Graham Corp Q2 FY2026 Earnings Call

Greetings, and welcome to the Graham Corporation Second Quarter 2026 Financial Results Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Tom Cook. Please go ahead.

Thank you, Carrie, and good morning, everyone. Welcome to Graham's Fiscal Second Quarter 2026 Earnings Call. With me on the call today are Matt Malone, President and CEO; and Chris Thome, Chief Financial Officer. This morning, we released our financial results. Our earnings release and accompanying presentation to today's call are available on our website at ir.grahamcorp.com. You should be aware that we may make forward-looking statements during the formal discussion as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents that are filed by the company with the Securities and Exchange Commission. You can find these documents on our website or at sec.gov. During today's call, we will also discuss non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the table that accompany today's release and slides. We also use key performance indicators to help gauge the progress and performance of the company. These key performance metrics are ROIC, orders, backlog and book-to-bill ratio. These are operational measures and a quantitative reconciliation of each is not required or provided. You can find a disclaimer regarding our use of KPIs at the back of today's presentation. So with that, if you'll please advance to Slide 3, I'll turn it over to Matt to begin. Matt?

Thank you, Tom, and good morning, everyone. We appreciate you joining us to review our second quarter fiscal 2026 results. We delivered another strong quarter, continuing to execute our communicated strategy and demonstrating the resiliency and diversification of our business. Revenue grew 23% to $66 million, driven by solid performance across all of our end markets. The timing of these key project milestones, particularly material receipts in our defense business as well as contributions from new programs and growth in existing platforms. Adjusted EBITDA increased 12% to $6.3 million. On a year-to-year basis, adjusted EBITDA margin expanded 40 basis points to 10.8%, underscoring our continued focus on operational execution and profitable growth. Bookings remained strong, resulting in a book-to-bill ratio of 1.3x and driving backlog to a record $500.1 million, up 23% year-over-year. Our backlog provides excellent visibility with roughly 35% to 40% expected to convert to revenue over the next 12 months. On the defense side, we continue to see strong momentum with our U.S. Navy programs. As a reminder, in July, we announced a $25.5 million follow-on order to produce mission-critical hardware for the MK48 Mod 7 Heavyweight Torpedo program. More recently, I want to highlight an important milestone for our defense business and our long-standing partnership with the U.S. Navy. In October, we commemorated our new 30,000 square foot advanced manufacturing facility in Batavia, New York, which represents a major investment in our capacity and capabilities to support key Navy programs. This purpose-built site is designed for efficiency, precision and scale and incorporates advanced technologies, including automated welding, optimized product flow and state-of-the-art machining. We expect the facility to be fully operational by the end of fiscal 2026. And once online, it will meaningfully expand our throughput, enhance quality and strengthen our ability to meet rising demand across multiple Navy programs. As part of this, we were honored to host Captain Heath Johnmeyer, Commanding Officer of the Future USS District of Columbia, along with several strategic partners and customers during the event. Their participation underscores the Navy's confidence in Graham and a critical role of our team and capabilities play in supporting fleet readiness as the Navy celebrated its 250th anniversary. This engagement reflects our position as a trusted supplier to some of the most important defense platforms in the world. In addition to expanding capacity, we continue to invest in advanced inspection and manufacturing technologies, including our enhanced x-ray testing and automated welding systems that are beginning to come online. These investments will further increase throughput, improve inspection precision and support production scale as we execute the Navy's long-term modernization initiatives. Moving to Energy and Process. During the quarter, we saw increased sales of $2.0 million or 11%, driven by the timing of large capital projects and continued strong aftermarket sales. Further, we are seeing meaningful momentum in small modular nuclear reactors and cryogenic applications, where customers' interest in our mission-critical equipment continues to expand as those markets slowly transition into commercial deployment. Demand fundamentals across all of our end markets remain healthy, though we are observing extended decision cycles on certain large global capital projects. Overall, our position remains strong, and we continue to execute well against opportunities in both mature and emerging applications. In space, as we have announced earlier this morning, we continue to see meaningful momentum. In the second quarter and first month of our fiscal 2026 third quarter, our Barber-Nichols subsidiary booked a series of new orders from six industry-leading customers in the commercial space launch market. These awards were for advanced turbomachinery and precision engineered components supporting next-generation commercial launch and space systems and totaled $22 million. These orders are expected to convert into revenue over the next 12 to 24 months, further strengthening our visibility and reinforcing the value we bring to these mission-critical space applications. We're encouraged by the breadth of programs we are involved in and the growing activity across customers who are scaling production to meet increased launch cadence and orbital infrastructure needs. To support this demand, we are continuing to invest in capacity and capabilities at Barber-Nichols, including additional CNC machining centers, expanded testing infrastructure and our new liquid nitrogen test stand. These investments build on our previously announced cryogenic test facility in Florida, which remains on track to come online later this year. Together, these enhancements strengthen our ability to deliver with speed and precision as our customers move from development into higher rate production. The momentum we are seeing in our space end markets reflects the strength of our technology, engineering expertise and decades-long reputation for performance in high-speed rotating equipment. As the commercial and government space markets continue to expand, we believe Graham is well positioned to support the industry's long-term growth and advance our strategy of building a diversified portfolio across high-growth, innovation-driven end markets. Finally, I want to touch on the recent acquisition announcement of Xdot Bearing Technologies, an engineering-led firm with patented foil bearing technology and deep expertise in high-speed rotating machinery. This is a highly strategic technology acquisition that strengthens our competitive position in an area where performance, reliability and efficiency are becoming increasingly critical across aerospace, defense, energy transition and industrial applications. Xdot's proprietary foil bearing designs deliver superior performance while reducing development and production costs. And when combined with Barber-Nichols turbomachinery capabilities, significantly expand our ability to engineer and deliver advanced high-speed pumps, compressors and rotating systems. This acquisition not only broadens our product portfolio, but also positions us to move into adjacent applications and emerging high-performance markets, where we are seeing growing customer interest. Importantly, this is a disciplined, strategically aligned investment that fits squarely within our capital allocation framework. Xdot brings proven technology, a respected technical founder and team and complementary customer relationships. We expect the acquisition to be slightly accretive to our fiscal 2026 results. Overall, this acquisition underscores our commitment to investing in differentiated technology, expanding our engineered solution offerings and creating durable competitive advantages across our growth platforms. More broadly, on the M&A front, we continue to see a strong pipeline of acquisition opportunities that align with our strategic objectives and remain focused on pursuing opportunities that offer risk-adjusted returns and can help us accelerate our product life cycle strategy. In closing, our fiscal second quarter results demonstrate continued business momentum across our diversified portfolio. With our record backlog, strong market positioning and progress on key growth initiatives, we're well positioned to capitalize on the opportunities ahead. With that, I'll turn the call over to Chris for a detailed review of our financial results. Chris?

