Conferencia de resultados del segundo trimestre fiscal de 2027 de Graham Corporation (GHM): cartera de pedidos récord, expansión de márgenes

Puntos clave

• Los ingresos del segundo trimestre fiscal de 2027 aumentaron un 6% interanual hasta los 69,8 millones de dólares, impulsados por el crecimiento en defensa y espacio y una aportación de 9,5 millones de dólares de FlackTek.
• El EBITDA ajustado aumentó un 64% hasta alcanzar la cifra récord de 10,3 millones de dólares. El margen de EBITDA ajustado se amplió 530 puntos básicos hasta el 14,8%.
• El margen bruto alcanzó el 28,2%, frente al 21,7% del año anterior, lo que refleja una mejor ejecución, una mezcla de ventas favorable, la contribución de FlackTek y menores recepciones de materiales de bajo margen.
• Los pedidos totalizaron 73,7 millones de dólares, lo que generó un ratio book-to-bill de 1,1x. La cartera de pedidos aumentó un 12% hasta alcanzar la cifra récord de 561 millones de dólares, registrando su séptimo récord trimestral consecutivo.
• Graham reafirmó sus previsiones de ingresos para el año fiscal 2027 de entre 285 y 295 millones de dólares y de EBITDA ajustado de entre 35 y 40 millones de dólares. Asimismo, elevó su previsión de margen bruto al 25%–26%.
• Defensa y espacio continuaron siendo los principales motores de crecimiento. Defensa representó el 66% de las ventas trimestrales, mientras que los ingresos de espacio aumentaron un 59% y su cartera de pedidos se incrementó un 108% interanual.

Principales resultados financieros

En el primer semestre del año fiscal 2027, los ingresos aumentaron un 16% hasta los 141 millones de dólares. El EBITDA ajustado creció un 45% hasta los 19,1 millones de dólares, lo que representa un margen del 13,5%.

El flujo de caja operativo se situó en 34,1 millones de dólares en los primeros seis meses. Graham cerró el trimestre con 71 millones de dólares en efectivo, sin deuda pendiente y con 75 millones de dólares disponibles en su línea de crédito rotativo.

Desempeño operativo y del negocio

Defensa: Los ingresos aumentaron un 12% interanual y representaron el 66% de las ventas totales. El crecimiento reflejó el cumplimiento de hitos en proyectos, programas nuevos y ampliados y la contribución de FlackTek, compensados en parte por aproximadamente 10 millones de dólares menos en recepciones de materiales. Los pedidos del sector de defensa sumaron 41,8 millones de dólares y su cartera de pedidos aumentó un 10%. Defensa representó aproximadamente el 83% de la cartera de pedidos total, de la cual el 85% estaba financiada.

Graham destacó su posicionamiento en los programas de submarinos de las clases Columbia y Virginia, el torpedo pesado Mark 48 Mod 7 y los conjuntos de turbobombas de aire Mark 19 Mod 2. La dirección también informó de avances en aplicaciones de refrigeración para radares y energía dirigida.

Espacio: Los ingresos crecieron un 59%, impulsados por la comercialización, un mayor ritmo de lanzamientos, el escalado de programas y FlackTek. Los pedidos trimestrales fueron de 10,6 millones de dólares, equivalentes a un ratio book-to-bill de 1,7x. En el primer semestre, los pedidos de espacio alcanzaron los 25 millones de dólares, es decir, dos veces las ventas, mientras que la cartera de pedidos de espacio aumentó un 108%.

La compañía completó su primera prueba de cliente en sus nuevas instalaciones criogénicas de Florida. En combinación con sus capacidades de ensayo con nitrógeno líquido en Colorado, la dirección afirmó que estos activos respaldan la cualificación y el escalado de la producción.

FlackTek: Los ingresos aumentaron de forma secuencial hasta los 9,5 millones de dólares desde los 6,6 millones de dólares. La dirección indicó que el negocio aportó márgenes superiores a la media de la cartera y se benefició de ciclos más cortos entre cotización y pedido, la demanda de máquinas de mayor tamaño y la transición de clientes desde la fase de evaluación hacia la de producción.

Energía y procesos: Los ingresos cayeron un 17% debido a la debilidad de los grandes proyectos de inversión, la incertidumbre geopolítica y menores ventas internacionales. El crecimiento en nuevas energías y FlackTek compensó en parte esas presiones.

