Graham Corporation (GHM) Q2 2027 earnings review
Graham profits and cash jump, but underlying sales shrink
Graham Corporation, a maker of fluid, power and heat-transfer hardware for naval ships, rockets and refineries, widened its profit margins even as underlying sales contracted. Reported revenue rose 6% to $70 million, but the newly acquired FlackTek mixing business supplied $9.5 million of that total, so sales from businesses owned a year ago fell 9% by our math on lower defense material receipts. Because those pass-through receipts carry thin margins, their absence helped lift gross margin by 6.5 percentage points and cash from operations to $47 million. Finance chief Christopher Thome kept the full-year sales and Adjusted EBITDA plan unchanged.
| Sales from businesses owned a year ago | -8.7% reported revenue $69.8M, +5.7% from a year ago (by our math) |
|---|---|
| Gross margin | 28.2% +6.5 percentage points from a year ago |
| Profit per share, excluding one-offs | $0.52 +68% from a year ago |
| Full-year sales and EBITDA outlook | Unchanged gross margin raised 0.5 pts, overhead raised 1.0 pt |
⚖️ Verdict: 🟢 Bullish
The standing story got better because factory execution and customer deposits eased the two biggest balance-sheet and margin worries. Gross margin topped 28% despite Defense reaching 66% of revenue, and $44 million of free cash flow by our math wiped out the first quarter's cash burn and left $71 million in cash with no debt. Two cautions offset part of that progress: higher acquisition overhead ate up the full-year gross margin raise, and management quietly trimmed the share of backlog expected to convert to sales over the next year from 35%–40% to 30%–35%.
The question now is whether the second quarter's margin jump is a lasting step toward the company's 2029 profitability target or a one-quarter windfall from fewer low-margin material receipts. By our math, the unchanged full-year outlook points to Adjusted EBITDA margin stepping back down to about 12% in the second half while revenue growth rebounds to 20%. Third-quarter gross margin and underlying sales growth will show whether the factory gains hold when normal defense shipments resume.
🐂 Bull Case
Product Mix and Execution Lifted Gross Margin
Graham builds fluid, power and heat-transfer equipment for submarines, rockets and refineries. Historically, a higher share of U.S. Navy work held down profitability because defense contracts carry lower margins than commercial orders.
This quarter broke that pattern. Defense grew to 66% of revenue, up from 62% a year ago, yet gross margin rose 6.5 percentage points to 28.2%. Cost of products sold fell by 6.5 percentage points of revenue. Management credited operational improvements, the addition of FlackTek — its newly acquired industrial mixing business — and fewer low-margin raw material pass-throughs than a year ago.
Finance chief Christopher Thome raised the full-year gross margin outlook by half a percentage point, to a range of 25.0% to 26.0%. Because first-half gross margin already sits at 26.6%, the new outlook still points to 24.5% in the second half by our math, so one strong quarter settles neither the defense mix drag nor the full-year margin debate.
What to watch: third-quarter gross margin alongside the defense share of sales. Holding gross margin above 25% while defense exceeds 60% of revenue would show that better factory execution has permanently offset the Navy mix drag.
Customer Deposits Turned Free Cash Flow Positive
Cash generation was a standing concern after Graham burned $15.3 million of free cash flow in the first quarter and ended last fiscal year slightly negative. Building custom defense and space hardware ties up cash in inventory and unbilled work before milestone payments arrive.
Those payments arrived in the second quarter. Operating cash flow reached $46.7 million, and after $2.2 million of capital spending, free cash flow hit $44.5 million by our math. Advance payments from customers — recorded on the balance sheet as customer deposits — rose by $27.4 million over the first six months to $129.7 million, while unbilled revenue dropped by $15.3 million as projects hit billing milestones.
The company ended September with $71.4 million in cash and no debt, helped by both the working-capital swing and the $50 million stock sale to T. Rowe Price in the first quarter. What to watch: operating cash flow in the second half as capital spending steps up by $10 million to $15 million to meet the full-year plan. Keeping free cash flow positive through the heavier spending half would put the cash-burn concern to rest.
