10-Q: Graham Corp. Reports Strong Q3 FY26 Growth, Record Backlog

Graham Corporation announced robust third-quarter fiscal 2026 results, driven by strong Defense sector sales and strategic acquisitions, leading to record backlog and increased full-year guidance.

Summary

• Net sales for the third quarter of fiscal 2026 increased 21% to $56,701 compared to $47,037 in the prior year's third quarter.
• Net sales for the first nine months of fiscal 2026 increased 18% to $178,215 compared to $150,551 in the prior year's nine-month period.
• Defense industry sales rose 31% in Q3 FY26, primarily due to project timing, new programs, and growth in existing programs.
• Energy & Process market sales increased 13% in Q3 FY26, driven by Aftermarket sales and momentum in New Energy markets, particularly small modular reactors (SMRs).
• Gross profit for Q3 FY26 was $13,469, up 15%, but gross profit margin declined 100 basis points to 23.8% due to sales mix and high material receipts.
• Net income for Q3 FY26 was $2,845, up from $1,588 in Q3 FY25, with diluted EPS of $0.25 compared to $0.14.
• Adjusted EBITDA for Q3 FY26 increased 50% to $6,044 from $4,027 in Q3 FY25.
• Orders booked in Q3 FY26 surged to $71,671 from $24,786 in Q3 FY25, resulting in a book-to-bill ratio of 1.3x.
• Backlog reached a record $515,633 at December 31, 2025, a 34% increase from $384,701 at December 31, 2024.
• The effective tax rate for Q3 FY26 was 11%, down from 29% in Q3 FY25, primarily due to higher-than-expected research and development tax credits.
• The company completed the acquisition of Xdot Bearing Technologies on October 20, 2025, and FlackTek Manufacturing, LLC and FlackTek Sales, LLC on January 23, 2026.
• The Revolving Credit Facility with Wells Fargo was amended on January 23, 2026, increasing the limit to $80,000 from $50,000.

Sentiment

Score: 8

Explanation: StockSavvy.ai views this as a very positive report, highlighted by significant revenue growth, record backlog, and strategic acquisitions that enhance future growth prospects. The slight dip in gross margin and some market uncertainties in traditional Energy & Process are minor offsets to an otherwise strong performance.

Positives

• Net sales for the third quarter of fiscal 2026 increased 21% year-over-year, demonstrating strong revenue growth.
• Defense industry sales grew 31% in Q3 FY26, reflecting robust demand and successful program execution.
• Energy & Process sales increased 13% in Q3 FY26, driven by Aftermarket strength and momentum in New Energy markets, particularly small modular reactors (SMRs).
• Net income for Q3 FY26 increased 79% to $2,845, and diluted EPS rose 79% to $0.25, indicating improved profitability.
• Adjusted EBITDA for Q3 FY26 increased 50% to $6,044, and for the nine months increased 30% to $19,177, showcasing enhanced operational performance.
• Orders booked in Q3 FY26 significantly increased to $71,671, leading to a strong book-to-bill ratio of 1.3x, exceeding the annual goal of 1.1x.
• Backlog reached a record $515,633 at December 31, 2025, providing substantial future revenue visibility.
• The effective tax rate decreased to 11% in Q3 FY26 due to higher-than-expected research and development tax credits.
• Strategic acquisitions of Xdot Bearing Technologies and FlackTek Manufacturing, LLC expand the company's technology portfolio and market reach.
• The Revolving Credit Facility was increased to $80,000, enhancing liquidity and financial flexibility.
• The company maintains a strong cash position with $22,254 in cash and cash equivalents at December 31, 2025, and no debt outstanding on its Revolving Credit Facility.
• Expected cash tax savings of approximately $8,000 over the next two years due to bonus depreciation provisions from the One Big Beautiful Bill Act (OBBB).
• Construction of a new 30,000 square foot Defense manufacturing facility was completed in July 2025, partially funded by a $13,500 strategic grant.
• A cryogenic propellant testing facility was completed in February 2026, enhancing capabilities for Space customers.

