Okay, thank you, Natalie. Welcome everyone to our discussion with Graham. Chris Thome and Matthew Malone here, CFO and CEO are here to run through the fireside topics. We've got slides which may be referenced as a aid to in any of the discussion topics. Yeah, just wanted to start out at a high level. We initiated on the shares recently, been, you know, pretty dramatic journey the last five years in terms of profitability, backlog growth, and just turning around the assets and the nimbleness and the customer service to position for some really interesting growth opportunities.
You know, in broad terms, how would you know, just kind of discuss and explain to people the journey over the past five years or so, in terms of executive transitions, operations, and financial management?
Chris, thanks for hosting us today, and look forward to introducing Graham. The first most important thing is Graham is a global industrial brand for 90 years in the energy and process markets, and it brings this incredible backbone that we had to build off of. The challenge with that business is it's in a highly cyclical end market. When you think about energy and process, there was value extraction on the highs and survival in the lows. In the early 2000s, Graham's leadership started diversifying to defense, to take out some of those peaks and valleys in the cyclical nature of the business, which was key positioning for the future. In 2021, Graham purchased Barber-Nichols, which is the business that myself and some of the other leaders have come from.
Chris joins shortly thereafter as the CFO. It was purchased for three reasons. Defense acumen, about 50% of the business was defense. Innovation, entrepreneurial spirit, leadership. Immediately following the acquisition, the changes in leadership started to unfold with a renewed focus on growth and prosperity. Businesses that had been dormant in reinvestment, we started reinvesting with opportunities of greater than 20% ROIC, which we've continued to do. Immediately following the acquisition, and leadership transitions, a three-year strategic plan was outlaid, which at the time to investors seemed extremely ambitious. To us, you know, we got to the ground and started working. Since then, we've executed per the plan with a high say-do ratio, and essentially hit every quarter's guidance. You know, here we are today.
The focus areas have been operational excellence and continuous improvement with respect to customers, employees, systems, processes, everything. Every day the focus is get better in all the areas that we can. Now we're at this critical inflection point as we move forward, Chris, where we've been growing at 8%-10% organic growth. We've been sprinkling in some inorganic growth, and we think we're really well-positioned in the early innings of a sort of a nine-inning baseball game. We think we're in inning two or three to just start the growth journey with a stable foundation.
Okay. Great. Thanks for that. You know, sticking with some of the broader narrative before getting into some of the more narrow themes. Just wanted to go deeper into the revitalized relationship with the U.S. Navy. Point of order, I think you said early 1990s was when Graham first went into the defense business, just as a side note. The revitalization process into Newport News and Electric Boat, you know, that revitalization process, curious to hear about, you know, the absolute changes from Graham's perspective and how you think you've, you know, measured up against other areas of the U.S. Navy supply chain in terms of, you know, kind of correcting for dormancy, I think was the general backdrop.
Yeah, great question. It's important to start from where we started. In 2021, Graham was actually just your typical supplier, behind, struggling to attract the right talent and working on what's called first article jobs within the business. These are the main condensers that go into the submarine and the aircraft carriers that thermally regulate the nuclear power plant. The short of it is we were behind and we were sort of part of the problem. Since that, we've completely transformed the business. We've made investments in people and technology. On the people side, we've started an apprenticeship program with local community colleges to attract welding talent. We've also brought in new executive leadership to ensure the right operational excellence and routine is built in.
We've invested in automated welders and critical equipment across the factory. Fast-forward now, just a number of years, we've reestablished pricing for a baseline. We've cut lead times significantly through operational excellence, and we are on track both on time, budget, and quality on all of the programs that we're performing on. We've gotten to a position of strength on the current programs we have. What that then is enabling, Chris, is we've been able to get to the point where now the government is investing in us. Our strategic customers have invested close to $20 million as grants with no strings attached besides providing for their equipment. We've been able to upscale our capability through that process.
Now that we're performing and we have the talent and the capability, they're looking to us to expand our footprint and our product portfolio within our offering. We're seeing it become what looks forward is them coming to us saying, "Wow, you've really done this, and you can do it for more product and more hardware.
Great. That can take a lot of different forms, Matt. You know, they may ask you to greenfield an initiative or a product, or might say, you know, 'Hey, here's five niche suppliers, a little trouble. Are you interested in picking up two or three of them in the acquisition pipeline?' Like, maybe you could just kind of sort out how that would manifest.