Thanks, Matt, and good morning, everyone. I will begin my review of results on Slide 6. For the second quarter of fiscal 2026, sales were $66 million, an increase of 23% compared to the prior year period, reflecting broad-based strength across all our end markets. This performance demonstrates continued execution and healthy demand across defense, energy and process, and space, and is consistent with our full-year expectations. Sales to the defense market increased by $9.9 million or 32%, primarily reflecting the timing of project milestones and particularly material receipts, as well as growth across new and existing programs. Sales to the energy and process market increased by $2 million, primarily driven by the timing on larger capital projects. Aftermarket sales to the energy and process and defense markets were $9.8 million for the quarter, slightly above the prior year period, but when combined with our first fiscal quarter are up 15% year-to-date and continue to reflect resilient demand for aftermarket support across our global installed base. As a reminder, our fiscal third quarter is typically our seasonally lowest revenue period due to normal holiday-related production schedules. Turning to Slide 7. Gross profit increased 12% to $14.3 million, and gross margin was 21.7% for the quarter. The lower margin in the quarter reflects the sales mix in the period, including an unusually high level of material receipts that carry lower margins. We estimate that this higher-than-normal level of material receipts impacted our gross margin by approximately 180 basis points in the quarter. As a reminder, the prior year period benefited from approximately $400,000 from the BlueForge Alliance grant income that did not repeat this year. Finally, for the first six months of fiscal 2026, we estimate the impact of tariffs to be approximately $1 million compared to the prior year. As we look at the full year, we have narrowed our expected tariff impact range to $2 million to $4 million, reflecting continued sourcing discipline and contract language that protects us. On Slide 8, you can see how this operating performance translated to the bottom line. Net income for the quarter was $0.28 per diluted share and adjusted net income was $0.31 per diluted share. Adjusted EBITDA was $6.3 million, up 12% from the prior year, and adjusted EBITDA margin was 9.5%. On a year-to-date basis, our adjusted EBITDA margin is 10.8%, up 40 basis points over the prior year and in line with our full-year guidance. As a reminder, the Barber-Nichols earnout bonus will phase out by the end of fiscal 2026. Excluding this item, we remain confident in our ability to achieve our fiscal 2027 goal of low to mid-teen adjusted EBITDA margin. Moving to Slide 9. It was another very strong quarter for orders, which totaled $83.2 million, driven by strong demand across defense, space and energy and process. This included a $25.5 million follow-on contract for the MK48 Mod 7 Heavyweight Torpedo program, as well as new orders from leading space and aerospace companies that Matt discussed and that we announced in our press release this morning. Aftermarket orders were $9.6 million, moderating from the record levels of last year but remaining strong on a historical basis. The resulting book-to-bill ratio was 1.3x, driving backlog to a record $500.1 million, up 23% year-over-year. Approximately 35% to 40% of this backlog is expected to convert to revenue over the next 12 months, and roughly 85% of the total backlog is attributable to the defense market. As a reminder, orders remain inherently lumpy given the multiyear nature of our defense programs and our large commercial contracts. To illustrate this point, since fiscal 2020, our annual book-to-bill ratio has ranged from 0.9x to 1.4x revenue. However, our quarterly book-to-bill ratio over the same time period has ranged from 0.5 to 2.8x revenue. Over the long term, we target a book-to-bill ratio of 1.1x each year in order to support our long-term growth goals of 8% to 10% per year. For the fiscal 2026 year-to-date period, our book-to-bill ratio is 1.7x. Turning to Slide 10. We remain in a strong liquidity position. We ended the quarter with $20.6 million in cash and no debt and $44.7 million available on our revolver, providing significant flexibility to support future growth investments. Operating cash flow was $13.6 million for the quarter, reflecting strong working capital conversion tied to milestone receipts and advanced payments, as well as strong cash profitability. Capital expenditures were $4.1 million in the quarter, focused on capacity expansion, automation, next-generation X-ray technology, and our new cryogenic testing facility in Florida, all of which Matt discussed earlier. All major projects remain on schedule and are expected to deliver returns above 20% ROIC. Turning to guidance on Slide 11. Based on our performance through the first half of fiscal 2026 and our outlook for the balance of the year, we are reaffirming our full-year guidance for all key financial metrics. The recently announced Xdot technology acquisition does not materially affect our guidance for the year as our annual revenue is only about $1 million per year. Again, we would like to remind everyone that our fiscal third quarter is typically our seasonally lowest revenue period due to normal holiday-related production schedules. Overall, with strong execution, robust end-market demand and a record backlog, we remain confident in our full-year outlook and our ability to continue delivering consistent performance. The 20% plus ROIC investments coming online in the next two quarters, along with the continued momentum that is building within our company gives us confidence we are on track to achieving our fiscal 2027 targets of 8% to 10% organic revenue growth and low to mid-teen adjusted EBITDA margin. With that, we can now open the call for questions.

