Graham Corporation (GHM) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reveals strong financial performance with a 15% increase in aftermarket sales and a 12% rise in gross profit. Despite maintaining guidance, the company has strategic investments and new facilities that are expected to drive growth. The Q&A section indicates healthy backlog and customer interest, minimal impact from government shutdowns, and promising developments in various markets. While some details were vague, the overall sentiment is positive due to strong revenue growth, strategic investments, and diversified defense orders.
Key Financial Performance
Revenue $66 million, an increase of 23% year-over-year. The growth was driven by solid performance across all end markets, particularly due to the timing of key project milestones, material receipts in the defense business, contributions from new programs, and growth in existing platforms.
Adjusted EBITDA $6.3 million, an increase of 12% year-over-year. Adjusted EBITDA margin expanded by 40 basis points to 10.8%, reflecting continued focus on operational execution and profitable growth.
Bookings $83.2 million, resulting in a book-to-bill ratio of 1.3x. This was driven by strong demand across defense, space, and energy and process markets, including a $25.5 million follow-on contract for the MK48 Mod 7 Heavyweight Torpedo program.
Backlog $500.1 million, up 23% year-over-year. Approximately 35% to 40% of this backlog is expected to convert to revenue over the next 12 months, with roughly 85% attributable to the defense market.
Sales to Defense Market Increased by $9.9 million or 32% year-over-year. This was primarily due to the timing of project milestones, material receipts, and growth across new and existing programs.
Sales to Energy and Process Market Increased by $2 million or 11% year-over-year. This was driven by the timing of larger capital projects and continued strong aftermarket sales.
Aftermarket Sales $9.8 million for the quarter, slightly above the prior year period. When combined with the first fiscal quarter, aftermarket sales are up 15% year-to-date, reflecting resilient demand for aftermarket support across the global installed base.
Gross Profit $14.3 million, an increase of 12% year-over-year. Gross margin was 21.7%, impacted by an unusually high level of material receipts that carry lower margins, reducing gross margin by approximately 180 basis points.
Operating Cash Flow $13.6 million for the quarter, reflecting strong working capital conversion tied to milestone receipts, advanced payments, and strong cash profitability.
Capital Expenditures $4.1 million for the quarter, focused on capacity expansion, automation, next-generation X-ray technology, and a new cryogenic testing facility in Florida.
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Operating Highlights
New Programs and Growth in Existing Platforms: Revenue grew 23% to $66 million, driven by contributions from new programs and growth in existing platforms.
Advanced Manufacturing Facility: A new 30,000 square foot advanced manufacturing facility in Batavia, New York, was inaugurated to support U.S. Navy programs. It incorporates advanced technologies and is expected to be fully operational by the end of fiscal 2026.
Space Market Orders: Barber-Nichols subsidiary booked $22 million in new orders for advanced turbomachinery and precision-engineered components in the commercial space launch market.
Acquisition of Xdot Bearing Technologies: Acquired Xdot Bearing Technologies, which specializes in foil bearing technology, to enhance capabilities in high-speed rotating machinery.
Defense Market: Strong momentum with U.S. Navy programs, including a $25.5 million follow-on order for the MK48 Mod 7 Heavyweight Torpedo program.
Energy and Process Market: Sales increased by $2 million, driven by large capital projects and aftermarket sales. Observing extended decision cycles on certain large global capital projects.
Space Market: Growing activity in commercial space launch and orbital infrastructure markets, supported by investments in testing infrastructure and cryogenic facilities.
Operational Execution: Adjusted EBITDA increased 12% to $6.3 million, with a margin expansion of 40 basis points to 10.8%.
Backlog and Book-to-Bill Ratio: Backlog reached a record $500.1 million, with a book-to-bill ratio of 1.3x. Approximately 35%-40% of the backlog is expected to convert to revenue in the next 12 months.
Inspection and Manufacturing Technologies: Investments in advanced inspection and manufacturing technologies, such as enhanced x-ray testing and automated welding systems, are coming online to improve throughput and precision.