Space Backlog Doubled and Held Revenue Gains
Graham is pushing into commercial space launch and propulsion cooling to reduce its reliance on U.S. Navy shipbuilding. Last quarter, chief executive Matthew Malone said the roughly $6.3 million quarterly space sales level was the new normal.
Second-quarter space sales reached $6.4 million, up 59% from a year ago, backing up Malone's claim. New space orders of $10.6 million ran at 1.7 times sales, lifting space backlog by 108% from a year ago to $49.6 million. Malone also noted the "successful completion of our first customer test at our new cryogenic testing facility and the groundbreaking of our new facility in Arvada", turning multi-year capital projects into working assets.
What to watch: organic space revenue growth in the fourth quarter, once the February 2026 FlackTek acquisition enters the prior-year comparison. Holding quarterly space sales above $6 million with a book-to-bill ratio above 1.0 would confirm that commercial space is expanding on its own.
🐻 Bear Case
Underlying Sales Shrank and Backlog Conversion Slowed
"Our record backlog of $561 million provides strong visibility into future growth and reinforces our confidence in the long-term opportunities ahead," chief executive Matthew Malone said. Headline sales rose 6% from a year ago to $69.8 million, and total backlog rose 12% to a seventh straight record.
The underlying numbers tell a slower story. FlackTek contributed $9.5 million of revenue this quarter, so sales from businesses Graham owned a year ago shrank 8.7% by our math. The company pointed to roughly $10.0 million of lower raw material receipts on defense contracts compared with last year's second quarter; stripping that $10.0 million out of last year's base leaves underlying growth at 7.6% by our math, still below the 8% to 10% annual target.
At the same time, management lowered the share of backlog it expects to turn into sales over the next 12 months from 35%–40% in prior quarters to 30%–35% today, and defense backlog — 83% of the total — dipped 1% from the first quarter. What to watch: next-12-month backlog conversion percentage and defense order intake in the third quarter. Another drop in the conversion range would mean multi-year Navy orders are stretching out rather than speeding up.
Higher Acquisition Overhead Offset Gross Margin Gains
While factory margins expanded, overhead costs grew faster than sales. Selling, general and administrative expense (including intangible amortization) jumped 34% from a year ago to $13.7 million, rising by 4.1 percentage points of revenue to 19.6%. That jump occurred even though a $1.1 million employee bonus for the Barber-Nichols unit ended last fiscal year and dropped out of costs.
- FlackTek ongoing overhead: added $2.3 million to quarterly SG&A expense
- Deal and integration costs: rose to $1.0 million in Q2, including earnout fair-value adjustments
- Full-year SG&A outlook: raised by 1 percentage point to 17.5%–18.5% of sales
- Costs excluded from Adjusted EBITDA outlook: raised to $6.0–$7.0 million from $5.5–$6.5 million in Q1
Finance chief Christopher Thome cited "minor updates to full-year fiscal 2027 guidance on gross margin based on mix and better execution, SG&A expense based on higher acquisition and integration related expenses". Because the 1-point rise in overhead ate up the 0.5-point raise in gross margin, the full-year Adjusted EBITDA plan stayed at $35 million to $40 million. What to watch: quarterly SG&A as a percentage of sales in the second half. A reading above 18% would show that new staffing and FlackTek costs are limiting operating leverage.
Foreign Project Delays Cut Energy and Process Sales
Graham's commercial refinery and petrochemical business, Energy and Process, provides higher-margin equipment and replacement parts. For two years, customers have delayed big construction projects, causing the segment's backlog to shrink.