Our first question comes from Bobby Brooks with Northland Capital Markets.

I would like to clarify something. It appears that the $22 million in space and aerospace orders announced this morning was partially recognized in the Q2 results, with some recognition expected in Q3. Am I correct in that understanding? Could you break down how much was recognized in Q2 versus Q3?

Yes. No, you're spot on there, Bobby. As you saw from the release today, we had $15 million of orders in Q2 and the other $7 million came in after quarter end. So they'll be in Q3.

Got it. And then so excellent results for revenue in the quarter, but guidance is maintained. So I was just curious, could you discuss why maintaining the guidance made more sense than raising? Is it just simply some stuff was scheduled to go out maybe in the back half and got pulled forward and occurred in the second quarter? Or maybe it's tied to some dynamic with the manufacturing footprint? Just hoping to get more insight there.

Yes. It's just all timing, Bobby. The results for the first half of the year are consistent with our expectations. We're tracking right on plan. So we just maintain the guidance.

Got it. It’s great to hear that the cryogenic facility is on track. I saw some updates from the Barber-Nichols during the quarter, and I believe I’ve read that you’re starting to book slots there. I’m curious to hear an update on how things are going.

Yes. So I'll answer two things. The first is we did successfully commission and execute testing at the Barber-Nichols location in Colorado with the liquid nitrogen stand, which is a smaller stand that supports a critical space program. In addition to the propellant test facility, which is obviously on a much larger basis down in Florida, which is what you're alluding to. We actually expect to get the occupancy here any day, at which point we'll be commissioning with our product. So we'll be testing an internal product. Simultaneously, we do expect within this calendar year to start testing customer product. With that being said, yes, I'd say that the backlog and customer conversations are healthy. And as we pivot from actually getting the test fan operational, we are shifting full focus to booking the customers into the backlog. So it's coming along just as we expected.

