Graham Corporation (GHM) Q4 2026 Earnings Report, Transcript and Summary

Good evening and welcome to Graham Corporation Fiscal 4Q '26 Earnings Call. [Operator Instructions]. It is now my pleasure to introduce your host, Tom Cook of Investor Relations. Thank you. You may begin.

Thank you, Shamali, and good morning, everyone. Welcome to Graham's Fiscal Fourth Quarter and Full Year 2026 Earnings Call. With me on the call today is Matt Malone, President and CEO, and Chris Thome, Chief Financial Officer. This morning, we released our financial results. Our earnings release and accompanying presentation for today's call are available on our website at ir.grahamcorp.com. You should be aware that we may make forward-looking statements during the formal discussion as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents that are filed by the company with the Securities and Exchange Commission. You can find these documents on our website or at sec.gov. During today's call, we will also discuss non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and slides. We also use key performance indicators to help gauge the progress and performance of the company. These key performance metrics are ROIC, orders, backlog, and book-to-bill ratio. These are operational measures and a quantitative reconciliation of each is not required or provided. You can find a disclaimer regarding our use of KPIs at the back of today's presentation. So with that, if you'll please advance to Slide 3, I'll turn it over to Matt to begin. Matt.

Thank you, Tom, and good morning, everyone. We appreciate you joining us to review our fourth quarter and full fiscal 2026 results. The foundation is strong, momentum is building, and we are just getting started. Fiscal 2026 was another year of strong execution and continued progress against the strategic objectives we have consistently communicated to investors. We delivered record annual revenue of $245 million, record orders of $359 million, and record backlog of $533 million and a book-to-bill of 1.5x. These results reflect the strength of our diversified business model and the long-term demand environment across our core markets with disciplined execution across our entire team. We accomplished this while making substantial investments to strengthen Graham's long-term competitive moat. During the year, we advanced strategic growth initiatives across the company, expanded capacity and technical capabilities, implemented new automation and manufacturing technologies, enhanced our testing infrastructure, and completed the acquisitions of Xdot and FlackTek. These investments, combined with our continued focus on talent, operational excellence, and scalable systems, further enable Graham to capture future growth opportunities and create enduring shareholder value. Turning to our end markets and starting with Defense. Demand remains very strong as validated by the record backlog. Throughout fiscal 2026, we benefited from continued execution across key naval programs, growth in existing platforms, and contributions from new programs. The strategic investments we have made over the last several years are translating into tangible operating advantages. Our newly opened Navy facility in Batavia is operational. Our automated welding systems have been commissioned and our vertically integrated X-ray capabilities are executing first inspections. These investments improve throughput, enhance quality, and position us to support increasing production requirements across critical Navy programs for many years to come. The demand environment remains favorable. We continue to see strong activity across our core naval platforms, and we believe the long-term outlook remains supported by fleet modernization initiatives, submarine production requirements, and the strategic importance of these programs we support. In addition to our naval defense programs, we are transitioning from development to production on several high-profile directed energy laser platforms, and radar programs, where we supply cooling pumps and motor controllers. Our modular, power-dense product offering enables our customers to optimize their system. Think more capability in a smaller footprint, enabling our customers complex mission critical systems to do more than ever before. Importantly, many of these programs extend over multiple years, providing durable revenue visibility and helping drive our record backlog today. Moving to Space. While revenue is consistent year over year, the underlying indicators within the space market continue to build momentum. Throughout fiscal 2026, we experienced significant growth in orders and backlog, reflecting strong customer demand and increasing activity across both commercial and government funded programs. We continue to see customers transition from development and qualification phases to higher rate production. This trend supports demand for highly engineered turbomachinery, cryogenic systems, and precision components that Barber-Nichols provides. To support this opportunity, we continued investing in our testing and manufacturing capabilities throughout the year. Our liquid nitrogen testing capability is operational, and our new cryogenic test facility in Florida is actively commissioning our internal product. These investments expand our ability to support customers as they scale production and strengthen Graham as a critical supplier across the growing space ecosystem. The long-term fundamentals of this market remain attractive, and we believe our technology portfolio, engineering expertise, and customer relationships will drive future durable growth. Turning to Energy and Process. We delivered a strong year despite continued uncertainty in this market and large capital project spending. Revenue increased 14% during fiscal 2026, supported by