It can go a few different ways, to your point. The first is, you know, we can beat out incumbents. That's the short of it. Or there could be a new strategic platform like SSN(X) on the submarine side, and they could, you know, we're working with them on design elements of that next generation platform. The other is we've, it's sort of been publicly acknowledged that the shipyards are behind on their production capacity. What we're seeing is they're also looking to us to potentially push downstream from them to us as a supplier, hardware that they're lagging behind on. It can come from a few different elements, Chris.
What that is enabling for us is we are investing. When we just built the 30,000 sq ft U.S. Navy facility that's shown on the upper left of this slide, we actually planned out the facility for two additional bays next to it, each of 30,000 sq ft. We did all of the break rooms, water, power so that we're ready to put down two additional facilities as we expand. It will mostly be on existing campuses, and not just at Batavia, but also Barber-Nichols out in Colorado. We're seeing the need for expansion. Another example just to share is two years ago we made a strategic land purchase out in Barber-Nichols.
We've since redeveloped all of that land, and we're getting ready to hit go on the build, which will be another 40,000 sq ft facility which would support critical programs for the Navy and other sources of supply.
Yeah. Jeez, you just finished so many test facilities and capacity expansion, so you're about to hit go on a new 40,000 sq ft in Arvada it is, right?
Correct.
Yeah. What's the kind of build cycle like on that? What are the long poles in the tent?
Yeah. I think most importantly, we only build if the demand is there. We allow our customer and PO placement and backlog to dictate demand on facility standup. We are purchasing land in the area because Colorado is land, you know, it's where we have a campus in an industrial area, so we have to always be thinking about the next strategic land purchase. In Batavia, we have a little bit more land available. Chris, the short of it is, we build the backlog, we see the need, we plan out the facility, and we develop the facility for it.
What we then do though is once we develop the facility, we try to make it as cross-compatible or dual use as possible. We don't design it just for that end product or that end market. We design it with a dual use purpose across our commercial business and our defense business where possible so that we can make sure we're ready for any changes in end market dynamics.
Okay.
It's on the kind of two to three-year mark at this point, and that's pretty accelerated. Yes, I think you're right is we are looking to continue to expand, and that's to support the 8%-10% organic growth.
Okay. The two to three-year mark means that would be the total build cycle for the 40,000 sq ft Arvada facility?
Yeah. It will be about 18 months.
Oh. Oh, okay. Okay. You know, Matt, you came with Barber-Nichols, I believe, to Graham. Just curious to hear you retrospect a bit on, you know, how that acquisition, integration process, you know, came across to you at the time, and how the combination, you know, benefits each strategically. Any key frictions the merger process had to work through.
Yeah. First of all, it was a long process for us. We needed two years of financials 'cause it was transformational for Graham. We had a lot of time to get to know each other. That's the short takeaway. Right after the acquisition, obviously Graham was in a tough position. Leadership transition. Dan moved to Batavia and ran Graham Corporation with Alan Smith. Chris came on as the CFO. I stayed back and ran Barber-Nichols. Truthfully just ran the strategy exactly the way that we had intended to do it prior to the acquisition. That went quite well. Integration was more hands-off for some time. We focused on building the superior business units. Over the last two years we've really been extracting value from each of the businesses.
I can say I've been extremely grateful to Graham and the acquisition for Barber-Nichols. We've been able to invest a lot of capital back into the business to make sure that the sustainability for this business is there. Double the backlog at Barber-Nichols, so it's gone really well, even as a previous owner of Barber-Nichols for this business. The other thing is Graham is market agnostic, yes, we play in 3N markets, it's allowed us to continue at Barber-Nichols to excel at the things that we do. Vice versa, Graham has benefited from Barber-Nichols. Examples of that, you know, there's obviously been leadership that we've already discussed, another example is we've helped sort of reinvent some of the innovations and bring some advanced analytics to their R&D facility to modernize their product portfolio.
This whole theme of innovation has really stimulated from Barber-Nichols to Graham. Lastly, I mean, you mentioned frictions. I'll just cover a few. The reality is, like, they're small in nature compared to the benefits, but two different locations always creates just, you know, separation. Innovation cycle between the businesses Barber-Nichols is evolving very quickly. Graham in a little bit more sort of that three to five year, Barber-Nichols in sort of that one year to 18 months. But we're starting to sync up those two. We're seeing that our core competencies, there's some overlap, but there's also differences, we need to be able to tailor our leadership approach to utilize the strengths, but not hinder the business units and just create sort of this generic brand.
