Graham (GHM +2.95%), an engineering and manufacturing company specialized in equipment for the defense, energy, and process industries, released its Q1 FY2026 financial results on August 5, 2025. The release showed a sharp improvement in profitability, with non-GAAP earnings per share (EPS) of $0.45, topping the analyst estimate of $0.37 (non-GAAP). However, the company's GAAP revenue was $55.5 million, which was below the expected $63.4 million (GAAP). In summary, the period saw robust margin gains and strong order growth, particularly in the Defense segment, but a shortfall on GAAP sales compared to expectations.
| Metric | Q1 FY26(Ended June 30, 2025) | Q1 FY26 Estimate | Q1 FY25(Ended June 30, 2024) | Y/Y Change |
|---|---|---|---|---|
| EPS (Non-GAAP) | $0.45 | $0.37 | $0.33 | 36 % |
| Revenue (GAAP) | $55.5 million | $63.44 million | N/A | N/A |
| Gross Margin | 26.5 % | 24.8 % | 1.7 pp | |
| Adjusted EBITDA | $6.8 million | $5.1 million | 33.3 % | |
| Book-to-Bill Ratio | 2.3x | N/A |
Source: Analyst estimates provided by FactSet. Management expectations based on management's guidance, as provided in Q4 2025 earnings report.
Understanding the Business and Strategy
Graham operates as a supplier of complex, custom-engineered equipment used in demanding environments. Its customers include defense contractors, energy producers, and process industry players. The company provides products such as ejectors, vacuum pumps, turbomachinery systems, and cryogenic test capabilities that support applications ranging from naval shipbuilding to emerging energy sources and space.
These include expanding into new markets beyond its industrial roots, focusing on innovation and proprietary technologies, deepening ties to U.S. defense programs, driving production efficiency, and maintaining strict financial discipline. Success depends on balancing demand shifts, converting backlog to sales, and extracting higher margins from advanced product offerings while controlling costs.
Quarter Highlights: Sales, Margins, Orders, and Investments
The quarter featured a divergence between high profitability and lower-than-expected revenue. While GAAP sales increased 11% year over year, reaching $55.5 million, they fell about $8 million short of analyst forecasts on a GAAP revenue basis. Despite the revenue shortfall, the company posted expanding gross and operating margins (GAAP). Gross margin rose to 26.5%, up 1.7 percentage points, and operating margin increased to 8.9%, compared to 6.5% in Q1 FY2025.
Non-GAAP EPS rose 36%, partly due to a shift toward higher-margin defense and aftermarket sales. Adjusted EBITDA, which is earnings before interest, taxes, depreciation, and amortization with certain adjustments for one-time items, climbed 33% to $6.8 million (non-GAAP). Aftermarket sales in the Energy & Process and Defense markets also stood out, increasing 33% to $10.4 million, which helps drive profitability because aftermarket business carries higher margins and recurring demand.
The headline order figure was $125.9 million, Orders more than doubled compared to the same quarter of the prior year. The book-to-bill ratio, which measures the relationship between orders received and products billed in a period, jumped to 2.3x from 1.1x in FY2025. This rapid order growth resulted in a record backlog of $482.9 million at period end.—Backlog was up 22% compared to the same period in the prior year, and with approximately 87% of backlog is now tied to Defense projects. Management explained that about 35–40% of this backlog is scheduled for conversion to sales over the next 12 months, offering sales visibility for the fiscal year.
Several investments in technology and production expanded Graham’s future capabilities. The company completed its Batavia defense facility expansion, rolled out automated welding systems. Management highlighted these investments as key to supporting both cost reductions and new sales opportunities. Other one-time activities included payment of a $4.3 million supplemental bonus related to a prior acquisition in FY2025, which impacted operating cash flow but will not recur. There were no changes reported to the company’s dividend policy.
Products and Segment Update
Graham’s business crosses several product lines. In defense, it supplies vacuum ejectors, pumps, and cryogenic systems used in programs like the U.S. Navy’s Virginia-class submarines and MK48 Mod 7 Heavyweight Torpedo project. Energy & Process offerings focus on vacuum systems, turbomachinery such as the self-contained actuated magnetic pump (SCAMP), and proprietary multi-channel diffuser (MCD) pump technologies acquired through the P3 Technologies integration. Aftermarket parts and services also play a larger role, supporting installed equipment across a global base.
Recent performance in defense was strong, with large follow-on orders driving the record book-to-bill ratio of 2.3x. Defense now makes up the bulk of Graham’s backlog, with approximately 87% attributable to the Defense industry, which provides a steady revenue stream but concentrates risk within a single customer set. Energy and process markets, including growth in small modular reactors and hydrogen, recorded growth in aftermarket and capital equipment projects. The new Florida cryogenic test center expands the company’s reach in advanced aerospace and next-generation energy projects, although that facility is just ramping up and has yet to secure committed bookings.
Management noted that the integration of P3 Technologies is largely complete, unlocking capabilities in turbomachinery that allow Graham to pursue novel, fast-turn projects. The proprietary SCAMP pump, initially developed for space, is now being evaluated for use in medical and terrestrial transportation applications. These moves reflect Graham’s strategy to broaden its customer base and increase high-value, recurring project work.
The payroll grew in step with expansion, with the Batavia welder workforce increasing by 10% year over year. Investments in worker training and automation aim to maintain production capacity as order volume increases. All major projects, including manufacturing and testing expansions, remain on plan and on budget.
Looking Ahead: Guidance and Focus Areas
Management maintained its full-year FY2026 guidance, projecting net sales between $225 million and $235 million, a gross margin of 24.5–25.5%, and adjusted EBITDA (non-GAAP) of $22 million to $28 million. Capital expenditures for FY2026 are planned between $15.0 million and $18.0 million, with the company targeting 8–10% annual organic revenue growth and low- to mid-teen adjusted EBITDA margins by FY2027. Guidance for FY2026 incorporates expected tariff costs of $2 million to $5 million, but maintains the company’s margin outlook. No changes were made to forward strategy.
Looking forward, investors should note several items. The strong order intake and record backlog provide revenue visibility, but the high share of Defense business increases customer concentration and exposes Graham to the timing of government budgets and project completions. Only 35–40% of the backlog as of June 30, 2025 (Q1 FY2026), is expected to convert to revenue in the following 12 months, highlighting conversion timing as a key area to monitor. The company’s ongoing investments in automation, process upgrades, and specialty testing aim to support continued margin growth and higher sales conversion as FY2026 advances. GHM does not currently pay a dividend.
Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.