strong aftermarket activity, growth within new energy applications, and contributions from the recently acquired FlackTek. Customer demand remains healthy across our install base as aftermarket activities continues to demonstrate the value of Graham's mission-critical equipment and global service capabilities. We also remain encouraged by the opportunities we see developing within new energy applications, including small modular nuclear reactors and cryogenic technologies. While customers remain cautious regarding large capital expenditures in global refining and petrochemical facilities, we believe our diversified exposure, growing install base, and increasing participation in emerging energy markets positions us well. Turning now to FlackTek, which we acquired at the end of January. FlackTek establishes advanced mixing and materials processing as our third core platform alongside vacuum and heat transfer and turbomachinery. The business brings highly differentiated technology, a strong intellectual property portfolio, an attractive reoccurring revenue component, and exposure to several markets where we already have established customer relationships. Strategically, FlackTek expands our ability to solve increasingly complex customer challenges and creates opportunities to provide more integrated solutions across Defense, Energy and Process, and Space. We are particularly excited about the long-term potential of the mega platform and the opportunity to commercialize advanced materials processing solution across the broader customer base. Although we are still in the early integration process, significant progress has been made. The long-term commercialization strategy has been developed, teams are working well together, critical hires have been made, and customer engagement is strong. Now more than ever, I remain excited about the future growth prospects of this business. We continue to believe FlackTek meets all the criteria we have outlined for strategic acquisitions and will create meaningful long-term value for shareholders. Turning to operational excellence and investments, beginning on Slide 4. Over the last several years, we have made deliberate investments to improve our capabilities, increase capacity, enhance productivity, and product offerings to support our future growth. Many of those investments are now complete or entering their final phases of implementation. Several examples. The Batavia Navy facility is occupied and flowing production. It's outfitted with automated welding systems, 3D inspection scanning, and high-power X-ray inspection capability to reduce cycle time. The Arvada assembly and overhaul facility and liquid nitrogen test facility are fully operational and actively shipping validated products to our end customers. The Jupiter Cryogenic Facility is actively testing our cryogenic pump and motor controller that will be used for a critical lunar lander program. Lastly, the Batavia ERP implementation is nearing its final go-live milestones that will upgrade us from a legacy AS400 system. Importantly, these investments, just to name a few, were made with a disciplined capital allocation framework and are expected to generate returns above our 20% ROIC hurdle rate. While these initiatives create some near-term pressure on profitability as we invest ahead of our growth, they will enable the business to achieve approved operating leverage and margin expansion over time. Turning to orders, backlog and visibility. Fiscal 2026 represented another exceptional year from a bookings perspective. Orders reached a record $395 million (sic) [ $359 million ] resulting in a book-to-bill ratio of 1.5x. Backlog increased 29% year-over-year to a record $533 million. This backlog reflects continued strength across both defense and space and provides substantial visibility into future revenue generation. Approximately 35% to 40% of backlog is expected to convert to revenue over the next 12 months, with the remainder extending over multiple years. Importantly, the quality of our backlog remains strong. Many of our programs are long-cycle, mission-critical applications that support essential customer priorities and provide durable demand visibility. Combined with our active pipeline, continued momentum in our end markets and active customer engagement, we are well positioned for continued growth. Finally, turning to fiscal 2027 and as Chris will cover in more detail shortly. Our guidance reflects another year of meaningful growth, with revenue expected to be between $285 million and $295 million and adjusted EBITDA expected to be between $35 million and $40 million, both in line with our long-term goals. The outlook is supported by our record backlog, continued strength across defense, increasing space and new energy activity, contributions from FlackTek and the benefits of operational and capacity investments made over the last several years. We also expect profitability to improve as volume increases. Recent investments begin to contribute more fully, integration activities mature and operational initiatives continue to drive productivity improvements throughout the organization. As we have discussed previously, our strategy remains straightforward. We will continue to invest in differentiated technologies, strengthen our operational capabilities, pursue disciplined organic and inorganic growth opportunities and maintain a relentless focus on execution as we get better every day. The foundation we have built over the last several years continues to strengthen. Our end markets remain attractive. Our backlog is at record levels. Our capabilities continue to expand, and our teams remain focused on creating long-term value for customers and shareholders. With that, I'll turn the call over to Chris for a detailed review of our financial results. Chris?

