Graham Corporation (NYSE:GHM) Q2 2026 Earnings Call Transcript

Graham Corporation (NYSE:GHM) Q2 2026 Earnings Call Transcript November 7, 2025

Graham Corporation misses on earnings expectations. Reported EPS is $0.31 EPS, expectations were $0.33.

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

Tom Cook: 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 complete — 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?

Matthew Malone: 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 be — 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 [ USSS ] 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 deploy.

Defense — demand fundamentals across all of our end markets remains 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 6 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 in 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?

Christopher Thome: 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 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 6 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 2 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.

Q&A Session

Operator: [Operator Instructions] And our first question comes from Bobby Brooks with Northland Capital Markets.

Robert Brooks: 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?

Christopher Thome: 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.

Robert Brooks: 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 in 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.

Christopher Thome: 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.

Robert Brooks: Got it. And then it’s great to hear that the cryogenic facility is on track. I saw some updates from the Barber-Nichols [indiscernible] intra-quarter. And I think I’ve read somewhere that you’re starting to book slots there. So just curious to maybe hear an update there and how things are going.

Matthew Malone: Yes. So I’ll answer 2 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 is 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.

Operator: And moving on to Russell Stanley with Beacon Securities.

Russell Stanley: 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.

Matthew Malone: 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.

Russell Stanley: 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.

Matthew Malone: 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.

Russell Stanley: 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.

Matthew Malone: Yes. It’s another great question. So yes, we’ve been working with at Barber-Nichols, specifically 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.

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

Joseph Gomes: 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.

Christopher Thome: 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.

Matthew Malone: 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 [ marry ] of the current capability that we’ve already invested in as well.

Christopher Thome: That’s a great point, Matt. And said a little bit differently as well, the investments we made enable us to win these orders to a great extent.

Joseph Gomes: Okay. And maybe the same — you talked about some momentum in the small modular reactors. Maybe you could just give us a little bit more color on what you’re talking about there and momentum and timing for that also.

Matthew Malone: Yes. Yes. So small modular reactors is a very interesting — we’ve seen ups and downs with nuclear over decades. We’re clearly in a bullish position right now. Barber-Nichols is well positioned with background on rotating machine that support both cryogenics that directly applies to thermal regulation of a nuclear reactor. In this case, Joe, we’re in the early phases of development on a number of, I’ll say, scaling programs or the potential to scale. And so we’ve already disclosed, but you can sort of see that the ramp is not going to happen overnight. So we are in the development phase. We’re seeing some products that will go into the Idaho National Lab dome in the next coming months/year and then have long-term potential for scale. So I’ll just — I’ll state it as simple as we’re in the early phases of that growth trajectory as almost aligned with what the industry is feeling.

Joseph Gomes: Okay. And then just on the defense, the increase, the $9.9 million growth in defense revenues. And you mentioned there was — one was the timing of some project milestones, new programs, growth in existing programs. I don’t know if you could kind of size those for us as to what percent of that $10 million growth came from the milestones versus the new programs versus the growth in existing programs?

Christopher Thome: Yes. So Joe, as you know, our revenue tends to be very lumpy. And part of what creates that lumpiness is when we receive materials on some of these programs, we’re allowed to recognize revenue since we’re on a percentage completion basis. We had — in our prepared remarks, we had an unusually high level of material receipts this past quarter, which was expected in this fiscal year. And that range from about $8 million to $10 million. So the biggest — a large chunk of that increase was because of these material receipts, which also, as stated in the comments today, do carry with it a lower margin. As we stated, it impacted our gross margin by about 180 basis points. So that’s the bulk of what you’re seeing there. But we have material receipts every quarter. It’s just not to this high level usually.

Operator: [Operator Instructions] And we’ll go next to Tony Bancroft with Gabelli.

George Bancroft: 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?

Matthew Malone: 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.

Operator: And we’ll go next to Gary Schwab with Valley Forge Capital Management.

Unknown Analyst: Yes. 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?

Matthew Malone: 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.

Unknown Analyst: 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.

Matthew Malone: 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.

Operator: And this now concludes our question-and-answer session. I would like to turn the floor back over to CEO, Matt Malone, for closing comments.

Matthew Malone: 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.

Operator: 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.