemical, oil refining and electric power generation industries, including nuclear, cogeneration and geothermal plants. Our equipment can also be found in alternative energy, ~~applications,~~ including ethanol, biodiesel and coal and gas-to-liquids, ~~and other applications,~~ and other diverse applications, such as metal refining, pulp and paper processing, shipbuilding, water heating, refrigeration, desalination, soap manufacturing, food processing, pharmaceuticals, and heating, ventilating and air conditioning.

Our corporate offices are located in Batavia, New York and we have production facilities in both Batavia, New York and at our wholly-owned subsidiary, Energy Steel and Supply Co., located in Lapeer, Michigan. We also have a wholly-owned foreign subsidiary, Graham Vacuum and Heat Transfer Technology (Suzhou) Co., Ltd., located in Suzhou, China, which supports sales orders from China and provides engineering support and supervision of subcontracted fabrication.

In advancement of our strategy to diversify our products and broaden our offerings to the energy industry, on December 14, 2010, we acquired Energy Steel and Supply Company (“Energy Steel”), which is now a wholly-owned domestic subsidiary of ours located in Lapeer, Michigan. Energy Steel is a code fabrication and specialty machining company which provides products to the nuclear industry, primarily in the United States.Steel. This transaction was accounted for under the ~~purchase~~acquisition method of accounting. Accordingly, the results of Energy Steel were included in our ~~Condensed Consolidated Financial Statements from~~consolidated financial statements and comparisons to our prior fiscal year will be enhanced by the ~~date~~inclusion of ~~acquisition.~~Energy Steel in this fiscal year’s results.

Highlights

Highlights for the ~~three- and nine-month periods~~three months ended ~~December 31, 2010~~June 30, 2011 (the ~~third quarter of the~~ fiscal year ending March 31, ~~2011 (“fiscal 2011”)~~2012 is referred to as “fiscal 2012”) include:

	•		Net sales for the ~~third~~first quarter of fiscal ~~2011~~2012 were ~~$19,215, up 58%~~$25,012, an increase of 87% compared with ~~$12,166~~$13,351 for the ~~third~~first quarter of the fiscal ~~2010.~~year ended March 31, 2011, referred to as “fiscal 2011”. Net sales for the first ~~nine months~~quarter of fiscal ~~2011 were $48,289, compared with net sales of $48,412 for the first nine months of fiscal 2010. Included in net sales were $684~~2012 included $3,865 associated with ~~our acquisition of~~ Energy Steel.

	•		Net income and income per diluted share for the ~~third~~first quarter of fiscal ~~2011~~2012 were ~~$837 or $0.08, respectively,~~$3,016 and $0.30, compared with net income of ~~$764~~$878 and income per diluted share of ~~$0.08~~$0.09 for the ~~third quarter of the fiscal year ended March 31, 2010 (“fiscal 2010”). Included in the third~~first quarter of fiscal 2011 was $510, net of income tax, or $0.05 per diluted share, of transaction costs, related to our acquisition of Energy Steel. Excluding these transaction costs, net income and income per diluted share for the third quarter of fiscal 2011 were $1,347 or $0.13, respectively. With the transaction costs excluded, net income increased by $583, or 76%.

	•		Net income and income per diluted share for the first nine months of fiscal 2011 were $3,272 and $0.33, respectively, compared with net income of $5,750 and income per diluted share of $0.58 for the first nine months of fiscal 2010.

			~~Excluding the previously mentioned acquisition transaction costs, net income and income per diluted share for the first nine months of fiscal 2011 were $3,782 and $0.38, respectively.~~2011.

	•		Orders booked in the ~~third~~first quarter of fiscal 2012 were $19,043, up 134% compared with the first quarter of fiscal 2011, when orders were ~~$17,784, which~~$8,124. Orders in the first quarter of fiscal 2012 included ~~$839~~$5,178 associated with Energy Steel. In total, orders were down 66% compared with the third quarter of fiscal 2010, when orders were $51,644. The prior year quarter benefited from a large order that was in excess of $25,000 with Northrop Grumman Corporation to provide surface condensers for a U.S. Navy aircraft carrier. Orders booked in the first nine months of fiscal 2011 were $36,384, down 60% compared with orders booked of $90,049 in the first nine months of fiscal 2010.

	•		Backlog ~~was $90,531~~decreased to $85,199 at ~~December 31, 2010,~~June 30, 2011, representing a ~~9% increase~~6% decrease compared with ~~September 30, 2010,~~March 31, 2011, when our backlog was $83,316. There was $8,625 of backlog associated with Energy Steel at the end of the quarter. We believe 70-80% of the current backlog will convert to sales over the next 12 months. Normally, 85-90% of the backlog is expected to convert to sales within the next 12 months.$91,096.

	•		Gross profit margin and operating margin for the ~~three-~~first quarter of fiscal 2012 were 33% and ~~nine-month periods ended December 31, 2010 was 25% and 29%, respectively,~~18% compared with ~~31%~~29% and ~~37%~~10%, respectively, for the ~~three- and nine-month periods ended December 31, 2009.~~

	•		~~Cash and short-term investments at December 31, 2010 were $48,234 compared with $74,590 at March 31, 2010.~~first quarter of fiscal 2011.

Cash and short-term investments at June 30, 2011 were $41,103 compared with $43,083 at March 31, 2011.

Forward-Looking Statements

This report and other documents we file with the Securities and Exchange Commission include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results implied by the forward-looking statements. Such factors include, but are not limited to, the risks and uncertainties identified by us under the heading “Risk Factors” in Item 1A of our Annual Report on Form 10-K for fiscal ~~2010 and in Item 1A of this Quarterly Report on Form 10-Q.~~2011.

Forward-looking statements may also include, but are not limited to, statements about:

	•		the current and future economic environments affecting us and the markets we serve;

	•		expectations regarding investments in new projects by our customers;

	•		sources of revenue and anticipated revenue, including the contribution from the growth of new products, services and markets;

	•		plans for future products and services and for enhancements to existing products and services;

	•		our operations in foreign countries;

	•		our ability to integrate our acquisition of Energy Steel and continue to pursue our acquisition and growth strategy;

	•		our ability to expand nuclear power work into new markets;

	•		estimates regarding our liquidity and capital requirements;

	•		timing of conversion of backlog to sales;

	•		our ability to ~~achieve expected profitability levels;~~

	•		~~our ability to~~ attract or retain customers;


	•		the outcome of any existing or future litigation;

	•		~~our acquisition strategy;~~

	•		~~our ability to successfully integrate and operate Energy Steel;~~ and

	•		our ability to increase our productivity and capacity.

Forward-looking statements are usually accompanied by words such as “anticipate,” “believe,” “estimate,” “may,” “intend,” “expect” and similar expressions. Actual results could differ materially from historical results or those implied by the forward-looking statements contained in this report.

Undue reliance should not be placed on our forward-looking statements. Except as required by law, we undertake no obligation to update or announce any revisions to forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

Fiscal 2012 and the Near-Term Market Conditions

AsThe downturn in the global economy ~~slowly recovers, albeit at~~which commenced in the fiscal year ending March 31, 2008 led to reduced demand for petroleum-based products, which in turn led our customers to defer investment in

major capital projects. We have seen an improved business environment over the past few quarters and believe that we are in the early stages of a ~~sluggish pace, our principal markets, specifically, oil refining and petrochemicals,~~business recovery. While there continues to be risks around a global economic recovery, we believe current signs are ~~improving. Currently,~~more positive than a year ago.