Thanks, Matt, and good morning, everyone. Turning to our fourth quarter and full year results, starting on Slide 6. Fiscal 2026 was a record year for Graham as we delivered record revenue, record orders and record backlog, all while continuing to invest in capacity expansion, operational excellence, advanced manufacturing capabilities and many other strategic initiatives designed to support long-term profitable growth. Starting with the fourth quarter, revenue increased 13% to a record $67.1 million. The growth was driven by continued strength in our defense market, building momentum across our space and new energy programs and contributions from the recently acquired FlackTek business. Defense revenue benefited from strong execution, capability and capacity expansion and continued demand across key naval defense programs. Space revenue increased 14% year-over-year as existing programs begin to ramp. Within Energy and Process, revenue was consistent with the prior year period as strong aftermarket demand, continued activity in new energy applications, including small modular reactor opportunities and the recent acquisition of FlackTek, which contributed $2.8 million to sales during the quarter, helped offset continued softness in large capital project spending in global refining and petrochemical facilities. For the full fiscal year, revenue increased 17% to a record $245 million. This increase was driven by 21% growth in Defense, which benefited from new program wins, capacity and capabilities expansion, growth on existing programs and a higher level of material receipts. Energy and Process revenue increased 14% year-over-year, supported by strong aftermarket activity, new energy applications and the contributions from FlackTek. Turning to Slide 7. Fourth quarter gross profit was $15.3 million, representing a gross margin of 22.7% compared with 27% in the prior year period. The year-over-year decline primarily reflects our change in sales mix, including a higher proportion of defense revenue that carries greater material content and lower margin characteristics as well as lower aftermarket sales compared with the prior year. Additionally, FlackTek results for the quarter were burdened by purchase accounting amortization, which is expected to be lower going forward and the margin is expected to improve as volume increases. These factors were partially offset by continued improvements in operational execution and productivity initiatives. For the full year, gross profit increased 9% to $57.8 million. Gross margin was 23.5% compared with 25.2% in fiscal 2025. While higher production volumes, pricing discipline and operational efficiencies continue to support profitability, margins were impacted by the higher mix of defense revenue and material receipts, incremental tariff impacts and the absence of the BlueForge Alliance welder training grant benefit that positively impacted fiscal 2025 results. Moving to Slide 8. Selling, general and administrative expenses increased during the quarter and year-to-date periods, primarily due to acquisition and integration activities, incremental costs associated with FlackTek and continued investments in our people, processes, technologies and other strategic initiatives that will drive future growth. Net income for the fourth quarter was $2 million or $0.18 per diluted share compared with $4.4 million or $0.40 per diluted share in the prior year period. Adjusted net income for the quarter was $3.7 million or $0.33 per diluted share, compared with $4.8 million or $0.43 per diluted share in the prior year. For the full year, net income increased to $12.5 million or $1.12 per diluted share compared with $12.2 million or $1.11 per diluted share in fiscal 2025. Adjusted net income increased 14% to $15.6 million or $1.40 per diluted share, compared with $1.24 per diluted share last year. Adjusted EBITDA for the fourth quarter was $6.8 million, representing a margin of 10.2% compared with $7.7 million and a margin of 12.9% in the prior year period. For the full year, adjusted EBITDA increased 16% to $26 million and was in line with our previously raised guidance for fiscal 2026. Adjusted EBITDA margin was 10.6%, consistent with the prior year despite the mix-related pressures I discussed earlier and the investments we continue to make to support future growth. Overall, we believe these results demonstrate the resiliency of our business model and the effectiveness of our long-term strategy. We continue to successfully balance growth investments with profitability while positioning the company to capitalize on future opportunities. Turning to Slide 9. Orders remained strong throughout the year and further reinforce the favorable demand environment across our core markets. Fourth quarter orders were $78.7 