We really need to continue to allow for that competitive differentiation within the business units. All in all, much more tailored towards wins than frictions.
Okay. Yeah, sounds great. You had a follow-up on some of the innovation cycle commentary. You said faster at Barber-Nichols than Graham, but starting to sync up. Just a little confused 'cause I thought maybe the differences was just the nature of the products and the applications for each, but then you said they're starting to sync up.
Actually no, it is inherently different. The backbone of Graham has been almost completely what I would call empirical based, which means trial and error. Test, cycle, test, cycle, build. It's a very hands-on iterative approach, and Barber-Nichols has been much more analytically driven. Understanding the physics of the system and using computation and analytics to drive solutions and inform, and that cycle of improvement can be much faster. It's more bringing an analytical mindset to Graham, and then an empirical mindset to Barber-Nichols. Where Barber-Nichols is highly analytical, it didn't have much testing capabilities, so that's why we've been investing in the testing. We've been leveraging those synergies back and forth to advance the R&D or innovation cycle.
Okay, great. something like Digital Twin would be much more familiar with the Barber-Nichols.
Correct
legacy. Okay. You know, Graham has described opportunity for multiple more facilities at Batavia over time. You know, you're moving now on another one in Arvada. Like, what is your view on this as a speculative notion versus more of an eventuality? I mean, your book-to-bill and backlog have been outperforming your commitments year after year for the most part. You know, so it's tempting to think of that description of rooftop forecast at Batavia as more of an eventuality than like a speculative notion. But I just wanted to hear you out on that.
Yeah, I think you hit it quite well. We're moving in the direction. We're, you know, we're pre-purchasing land for reasons. Our customers continue to be engaged in our future. Our customers are investing through grants without strings because we're on critical strategic programs. We're gonna continue to nurture those relationships, Chris. Yes, I do believe that it is more of an eventuality. What I will say, though, is it is important to continue to thematically understand that when we do make those investments, we will keep them as dual use and broad as possible, not as pinpoint and the factory that's perfect for that exact end use. The reasons for that being is we wanna ensure that we have long-term applicability of those facilities and assets.
Yeah. You know, besides kind of the raw production facility, I think there were at least three new test facilities you opened last year. Curious if you're seeing that make a difference in, you know, differentiating competitively for new business? I know a lot of new business your processes you're involved in are years in the making and maybe still have some ways to go. Yeah, kind of intrigued by those test facilities just for your kind of business development perspective and also moving expensive processes in-house. Are there some, you know, step function and margin opportunities from these test facilities?
Yeah. Testing it, I often talk about with Graham full product life cycle, what I mean by that is being able to do it from concept through aftermarket. We've been really good at being able to create hardware and deliver product. One thing that we've struggled with on the Barber-Nichols side, not the Graham side, is we've shipped best effort product, which essentially needs to meet requirements that the customer validates for us. The challenge with that is you put a piece of equipment in for the first time into the system for the customer to prove that it works on their final application. Why we're investing in this testing capability is now we can prove to the customer before they get the product that it absolutely will work in their final system.
What we're able to do as a result of that is we're able to provide value through the entire full product life cycle. Number two is we're able to extract margins as a result of that, and retain our IP through that process. As we move towards a margin expansion portfolio, we need to be able to validate the technology that we're shipping before it gets there. An example of that. In the lower right is a liquid nitrogen testing facility at Barber-Nichols. That was set up for a specific upper stage program for a space launch application, and we have shipped, let's just say over a dozen pumps at this point that are going on a mission critical application.
Before, it would've taken us months to do the testing, the units would be shipping between California and Barber-Nichols, now we can do the test in one week and prove to our customer that it's ready for integration immediately into their end application. It's really a value extraction play in ensuring that we can stand behind our product. Another example, just to give continuity because I think it's important, we're providing critical cooling equipment for a next generation battlefield radar, we provide two cooling assets per unit. We are actually able to do all the testing in-house to prove that it would work before it's launched to White Sands, it's gone through testing without issue because of that.
We're able to provide confidence to our customer for mission critical product in an environment that must perform.