In addition, we believe that ~~international markets present greater demand than those~~the significant increase in North America. For example, Asia has renewed its activities to invest in new refining and petrochemical capacity. China had slowed its investments somewhat during the global recession, but appears to have reinvigorated its efforts to build capacity. Also, there are a number of refining and petrochemical projects on the horizon in the Middle East, while South America is moving forward with planned investment in new capacity.

Underlying demand from projected economic growth in less developed countries appears to be driving the strengthened and apparently stable price for crude oil that has remained above $75 per barrel for over a year. Likewise, otherconstruction costs, including raw material costs, ~~have increased~~which had occurred over the ~~past 12~~four-to-five-year period prior to ~~18 months, although they remain below their peaks~~the recent downturn, also led to delays in 2008, with the exception of copper. However, despite that higher commodity prices have an effect on overall project cost for the end user, it appears that the improving economy, which is supporting the strength of the oil market, is spurring new ~~international investment~~commitments by our customers. The increase in ~~refineries and petrochemical plants.~~

~~In the U.S., renewable energy projects~~costs resulted in the ~~U.S.~~economics of projects becoming less feasible. While some material costs have ~~been very active~~improved, copper and steel are ~~expected to~~again elevated and remain so for the next few years. Moreover, investment in the U.S. nuclear power generation market is anticipated to be favorable and will be driven by capital investment in existing nuclear power plants to increase power generation and/or extend their operating lives. In addition, construction of new nuclear power generation capacity is planned.volatile.

~~Currently, near-term~~Near-term demand trends that we believe are affecting our customers’ investments ~~include the following:~~include:

	•		As the ~~global economy~~world recovers slowly from the global recession, many emerging economies continue to have relatively strong economic growth. This expansion is driving growing energy requirements and the need for more refined petroleum ~~products.~~products in energy markets. Although uncertainty in the capital markets continues, there has been some improved access to capital, which has resulted in certain previously stalled projects being released.

	•		The expansion of the Middle Eastern economies and the continued ~~global~~ growth in demand for oil and refined products has renewed investment activity in ~~this geographic area. We believe~~ that ~~such renewed activity is exemplified by the re-~~

			~~starting~~region. The planned timeline of ~~projects in both the petrochemical and refining industries, such as the Jubail and Yanbu export~~ refinery projects in ~~Saudi Arabia.~~the major Middle Eastern countries is encouraging.

	•		~~Demand~~Asia, specifically China, began experiencing renewed demand for refined petroleum products such as gasoline, in Asia (specifically China) experienced continued growth during the last two calendar years following reductions in demand during calendar year 2008 when economic uncertainty stymied growth.gasoline. This ~~continued~~renewed demand is driving increased investment in petrochemical and refining projects.

	•		South America, specifically Brazil, Venezuela and Colombia, is seeing increased refining and petrochemical investments that are driven by their expanding economies and increased local demand for gasoline and other products ~~derived~~that are made from ~~oil.~~oil as the feedstock.

	•		The U.S. refining market has ~~experienced some~~exhibited recent improvement, including near-term increases in orders of short cycle and spare parts. Historically, these types of orders have suggested a recovery, ~~from its bottom. However, refinery utilization remains somewhat below levels prior~~as delayed spending is released. We expect the U.S. refining market will not return to the ~~global recession.~~levels experienced during the last up cycle, but will improve compared with its levels over the past few years. We ~~believe~~expect that ~~uncertainty around~~the U.S. ~~energy policy~~refining markets will continue to be an important aspect of our business. We are beginning to see signs of planned investments to convert greater percentages of crude transportation fuels, such as revamping the distillation column to extract the residual higher value components from the low value waste stream.

	•		Investments in North American oil sands projects have recently increased, especially for extraction projects in Alberta and ~~its potential impact on production costs is also affecting~~foreign investment in Alberta, which suggest that downstream investments that involve our ~~customers. As a result, there have been fewer investments in capital projects for refineries~~equipment might increase in the ~~U.S. This trend is expected~~next one to ~~continue for the next few~~three years.

	•		~~Recently there have been investments~~Investment in ~~North American oil sands extraction projects~~new nuclear power capacity may become subject to increased uncertainty due to political and social pressures, enhanced by the tragic earthquake and tsunami which occurred in ~~Alberta~~Japan in March 2011. However, the need for additional safety and ~~foreign investment in Alberta. We expect that refineries~~back up redundancies at existing plants could increase demand for Energy Steel’s products in the U.S. may begin investing to upgrade facilities to be able to accommodate for the synthetic feedstock. Historically, downstream investments that involve our equipment occur two to three years after extraction projects.

	•		Energy policy focus in the United States has generated renewed interest in nuclear power. The time frame to design, permit, fund and build a new nuclear facility is extremely long and we believe it is very early in that process. However, the maintenance, license extension and re-rating of the 104 existing nuclear plants in the United States is quite active and provides us with sales opportunities.near term.

~~A consequence~~We expect that the consequences of these near-term trends, and specifically the ~~global recession~~growth in Asia and ~~the shift~~South America, will result in ~~geographic opportunities for our products is~~more pressure on our pricing and gross ~~margin. The~~margins, as the U.S. refining market has historically provided higher margins than certain international ~~markets~~markets.

Because of continued global economic uncertainty and ~~there has been significant competition for fewer projects. As~~ the ~~global economy has begun to improve,~~risk associated with growth in emerging economies, we ~~believe this pressure is beginning to ease, although we would not expect this to be reflected in our financial results within the next twelve months.~~

~~Despite the improving global outlook, we~~also expect that we will ~~continue to experience~~have continued volatility in our order pattern. ~~For example, sequentially the past seven quarters had~~We continue to expect our new order levels ~~of $8,838, $29,567, $51,644, $18,268, $8,124, $10,476~~to remain volatile, resulting in both strong and ~~$17,784 in~~weak quarters. As the ~~first, second, third and fourth quarters of fiscal 2010 and the first, second and third quarters of fiscal 2011, respectively.~~chart below indicates, quarterly orders can vary significantly.

We believe that looking at our order level in any one quarter does not provide an accurate indication of our future expectations or performance. Rather, we believe that looking at our orders and backlog over a rolling four-quarter time period provides a better measure of our business. For the next several quarters, we also expect to see smaller value projects than what we ~~had seen~~saw during the beginning of the last expansion cycle. ~~As a result, we~~This will ~~have to win a greater number of~~require more orders for us to achieve a similar ~~or higher~~revenue level ~~of revenue.~~and will adversely impact our ability to realize margin gains through volume leverage.

Demand Trends

	•		Global consumption of crude oil is estimated to expand significantly over the next two decades, primarily in emerging markets. This is expected to offset estimated flat to slightly declining demand in North America and Europe.

	•		Global oil refining capacity is projected to increase, and is expected to be addressed through new facilities, refinery upgrades, revamps and expansions.

	•		Increased demand is expected for power, specifically nuclear and alternative energy sources, refinery and petrochemical products, stimulated by an expanding middle class in Asia ~~in particular China~~ and ~~India.~~

	•		~~The requirement for developing clean, low cost electric power in~~ the ~~U.S. is expected to continue.~~Middle East.