million, resulting in a book-to-bill ratio of 1.2x. For the full fiscal year, orders reached a record $359 million, representing a book-to-bill ratio of 1.5x. These results reflect continued strength in defense and building momentum in space and new energy. As a result, backlog increased to a record $533 million at year-end, up 29% from the prior year. We expect approximately 35% to 40% of backlog to convert into revenue over the next 12 months, providing substantial visibility into our fiscal 2027 revenue and supporting our confidence in the outlook we are providing today. Turning to Slide 10. Our balance sheet remains strong and provides the flexibility to continue executing our strategic priorities. Cash provided by operating activities during fiscal 2026 was $15.9 million and reflected strong earnings generation, partially offset by higher working capital balances associated with growth and program execution. Additionally, fourth quarter fiscal 2026 cash flow from operations was negatively impacted by approximately $4 million of transaction bonuses assumed in the FlackTek acquisition that were awarded by the previous owners of FlackTek, but paid by the company and was a reduction to the cash purchase price at the time of close. During the year, we continued to deploy capital towards strategic growth initiatives. Net capital expenditures totaled $15.8 million for fiscal 2026 and we were focused on capacity expansion, productivity improvements, automation, advanced manufacturing technologies and infrastructure investments designed to support future growth and margin expansion. Additionally, $27 million of cash was deployed in connection with the Xdot and FlackTek acquisitions, which was funded by cash flow from operations and capacity under our $80 million revolving credit facility. Subsequent to year-end, we further strengthened our balance sheet through a $50 million strategic investment from accounts advised by T. Rowe Price and was based upon the 20-day average closing price of the company's stock on April 13, 2026. We utilized approximately $13 million of the proceeds to repay our outstanding debt and expect to use the remaining proceeds to support future organic and inorganic growth initiatives. Combined with our revolving credit facility, we currently have over $100 million of available liquidity, providing significant flexibility to execute our strategic organic and inorganic growth plans. Turning to our guidance on Slide 11. We expect revenue to be in the range of $285 million to $295 million for fiscal 2027, representing 18% growth at the midpoint and is supported by a record backlog, the strong demand environment and having a full year of $50 million strategic investment from accounts advised by FlackTek as well as continued execution across our businesses. We expect gross margin to be between 24.5% and 25.5%, reflecting the benefits of higher volume, operational and productivity initiatives and an improved mix versus fiscal 2026. SG&A expense is expected to be between 16.5% and 17.5% of sales and includes the impact of approximately $2.5 million of incremental investments in people, technology and commercialization initiatives to enable our future growth. Additionally, embedded within our outlook are approximately $4 million to $5 million of equity-based compensation, acquisition and integration costs and ERP conversion costs included in SG&A as well as a higher level of SG&A as a result of the FlackTek acquisition. which is currently a 10% adjusted EBITDA margin business, but is expected to quickly improve to levels more in line with our businesses -- in line with our other businesses as revenue scales. Based on these assumptions, we expect adjusted EBITDA to be between $35 million and $40 million, representing 44% growth over fiscal 2026 at the midpoint and is in line with our long-term profitability objectives. We also expect our effective tax rate to be between 18% and 20% and capital expenditures to be between $18 million and $22 million as we continue investing in strategic organic growth initiatives, operational capabilities and productivity-enhancing projects, including the construction of a new 30,000 square foot manufacturing facility on our Arvada, Colorado campus. Finally, we will provide an update to our long-term guidance at our upcoming Analyst and Investor Day on June 18. Overall, we are pleased with our results and consistent performance. We are entering fiscal 2027 from a position of strength with record backlog, strong demand across our end markets, disciplined execution and a strong balance sheet, all of which provide us with confidence in our ability to deliver another year of profitable growth while continuing to invest in our long-term opportunities ahead of us. With that, we are now ready for questions.

