Prepared remarks
Greetings. Welcome to the Mirion Technologies Second Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please press star zero. Please note this conference is being recorded. I will now turn the conference over to Eric Linn, Treasurer and Head of Investor Relations. Thank you, Eric. You may begin.
Hey. Thank you, Liz. And good morning, everyone. Welcome to Mirion's second quarter 2026 Earnings Conference Call. Joining me this morning are Mirion's Founder, Chairman, and CEO, Thomas D. Logan and Mirion's CFO and Medical Group President, Brian Schopfer. Before we begin today's prepared remarks, allow me to remind you that comments made during this call will include forward-looking statements and results may differ materially from those projected in the forward-looking statements. The factors that could cause actual results to differ are discussed in our annual reports on Form 10-K, quarterly reports on Form 10-Q, and in Mirion's other SEC filings, under the caption Risk Factors. Quarterly references within today's discussion are related to the second quarter ended June 30, 2026, unless otherwise noted. The comments made during this call will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the appendix of the presentation accompanying today's call. All earnings materials can be found in the investor relations section of our website at www.mirion.com. With that, let me now turn the call over to Thomas, who will begin on slide 3.
Eric, thank you, and good day to everyone joining on the call today. Yesterday, after market closed, we issued our second quarter results. Once again, we demonstrated growing orders and backlog, including key large opportunity order wins. This double-digit order growth is fueling continued backlog expansion as the nuclear power momentum continues to take hold. We also demonstrated expanding adjusted EBITDA margins from both operating segments and across the total enterprise. Better mix and pricing helped to more than offset the dilutive impact from M&A and broader inflation headwinds. All of this is setting the stage for a strong second half 2026 acceleration. We are maintaining our full year 2026 guidance, which implies a meaningful step up in financial performance for the remainder of the year. Brian will walk you through the details, including expectations for the third quarter and the second half. We continue to believe that the momentum in nuclear power is building. Nowhere is this more evident than right here in North America. As I have said on prior calls, the nuclear supertrend continues to broaden and this quarter's headlines highlighted on Slide 4 make that abundantly clear. Here in the U.S., regulatory and policy improvements are supporting momentum within nuclear power. The NRC has proposed updates designed to streamline the licensing process, eliminating unnecessary burdens and increasing regulatory clarity, while importantly maintaining safety standards. Pair that with the Department of Energy's $17.5 billion loan program to support new reactor builds and you can see both the financing and regulatory gateways beginning to open up simultaneously. We are also encouraged by execution, not just policy. The DOE's reactor pilot program achieved criticality across four advanced reactor designs, outperforming its own target of three by the July 4 deadline. That is a tangible example that small modular reactor designs are progressing. Importantly, Mirion, Paragon, and Certrec were squarely in the mix on each of these advanced reactor designs. On the demand side, new power deals continue to materialize. Constellation and Walmart announced a new nuclear power agreement — Walmart's first and among the first between a large retailer and a nuclear facility in this country. Additionally, New York State and Canada are advancing their nuclear plans to add additional capacity. Moreover, just last week, the U.S. announced a deal with Saudi Arabia to supply new reactors and nuclear technology, creating another avenue of incremental nuclear demand. Each of these examples in just the past few months showcase the well-timed acquisitions of Paragon and Certrec to leverage their market-leading positions within North America. Looking beyond North America on Slide 5, fresh data from the World Nuclear Association reinforces what we are already seeing take hold: a generational buildout of global nuclear capacity. Today, the world operates at approximately 400 gigawatts of nuclear capacity. Latest projections forecast a tripling of total global capacity by 2050 to nearly 1.5 terawatts. This is a 45% increase compared to projections a decade ago. Even excluding growth from China and Russia, global capacity still grows at a staggering 2x. Each projection on this panel points in the same direction — increased demand for Mirion solutions and an expanding installed base that provides recurring demand for decades to come. Recall, approximately 80% of our nuclear power–based revenue comes from today's