Posventa: Las ventas fueron de 8,6 millones de dólares, un 3% menos interanual, mientras que los pedidos aumentaron un 91% hasta alcanzar los 18,3 millones de dólares. Graham continúa enfocándose en el mantenimiento, las piezas de repuesto y las mejoras de rendimiento en toda su base instalada.

La empresa también inició las obras de construcción de unas instalaciones de 30.000 pies cuadrados en su campus de Arvada, Colorado. La dirección afirmó que el proyecto busca añadir capacidad de turbomaquinaria con vistas a los futuros requerimientos de la cartera de pedidos, y no para resolver una limitación inmediata de capacidad.

Previsiones de la dirección

Graham reafirmó las siguientes previsiones para el año fiscal 2027:

• Ingresos de entre 285 y 295 millones de dólares, lo que supone un crecimiento del 18% en el punto medio.
• EBITDA ajustado de entre 35 y 40 millones de dólares, lo que representa un crecimiento del 44% en el punto medio.
• Margen bruto del 25%–26%, elevando ambos extremos en aproximadamente 50 puntos básicos tras una mejor ejecución y mezcla de ventas en el primer semestre.

La dirección advirtió de que el tercer trimestre fiscal suele ser el de menores ingresos debido a los periodos festivos y a la dependencia del negocio de la mano de obra directa.

Para el año fiscal 2029, la compañía mantiene como objetivo un crecimiento orgánico anual de los ingresos del 8%–10% y un margen de EBITDA ajustado del 14%–16%. Dicho marco implica unos ingresos de aproximadamente 340 a 350 millones de dólares y un EBITDA ajustado de entre 50 y 55 millones de dólares. Los proyectos de inversión continúan sujetos a la tasa mínima de rentabilidad sobre el capital invertido del 20% establecida por Graham.

Riesgos y aspectos a vigilar

• La dirección prevé que el margen bruto trimestral del 28,2% se normalice a medida que las recepciones de materiales y la mezcla de ventas varíen a lo largo del resto del año.
• Los pedidos, el capital circulante y el flujo de caja pueden presentar fluctuaciones, ya que los grandes contratos de defensa, los proyectos de inversión y los pagos de clientes pueden trasladarse de un trimestre a otro.
• Los grandes proyectos de inversión en energía y procesos continúan mostrando debilidad debido a la incertidumbre geopolítica, especialmente fuera de Estados Unidos.
• El calendario de asignación de fondos para defensa puede repercutir en el ritmo de los programas, si bien la dirección hizo hincapié en el carácter plurianual de sus principales proyectos y en la porción financiada de la cartera de pedidos.
• Se espera que solo entre el 30%–35% de la cartera de pedidos al cierre del trimestre se convierta en ingresos en un plazo de 12 meses, entre el 20%–25% en un periodo de uno a dos años y el resto a más de dos años.

Puntos destacados de la sesión de preguntas y respuestas con analistas

La dirección indicó que los centros de mecanizado de Batavia operaron a plena capacidad durante el turno de día, mientras que las capacidades de soldadura automatizada y ensayos radiográficos continuaron en aumento. Un segundo turno y naves adicionales ofrecen posibles opciones de expansión.

En cuanto a la disponibilidad de lanzamientos espaciales, el director ejecutivo Matthew Malone señaló que la empresa considera las condiciones actuales del mercado como un viento de cola más que un obstáculo. Graham está explorando oportunidades en vehículos de lanzamiento de mayor envergadura, plataformas de lanzamiento de reemplazo, sistemas satelitales y aplicaciones de refrigeración conexas.

En lo relativo a los márgenes, la dirección atribuyó la mejora a una mezcla favorable en espacio y FlackTek, precios más firmes, una mejor ejecución de programas y la transición para dejar atrás antiguos pedidos de defensa de bajo margen. Las menores recepciones de materiales también impulsaron el margen reportado.

Graham describió su cartera de fusiones y adquisiciones como activa, pero afirmó que la inversión orgánica sigue siendo su primera prioridad en la asignación de capital. Las posibles adquisiciones deben ser sumamente estratégicas y cumplir los criterios presentados en el Día del Inversor de la compañía.

Transcripción completa de la conferencia de resultados

Transcripción completa de la conferencia de resultados

Comentarios de la dirección

Operator

Greetings and welcome to the Graham Corporation Fiscal Second Quarter 2027 Earnings Call.