[Operator Instructions]. Our first question comes from the line of Russell Stanley with Beacon Securities.

My first is around orders, $79 million in the quarter. Congrats on that. I think it's your fifth straight quarter with orders better than $70 million. There seems to be less quarter-to-quarter volatility here than we saw in prior years. So I'm understanding we should still expect to see some variability going forward. But do you sense you're now into a new normal in terms of the steadiness of order flow?

Yes, Russ, I would still say that our business as a whole is susceptible to volatility and lumpiness with regards to orders. As you know, the contracts received could be anywhere from $75 million to $100 million. So although we wish we could book orders like that every quarter, it doesn't always necessarily happen. But to your point, given the diversification of our businesses across the many markets, it is becoming more stabilized as we diversify our business. But no, I would still expect some lumpiness. And 2026 -- fiscal 2026 was a record year for us, but there still can be some lumpiness in the future.

I understood on the revenue mix. I guess following up on that, really strong order growth in both Defense and Space. And in the past, you've talked about where your ideal revenue mix would be, but I'm wondering if you might -- how you're thinking about your ideal revenue mix given the momentum, particularly in Space and Defense, might be able access guardrails or those -- that target mix and let those 2 segments, in particular, run as hard as they will over the next few years?

Yes, Russ, I appreciate that question. I think you hit it perfect right at the end. We do love the split between defense and commercial. And the reason being is they augment each other when one is up, the other one can be slightly sluggish. In this particular case, like discussed over time, our technology and core competencies are market agnostic. And so you hit it perfect. What we're intending to do is follow the tail markets -- follow the tailwinds of the end markets and ensure that our capabilities and technology align to them. And then yes, we will shift that percentage mix as we move forward. So right now, we're seeing that in the Defense side as well as Space. And with the orders booked on the Space side, we do see that revenue ramping over the next years. And so -- but I don't want to lose sight of something really important. Aftermarket on the Energy and Process side, we're going to continue to invest in. We've got the small modular nuclear footprint, which is in the early phases of development. And then we've got quite a bit of activity in just commercial nuclear more broadly that's coming online. And so we don't want to lose sight of that because it will have its time to really shine in Graham's future. So it's a balanced portfolio that has market-agnostic technology and competencies. But yes, we will follow the tailwinds of the end markets.

Got it. Maybe one more question for me, and I'll hop back in the queue, just around FlackTek. I guess what are the major milestones left in terms of integration before you would call it substantially complete? And I guess following up on that, until then, should we think about your acquisition activity perhaps being fairly limited until you complete FlackTek? Or are you still out there hunting, so to speak?

Yes. So first and foremost, FlackTek, it's going quite well. The strategic plan, we were -- that we closed the acquisition just in time to get a strategic plan laid and get it built into our budget for this year. With that, we made commitments to grow key areas within that business. And specifically, our primary focus is commercialization of that technology through market adoption. We're seeing that pay dividends even early on. So Russ, I think at this point, integration is going exactly per plan, if not accelerated, and we just need to let it play out. So the corporate team continues to still support FlackTek, but I can feel it minimizing as we move forward. We've got a great leader there. We've got a great team there. And our focus right now is commercialization of the technology that they have in the portfolio. The second question specific to M&A, the strategic placement of capital by T. Rowe, our continued revolver, we do have a healthy portfolio of businesses that we're looking at for our acquisition portfolio. And what I'll say is, while we need to make sure that we finish solid integration of the current businesses, that doesn't preclude us from continuing to ensure that we follow: one, a disciplined approach; two, a selective approach. And as always, because our organic pipeline is so strong, we want to make sure that it's accretive to the business.

Our next question comes from the line of Bobby Brooks with Northland Capital Markets.

You mentioned new program wins within Defense, and I was just curious to hear more on that. And if you could share what programs those were or just maybe some more context around that? And separately, could you discuss what drove those new program wins? Is it just the Navy suppliers being more comfortable with you, your expanded capabilities, tech or maybe a bit of all 3. Just curious to hear more there.