installed base and is the source of considerable recurring and repeat revenue. Slide 6 focuses on the near- to medium-term. Reactors operating today are providing foundational demand growth. At a high level, we are seeing three waves of installed-base nuclear customer demand. The first wave is catch-up capital spending. Decades of capital rationing across the operating fleet left operators with a backlog of deferred maintenance and required replacement parts. Add in the funnel of plant restarts we have talked about, and you get an outsized near-term call on commercial-grade dedication, reverse engineering, and spare parts out of our Peaks platform. The second wave is life extensions and extended power upgrades. Once an operator makes the decision to life extend, they have greater visibility to operate for another 10 to 20 years. This triggers upgrade decisions to instrumentation and controls and broader plant ecosystems. The third wave is emerging, but it is common: digital transformation. The nuclear workforce is aging out, and with it goes decades of tribal knowledge. Replacing these workers are digital natives increasingly looking toward digital platforms to capture and scale that expertise. Additionally, digital platforms are providing the firepower to optimize outages and assist operators in improving thermal efficiency. We are already seeing these factors drive order growth as illustrated on Slide 7. Second quarter 2026 backlog totals over $1.1 billion. This is nearly 40% higher versus a year ago. Legacy backlog, excluding backlog additions from the Paragon and Certrec deals, has grown by 17%. Let's drill into this legacy backlog number a bit to illustrate my broader point about growing nuclear power demand. This subset of the backlog has seen incredible growth — up 31% versus 17% for total legacy Mirion. If you isolate the legacy Mirion installed base, it is even more impressive — up nearly 40% versus Q2 2025. Slide 8 addresses investor questions on the second half revenue visibility. We continue to have good line of sight to our full-year revenue expectations. Between first-half actual results and backlog expected to convert to revenue in the second half, approximately 81% of our expected full-year revenue is accounted for. Importantly, this 81% shows comparable revenue coverage to prior years. This gives us the confidence to maintain full-year revenue expectations. Additionally, Paragon's Peaks business adds a new revenue stream for us that does not appear in backlog. Instead, this revenue is booked in quarter. Before I turn it over to Brian to detail the quarter, allow me to spend a minute on AI shown on Slide 9. This is where an increasing amount of my time is spent today — thinking strategically and guiding our business to harness the incredible potential from artificial intelligence. We are investing to create early-adopter advantage by embedding AI into how we develop products, how we serve customers, and how we run our operations. We have organized our AI strategy across three distinct pillars, with dedicated resources committed to accelerating adoption and deployment across the company. The first pillar is accelerating product development. AI is fundamentally changing our software development cycles and compressing time to market. Specifically, we are improving data analytics, accelerating real-time feedback loops, and improving testing and compliance workflows. This would have taken our engineering teams months to execute manually. The ability to move faster while maintaining, and in fact improving, the rigor of our compliance processes is a genuine game-changer. The second pillar is organization-wide efficiencies. AI is becoming an important tool in this effort — from automating back-office processes like document review to test plan development. We are still in the early innings here, but the trajectory is encouraging and internal adoption is gaining traction. The third pillar, the one I am most excited about, is AI-powered solutions. We are developing new AI-centric innovations across both segments. And importantly, we are increasingly focused on connecting our hardware devices — think instruments that sit in nuclear power plants and cancer treatment centers around the world — to software and data platforms that drive measurable productivity improvements for our customers. In fact, last week at the AAPM Annual Meeting in Vancouver, we highlighted our new PlanAI dosimetry platform, which enables dosimetrists to deliver higher-quality, patient-specific plans faster. In our RTQA business, we also highlighted our new Daily QA4 Pro, which consolidates dosimetry and imaging checks into a single imageable solution, reducing room entries, minimizing setup time, and standardizing execution across users. Importantly, it is integrated into our existing SunCHECK platform so physics teams can spend less time on logistics and more time on patient care. Let me turn it over to Brian now to walk through the financials. Brian?
