GHM

Business Context and Reporting Period

Company: Graham Corporation (NYSE: GHM)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Third quarter and nine months ended December 31, 2025 (Fiscal Year 2026)
Business Overview: Graham designs and manufactures mission-critical fluid, power, heat transfer, vacuum, and advanced mixing technologies for the Defense, Energy & Process, and Space industries. The company operates as a single reporting segment.

Key Financial Metrics

Note: Dollar amounts in thousands except per share data. Fiscal year ends March 31.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 21% in Q3 and 18% for the nine months ended Dec 31, 2025, compared to the prior year. Defense sales drove a 31% increase in Q3, while Energy & Process sales rose 13%.
• Profitability: Net income surged 79% in Q3 and 34% for the nine-month period. Operating income increased 41% in Q3.
• Margins: Gross margin declined 100 basis points in Q3 to 23.8% due to a mix of sales with lower-margin material receipts and the absence of a $255k BlueForge Alliance grant received in the prior year. SG&A expenses as a percentage of sales improved to 18.6% in Q3 from 20.6% in the prior year.
• Backlog: Total backlog reached a record $515.6 million, a 34% increase year-over-year, driven by strong Defense and Space orders. The book-to-bill ratio for Q3 was 1.3x.
• Acquisitions: Completed the acquisition of Xdot Bearing Technologies in October 2025 ($900k purchase price). Subsequently, on January 23, 2026, acquired FlackTek Manufacturing for $35 million (cash and stock).

Guidance, Outlook, and Risks

Fiscal 2026 Guidance (Updated)

• Net Sales: $233.0 million to $239.0 million (Previous: $225.0M - $235.0M).
• Gross Profit Margin: 24.0% to 25.0% of sales (Previous: 24.5% - 25.5%).
• SG&A Expenses: 17.5% to 18.5% of sales.
• Effective Tax Rate: 16% to 18% (Previous: 20% - 22%).
• Adjusted EBITDA: $24.0 million to $28.0 million (Previous: $22.0M - $28.0M).
• Capital Expenditures: $15.0 million to $18.0 million.

Management Commentary & Risks

• Tariffs: Management estimates the impact of tariffs for the full fiscal year will be an incremental $1.0 million to $1.5 million compared to the prior year.
• Tax Reform: The "One Big Beautiful Bill Act" (OBBB) enacted in July 2025 is expected to increase the effective tax rate by ~200 basis points but will generate approximately $8 million in cash tax savings over two years via bonus depreciation.
• Legal Contingencies: The company faces ongoing asbestos-related lawsuits and is cooperating with authorities regarding a whistleblower investigation into its Indian subsidiary (GIPL). Management does not believe these will have a material adverse effect on financial results.
• Liquidity: The company has a $50 million revolving credit facility (amended to $80 million post-FlackTek acquisition) with no borrowings outstanding as of Dec 31, 2025.

Investor Verification Checklist

• Backlog Conversion: Verify the timing of revenue recognition for the record $515.6 million backlog, noting that 35-40% is expected within one year and the remainder extends beyond two years, heavily weighted toward long-cycle Defense contracts.
• Acquisition Integration: Monitor the integration of Xdot and FlackTek, specifically the realization of synergies and the impact of the $25 million potential earn-out on FlackTek.
• Tariff Exposure: Track the actual impact of tariffs on margins, as management estimates a $1.0M-$1.5M hit for the full year.
• Capital Expenditures: Confirm progress on the $15M-$18M CapEx plan, including the new 30,000 sq. ft. Defense facility and cryogenic testing facility, which are partially funded by customer grants.
• Legal Proceedings: Review updates on the GIPL investigation and asbestos litigation to ensure no material provisions are required.