10-Q: Graham Corp. Soars on Strong Q1 Sales & Record Backlog

Graham Corporation reported robust first-quarter fiscal 2026 results with an 11% increase in net sales and a 22% surge in backlog, driven by significant defense and new energy orders.

Summary

• Net sales for the first quarter of fiscal 2026 increased by 11% to $55.487 million, up from $49.951 million in the prior year.
• Gross profit margin improved by 170 basis points to 26.5% in Q1 FY26, compared to 24.8% in Q1 FY25.
• Net income for the quarter was $4.595 million, or $0.42 per diluted share, a significant increase from $2.966 million, or $0.27 per diluted share, in Q1 FY25.
• Adjusted net income rose 38% to $4.938 million, and adjusted diluted EPS increased 36% to $0.45 per share.
• Adjusted EBITDA for the quarter was $6.838 million, up from $5.137 million in the prior year, with an Adjusted EBITDA margin of 12.3%.
• Orders booked in Q1 FY26 totaled $125.898 million, resulting in a book-to-bill ratio of 2.3x.
• Backlog reached a record $482.860 million at June 30, 2025, a 22% increase year-over-year, with 87% attributed to the Defense market.
• Cash and cash equivalents decreased to $10.753 million at June 30, 2025, from $21.577 million at March 31, 2025, primarily due to cash used in operating activities and capital expenditures.
• Capital expenditures for the quarter were $7.004 million, more than double the $2.978 million in the comparable prior-year period, reflecting investments in new facilities and equipment.
• The company reiterated its full-year fiscal 2026 guidance, expecting net sales between $225 million and $235 million and Adjusted EBITDA between $22 million and $28 million.

Sentiment

Score: 8

Explanation: The company reported strong financial results with significant increases in sales, gross profit, net income, and adjusted EBITDA. Orders and backlog reached record levels, indicating robust future revenue. Strategic investments in new facilities and technologies, partially grant-funded, position the company for long-term growth, especially in Defense and New Energy. While cash flow from operations was negative due to bonus payments and high capital expenditures, these are largely explained by growth initiatives. The company's compliance with debt covenants and positive outlook contribute to a strong overall sentiment, despite some market uncertainties and ongoing legal matters which management believes are not material.

Positives

• Net sales increased by 11% to $55.487 million, demonstrating strength across a diversified revenue base.
• Energy & Process sales surged by 33% ($5.664 million increase), driven by Chemical/Petrochemical and New Energy markets (hydrogen, SMRs).
• Aftermarket sales to Energy & Process and Defense markets remained strong at $10.410 million, a 33% increase.
• Gross profit margin improved by 170 basis points to 26.5%, reflecting increased leverage on fixed overhead, improved sales mix, and better execution on defense contracts.
• Net income increased by 55% to $4.595 million, and diluted EPS rose to $0.42 per share.
• Adjusted net income and adjusted diluted EPS increased by 38% and 36% respectively, indicating strong underlying operational performance.
• Adjusted EBITDA increased to $6.838 million, with a margin of 12.3%, showing improved earnings power.
• Record orders of $125.898 million were booked, including $86.500 million in follow-on orders for the U.S. Navy's Virginia Class Submarine program.
• The book-to-bill ratio of 2.3x indicates strong future revenue potential and demand.
• Backlog increased by 22% to $482.860 million, providing significant revenue visibility for multiple years, with 87% in the stable Defense market.
• Strategic investments in a new 30,000 square foot manufacturing facility and Radiographic Testing (RT) equipment are partially funded by $13.5 million and $2.2 million strategic grants from Defense customers, respectively.
• The company is investing in a cryogenic propellant testing facility to support customers and enhance capabilities in the Space and New Energy sectors.
• SG&A costs as a percentage of sales decreased to 17.7% from 18.6%, reflecting cost discipline.
• The effective tax rate decreased to 8.3% due to increased discrete tax benefits related to restricted stock awards and improved stock price.
• Compliance with all financial covenants of the Revolving Credit Facility, with a low leverage ratio of 0.3x.
• The NextGen steam ejector nozzle offers a significant market opportunity of over $50 million in the next 5 to 10 years by reducing steam consumption and operating costs.
• The company is well-positioned in growing markets like hydrogen, small modular nuclear reactors (SMRs), concentrated solar, lithium extraction, and geothermal processes, with increased SMR activity driven by energy demands from population growth, crypto-currency mining, and AI data centers.