Yes, Bobby. Thanks for the question. They're not necessarily new programs. I want to characterize it slightly differently. These are programs that have been in development phase for a number of years with what I'll call smaller platforms. So think more power dense solutions. And so one I can talk high level about is a radar platform that goes from single direction radar visibility to now 360 degrees on the battlefield. And that particular asset has to be able to do more cooling in actually a smaller package to accommodate that additional capability. And that's really where the Graham portfolio comes into play is for these very high-power, high-density applications, we have the ability to design end product solutions that come from our commercial pedigree that allow for improved system value. And so think more in a smaller package. And so with that, these have been -- these programs have been under development for a number of years, and they're finally moving into the production lens. And so yes, we're seeing additional production volumes as a result of those programs. And just to expand one last topic. So these are on critical radar platforms as well as directed-energy laser platforms.

And the other one, Bobby, that just to add on to what Matt said that we've publicly disclosed last year was that we were awarded the air turbine pump for the Columbia class submarine, which was a competitively bid award that we did win, and that was new.

Got it. Very helpful there. Something I've been also really excited about just throughout this year is the testing facility that you stood up during your fiscal '26. So I wanted to hear, have those already led to new -- have those already led to you getting in conversations with new customers? And then secondly, are they -- it seems like some of them, the cryogenic one is that you're doing internal testing. Just hoping for more sense on that.

Yes. So the first is I want to touch on the facilities at Barber-Nichols. Specifically, we right now have rig testing as well as the liquid nitrogen testing, where we are actively testing and shipping production programs. And Bobby, why that's so important is now we can validate these designs that are quite complex for our customer. And instead of having them do the validation testing for us, we can do it for them and provide a fully ready for integration into their final asset product, and we are seeing great value from that. The second that you mentioned, and I think the core of your question is around the cryogenic facility down in Jupiter. Great news with that facility. It's up and running. Number one, most important is safety. We have liquid oxygen and liquid hydrogen on that facility. So we needed to ensure that we followed all those safety protocols. We have successfully flowed both fluids through the test facility. And right now, we are actively integrating our internal pump, which is called SCAMP, and that is being used for a lunar lander program. We are now testing that in parallel with our customer testing on their final integrated engine solution. And so Bobby, what we're seeing there is, yes, a mix of exciting pipeline conversations and proving our existing product portfolio. Just to characterize that more broadly, though, the primary reason for investing in that facility was to validate our internal solutions before they go to our customer, but we will use it as a service facility for our customers for programs that we see viable production opportunity longer term.

That's super helpful color. And then last one for me is space orders up this year, very impressive, 132% year-over-year. Just wanted to get some more context around that. Was it driven by new customer wins, current customers -- you have talked about customers expanding from more pilots to production phases. So maybe that's part of it, maybe some wallet share expansion mixed in there? Or maybe I'm just completely off base. So just wanted to hear a little bit more discussion on that order strength in space and maybe your outlook for it in '27.

Yes. Space is strong, and we've been alluding to that. What we're seeing is a few things. It is both new customers as well as existing. I want to focus in on new for a second. When we go with new customers, we are pretty selective on what end users we're providing equipment to. And the reason why is we want to make sure we take a disciplined approach to where we invest our resources. With that, we're seeing strong demand, multiple launch providers, you can see scaling. Launch cadence is increasing across a number of large platform launch providers. All of this is transitioning to then getting to a healthy cadence of launch. And so we're seeing in Florida, in Texas, a whole bunch of different providers. There's a pretty limited number, I shouldn't say a whole bunch, but we have critical equipment on both of those -- on a lot of those assets. And now the conversation, Bobby, is moving to what do we do in Space. And so we're seeing our backlog grow from 2 vectors. The first is launch and getting to a reliable cadence where we have either A asset or critical assets on several different providers. The second is now we have the ability to launch additional satellites astronaut backpacks, lunar landers, et cetera, et cetera, and we have content a lot of those end assets. So really, it's an ecosystem that's coming to life. It's not just a single end user or end application, if that makes sense.