Negatives

• Gross profit margin declined 100 basis points to 23.8% in Q3 FY26, primarily due to the mix of sales and a high level of material receipts, which carry a lower profit margin.
• The estimated impact of tariffs on consolidated financial statements for the first nine months of fiscal 2026 was approximately $1,000, with a potential full-year incremental impact of $1,000 to $1,500.
• A $255 grant in Q3 FY25 and a $1,460 grant for the nine months of FY25 from the BlueForge Alliance for defense welder training programs did not repeat in the current year, impacting gross profit comparison.
• Selling, general and administrative (SG&A) expenses increased by $868 in Q3 FY26 due to investments in operations, employees, technology, higher acquisition/integration costs, and increased performance-based compensation.
• Aftermarket orders for Q3 FY26 decreased $5,151 to $7,963 from prior year record levels.
• The timing of large capital project orders in traditional Energy & Process markets has been pushed out due to lower gas prices and geopolitical uncertainty.
• Net cash provided by operating activities for the first nine months of fiscal 2026 decreased to $16,084 from $27,873 in the comparable prior year period, primarily due to an increase in working capital.
• The enactment of the One Big Beautiful Bill Act (OBBB) in July 2025 resulted in an increase to the expected effective tax rate for fiscal 2026 of approximately 200 basis points.

Risks

• Legal matters, including asbestos-related lawsuits, are subject to inherent uncertainties, and their ultimate resolution could have a material adverse impact on financial position or results of operations.
• The investigation into a whistleblower complaint at Graham India Private Limited (GIPL) identified misconduct, and while remedial actions have been taken, the resolutions of these matters are inherently uncertain.
• The effective tax rate can experience volatility due to factors such as discrete items, changes in the mix and amount of projected pre-tax income, changes in tax laws, and foreign currency fluctuations.
• Operating in global markets exposes the company to foreign currency exchange rate movements, which can affect sales and competitiveness against foreign competitors.
• Price risk exists due to competition from global manufacturers who may benefit from lower production costs and more favorable economic conditions, potentially leading to lower product pricing.
• The company faces significant cost inflation in labor, raw materials, tariffs, and supply chain costs due to broad global supply chain disruptions.
• International conflicts or geopolitical events (e.g., Russia-Ukraine, Israel-Hamas/Iran) may further increase supply chain costs, transportation/energy costs, tariffs, and inflation.
• Revenue and growth in the Space market are uncertain due to high dependency on launch provider commercialization, timing, and success, as many customers have yet to achieve profitability.
• The company's outlook for sales and profitability assumes the ability to operate production facilities at planned capacity, access to its global supply chain, and no significant global health-related disruptions or unforeseen events.
• The Revolving Credit Facility contains terms that may, under certain circumstances, restrict the company's ability to declare or pay dividends.

Future Outlook

The company has updated its fiscal 2026 outlook, raising net sales guidance to $233,000-$239,000 (from $225,000-$235,000) and Adjusted EBITDA guidance to $24,000-$28,000 (from $22,000-$28,000). Gross profit margin guidance was slightly lowered to 24.0%-25.0% of sales (from 24.5%-25.5%), while the tax rate guidance improved to 16%-18% (from 20%-22%). Capital expenditures are expected to remain between $15,000-$18,000. The company is on track to achieve its fiscal 2027 goals of 8%-10% average annualized organic revenue growth and Adjusted EBITDA margins in the low to mid-teens, assuming planned production capacity, global supply chain access, and no significant unforeseen events.

Management Comments

• "Combining Xdot's foil bearing technology with BN's turbomachinery expertise will significantly expand our ability to design and deliver high-speed rotating machines into new markets and applications."
• "FlackTek's patented technology platform delivers highly repeatable, precision mixing with significantly faster cycle times, minimal entrained air, reduced downtime between batches, consistency in production, and reduced heat transfer compared to traditional bladed methods."
• "We are seeing momentum in the small modular nuclear and cryogenics space, however the timing of large capital project orders in our traditional Energy & Process markets has pushed out due to lower gas prices and geopolitical uncertainty."
• "We have made significant progress with the advancements in our business, which puts us on track to achieve our fiscal 2027 goals of 8% to 10% average annualized organic revenue growth and adjusted EBITDA margins in the low to mid-teens."

Industry Context

StockSavvy.ai notes that demand for equipment and systems in the Defense industry is expected to remain strong and expand, driven by defense budget plans and accelerated ship build schedules due to geopolitical tensions. The Energy & Process markets are undergoing a significant transition, with a shift in capital investments towards alternative fuels, though traditional project orders are being delayed by lower gas prices and geopolitical uncertainty. Long-term, population growth and an expanding global middle class are expected to drive demand for industrial goods, and alternative/clean energy opportunities, particularly in small modular reactors (SMRs) due to increased energy demands from AI data centers and crypto-currency mining, are expected to grow. The commercial Space market continues its rapid growth, with the company providing critical support for rocket engine turbopump systems, though revenue in this sector remains dependent on launch provider commercialization and customer profitability.

