Graham Corporation (GHM) Earnings

Management highlights

- Overall Business Momentum & Strategic Execution: Graham delivered record first quarter revenue and a sixth consecutive quarter of record backlog, reaching $557 million. Management noted that multi-year strategic capacity and capability investments are now operational and driving improved performance, positioning the company for sustained profitable growth. 15% of backlog will convert to revenue over 12 months, with an additional 20-25% converting the following year, providing high earnings visibility. - Investment and Capacity Updates: Most prior strategic investments (Batavia Navy/X-ray facility, automated welding systems, Florida cryogenic testing facility, ERP modernization) are complete or near completion. The company is now constructing a new 30,000 square foot manufacturing facility on its Arvada campus to support growing turbo machinery demand, with all investments evaluated against a 20% ROIC hurdle rate. - Acquisition Integration: FlacTech integration is progressing ahead of plan, adding advanced materials processing as Graham's third core technology platform alongside vacuum/heat transfer systems and turbo machinery. Cross-selling opportunities with existing Graham customers in aerospace, defense and space are already emerging, particularly for FlacTech's MEGA mixing platform. - Market Development: The company is expanding beyond core legacy programs into attractive higher-margin adjacent defense and space applications, including thermal management for radar and directed energy systems, and solid rocket motor processing for missiles via FlacTech. New energy markets (small modular nuclear reactors, cryogenic applications) remain in early commercialization but show growing customer engagement.

Guidance

- Fiscal 2027 full-year guidance remains fully unchanged from prior updates: - Revenue is projected between $285 million and $295 million, representing 18% growth at the midpoint, supported by record backlog, full-year FlacTech contributions and broad-based demand. - Gross margin is expected to range between 24.5% and 25.5%, up from fiscal 2026, supported by operational improvements, automation and improved sales mix. - SG&A is projected between 16.5% and 17.5% of revenue, including ~$2.5 million in incremental growth-focused investments in people, processes and commercialization. - Adjusted EBITDA is projected between $35 million and $40 million, representing 44% growth at the midpoint. - Capital expenditures are expected between $18 million and $22 million, primarily for capacity expansion projects including the new Arvada manufacturing facility. - Long-term three-year financial framework (through fiscal 2029) also remains unchanged: the company targets 8% to 10% annual organic revenue growth and adjusted EBITDA margins expanding to 14% to 16% by fiscal 2029, with a long-term goal of top-quartile industrial performance.

Segment performance

Total company revenue for the quarter was a record $71.3 million, growing 29% year-over-year, with organic growth of 17% and 12% of total revenue contributed by acquired FlacTech. - Defense: Revenue increased 40% year-over-year, representing ~58% of total first quarter revenue. The segment received $61.8 million in new and follow-on orders during the quarter, driven by demand from U.S. Navy Columbia-class, Virginia-class submarine programs and the MK-48 Mod 7 heavyweight torpedo program. - Space: Revenue increased 86% year-over-year, representing ~18% of total first quarter revenue. Orders totaled $14.4 million for a 2.3x book-to-bill ratio, as development programs transition to production ramps. - Energy and Process: Revenue increased 5% year-over-year, representing ~30% of total first quarter revenue. Strength in 20% year-over-year growing aftermarket revenue and FlacTech contributions offset delays in large refining and petrochemical capital projects. Aftermarket revenue across defense and energy/process grew 20% year-over-year overall. - FlacTech (acquired business): Contributed $6.6 million in revenue (12% of total) and $13.2-13.3 million in orders for a ~2x book-to-bill ratio, in line with integration expectations.

Risks & headwinds

No new material risks or operational failures were explicitly discussed on the call. Management noted that forward-looking results are subject to general market risks and uncertainties that could cause actual outcomes to differ from projections, which are detailed in prior SEC filings. Specific known factors that impact near-term performance include lumpy order flow in high-value defense and space segments, timing of project milestones, and delayed execution of large capital projects in refining and petrochemical end markets.

Analyst Q&A

• Q: The 86% year-over-year growth in space revenue and 2.3x book-to-bill ratio suggests structural growth rather than just timing. Is this correct, and what is driving this strength? /

  A: Management confirmed structural growth began last year, with sustained higher revenue run rates becoming the new norm going forward. While quarterly orders will remain lumpy, the growth comes from long-running development programs that have now transitioned from development to production ramps, driving steady higher volume.

• Q: Eight months after acquiring FlacTech, what cross-selling or integration benefits have been realized so far? /

  A: Integration has gone extremely well, with FlacTech already benefiting from Graham's infrastructure and existing customer base. The clearest near-term cross-selling opportunities are in advanced aerospace, defense and space applications, such as high-performance adhesives for critical re-entry components, where FlacTech's advanced mixing technology outperforms legacy solutions.

• Q: What implications do recent large submarine program awards to General Dynamics and Huntington Ingalls have for Graham's order pipeline? /

  A: Some portions of the work tied to these awards are already in Graham's backlog, while others are still in the pipeline. The awards confirm the long-term strategic priority of submarine programs and industry plans to accelerate production, which creates sustained tailwinds for Graham. The company's prior capacity investments position it well to capture additional growth from these programs.

• Q: What drove the 230 basis point sequential increase in gross margin from the fourth quarter of fiscal 2026? /

  A: The main driver is sales mix variability: the fourth quarter of fiscal 2026 included a higher share of lower-margin defense revenue, alongside initial purchase accounting adjustments for the FlacTech acquisition that pressured margins sequentially. Defense revenue remained a majority of sales in the first quarter, but its share was slightly lower than the prior quarter, leading to the sequential margin improvement.

• Q: The recent MK-48 and MK-19 defense awards represent what sort of change to Graham's existing scope and wallet share on these programs? /

  A: The MK-48 award is a standard annual follow-on option for existing sole-sourced work, with no new additional scope. The MK-19 Mod 2 air turbine pump assembly award for submarine fleet spares was a new competitive solicitation win that expands Graham's scope to support fleet maintenance and spares, representing incremental wallet share growth on Navy programs.