All of these investments that we've been talking about here today, and as shown on this slide here, is all going to help us expand our revenue as well as our margins, you know, for the next several years. It's going to be a gradual improvement. It's not going to be a step change. The only step change to our margins, as you know, Chris, is with the sunsetting of the Barber-Nichols earn-out bonus in fiscal year 2026, which just ended in March. That's going to add about 200 basis points to our margin. The midpoint of our guidance for fiscal year 2026 implies about an 11% adjusted EBITDA margin. We've also guided with our two-year plan that we issued four years ago that we want to get to the low-to-mid teens, which is 13%-15%.
It's all these projects here on this screen and that Matt's been talking about that's going to help us get to that 13%-15%. Four years ago when we set those targets, it was based upon the average of our peer group. You know, I can assure you that Matt and I and the other executives of Graham don't wake up every day saying that we want to, you know, just be average. You know, we have aspirations to get higher than that. That's all the public guidance that we've given, you know, to date. We are having an investor day on June 18th at the New York Stock Exchange, where we plan on rolling out, you know, more guidance and a three-year outlook.
Right. Okay. Yeah, good to get that in there. We're well aware of that, spread the word and we'll do that as well. You know, just, if we think about the main defense programs, I don't know if the carriers and the subs are, you know, 60% of your defense rev or, I know you haven't disclosed it. We have some pointers to try to triangulate. You know, I think the most superficial growth story there is expanding the rate of production at the shipyards. I think it's moved, you know, maybe not quite halfway from 1.3 to 2.3 a year, that's progressing and that's providing you growth.
There's also the notion of, you know, what we talked about earlier, additional parts and awards if a competitor or a peer is not producing to speed or, you know, some capacity offloading to you from the shipbuilders. You know, could the, you know, drive to accelerate the rates of production or your work on additional content, are they kind of co-equal drivers for the carriers and the nuke subs?
Yeah. There's a lot packed in there, but I'll break it down into, I think, Chris, what are the key themes. The first is, yes, one of the key drivers is going to be the acceleration of the shipbuilding schedule. I think you continue to read it, you know, all continue to read in the thematic headlines that welders and the slowdown at GD and Newport News, where all these systems are integrated. There's a commitment to accelerate that. I think most importantly is our capabilities and core competencies are needed widely across the MIL. We're talking welding, fabrication, machining, all the things that are sort of the highlights within those reports of why they're not moving quickly, or quick enough, I should say.
We not only design those products, but we also make the hardware. We have qualified engineers and welders with a long pedigree of experience. First, we needed to prioritize executing our current programs, but what we're seeing now, Chris, is that second element that you mentioned, which is because we're executing and we have the core competencies and capabilities that are required to accelerate, we're getting additional content opportunities within the larger ocean of supply. I think it's I don't know that it's a 50/50 split, but part of it is acceleration and the other part is additional content.
Okay, both are material at least is.
Absolutely.
Yeah. Okay. Yeah, 'cause I just wasn't sure where the rubber hit the road, you know, if some of the content gains is, like, perspective here we're setting up well or if it's kinda continuous, kinda eking into the system. It sounds like it's more the latter.
It's both of those. It's acceleration and additional content. The thing that we haven't talked about is all of the small calls in defense that we're working on outside of these strategic programs. Torpedoes are evolving very quickly, and we obviously have been a long-term design agent for torpedoes. UUVs, undersea vehicles are progressing quickly with autonomy. The similar power plants on torpedoes we're reusing and retooling for UUV-type applications. There's a lot of additional growth vectors outside of the ones that you just mentioned for us in defense.
Great. Yeah, speaking of other applications, modular nuclear reactors, or what do you call, SMRs.
Yeah
small modular reactors. You know, that's certainly getting more play. Can you discuss the range of applications there? I think data center's a big one. I'm not Maybe related to Golden Dome and some of the powering of that if I'm not mistaken. Yeah, can you explain? Are you kind of one-for-one leverage with that industry like you are with space?
Yeah, let's talk through what we're doing, and then I'll go into that. What we do in small modular nuclear is we are providing one of three things. Either the circulator or the molten salt pump, which essentially is thermally regulating the reactor itself, which ends up being about 10% of the total content of the small modular reactor. The second thing we would provide is the surface condenser if it's a steam cycle in the process. The last item is what's called a supercritical CO2 machine, which converts the heat source into electricity. Those are the three sources of supply from Graham's portfolio.
With that being said, there are a lot of players in small modular nuclear, you know, there's 50+ , and we have taken a technology and product focus, and we've sort of taken a end user agnostic approach. You can see a bunch of SMR users on the lower right portion. These are the ones that we can mention. What we are doing is we are developing a robust set of technology and products that serve a large, vast end user base, and many of them are applicable to all of the different system outcomes. Like I mentioned, small modular nuclear at the system level can come in the form of molten salt, which we are doing some molten salt pumps for those facilities.