	•		Increased development of geothermal electrical power plants in certain regions is expected to ~~help~~ meet projected growth in demand for electrical power.

	•		Increased global regulations over the refining, petrochemical and ~~petrochemical~~nuclear power industries are expected to continue to drive requirements for capital investments.

	•		~~Funded defense industry plans for~~Increased focus on safety and redundancy is anticipated in existing nuclear ~~powered carriers, submarines and destroyers are~~power facilities.

	•		Long-term increased project development of international nuclear facilities is expected, ~~to continue.~~despite the recent tragedy in Japan.

~~Growth Opportunities~~


	•		Construction of new petrochemical plants in the Middle East, where natural gas is plentiful and less expensive, is expected to continue.

	•		Increased investments in new power projects are expected in Asia and South America to meet projected consumer demand increases.

	•		~~Global oil refining capacity is projected to increase, and is expected to be addressed through new facilities, refinery upgrades, revamps and expansions.~~

	•		Long-term growth potential is believed to exist in alternative energy markets, such as ~~nuclear,~~geothermal, coal-to-liquids, gas-to-liquids and other emerging technologies, such as biodiesel, ethanol and waste-to-energy.

	•		~~Replacement or upgrading~~Shale gas development and the resulting availability of ~~existing equipment in U.S. nuclear power generation plants~~affordable natural gas as feedstock to U.S.-based chemical/petrochemical facilities is expected to ~~continue.~~

	•		~~Construction of new nuclear power generating capacity is expected.~~

	•		~~Construction of new nuclear propelled~~lead to renewed investment in chemical/petrochemical markets in the U.S. ~~naval vessels and replacement of worn equipment on existing vessels is expected.~~

We believe that all of the above factors offer us long-term growth opportunity to meet our customers’ expected capital project needs. In addition, we believe we can continue to grow our less cyclical smaller product lines and aftermarket businesses.

Emerging markets require petroleum-based products ~~and~~ are expected to continue to grow at rates faster than the U.S. ~~Therefore,~~Because of our access to the nuclear power industry with the Energy Steel acquisition and our expanding market penetration with the U.S. Navy, we ~~expect~~believe the domestic and international markets will offer similar opportunities ~~will be more plentiful as they relate to oil refining and petrochemical markets, whereas U.S. power generation markets, both nuclear and alternative energy, are expected to be active and provide~~for us ~~additional opportunities domestically.~~in the near term. Our domestic sales as a percentage of aggregate product sales, which had increased from 50% in our fiscal year ended March 31, 2007 to 54% in our fiscal year ended March 31, 2008 to 63% in our fiscal year ended March 31, 2009, decreased to 45% in each of our fiscal years ended March 31, 2010 and fiscal 2011, and were also 45% in the first quarter of fiscal 2012.

~~aggregate product sales, which were 63% in fiscal 2009, decreased to 45% in fiscal 2010 and declined to 41% in the first nine months of fiscal 2011.~~

In the first nine months of fiscal 2011, international orders were 54% of total orders. With the acquisition of Energy Steel, whose sales are almost exclusively domestic, we expect that the weighting of international orders will be less dominant than would have occurred prior to the addition of Energy Steel. Our order rates for fiscal 2010 were 50% domestic and 50% international. However, the fiscal 2010 domestic order level was heavily impacted by a large order (in excess of $25,000) from Northrop Grumman to supply surface condensers for the U.S. Navy. If we exclude this project, the international order percentage in fiscal 2010 would have exceeded 65%.

~~Energy Steel Acquisition~~

On December 14, 2010, we completed the acquisition of Energy Steel & Supply Co. (“Energy Steel”), a privately-owned code fabrication and specialty machining company located in Lapeer, Michigan dedicated primarily to the nuclear power industry. We believe that this acquisition furthers our growth strategy through market and product diversification, broadens our offerings to the energy markets and strengthens our presence in the nuclear sector.

This transaction was accounted for under the purchase method of accounting. Accordingly, the results of Energy Steel were included in our Condensed Consolidated Financial Statements from the date of acquisition. The purchase price was $17,882 in cash. Acquisition-related costs of $666 were expensed in the third quarter of fiscal 2011 and are included in Selling, general and administrative expenses in the condensed consolidated statement of operations included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The purchase agreement also includes a contingent earn-out, which ranges from $0 to $2,000, dependent upon Energy Steel’s earnings performance in calendar years 2011 and 2012. If achieved, the earn-out will be payable in fiscal 2011 and fiscal 2012 and is treated as additional purchase price. In addition, we entered into a five year lease agreement with ESSC Investments, LLC for Energy Steel’s manufacturing and office facilities located in Lapeer, Michigan, which agreement includes an option to renew the lease for an additional five year term. We also have an option to purchase the leased facility for $2,500 at any time during the first two years of the lease term. ESSC Investments, LLC is partly owned by the President of Energy Steel.

The cost of the acquisition was preliminarily allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition and the amount exceeding the fair value of $17,326 was recorded as goodwill, which is not deductible for tax purposes. As the values of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained, including, but not limited to, settlement of the contingent payment, the finalization of the valuation of intangible assets, and the final reconciliation and confirmation of tangible assets. The valuation of acquisition-related intangible assets will be finalized within twelve months of the close of the acquisition. The fair value of acquisition-related intangible assets includes customer relationships, teaming partner agreements, permits and certificates. It is estimated that a significant portion of the goodwill will be allocated to acquisition-related intangible assets, some of which may have an indefinite life. Changes to the preliminary valuation will result in material adjustments to the fair value of assets and liabilities acquired. Adjustments to record intangible assets acquired will result in a reduction of goodwill.

~~The following table summarizes the preliminary allocation of the cost of the acquisition to the assets acquired and liabilities assumed as of the close of the acquisition:~~

December 14,
2010
Assets acquired:
Current assets $ 2,768
Property, plant & equipment 1,390
Goodwill 17,326
Other assets 32

Total assets acquired 21,516
Liabilities assumed:
Current liabilities 1,834

Total liabilities assumed 1,834

Purchase price $ 19,682

Results of Operations

For an understanding of the significant factors that influenced our performance, the following discussion should be read in conjunction with our condensed consolidated financial statements and the notes to our condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.

The following table summarizes our results of operations for the periods indicated:


	Three Months Ended				Nine Months Ended
	December 31,				December 31,				Three Months Ended June 30,
	2010		2009		2010		2009		2011		2010
Net sales	$	19,215	$	12,166	$	48,289	$	48,412	$	25,012	$	13,351
Net income	$	837	$	764	$	3,272	$	5,750	$	3,016	$	878
Diluted income per share	$	0.08	$	0.08	$	0.33	$	0.58	$	0.30	$	0.09
Total assets	$	105,618	$	89,240	$	105,618	$	89,240	$	118,195	$	106,459