Technology Investments: Investments in cryogenic testing facilities and CNC machining centers to support high-growth markets like space and energy.
M&A Strategy: Acquisition of Xdot Bearing Technologies aligns with the strategy to expand engineered solutions and enter high-performance markets.
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Risk or Challenges
Extended decision cycles on large global capital projects: The company is observing extended decision cycles on certain large global capital projects, which could delay revenue realization and impact financial performance.
Tariff impacts: The company estimates the impact of tariffs to be approximately $1 million for the first 6 months of fiscal 2026, with a full-year impact range narrowed to $2 million to $4 million. This could affect profitability.
Seasonal revenue fluctuations: The fiscal third quarter is typically the seasonally lowest revenue period due to normal holiday-related production schedules, which could impact quarterly financial performance.
Material receipts with lower margins: An unusually high level of material receipts carrying lower margins impacted gross margin by approximately 180 basis points in the quarter, which could affect profitability if this trend continues.
Lumpy order patterns: Orders remain inherently lumpy due to the multiyear nature of defense programs and large commercial contracts, which could lead to revenue volatility.
Dependence on defense market: Approximately 85% of the total backlog is attributable to the defense market, indicating a high dependency on this sector, which could pose risks if demand weakens.
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Guidance & Outlook
Revenue Expectations: Approximately 35% to 40% of the current backlog is expected to convert to revenue over the next 12 months. The company reaffirms its full-year guidance for all key financial metrics, including revenue.
Defense Market Outlook: The company expects continued strong momentum in U.S. Navy programs, supported by investments in a new advanced manufacturing facility in Batavia, New York, which will be fully operational by the end of fiscal 2026. This facility will enhance throughput, quality, and capacity to meet rising demand.
Space Market Growth: The company anticipates revenue from new orders in the commercial space launch market to convert over the next 12 to 24 months. Investments in capacity and capabilities at Barber-Nichols, including new testing infrastructure, are expected to support higher production rates.
Energy and Process Market Trends: The company sees meaningful momentum in small modular nuclear reactors and cryogenic applications, with markets transitioning into commercial deployment. Demand fundamentals across all end markets remain healthy, though extended decision cycles on large global capital projects are observed.
Acquisition Impact: The acquisition of Xdot Bearing Technologies is expected to be slightly accretive to fiscal 2026 results. This acquisition strengthens the company's position in high-speed rotating machinery and expands its product portfolio.
Long-Term Financial Targets: The company remains on track to achieve fiscal 2027 targets of 8% to 10% organic revenue growth and low to mid-teen adjusted EBITDA margin.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:Can you clarify the $22 million in space and aerospace orders announced this morning? How much was recognized in Q2 versus Q3?
A:$15 million of orders were recognized in Q2, and the remaining $7 million will be recognized in Q3.
Q:Why was guidance maintained despite excellent revenue results for the quarter?
A:Guidance was maintained due to timing. The results for the first half of the year were consistent with expectations, and the company is tracking right on plan.
Q:Can you provide an update on the cryogenic facility and customer bookings?
A:The liquid nitrogen stand at Barber-Nichols in Colorado has been commissioned and tested. The propellant test facility in Florida is expected to receive occupancy soon, with internal product testing to follow. Customer product testing is expected to start within the calendar year. Backlog and customer conversations are healthy, and the focus is shifting to booking customers into the backlog.
Q:How much of the Q2 defense orders were Navy-related or related to carrier programs?
A:The bookings in Q2 were not directly connected to strategic platforms but were related to the larger defense scope, including torpedo and aftermarket pickups, as well as space bookings. The bookings were diversified.
Q:Are there any impacts from the government shutdown on the business?
A:The impact is minimal both in the near and long term. Tactical delays in government reviews and appropriations are occurring, but they do not disrupt outcomes significantly. Development-like programs are experiencing some delays in issuing work.