[Operator Instructions]

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tom Cook, Investor Relations. Thank you. You may begin.

Tom Cook

Thank you, Sachi, and good morning, everyone. Welcome to Graham's second quarter fiscal 2027 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 second quarter fiscal 2027 financial results. Our earnings release and accompanying presentation for 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, 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. 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 tables 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 the call over to Matt to begin.

Matthew Malone

Thank you, Tom, and good morning, everyone. We appreciate you joining us to review our second quarter fiscal 2027 results. We have continued to execute on our strategic priorities with growth in defense and space, significant improvement in profitability, another quarter of record backlog, and continued momentum in our FlackTek business.

Second quarter revenue was $69.8 million, up 6% from the prior year. Adjusted EBITDA increased 64% to $10.3 million, representing a margin of 14.8%. Orders totaled $73.7 million and backlog reached a record $561 million. This performance reflects the sustained demand for our mission-critical technologies, the contributions of FlackTek, and better execution across our entire business platform.

We are excited by the improvement in profitability while we continue to invest in our people, processes, and technology. Operational improvements on new and existing programs, a more favorable mix in defense and space work, and the addition of FlackTek are all additive to our results. Program mix and the timing of material receipts also affect our margins, and Chris will discuss those factors in more detail in a few minutes.

The investments we have made across our organization to support capacity, automation, testing, and systems are increasingly supporting the business. FlackTek's integration is translating into stronger results. We completed our first customer test at our new cryogenic test facility this quarter. We also broke ground on our new Arvada facility in Colorado to support our continued growth.

Based on our first half performance and expectations for the remainder of the year, we are reaffirming our fiscal 2027 revenue and adjusted EBITDA guidance. We have also increased our gross margin outlook to reflect better execution and mix. We remain focused on our three-year framework that we outlined at our June Investor Day, targeting 8% to 10% organic revenue growth and adjusted EBITDA margins of 14% to 16% by fiscal 2029. This quarter demonstrates progress towards those objectives as we work towards becoming a top-quartile performer over time.

Turning to our markets on Slide 4 and starting with defense, revenue increased 12% from the prior year quarter and represented 66% of total sales. Growth reflected project milestone timing, new programs, expansion of existing programs, and the addition of FlackTek, partially offset by approximately $10 million lower material receipts than the prior year's quarter. Defense orders were up $41.8 million and defense backlog increased 10% from a year ago.

Our primary naval positions include the Columbia and Virginia-class submarine programs and the Mark 48 Mod 7 heavyweight torpedo, which are both bipartisan supported. We also supply the Mark 19 Mod 2 air turbine pump assemblies to support submarines' fleet spares. These positions give us exposure to both new production and the recurring requirements of the installed fleet.

Additionally, our thermal management and cooling technologies position us well for growth in radar and directed energy platforms, where we are seeing continued progress from development towards production. These systems are becoming increasingly more important as warfare is reshaped by the proliferation of drones and other new technologies. From a margin perspective, we are seeing the benefits of operational excellence and a more profitable mix of work. Better execution on existing programs together with pricing discipline on new opportunities supports our long-term margin goals.

Before turning to space, I want to spend a minute discussing the defense budget and framing Graham's interplay. The vast majority of the programs we support have requirements that extend well beyond any individual budget or political cycle. Shipbuilding, for example, is a multi-decade cycle with strong bipartisan support and one where America's adversaries are making strides ahead of the U.S. We have appropriations, and while funding timing still matters, the multi-year nature of these programs provides visibility as we plan capacity and investments alongside our customers. Our defense backlog is 85% funded, and we are excited about the continued momentum.

Moving to space, growth continues to build. Revenue increased 59% from the prior year quarter, reflecting commercialization, higher launch cadences, the ramp of existing programs, and contributions from FlackTek. Orders were $10.6 million, representing a book-to-bill ratio of 1.7x. For the first half, space orders totaled $25 million, or 2x sales, and the space backlog was up 108% from a year ago.

As customers advance their programs, demand is growing for turbomachinery, cryogenic systems, pumps, and related technologies that we provide. FlackTek adds advanced materials processing capabilities that broaden our participation in space and defense applications, including missiles. Our testing investments are also strengthening our offering. We successfully completed the first customer test at our new cryogenic facility in Florida this quarter.

