10-Q: Graham Corp. Reports Strong Sales, Record Backlog Amid Investments

Graham Corporation announced a 23% increase in Q2 net sales and a record $500 million backlog, driven by defense and energy markets, while investing heavily in growth initiatives and completing an acquisition.

Summary

• Net sales for the second quarter of fiscal 2026 increased by 23% to $66.0 million, compared to $53.6 million in the prior year's second quarter.
• Year-to-date net sales for the first six months of fiscal 2026 rose 17% to $121.5 million, up from $103.5 million in the same period last year.
• Net income for Q2 fiscal 2026 was $3.1 million ($0.28 per diluted share), a decrease from $3.3 million ($0.30 per diluted share) in Q2 fiscal 2025.
• Year-to-date net income for the first six months of fiscal 2026 increased 23% to $7.7 million ($0.69 per diluted share), compared to $6.2 million ($0.57 per diluted share) in the prior year.
• Adjusted EBITDA for Q2 fiscal 2026 grew 12.1% to $6.3 million, and year-to-date Adjusted EBITDA increased 22.1% to $13.1 million.
• Gross profit margin for Q2 fiscal 2026 declined to 21.7% from 23.9% in Q2 fiscal 2025, primarily due to sales mix and high material receipts with lower profit margins.
• Orders booked in Q2 fiscal 2026 increased to $83.2 million, up from $63.7 million in the prior year, resulting in a book-to-bill ratio of 1.3x.
• Backlog reached a record $500.1 million as of September 30, 2025, a 23% increase from $407.0 million a year ago, with 85% attributed to the defense market.
• The company completed the acquisition of Xdot Bearing Technologies on October 20, 2025, for $1.5 million, expecting it to be slightly accretive to fiscal year 2026 GAAP net income.
• Capital expenditures for the first six months of fiscal 2026 were $11.1 million, significantly higher than $6.5 million in the prior year, reflecting investments in new facilities and equipment.
• The effective tax rate for Q2 fiscal 2026 increased to 27% from 24% due to the enactment of the One Big Beautiful Bill Act (OBBB), which is expected to provide $8.0 million in cash tax savings over two years despite the rate increase.

Sentiment

Score: 8

Explanation: The company demonstrates strong top-line growth, record backlog, and significant strategic investments for future expansion. While Q2 net income saw a slight dip and gross margins faced pressure, year-to-date net income and Adjusted EBITDA are robustly positive. The Xdot acquisition and focus on high-growth markets like Defense and new energy are strong positives, indicating a healthy long-term trajectory despite some short-term operational challenges and a decrease in operating cash flow due to working capital.

Positives

• Net sales increased significantly by 23% in Q2 and 17% year-to-date, demonstrating strong revenue growth across all principal markets.
• Backlog reached a record $500.1 million, a 23% increase year-over-year, providing strong visibility into future revenue, with 85% from the stable Defense industry.
• Orders booked in Q2 fiscal 2026 increased to $83.2 million, resulting in a healthy book-to-bill ratio of 1.3x, exceeding the annual goal of 1.1x.
• Adjusted EBITDA showed robust growth, increasing 12.1% in Q2 and 22.1% year-to-date, indicating improved operational profitability excluding certain non-GAAP adjustments.
• Strategic investments in operations, employees, and technology, including new manufacturing and testing facilities, are expected to support long-term organic growth.
• The acquisition of Xdot Bearing Technologies is expected to be slightly accretive to fiscal year 2026 GAAP net income and enhances turbomachinery expertise for new markets.
• The company has no debt outstanding as of September 30, 2025, and maintains significant liquidity with $44.7 million available on its revolving credit facility.
• Defense sales increased by 32% in Q2 and 17% year-to-date, driven by new programs and existing program growth, reinforcing the company's strong position in this market.
• The One Big Beautiful Bill Act (OBBB) is expected to result in approximately $8.0 million in cash tax savings over the next two years due to bonus depreciation and R&D Section 174 rules.

Negatives

• Net income for Q2 fiscal 2026 decreased by 5.8% to $3.1 million, and diluted EPS fell to $0.28 from $0.30 in the prior year.
• Gross profit margin declined by 2.2 percentage points to 21.7% in Q2 fiscal 2026, attributed to sales mix and an extraordinary high level of material receipts with lower profit margins.
• Net cash provided by operating activities for the first six months of fiscal 2026 decreased significantly to $11.3 million from $22.6 million in the prior year, primarily due to an increase in working capital.
• The company estimates a tariff impact of approximately $1.0 million for the first six months of fiscal 2026, with a potential full-year impact of $2.0 million to $4.0 million.
• A grant from the BlueForge Alliance, which benefited gross profit by $435 thousand in Q2 fiscal 2025 and $915 thousand year-to-date fiscal 2025, did not repeat in the current year.
• Selling, general and administrative expenses increased by $1.1 million in Q2 fiscal 2026, partly due to higher bad debt reserves related to a non-U.S. customer.
• The effective tax rate for Q2 fiscal 2026 increased to 27% from 24% due to the enactment of the OBBB, despite expected future cash tax savings.
• Aftermarket orders for the Energy & Process and Defense markets decreased 25% in Q2 fiscal 2026 and 8% year-to-date compared to prior year record levels.