Q:What customer feedback has been received regarding the Xdot transaction, and where might the technology have the most significant impact?
A:Customers were not previously aware of the use of Xdot technology, but it has enabled entry into areas like small modular nuclear and fuel cell blowers. The transaction has sparked interest in machine upgrades and future opportunities, with the most significant impact likely in technology excellence.
Q:Can you provide more color on the size and timing of investments in the space market?
A:Investments are factored into the CapEx guidance for the year and will spill over into fiscal year '27. Investments are only made with orders to support them and must have a greater than 20% ROIC. Current orders reaffirm past investments and support facilities like the liquid nitrogen stand and the Florida test facility.
Q:What is the momentum in the small modular reactors market, and what is the timing for growth?
A:The company is in the early phases of development for small modular reactors, with products expected to go into the Idaho National Lab dome in the coming months/year. Long-term potential for scale exists, but growth will not happen overnight.
Q:What contributed to the $9.9 million growth in defense revenues?
A:The growth was primarily due to an unusually high level of material receipts, ranging from $8 million to $10 million, which allowed revenue recognition on a percentage completion basis. This also impacted gross margin by about 180 basis points.
Q:What is the company's focus and growth strategy over the next five years?
A:The company aims to maintain a 50-50 split between commercial and defense segments, leveraging commercial competitiveness and technology to disrupt the defense market. The split may vary based on opportunities.
Q:What are the opportunities in new torpedo programs, and how does Xdot's technology play a role?
A:The company is well-positioned as a key supplier for new torpedo platforms, independent of Xdot's technology. The new platforms address gaps like range, longevity, and reuse. Xdot's foil-bearing technology may provide additional advantages in propulsion or guidance systems.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the Navy's plans for new torpedo platforms and the exact gaps they aim to fill. Additionally, they did not disclose detailed customer feedback on the Xdot transaction or specific financial impacts of the investments in the space market.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Barber Nichols
Batavia New
Bearing Technologies
Bookings book
CEO Thome
CNC machining
Captain Commanding
Carrie today
Columbia partner
Commanding Officer
Cook risk
District Columbia
Navy program
Xdot
ability speed
capacity capability
capital project
cycle
efficiency
end market
engineering
expertise
foil
infrastructure
inspection
interest
launch
manufacturing
milestone
mission
momentum
platform
portfolio
precision
production
record backlog
scale
test
turbomachinery
GHM Transcript
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Positive2-6
The earnings call indicates strong demand in defense and space markets, improved net income, and strong cash flow. Investments in manufacturing facilities and strategic acquisitions align with long-term growth targets. Despite some concerns about sales mix and market potential specifics, the company's reaffirmed revenue guidance and ongoing strategic investments suggest a positive outlook. The Q&A section supports these views, highlighting strong defense demand and strategic growth initiatives.
Graham Corporation (GHM) Q2 2026 Earnings Call Transcript
Positive11-7
The earnings call reveals strong financial performance with a 15% increase in aftermarket sales and a 12% rise in gross profit. Despite maintaining guidance, the company has strategic investments and new facilities that are expected to drive growth. The Q&A section indicates healthy backlog and customer interest, minimal impact from government shutdowns, and promising developments in various markets. While some details were vague, the overall sentiment is positive due to strong revenue growth, strategic investments, and diversified defense orders.
Graham Corporation (GHM) Q1 2026 Earnings Call Transcript
Positive8-5
The earnings call summary indicates strong financial performance, strategic growth initiatives, and optimistic guidance, despite some uncertainties in margin sustainability. The Q&A highlights robust aftermarket sales, a growing defense backlog, and promising opportunities in nuclear and space sectors. While management is cautious about future margins, the overall sentiment is positive with a record backlog and strategic investments. The absence of significant hiring challenges and a clear strategy for international growth further support a positive outlook. These factors suggest a likely stock price increase of 2% to 8% over the next two weeks.
GHM Report
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