GRAHAM CORP Q2 FY2026 earnings call

• Revenue grew 23% to $66 million, and adjusted EBITDA increased 12% to $6.3 million with adjusted EBITDA margin expanding 40 basis points to 10.8%. - Bookings were strong with a book-to-bill ratio of 1.3x, driving backlog to a record $500.1 million, up 23% year-over-year, with 35% to 40% expected to convert to revenue in the next 12 months. - Defense: Strong momentum with U.S. Navy programs, including a $25.5 million follow-on order for the MK48 Mod 7 Heavyweight Torpedo program, and a new 30,000 square foot advanced manufacturing facility in Batavia, NY set to be fully operational by the end of fiscal 2026, with investments in advanced inspection and manufacturing technologies. - Energy and Process: Increased sales driven by large capital projects and aftermarket sales, with momentum in small modular nuclear reactors and cryogenic applications. - Space: Barber-Nichols booked $22 million in orders, investing in capacity and capabilities such as additional CNC machining centers, expanded testing infrastructure, and a liquid nitrogen test stand, with a cryogenic test facility in Florida on track to come online later this year. - Acquisition of Xdot Bearing Technologies, a strategic move to strengthen competitive position in high-speed rotating machinery applications, expected to be slightly accretive to fiscal 2026 results.

Revenue grew 23% to $66 million. Defense sales increased by $9.9 million or 32%, primarily due to timing of project milestones and growth in new and existing programs. Energy and Process saw increased sales of $2.0 million or 11% driven by large capital projects and aftermarket sales. Space: Barber-Nichols subsidiary booked $22 million in new orders from commercial space launch customers in the second quarter and first month of the third quarter, expected to convert to revenue over the next 12 to 24 months.

• Reaffirmed full year guidance for key financial metrics based on first half performance and outlook for the balance of the year. - The recently announced Xdot technology acquisition does not materially affect the guidance as annual revenue from Xdot is only about $1 million per year. - Confident in the full year outlook with strong execution, robust end market demand, and a record backlog, expecting 8% to 10% organic revenue growth and low to mid-teen adjusted EBITDA margin in fiscal 2027.

• Tariff impact: Estimated $1 million in the first 6 months of fiscal 2026, with the full year range narrowed to $2 million to $4 million. - Government shutdown: Minimal impact on near and long term due to long-standing programs, but some delay in issuing work for development-like programs. - Order lumpiness: Revenue can be lumpy due to the multiyear nature of defense programs and large commercial contracts.

Q: Just wanted to get a little bit more clarity. It seems like the $22 million in space and aerospace orders announced this morning, it seems like some of that was recognized in 2Q results and some of it will be recognized in 3Q results. Just is that -- am I thinking about it right? And could you parse that out for how much was in 2Q versus 3Q?

A: 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.

Q: Congrats on the quarter. Maybe just on orders, surprisingly strong in the quarter, given how strong Q1 was, understanding the lumpiness going forward. But can you talk to, I guess, how much of the Q2 defense orders were Navy related or specifically related to the [indiscernible] carrier programs. Just wondering what kind of opportunities you're seeing outside of those core programs you're already on?

A: 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 the -- 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.

Q: 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?

A: Yes. No, you got that right on, Joe. We are going to need to buy some additional [indiscernible]. That's factored into the CapEx guidance for the year. So as you saw, there was no change to our guidance and we'll spill over a little bit into fiscal year '27. But as we've always said, we're not going to make big capital investments unless we have the orders to support them, and they all have to have a greater than 20% ROIC that we've discussed as well. So -- and we won't make those investments until we have that in hand.

Q: Great job on the quarter. As I'm looking at all your numbers here in your backlog and your balance sheet, it seems like you guys -- everything is going high and right, a lot of orders, very sticky stuff, long-term secular stuff. In 5 years, you sort of have -- it seems like sort of 3 strong markets that you're in. And as far as growth, how do you -- in 5 years, how are you going to see yourself positioned? Are you going to be focusing on the sort of the naval defense? You've got this sort of a nice space business that's growing nicely. And then you obviously have the commercial SMR business. Your funnel, what are you seeing as the best opportunities? And maybe talk about the demand there, the pricing there and sort of walk through that for me?

A: Yes. Tony, great question. I'm going to answer this a little bit higher level, and then we can go deeper if needed. We love the 50-50 target split between sort of the commercial segment and the defense segment. And what that allows us to do is be speedy and nimble, I'll say, attuned to pricing and specifically optimizing pricing on the commercial side and then bringing commerciality where possible in technology and speed to the defense market. So we really act as that long-term provider, but also that sort of technology disruptor in the defense space. So I'll just say, fundamentally, that is our focus, is to keep that velocity from the -- in competitiveness from the commercial side and bring that to the defense side. And 5 years out, we see that same dynamic moving forward. What I will also say is, yes, there will probably be ebbs and flows to what that split looks like based on opportunities that come in the door.

Q: Great quarter, guys. I just want to go a little further into the last caller's question on -- but I want to go into a different direction. You have a proven success record so far for the MK48 Torpedo program. This is for Matt. I've got a 2-part question for you. Looking ahead for opportunities into 2027 on new torpedo programs, it has to do with the [ SCEPS ], the solid chemical torpedo propulsion system being developed for 2 new torpedo platforms. And it looks like those 2 new torpedoes will serve 2 distinctly different roles from the MK48 program. I know we're already supplying a limited production run on this propulsion system. My first question is, can you add some insight into how the Navy plans to deploy these 2 new torpedo platforms and what gaps they're trying to fill? And then secondly, given Xdot's superiority in its foil-bearing technology, do you see an opportunity that would give us a key advantage possibly of winning a role on either the propulsion side or the guidance system side of either of these torpedo platforms?

A: 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.