And moving on to Russell Stanley with Beacon Securities.

Congratulations on the quarter. The orders were surprisingly strong this quarter, especially considering how robust Q1 was, while acknowledging the variability ahead. Can you elaborate on how many of the Q2 defense orders were Navy-related or linked to the carrier programs? I'm curious about the opportunities you are seeing beyond the core programs you are currently involved in.

Yes. Ross, it's a great point. And I think it's worth a little bit of expansion. Actually, the bookings primarily this last quarter weren't in connection to the actual strategic platforms themselves, but in some way are connected to the larger defense scope. So as mentioned, we saw the torpedo side. We saw some of the aftermarket pickup on the defense side. We saw the space bookings that were announced this morning. So it was really a host of opportunities that we've been nurturing sort of in the background connected to the strategic programs, without providing too much additional color that I really can't go into. So yes, it was a nice diversified bookings, but very strong, as you alluded to.

Great. Congrats on that. Maybe I can ask, obviously, excellent order numbers. The customer advances look strong, but just heard from the major shipbuilders a few weeks back. Wondering if you could talk to any sort of impacts you're seeing in your business around the government shutdown, be it in customer conversations or order flow looking a little further out.

Yes. So fortunately, for us, as you followed us closely, the programs that we're involved with are extremely long-standing and have great confidence long-term. So what we're seeing is in terms of impact, it is pretty minimal, both in the near term and long term. What we do feel, just to break it down to a very narrow window is we obviously have quite a bit of components working their way through the factory. And so the support from government reviews and reviewing deviations and other things that are much more tactical we are taking some additional time. Fortunately, a unit like this takes years. And so days doesn't end up disrupting the outcome. So I think we're really well positioned despite the shutdown. The other area that we're feeling some impact is just appropriations and then actually sending out the sort of defined POs for what are more development-like programs. So we have gotten all indications that everything is moving forward, but just some delay in actually issuing the work.

That's great. Maybe one last question just around the Xdot transaction. I understand I think you're already doing business with them. But can you talk to, I guess, what kind of customer feedback you've received around the transaction, what they've said to you? And secondarily, I guess, the tech has applications, I think, across your main business lines, but wondering where the most significant impact might be.

Yes. It's another great question. So yes, we've been working with Barber-Nichols specifically on foil-bearing technology for decades at this point on what I'll say is very focused applications. We've also been working with Xdot for extended periods of time. With that being said, we've developed a great relationship and they have analytical capability that ourselves and others do not. So in addition to this, the product portfolio, we get some additional capability. The customer conversations, our customers don't necessarily know that we're using Xdot technology up to this point, but it's an enabling technology. So I'll just say it has allowed us to enter into areas like small modular nuclear, which we're using foil-bearing technology in some other areas like, for example, fuel cell blowers and such, but our customers don't necessarily know that connection and link. What we are seeing is their bearing end user, which is essentially buying spare bearings today or production bearings are now looking to have conversations with Barber-Nichols about potentially machine upgrades or future opportunities. So I guess, Russ, that's the color I'd provide, but it really is around technology excellence.

And our next question comes from Joe Gomes with NOBLE Capital.

Congrats on the quarter. On the announcement today on the space market, you did mention that orders that you're making some investments. Maybe you could just give us a little more color on the size and timing of those investments.

Yes, you got it right, Joe. We will need to make some additional purchases. That is included in our CapEx guidance for the year. As you noticed, there has been no change to our guidance, and we will extend a bit into fiscal year '27. However, as we have always stated, we will not make significant capital investments unless we have the necessary orders to justify them, and they must demonstrate a return on invested capital greater than 20%, which we have discussed. We will hold off on those investments until we have that secured.

Yes. And one quick add, Joe, just for some additional insight. The orders really secure the investments that we've already been making. And so these orders really reaffirm a lot of our ROIC calculations that have been made in the past. So it's just really nice that it's sort of reaffirming our commitments in our budgeting process. So strategic direction, the assets like down in Florida, some of these orders impact that facility. The liquid nitrogen stand also has impacted the assembly and test area at Barber-Nichols that just came online last quarter, where this product is going through that facility. And so it's just a great merging of the current capability that we've already invested in as well.

Could you provide more details about the momentum you've mentioned regarding small modular reactors, as well as the timing associated with that?