Negatives

• Cash and cash equivalents decreased significantly by $10.824 million to $10.753 million, primarily due to cash used in operating activities and higher capital expenditures.
• Net cash used by operating activities was $2.259 million, a reversal from $8.716 million provided in the prior year, mainly due to the payment of fiscal 2025 bonuses ($4.3 million BN Performance Bonus).
• Capital expenditures more than doubled to $7.004 million, impacting cash flow.
• Space segment sales decreased by 14% ($569 thousand decrease) compared to the prior year.
• Energy & Process orders decreased by 27% ($7.001 million decrease) compared to the prior year.
• International orders decreased by 82% ($15.894 million decrease) compared to the prior year, largely due to the lumpy nature of large capital projects.
• The estimated impact of increased tariffs for the full fiscal year 2026 is between $2.0 million and $5.0 million.
• The company currently has no intention to pay dividends for the foreseeable future.

Risks

• The company is a co-defendant in asbestos-related lawsuits, which, while historically settled for immaterial amounts or dismissed, could potentially have a material adverse impact on financial position or results of operations.
• An investigation into a whistleblower complaint at Graham India Private Limited (GIPL) identified employee misconduct totaling $150 thousand over four years, leading to terminations and remedial actions; while management believes the remaining impact will not be material, resolutions are uncertain.
• Sales and orders to the Space industry are variable, and many customers in this market have not yet achieved profitability and may require additional funding, leading to uncertain future revenue and growth.
• Traditional Energy markets are undergoing significant transition, with expected low project quantity and challenging new project pricing, and most new capital investment orders anticipated outside the U.S.
• Recent decreases in oil prices combined with economic uncertainty from increased tariffs may negatively impact future Energy & Process aftermarket order volumes.
• The company faces significant cost inflation in labor, raw materials, tariffs, and supply chain costs due to global supply chain disruptions.
• International conflicts (Russia-Ukraine, Israel-Hamas, Israel-Iran) and geopolitical events may further increase supply chain costs, transportation and energy costs, tariffs, and inflation, potentially affecting business and supply chain.
• Future results are contingent on operating production facilities at planned capacity, access to the global supply chain, and the absence of global disruptions or unforeseen events.
• The revolving credit facility contains covenants that may, under certain circumstances, restrict the company's ability to declare or pay dividends.

Future Outlook

The company reiterated its full-year fiscal 2026 guidance, expecting net sales between $225 million and $235 million, gross profit margins of 24.5% to 25.5% of sales, SG&A expenses between 17.5% and 18.5% of sales, a tax rate of 20% to 22%, Adjusted EBITDA between $22 million and $28 million, and capital expenditures between $15 million and $18 million. The company is on schedule to achieve its fiscal 2027 goals of 8% to 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 major disruptions.

Management Comments

• Net sales for the first quarter of fiscal 2026 were $55.487 million, up $5.536 million, or 11% compared with the first quarter of fiscal 2025 reflecting the strength of our diversified revenue base.
• The 170 basis point improvement in gross profit margin over the comparable period of fiscal 2025 reflected increased leverage on fixed overhead costs due to the higher volume of sales discussed above, as well as an improved mix of sales related to higher margin aftermarket sales, and better execution and pricing on defense contracts.
• The increase in SG&A expense reflects the investments we are making in our operations, our employees, and our technology, as well as continued cost discipline as SG&A costs represented 17.7% of sales for the first quarter of fiscal 2026 compared to 18.6% in fiscal 2025.
• Cash flow used by operations during the fiscal 2026 first quarter was primarily driven by the payment of fiscal 2025 bonuses during the quarter, including the BN Performance Bonus of $4.3 million, partially offset by cash net income.
• Orders booked in the first quarter of fiscal 2026 were $125.898 million. As a result, backlog increased $70.525 million during the quarter to $482.860 million at June 30, 2025.
• In July 2025 we received a $25.5 million follow-on order to provide mission-critical hardware for the MK48 Mod 7 Heavyweight Torpedo, which we believe supports our position as a trusted supplier to the U.S. Navy and allied defense programs.
• 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

The company operates in critical sectors, with strong demand in Defense driven by geopolitical tensions and accelerated ship build schedules. The Energy & Process market is undergoing significant transition, with a shift towards New Energy applications like hydrogen, SMRs, and lithium extraction, where the company is actively participating. Increased energy demands from population growth, crypto-currency mining, and AI data centers are driving SMR activity. The commercial Space market is rapidly evolving, and the company provides essential components, though profitability for some customers remains a challenge. The company's strategy to increase participation in the Defense market has been successful, with Defense comprising 87% of its total backlog.

