Karman Q3 2026 Earnings Results & Report

Karman EPS Results

• Actual EPS: $0.19
• Consensus EPS: $0.16
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: $0.10
• EPS Beat Rate: 4 of last 7 quarters

Karman Revenue Results

• Actual Revenue: $201.62 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: +65.60%

Karman (NYSE:KRMN) Holdings Corp., doing business as Karman Space & Defense, is an aerospace and defense company that develops and manufactures mission-critical components, assemblies and structures. Its products are used in space-launch vehicles, missiles, hypersonic systems and other defense applications where performance, reliability and precision are essential.

The company’s capabilities include the production of composite and metallic structures, propulsion-related components, precision-machined parts and other highly engineered hardware. Karman supplies components and subsystems to leading aerospace and defense contractors and serves programs supporting government and commercial space missions, national security and advanced weapons systems.

Karman operates primarily in the United States and has expanded its capabilities through a group of specialized manufacturing businesses. The company became publicly traded on the New York Stock Exchange under the symbol KRMN in 2025. Tony Koblinski serves as the company’s chief executive officer.

Karman Q3 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Karman reported record third-quarter revenue of $202 million, up 66% year over year, with organic growth of 25% and adjusted EBITDA of $61 million. It raised 2026 revenue guidance to $755 million–$760 million and reiterated expectations for 20%–25% annual organic growth and roughly 30% adjusted EBITDA margins.
• Positive Sentiment: Backlog reached a record $1.7 billion, supported by nearly $465 million in quarterly bookings and a $218 million, seven-year THAAD agreement. Two additional long-term agreements are expected this year, though some missile quantities and related bookings may not be finalized until 2027.
• Negative Sentiment: Space and launch revenue fell 7% year over year to $38 million, as a shift in ULA’s Vulcan launch schedule offset growth elsewhere. Management expects a rebound next year, but that recovery depends in part on launch timing.
• Positive Sentiment: Free cash flow was $13 million in the quarter, and the company now targets at least $20 million for the second half of 2026. Management attributed the improvement to better working-capital execution, while noting cash flow may remain uneven as the business grows.
• Negative Sentiment: Net debt rose to $791 million and net leverage was about 3.2 times adjusted EBITDA, following acquisitions and investment to expand capacity. The company expects leverage to fall below three times by year-end, but that depends on forecast EBITDA and cash-flow growth.

Presentation

[Operator]

I will now hand the call over to Steven Gitlin, Senior Vice President of Investor Relations and Treasury. Steven, please go ahead.

[Steven Gitlin, SVP of Investor Relations and Treasury at Karman]

Good afternoon and thank you for joining Karman Space & Defense's third quarter fiscal year 2026 earnings conference call. I am Steven Gitlin, Senior Vice President of Investor Relations and Treasury. Joining me today are Jon Rambeau, Chief Executive Officer, Chris Boynton, Chief Financial Officer, Jonathan Beaudoin, Chief Operating Officer, and Mike Willis, our departing CFO. Before we begin, please note that many of the statements made on this call are forward-looking and are based on assumptions as of today. Actual results may differ materially as a result of various factors, including the risks and uncertainties described in today's earnings release and our quarterly report on Form 10-Q filed with the SEC. We undertake no obligation to revise or update any forward-looking statements after this call. We will also discuss non-GAAP financial measures that we believe help evaluate our performance.

[Steven Gitlin, SVP of Investor Relations and Treasury at Karman]

These measures should not be considered in isolation or as substitutes for GAAP results. Our earnings release, available under News and Events on the Investor section of our website, reconciles each non-GAAP measure to the most comparable GAAP measure. We have posted our earnings release and presentation on our website at karman-sd.com. Now, I will turn the call over to Jon.

[Jon Rambeau, CEO at Karman]

Thank you, Steve, and good afternoon, everyone. Thank you for joining us today. The Karman team continues to deliver on customer commitments while expanding capacity to meet rising demand, yielding record third quarter financial results. As shown on page three of our earnings presentation, Karman supplies capabilities to more than 150 prime contractors across more than 150 programs and across the full program life cycle. We design and produce mission-critical subsystems for our targeted end markets, delivering at the speed and scale required for the demand of today and the missions of tomorrow. As a merchant supplier, we do not generally compete for prime program wins. We support prime contractors with qualified capabilities that enable their success. This model positions us to grow profitably within our end markets as demand rises and we gain share.

