Graham Corp's Q2 2026 Earnings Call: Contradictions Emerge on Defense Revenue Drivers, International Opportunities, and Supply Chain Impact

Date of Call: November 7, 2025

Financials Results

• Revenue: $66.0M, up 23% YOY
• EPS: Net income $0.28 per diluted share; adjusted net income $0.31 per diluted share
• Gross Margin: 21.7%, impacted by unusually high material receipts (~180 bps headwind); prior year benefited from ~$0.4M grant that did not repeat
• Operating Margin: Adjusted EBITDA margin 9.5% for the quarter (Adjusted EBITDA $6.3M, up 12% YOY); YTD adjusted EBITDA margin 10.8%, up 40 bps YOY

Guidance:

• Reaffirming full-year guidance for all key financial metrics.
• Xdot acquisition does not materially affect FY26 guidance (annual revenue ~ $1M).
• Fiscal Q3 is seasonally the lowest revenue period.
• Narrowed expected tariff impact to $2M–$4M for the full year.
• Targeting FY27: 8%–10% organic revenue growth and low- to mid-teen adjusted EBITDA margin.
• >20% ROIC investments coming online in the next two quarters.

Business Commentary:

* Revenue and Order Growth: - Graham Corporation reported a revenue growth of 23% to $66 million in Q2 fiscal 2026, driven by a book-to-bill ratio of 1.3x. - The increase was driven by strong performance across all end markets, including defense, space, and energy, due to advanced orders and material receipts.

• Defense Segment Performance:
• Sales to the defense market increased by $9.9 million or 32%, with notable contributions from programs like the MK48 Mod 7 Heavyweight Torpedo.
• This growth was attributed to timing of project milestones, material receipts, and expansion in new and existing programs.

• Space Market Momentum:
• Barber-Nichols subsidiary booked $22 million in new orders from industry-leading customers in the commercial space launch market, adding to the $500.1 million backlog.

• This momentum is due to investments in capacity and capabilities, supporting mission-critical space applications and increased launch cadence.

• Strategic Acquisitions:

• Graham Corporation acquired Xdot Bearing Technologies, enhancing its competitive position with patented foil-bearing technology.
• This acquisition is expected to be slightly accretive to fiscal 2026 results, positioning the company to enter adjacent applications and high-performance markets.

Sentiment Analysis:

Overall Tone: Positive

• Management: "We delivered another strong quarter... Revenue grew 23% to $66 million"; "record $500.1 million backlog, up 23% year-over-year"; "reaffirming our full year guidance"; "confident in our ability to achieve our fiscal 2027 goals of 8% to 10% organic revenue growth and low to mid-teen adjusted EBITDA margin."

Q&A:

• Question from Robert Brooks (Northland Capital Markets): The $22 million in space and aerospace orders announced this morning — some recognized in 2Q and some in 3Q. Can you parse how much was in 2Q versus 3Q?
  Response: Chris: $15M was booked in Q2; the remaining $7M came in after quarter end and will be in Q3.

• Question from Robert Brooks (Northland Capital Markets): Results were strong but guidance was maintained. Why not raise guidance?
  Response: Chris: It's timing — first-half results are consistent with plan, so the company maintained the full-year guidance.

• Question from Robert Brooks (Northland Capital Markets): Update on the cryogenic facility and booking of slots?
  Response: Matt: Liquid nitrogen stand commissioned in Colorado; Florida propellant test facility imminent occupancy and will begin customer testing this calendar year; backlog/customer conversations healthy.

• Question from Russell Stanley (Beacon Securities): How much of Q2 defense orders were Navy-related or tied to core programs vs. other opportunities?
  Response: Matt: Bookings were diversified — connected to broader defense scope (torpedo follow-on, aftermarket, space) rather than concentrated on a single platform.

• Question from Russell Stanley (Beacon Securities): Any impacts from the government shutdown on customer conversations or order flow?
  Response: Matt: Minimal impact overall; some tactical delays in government reviews and PO issuance, but long-term programs remain intact.

• Question from Russell Stanley (Beacon Securities): Customer feedback on the Xdot transaction and where the technology will have the biggest impact?
  Response: Matt: Xdot's analytic and foil-bearing technology is enabling across applications (SMR, fuel-cell blowers); customers are now engaging on bearings and potential machine upgrades.

• Question from Joseph Gomes (NOBLE Capital Markets): Size and timing of investments to support recent space orders?
  Response: Chris: Incremental CapEx is included in current guidance and may spill into FY27; investments require orders and must meet >20% ROIC before execution.

