Executive Summary / Key Takeaways

• Graham Corporation has successfully transformed from a highly cyclical energy-focused business into a diversified provider of mission-critical technologies, with Defense now comprising 58% of sales and anchoring a record $412 million backlog.
• Strategic investments in capacity expansion, advanced manufacturing (automated welding, RT equipment), and new testing facilities (cryogenic propellant) are expected to drive future organic growth and improve operational efficiency, targeting over 20% return on invested capital.
• The company's differentiated technologies, including the new NextGen steam ejector nozzle and P3's turbomachinery IP (MCD, SCAMP), offer quantifiable benefits like improved efficiency and lower operating costs, enhancing its competitive moat in niche applications.
• Strong financial performance in fiscal 2025, with 13% revenue growth and significant gross margin expansion to 25.2%, demonstrates improved execution and leverage on higher volume, positioning the company for continued profitability gains.
• Fiscal 2026 guidance projects continued top-line growth (midpoint 10% increase) and adjusted EBITDA margin expansion, keeping Graham firmly on track towards its fiscal 2027 goals of 8-10% organic revenue growth and low to mid-teen adjusted EBITDA margins.

A Strategic Transformation Anchored in Mission-Critical Expertise

Graham Corporation, with roots tracing back to 1936, has undergone a significant strategic evolution. Historically tied to the volatile capital cycles of the petroleum refining and petrochemical industries, the company has successfully diversified its business over recent years. This transformation has reshaped Graham into a global leader in the design and manufacture of mission-critical fluid, power, heat transfer, and vacuum technologies, now serving a broader base across the Defense, Energy Process, and Space industries. This pivot was a deliberate response to the inherent cyclicality of its traditional markets, aiming to build a more stable and predictable business model.

The core of Graham's offering lies in its custom-engineered, highly reliable products designed for demanding applications. This requires deep engineering know-how and a highly skilled workforce, capabilities that form the bedrock of the company's competitive position. The strategic shift has prioritized pursuing niche applications within markets characterized by high barriers to entry and enduring tailwinds, where differentiated engineered products and a full lifecycle scope of work command higher margins.

A key driver of this transformation has been the increased penetration into the Defense sector, particularly with the U.S. Navy. This focus has dramatically altered the company's revenue mix, with Defense sales climbing from approximately 25% in fiscal 2021 to 58% in fiscal 2025. This segment provides a stable, multi-year revenue stream, anchoring the company's record backlog and offering significant visibility into future performance. Complementing this, strategic acquisitions like Barber-Nichols (BN) and P3 Technologies (P3) have expanded Graham's technological portfolio, adding specialized turbomachinery and cryogenic capabilities crucial for the Space and New Energy markets, further diversifying the business and enhancing its ability to serve complex, high-compliance needs.

Technological Differentiation and Innovation

Graham's competitive edge is significantly shaped by its technological capabilities and commitment to innovation. The company specializes in custom-engineered solutions across vacuum, heat transfer, cryogenic pump, and turbomachinery technologies. These aren't off-the-shelf components; they are designed to meet the unique, stringent requirements of mission-critical applications in demanding environments.

A prime example of Graham's differentiated technology is the recently launched NextGen steam ejector nozzle for the Energy Process market. Engineered to optimize performance in vacuum distillation towers, this nozzle is designed to reduce steam consumption by up to 10% or increase system throughput. These tangible benefits translate directly into lower operating costs and enhanced profitability for refinery and process plant operators, while also supporting environmental goals by minimizing carbon footprint. Management estimates the total addressable market for this specific nozzle technology exceeds $50 million over the next 5 to 10 years, highlighting a concrete opportunity for leveraging R&D into profitable growth.

The acquisitions of Barber-Nichols and P3 Technologies have further bolstered Graham's technological moat, particularly in turbomachinery. BN brings expertise in specialty turbomachinery for Space, Aerospace, Cryogenic, and New Energy markets, including electrochemical milling capabilities for manufacturing to tight tolerances. P3 added patent-protected intellectual property, such as the multi-channel diffuser (MCD) and the self-contained actuating magnetic pump (SCAMP). The MCD technology improves the efficiency and operating range of pumps and compressors, applicable to both new designs and retrofits. The SCAMP is a positive displacement pump family for low-flow, high-pressure cryogenic applications, compatible with various propellants. Management sees potential for the MCD to disrupt the market for pumps operating 24/7, indicating a belief in the technology's significant performance advantages.