Sales for the ~~third~~first quarter of fiscal ~~2011~~2012 were ~~$19,215, up 58%~~$25,012, an 87% increase as compared with sales of ~~$12,166~~$13,351 for the ~~third~~first quarter of fiscal ~~2010. Included~~2011. The increase in the ~~quarter~~current quarter’s sales was ~~$684~~due to higher volume in the majority of our product lines and the benefit of the acquisition of the Energy Steel business, which was purchased in December 2010 and contributed $3,865 in sales ~~associated with Energy Steel. Other than~~for the ~~addition~~quarter. International sales year-over-year increased $5,949, or 76%, due to increases of ~~Energy Steel,~~$5,875 in the Middle East and $2,403 in South America, partly offset by lower Asian sales, ~~growth was driven by improvements in all products, except aftermarket, and higher international sales, which more than offset the decline in sales to the U.S.~~off $1,557. International sales accounted for ~~64%~~55% and ~~58%~~59% of total sales for the ~~third quarters~~first quarter of fiscal ~~2011~~2012 and fiscal ~~2010,~~2011, respectively. ~~International sales year-over-year increased $5,274, or 74%, driven by stronger sales to Asia, Middle East and South America.~~ Domestic sales increased ~~$1,775,~~$5,717, or ~~35%~~104%, in the ~~third~~first quarter of fiscal 2012 compared with the first quarter of fiscal 2011, ~~compared~~ with the ~~third quarter~~Energy Steel business contributing 68% of ~~fiscal 2010.~~this increase. Fluctuations in sales among products and geographic locations can vary measurably from quarter-to-quarter based on timing and magnitude of projects. We believe the growth in international sales will continue into fiscal 2012. With our recent acquisition of Energy Steel, which sells primarily into the domestic market, we expect strong domestic sales growth. Sales in the three months ended ~~December 31, 2010~~June 30, 2011 were ~~40%~~48% to the refining industry, ~~17%~~12% to the chemical and petrochemical industries, 23% to the power industry, including nuclear market and ~~43%~~17% to other commercial and industrial applications. Sales in

the three months ended ~~December 31, 2009~~June 30, 2010 were ~~36%~~25% to the refining industry, ~~44%~~40% to the chemical and petrochemical industries, 8% to power industry, and ~~20%~~27% to other commercial and industrial applications. For additional information on ~~anticipated~~ future sales and our markets, see “Orders and Backlog” below.

Sales for the first nine months of fiscal 2011 were $48,289, compared with sales of $48,412 for the first nine months of fiscal 2010. Increases in condensers, pumps and heat exchangers were offset by lower ejector and spare sales. International sales accounted for 59% and 52% of total sales for the first nine months of fiscal 2011 and fiscal 2010, respectively. International sales year-over-year increased $3,389, or 14%. International sales increased in South America, Middle East, Canada and Mexico. These increases were partly offset by lower sales in Asia. Domestic sales decreased $3,512, or 15% in the nine months ended December 31, 2010 compared with the nine months ended December 31, 2009. Sales in the first nine months of fiscal 2011 were 34% to the refining industry, 28% to the chemical and petrochemical industries and 38% to other commercial and industrial applications. Sales in the first nine months of fiscal 2010 were 43% to the refining industry, 32% to the chemical and petrochemical industries and 25% to other commercial and industrial applications. For additional information on future anticipated sales and our markets, see “Orders and Backlog” below.

Gross profit for the third quarter of fiscal 2011 was $4,863, up 27% compared with fiscal 2010. Higher gross profit reflects increased volume. However, as a percentage of sales, gross profit for the third quarter of fiscal 2011 was 25% compared with 31% for the third quarter of fiscal 2010 due to the impact of a more competitive pricing environment in which the projects that were shipped in the third quarter were awarded. Orders for many of these projects were received in the second half of fiscal 2010.

~~Gross profit for the first nine months of fiscal 2011 was $14,060, down 22% compared with the same period in fiscal 2010.~~ Our gross profit margin for the first ~~nine months~~quarter of fiscal ~~2011~~2012 was ~~29%~~33% compared with ~~37%~~29% for ~~the first nine months of fiscal 2010. Gross profit decreased primarily due to non-repeatable raw material purchasing benefits achieved in~~ the first quarter of fiscal ~~2010~~2011. Gross profit dollars for the first quarter of fiscal 2012 increased to $8,197 from $3,850, or 113% compared with fiscal 2011. Gross profit percentage and ~~as a result of having lower margin projects~~dollars increased primarily due to ~~the more competitive pricing environment associated~~higher organic volume and improving facility utilization. Gross profit dollars were also improved by $1,181 with the ~~projects shipped during the period that had been awarded six to twelve months earlier as discussed above.~~addition of Energy Steel.

Selling, general and administrative (“SG&A”) expense in the three- and nine-month periods ended December 31, 2010 increased $865, or 32%, and $171 or 2%, respectively, compared with the same periods of the prior year. Included in the third quarter of fiscal 2011 was $666 of transaction costs related to our acquisition of Energy Steel, which closed on December 14, 2010. Excluding these costs, SG&A expense in the three- and nine-month periods ended December 31, 2010 increased $199, or 7%, and decreased $495, or 6%, respectively, compared with the same periods of the prior year. SG&A expenses in the first nine months of fiscal 2011, excluding acquisition costs, were lower due to the savings realized from restructuring, which occurred in fiscal 2010, lower pension expense and variable compensation expenses.

~~SG&A expense~~ as a percent of sales for the ~~three- and nine-month~~three-month periods ended ~~December 31,~~June 30, 2011 and 2010 ~~was consistent at 19%. Excluding the Energy Steel acquisition costs noted above, SG&A expense as a percent of sales for the three- and nine-month periods ended December 31, 2010 was~~were 15% and ~~18%~~19%, respectively. ~~This~~Actual costs in fiscal 2012 were $3,701, an increase of $1,134, or 44%, compared with ~~22%~~the first quarter of fiscal 2011. Half of the increase was organic, the remaining portion due to the addition of Energy Steel. The organic SG&A expenses increased due to increased headcount and ~~19%, respectively, for the same periods ended December 31, 2009.~~higher variable costs related to higher sales and income.

2523

Interest income for the ~~three-~~three month-periods ended June 30, 2011 and ~~nine-month periods ended December 31,~~ 2010 was ~~$13~~$21 and ~~$47,~~$16, respectively. ~~Interest income for the same periods of fiscal 2010 was $11 and $44, respectively. The low level~~Low levels of interest income ~~relative to~~resulted from the ~~amount~~continuing low level of ~~cash invested reflects the persistently low~~ interest rates on short term U.S. government ~~securities.~~securities and money market rates.

Interest expense was ~~$14 and $30 for the three- and nine-month periods ended December 31, 2010, up from $0, but down from $34~~$20 for the quarter ~~and year-to-date period~~ ended ~~December 31, 2009.~~June 30, 2011, up from $7 for the quarter ended June 30, 2010.

Our effective tax rate ~~for~~in fiscal 2012 is projected to be between 33% and 35%, which represents the ~~three and nine months ended December 31, 2010 was 35% and 33%, respectively. Our projected~~tax rate used to reflect income tax expense in the current quarter (33%). The actual annual effective tax rate for fiscal 2011 ~~is between~~was 33% ~~and 34%~~. ~~The tax rate in the three and nine months ended December 31, 2009 was 31% and 35%, respectively (the effective tax rate for fiscal 2010 was 37%).~~

Net income for the first three ~~and nine~~ months ~~ended December 31,~~of fiscal 2012 compared with the first three months of fiscal 2010 was ~~$837~~$3,016 and ~~$3,272,~~$878, respectively. Excluding the costs associated with our acquisition of Energy Steel, net income for the three and nine months ended December 31, 2010 was $1,347 and $3,782, respectively. These results compare with $764 and $5,750, respectively, for the same periods in the prior fiscal year. Income per diluted share ~~in fiscal 2011~~ was ~~$0.08~~$0.30 and ~~$0.33~~$0.09 for the ~~three and nine-month periods, $0.13 and $0.38, when the Energy Steel transaction costs are excluded, compared with $0.08 and $0.58 for the same periods of fiscal 2010.~~respective periods.