Thank you, Thomas, and good morning, everyone. I will continue the prepared remarks on Slide 10 outlining our financial performance. Second quarter total revenue was $266.8 million, an increase of 20% versus last year's second quarter. Organic revenue growth was 1%, in line with our expectations and aligned with what we communicated in April. Second quarter adjusted EBITDA was $65.3 million, or 27.5% higher than last year. Margins expanded 150 basis points in the quarter, driven by favorable product mix and price across both segments. Excluding the impacts of M&A and a one-time tariff refund, margins would have expanded over 200 basis points. We have received approximately $1 million in tariff refunds to date. Based on how the stock is traded, we used approximately $25 million of our $100 million share repurchase program in the second quarter to opportunistically buy back approximately 1.4 million shares. This brings our total share buybacks for the year to approximately $40 million with $40 million still remaining under the program. We generated $49 million of adjusted free cash flow in the quarter, reflecting higher adjusted EBITDA and a source of cash from net working capital, as well as continued tailwinds from our refinancing activities last year. Lastly, as Thomas outlined, orders in the second quarter were strong — up 10% versus last year's second quarter. Once again, nuclear power led the way among our end markets. Slide 11 details the continued progress against our large opportunity pipeline. In the second quarter, we won a number of opportunities, including the previously disclosed large SMR order at Paragon, the second part of another SMR order, and another portion of the radioactive waste handling order within our defense and diversified end market. Although slightly later than we had expected, we have continued to see good momentum as we turned the page to July, where in the first two weeks we were awarded more than $50 million of large orders, including a large European installed-base order and a U.S. Department of Energy order. Separately in July, we also unexpectedly experienced a cancellation for a Chinese new-build order that was originally booked in 2019. The sites that this project is associated with have seen little progress, and these projects were stalled due to geopolitical tensions that started shortly after they were signed. Normally, with Chinese new builds, we see a much shorter order-to-build cycle. It is important to note that this project has no impact to our full-year 2026 guidance and an immaterial impact on any of our long-range guides that we have given. In total, our July awards bring our year-to-date performance to approximately $160 million with approximately $280 million of opportunities still available to us. Slide 12 has the Q2 order book details for Q2 of last year. Before M&A, core orders grew 10%. Total orders, including a $62 million contribution for Paragon and Certrec, grew 40% in the quarter to $291 million. Nuclear and safety order growth was driven by the robust growth we saw in the nuclear power end market of approximately 50% excluding M&A, with half of the dollar growth coming from the operating fleet and the remainder coming from SMRs. The growth within nuclear power was partially offset by declines in labs and research in defense and diversified. Q2 medical orders declined slightly from last year. Recall, we had a tough comp as we prioritized Asia orders to minimize tariff exposure. Dosimetry orders declined due to a tough euro-based order comp, while nuclear medicine remained flat. Slide 13 details Q2 order performance versus Q1 this year. Recall last quarter, we guided 15% to 20% sequential order growth. If we include the two large orders that were awarded in early July, net of the Chinese cancellation, orders grew 14%, slightly below this range. Without the China cancellation, we would have been at the high end of the range. Before digging into the quarterly financial results, first, an update on nuclear — on the nuclear power end market on Slide 14. Nuclear power orders, excluding M&A, grew 50% in the second quarter with both the operating fleet and SMRs being key drivers. We booked $49 million of SMR orders inclusive of the two large opportunities previously detailed. This is up $42 million over last year, illustrating the continued momentum within the space as well as Paragon's contribution. Overall, nuclear power revenue was flat organically, with increases in the installed base and SMRs offset by a decline in new-build revenue. We remain confident that nuclear power will see double-digit organic revenue growth for the full year. Let's get into the quarterly financials beginning on Slide 15. Consolidated second quarter revenue grew 19.7% to $266.8 million. Approximately 18 of the 19.7% growth was attributed to acquisitions, mainly