Graham Q1 FY2027 earnings: Record sales came with margin pressure

Graham Corporation (NYSE: GHM) reported fiscal Q1 2027 net sales of $71.3 million, up 29% year over year, while GAAP diluted EPS fell 21% to $0.33 from $0.42. Adjusted EBITDA increased 28% to $8.8 million, but gross-margin contraction, higher expenses and negative operating cash flow showed that record revenue did not translate into broader GAAP profit growth.

Core Earnings Data

Revenue increased by $15.9 million, with the FlackTek acquisition contributing $6.6 million and growth spanning Defense, Space, and Energy & Process markets. Defense was the largest reported growth contributor.

Gross profit rose more slowly than revenue, and higher operating expenses pushed GAAP operating income and net income lower. In contrast, adjusted net income increased 16% to $5.7 million, adjusted diluted EPS rose 9%, and adjusted EBITDA margin remained unchanged.

Adjusted EPS and adjusted EBITDA are non-GAAP measures and exclude certain acquisition-related, equity-compensation, ERP and other items under Graham’s definitions.

Business and Market Performance

Defense sales increased by $11.8 million, or 40%, primarily because of project milestone timing, new programs and growth in existing programs. Space sales rose by $2.9 million, or 86%, supported by new programs, ramping existing programs and FlackTek. Energy & Process sales increased by $1.1 million, or 5%, as higher aftermarket sales were partly offset by delays in large capital projects.

Combined Defense and Energy & Process aftermarket sales reached $9.7 million, up 20%. This provided another source of growth alongside Graham’s larger project-based programs.

Orders totaled $95.9 million, below the prior-year quarter’s $125.9 million, which included $86.5 million of follow-on orders for the U.S. Navy’s Virginia Class Submarine program. Current-quarter activity included approximately $61.8 million of Defense orders, $14.4 million of Space orders and $13.2 million contributed by FlackTek; these categories should not be added together because they may overlap.

Approximately 35% to 40% of backlog is expected to convert to sales over the next 12 months, another 20% to 25% within one to two years, and the remainder after two years. Defense represented about 84% of backlog at June 30, 2026, providing visibility but also creating significant end-market concentration.

Sales Growth Did Not Flow Through to GAAP Profit

The quarter’s central issue was the divergence between record revenue and declining GAAP earnings. Gross margin fell 150 basis points because the sales mix included more Defense revenue and material receipts, which carry lower margins. As a result, gross profit increased 21%, eight percentage points slower than revenue.

SG&A, including intangible amortization, rose by approximately $3.2 million, or 33%, to about $13.1 million. Incremental FlackTek SG&A accounted for $1.8 million of the increase, while acquisition and integration expenses contributed another $0.6 million. Graham also continued investing in people, processes and technology, although these costs were partly offset by the absence of the $1.1 million Barber-Nichols Performance Bonus expense recorded a year earlier.

The share count also affected per-share results. Diluted weighted-average shares increased by approximately 6% to 11.7 million, helping explain why GAAP EPS declined 21% compared with a 15% decrease in net income. Similarly, adjusted EPS grew more slowly than adjusted net income.

Cash Flow and Balance Sheet

Operating activities used $12.7 million of cash, compared with $2.3 million used a year earlier. Major working-capital uses included a $16.0 million increase in accounts receivable, a $6.0 million increase in unbilled revenue, and lower accrued compensation and other liabilities. A $10.8 million increase in customer deposits provided a partial offset. The company also paid fiscal 2026 bonuses during the quarter.

Capital expenditures were $2.6 million and focused on capacity, capabilities and productivity. Operating cash flow less capital spending was therefore approximately negative $15.3 million for the quarter.

Despite the operating outflow, cash increased to $27.0 million from $6.6 million at the end of the previous quarter. The increase was primarily supported by a $50.0 million stock issuance, after which Graham repaid $13.0 million of debt. The company ended June with no outstanding debt and $74.5 million available under its revolving credit facility after outstanding letters of credit.

Fiscal 2027 Guidance

Graham reaffirmed its full-year fiscal 2027 guidance as of August 6, 2026. Management said first-quarter results were in line with its expectations and continued to emphasize converting backlog into profitable growth.

The outlook includes approximately $2.5 million of incremental spending on people, processes and technology. SG&A guidance also includes roughly $4 million to $5 million of equity compensation, net acquisition and integration costs, and ERP conversion costs. Adjusted EBITDA guidance excludes approximately $5.5 million to $6.5 million of specified items.

Risks Investors Need to Watch

• Margin mix: Higher Defense sales can support revenue and backlog while lowering gross margin when the mix includes lower-margin programs and material receipts.
• Working-capital conversion: Rising receivables and unbilled revenue contributed to a substantially larger operating cash outflow. Converting reported earnings and backlog into cash remains important.
• Backlog timing and concentration: Only 35% to 40% of backlog is expected to convert within 12 months, while 84% is tied to Defense. Backlog can also include funded and unfunded government orders subject to cancellation, termination or suspension provisions.
• Project delays and lumpy orders: Energy & Process capital projects experienced pushouts, and large Defense orders can produce significant quarter-to-quarter fluctuations.
• Investment and integration costs: FlackTek expenses, acquisition integration, ERP work and growth investments may continue to affect GAAP profitability while Graham works toward its margin objectives.

Summary

Graham’s fiscal Q1 2027 established new records for sales and backlog, supported by Defense, Space and FlackTek. However, lower gross margin, higher SG&A and working-capital outflows kept that growth from translating into higher GAAP earnings or cash generation. The main issues to monitor are backlog conversion, margin performance as Defense revenue grows, working-capital normalization and execution against the reaffirmed full-year guidance.