Liquidity and Capital Resources

The following discussion should be read in conjunction with our Condensed Consolidated Statements of Cash Flows:


	December 31,		March 31,		June 30,		March 31,
	2010		2010		2011		2011
Cash and investments	$	48,234	$	74,590	$	41,103	$	43,083
Working capital		40,958		56,704		47,047		44,003
Working capital ratio⁽¹⁾		2.5		2.6		2.6		2.3

~~repurchased by us or when our board of directors terminates the program. In total, 362 shares have been repurchased under this plan at a total cost of $3,392.~~

~~Dividend payments~~accounts receivable in the first ~~nine months~~quarter of fiscal ~~2011~~2012, as projects were ~~$592 compared with $591~~completed and shipped to customers, we expect cash and investment to increase over the next quarter or two.

We invest net cash generated from operations in excess of cash held for ~~the first nine months of fiscal 2010.~~

Our cash, cash equivalents, and investments on December 31, 2010 were $48,234 compared with $74,590 at the end of fiscal 2010. Investments on December 31, 2010 were $27,516 compared with $70,060 on March 31, 2010. Investments are madenear-term needs in ~~United States~~either a money market account or in U.S. government instruments, generally with maturity periods of 91up to ~~120~~180 days. ~~Starting in the third quarter of fiscal 2010, we made a decision to keep a portion of our cash and investments in a short term,~~Our money market account ~~with Bank of America,~~is used to ~~cash collateralize~~securitize our outstanding letters of credit and ~~receive~~allows us to pay a ~~discounted fee. Cash and equivalents~~lower cost on ~~December 31, 2010 were $20,718 compared with $4,530 on March 31, 2010.~~those letters of credit.

Our current cash, cash equivalents, and investments position includes $14,368 in customer deposits. A small number of major customers provided upfront, negotiated cash payments to assist in lowering our cost to complete their projects in the fourth quarter of fiscal 2010. This cash is being utilized to procure materials for these customers’ projects in the fiscal years ended March 31, 2011 and 2012. Although we often obtain progress payments for large projects from our customers throughout the procurement and manufacturing process, during fiscal 2010 more cash was provided for certain orders shortly after the order was secured. During the remainder of fiscal 2011 and into fiscal 2012, we expect operating cash flow may be negative at times, as the customer deposits balance is utilized to procure materials to support production. Through the first nine months of fiscal 2011, our customer deposit liability decreased by $7,961.

The acquisition of Energy Steel included a contingent earn-out, which ranges from $0 to $2,000, dependent upon Energy Steel’s earnings performance in calendar years 2011 and 2012. A contingent liability of $1,800 was recorded related to the earn-out and will be payable in fiscal 2011 and fiscal 2012, if achieved. In addition, we entered into an agreement to lease the manufacturing and office facilities of Energy Steel, which provides us with an option to purchase the leased facility for $2,500 at any time during the first two years of the five year lease term.

~~We entered into a new~~ revolving credit facility with Bank of America, N.A. ~~in December 2010. The new facility~~ provides us with a line of credit of $25,000, including letters of credit and bank guarantees. In addition, the ~~facility has an accordion feature, which~~agreement allows us

to increase the ~~facility by as much as an additional~~line of credit, at our discretion, up to another $25,000, for a total availability of $50,000. Borrowings under our credit facility are secured by all of our assets. Letters of credit outstanding under our credit facility on ~~December 31, 2010~~June 30, 2011 and March 31, ~~2010~~2011 were ~~$15,016~~$16,582 and ~~$9,584,~~$13,751, respectively. ~~Other utilization of~~There were no other amounts outstanding on our credit facility ~~limits~~ at ~~December 31, 2010~~June 30, 2011 and March 31, ~~2010 were $0.~~2011. Our borrowing rate as of ~~December~~June 30 and March 31, ~~2010~~2011 was Bank of America’s prime rate, or 3.25%. Availability under the line of credit was $8,418 at June 30, 2011. We believe that cash generated from operations, combined with our investments and available financing capacity under our credit facility, will be adequate to meet our cash needs for the immediate future.

Orders and Backlog

Orders for the ~~three- and nine-month~~three-month periods ended ~~December 31,~~June 30, 2011 and 2010 were ~~$17,784~~$19,043 and ~~$36,384,~~$8,124, respectively, ~~compared with $51,644 and $90,049 for the same periods in the prior fiscal year.~~an increase of 134%. Orders represent written communications received from customers requesting us to supply products and services. ~~Included in orders for~~During the ~~three-month period ended December 2010 was $839 associated~~first quarter of fiscal 2012 compared with the ~~acquisition of Energy Steel.~~

~~During the third~~first quarter of fiscal 2011, ~~we experienced~~orders for the organic business increased $5,741 or 71%. Orders increased in refining, up $4,319, and power, up $1,741, offset by a small decline in chemical and petrochemical, down $410. Energy Steel contributed $5,178 in new orders in ~~all markets, compared with~~ the ~~record orders received in the third~~first quarter of fiscal ~~2010 (which included the previously mentioned U.S. Navy order in excess of $25,000).~~2012.

Domestic orders were ~~$8,953 or 50%~~66% of total orders, ~~while international orders were $8,831 in the third quarter. In the third quarter of fiscal 2010, domestic orders were $36,981~~or $12,654, and international orders were ~~$14,663, or 72% and 28% of total orders, respectively.~~

~~For the first nine months of fiscal 2011, domestic orders were 46%~~34% of total orders, or ~~$16,696, while international orders were 54%, or $19,688. During~~$6,389, in the current quarter compared with the first ~~nine months~~quarter of fiscal ~~2010,~~2011, when domestic orders were ~~52%~~53%, or ~~$47,078, and international orders were 48%~~$4,266, of total orders, and export orders were 47%, or ~~$42,971.~~$3,858, of total orders.

Backlog was ~~down 4% to $90,531~~$85,199 at ~~December 31, 2010,~~June 30, 2011, compared with ~~a record $94,255 backlog~~$91,096 at March 31, ~~2010. The current backlog includes Energy Steel, which accounts for $8,625.~~2011, a 6% decrease. Backlog is defined as the total dollar value of orders received for which revenue has not yet been recognized. All orders in backlog represent orders from our traditional markets in established product lines. Approximately ~~70%~~80% to ~~80%~~85% of orders currently in backlog are expected to be converted to sales within the next twelve months. This ~~differs from~~is lower than our normal conversion, ~~rate,~~ which is approximately 85% to 90% ~~of backlog converting to sales~~ over ~~a twelve-month~~an upcoming 12-month period. ~~Our~~The difference in our current backlog ~~conversion period has been lengthened due to a small number of large projects (especially~~includes the Northrop Grumman project for the U.S. ~~Navy), with extended delivery requirements.~~Navy. While a significant portion of the Navy project is expected to convert in fiscal 2012, over 50% of the project is expected to still be in the backlog at the end of fiscal 2012. At ~~December 31, 2010, 38%~~June 30, 2011, 30% of our backlog was attributable to equipment for refinery project work, ~~8% to~~10% for chemical and petrochemical projects, 21% for power projects, including nuclear, and ~~54%~~39% for other ~~commercial~~industrial or ~~industrial~~commercial applications (including the Northrop Grumman ~~order for the U.S. Navy)~~order). At ~~December 31, 2009, 40%~~June 30, 2010, 38% of our backlog was attributed to equipment for refinery project work, ~~20% to~~13% for chemical and petrochemical projects, 12% for power projects, and ~~40%~~37% for other ~~commercial~~industrial or ~~industrial~~commercial applications.