Paragon. Organic revenue growth of 1% was in line with our April guidance. Second quarter adjusted EBITDA was $65.3 million, or 27.5% better than last year's second quarter. Adjusted EBITDA margins expanded across both segments, with favorable contribution from product mix and pricing. Adjusted EPS totaled $0.12 per share in the quarter. As a reminder, in 2026, we are now including stock-based compensation in our adjusted EPS calculation. Last year's adjusted EPS would have been $0.09 per share using a similar method to the one put in place. For 2026, we have an adjusted EPS reconciliation slide in the appendix that has the details for your modeling. Turning to the nuclear and safety segment on Slide 16: second quarter revenue was $186 million, up 31%. Organic revenue was 2.3%, in line with our April guidance. We continue to be pleased with Paragon's financial performance, with 15% revenue growth for the quarter and 27% growth year-to-date, highlighting the heightened demand for their products and services. Under Mirion's ownership, we have continued to see Paragon's adjusted EBITDA margins expand. We expect this trend to continue as we identify and capture further areas of integration and synergy. As previously mentioned, nuclear power end-market revenue growth was flat, as growth in the installed base and SMRs was offset by less new-build revenue in the period. New-build revenue can be lumpy based on project timing. Adjusted EBITDA grew 35% to $51.1 million. Margins expanded approximately 70 basis points, reflecting the impacts of favorable product mix in Europe, good cost control across the business, and a modest tariff refund here in the U.S. This was partially offset by dilution from the Paragon acquisition. Onto the medical segment on Slide 17: second quarter revenue was $81 million, down 1%. Organic revenue declined 1% driven by the nuclear medicine and dosimetry end markets. This is below our previously disclosed April expectations of low-single-digit organic growth. Our RTQA revenue continues to grow, driven by the OEM sector performance and our growing software business. We previously mentioned in April that in the second quarter of last year, we shipped a large quantity of products into Asia before tariffs went into effect. Excluding this tariff comp headwind, organic RTQA revenue would have grown mid-single-digits. In nuclear medicine, organic revenue declined due to delayed hardware demand. We do expect to see a pickup in the back half of the year in this business. Encouragingly, our nuclear medicine software business generated strong double-digit order growth in the first half. Lastly, the dosimetry services end market also had negative organic growth. The large hardware order from last year continues to be a difficult comp, and will be in the back half of the year as well. Importantly, excluding this, our core dosimetry services organic revenue grew mid-single-digits in Q2. Medical segment Q2 adjusted EBITDA was $30.7 million, or 3% better than last year. Despite lower revenue, margins expanded in the quarter, reflecting price tailwinds, favorable product mix, and software revenue. We saw limited tariff refunds in this segment. Turning to Slide 18, I want to give an update on our end-market expectations within medical while reiterating our full-year segment guidance. Within RTQA, we are raising our outlook to double-digit growth for the year, up from our prior mid-single-digit-plus guide, reflecting OEM sector dynamics and continued strong performance from our software offerings. In nuclear medicine, we are lowering our full-year guide to mid-single-digits, down from our prior double-digit guide, driven by the reduced hardware volume from delayed customer demand. At this point, we see this as a delay, not a decline in demand. In dosimetry, we now expect organic revenue to be negative for the year, down from our prior flat guide, driven by less hardware revenue. Note, we are also lapping the tough comp from hardware sales in 2025. We continue to expect total service revenue growth to be low-single-digits-plus, in line with historical guidance. These puts and takes largely offset and we are maintaining our full-year medical segment guidance. Turning to adjusted free cash flow on Slide 19, we generated $49 million of adjusted free cash flow in Q2 to end the first half of 2026 with $60 million of adjusted free cash flow. This improvement represents our best first half adjusted free cash flow since going public and is driven by good control of our net working capital with continued improving metrics, lower cash taxes, and improvements to our capital structure. Turning to Slide 20, our full-year 2026 guidance is unchanged from April. Based on what we discussed earlier around our backlog coverage, Slide 21 shows that we are expecting to see an uptick in the second half of the