GHM

Business Context and Reporting Period

Company: Graham Corporation (GHM)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Second Quarter and Six Months ended September 30, 2025 (Fiscal 2026)
Business Overview: Graham designs and manufactures mission-critical fluid, power, heat transfer, and vacuum technologies for the Defense, Energy & Process, and Space industries. The company operates through wholly-owned subsidiaries including Barber-Nichols (BN) and P3 Technologies.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 23% in Q2 and 17% year-to-date (YTD) compared to the prior year. Defense sales drove the Q2 increase (+32%), while Energy & Process sales grew 11% in Q2 and 21% YTD.
• Margin Compression: Gross margin declined 220 basis points in Q2 to 21.7% due to a mix of sales involving high levels of material receipts which carry lower margins. A one-time grant of $435k received in the prior year for welder training did not repeat.
• SG&A Expenses: Increased $1.1M in Q2 and $1.6M YTD, driven by higher performance-based compensation, equity-based compensation, and bad debt reserves related to a non-U.S. customer. However, SG&A as a percentage of sales improved to 15.5% in Q2 from 17.1%.
• Backlog: Reached a record $500.1 million, a 23% increase year-over-year, driven by a $25.5M follow-on order for the MK48 Mod 7 Heavyweight Torpedo and strong Space/Aerospace orders.
• Book-to-Bill: Q2 book-to-bill ratio was 1.3x, exceeding the annual goal of 1.1x.

Guidance, Outlook, and Risks

Fiscal 2026 Outlook

• Net Sales: $225M - $235M
• Gross Profit Margin: 24.5% - 25.5% (includes estimated tariff impact of $2M-$4M)
• SG&A Expenses: 17.5% - 18.5% of sales
• Effective Tax Rate: 20% - 22%
• Adjusted EBITDA: $22M - $28M
• Capital Expenditures: $15M - $18M

Management Commentary & Unusual Items

• Tax Legislation: The "One Big Beautiful Bill Act" (OBBB) enacted in July 2025 increased the Q2 effective tax rate to 27% but is expected to generate ~$8M in cash tax savings over two years via bonus depreciation.
• Acquisition: On October 20, 2025, Graham acquired assets of Xdot Bearing Technologies for $1.5M (including earnouts) to expand foil bearing technology capabilities.
• Tariffs: Estimated impact of tariffs for the first six months was ~$1M; full-year impact estimated between $2M and $4M.

Risks and Contingencies

• Legal: Ongoing asbestos-related lawsuits; management does not expect a material adverse effect but notes inherent uncertainties.
• Compliance: Investigation into misconduct at Graham India Private Limited (GIPL) concluded in FY2024; remedial actions taken and authorities notified. Management does not expect material remaining impact.
• Market: Exposure to foreign currency fluctuations (17% of sales international) and geopolitical tensions affecting supply chains and defense budgets.

Investor Verification Checklist

• Backlog Conversion: Verify the timing of revenue recognition for the record $500M backlog, noting that 35-40% is expected within one year and a significant portion (Defense) has multi-year conversion cycles.
• Tariff Impact: Monitor the realization of the estimated $2M-$4M full-year tariff impact on gross margins.
• Capital Expenditure Funding: Confirm the funding sources for the $15M-$18M CapEx plan, specifically the reliance on strategic grants ($13.5M for facility, $2.2M for RT equipment) versus cash burn.
• Working Capital Trends: Review the significant increase in unbilled revenue ($50.1M) and customer deposits ($104.9M) to understand cash flow timing relative to revenue recognition.
• Adjusted EBITDA Reconciliation: Scrutinize the non-GAAP adjustments, particularly the $1.1M equity-based compensation and ERP implementation costs excluded from Adjusted EBITDA.