It could be gas cooled, which is where we're doing helium or nitrogen circulators for, or it could be a more complex system where we could have another solution for. Chris, I think it's really important to say it's in its early phases of adoption. They're being utilized for things like where power is rapidly needed to be deployed and/or where sustainable uptime needs to be deployed without long-term policing. It's this hyper-scaling type approach, and we think we're really well-positioned with some key players there.
Great. You know, this may be something front running or, you know what, Okay, we have five minutes. Excuse me. This may be something more for the June investor day but, you know, at some point, a book-to-bill average, I think the four or five-year average is well above your 1.1x target. At some point, you know, that's ultimately what drives the 8%-10% organic growth. There's a lead lag there and, been performing well above the 8%-10%, but the book-to-bill has outperformed your target from four or five years ago. You know, intuitively putting that together, you're starting to look at an upgrade to the 8%-10%.
I don't know if you want to comment on that and say, "Hey, let's talk in June.
I guess the only way I would answer that is, you know, our long-term goal, if you look back at our book-to-bill over the last 10 years, it's been 1.1. To grow 8%-10% a year, we want to at least grow our backlog 10%. You know, as you can see on this chart here, you know, our orders have been well in excess of that, and we were at 1.6 year to date for a book-to-bill ratio. You know, as we've said on the last several quarters, you know, our pipeline of opportunities remain full, you know, with a lot of the things that Matt's been talking about today and a lot of those small call options in the new areas. You know, over the long term, you know, we at least wanna grow our book-to-bill at 1.1.
As of late it's been much higher, and it's gonna be all these investments that we're making, and it's all these new programs and these SMRs that are gonna help drive that in the future. You know, we don't give annual book-to-bill guidance just because our orders can be so large in nature that they can be very lumpy. We always caution investors. I think over that 10-year period, you know, our book-to-bill ratio for any one quarter range from 0.5 to, you know, 2. It can be very lumpy in nature.
You know, the perfect example of that was in, you know, the first quarter of fiscal year 2026, we booked a $137 million order, but that order is gonna be fulfilled and convert to revenue over the next seven years. Yes, we have seen a higher book-to-bill ratio as of late because of the tailwinds that we're seeing both in space, in defense and then aftermarket. Over the long term, it's our goal to have at least a 1.1 book-to-bill to achieve our 8%-10% organic annual growth goals.
Okay, great. Just last couple minutes, I'll close out with a narrower one. You just closed on FlackTek. Sounds like a really unique mixing technology, and it also, you know, a wide range of applications. I'm just kinda curious what, you know, kind of legacy kinda mixers, they sound kind of archaic compared to the descriptions of the bladeless centrifugal application. You know, why hasn't the process industry invented this before? Can you help me appreciate the uniqueness of this and, you know, the scalability? I mean, there's some full service, big process providers out there like Emerson, but there's also a lot of fragmentation in the space. Just kinda the kinda rifle shot application in a world of, you know, some big process guys, but also some fragmentation.
Love it. We remain excited about FlackTek. The first thing I just wanna say is the system physics, meaning how the thing works physically, is right in our wheelhouse. It's the exact intersection of vacuum and heat transfer, which is Graham's base business, plus rotating machines, is bladeless mixing. You combine the two, and you have FlackTek. The end users are very similar to all of our business segments today. What really is the differentiator to date, bladeless mixing was not able to compete in a production environment with bladed mixing because of the size of machine. The forces required to create such a capability allowed it to only scale so big in size until FlackTek with Anduril as the lead customer, really changed the game.
They developed the mega machine, which is of an order of magnitude larger than ever been done before in the bladeless setting. Now with the automation, with robotics, that can be easily coupled to it, we are seeing that it could actually disrupt, in some applications, the, the bladed long longevity market. Chris, I think it's the sheer size of the latest development with the mega coupled with the market agnostic, and they literally can serve from a mine to the integration of a thermal panel on a rocket. Mixing is used everywhere. We're in a really exciting position with them and just in the early phases, but those are the two main drivers.
Sounds great. Thanks. We're at time, so thanks again for joining. Great discussion. I know you have some breakouts, so we'll talk to you soon.
Yeah. Cheers. Thank you.
Thanks, Chris. Take care.