• Question from Joseph Gomes (NOBLE Capital Markets): Momentum and timing in small modular reactors?
  Response: Matt: Early-phase development with selected products headed to Idaho National Lab in coming months; long-term scaling potential but ramp will be gradual.

• Question from Joseph Gomes (NOBLE Capital Markets): Of the $9.9M defense revenue increase, how much was material receipts vs. new or existing programs?
  Response: Chris: Majority driven by unusually high material receipts (~$8M–$10M), which also pressured margins (~180 bps).

• Question from George Bancroft (Gabelli ETFs Trust - Gabelli Commercial Aerospace and Defense ETF): In five years how will Graham be positioned across naval defense, space, and SMR — where will growth/pricing opportunities be?
  Response: Matt: Target a balanced ~50/50 commercial and defense mix, leveraging commercial speed/price competitiveness to drive defense opportunities; expect similar dynamic over five years with ebbs/fl ows by opportunity.

• Question from Gary Schwab (Valley Forge Capital Management): On new torpedo platforms and Xdot — how will the Navy deploy these and could Xdot provide a competitive advantage on propulsion or guidance?
  Response: Matt: Graham is already well positioned on these platforms independent of Xdot; Xdot is complementary but not required to be a key supplier.

• Question from Gary Schwab (Valley Forge Capital Management): Will these new torpedo programs be much bigger; are they targeted at new uses like countering drones?
  Response: Matt: Details can't be disclosed, but there are practical/adjacent uses and potential deployments across naval platforms; program sizing will vary.

Contradiction Point 1

Defense Revenue Growth Components

It highlights discrepancies in the explanation of the growth components within the defense revenue, which may impact investor understanding of the company's financial performance.

Can you break down the $9.9 million growth in defense revenues by component? - [Joseph Gomes](NOBLE Capital Markets)

2026Q2: The growth was mainly due to material receipts, which carry lower margins and impacted gross margin by 180 basis points. - [Christopher Thome](CFO)

Is there any risk to margins from increased defense sales? - [Russell Stanley](Beacon Securities)

2026Q1: We saw higher receipts for material on our defense contracts. The higher receipts also impacted our margins by 220 basis points. - [Matthew J. Malone](CEO)

Contradiction Point 2

International Business Opportunities

It involves differing perspectives on the potential growth and opportunities in international business, which could impact strategic decision-making and investor expectations.

Can you provide more detail on investments supporting space market orders? - [Joseph Gomes](NOBLE Capital Markets)

2026Q2: We are investing in additional machinery and testing infrastructure to support these orders, with a ROIC above 20%. - [Christopher Thome](CFO)

How do you see international business growth? - [Robert Brooks](Northland Capital Markets)

2026Q1: There is interest in the long-term, but we haven't seen large orders recently from the Chinese market or the Indian market to supply other markets. - [Matthew J. Malone](CEO)

Contradiction Point 3

Defense Revenue Growth and Market Dynamics

It involves differing explanations of defense revenue growth and market dynamics, which are crucial for understanding the company's performance and strategy in a key sector.

What portion of Q2 defense orders were for Navy or carrier programs? - [Russell Stanley](Beacon Securities)

2026Q2: The defense bookings were diversified, including the torpedo and aftermarket orders, as well as space bookings. While connected to key programs, they were not direct contributions to the strategic platforms. - [Matthew Malone](CEO)

What is driving the strong aftermarket results, particularly the defense growth? - [Dick Ryan](Oak Ridge Financial)

2025Q3: The defense growth on the aftermarket was very strong due to the push of maintaining submarine speed and availability. - [Dan Thoren](CEO)

Contradiction Point 4

Supply Chain and Funding

It involves differing statements about the impact of the government shutdown and ongoing funding, which are essential for understanding the company's ability to navigate market challenges and maintain growth.

Have you seen any impacts on your business from the recent government shutdown? - [Russell Stanley](Beacon Securities)

2026Q2: The shutdown has had minimal long-term impact. We've seen some delay in reviews and approps, but it hasn't disrupted our program timelines. - [Matthew Malone](CEO)

What are the current supply chain and labor challenges, and potential funding from BlueForge? - [Russell Stanley](Beacon Securities)

2025Q3: The government plans to continue supplier development funding. We're working with customers to identify future needs and prioritize investments. Shovel-ready projects and established training programs like ours can attract ongoing funding. - [Dan Thoren](CEO)