Graham's R&D efforts, while partially customer-funded to solve specific problems, are increasingly focused on internal investments to drive organic growth and maintain technological leadership. The company expects non-customer-funded R&D spend to gradually increase to 1% to 2% of revenue, aiming to disrupt markets and enhance existing products. This commitment is further evidenced by strategic capital investments like the new Radiographic Testing (RT) equipment at the Batavia facility, supported by a Defense customer investment. This equipment enhances the ability to evaluate critical welds for submarine programs, ensuring quality and compliance, which is a crucial differentiator in the demanding Defense market.

The "so what" for investors is that these technological differentiators provide Graham with a competitive moat in its chosen niches. The ability to offer solutions that deliver quantifiable benefits like improved efficiency, lower operating costs, and enhanced reliability allows Graham to compete on value, not just price. This supports higher margins and strengthens long-term customer relationships, contributing directly to the company's strategic goals of profitable growth and market share capture in specialized applications.

Strategic Execution and Financial Performance

Graham's strategic transformation is clearly reflected in its recent financial performance. Fiscal year 2025 marked a period of strong growth and significant profitability improvement, demonstrating the effectiveness of the company's operational focus and market diversification.

Net sales for fiscal 2025 reached $209.9 million, a 13% increase over fiscal 2024. This growth was primarily organic, driven by a substantial 23% increase in Defense sales, fueled by existing programs, improved execution, better pricing, and the timing of key project milestones. The P3 acquisition, completed in November 2023, contributed $2.8 million in incremental revenue for the year, further supporting growth, particularly in the Space and Defense segments. Energy Process sales remained consistent year-over-year, with international growth offsetting a decline in aftermarket sales from a record prior year, though aftermarket activity remained robust.

A key highlight of fiscal 2025 was the significant expansion in gross profit margin, which increased by 330 basis points to 25.2%. This improvement stemmed from increased leverage on fixed overhead costs due to higher sales volume, coupled with better execution and improved pricing. The completion of challenging first article U.S. Navy projects in fiscal 2024 also removed a drag on margins. Additionally, a $1.3 million grant from the BlueForge Alliance for welder training contributed to the fiscal 2025 gross profit.

While Selling, General, and Administrative (SGA) expenses increased in fiscal 2025, this was largely attributable to strategic investments aimed at supporting future growth and improving operational capabilities. These included costs associated with integrating P3, increased staffing, performance-based compensation, higher R&D investment, and the implementation of a new ERP system at the Batavia facility. Notably, the supplemental performance bonus related to the Barber-Nichols acquisition also contributed to SGA, impacting adjusted EBITDA margin by over 200 basis points in fiscal 2025. This bonus is set to conclude at the end of fiscal 2026, which is expected to provide a tailwind to margins thereafter.

The net result of strong revenue growth and margin expansion was a significant improvement in profitability. Net income for fiscal 2025 was $12.2 million, or $1.11 per diluted share, a substantial increase from $4.6 million, or $0.42 per diluted share, in fiscal 2024. Adjusted net income and adjusted net income per diluted share also saw strong growth, reaching $13.7 million and $1.24, respectively, up from $6.8 million and $0.63 in the prior year. Adjusted EBITDA increased by 69% to $22.4 million, representing a 10.7% margin, a 350 basis point improvement over fiscal 2024.

Graham's balance sheet reflects this improved performance and strategic focus. Cash provided by operating activities was $24.3 million in fiscal 2025, supporting increased capital expenditures of $19.0 million. These investments were directed towards capacity expansion and productivity enhancements, including the Batavia facility expansion, the Arvada land purchase, and the Florida cryogenic testing facility. The company ended fiscal 2025 with $21.6 million in cash and no outstanding debt on its $50 million revolving credit facility, providing ample liquidity and financial flexibility for continued organic and potential inorganic growth initiatives.

The company was in compliance with all financial covenants, and management believes its current liquidity position is sufficient to meet immediate cash needs.