year. On organic revenue growth, the first half came in at 2%, held back by difficult comparables from last year's tariff-related pull-forward on the medical side and a difficult Q1 25 nuclear power comp. We expect organic revenue to step up meaningfully in the back half to between 7.5% and 11.2%, driven by the nuclear power end market within Nuclear and Safety and the RTQA end market within Medical. On margins, first-half adjusted EBITDA margins came in at 22.8%, down 23 basis points year over year on dilutive M&A and mix impacts from Q1 26. As is seasonally normal, we expect to see acceleration on margins in the second half of the year, with margin rates expected to be between roughly 27% to 29%, up roughly 150 basis points versus last year as operating leverage kicks in. Second-half adjusted free cash flow is forecasted at $95 to $115 million with Q1 having been our lightest quarter and Q4 our largest cash-generation quarter. At this point, we are trending towards the high end of the range. Altogether, accelerating organic growth and expanding margins coupled with strong backlog are why we remain confident in our full-year guidance despite a slower first half. Before we open the call to Q&A, let's spend some time discussing the third quarter guidance on Slide 22. Consolidated third quarter organic revenue growth is expected to be in the high single-digits. Nuclear and Safety is expected to be mid-single-digits while we anticipate high single-digit growth in Medical. Consolidated adjusted EBITDA margins are expected to expand compared to last year. Nuclear and Safety segment adjusted EBITDA margins should contract, reflecting the impacts of the dilution from Paragon, comping a reduction in incentive compensation for 2025, and the mix-shift impact of anticipated higher new-build revenue in the quarter. As a reminder, new-build projects typically have a slightly lower margin than the installed base. Medical segment adjusted EBITDA margins are expected to expand due to the impact of operating leverage from increasing revenue growth versus the first half of the year. With that, happy to take your questions.
Questions and answers
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, you may press star 2. If you would like to remove your question from the queue, press star 1. One moment, please, while we poll for questions. Our first question is from James West from Melius Research. Please go ahead.
Hey. Good morning, Thomas and Brian.
Hey, guys.
So curious about what you guys talk about as your large opportunity pipeline. There is a significant amount of potential out there that you have discussed. A lot of it is still available, as you noted in your slide deck and in your comments this year, but also as we go into 2027. I wanted to characterize a bit for us how much of that potential is kind of yours to lose, if you will, or follow-on contracts. How much of that is definitely coming to Mirion? How much is kind of up for grabs for others? Just curious if you had some kind of view on how much we should be thinking about that translating to Mirion.
Yeah, James. I will start, and then Brian can add additional color. The way we look at it is that we have a right to win on all of this stuff. The screening methodology that we use to provide this color and broader visibility is that these are opportunities that are greater than $10 million in scope, where we think our probability of winning is likely to be greater than 50%, meaning that we feel like we have a right to win. If we look at the opportunities that actually traded in the last quarter, I believe we won all of them; I do not think we lost anything that actually transacted over that period of time. We remain optimistic about our ability to continue that track record. In our view, the biggest risk is timing risk. Depending on the nature of the project and the sector, they can have a tendency to move to the right. But I would also note that this is a replenishing opportunity set that continues to build overall, so we feel very good about it in aggregate.
And then maybe a little bit unrelated follow-up. When I was with you earlier this year, we talked about the M&A outlook, and you were clear that you had a pipeline and it was strong. I wonder if that has changed, or should we be expecting announcements? What is happening with the target list?
I would characterize our M&A pipeline as of continued strength. There are a lot of really interesting assets in the market that we view as highly complementary and strategic to our business model. M&A has always been an important part of our strategy. We have done roughly 20 deals over the last decade, and our expectation is that we are going to continue to be active in this realm.
Our next question is from Joe Ritchie with Goldman Sachs. Please proceed with your question.
Hey, guys. Good morning.
Morning.
