Graham Corporation (GHM) Q3 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
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.
Key Financial Performance
Revenue $56.7 million, an increase of 21% year-over-year. The increase was driven by solid performance across end markets, timing of key project milestones, particularly within the defense business, contributions from new programs, and continued growth across existing platforms.
Adjusted EBITDA $6 million, an increase of 50% year-over-year. The improvement reflects disciplined execution, ongoing productivity initiatives, and the scalability of the operating model as volumes continue to grow.
Backlog $515.6 million, up 34% year-over-year. The increase was driven by strong bookings and a book-to-bill ratio of 1.3x, providing excellent visibility with approximately 35% to 40% expected to convert to revenue over the next 12 months.
Sales to Defense Market Increased by $8.3 million year-over-year. The growth was driven by the timing of project milestones, contributions from new programs, better pricing, and growth across existing programs.
Sales to Energy and Process Market Increased by $2.1 million or 13% year-over-year. The growth reflects continued strength in aftermarket sales, momentum in new energy markets, and particularly in SMRs.
Aftermarket Sales $10.8 million, up 11% year-over-year. The increase demonstrates demand across the global installed base.
Gross Profit $13.5 million, an increase of 15% year-over-year. Gross margin was 23.8%, reflecting a year-over-year decline of 100 basis points due to sales mix and the absence of a prior year benefit from the BlueForge Alliance grant.
Net Income $0.25 per diluted share, with adjusted net income at $0.31 per diluted share. The increase reflects improved operating leverage and disciplined cost control.
Orders $71.7 million, driven by strong demand in the defense and space markets. Energy and Process orders were slightly down due to lower aftermarket orders and delays in large capital projects, but growth in new energy orders, particularly SMRs, offset this.
Operating Cash Flow $4.8 million for the quarter, reflecting strong cash flow generation.
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Operating Highlights
Xdot Bearing Technologies acquisition: Acquired Xdot Bearing Technologies, an engineering-led firm with patented foil bearing technology. This acquisition enhances capabilities in high-speed rotating machinery and strengthens competitive positioning in aerospace, defense, energy transition, and industrial applications.
FlackTek acquisition: Acquired FlackTek, a leader in advanced mixing and materials processing solutions, for $35 million with potential performance-based earn-outs of up to $25 million. This acquisition adds a third core technology platform and expands Graham's addressable market with innovative products like the MEGA platform.
Defense market expansion: Completed a $17.6 million Navy manufacturing facility in Batavia, New York, supported by a $13.5 million customer grant. This facility enhances capacity and capabilities for U.S. Navy programs.
Energy and Process market: Completed renovation of assembly and test facility in Arvada, Colorado, and expanded engineering and service footprint in India. These initiatives improve flexibility, execution, and cost efficiency.
Space market: Completed liquid nitrogen testing capability in Arvada and a new cryogenic test facility in Jupiter, Florida, enhancing in-house testing capacity for transitioning programs to higher production rates.
Revenue growth: Revenue increased 21% to $56.7 million, driven by strong performance across end markets and timing of key project milestones.
Backlog and visibility: Backlog reached a record $515.6 million, up 34% year-over-year, with 35%-40% expected to convert to revenue in the next 12 months.
Adjusted EBITDA: Adjusted EBITDA increased 50% to $6 million, reflecting disciplined execution and productivity initiatives.
Organic investments: Invested in new facilities, automated welding, and AI tools to enhance throughput, quality, and scalability.
Strategic acquisitions: Acquired Xdot and FlackTek to strengthen technology platforms and expand market reach, aligning with long-term growth and margin expansion goals.
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Risk or Challenges
Tariffs impact: The company estimates that tariffs have impacted results by approximately $1 million for the first 9 months of fiscal 2026, with a full-year expected impact of $1 million to $1.5 million. This reflects challenges in sourcing and navigating the uncertain tariff environment.
Macroeconomic environment: There is some slowing in large CapEx purchases driven by lower oil prices, tariffs, and an uncertain macroeconomic environment, which could impact demand in the energy and process markets.
Sales mix and material receipts: Gross margin declined year-over-year due to sales mix, which included a higher level of material receipts that carry lower margins. This could affect profitability if the trend continues.
Acquisition integration costs: Higher acquisition and integration costs related to the Xdot and FlackTek acquisitions increased SG&A expenses, which could pressure margins in the short term.
Defense program execution: The company is heavily reliant on long-cycle Navy programs, which require precise execution. Any delays or quality issues could impact revenue and profitability.
Aftermarket orders and large capital projects: Energy and Process orders were down slightly due to lower aftermarket orders and delays in large capital projects, which could affect future revenue.
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Guidance & Outlook
Revenue Expectations: Revenue for fiscal 2026 is expected to be in the range of $233 million to $239 million, representing a 12% increase at the midpoint of the range.