Risks

• Legal matters, including asbestos-related lawsuits, are subject to inherent uncertainties, and while not currently expected to be material, could have an adverse impact on financial position or results of operations.
• The resolution of the GIPL whistleblower complaint investigation, while not expected to be material, involves ongoing cooperation with authorities in India, the U.S. Department of Justice, and the SEC.
• Sales and orders to the Space industry are variable, and many customers have yet to achieve profitability, posing uncertainty for future revenue and growth in this market.
• Current market conditions in traditional Energy markets are undergoing significant transition, with expected low project quantities and challenging new project pricing in the near term.
• The company faces price risk from global competitors with lower production costs and more favorable economic conditions, potentially leading to lower prices for similar products.
• Significant cost inflation, particularly in labor, raw materials, tariffs, and other supply chain costs, continues to impact the business.
• International conflicts or geopolitical events (e.g., Russia-Ukraine, Israel-Hamas, Israel-Iran) may further contribute to increased supply chain costs, energy costs, tariffs, and inflation.
• The company's ability to operate production facilities at planned capacity, access its global supply chain, and avoid global disruptions are critical assumptions for its sales and profitability outlook.
• The revolving credit facility contains terms that may restrict the company's ability to declare or pay dividends in the future.

Future Outlook

Graham Corporation projects fiscal year 2026 net sales between $225 million and $235 million, with gross profit margins of 24.5% to 25.5% of sales, and Adjusted EBITDA between $22 million and $28 million. Capital expenditures are expected to be $15 million to $18 million. The company aims for 8% to 10% average annualized organic revenue growth and low to mid-teens Adjusted EBITDA margins by fiscal year 2027. The third quarter is historically the lowest revenue quarter due to holidays and vacations.

Management Comments

• "Net sales for the second quarter of fiscal 2026 were $66,027, up $12,464, or 23% compared with the second quarter of fiscal 2025 reflecting the strength of our diversified revenue base."
• "The increase [in sales] was across all our principle markets including a $9,853 or 32% increase in sales to the defense industry, primarily due to the timing of project milestones (material receipts), as well as new programs and growth in existing programs."
• "This decrease in gross profit margin reflects the mix of sales during the second quarter of fiscal 2026, and in particular, an extraordinary high level of material receipts which carry a lower profit margin."
• "SG&A costs represented 15.5% of sales for the second quarter of fiscal 2026 compared to 17.1% in fiscal 2025."
• "Orders booked in the second quarter of fiscal 2026 increased to $83,200 compared with $63,678 in the second quarter of fiscal 2025. As a result, backlog reached a record $500,072 at September 30, 2025."
• "Cash provided by operating activities for the first six months of fiscal 2026 of $11,326 was offset by capital expenditures of $11,148 as we continue to invest in process improvement and longer-term growth opportunities."
• "By combining Xdot’s foil bearing technology with BN’s turbomachinery expertise, we expect to significantly expand our ability to design and deliver high-speed rotating machines into new markets and applications."
• "Demand for our equipment and systems for the Defense industry is expected to remain strong and continue to expand, based on Defense budget plans, accelerated ship build schedules due to geopolitical tensions, and the projected build schedule of submarines, aircraft carriers and undersea propulsion and power systems that we provide solutions for."
• "We believe that in the near term the quantity of projects available for us to compete for [in traditional Energy markets] will remain low and that new project pricing will remain challenging."
• "As a result of increased energy demands driven by population growth, crypto-currency mining, and artificial intelligence ('AI') data centers, we have seen an increase in activity and orders related to SMRs which we expect to continue for the foreseeable future."
• "We believe we are positioned to be a significant contributor as these markets continue to develop."
• "We intend to stay competitive in our traditional Energy & Process markets by investing in technology such as our NextGen steam ejector nozzle, which has been engineered to reduce steam consumption, lower operating costs, and increase system capacity."
• "We estimate that the total market opportunity for our NextGen nozzle exceeds $50,000 over the next 5 to 10 years."
• "We expect that in the long-term, extended space exploration will become more prevalent, and we anticipate that our thermal/fluid management and environmental control and life support system turbomachinery will play important roles."
• "We believe that cash generated from operations combined with the liquidity provided by available financing capacity under the Revolving Credit Facility, will be adequate to meet our cash needs for the immediate future."
• "We have made significant progress with the advancements in our business, which we believe puts us on schedule in achieving 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

Graham Corporation operates in critical sectors including Defense, Energy & Process, and Space. The strong performance in Defense is aligned with increased geopolitical tensions and accelerated ship build schedules, indicating robust government spending. The Energy & Process market is undergoing a significant transition, with traditional fossil fuel investments shifting outside the U.S. and a growing focus on alternative and clean energy, including small modular reactors (SMRs) driven by rising energy demands from population growth, cryptocurrency mining, and AI data centers. The Space market continues its rapid growth, with the company providing essential turbomachinery and cryogenic products to leading launch providers, although profitability challenges for some customers remain a factor. Graham's strategic investments in technology like the NextGen steam ejector nozzle and the Xdot acquisition position it to capitalize on efficiency improvements and emerging clean energy applications.