So you guys provided a bunch of good color on the confidence you have in the guide going into the rest of the year. If you are thinking about the Nuclear and Safety segment, I think the implied guidance suggests at least mid-teens type organic growth in the fourth quarter. I just want to get a sense for how much of that is already in backlog and then maybe provide a little more color on that ramp between now and the end of the year?
Yeah. That is why we gave a pretty implicit Q3 guide, because you can now squeeze it to the fourth quarter. We put the visibility out there for the rest of the year — 81% coverage — so we are sitting exactly where we have sat at this point in every other quarter coming out of Q2. When we look backwards, this is an apples-to-apples comparison about where we actually landed from a revenue perspective over what we thought would trade from a backlog perspective. We put out the guide because we feel very good about where we are. We have good visibility to the back end of the year. There is clearly some work on the execution side, and we still have orders to win. The orders we won in early July also helped us. We continue to feel good about where we sit. We recognize that a mid-teens guide for the fourth quarter is big, but the comps for us more broadly in the back half of the year are smaller than what we saw in the first half, and that gives us a tailwind as well.
Maybe a broader question for Thomas. Regarding that China debooking — I know it was only $18 million but it was for a contract that goes back to 2019. How do you think about the backlog you have today relative to potential risk from legacy contracts? Why now to debook that specific contract this quarter?
Joe, we continuously scrutinize our backlog. The history of debooking events for us is exceedingly rare. These are very unusual events typically tied to some broader issue. Shortly after we went public, we had a debooking of a Finnish order tied to the Ukraine conflict. We had a debooking in Turkey a couple years later related to a localized contractual dispute. This one came, candidly, a bit out of the blue. To be clear, when you look at the contractual provisions, there is not an exit provision, and obviously we will have extensive discussions and negotiations. But this was a contract undergirded by a project that was making very little progress. It was booked many years ago and has been impacted by changed trading dynamics specifically between the U.S. and China. Looking beyond that, our view is backlog quality continues to be very high. We do not see an elevated risk or a trigger event where others will fall behind. We remain confident in the dry powder that we have overall. A point to note: when we look at the Chinese market overall, today we have a meaningful position in 50 out of 60 operating Chinese reactors. This track record predates Mirion and goes back about 30 years. Over time, we have seen a declining wallet share in the Chinese market, driven by familiar industry factors. Where we stand today, we continue to see a robust and predictable spare parts market there; over the last five years it has averaged about $8 million a year, and we have confidence that will continue. Regarding new-build dynamics in China, the primary focus now is on an indigenous reactor type called the Hualong reactor where we are effectively locked out — it is 100% locally produced. But there continue to be export opportunities in China through derivatives of the Westinghouse AP1000, the Framatome EPR, and the Rosatom VVER technology. We expect to continue to have at bats there over our planning horizon. Finally, we are active in three advanced reactor applications in China; China is active in the SMR market and doing interesting things with advanced reactor technology, which continues to be an opportunity for us. This debook was disappointing and there will be more to the story over the next few months, but we do not view it as indicative of broader issues for us.
Our next question is from Quinn Fredrickson with Baird. Please proceed with your question.
Good morning. Just building on that last question on SMRs — you clearly have some momentum here based on these large orders and expecting a move from 2% of revenue to 3% through this year. I think 2030 has been speculated as the timeframe when SMRs become more commercially deployed. Based on that order momentum and the visibility you have today, should we think about the portion of your revenue from SMRs scaling further in 2027?
What I would say, Quinn, is that while historically we have been cautious about expressing confidence in the SMR timeline, the reality continues to move to the left. We are seeing a stronger and stronger opportunity flow in this sector. Our positioning is somewhat unique given the breadth of our capabilities relevant to these players. The growth dynamic and the momentum are continuing to build. We are increasingly bullish on this sector and our right to win. I expect this will continue to grow at a rate faster than our overall organic growth rate in our planning horizon, though I am not putting specific guidance on it today.