Those delays hit the top line in the second quarter. Energy and Process sales fell 17% from a year ago to $17.6 million, even with FlackTek added in. The company blamed "softness in investments on large capital project activity caused by geopolitical uncertainties and decreases in sales to customers outside the U.S." Sales to Asia dropped 90% from a year ago to $0.4 million, leaving the United States at 93% of company revenue. One bright spot: Energy and Process orders held steady at $21.3 million, lifting segment backlog by 9% from the first quarter to $45.3 million, though still down 13% from a year ago.
What to watch: Energy and Process orders and aftermarket replacement-part sales next quarter. Aftermarket orders jumped 91% to $18.3 million this quarter, so a rebound in segment revenue will show whether spare parts can offset the missing international capital projects.
💲 Other KPIs
Backlog — signed orders not yet recognized as revenue — reached a record for a seventh straight quarter, up 12.2% from a year ago. Growth is slowing as last year's submarine orders enter the comparison base: quarterly orders fell 11.4% from a year ago to $73.7 million, leaving the book-to-bill ratio at 1.1 times sales.
Diluted shares rose 6.5% from a year ago, up from 11.14 million. The increase stems from issuing stock to accounts advised by T. Rowe Price for $50 million in the first quarter and paying 15% of the FlackTek purchase price in shares. The higher share count held per-share profit growth to 39% on a 50% rise in net income.
🔮 Guidance
Unchanged. The middle of the range calls for 18.2% growth this fiscal year. By our math, after $141.1 million of sales in the first half, the plan leaves $148.9 million for the second half, or 20.3% growth from a year ago — a sharp step-up from the second quarter's 5.7% pace. Graham beat its full-year revenue midpoint by an average of 3.2% over the past two years.
Unchanged. The plan points to 44.3% growth at the middle of the range and a 12.9% full-year margin. Because Graham already earned $19.1 million (a 13.5% margin) in the first half, the middle of the full-year outlook leaves $18.4 million, or a 12.4% margin, for the second half by our math — down from 14.8% in the second quarter.
Raised. Management lifted the full-year range by 0.5 percentage points after first-half gross margin reached 26.6%. By our math, the 25.5% middle of the new range leaves second-half gross margin at 24.5%, down 3.7 percentage points from the second quarter as normal defense material receipts resume.
Raised. The company increased its expected overhead ratio by 1 percentage point of sales to cover higher FlackTek acquisition and integration charges. First-half SG&A ran at 18.9% of sales, so reaching the 18.0% midpoint requires overhead to step down to about 17.1% of sales in the second half by our math.
Unchanged. The second-quarter tax rate ran at 22.3%, bringing the first-half rate to 15.8% after a low first-quarter tax bill. Hitting the 19% full-year midpoint requires a slightly higher tax rate in the second half than the first-half average.
Cut. Management lowered the middle of the capital spending plan by $2.5 million, to $17.5 million, citing the timing of major facility projects. Having spent $4.9 million in the first six months, the company still plans to spend $10.1 million to $15.1 million across the remaining two quarters.
❓ Key Questions
Why did the 12-month backlog conversion rate step down?
Management now expects 30% to 35% of its $561.3 million backlog to turn into sales over the next 12 months, down from 35% to 40% in recent quarters. Did U.S. Navy build schedules shift to the right, or did longer-dated orders change the mix?
How much did FlackTek contribute to Space and Defense?
FlackTek added $9.5 million to total sales, leaving company-wide underlying sales down 8.7% by our math. Without a segment breakdown of FlackTek's revenue, investors cannot see how much of the 59% Space growth and 12% Defense growth was organic.
Why did excluded adjustment costs rise for a second quarter?
The full-year Adjusted EBITDA outlook now excludes $6.0 million to $7.0 million of stock compensation, acquisition and software costs, up from $4.0 million to $5.0 million two quarters ago. Is the increase entirely FlackTek earnout accounting, or are integration costs running over budget?
What drives the 20% second-half revenue growth acceleration?
Reaching the $290 million full-year midpoint requires second-half sales to grow 20.3% from a year ago by our math, up from 5.7% in the second quarter, even though the third quarter is seasonally slow and FlackTek laps its acquisition date in January.