The only other thing I would add to that is just to remind everybody that FlackTek did come with a 10% space business. So that will be driving space growth in fiscal '27 as well as our FlackTek business.

Congrats on a record breaking year. Very impressive.

Our next question comes from the line of Christopher Glynn with Oppenheimer & Company.

I had a question about the subs and carriers progression. What's been a more meaningful growth driver in the recent past and prospectively, when you look at build rates on the one hand, how those are moving versus new work and content scopes?

Yes. So great question. We continue to hear -- read about, I would say, headwinds on the final integration production side for naval nuclear and more specifically submarines. The government and specifically the Navy continues to claim that we will catch up to build rates. With that being said, we are not seeing any impact on our robust pipeline converting. And so in most cases, the condenser that goes on board, the submarine or the aircraft carrier that we provide or the air turbine pump, a lot of these are some of the earliest assets that get integrated. And so as soon as the electric boats and Newport News get their contract awards, typically, it's slowing down to us. With that, we continue to see opportunity as FlackTek comes on board and Barber-Nichols, on this munition replacement area, so torpedoes, as we look at energetics for missiles, a lot of these end uses stimulate those 2 businesses. So we're seeing the tailwinds on the long-cycle strategic programs like the submarines and carriers, but we're also now starting to have a portfolio element where more of the faster-moving munitions replenishment is part of Graham. And so it's no one simple answer or one simple commentary, but that's the general architecture.

Okay. And then I just wanted to check in on the -- some of the new products you talked about lately in terms of the aftermarket development. It sounds like you've got a constructive view on aftermarket resuming good growth in 27. But I think Heliflow, Heat Exchanger and the NextGen Nozzle Steam Ejectors were a couple of your highlight initiatives. So I just want to check in on those.

Yes. So aftermarket, we have a $1 billion installed base, and so never want to lose sight of ensuring that our customers are well supported, both with replenishment upgrades and as well as new capital. Heliflow, NextGen continue to nurture into the ecosystem quite well. We're seeing a lot of opportunity as we start to talk about NextGen with our customers, both selling NextGen and then stimulating additional in-kind replacements, we're seeing that be a great conversation starter. So this modernization approach is working in that sense. The other is I've continued over the years to have the conversation around moving from a reactive aftermarket, which what I mean by reactive is our customer today calls us, we are in this next year, and we'll talk about it more at the Investor Day, moving to what is a proactive aftermarket. Will we go on the offensive. We know where all of our installed base is, et cetera, et cetera. And once we get those established relationships, which we already have, we'll look to bring modernized equipment to that environment. And Heliflow, NextGen and other technology that we're working in R&D will be a part of that.

Great. And a bookkeeping one for Chris. Curious what we should be thinking about for D&A for fiscal '27 and the amortization component alone?

Yes. So -- no problem, Chris. As you saw, there was a higher level of amortization in the current quarter, and that's really because of the amortization in connection with the FlackTek acquisition. So that was in there for 2 months out of the year. So I would expect Q1 to be a little bit higher in amortization because of that, and then you can kind of annualize it from there.

Okay. So that doesn't get confused by the onetime inventory step-up at all, what the explanation you just gave?

Yes, there was a little bit of onetime. So those will probably offset each other a little bit. So you could just probably take the current quarter and annualize that and look to what it will be for next year.

Our next question comes from the line of Joe Gomes with NOBLE Capital.

Congrats on the quarter. So in the quarter, it was very strong. Was there anything there that didn't perform up to your expectations?