[Jon Rambeau, CEO at Karman]

Before I summarize our record third quarter results, I would like to take a moment to comment on the outcome of Tuesday's midterm elections. A change in control of Congress could impact the timing and form of defense appropriations. However, what remains clear is that America's strategic deterrence and power projection is built on the munitions, submarine, missile defense, UAS, and counter-UAS programs that Karman supports. It is also clear that political support for these priority programs is bipartisan. For Karman, exposure to the space economy and international defense provide funding streams that are largely independent of the U.S. political environment. It may take some time to gain a clear understanding of how and when the U.S. defense appropriations will take place, but to be clear, Karman will remain focused on our customer commitments and partner closely with those customers to ensure maximum support for our priority programs.

[Jon Rambeau, CEO at Karman]

Today, I will review our record quarterly performance and the priorities shaping our next phase of growth. Chris will cover third quarter results and updated guidance. Jonathan will discuss demand, integration, and capacity, and I will close with our outlook before we open the call for Q and A.

[Jon Rambeau, CEO at Karman]

Select third quarter highlights summarized on pages four and five of our presentation include year-over-year organic revenue growth of 25%, representing growth from businesses we have owned for more than 12 months, sequential revenue growth of 11% from the second quarter, record backlog of $1.7 billion, which is more than double that of year-end 2025, and was driven by strong quarterly bookings of nearly $465 million, $13 million of free cash flow in the quarter, making good progress on our goal of $15 million-$20 million of free cash in the second half of 2026, even as we have accelerated strategic CapEx investments in the first nine months of the year to support growth in 2027 and beyond. Implementation of the majority of controls necessary to remediate our material weakness.

[Jon Rambeau, CEO at Karman]

We continue to track according to plan and expect to conclude testing of all controls by the middle of 2027. With the completion of our Walker acquisition, we now operate in the U.K. and the European Union, representing our first increment of international expansion. We executed a second large long-term agreement valued at $218 million with Lockheed Martin for the THAAD program and expect two additional agreements this year. Those agreements are expected to span multiple subsystems and missile types. We anticipate firm 2026 orders for programs where annual quantities have already been finalized. For missile types where quantities have not yet been finalized at the prime level, additional bookings are expected in 2027 as our agreements are updated. Customer orders continue to drive strong year-over-year and sequential growth.

[Jon Rambeau, CEO at Karman]

Third quarter revenue reached $202 million, adjusted EBITDA was $61 million, and backlog rose to a new record level, providing full visibility to the midpoint of our increased full-year revenue guidance. That visibility combines $535 million of year-to-date revenue with backlog expected to convert this year. As a reminder, our backlog includes only firm, binding customer commitments. Consistent with our strategy of playing offense on second source initiatives, we continue to pursue opportunities where customers require additional capacity. Of the four opportunities discussed last quarter, two have now entered qualification, with others still being pursued. We've added a fifth second source opportunity for composite phenolic assemblies and remain engaged on a future lower-cost interceptor program. In addition to our exposure to high-priority UAS, counter-UAS, and maritime programs, Karman provides subsystems on 10 of the 14 Munitions Acceleration Council, or MAC, programs.

[Jon Rambeau, CEO at Karman]

These opportunities reflect growing confidence in our ability to scale, innovate, and deliver critical hardware at speed at a moment when generational demand is building. In our space and launch end market, the demand for our solutions to support robust launch activity and new missions remains strong, but a shift in launch cadence for one particular customer resulted in a modest decline in year-over-year revenue. Chris will provide more details on this shortly. Looking ahead, we remain focused on the three priorities I laid out last quarter. First, we will seek to deliver record financial performance while capturing a generational surge in demand across our end markets. This is best illustrated by a recent long-term agreement for THAAD shrouds. Second, we are working to fully unlock the value of Karman, leveraging differentiated capabilities, a growing and well-capitalized development and production system, and a talented workforce.

[Jon Rambeau, CEO at Karman]

Jonathan will discuss some examples in his comments. And third, we're making progress on our drive to deliver operational excellence through technology, capacity, and a rigorous operating rhythm. Strong execution and visibility position us well for another record year while building a stronger platform for 2027. With that overview, I'll now turn the call over to Chris to review our quarterly and year-to-date financial performance.

[Chris Boynton, CFO at Karman]

Thank you, Jon. It's a pleasure to be with you all today. I'm excited to be part of the Karman story and look forward to meeting more of our investors in the months ahead. Our unique position within today's most critical end markets, our diverse product and customer set, combined with a strong and growing culture embraced by top-tier talent and leadership is what first attracted me to the company. What I've experienced and learned over the last few weeks has only reinforced my decision to join this team. Before reviewing our third quarter results, I want to take a moment to thank Mike Willis for his partnership and support during this transition period. Mike was instrumental in helping build Karman into the company it is today, including establishing the finance organization, systems, and processes that supported our growth, strong profitability, and successful transition to a public company.

