Rooted in Excellence: A Storied Legacy
Incorporated in 1936, Graham Corporation has evolved from a specialized manufacturer of surface condensers and ejectors into a diversified provider of mission-critical equipment and systems. The company’s origins can be traced back to the early 20th century, when it was founded as Graham Manufacturing Company, catering primarily to the steam power generation market. Over the years, Graham has strategically expanded its product portfolio and geographic reach, establishing a strong presence in the defense, space, and alternative energy sectors.
In the 1960s and 1970s, Graham significantly expanded its product offerings to serve new markets beyond steam power generation, including the petrochemical, refining, and nuclear power industries. This diversification strategy proved crucial in helping the company weather downturns in individual markets. During this period, Graham also established manufacturing operations in China to tap into the growing Asian market, further expanding its global footprint.
The 1980s and 1990s presented challenges as Graham navigated the changing global energy landscape. In response, the company proactively invested in research and development to create more energy-efficient and environmentally friendly products. This strategic move allowed Graham to maintain its leadership position in key markets and adapt to evolving industry needs.
The 2000s and 2010s marked a period of strategic expansion through targeted acquisitions. A significant milestone was the purchase of Barber-Nichols in 2020, a Colorado-based subsidiary specializing in turbomachinery products and services for the space, aerospace, cryogenic, defense, and energy markets. This acquisition substantially broadened Graham’s product portfolio and market reach, enhancing its capabilities in high-growth sectors.
Throughout its history, Graham has demonstrated remarkable resilience and adaptability. The company successfully navigated asbestos-related lawsuits without material impact, showcasing its robust risk management and legal strategies. Graham’s transformation from a family-owned steam power equipment manufacturer to a global leader in mission-critical technologies serving a wide range of industrial markets is a testament to its strategic vision and execution.
Navigating Diverse Markets: A Resilient Business Model
Graham’s diversified business model has been a key driver of its resilience. The company’s products and services are deployed across a wide range of industries, including defense, space, energy, and process industries, mitigating its reliance on any single market. This diversification has enabled Graham to weather economic fluctuations and capitalize on growth opportunities in various sectors.
In the defense industry, Graham supplies mission-critical equipment for nuclear and non-nuclear propulsion, power, fluid transfer, and thermal management systems. The company’s reputation for engineering excellence and close customer collaboration has solidified its position as a trusted partner for the U.S. Navy and other defense agencies. Graham has built a leading, and in most cases sole source, position for certain systems and equipment for the defense industry. This segment has been a major driver of the company’s growth, with sales to the defense industry increasing 23% in the second quarter of fiscal 2025 compared to the prior year period.
Graham’s footprint in the space industry includes the design, development, and manufacture of propulsion, power, and energy management systems, as well as life support equipment. The company’s expertise in cryogenic and thermal management technologies has made it a valuable contributor to the rapidly evolving commercial space sector. In the second quarter of fiscal 2025, Graham booked a significant order to provide cryogenic pumps for a space launch vehicle, highlighting the growth opportunities in this market. However, sales to the space industry can be variable as many of the key players have yet to achieve profitability.
In the energy and process industries, Graham’s solutions are utilized in various applications, from oil refining and cogeneration to alternative energy projects, such as hydrogen production, concentrated solar power, and geothermal power generation. The company’s commitment to innovation has led to the development of its NextGen steam ejector nozzle, a technology designed to enhance efficiency, environmental sustainability, and profitability for its customers. While traditional energy markets have faced challenges, Graham is positioning itself to capitalize on the growth in alternative and clean energy opportunities. Sales to the refining and chemical/petrochemical markets increased 15% and 24% respectively in the second quarter of fiscal 2025 compared to the prior year.
In addition to capital equipment sales, Graham has experienced strong aftermarket sales, particularly to the refining, chemical/petrochemical, and defense markets. Aftermarket sales remained robust in the second quarter of fiscal 2025, though they were 15% lower than the record levels seen in the prior year period.
Financial Strength and Operational Excellence
Graham’s financial position has been a testament to its operational discipline and strategic foresight. As of September 30, 2024, the company reported a strong cash and cash equivalents balance of $32.32 million, with no outstanding debt on its balance sheet. This financial flexibility enables Graham to pursue growth initiatives, invest in innovation, and maintain a nimble posture in an ever-changing market landscape.
The company’s focus on operational excellence has also been a key contributor to its financial performance. Graham has implemented robust cost management strategies, streamlined its manufacturing processes, and made strategic investments in automation and digital technologies to enhance productivity and efficiency. These initiatives have translated into improved gross margins and adjusted EBITDA margins, underscoring the company’s ability to deliver value to its customers and shareholders.
Graham Corporation’s financial performance reflects its strategic initiatives and operational efficiency. The company’s revenue for the fiscal year 2024 reached $185.53 million, representing a significant increase from the previous year. This growth was driven by strong performance across its key market segments, particularly in the defense and space industries.