Together with our liquid nitrogen testing capabilities in Colorado, this allows us to validate performance under demanding conditions and deliver fully tested solutions. That is valuable to our customers as they work through qualification and scale production.

Turning to energy and process, revenue declined 17% from the prior year quarter. Large capital projects remain soft amid global uncertainty, and sales to customers outside the U.S. were lower. Growth in new energy and contributions from FlackTek partially offset those pressures, and we continue to manage the business with that large project environment in mind.

The aftermarket remains a strong and important opportunity across energy, process, and defense. Combined aftermarket sales were $8.6 million, down 3% from the prior quarter, while orders increased 91% to $18.3 million. Sales remained at a high level, and the strength in our bookings supports future activity. With a more than $1 billion installed base of Graham equipment around the world, we have a substantial group of customers who need ongoing maintenance, replacement parts, and performance improvements. Expanding that lifecycle remains a key priority.

In new energy, we continue to see opportunities in development programs supporting micro-reactors, small modular reactors, and other technologies. These markets are still developing, and we will continue to pursue opportunities where our engineering capabilities can solve specific customer needs.

Turning now to FlackTek, which I want to highlight and am very excited about. The integration has gone exceptionally well, and that is showing up in the business results. Revenue increased to $9.5 million from $6.6 million in the first quarter, and the business is contributing margins that are accretive to the portfolio.

A key focus has been sales excellence. The team is following a more rigorous process to help customers understand the technology, validate its application, and move towards an order. We are seeing the time from request for quotation to order shorten alongside greater demand for larger machines and higher-value purchase orders.

The key message is the shift towards production. As customers move from evaluating the technology to using it in production, the scale and the opportunity expands. That is why we remain particularly excited about the MEGA platform and the potential to introduce FlackTek's advanced materials processing technologies to the world.

FlackTek is also a useful example of how we approach M&A. We look for differentiated, engineer-led businesses with proprietary technology that can expand our addressable markets and create opportunities for profitable growth. Alongside our investments in technologies such as Xdot, our focus is on turning technical differentiation into commercial results.

Turning to operational excellence on Slide 5, our focus continues to move from not only building capabilities, but to getting more out of those capabilities as well. The NDE and X-ray facilities in Batavia, automated welding, expanded assembly and testing in Colorado, and the cryogenic testing facility in Florida give us a stronger base from which to serve our customers. We are also continuing to modernize our systems through our ERP initiatives. The next step is to translate those capabilities into higher utilization, shortened cycle times, and improved throughput.

The operational improvements contributing to this quarter's gross margin are encouraging, and we see further opportunity as we repeat that execution across more programs. During the quarter, we broke ground on our new 30,000-square-foot facility at our Arvada campus. This expansion is intended to support increasing demand and provide additional capacity for our turbomachinery applications. It is an investment in our ability to execute the work ahead of us and support future growth.

We continue to evaluate special capital projects against our 20% ROIC hurdle rate. Our focus is on investments that expand capacity, improve productivity, and strengthen differentiated capabilities. The change in our capital expenditure outlook reflects the timing of major projects, which Chris will discuss in more detail.

These investments support the execution and visibility of our backlog, which increased 12% from a year ago and represents our seventh consecutive quarter of record backlog. Approximately 83% is in defense, with many programs extending over multiple years. Our year-to-date book-to-bill is 1.2x. Together with our active pipeline, this supports our confidence in the fiscal 2027 outlook and our longer-term framework.

As we move into the second half, we will build on these opportunities in space and defense, expand aftermarket support, commercialize our proprietary technologies, and improve profitability through disciplined pricing. We also remain selective as we pursue acquisitions that complement our organic growth strategy and offer attractive returns.

The foundation we have built is contributing more meaningfully to our results. We are pleased with our progress through the first half of the fiscal year and recognize there is more work ahead as we continue improving execution and creating value for our customers and shareholders. I want to thank every one of our employees for their continued commitment to our customers and seeing our vision come to life.

With that, I'll turn the call over to Chris for a detailed review of our financial results and outlook. Chris?

Christopher Thome

Thanks, Matt, and good morning, everyone. Turning to our second quarter results, starting on Slide 6. We delivered another solid quarter with continued growth in defense and space, meaningful gross margin expansion, and strong cash generation. The results reflect the benefits of operational execution, the investments we have made to support our long-term growth strategy, and the acquisition of FlackTek.