Comparison to Industry Standards

• The company's book-to-bill ratio of 1.3x for Q2 fiscal 2026 exceeds its annual goal of 1.1x, indicating strong order intake relative to sales, which is a positive indicator of future growth compared to industry peers.
• The record backlog of $500.1 million, with 85% from the Defense industry, suggests a strong competitive position and long-term contract stability, particularly in a sector known for multi-year projects like the U.S. Navy's Virginia Class Submarine program and MK48 Mod 7 Heavyweight Torpedo hardware.
• The company's focus on high-growth areas like SMRs, hydrogen production, and advanced turbomachinery for Space aligns with broader industry trends towards clean energy and space exploration, potentially outperforming companies solely focused on traditional, declining energy sectors.
• The decline in gross profit margin due to sales mix and high material receipts, while noted, is a common challenge across manufacturing industries facing supply chain disruptions and inflationary pressures, and the company's ability to maintain overall profitability (especially Adjusted EBITDA growth) suggests effective cost management in other areas.

Corporate Governance

Legal Proceedings

• The company is a co-defendant in lawsuits alleging personal injury from exposure to asbestos, which it intends to vigorously defend against. Management believes the resolution will not have a material adverse effect.
• An investigation into a whistleblower complaint at Graham India Private Limited (GIPL) concluded, identifying misconduct totaling $150,000 over four years. All 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. Management does not believe any remaining impact will be material.

Related Party Transactions

• The company has operating leases with companies in which its Executive Chairman holds a majority interest, including two building lease agreements and two equipment lease agreements in Arvada, Colorado. Fixed minimum lease payments were $254,000 for the three months ended September 30, 2025, and $506,000 for the six months ended September 30, 2025. Future fixed minimum lease payments under these leases as of September 30, 2025, are $4,292,000.

Stakeholder Impact

• **Shareholders:** Potential for long-term value creation through strong backlog, revenue growth, strategic acquisitions, and investments in high-growth markets. However, short-term net income dip and gross margin pressure could be a concern. No dividends are expected in the foreseeable future.
• **Employees:** Investments in operations and technology, along with higher performance-based compensation, suggest positive impact. Termination of employees at GIPL due to misconduct highlights commitment to ethical standards.
• **Customers:** Enhanced production capabilities through new facilities and equipment (e.g., Batavia, Florida, Arvada) are expected to improve throughput and meet accelerating schedules, particularly for Defense and Space customers. New technologies like the NextGen steam ejector nozzle aim to provide cost savings and environmental benefits.
• **Suppliers:** Increased capital expenditures and material receipts indicate strong demand for supplier services and materials, though high material receipts also contributed to lower gross margins.
• **Creditors:** Strong liquidity with no outstanding debt on the revolving credit facility and compliance with financial covenants indicate a healthy financial position, reducing credit risk.

Next Steps

• Continue investing in process improvement and longer-term growth opportunities, with capital expenditures expected to be between $15 million and $18 million for fiscal 2026.
• Complete construction of a cryogenic propellant testing facility near P3 in Florida by the third quarter of fiscal 2026.
• Complete installation of advanced Radiographic Testing (RT) equipment at the Batavia, NY facility by the third quarter of fiscal 2026.
• Integrate Xdot Bearing Technologies into the BN business to expand capabilities in high-speed rotating machines.
• Monitor and manage the impact of tariffs, estimated to be between $2 million and $4 million for the full fiscal year 2026.
• Achieve fiscal 2027 goals of 8% to 10% average annualized organic revenue growth and adjusted EBITDA margins in the low to mid-teens.

Key Dates

Recommendation

Graham Corporation demonstrates robust top-line growth, evidenced by a 23% increase in Q2 net sales and a record $500 million backlog, providing strong revenue visibility. While Q2 net income saw a slight decline and gross margins faced pressure due to sales mix and material receipts, the year-to-date net income and Adjusted EBITDA show significant improvement. The company is making substantial strategic investments in new facilities and technology, partially funded by grants, to support long-term organic growth in critical Defense, Space, and emerging clean energy markets. The Xdot acquisition further strengthens its technological capabilities. With no outstanding debt and ample liquidity, Graham is well-positioned to capitalize on its strong market presence and strategic initiatives, making it an attractive long-term investment despite short-term operational fluctuations.

Keywords

Graham Corporation, 10-Q, SEC filing, financial results, net sales, net income, backlog, orders, Defense industry, Energy & Process, Space industry, turbomachinery, heat transfer, vacuum technologies, capital expenditures, Xdot Bearing Technologies, acquisition, gross profit margin, Adjusted EBITDA, tariffs, cash flow, corporate governance, risk factors, OBBB Act, tax savings