At March 31, ~~2010,~~2011, our backlog included ~~four orders~~one order with a value of ~~$6,655~~$1,130 that ~~had been~~was placed on hold (suspended) pending further customer evaluation. During the ~~nine~~three months ended ~~December 31, 2010, two~~June 30, 2011, the order was released for production and is expected to ship in the next 12 months. No orders ~~valued at $4,278 were returned to active status and one order valued at $1,588 was cancelled. Production had started~~in the current backlog are on the cancelled project prior to such order being put on hold and the customer requested shipment of the partly completed project on an “as is” basis. At December 31, 2010, one order included in backlog with a value of $1,130 remained on hold (suspended).hold.

Outlook

~~Sales have begun to improve, as evidenced~~We believe that we are in the early stages of a recovery in the refinery and petrochemical markets. We also believe the improved strength of the alternative energy markets and the U.S. nuclear industry will continue into fiscal 2012. We experienced significant organic order growth in the second ~~and third quarters of fiscal 2011. Sales increased sequentially by 22% in the third quarter compared with the second quarter, at $19,215, up from $15,723 after an increase of 18% in the second quarter~~half of fiscal 2011, ~~compared~~supplemented by our acquisition of Energy Steel. We believe that with our current backlog of $85,199, the ~~first quarter of fiscal 2011 of $13,351. We expect the sequential sales growth, which occurred~~improved trend in order levels and our strong

pipeline, that our revenue will increase 30% to 40% over ~~the past two quarters of fiscal 2011, to continue into the fourth quarter of fiscal 2011. Sales in the first nine months of fiscal 2011 were $48,289. We expect sales for the full~~last fiscal year, to be between ~~$69,000~~$95 and ~~$72,000.~~

~~Orders~~$105 million, in fiscal 2012. Approximately, 16% to 20% of our revenue is expected to come from Energy Steel. In fiscal 2011, Energy Steel contributed 8% of our revenue, as we completed our acquisition late in the third quarter of fiscal 2011 of $17,784, including $839 from Energy Steel, were improved from the previous two trailing quarters and were about equivalent to the combined order total of $18,600 from the first two quarters of fiscal 2011. Our order activity was strong in fiscal 2010 and included a few very large orders with extended delivery schedules. With the addition of the Energy Steel backlog of $8,625, total backlog on December 31, 2010 was $90,531, just 4% below the March 2010 record level of $94,255.

We expect ~~near term~~fiscal 2012 order levels to continue to be variable ~~by quarter. While~~across the year, though we ~~have seen some improvements in the Middle East, Asia and recently, South America, it is not clear~~are optimistic that ~~the recovery in the international markets has fully taken hold. We also believe the domestic market in refining and chemical processing~~orders will be ~~relatively weak for~~similar to the ~~remainder~~second half of fiscal 2011 and ~~beyond. Although we are generally encouraged by~~ the ~~outlook, we anticipate that recovery will commence slowly, particularly~~first quarter of fiscal 2012 during which period they ranged from approximately $17 to $27 million and averaged $21 million. We continue to expect a strong international market, with pockets of strength in the U.S. ~~markets. We are encouraged at~~, especially in alternative energy and nuclear.

Normally, we convert 85% to 90% of our existing backlog to sales within a 12-month period. However, the ~~strength~~Northrop Grumman project for the U.S. Navy currently in our backlog is expected to convert to revenue over the next three fiscal years, with the majority of the ~~domestic nuclear market~~revenue expected to occur in fiscal 2012 and in the ~~opportunities that this will provide for us with the acquisition of Energy Steel.~~

~~For~~ fiscal year ending March 31, 2013. Therefore, our June 30, 2011 backlog is expected to extend beyond our historical level, and we expect to convert approximately 80% to 85% of it to sales ~~to increase~~over the next twelve months.

Our expected sales for fiscal 2012 assume the expected conversion of backlog as well as continued market improvement and investment by ~~11% to 16%, to between $69,000 and $72,000 when compared with fiscal 2010. This is at the~~our customers. The upper end of the range may be achieved by acceleration of projects by refining and petrochemical and alternative energy end users, our ~~previous guidance range, due~~historical customer base. In addition, increased focus on safety and redundancy projects at U.S. nuclear facilities may drive near term opportunities at Energy Steel. We do, however, anticipate more revenue concentration in fiscal 2012 than in prior years. Two orders, the U.S. Navy project and a Middle East refinery project, are expected to ~~the addition of Energy Steel~~account for ~~a few weeks of the third quarter and the entire fourth quarter~~approximately 25% of fiscal ~~2011.~~2012 revenue.

We ~~believe that our~~expect gross profit margin ~~for~~in fiscal ~~2011 will~~2012 to be in the ~~28%~~29% to ~~30%~~32% range. ~~This~~The full year expected margin level ~~is below~~represents an increase from fiscal 2011, which included some lower margin projects won during the depths of the downturn in our markets. While we still have a few lower margin projects in our backlog, the overall margin within our backlog has improved compared with the start of fiscal 2011. We expect that the current shift of business in the refining and petrochemical market toward international markets, where margins are generally lower than domestic project margins, will have the effect of reducing our margins.

Historically, at the start of a recovery we have experienced margins that are somewhat less compared with later in the recovery. Due to changes in geographical markets and end use markets, we expect gross margins are unlikely to reach the 40% range achieved in the prior up cycle. We believe long-term up cycle gross profit margin level we achieved in fiscal 2010, which had improved margins in the first two quarters resulting from raw material purchasing benefits. We expect that our margins in fiscal 2011 will be affected by the following:

	•		~~A significantly enhanced competitive environment, as we and our competitors have been aggressively pursuing fewer projects.~~

	•		~~A shift toward international markets, where margins are generally lower when compared with domestic projects.~~

	•		~~Continued expected underutilization of capacity, especially in the first two quarters of fiscal 2011.~~

~~Gross profit margins are expected to improve beyond fiscal 2011 as volumes increase. We believe the gross profit margin percentage at the peak of the next cycle will be~~ in the mid-to-upper ~~30% range.~~30’s is a more realistic expectation. We also expect this recovery will continue to be more focused on emerging markets, which historically have lower margins and more competitive pricing than developed markets.

Factors that may positively impact our margin projections include: (i) increased volume that increases utilization of capacity; (ii) continued improvements in our manufacturing productivity; and/or (iii) expanded margin opportunities at Energy Steel.

SG&A spending is expected to beincrease during fiscal 2012 to between ~~$12,400~~$16,000 and ~~$12,800 for fiscal 2011, excluding~~$17,000. This includes the ~~$656 transaction costs related to the~~full year impact of Energy Steel ~~acquisition.~~(compared with 3¹/2 months in fiscal 2011). In addition to Energy Steel, we continue to invest in personnel as we prepare for increased opportunities in fiscal 2012 and beyond. Our effective tax rate during fiscal ~~2011~~2012 is expected to be between 33% and ~~34%, absent one time adjustments.~~35%.