And then for my follow-up on nuclear medicine: can you elaborate on what caused the reduced hardware volume and delayed demand during the quarter? And unpack what gives you confidence in the pickup in the back half that you mentioned?
We have seen a bit of a pause in the first half; I think we were waiting to see more momentum in the drug pipeline. The team continues to be very bullish about the second half based on what we saw coming out of June. Our nuclear medicine software business saw very strong order growth in the first half — strong double digits. We have spent a lot of time in that factory; we did an ERP implementation and consolidated some factories. That factory is working better today than it has been, and lead times have come down dramatically. Our ability to book and ship in that business in a quarter or two has dramatically increased. All those dynamics are at play. We continue to watch it, but we remain optimistic about the back end of the year and into 2027.
Our next question is from Andy Kaplowitz with Citigroup. Please proceed with your question.
Hey, good morning, everyone. Thomas and Brian, I just wanted to ask Joe's question in a slightly different way. Nuclear power order growth was 47% ex-M&A but nuclear power revenue was still flat in Q2. Why is the disconnect lasting so long? If I think about what is ramping up in Q3, you are starting to lap much easier comparisons in your nuclear business. Is it that simple, or is there a higher degree of SMR as well as installed-base projects ramping up too? Have you seen any inflection in July?
To hit the back-end numbers, we are expecting a step up in all three pieces of the nuclear power business: SMR, new build, and NPP. NPP is 80% of our nuclear power revenue, so that business needs to work to hit the back end. The growth was half from the installed base and half from SMR on a dollars basis, much of the SMR came from the large orders. That continues to give us confidence that the business is poised to deliver in the back half. We are sitting at a coverage base at the midpoint of our guide that is consistent with where we have sat in previous years. If you add the Peaks revenue, that gives you another incremental percentage point of coverage, plus the wins in early July continue to bolster coverage dynamics.
From a broader standpoint, there is sometimes a belief that short-cycle power supply — for example, data center builds — will fundamentally displace the nuclear cycle. While new data centers are a big call on incremental energy demand, the important dynamic for our customers is often binary: once an operator decides to extend the life of an asset by another 20 years, that decision drives a set of investments across many systems and subsystems with long replacement cycles. The generalized fear about short-cycle dynamics has less impact on the installed base. The key decisions are about life extension and operating the capacity. Remember that 80% of our revenue comes from the global installed base; that is the most important foundational understanding for our business. More data centers can create upside, especially for SMRs, but we view that as optionality and less important than the growth arc of the installed base.
Our next question is from Christopher Moore with CJS Securities. Please proceed with your question.
Hey, good morning, guys. Maybe talk a little bit about margin. Paragon acquisition continues to be attractive. Just wondering if it makes the 30% EBITDA target for 2028 a little more challenging. For context, 2025 margins were 24.6%, midpoint of this year's guide is 25.6% — a 100-basis point increase. Consensus for next year is 21%, so the market is expecting a drop. How should we think about the puts and takes for margin increases into 2027 and perhaps again in 2028?
Christopher, start with the major building blocks that walk us to our target. The biggest building block is operating leverage. We have a high degree of operating leverage given the fixed versus variable-cost spread. If we maintain factory overhead and SG&A growth in check while top line grows, we see significant fall-through. We would anticipate that half or more of the margin improvement comes from operating leverage as top line continues to grow. The second major component is procurement. We have made meaningful gains in procurement efficiency over the last two years and have a strong queue of in-stream opportunities that reflect a multiyear prosecution of a more optimized supply chain. That is another 1 to 2 points of margin over this period based on what we have line of sight to today. The final piece is self-help beyond procurement: application of our business system, now further enabled by AI, improving conversion efficiency, sales and operations, continued optimization of factory footprint, and improvements in administrative SG&A workflows. We took a reserve in the quarter for some organizational restructuring that is in stream now, driven by opportunities to improve efficiency in spans and layers. That will add near-term benefit on the margin rate as we look to 2027. We are still holding to a 30% target. It is audacious and we are motivated to achieve it. Notwithstanding the dilutive impacts of some M&A deals, we are eyes open about the path.