[Chris Boynton, CFO at Karman]

Many of the capabilities that allow us to execute at a high level and deliver the strong organic growth and margin performance you see today were built under Mike's leadership. We are grateful for his many contributions to Karman and happy to have him with us today for Q and A. Now, to our third quarter results. We extended our momentum with another record quarter. Page six shows the key year-over-year metrics. Revenue of $202 million was up 66% and 11% sequentially. Gross profit of $86 million increased by 73% with a gross margin of 43%. Net income of $21 million grew 174%. Adjusted EBITDA of $61 million climbed 60% with a 30% margin. Adjusted EPS of $0.19 nearly doubled from last year. Backlog of $1.7 billion more than doubled from the end of FY 2025.

[Chris Boynton, CFO at Karman]

As a reminder, our backlog only includes firm, binding customer commitments. Bookings in the quarter totaled nearly $465 million from all end markets, including a large defense LTA that Jon described moments ago. A continued focus on working capital management drove free cash flow of $13 million. Third quarter organic revenue grew 25% year-over-year, supporting our 20%-25% annual organic growth target. All defense end markets delivered year-over-year growth on a quarterly and year-to-date basis, illustrated on page seven. Tactical missiles and IDS revenue grew 52% to $68 million year-over-year, and 45% to $176 million year-to-date, led by strength in core production programs, including unmanned and counter-UAS and emerging programs transitioning to production.

[Chris Boynton, CFO at Karman]

Hypersonics and strategic missile defense revenue grew 40% to $51 million year-over-year, and 28% to $130 million year-to-date, driven by growth in key interceptor production and increased production associated with a new surface-to-surface missile system. Maritime defense systems contributed $45 million in revenue in the quarter, up 30% sequentially and $105 million year-to-date, driven by legacy and next-generation submarine and surface vessel programs. Finally, space and launch revenue declined 7% to $38 million year-over-year and increased 8% to $124 million year-to-date, supported by content for both legacy and new launch providers. The increase was partially offset by a shift in ULA's Vulcan launch schedule, which is planned to resume this month. At the same time, we saw increased orders for New Glenn in the quarter.

[Chris Boynton, CFO at Karman]

We expect a rebound in space and launch revenue next year, supported by backlog that includes the $250 million LTA that we announced last quarter. Our third quarter revenue mix was as follows: tactical missiles and IDS, 34%, hypersonics and SMD, 25%, maritime defense systems, 22%, and space and launch, 19%. For the nine months ending September 30th, 2026, revenue rose to $535 million, up 59% year-over-year. Gross profit increased to $228 million, up 67% year-over-year. Net income grew to $43 million, up from $10 million a year ago. Adjusted EBITDA jumped to $160 million, up 55% year-over-year, and adjusted EPS climbed to $0.44, up from $0.25 year-over-year. Now turning to our balance sheet and cash flow.

[Chris Boynton, CFO at Karman]

As expected for a high-growth company like Karman, with growing backlog, working capital is also increasing to support higher volume. There is a natural lag between backlog, revenue growth, and ultimately cash receipt from our customers. This is most evident in our net contract asset balance. Other key drivers include inventory, accounts receivable, and accounts payable. We generate revenue and EBITDA when we perform the work, but cash is generated when we invoice our customers and ultimately collect payment. During periods of rapid growth, contract assets, receivables, and capacity investments can temporarily consume cash, even though the underlying programs are profitable. As Karman continues to scale, we expect cash generation to accelerate through operating leverage and working capital efficiency. As page eight shows, net operating working capital has increased in dollars and declined as a percentage of revenue from Q3 2025 to Q3 2026.

[Chris Boynton, CFO at Karman]

That improvement reflects stronger operating discipline and cash focus as we scale. Our increasingly disciplined cash management produced $13 million of free cash flow in the quarter. This result was driven by improvements in both days sales outstanding and days payable outstanding, and we are now targeting at least $20 million of free cash flow in the second half of the year. Cash and cash equivalents total $68 million, up $34 million from year-end 2025. Net cash provided by operating activities in the third quarter was $26.7 million. Turning now to capital allocation. In order to meet growing demand, we continue to invest in capacity and capability. CapEx was $35 million year-to-date, reflecting a higher pace of investment to support our capacity expansion. This represents a slightly higher run rate than our 5% target for the year.