Competitive Positioning

Graham operates in a highly competitive landscape, facing rivals that vary by market segment. Principal bases of competition include technology, price, performance, reputation, delivery, and quality. Key publicly traded competitors in overlapping areas include Curtiss-Wright (CW), Woodward (WWD), Parker-Hannifin (PH), and Flowserve (FLS), among others.

Compared to larger, more diversified players like CW and PH, Graham often competes in niche, highly specialized applications where its custom engineering expertise and ability to meet stringent quality and performance requirements are critical differentiators. While larger competitors may possess greater financial, marketing, and manufacturing resources or benefit from economies of scale leading to potentially lower production costs, Graham leverages its deep technical knowledge, responsive production environment, and strong customer relationships built over decades.

Graham's strategic focus on mission-critical, high-compliance products provides a degree of insulation from direct price-based competition in certain segments, particularly in Defense where reliability and performance are paramount. The company's ability to handle complex, custom orders and manage rigorous project requirements is a key competitive advantage. The recent investments in automated welding, enhanced RT equipment, and the cryogenic testing facility are aimed at reinforcing this position by increasing throughput, improving quality control, and expanding capabilities in high-demand areas like naval defense and cryogenic applications. The new RT equipment, for instance, is expected to greatly simplify and expedite the evaluation of complex welds, enhancing efficiency and quality compared to traditional methods. The cryogenic testing facility offers a scalable, cost-effective alternative to existing centers, providing a competitive edge in serving critical programs needing timely testing solutions.

While some competitors may have higher R&D spending as a percentage of revenue or faster innovation cycles in certain areas (e.g., WWD in electrification), Graham's R&D is targeted at developing differentiated products like the NextGen nozzle, which offers specific, quantifiable benefits designed to disrupt existing markets based on performance and cost savings. The patent-protected IP acquired with P3, such as MCD and SCAMP, also provides unique technological advantages in specific turbomachinery applications.

Graham's increasing concentration in domestic Defense sales (81% of total sales in FY25 were domestic, 58% to Defense) reduces exposure to certain international competitive dynamics, such as foreign competitors benefiting from weaker currencies or differing regulatory environments. However, it also increases customer concentration risk with the U.S. government. The company's efforts to expand its international footprint and aftermarket services, particularly in the Energy Process market in regions like India and the Middle East, aim to diversify its customer base and capture opportunities in growing markets.

Overall, Graham positions itself as a high-value, reliable partner in specialized, demanding applications. While it may not compete head-to-head on scale or broad product catalogs with industry giants, its technical expertise, operational flexibility, and targeted technological advancements provide a competitive moat in its chosen niches. The company's strategic investments are designed to enhance these core strengths and improve its competitive standing by increasing capacity, improving efficiency, and expanding its differentiated capabilities.

Outlook and Growth Trajectory

Graham's outlook for fiscal year 2026 and its long-term targets reflect confidence in its strategic direction and the momentum built over the past few years. The company is projecting continued growth and profitability improvement, driven by its robust backlog and ongoing strategic initiatives.

For fiscal year 2026, Graham anticipates net sales between $225 million and $235 million. The midpoint of this range represents a 10% increase over fiscal 2025, supported by the strong backlog, approximately 45% of which is expected to convert to revenue within the next 12 months. This guidance assumes the company can operate its production facilities at planned capacity, maintain access to its global supply chain, and does not experience significant global disruptions or unforeseen events.

Profitability is expected to remain strong, with a projected gross profit margin between 24.5% and 25.5%. This range incorporates the estimated impact of increased tariffs ($2 million to $5 million) and the absence of the fiscal 2025 welder training grant benefit, which are expected to be partially offset by ongoing process improvements and operational efficiencies. SGA expenses are projected to be between 17.5% and 18.5% of sales, reflecting continued investments in growth initiatives and the inclusion of the Barber-Nichols performance bonus and ERP conversion costs.

Based on these projections, Graham expects adjusted EBITDA for fiscal 2026 to be between $22 million and $28 million. The midpoint of this range implies a 12% increase over fiscal 2025, with an adjusted EBITDA margin of approximately 11.1% at the midpoint. This outlook keeps the company firmly on track towards its long-term financial goals for fiscal 2027: achieving 8% to 10% average annualized organic revenue growth and low to mid-teen adjusted EBITDA margins.