Maybe a quick follow-up on AI. Is there a significant amount of spend at this point, or much anticipated to get to where you need to go?
We are building our AI capabilities by combining data infrastructure and engineering capabilities. On top of that there is token spend. Right now, our spend rate, primarily OpEx with some CapEx, is running about $5 million and it is a number that is growing. It is a material but not outrageous number, and we remain mindful of it relative to margin dynamics.
Our next question is from Jeffrey Grampp with Northland Capital Markets. Please proceed with your question.
Good morning, guys. Just to touch on the 2027 pipeline and large opportunity pipeline: I think you noted in the slides that it is building or growing. Today versus this time last year, any observations, compare and contrast, or themes worth noting at this point, understanding it is still early?
Jeff, the biggest delta thematically between today and a year ago is the SMR opportunity set, which continues to grow. We are seeing tangible engagements and meaningful gigawatt-scale opportunities. There are also opportunities relating to federal government work and global analogs. Broadly, that is in line with what we saw a year ago; the biggest delta is on the new-build front, most pointedly in the SMR arena.
My follow-up, more near-term on the Q3 commentary: you mentioned Nuclear and Safety mid-single-digit growth, and within that power specifically double-digit. That implies some of the other contributing factors are lower. Is that isolated to Q3? Can you touch on the dynamics for the other revenue components within the Nuclear and Safety segment?
We have not changed a lot of our full-year guides on the Nuclear and Safety side by end market. Labs and research we continue to model as flat for the year; diversified business is mid-single-digits; nuclear power is double-digits. The math on the fourth quarter implies the nuclear and safety business is a big piece of the growth. I do not have much more to add at this time.
Our next question is from Tomo Sano with J.P. Morgan. Please proceed with your question.
Hi, good morning everyone. In July, net bookings were $37 million. Could you give us more color on major contributors and should we think about this as run rate or timing related? Share more color into the second half — I appreciate it. Thank you.
Just to clarify, the $37 million net is the two large orders we won in the first two weeks of July net of the Chinese cancellation we already discussed. That does not include anything broader from a sub-$10 million order scale or the book-to-bill flow business.
If you could talk about some opportunities and momentum into the second half for the large opportunity pipeline, I appreciate it.
You can see on the right side of that slide we still have about 12 opportunities in queue. Eight are classified in new build — that includes utility-scale and SMRs — representing about 15 reactors in total; so it is not one-to-one. We like our right to win on every one of those. Timing between Q3 and Q4 is always uncertain; I do not want to pin it down again. We continue to believe each of these opportunities could trade this year, and we will see how that plays out. We continue to see a couple of installed-base opportunities of size. The DOE represents another bucket and we continue to see good activity there; we are watching whether that hits in 2026 or maybe 2027. We are also watching government dynamics in Washington. There is a lot happening, but a lot out there for us at the larger scale, and the flow business continues to have good momentum.
One quick follow-up on capital allocation. As you generate stronger free cash flow and target a lower level of leverage, how are you thinking about medium-term capital allocations? Thomas, you mentioned AI investment and M&A, and Brian, you talked about buybacks. Any update?
If we did no M&A for the balance of the year, based on our operating plans and capital spending plans, we would end the year around 2.5x leverage. We have a decent pipeline and these tend to be smaller-sized deals. Our first strategic priority for capital allocation is M&A, but there will be a net reduction in leverage over the course of the year. The degree to which that is impacted by M&A is to be determined.
We have reached the end of the question-and-answer session. I would like to turn the floor back over to Thomas D. Logan for closing remarks.
Ladies and gentlemen, appreciate your time and attention today. Again, we are happy to report the second quarter performance. We are excited about the support we see for Q3 and Q4 and look forward to reconnecting in three months to update our outlook at that point. Appreciate your time. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.