Comparison to Industry Standards

• The company's strong backlog of $482.860 million, with 87% in Defense, positions it favorably compared to peers reliant on more volatile commercial markets, providing long-term revenue visibility (up to six years for U.S. Navy contracts).
• The 2.3x book-to-bill ratio for Q1 FY26 significantly exceeds the company's long-term goal of 1.1x, indicating exceptional demand and future growth potential relative to its current sales, which is a strong indicator compared to industry averages that often hover around 1.0x.
• The 33% increase in Energy & Process sales, particularly in New Energy (hydrogen, SMRs), demonstrates successful diversification and alignment with global energy transition trends, potentially outperforming companies still heavily reliant on traditional fossil fuel projects.
• Strategic grants of $13.5 million and $2.2 million from Defense customers for new manufacturing facilities and RT equipment highlight the company's critical supplier status and strong customer relationships, a competitive advantage not always seen across the industry.
• The company's NextGen steam ejector nozzle, designed to reduce steam consumption and lower operating costs, positions it competitively in the Chemical/Petrochemical sector by offering solutions that enhance throughput while minimizing carbon footprint, aligning with industry sustainability goals.

Management Changes

Corporate Governance

Legal Proceedings

• The company is a co-defendant in lawsuits alleging personal injury from asbestos exposure, similar to previous cases that were dismissed or settled for immaterial amounts. Management intends to vigorously defend itself and believes these will not have a material adverse effect, though outcomes are inherently uncertain.
• An investigation into a whistleblower complaint at Graham India Private Limited (GIPL) identified employee misconduct totaling $150 thousand over four years. All involved employees were terminated, and remedial actions were implemented. The 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 to consolidated results.

Related Party Transactions

• The company has operating leases with Ascent Properties Group, LLC, a limited liability company in which the Executive Chairman holds a majority interest. Fixed minimum lease payments were $252 thousand for the three months ended June 30, 2025, and $247 thousand for the same period in 2024. Future fixed minimum lease payments under these leases as of June 30, 2025, are $4.544 million.

Stakeholder Impact

• **Shareholders:** Positive impact from strong financial performance (increased net income, EPS, Adjusted EBITDA), record orders and backlog, and strategic investments for future growth. However, the decrease in cash and no intention to pay dividends in the foreseeable future might be a concern for income-focused investors.
• **Employees:** Positive impact from continued investment in operations and employees, including performance-based bonuses (BN Performance Bonus of $4.3 million paid in Q1 FY26). Management changes indicate a focus on succession and strengthening the leadership team.
• **Customers:** Positive impact from increased production capabilities (new manufacturing facility, RT equipment) and enhanced technological offerings (NextGen steam ejector nozzle, cryogenic propellant testing facility), promising improved service and product delivery, especially for Defense and New Energy clients.
• **Suppliers/Creditors:** The company's strong backlog and compliance with credit facility covenants suggest a stable financial position, which is favorable for suppliers and creditors. However, potential supply chain disruptions and cost inflation could impact supplier relationships.
• **Regulatory Authorities:** The voluntary reporting of GIPL investigation findings to Indian authorities, U.S. Department of Justice, and the SEC demonstrates cooperation and commitment to compliance, which is positive for regulatory relations.

Next Steps

• Complete construction of the cryogenic propellant testing facility near P3 in Florida, expected in the third quarter of fiscal 2026.
• Complete installation of new Radiographic Testing (RT) equipment at the Batavia, NY facility, expected in the third quarter of fiscal 2026.
• Go-live of the new ERP system at the Batavia facility, expected in the third quarter of fiscal 2026.
• Continue analyzing the impact of the One Big Beautiful Bill Act (OBBB) on consolidated financial statements and effective tax rate.
• 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.

Key Dates

Recommendation

The filing indicates a strong operational and financial performance, with significant increases in net sales, gross profit margin, net income, and adjusted EBITDA. The record orders and substantial backlog, particularly in the stable Defense sector, provide excellent revenue visibility and future growth potential. Strategic investments in manufacturing capacity and new technologies, partially funded by customer grants, further solidify the company's competitive position. While cash flow from operations was negative due to bonus payments and increased capital expenditures, these are investments supporting future growth rather than indicative of underlying weakness. The company's reiterated positive outlook and progress towards long-term growth targets suggest continued upward trajectory. The stock is attractive for long-term growth-oriented investors.

Keywords

Defense industry, Energy & Process, Space industry, turbomachinery, heat transfer, vacuum technologies, backlog, orders, net sales, gross profit margin, adjusted EBITDA, capital expenditures, U.S. Navy, Virginia Class Submarine, MK48 Mod 7 Torpedo, hydrogen, small modular nuclear reactors, SMRs, aftermarket sales, corporate governance, financial performance, SEC filing