Second quarter revenue increased 6% to $69.8 million, compared with $66 million in the prior year period. FlackTek contributed $9.5 million of revenue during the quarter. Defense revenue increased 12% year-over-year, primarily driven by the timing of project milestones, new programs, and continued expansion of existing programs, along with the contributions from FlackTek.

This growth was partially offset by approximately $10 million of lower material receipts compared with the extraordinarily high level of the prior year quarter. Defense represented 66% of quarterly sales. Space revenue increased 59% year-over-year and reflects commercialization, accelerated launch cadences, and the ramp of existing programs, as well as the addition of FlackTek.

Within energy and process, revenue decreased 17% from the prior year period, reflecting softness in large capital project investments amid geopolitical uncertainty and lower sales to customers outside the U.S., partially offset by growth in new energy and FlackTek. Aftermarket sales across energy and process and defense were $8.6 million, down 3% year-over-year, but remained at high levels.

Turning to Slide 7, gross profit increased 38% to $19.7 million, compared with $14.3 million in the prior year period. Our gross margin expanded 650 basis points to 28.2% compared with 21.7% a year ago. This increase reflects operational improvements from the investments we have made, contributions from FlackTek, and a more favorable sales mix, particularly within space and defense. The comparison also benefited from lower material receipts in the second quarter of fiscal '27 as compared to the prior year, which had lower margins.

Moving to Slide 8, selling, general, and administrative expenses, including intangible amortization, increased $3.4 million, or 34%, compared with the prior year period. Approximately $2.3 million of the increase reflected incremental SG&A associated with FlackTek, and acquisition and integration expenses contributed $0.7 million to the increase.

We also continue to invest in our people, our processes, and our technology. These investments are expected to total approximately $2.5 million of incremental costs in fiscal 2027 to support future growth and accelerate commercialization. These increases were partially offset by the end of the Barber-Nichols performance bonus in fiscal 2026. The prior year quarter included $1.1 million of expense related to that bonus with no corresponding expense in the current quarter.

Net income increased 50% to $4.6 million, compared with $3.1 million in the prior year quarter. Net income per diluted share increased 39% to $0.39 compared with $0.28 a year ago. On an adjusted basis, net income increased 80% to $6.2 million, compared with $3.4 million a year ago. Adjusted net income per diluted share increased 68% to $0.52, compared with $0.31 in the prior year quarter.

Adjusted EBITDA increased 64% to a record $10.3 million, compared with $6.3 million in the prior year period. Adjusted EBITDA margin expanded 530 basis points to 14.8% from 9.5% a year ago. For the first half of fiscal 2027, revenue increased 16% to $141 million and adjusted EBITDA increased 45% to $19.1 million, representing an adjusted EBITDA margin of 13.5%. Overall, we are pleased with the improvement in profitability while continuing to invest to support future growth.

Turning to Slide 9, orders totaled $73.7 million during the quarter, resulting in a book-to-bill ratio of 1.1x. For the first six months of fiscal 2027, our book-to-bill ratio was 1.2x, and our pipeline of opportunities remained strong. With that said, orders can be lumpy given the nature of our business, particularly large capital projects and multi-year defense orders.

Defense orders totaled $41.8 million in the quarter. As Matt discussed earlier, the vast majority of the programs we support have requirements that extend well beyond any individual budget or political cycle. Shipbuilding is a multi-decade cycle with strong bipartisan support. While funding timing can be impacted, the multi-year nature of these programs provides visibility as we plan capacity and investments alongside our customers. Our defense backlog is 85% funded, and we are excited about the continued momentum.

Space orders were $10.6 million, representing a book-to-bill ratio of 1.7x. For the first half of fiscal '27, space orders totaled $25 million, or 2x sales. Aftermarket orders across defense and energy and process increased 91% to $18.3 million. And finally, our FlackTek business continues to build momentum as book-to-bill was 1.3x for the first half of the year.

Backlog reached another record of $561 million, up 12% from the prior year period, marking our seventh consecutive quarter of record backlog. Defense backlog increased 10% and space backlog increased 108% from a year ago. Defense represented approximately 83% of backlog at quarter end.

We currently expect approximately 30% to 35% of quarter-end backlog to convert to revenue within the next 12 months, another 20% to 25% within 1 to 2 years, and the remainder beyond 2 years. This backlog continues to provide meaningful visibility into future revenue.