[Chris Boynton, CFO at Karman]

We continue to invest ahead of our orders to strengthen our ability to respond to the generational demand cycle we expect to persist for a number of years. Net debt was $791 million at the end of the third quarter, an increase of $325 million from December 31, 2025. Our Q3 net leverage ratio was approximately 3.2x adjusted EBITDA on a third quarter run rate basis, the result of acquisitions that have expanded our platform and value proposition. Given our expected EBITDA and free cash flow growth, we anticipate net leverage declining to below three times by year-end and continuing to decrease during 2027, notwithstanding any future acquisition activity. Our $150 million revolving credit facility remained untapped at quarter end. Our proprietary M&A pipeline remains active.

[Chris Boynton, CFO at Karman]

We continue to pursue opportunities that expand the Karman platform and further strengthen our portfolio, with no material change in seller valuation expectations. Now, I will provide an update on our full-year guidance. Based on strong year-to-date results, record backlog, and strong visibility, we are raising our 2026 outlook as shown on page nine. We now expect full-year revenue of $755 million-$760 million, and adjusted EBITDA of $225 million-$227 million, representing a 29.8% margin at the midpoint. This represents year-over-year revenue growth of 61% and adjusted EBITDA growth of 55% to the midpoint. Importantly, we continue to expect 20%-25% annual organic growth with adjusted EBITDA margins of about 30% in 2026.

[Chris Boynton, CFO at Karman]

With full visibility for 2026 revenue, much of our growing record backlog supports our plans for 2027 and beyond, including an expectation for 20%-25% organic revenue and adjusted EBITDA margin of 30%. Lastly, for 2026 modeling purposes, we expect the following: an effective tax rate of approximately 5%. The decline in tax rate is driven by partial recognition of cumulative R&D tax credits that have not been previously recognized. We do expect additional tax benefits in early 2027 as well. Converting strong customer demand for capabilities into shareholder value requires CapEx investments that we now expect to be between 5%-6% of revenue for the fourth quarter. We are taking a thoughtful approach to these investments to ensure that we remain just ahead of customer demand. Now, I will turn the call over to Jonathan.

[Jonathan Beaudoin, COO at Karman]

Thank you, Chris. I am excited to share the progress we are making on operations and integration at a time when the demand environment remains strong across both legacy and emerging customers. To ensure that we do everything possible to meet the moment, we are continuing to expand capacity to address growing customer demand. In Salt Lake City, the first set of automated production equipment is on site, and initial production has commenced. We are onboarding talent and conducting training for newly hired supervisors, manufacturing engineers, and technicians. In Gulfport, after having completed a new logistics facility that we discussed in our first quarter earnings call, we have now broken ground on a new polymer facility for specialized naval coatings, a complementary market for our maritime work.

[Jonathan Beaudoin, COO at Karman]

In Cedar City, we are expanding our facility to support increased demand for UAS propulsion systems from an emerging privately funded UAS prime contractor that supports international customers. What is important about this capability is that it is a Karman-designed propulsion system that has already been ordered in large quantity. Opportunities like this one are important because they will continue to scale independent of U.S. defense budget uncertainties or constraints. Supporting the effective use of our capacity, we are developing the next phase of the Karman Operating System, focused on enhancing the connection between demand and capacity planning, factory execution, and enterprise reporting. Better visibility into production constraints and more consistent planning will help us use available capacity more effectively and improve delivery performance. As we continue to expand our capacity, we are closely monitoring our supply chain and are aware of no meaningful supply constraints to our growth.

[Jonathan Beaudoin, COO at Karman]

Inorganic growth remains a core element of growth strategy. The effective integration of newly acquired assets has continued to strengthen the Karman platform, supporting market share increases and growth. In one example, multiple acquisitions have led to an increase in demand for our capabilities to support a customer's lunar lander program. We are producing products for that customer in our Los Angeles facility. In another case, our Cedar City operation enabled us to secure the meaningful new contract for UAS propulsion systems that I spoke about moments ago. Outside of the U.S., our integration of Walker, now Karman Europe, is proceeding well, focusing initially on financial reporting, governance, and pipeline expansion. Our integration management office is leading the effort, applying learning from previous efforts to continuously improve outcomes. Now for an update on our AI initiative.

