GHM Q2 Deep Dive: Backlog Strength and Margin Expansion Amid Tariff and Mix Uncertainty

Industrial fluid and energy systems manufacturer Graham Corporation (NYSE: GHM) fell short of the market’s revenue expectations in Q2 CY2025, but sales rose 11.1% year on year to $55.49 million. The company’s full-year revenue guidance of $230 million at the midpoint came in 1.3% below analysts’ estimates. Its GAAP profit of $0.42 per share was 78.7% above analysts’ consensus estimates.

Is now the time to buy GHM? Find out in our full research report (it’s free).

StockStory’s Take

Graham Corporation faced a negative market reaction following its Q2 results, despite posting double-digit sales growth and notable margin improvement. Management pointed to strong aftermarket performance and increased demand in both energy and defense markets as key drivers. CEO Matthew Malone emphasized that aftermarket sales surged 33% year-over-year, supporting gross margin expansion. However, Malone acknowledged the unusually high aftermarket mix this quarter may not be sustained, and highlighted that future quarters could see more normalized margins as business mix shifts and lower-margin projects are delivered.

Looking ahead, the company’s outlook is shaped by a robust order backlog and continued investment in manufacturing capacity and operational systems. Management expects new facilities, ongoing ERP system implementation, and expansion in cryogenic testing to support future growth. Malone noted, “Our foundation enables us to deliver consistent results while positioning Graham to achieve sustainable long-term growth.” The team cautioned that tariffs and a shifting mix could pressure margins, but remains focused on achieving its multi-year organic growth and profitability targets through operational improvements and strategic partnerships.

Key Insights from Management’s Remarks

Graham’s management attributed the quarter’s results to a higher proportion of aftermarket sales, new contract wins in defense, and ongoing operational investments, but flagged that the sales mix may return to more typical levels in coming quarters.

• Aftermarket sales surge: Management reported a 33% year-over-year increase in aftermarket sales, particularly in energy and defense. The recently expanded overhaul facility in Colorado is supporting fleet maintenance, while increased spare part demand for torpedo programs is adding to momentum.
• Defense contract momentum: The company secured a $25.5 million follow-on order for the MK48 torpedo program and continued work on a $136.5 million Virginia-class submarine contract, both contributing to recurring revenue and increased backlog. Malone described these as providing "stable reoccurring revenue streams" and strong visibility.
• Capacity and technology investments: Graham completed installation of automated welding machines and advanced machining at its new Batavia facility, with the plant expected to be fully operational by the end of Q3. These projects are designed to accelerate throughput and better serve U.S. Navy programs.
• Cryogenic testing facility progress: The new facility in Florida for cryogenic propellant testing is nearing operational status, intended to support the company’s space segment and validate specialized equipment for customers. Early interest from customers is apparent, though revenue impact will be discussed in future quarters.
• International and new energy strategies: Management is shifting its China approach to “China for China” and expanding its India footprint to support global supply. In the new energy segment, Graham sees early-stage momentum in small modular nuclear reactors, though this remains a small part of current business.

Drivers of Future Performance

Graham’s guidance is anchored in strong backlog execution, ongoing operational investments, and the potential impact of tariffs and mix shifts on margins.

• Backlog-driven revenue visibility: The record backlog, with 35–40% expected to convert to revenue within a year, underpins management’s confidence in steady growth. Much of this backlog is tied to long-term defense contracts, which management views as providing stability but notes can be lumpy in timing.
• Operational improvements and automation: Management expects investments in automation, manufacturing capacity, and ERP systems to enhance efficiency and support higher margin targets, though some benefit will be offset by the expected mix shift to lower-margin business later in the year.
• Tariff and mix uncertainty: Although tariff impacts were minimal this quarter, management estimates a potential $2–5 million annual effect depending on raw material sourcing and global trade conditions. Proactive contract terms and supply chain adjustments are in place, but leadership acknowledges that both tariffs and a lower aftermarket sales mix could pressure margins in coming quarters.

Catalysts in Upcoming Quarters

Going forward, our analysts will watch (1) the pace of backlog conversion to revenue, especially from defense contracts; (2) the operational impact and customer adoption of the Batavia and cryogenic testing facilities; and (3) the business mix between aftermarket and project work, which will influence margins. We are also tracking tariff developments and progress in international and new energy markets as additional drivers of performance.

Graham Corporation currently trades at $50.19, down from $57.48 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free).

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