Turning to Slide 10, our balance sheet remains strong and provides significant flexibility to support our strategic priorities. Net cash provided by operating activities was $34.1 million for the first six months of fiscal 2027. The strong cash generation primarily reflects the timing of accounts receivable collections and customer deposits, along with higher cash net income.

Net capital expenditures totaled $4.9 million for the first half of 2027 as we continue to invest in growth and productivity improvements. We ended the quarter with $71 million of cash, no outstanding debt, and $75 million available under our revolving credit facility. This financial flexibility positions us to pursue both organic and inorganic growth plans.

Turning to guidance on Slide 11, we are reaffirming our fiscal 2027 revenue and adjusted EBITDA outlook while updating our gross margin, SG&A, and capital expenditure assumptions based on first half performance and our expectations for the remainder of the fiscal year. We continue to expect revenue to be between $285 million and $295 million, representing an increase of 18% over the prior year at the midpoint, and our adjusted EBITDA to be between $35 million to $40 million, representing a 44% increase at the midpoint.

I should remind everyone that our fiscal third quarter is typically our lowest revenue quarter of the year, given the holidays and the dependence of our business on direct labor.

Before concluding, I would like to remind everyone of the three-year financial framework that we laid out at our Investor Day in June. Our objectives remain to achieve 8% to 10% organic revenue growth per year and adjusted EBITDA margins of 14% to 16% by fiscal 2029, supported by higher volumes, operational improvements, a more commercial mix, and continued leverage from our business investments.

That framework implies approximately $340 million to $350 million in revenue and $50 million to $55 million of adjusted EBITDA by fiscal 2029. We remain focused on disciplined capital allocation and targeting returns above our 20% ROIC hurdle rate for our CapEx investments.

Overall, we are pleased with our results through the first half of fiscal 2027. Our record backlog, continued execution, and strong balance sheet position us well to deliver on our full-year outlook. With that, operator, we are now ready for questions.

Operator

[Operator Instructions]

The first question is from Russell Stanley from Beacon Securities. Please go ahead.

Preguntas y respuestas

Russell Stanley

Good morning. Maybe just starting with defense orders, anything you can share on this front, but we generally assume, I think, that subs and carriers drive the vast majority of that number along with torpedoes. I'm wondering what you can say as to the share of defense orders that are from non-Navy applications or opportunities, and just trying to understand what your objectives might be for that component as a share of the order book going forward.

Christopher Thome

Yes, thanks, Russ. So again, another great quarter of orders, 1.1x book-to-bill, 1.2x for the full year. So that's impressive given that last year's book-to-bill ratio was 1.5x. So we continue to see very good momentum in our backlog and our orders.

On the call today, our aftermarket orders were up 91% for the year. Our orders in space were up very significantly as well. So we're just seeing health across all the portfolios. We did mention we did have some larger Navy orders that are within defense, but as you know, those can be very lumpy in nature.

Russell Stanley

Maybe moving on to Batavia, just wondering how the facility has performed, the expansion facility, how that's performed relative to expectations, and understanding you just broke ground on the Arvada expansion facility, and wondering what your appetite may be for additional expansion facilities in New York.

Matthew Malone

Thank you. Yes, Russ, we're definitely seeing the facility come online here. The machining centers are full during day shift, and I say that in reference to where I'm going to go after this. We continue to see the automated welders come online and all of the welding procedures get approved as we move forward.

We're approaching a stance of utilization that I say is a critical milestone, which means we're reaching targets that are consistent with the other parts of our business. But we're not there. We've got work to go do. The RT facility is also online, and we're using it. It's been fantastic to not have to drive an asset and then go through in an iterative cycle outside of the facility. These things are large, and so it was driving quite a bit of churn into our business.

So that investment has paid off on the defense side, and obviously we can utilize it as well more broadly. The last thing I'll note on the first part of the question is, we have the opportunity to bring on a second shift if we get to that point. And so it's going well, the Batavia facility.

I'm going to stick to Batavia for a second. We had mentioned early on that we laid the foundation for Building 14 with two additional bays next door, which are basically exactly the same facility. And we're seeing our backlog continue to expand, an opportunity for potential growth and need for growth on this campus as we move forward in the defense sector.

Moving to the Colorado facility, yes, that 30,000-square-foot facility, we have great confidence. That's really to support our increasing backlog, so it's not so much—I'll say acceleration of backlog conversion. It really is more out in supporting our future growth.