Comparison to Industry Standards

• The company has built a leading position, and in most instances a sole source position, for certain systems and equipment for the Defense industry, indicating a strong competitive advantage.
• FlackTek's systems are sold to leading OEMs, research and development centers, defense laboratories, and industrial manufacturers, suggesting a strong market presence and acceptance within its niche.
• The company's NextGen steam ejector nozzle is engineered to reduce steam consumption and operating costs, positioning it competitively for refineries and process plants seeking efficiency and reduced carbon footprint.

Corporate Governance

Legal Proceedings

• Asbestos-related lawsuits: The company is a co-defendant in lawsuits alleging personal injury from asbestos exposure. It intends to vigorously defend itself and believes the resolution will not have a material adverse effect, though acknowledges inherent uncertainties.
• GIPL whistleblower complaint: An investigation concluded in Q3 FY24 identified misconduct by a few employees over four years, which was not deemed material. Involved employees were terminated, and remedial actions were implemented. Findings have been voluntarily reported to authorities in India, the U.S. Department of Justice, and the SEC, with no material impact expected on consolidated results.

Related Party Transactions

• The company has entered into operating leases with companies in which its Executive Chairman holds a majority interest for buildings, equipment, and storage units located in Arvada, Colorado. Fixed minimum lease payments of $256 were made during the three months ended December 31, 2025, and $762 during the nine months ended December 31, 2025. Future fixed minimum lease payments under these leases as of December 31, 2025, total $4,039.

Stakeholder Impact

• Shareholders: Positive financial results, record backlog, and increased guidance could lead to increased share value. However, no dividends are planned for the foreseeable future.
• Employees: Investments in operations, employees, and technology, along with higher performance-based compensation, are beneficial. The Employee Stock Purchase Plan remains available. Terminations occurred at GIPL due to misconduct.
• Customers: Enhanced Defense production capabilities, a new cryogenic propellant testing facility, and the acquisition of FlackTek's advanced mixing solutions aim to improve product offerings and support. The NextGen steam ejector nozzle offers potential cost savings and efficiency for Energy & Process customers.
• Suppliers: The company's outlook relies on continued access to its global supply chain. Geopolitical events and inflation pose risks of increased supply chain costs.
• Creditors: The amended Revolving Credit Facility provides increased liquidity and flexibility. The company is in compliance with all financial covenants, indicating a strong credit profile.

Next Steps

• Integrate Xdot Bearing Technologies into the Barber-Nichols (BN) business.
• Integrate FlackTek Manufacturing, LLC and FlackTek Sales, LLC into Graham's financial, compliance, and operational infrastructure.
• Continue investments in production capacity and capabilities at the Arvada, CO facility, including new CNC machining centers and a liquid nitrogen test stand.
• Complete the installation of advanced Radiographic Testing (RT) equipment at the Batavia, NY facility in the fourth quarter of fiscal 2026.
• Work towards achieving fiscal 2027 goals of 8% to 10% average annualized organic revenue growth and adjusted EBITDA margins in the low to mid-teens.
• Continue to cooperate with authorities in India, the U.S. Department of Justice, and the SEC regarding the GIPL investigation.
• Vigorously defend against ongoing asbestos-related lawsuits.

Key Dates

Recommendation

Graham Corporation's Q3 FY26 results demonstrate robust growth across key segments, particularly Defense, leading to a record backlog of over $515 million. The strategic acquisitions of Xdot and FlackTek enhance technological capabilities and market reach, especially in high-growth areas like New Energy and advanced materials. The increased full-year guidance for net sales and Adjusted EBITDA, coupled with a strong balance sheet and significant cash tax savings, positions the company for continued expansion. While gross margin saw a slight dip and traditional Energy & Process orders face near-term headwinds, the overall trajectory and strategic positioning warrant a strong buy recommendation for long-term investors.

Keywords

Graham Corporation, GHM, SEC 10-Q, Quarterly Report, Financial Results, Defense Industry, Energy & Process, Space Industry, Backlog, Acquisitions, Xdot Bearing Technologies, FlackTek Manufacturing, Turbomachinery, Foil Bearing Technology, Advanced Mixing, Small Modular Reactors (SMRs), Cryogenics, Financial Performance, Earnings, Revenue Growth, Profitability, Capital Expenditures, Corporate Governance, Risk Factors, Investment Analysis