Adjusted EBITDA Projections: Adjusted EBITDA for fiscal 2026 is projected to be between $24 million and $28 million, reflecting a 16% increase at the midpoint.
Backlog Conversion: Approximately 35% to 40% of the current backlog is expected to convert to revenue over the next 12 months, with an additional 25% to 30% converting within 1 to 2 years.
Organic Revenue Growth: The company targets 8% to 10% organic revenue growth per year over the long term.
Adjusted EBITDA Margin: The company aims to achieve low to mid-teen adjusted EBITDA margins by fiscal 2027.
Market Trends: Demand in defense and space markets remains strong, while energy and process markets are experiencing some slowing in large CapEx purchases due to lower oil prices, tariffs, and macroeconomic uncertainty.
Capital Expenditures: Investments in capacity expansion and productivity improvements are ongoing, with $2.8 million spent in the third quarter of fiscal 2026.
Acquisition Impact: The recent acquisitions of FlackTek and Xdot are expected to enhance revenue visibility, expand market opportunities, and contribute to long-term growth and margin expansion.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:What is the company's perspective on the demand in the defense sector and their CapEx allocation strategy?
A:The defense platform, particularly strategic undersea programs, remains healthy with strong demand. The company has been making investments for several years, improving efficiency and capacity. They plan to continue investing 7%-10% of revenue, balancing internal investments with marine industrial base opportunities.
Q:What is the company's M&A strategy, particularly after the acquisition of FlackTek?
A:The company focuses on nurturing long-term relationships and seeks partners who want to grow with them. FlackTek adds a third platform alongside Graham Manufacturing and Barber-Nichols. The focus will remain on these three platforms for now, with potential for additional platforms in the future through spinouts or acquisitions.
Q:How is the company pursuing new work from the Navy beyond existing programs?
A:The company leverages its core competencies, such as precision fabrication and high-speed rotating machines, to pursue new opportunities. They are bolstering their commercialization strategy to proactively offer value to customers, moving beyond their typical inbound strategy.
Q:How is the company achieving growth in existing defense programs?
A:The company is winning additional scope within current programs, including solicitations for spare assets. They are also meeting customer requirements effectively, leading to new opportunities in areas like undersea submarine platforms and laser/radar cooling platforms for directed energy.
Q:What is the company's perspective on the long-term book-to-bill ratio and its current performance?
A:The company targets a long-term book-to-bill ratio of 1.1 to support 8%-10% organic growth. While the year-to-date ratio is 1.6, they expect to exceed the 1.1 target this year but maintain it as a long-term goal.
Q:What are the addressable markets and adjacencies for FlackTek?
A:FlackTek's advanced mixing technology aligns with the company's engineering expertise. It serves markets like medical, personal care, and battery technology, offering disruptive solutions. The focus is on engineered, differentiated, technology-driven solutions with a market-agnostic footprint.
Q:Are there any restrictions on FlackTek's partnership with Anduril regarding solid rocket motor mixing?
A:The partnership with Anduril does not restrict FlackTek from selling dual asymmetric mixing machines to others, except for the MEGA product line under specific conditions. The company sees broad opportunities in energetics and other markets.
Q:What is the company's focus for FlackTek's future growth and market potential?
A:The focus is on production-level machines, including the MEGA product line. While the total addressable market is not quantified, the technology has broad applicability across various industries, offering significant growth potential.
Q:What is the visibility and impact of material receipts on gross margin?
A:Material receipts are lumpy and impacted Q2 and Q3 results. They are expected to normalize in Q4 and beyond. Orders are placed only after receiving customer orders, and the company has visibility for about a year.
Q:What are the recent facility enhancements and their impact on the business?
A:The company has delivered assets from the liquid nitrogen test facility and brought online assembly and test facilities, impacting Q3 results. These investments are aimed at achieving fiscal 2027 targets, with gradual performance improvements.
Q:How is the activity at the testing facilities in Jupiter, Florida, and Colorado progressing?
A:The Arvada facility is focused on a specific production program with a healthy pipeline. The Jupiter facility is prioritizing commissioning and testing products in the backlog, with active conversations for future opportunities.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the total addressable market for FlackTek's MEGA product line and used broad language to describe its market potential. Additionally, they did not provide precise timelines or quantifiable impacts for some facility enhancements and testing activities.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Barber Nichols
FlackTek technology
MEGA
Nichols turbomachinery
Xdot
acquisition FlackTek
application customer
bladeless
customer base
cycle
durability
economics
efficiency
end market
engineering
facility Batavia
foil
heat transfer
investment capability
investment throughput
market defense
material processing
mission application
mixing
precision repeatability
production
purchase
quality
scalability
scale
service
speed
technology platform
unit
vacuum heat
value chain
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.
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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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