Look, we've already got plans for it, and the team's working on laying out the facility. It utilizes the majority of new equipment, so we don't have to relocate from an existing building. So it's coming along nicely. Ground's being moved, and concrete should be poured here in the next few weeks. So, progressing.

Russell Stanley

That's great. Maybe one more for me and I'll get back in the queue, just around space. Congrats on the success and significant growth there, looks great. A lot of media reports, media attention around the shortage of launch vehicle access. And I'm just wondering if you are seeing that as a potential headwind to your growth here directly or perhaps a little further down the chain. Thank you.

Matthew Malone

Yes, with respect to space, I don't see it as a headwind. I see it more as a continued tailwind. We did not have content on Falcon, so what that allows us to do is continue to expand with that particular customer on their larger asset as well as the assets that will replace the backfill for Falcon.

We're seeing continued increase in opportunities, not only with the large rocket—I'll just say large rocket customers, but we're also seeing continued interest from the folks that are going to replace that smaller fleet of launch. So I would say that it's a tailwind at this point, which is what's being reflected in our order pipeline or orders and pipeline.

Russell Stanley

That's great, Matt. That's all for me. Thank you.

Operator

The next question is from Tomohiko Sano from J.P. Morgan. Please go ahead.

Tomohiko Sano

Hi, good morning, everyone.

Christopher Thome

Hi, Tomo.

Tomohiko Sano

Maybe just on gross margins, which improved significantly to 28.2%, up 650 basis points. While your full year guidance is 25% to 26%, could you unpack a little bit more the margin expansions behind several factors, and how should we think about the margins going forward into the back half to stay at a high level? Thank you.

Christopher Thome

Yes, thanks for the question. Margins were a little bit higher than our normal run rate for the quarter, and that really was a function of mix as well as higher volumes, but primarily the impact on the margin was lower material receipts.

If you recall, in the second quarter of last year, we had about $10 million of extraordinarily high material receipts, which carry with them lower margins. So you have a little bit lower than normal margin in the prior year quarter, and we have a little bit higher than normal margin in the current quarter. So we would expect that to normalize as the year progresses.

However, it was ahead of our expectations, which is why we bumped our gross margin guidance by about 50 basis points on the bottom and top end.

Matthew Malone

Yes, and what we're seeing there is we're seeing improved execution. We're seeing more favorable pricing start to come out of the backlog. So we had talked before about how we had to get lower margin jobs out of the backlog, and that process has been unwinding. So it's a little bit of pricing, it's a little bit of improved execution, as Chris mentioned, and then it's a little bit of just mix versus material receipts.

Christopher Thome

And more specifically on the mix, space obviously is a lot higher in the current year, which carries with it higher margins, as you know. Additionally, FlackTek was higher this quarter versus the prior year and versus the sequential quarter, and they have a higher margin business as well.

And then, one thing that may not be intuitive, within our defense business, we are starting to enter into some higher margin programs now that we have some of the older orders off the books. So it's not only the mix within the markets, but within defense itself as well.

Tomohiko Sano

Thank you. And then on cash flow, please. Operating cash flow was very strong in Q2, partially reflecting the timing with receivable collections and customer deposits. But what level of cash generation should we expect in future quarters? And also, as related to that, any comments on the M&A pipeline in any areas? Appreciate it. Thank you.

Christopher Thome

Yes, sure. Yes, we had an exceptionally strong cash flow quarter. The teams did a great job on receivables collections. As you know, our business is very cash flow positive, as with many of our contracts, we're able to bill for the materials ahead of time before we actually have to pay for them.

With that said, they can also be very lumpy. We had some receivables push out from the first quarter to the second quarter, which is why the second quarter was so high. As you know, we typically like to speak to EBITDA as far as our cash flow generation, just because of the lumpiness of our cash and our working capital.

We literally can have a $5 million or $10 million payment that shifts from one quarter or one year to the next, which can kind of skew the results from quarter to quarter, which is why we don't provide cash flow guidance and prefer to talk to adjusted EBITDA.

Matthew Malone

And as far as M&A, when we look at what we're prioritizing with the cash that we have, since we have no debt, first priority is continued investment in organic growth. We see that as the highest avenue for return for our shareholders, and specifically, we continue to have that 20% hurdle rate.