Yes. Small modular reactors are very interesting. We've experienced fluctuations with nuclear energy over the decades, but we are currently feeling optimistic about it. Barber-Nichols is well positioned because of our expertise in rotating machinery, which is relevant to cryogenics and the thermal regulation of a nuclear reactor. At this point, we are in the early stages of development on several scaling programs. While we have shared information, it's important to note that the growth won't happen overnight. We are in the development phase and have products that will be introduced to the Idaho National Lab dome in the coming months to a year, with promising long-term scaling potential. To put it simply, we are at the beginning of this growth trajectory, which aligns with the sentiment in the industry.

Okay. Regarding the defense sector, there was a $9.9 million increase in defense revenues. You mentioned that this was due to the timing of some project milestones, new programs, and growth in existing programs. Could you provide some perspective on what portion of that $10 million growth came from milestones, new programs, and the growth in existing programs?

Yes. Our revenue can vary significantly from quarter to quarter. This variability is influenced by when we receive materials for certain programs, which allows us to recognize revenue on a percentage completion basis. In the last quarter, we experienced an unusually high level of material receipts, which was anticipated for this fiscal year, amounting to roughly $8 million to $10 million. A substantial portion of this increase was due to those material receipts, which, as mentioned, have a lower margin. Consequently, this affected our gross margin by about 180 basis points. This explains most of what you're observing, but we do have material receipts every quarter, though typically not at this elevated level.

And we'll go next to Tony Bancroft with Gabelli.

Great job on the quarter. Your backlog and balance sheet numbers indicate that everything is performing well, with numerous orders and long-term growth trends. In five years, it seems like you will be established in three strong markets. Regarding growth, how do you envision your position in five years? Will your focus be on naval defense, your expanding space business, or the commercial SMR sector? What are the best opportunities you see in your pipeline? Can you discuss the demand and pricing in those areas and provide some insights?

Yes, Tony, that's a great question. I'll answer this at a higher level first, and then we can dive deeper if needed. We appreciate the 50-50 target split between the commercial and defense segments. This approach enables us to be quick and agile, allowing us to focus on pricing and specifically optimize it on the commercial side, while also bringing commercial advantages in technology and speed to the defense market. Our goal is to serve as a long-term provider and a technology disruptor in the defense sector. Fundamentally, our focus is to maintain the competitive speed of the commercial side and transfer that to the defense side. Looking five years ahead, we expect that same dynamic to continue. I should also mention that there will likely be fluctuations in that split depending on the opportunities that arise.

And we'll go next to Gary Schwab with Valley Forge Capital Management.

Yes, great quarter, everyone. I want to expand on the previous caller's question but take it in a different direction. You have a solid track record with the MK48 Torpedo program. This is for Matt. I have a two-part question for you. Looking ahead to opportunities in 2027 for new torpedo programs, I'm referring to the solid chemical torpedo propulsion system being developed for two new platforms. It seems that these two torpedoes will have distinctly different roles compared to the MK48 program. I know we are already supplying a limited production run for this propulsion system. My first question is, can you provide some insight into how the Navy plans to deploy these two new torpedo platforms and what gaps they aim to address? Secondly, given Xdot's advantages in foil-bearing technology, do you see a potential opportunity for us to gain a significant advantage in either the propulsion or guidance system for either of these platforms?

Yes, Gary, and yes, there's a lot of momentum building. First, I'll start off with the torpedo topic. I'm going to decouple Xdot, and I'll cover that sort of after. Independent of bearing technology, we're well positioned to be a key supplier on the platforms that you referenced. So I'll just keep it high level and say we don't need that technology to be a key supplier. We're already engaged in doing work in that arena. Once again, I can't sort of speculate on the Navy's plans for these products. And certainly, it could be Army and other areas. But what I will say is the gaps that they cover, all the gaps that you would expect with such capability, and that's sort of range, longevity, reuse, all the things that would add additional value to the defense portfolio. So yes, we are well positioned on those new technologies in the torpedo space, and we're working with primes and the government to develop those technologies.

Can I just ask, is that going to be a much bigger program? Because I know that the problem with going after drones now, one of the programs is for multiple torpedoes, small torpedoes to go after drones.

So once again, you'll have to sort of read in depth because I can't disclose too many details. But I'll just say that there's a lot of practical uses for both the MK48 Torpedo as well as the new technologies. So yes, I think they're looking to sort of deploy such similar technology to adjacent capability within the naval platform.

And this now concludes our Q&A session. I would like to turn the floor back over to CEO, Matt Malone, for closing comments.

Thank you. We are pleased with our results through the first half of the fiscal year, which were in line with our expectations and guidance. We look forward to keeping you updated on our progress. As always, please reach out with any questions. Thank you, everyone, for joining us today and your interest in Graham.

And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.