Capital expenditures are expected to remain elevated in fiscal 2026, projected between $15 million and $18 million. Approximately half of this spend is allocated to completing the Batavia Defense expansion and the Florida cryogenic testing facility, both scheduled for completion in the first quarter of fiscal 2026. These investments, along with others targeting over 20% ROIC, are crucial for supporting the planned organic growth and enhancing operational capabilities.

Management highlights that the conclusion of the Barber-Nichols supplemental bonus at the end of fiscal 2026 is expected to provide a significant tailwind, contributing approximately 200 basis points to the adjusted EBITDA margin in fiscal 2027, further supporting the achievement of the low to mid-teen margin target. The leadership transition, with Matt Malone assuming the CEO role and Dan Thoren becoming Executive Chairman focused on strategic initiatives, is intended to ensure continuity and drive the next phase of growth.

Risks and Challenges

While Graham's strategic transformation and recent performance are encouraging, investors should be mindful of potential risks and challenges that could impact the company's outlook.

A significant risk is the increasing customer concentration, particularly with the U.S. Navy. While this provides stability, any disruption in government funding, shifts in Defense spending priorities, or changes in Graham's participation in key programs could materially affect revenue and results. The large, long-term nature of Defense contracts, often fixed-price, also exposes the company to risks of estimating errors, cost overruns, supplier failures, and potential volatility in short-term financial results if project timelines are delayed. Government contracts also carry unique risks related to stringent regulations, audits, and potential penalties for non-compliance.

Supply chain disruptions remain a concern, potentially impacting the ability to meet production schedules, especially given the accelerated shipbuilding demands from the Navy. While Graham is investing in capacity and working with customers and partners like BlueForge Alliance to address these issues, broader supply chain constraints within the defense industrial base or other markets could still pose challenges.

The Energy Process market, despite diversification efforts, remains subject to volatility in commodity prices and capital investment cycles. A sustained downturn in these industries could reduce demand for Graham's products, particularly capital equipment. The ongoing energy transition and evolving government policies regarding fossil fuels and alternative energy sources also create uncertainty regarding long-term demand trends in this segment.

Foreign operations, particularly in China and India, expose Graham to economic, political, regulatory, and legal system uncertainties, as well as foreign currency fluctuations and potential impacts from changing trade policies and tariffs. While the company takes steps to mitigate these risks, they remain inherent in international business.

Operational risks include the complexity and potential disruption associated with implementing a new ERP system at the Batavia facility. Furthermore, achieving the planned benefits and timely completion of major capital projects, such as the Batavia expansion and cryogenic testing facility, is crucial for realizing expected growth and efficiency improvements.

Finally, the ability to attract and retain a skilled workforce, particularly engineers and welders, is essential for executing on the company's backlog and supporting growth initiatives. While Graham has implemented training programs and seen positive results, labor shortages or increased competition for talent could lead to higher costs or impact production capacity.

Conclusion

Graham Corporation has successfully navigated a significant strategic transformation, repositioning itself as a diversified provider of mission-critical technologies with a strong and growing presence in the Defense, Energy Process, and Space markets. The company's focus on custom-engineered, high-reliability products, coupled with strategic investments in capacity, advanced manufacturing, and new testing capabilities, is building a solid foundation for future growth.

The record backlog, anchored by stable, multi-year Defense programs, provides excellent revenue visibility. Recent financial performance demonstrates improving operational execution and profitability, with significant margin expansion achieved in fiscal 2025. The company's strong balance sheet and liquidity position provide the financial flexibility needed to pursue its strategic objectives, both organically and potentially through opportunistic acquisitions.

While challenges remain, including customer concentration, supply chain risks, and market cyclicality in certain segments, Graham's differentiated technology, commitment to innovation, and clear strategic roadmap position it to capitalize on opportunities in its target markets. The fiscal 2026 guidance and the path towards low to mid-teen adjusted EBITDA margins by fiscal 2027 underscore management's confidence in the company's ability to deliver sustainable, profitable growth. For investors, Graham represents a compelling story of a company that has successfully reinvented itself, leveraging its core expertise to pursue higher-margin opportunities in resilient markets, with tangible catalysts for future performance improvement on the horizon.