The next in line would be debt, but we don't have any, so third in line is M&A, and I'll just say the pipeline remains full. We're only focused on extremely strategic opportunities that meet the criteria that we've laid out in our investor slide deck. And yes, the pipeline remains full, conversations are active, and we're excited about potential opportunities on the horizon.

Tomohiko Sano

Great. Thank you very much. Congrats on the quarter.

Matthew Malone

Thanks, Tomo. Thank you.

Operator

[Operator Instructions]

The next question is from Robert Brooks from Northland Capital Markets. Please go ahead.

Robert Brooks

Hey, good morning, team. As we think of the increasing needs for more power-dense items in high-stress environments, that really kind of plays right into your favor in what you guys specialize in, right? So I was just curious to hear any new orders you'd like to highlight so far year-to-date for your fiscal '27 that exemplify that thesis in action.

Matthew Malone

Yeah, something that just gets me jazzed. So Bobby, I'll talk through a few examples at a high level. The first, specifically I want to hone in on even a sub-sector of nuclear. If you look at micro-reactors, so I'm talking containerized reactors that could be deployed at a hyperscale level, and look, it's not going to happen overnight, but we do still feel optimistic.

Barber-Nichols does design and produce some of the most power-dense rotating machines on the market, and with the micro-reactor, power density matters. You got to be able to fit the rotating machine that cools the reactor within the shipping container. And so we are seeing a number of opportunities that have entered into our design environment and now production environment that meet those needs. And so that's one example in the micro-reactor space.

The next area where we're seeing it is on the defense side. If you look specifically, you hone in and you say radar, we've had some opportunities this year that have converted that have to do with increasing the visibility on the battlefield from a directional radar platform to 360 degrees. And I would specifically say, we've talked about that at our Investor Day, but what's happening is it's starting to scale to low-rate and now rate production. And so we're starting to see the scaling effect of that.

Lastly, on the space side, Barber-Nichols has had heritage on the space side with complex rotating machines and, more specifically, power-dense rotating machines for now 20-plus years. And we're seeing opportunities in space to cool—I'll say we have had bookings and opportunities to cool long-term launch vehicles as well as satellite systems, as well as astronaut backpacks. So some of that's been a long conversation, some of it's converted more recently.

So I would just say it's an area where power-dense, electrified rotating machines is the differentiator, and we're seeing it connect with the market need.

Robert Brooks

That's really helpful color there. And then just as we maybe step back or expand the view, obviously you have a really strong position within supplying U.S. naval programs. I was just curious to get a sense of maybe what are the key hurdles for you guys to clear to win defense positions business with American allied naval programs? Or is that something that's not really on the table and you kind of focus where there's better opportunities domestically?

Matthew Malone

No, it's a great question. We do it today. The nice thing is as we do it through the folks that buy it, so our integrator, our prime, or upstream is actually the one that then regulates it to where it goes to foreign allies.

And so we basically have increased content. Shipbuilding as an example, it gets integrated at a prime and then it could go to AUKUS, which is other different avenues for usage. Other examples of that, we do supply spare parts for different submarine solutions globally. So I would just say it is a part of our business today and we continue to see opportunity there for growth.

Robert Brooks

That's great to hear. And then maybe just the last one for me on capacity. So it seems like you don't necessarily have capacity constraints today, but then the Arvada expansion is more about building better, not about throughput, but about growing the business in the future. I was a little confused there. I just want to clear up my understanding.

Matthew Malone

Okay, so think of it this way. We're not capacity constrained today, but when you overlay the backlog that's been growing for seven straight quarters, you get to a situation in the future where current capacity doesn't meet it.

So you essentially have to build ahead to meet the capacity constraints, because you can't build a facility overnight. And so it's just leveling up to meet the backlog overlay in our portfolio. And that's what we've done really well for the last number of years.

Robert Brooks

That's definitely the case. I appreciate the time and congrats on another strong quarter.

Matthew Malone

Thanks, Bobby.

Operator

This concludes the question-and-answer session. I'd like to turn the floor back over to Matthew Malone for closing comments.

Matthew Malone

Thank you. Overall, we are pleased with a solid start to the first half of the year. With that said, we recognize there is still significant work ahead, and we remain focused on disciplined execution, profitable growth, and getting better every day as we work towards becoming a top-quartile performer and creating value for our customers and shareholders.

As always, please reach out with any questions. Thank you everyone for joining us today and your interest in Graham.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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