[Jonathan Beaudoin, COO at Karman]

Our Project Moonshot has progressed from proof of concept into pilot validation at two Karman locations, applying AI to generate new value from our decades of engineering and program knowledge. Teams are using these capabilities to identify customer requirements, reuse prior engineering work, develop initial proposals, and assess win strategies. The opportunity is to turn that knowledge into greater capacity and stronger execution. For example, being able to respond to more opportunities, shorten proposal preparation, and free engineers to focus on complex technical work. Early user feedback is encouraging, and we are validating productivity and quality improvements to guide broader deployment. We are excited about early results and look forward to driving deeper and more meaningful outcomes with the help of AI. Now I'll turn the call back over to Jon.

[Jon Rambeau, CEO at Karman]

Thank you, Jonathan. We built stronger momentum throughout 2026, and our business is positioned for even greater achievements in 2027 and beyond. With the congressional midterms behind us, we anticipate renewed attention and progress in Washington on appropriations for the critical defense programs we support. Although the continuing resolution creates uncertainty, our growing backlog for 2027 provides support for continued production during a CR, while increasing allied defense budgets represent important sources of demand and funding. For the remainder of 2026, we are focused on execution. That entails delivering on our commitments, converting two remaining long-term supply agreements, advancing two second-source qualification opportunities, and finalizing our 2027 planning cycle. Beyond 2026, we are positioning ourselves for next-generation programs that will drive results in the years to come. Approximately 1/5 of our revenue comes from development programs today. This mix of business ensures that we are positioned for tomorrow's production programs.

[Jon Rambeau, CEO at Karman]

Success in the coming years is grounded in a strong manufacturing capability to produce at scale to address our customers' demand. As much as organic growth remains our top priority, we will also continue to pursue acquisitions that add complementary capabilities in the end markets we currently support. I'm proud of our team and pleased with our progress, and most of all, humbled to serve so many customers around the globe who secure our freedoms and push the boundaries of space exploration. We have exciting work ahead. Now, let's take your questions.

[Operator]

We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up, at which point you may return to the queue for another two questions. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, please press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q and A roster. Your first question comes from the line of Peter Arment with Baird. Your line is open. Please go ahead.

[Peter Arment, Analyst at Baird]

Hey, good afternoon, everyone. Really nice results. Hey, Jon, maybe you could give us a little more color on the big seven-year THAAD awards, and you've got, I guess, two LTAs to remain. How does this business scale up in terms of the production rates from here, and what would you expect to kind of sign up the other two LTAs? Thanks.

[Jon Rambeau, CEO at Karman]

Yeah, thanks for the question, Peter. It's an important one. There's a fair amount to unpack here. First off, we're pleased with the progress on the long-term agreement negotiations. I think, as we predicted earlier this year, those would take through the end of 2026 to negotiate, and we are on track, I think, to that expectation. In terms of the ramp, it's a little steeper than I think we had originally forecast in the sense that the rate of production is looking to go up pretty significantly on at least the missile types that have been defined for 2027, and sort of flatten over a period of time from there. So, I would say we'll see the most steep acceleration in 2027 and then continue at an elevated rate after that, not growing quite as much year-over-year from that point forward.

[Jon Rambeau, CEO at Karman]

So, in that sense, we like it because the ramp's a little bit steeper. Karman has made the right investments, and we're ready to capitalize on that, and we'll certainly take that into account as we look to our 2027 planning. With respect to the two remaining agreements, those are a bit more complex in the sense that they will each span multiple missile types, some of which have had quantities finalized. As those have been finalized, the agreements that we sign this year will include part numbers, quantities, pricing by year, and those will be bookings in 2026.

[Jon Rambeau, CEO at Karman]

There are other missile types that will be, I'll say, framed out in the agreement in the sense that there'll be placeholders there for the final quantities and pricing by year to be added in, and I expect that to happen in the first and potentially even into the second quarter of 2027 until the full value of those bookings are realized. So, you can expect to see a fairly substantial booking this year on each one of those agreements and also some additional bookings in 2027.

[Peter Arment, Analyst at Baird]

That is great to hear. Just as a quick follow-up, Chris, maybe you could just congrats on cash generation and obviously moving that guidance up. Can you maybe just talk about working capital, the best way to kind of measure how you guys are doing on your progress? You talked a little bit about that in your opening remarks, but just any more color there would be helpful. Thanks.