Cash flow in fiscal ~~2011~~2012 is expected to be ~~negative due~~positive, driven by improved net income and the minimal need for additional working capital despite the significant increase in revenue. We also expect to ~~our acquisition of Energy Steel, which utilized $17,882~~see reductions in ~~cash, and~~unbilled revenue, partly offset by the drawdown of customer deposits ~~(which~~which have ~~decreased 36% to $14,368 on December 31, 2010). Customer deposits grew in~~been atypically high since the fourth quarter of fiscal ~~2010 from $5,461 at December 31, 2009 to $22,022 at March 31,~~ 2010. ~~The increase in customer deposits was due to a small number of major customers who provided upfront negotiated cash payments to assist in lowering our cost to complete their projects. This cash was~~

Contingencies and will continue to be utilized to procure materials for these customers’ projects through fiscal 2013. We also expect to spend $2,800 to $3,300 in capital spending, above our typical $1,500 to $2,000 range, due to a $1,500 capital project required for the project for the U.S. Navy.

Commitments ~~and Contingencies~~

We have been named as a defendant in certain lawsuits alleging personal injury from exposure to asbestos contained in our products. We are a co-defendant with numerous other defendants in these lawsuits and intend to vigorously defend ~~ourselves~~ against these claims. The claims are similar to previous asbestos lawsuits that named us as a defendant. Such previous lawsuits either were dismissed when it was shown that we had not supplied products to the

plaintiffs’ places of work or were settled by us for amounts below expected defense costs. Neither the outcome of these lawsuits nor the potential for liability can be determined at this time.

From time to time in the ordinary course of business, we are subject to legal proceedings and potential claims. As of ~~December 31, 2010,~~June 30, 2011, other than noted above, we were unaware of any other material litigation matters.

Critical Accounting Policies, Estimates, and Judgments

Our unaudited condensed consolidated financial statements are based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make significant assumptions. We believe that the most critical accounting estimates used in the preparation of our condensed consolidated financial statements relate to labor hour estimates used to recognize revenue under the percentage-of-completion method, accounting for business combinations, goodwill and intangible asset impairment, accounting for income taxes, accounting for contingencies, under which we accrue a loss when it is probable that a liability has been incurred and the amount can be reasonably estimated, and accounting for pensions and other postretirement ~~benefits and determining fair value estimates as they relate to assets acquired and liabilities assumed in business combinations.~~benefits. For further information, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 “Financial Statements and Supplementary Data” included in our Annual Report on Form 10-K for the year ended March 31, ~~2010.~~2011.

Off Balance Sheet Arrangements

We did not have any off balance sheet arrangements as of ~~December 31, 2010~~June 30, 2011 or March 31, ~~2010,~~2011, other than operating ~~leases.~~leases and letters of credit.


~~Item 3.~~		~~Quantitative and Qualitative Disclosures About Market Risk~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The principal market risks (i.e., the risk of loss arising from changes in the market) to which we are exposed are foreign currency exchange rates, price risk and project cancellation risk.

The assumptions applied in preparing the following qualitative and quantitative disclosures regarding foreign currency exchange rate, price risk and project cancellation risk are based upon volatility ranges experienced by us in relevant historical periods, our current knowledge of the marketplace, and our judgment of the probability of future volatility based upon the historical trends and economic conditions of the markets in which we operate.

In the first ~~nine months~~quarter of each of fiscal ~~2011~~2012 and fiscal ~~2010,~~2011, all sales by us and our wholly-owned ~~Chinese subsidiary,~~subsidiaries, for which we were paid, were denominated in the local currency ~~(the vast majority of which were in U.S.~~(U.S. dollars ~~with a small amount of sales denominated in~~or Chinese RMB). At certain times, we may enter into forward foreign currency exchange agreements to hedge our exposure against potential unfavorable changes in foreign currency values on significant sales contracts negotiated in foreign currencies.

We have limited exposure to foreign currency purchases. In the first ~~nine months~~quarter of fiscal ~~2011~~2012 and ~~2010,~~2011, our purchases in foreign currencies represented 1% and 1%2%, respectively, of the cost of products sold. At certain times, we may utilize forward foreign currency exchange contracts to limit currency exposure. Forward foreign currency exchange contracts were not used in the periods being reported on in this Quarterly Report on Form 10-Q and as of ~~December 31, 2010~~June 30, 2011 and March 31, ~~2010,~~2011, we held no forward foreign currency contracts.

Price Risk

Operating in a global marketplace requires us to compete with other global manufacturers which, in some instances, benefit from lower production costs and more favorable economic conditions. Although we believe that our customers differentiate our products on the basis of our manufacturing quality and engineering experience and excellence, among other things, such lower production costs and more favorable economic conditions mean that certain of our competitors are able to offer products similar to ours at lower prices. Moreover, the cost of metals and other materials used in our products have experienced significant volatility. Such factors, in addition to the global effects of the recent volatility and disruption of the capital and credit markets, have resulted in downward demand and pricing pressure on our products.

Project Cancellation and Project Continuation Risk

~~As described in Note 3~~Economic conditions over the past few years have led to ~~the Condensed Consolidated Financial Statements included in Item 1~~a higher likelihood of ~~this report, at March 31, 2010,~~project cancellation by our ~~backlog included four orders with a value of $6,655 that had been placed~~customers. Our last project on hold, ~~(suspended) pending further customer evaluation. During~~in the nine months ended December 31, 2010, two orders valued at $4,278 were returned to active status and one order valued at $1,588 was cancelled. Production had started on the cancelled project prior to such order being put on hold and the customer requested shipment of the partly completed project on an “as is” basis. At December 31, 2010, one order included in backlog with a valueamount of $1,130, ~~remained~~was released in April 2011. Currently, we have no projects on ~~hold (suspended).~~hold. We attempt to mitigate the risk of cancellation by structuring contracts with our customers to maximize the likelihood that progress payments made to us for individual projects cover the costs we have incurred. As a result, we do not believe we have a significant cash exposure to projects which may be cancelled.

Open orders are reviewed continuously through communications with customers. If it becomes evident to us that a project is delayed well beyond its original shipment date, management will move the project into ~~placed~~“placed on ~~hold (suspended)~~hold” (i.e., suspended) category. Furthermore, if a project is cancelled by our customer, it is removed from our backlog.

Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, and as of such date, our President and Chief Executive Officer and Vice President-Finance & Administration and Chief Financial Officer concluded that our disclosure controls and procedures were effective in all material respects.

Changes in internal control over financial reporting

~~Other than the events discussed under the section entitled Energy Steel acquisition below, there~~There has been no change to our internal control over financial reporting during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or that is reasonably likely to materially affect our internal control over financial reporting.

~~Energy Steel Acquisition~~

On December 14, 2010, we acquired Energy Steel, a code fabrication and specialty machining company dedicated exclusively to the nuclear power industry and located in Lapeer, Michigan. For additional information regarding the acquisition, refer to Note 2 to the Unaudited Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 2 in this Quarterly Report on Form 10-Q.

As permitted by Securities and Exchange Commission guidance, we plan to exclude the Energy Steel acquisition from the scope of our Sarbanes-Oxley Section 404 report on internal control over financial reporting for the fiscal year ending March 31, 2011. We are in the process of implementing our internal control structure over the Energy Steel acquisition and we expect that this effort will be completed during the fiscal year ending March 31, 2012.

