格雷厄姆公司 (GHM) 2027财年第二季度业绩电话会：在手订单创新高，利润率扩张

核心要点

• 2027财年第二季度营收同比增长6%至6980万美元，主要得益于国防与航天业务的增长，以及FlackTek贡献的950万美元。
• 调整后EBITDA同比增长64%，创下1030万美元的历史新高。调整后EBITDA利润率提升530个基点至14.8%。
• 毛利率达到28.2%，高于上年同期的21.7%，主要反映出执行力提升、有利的产品销售组合、FlackTek的贡献以及低利润率材料收料入账的减少。
• 新签订单总额达7370万美元，订单出货比为1.1倍。在手订单增长12%，达到创纪录的5.61亿美元，连续第七个季度创下历史新高。
• 格雷厄姆重申了2027财年的业绩指引，预计营收为2.85亿至2.95亿美元，调整后EBITDA为3500万至4000万美元；同时将毛利率指引上调至25%–26%。
• 国防和航天业务仍是主要的增长动力。国防业务占季度销售额的66%，航天业务营收同比增长59%，航天在手订单同比增长108%。

主要财务业绩

2027财年上半年，营收同比增长16%至1.41亿美元。调整后EBITDA增长45%至1910万美元，对应利润率为13.5%。

上半年经营现金流为3410万美元。截至季度末，格雷厄姆拥有7100万美元现金，无未偿债务，循环信贷额度尚有7500万美元可用。

业务与经营业绩

国防业务：营收同比增长12%，占总销售额的66%。增长主要受项目里程碑达成、新增及扩展项目以及FlackTek的推动，但部分被材料收料减少约1000万美元所抵消。国防订单总额为4180万美元，国防在手订单增长10%。国防业务约占在手订单总额的83%，其中85%已获得资金支持。

格雷厄姆重点强调了其在哥伦比亚级和弗吉尼亚级潜艇项目、Mark 48 Mod 7重型鱼雷以及Mark 19 Mod 2空气涡轮泵总成方面的业务地位。管理层还汇报了在雷达和定向能冷却应用方面的进展。

航天业务：在商业化推进、发射频度提升、项目放量以及FlackTek的推动下，营收增长59%。季度订单额为1060万美元，相当于1.7倍的订单出货比。上半年航天订单达2500万美元，为销售额的2倍，航天在手订单同比增长108%。

该公司在佛罗里达州的新低温设施中完成了首次客户测试。管理层表示，结合科罗拉多州的液氮测试能力，这些资产将有力支持产品资质认证与规模化量产。

FlackTek：营收环比从660万美元增长至950万美元。管理层表示，该业务贡献了高于公司整体平均水平的利润率，并受益于从报价到下单周期的缩短、对大型设备的需求以及客户从评估阶段转向投产阶段。

能源与流程工业：由于大型资本项目疲软、地缘政治不确定性以及国际销售下滑，营收下降17%。新能源业务和FlackTek的增长部分抵消了上述压力。

售后市场：销售额为860万美元，同比下降3%，但新签订单大幅增长91%至1830万美元。格雷厄姆继续以其庞大装机基础的维护、替换零部件以及性能升级为目标市场。

该公司还在科罗拉多州阿瓦达园区破土动工了一座占地30,000平方英尺的设施。管理层表示，该项目旨在提前增加透平机械产能以满足未来的在手订单需求，而非应对当前的产能瓶颈。

管理层业绩指引

格雷厄姆重申了以下2027财年业绩展望：

• 营收预计为2.85亿至2.95亿美元，按中值计算增长18%。
• 调整后EBITDA预计为3500万至4000万美元，按中值计算增长44%。
• 毛利率预计为25%–26%，得益于上半年更强劲的执行力和有利的产品组合，指引区间上下限均上调了约50个基点。

管理层提醒称，由于节假日以及业务对直接人工的依赖，第三财季通常是营收最低的季度。

对于2029财年，该公司继续以8%–10%的年度内生营收增长率和14%–16%的调整后EBITDA利润率为目标。该框架意味着营收约为3.4亿至3.5亿美元，调整后EBITDA为5000万至5500万美元。资本项目仍须达到格雷厄姆20%的投入资本回报率门槛要求。

风险与关注重点

• 管理层预计，随着年内剩余时间内材料收料和销售组合的变化，28.2%的季度毛利率将回归正常化水平。
• 由于大型国防合同、资本项目以及客户付款可能在不同季度之间发生转移，新签订单、营运资金和现金流可能会出现波动或不均衡。
• 在地缘政治不确定性的背景下，大型能源和流程工业资本项目依然疲软，尤其是美国以外地区。
• 国防拨款的时间节点可能会对项目推进产生影响，不过管理层强调了其主要项目的多年期性质以及在手订单中已获资金支持的比例。
• 截至季度末的在手订单中，预计仅有30%–35%将在12个月内转化为营收，20%–25%预计在1至2年内转化，其余则将在2年后转化。

分析师问答环节亮点

管理层表示，巴达维亚（Batavia）加工中心在白班期间已实现满负荷运转，同时自动焊接和射线照相检测能力持续爬坡。增设第二班次和额外工位提供了潜在的扩产选项。

针对航天发射运力情况，首席执行官马修·马隆（Matthew Malone）表示，公司认为当前的市场环境是顺风而非逆风。格雷厄姆正积极寻求在更大型运载火箭、替代发射平台、卫星系统以及相关冷却应用领域的机遇。

关于利润率，管理层将改善归功于航天和FlackTek有利的业务组合、更强的定价能力、更优的项目执行，以及摆脱了过去利润率较低的旧国防订单。此外，材料收料减少也提振了财报显示的毛利率。

格雷厄姆表示其并购储备项目保持活跃，但内生性投资仍是其资本配置的首要任务。潜在的收购标的必须具有高度战略意义，并符合公司在投资者日上公布的标准。

业绩电话会议完整实录

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完整财报电话会议逐字稿

管理层陈述

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.

分析师问答

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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