The company’s gross profit margin improved to 20.5% in fiscal year 2024, up from 18.7% in the prior year, reflecting the impact of operational improvements and a favorable product mix. Net income for the year was $4.56 million, compared with a net loss in the previous fiscal year.
For the second quarter of fiscal 2025, Graham reported strong growth with net sales increasing 19% year-over-year to $53.56 million. This growth was driven by a $0.86 million contribution from the recent P3 acquisition and a $5.78 million increase in defense sales, partially offset by a decline in aftermarket sales. Gross profit margin expanded significantly, reaching 23.9%, driven by increased leverage on fixed overhead costs, improved sales mix, and execution. Net income for the quarter was $3.28 million, or $0.30 per diluted share, compared to $411,000, or $0.04 per diluted share, in the prior year period.
Liquidity
Graham Corporation maintains a strong liquidity position, which provides financial flexibility and supports its growth initiatives. As of September 30, 2024, the company had $32.32 million in cash and cash equivalents, with no debt on its balance sheet. This robust liquidity position allows Graham to pursue strategic opportunities, invest in research and development, and navigate potential market uncertainties.
The company’s operating cash flow for fiscal year 2024 was positive at $28.12 million, reflecting strong working capital management and improved profitability. Free cash flow for the same period was $18.89 million. For the second quarter of fiscal 2025, operating cash flow was $13.93 million, with free cash flow of $10.45 million.
Graham’s current ratio, a measure of short-term liquidity, stood at 1.08, while the quick ratio was 0.83, indicating the company’s ability to meet its short-term obligations. The company has a new 5-year $50 million revolving credit facility with Wells Fargo, of which $43.15 million was available as of September 30, 2024. The facility has customary terms and requires Graham to maintain a consolidated total leverage ratio not exceeding 3.5x and a consolidated fixed charge coverage ratio of at least 1.2x.
Navigating Challenges and Seizing Opportunities
Graham has demonstrated its resilience in the face of market volatility and industry-specific challenges. The company has successfully navigated through periods of uncertainty, including the global pandemic and supply chain disruptions, by leveraging its diversified revenue streams, strong customer relationships, and operational agility.
The company’s recent acquisition of P3 Technologies, a custom turbomachinery engineering and manufacturing business, has further strengthened its capabilities in the space, defense, and new energy sectors. The integration of P3’s expertise in computational fluid dynamics and product validation has enhanced Graham’s ability to develop innovative solutions and address the evolving needs of its customers.
In the third quarter of fiscal 2024, Graham’s Audit Committee concluded an investigation into a whistleblower complaint regarding its India subsidiary GIPL. The investigation identified evidence of employee misconduct totaling $150,000 over 4 years, which was isolated to GIPL. All involved employees have been terminated and Graham has implemented remedial actions, including strengthening its compliance program and internal controls. The company has voluntarily reported the findings to the appropriate authorities.
Looking to the Future: Poised for Continued Growth
As Graham Corporation charts its course forward, the company remains focused on leveraging its core competencies, investing in strategic initiatives, and positioning itself for long-term success. The company’s commitment to R&D, workforce development, and operational excellence positions it well to capitalize on emerging opportunities in its target markets.
Graham’s guidance for the fiscal year 2025 reflects its confidence in its growth trajectory. The company expects to achieve revenue between $200 million and $210 million, representing a projected topline growth of 11% over fiscal 2024 at the midpoint. Additionally, the company has raised its adjusted EBITDA guidance to a range of $18 million to $21 million, implying an adjusted EBITDA margin of approximately 9.5% at the midpoint, representing a 230 basis point improvement over fiscal 2024. This updated EBITDA guidance keeps Graham on track to achieve its long-term goal of low-to-mid-teen adjusted EBITDA margins by fiscal 2027.
The company’s backlog increased 3% during the second quarter of fiscal 2025 to $407.01 million, providing good visibility into future revenue. Graham expects approximately 35% to 45% of this backlog to convert to sales within the next 12 months, with an additional 30% to 40% projected for conversion over the following 12 months.
Conclusion
Graham Corporation’s legacy of engineering excellence, financial discipline, and market diversification has positioned the company as a formidable player in the defense, space, energy, and process industries. As the company navigates the evolving landscape, its commitment to innovation, operational efficiency, and strategic execution will be instrumental in driving sustainable growth and delivering long-term value to its shareholders.
With a strong balance sheet, growing backlog, and strategic focus on high-growth markets, Graham is well-positioned to capitalize on emerging opportunities in the defense, space, and clean energy sectors. The company’s ability to leverage its expertise in mission-critical fluid, power, heat transfer, and vacuum technologies across diverse industries provides a solid foundation for continued success and value creation.
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