3229

GRAHAM CORPORATION AND ~~SUBSIDIARY~~SUBSIDIARIES

FORM 10-Q

~~December 31, 2010~~June 30, 2011

PART II — OTHER INFORMATION


~~Item 1A.~~		~~Risk Factors~~

~~Our acquisition of Energy Steel & Supply Co. may not be successful.~~Item 6. Exhibits

On December 14, 2010, we acquired Energy Steel & Supply Co., which provides products to the nuclear industry. We cannot provide any assurances that we will be able to integrate the operations of Energy Steel without encountering difficulties, including unanticipated costs, difficulty in retaining customers and supplier or other relationships, failure to retain key employees, diversion of management’s attention, failure to integrate our information and accounting systems or establish and maintain proper internal control over financial reporting, any of which would harm our business and results of operations.

Furthermore, we may not realize the revenue and net income that we expect to achieve or that would justify our investment in Energy Steel, and we may incur costs in excess of what we anticipate. To effectively manage our expected future growth, we must continue to successfully manage our integration of Energy Steel and continue to improve our operational systems, internal procedures, accounts receivable and management, financial and operational controls. If we fail in any of these areas, our business and results of operations could be harmed.

~~Our acquisition of Energy Steel might subject us to unknown liabilities.~~

Energy Steel may have unknown liabilities, including, but not limited to, product liability, workers’ compensation liability, tax liability and liability for improper business practices. Although we are entitled to indemnification from the seller of Energy Steel for these and other matters, we could experience difficulty enforcing those obligations or we could incur material liabilities for the past activities of Energy Steel. Such liabilities and related legal or other costs could harm our business or results of operations.


~~Item 2.~~		~~Unregistered Sales of Equity Securities and Use of Proceeds~~

Under our previously announced stock repurchase program, we may make repurchases of our common stock from time to time either in the open market or through privately negotiated transactions and fund such repurchases with current cash on hand and cash generated from operations. Our stock repurchase program terminates at the earlier of the expiration of the program in July 2011, when all 1,000 shares authorized thereunder are repurchased or when our Board of Directors otherwise determines to terminate the program. Common stock repurchases in the quarter ended December 31, 2010 were as follows:

(c)⁽¹⁾ (d)
Total Number Maximum
of Shares Number of
Purchased Shares that
(a) (b) As Part of May Yet
Total Average Publicly Be Purchased
Number Price Announced Under
of Shares Paid Per Plans or The Plans or
Period Purchased Share Programs Programs
10/1/2010 — 10/31/2010 10 $ 14.98 362 638
11/1/2010 — 11/30/2010 — — 362 638
12/1/2010 — 12/31/2010 — — 362 638

Total 10 $ 14.98 362 638


~~(1)~~		~~The total number of shares repurchased as part of our publicly announced program includes all shares repurchased since the commencement of the stock repurchase program on January 29, 2009.~~


~~Item 6.~~		~~Exhibits~~

See index to exhibits on page 3633 of this report.

3430

INDEX TO EXHIBITS


(10)	Material Contracts

⁺#
~~(3)~~10.1	~~(ii)~~		~~Bylaws~~Form of Employee Performance-Vested Restricted Stock Agreement.

#		10.2
						~~3.2~~	~~Amended~~Compensation information, including salary and ~~Restated By-Laws of Graham Corporation, are incorporated herein by reference from Exhibit 3.2 to~~fiscal 2012 cash bonus program information, previously filed on the Company’s Current Report on Form 8-K dated ~~October 28, 2010.~~March 24, 2011, is incorporated herein by reference.

		~~(10~~	)		~~Material Contracts~~

		*				~~10.1~~	Stock Purchase Agreement dated December 14, 2010 by and among Graham Corporation, ES Acquisition Corp., Energy Steel & Supply Co. and Lisa D. Rice, individually, and as Trustee of the Lisa D. Rice Revocable Trust dated June 5, 2003.

		*				~~10.2~~	Earn Out Agreement dated December 14, 2010 by and between Energy Steel Acquisition Corp., Graham Corporation and Lisa D. Rice, individually, and as Trustee of the Lisa D. Rice Revocable Trust dated June 5, 2003.

		*	#			10.3		~~Escrow Agreement dated December 14, 2010 by~~Compensation information, including information regarding restricted stock grants made to the Company’s named executive officers under the Amended and ~~among PNC Bank, National Association, ES Acquisition Corp. and Lisa D. Rice, individually and as Trustee of the Lisa D. Rice Revocable Trust dated June 5, 2003.~~

		*				~~10.4~~	~~Lease Agreement by and between ESSC Investments, LLC, Energy Steel & Supply Co., and~~Restated Graham Corporation ~~dated December 14, 2010.~~

						~~10.5~~	~~Loan Agreement between the Company~~Incentive Plan to Increase Shareholder Value and ~~Bank of America, N.A., dated December 3, 2010, is incorporated herein by reference from Exhibit 99.1 to~~named executive officer cash bonus information, previously filed on the Company’s Current Report on Form 8-K dated ~~December 3, 2010.~~

						~~10.6~~	~~Trademark Security Agreement Amendment 1 between the Company and Bank of America, N.A., dated December 3, 2010,~~May 26, 2011, is incorporated herein by ~~reference from Exhibit 99.2 to the Company’s Current Report on Form 8-K dated December 3, 2010.~~reference.

		~~(31~~	)(31)		Rule 13a-14(a)/15d-14(a) Certifications

		*	⁺			31.1		Certification of Principal Executive Officer

		*	⁺			31.2		Certification of Principal Financial Officer

(32)	Section 1350 Certification

⁺
		~~(32~~	)32.1		Section 1350 Certifications

(101)	Interactive Date File

*⁺		101.INS			XBRL Instance Document

*⁺		101.SCH			XBRL Taxonomy Extension Schema Document

*⁺		101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document

*⁺		101.DEF			XBRL Taxonomy Extension Definition Linkbase Document

*⁺		101.LAB		~~32.1~~	XBRL Taxonomy Extension Label Linkbase Document

*⁺		~~Section 1350 Certifications~~101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document


*⁺		Exhibits filed with this report.

*		Pursuant to Rule 406T of Regulation S-T, the information in this exhibit shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement, prospectus or other document filed under the Securities Act of 1933, or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filings.

#		Management contract or compensation plan.

3632


	Page
Part I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements		54
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative ~~Disclosures~~Disclosure About Market Risk		3027
Item 4. Controls and Procedures		31
		29
Part II. OTHER INFORMATION
Item ~~1A. Risk Factors~~		33
~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~		34
~~Item~~ 6. Exhibits		3430
Signatures		3531
Index to Exhibits		3632
EX-10.1
~~EX-10.2~~
~~EX-10.3~~
~~EX-10.4~~
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT


	GRAHAM CORPORATION
	By:	/s/Jeffrey Glajch
		Jeffrey Glajch
		Vice ~~President - Finance~~President-Finance & Administration and Chief Financial Officer


1)		Working capital ratio equals current assets divided by current liabilities.


~~Item 4.~~		~~Controls and Procedures~~

Large accelerated filero

Accelerated filerþ

Non-accelerated filero

Smaller reporting companyo

(Do not check if a smaller reporting company)