No. Joe, I continue to use the same conversation with our entire employee base and investor base. Right now, we're executing 250 drives down the middle of the fairway. And so we're not overextending at this point because we need to make sure that we have a healthy foundation that we can build off of as we move forward. We did have a little bit additional material, as though Chris mentioned in his commentary, specifically around the Defense side that comes with slightly lower margin. And once again, I just want to characterize what that means. That material, we haven't done any work to it. So it's coming in essentially as raw material. And so the margins start to pick up as a result of us putting labor into that material. So we can't control exactly what week it comes in. But Joe, I would say the only thing is specifically on the material side on the defense platform. And then lastly, the only other commentary I could give is -- on the Energy and Process side, I'd specifically focus in on refining and petrochem on the process markets, some continued headwinds specifically on decision-making with the geopolitical tensions in the Middle East that we're all following closely as well as Russia, Ukraine. It's -- we know that we -- the world is in need and has demand, but just making commitments to build these new factories is -- remains somewhat in paralysis, but not unexpected for us.

Right, right. And when you talk about the material receipts, I know in the third quarter, you talked -- you thought it would be more in line, the more normalized, let's call it, rate for the fourth quarter, you're saying it was a little bit higher than initially anticipated. Just to clarify.

Yes, you could see -- and Chris, you can add commentary if you'd like, but high end of guidance or just over the high end on revenue. And so just I would say, slightly more favorable on revenue. And then not material in that sense.

Yes. And also to keep in mind, the fourth quarter of last year was the highest quarter gross margin percentage in the last 2 years, mainly because of the mix. As we stated in our commentary, the current quarter had a higher mix of lower-margin defense and a lower mix of aftermarket, which impacted the margins as well.

Okay. And then, Matt, just big picture here. I mean everything is going well, putting up some great numbers here. What keeps you up at night looking forward as to your biggest concerns?

Reaching our potential truthfully. We have laid the strategic framework and all the initiatives that we put in place. It's just not reaching the potential that we can. And I get excited about that because it's an opportunity. We've got the right leaders in place across all of the business units and the corporate team. So it's really execution and just staying very focused on today while not losing the DNA and the fabric that's made us who we are. And that is continually improving in every area, people, tools, processes every day, and it comes down to every employee partaking. But truthfully, there's no one thing. It comes down to just waking up every day and every employee doing the best that they can to serve our customers.

Our next question comes from the line of Tate Sullivan with Maxim Group.

Thanks for your comments on investing for the growth and understand the meaningful opportunities in multiple parts of the industrial markets just -- and you gave the CapEx guidance for this coming fiscal year, but can you just touch on your cash flow -- free cash flow expectations? I mean with customer deposits decreasing quarter-to-quarter in the last quarter, can you comment on sort of should we forecast a little temporary cash outflow for fiscal year '27?

Yes, Tate, I can take that one. As you know, similar to the rest of our business, our cash flows can be very lumpy. The defense contracts that we have are very cash positive, but adds lumpiness to our cash flow. So it's really tough to talk about in terms of cash flow. We like to talk about it in terms of our EBITDA to get a better idea of a run rate. The other thing, as I pointed out in my commentary today is that we did have $4 million of payments related to the FlackTek acquisition in the fourth quarter, which brought down our cash flow. So you're correct, we did guide $18 million to $22 million, which is 7% of revenue, which is right in line with our long-term guidance for capital spend, and we continue to expect that level of expenditure here. But I would look to our EBITDA for purposes of cash generation.

And then just following up on customer deposits going forward after the acquisitions, is most of that line item related to the U.S. Navy work still.

Correct. And that's what becomes very lumpy because someone -- a customer can literally place an order for $50 million of material receipts. As soon as we order that material, we get to invoice the customer for it. But then that material doesn't come in for another 9 to 12 months later. And then when it comes in, we have to pay for it. So that's what I'm referring to. And that's a good example of the lumpiness in our cash flows and why we don't typically guide to cash flow.

And we have reached the end of the question-and-answer session. And I would like to turn the floor back over to CEO, Matthew Malone, for closing remarks.

Thank you, Shamali. As you can see, fiscal 2026 was another year of strong execution and continued progress against the strategic objectives we have consistently communicated to investors. We see continued momentum into fiscal year 2027 and look forward to providing you with a more in-depth look into our businesses, our management team and strategic opportunities at our upcoming Analyst and Investor Day on June 18 in New York City. As always, please reach out with any questions. Thank you, everyone, for joining us today and your interest in Graham.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.