[Chris Boynton, CFO at Karman]

Yeah, Peter, I think, first and foremost, I am pleased to see our results in free cash flow in the quarter of $13 million, while achieving the 25% organic growth. That has given us increased confidence to hit the $20 million-plus in the second half that we talked about. Ultimately, our cash conversion is a function of growth and ultimately scale, but as we think about working capital and we think about the components of working capital, both contract assets, liabilities, inventory, accounts payable and receivable, those all represent opportunities for us to get marginally better over time. We see those opportunities, they are in front of us, they are priorities for us, and so that will ultimately drive our working capital down as a percentage of sales.

[Chris Boynton, CFO at Karman]

Now, with our growth, we do expect working capital to continue to be moving upward, however, lower as a percentage of sales. That should be a little bit of a tailwind for us from a working cap perspective, and ultimately help us deliver increasingly growing free cash flow over time.

[Peter Arment, Analyst at Baird]

Appreciate all the details. Thanks, guys.

[Operator]

Your next question comes from the line of John Godyn with Citi. Your line is open. Please go ahead.

[John Godyn, Analyst at Citi]

Hey, guys. Thanks for taking my question. I wanted to just follow up on the long-term agreements as well on Peter's question. The other dimension to them was, I guess, some questions about the margin outlook, and you guys are reiterating 30% margins with more conviction. Now you have one LTA in the bag. Maybe you can talk a little bit about the LTAs, and I can appreciate you don't want to disclose all the details, but to the degree they're reinforcing your margin outlook and giving you more confidence, it would be helpful if you could share any color that you're willing to share.

[Jon Rambeau, CEO at Karman]

Yeah, John, thank you for the question. I will reiterate that I feel more confident as we continue through the negotiations that we'll be able to sustain our margins and that these LTAs will not present a headwind to the overall margin profile for the company. The reason for that is, as I've said previously, a lot of the conversations we've had with our customers have been almost exclusively about capacity, commitment, the ability to meet some very accelerated production schedules and do that with the right quality, and within the budget box, which typically has been stated as not to exceed last price paid plus inflation. We are certainly going to be able to do that.

[Jon Rambeau, CEO at Karman]

As we look to the future, we feel confident that the deals we've signed so far, as well as the ones that are pending, will allow us to provide our customers a fair deal that gives them, I think, what they're looking for, and also presents opportunity for Karman in terms of long-term visibility into production rates, the ability to optimize the factory, the ability to work with our supply chain to receive more advantageous pricing. In total, I think it'll be a good deal for our customers, and there'll be ample opportunity for Karman to manage our cost profile and achieve the margins that all have come to expect of us.

[John Godyn, Analyst at Citi]

That is great. It is good to hear that. Just changing gears quickly on international. Leaning into international, Jon, I feel like is one of the things that we have heard the last couple quarters. As we gain more and more knowledge on the international opportunity for Karman, maybe you can share a bit of an update there on demand signals and the shape of that.

[Jon Rambeau, CEO at Karman]

Sure. First off, we have had the opportunity to engage with the customers of Walker, or as we have now named the business, Karman Europe. The reaction to the acquisition has been favorable across the board. Customers are pleased with our having taken the time to personally engage and sit down with them and understand their priorities. So, I think we will continue to see strong support for the programs that the business has been engaged in historically. There are new opportunities that are being brought forth by those customers, and I can assure you I am getting a weekly report on what those are, and it is good opportunity to continue to expand the business.

[Jon Rambeau, CEO at Karman]

We also have opportunities to support some of our current U.S. customers by offering capacity and localized footprint within both the U.K. and the EU. That is something that I think would be very attractive to U.S. primes as they look to go further expand their presence in Europe when there is a lot of pressure to produce product locally and contribute back to the local economy. So, I think from a number of different points of view, this is a positive acquisition for us, and we are excited about the future.

[John Godyn, Analyst at Citi]

Appreciate the color. Thank you.

[Operator]

Your next question comes from the line of Ken Herbert with RBC Capital Markets. Your line is open. Please go ahead.

[Ken Herbert, Analyst at RBC Capital Markets]

Yeah. Hey, good afternoon. Nice results. Maybe Jon or Chris, I wanted to see if we can dig into the guidance raise a little bit. Is it possible to parse out better performance year-to-date versus inclusion of Walker now in the guide, and how we think about the guidance raise with those moving pieces?

[Chris Boynton, CFO at Karman]

Yeah, Ken, this is Chris. I think it's a mix of both. Most of the guide range increase is driven by our performance year-to-date and our expectations for the fourth quarter. There obviously is some Walker in that range, but I would describe most of the upside that we're seeing as a result of our increased confidence in our performance and how we've been executing.

[Ken Herbert, Analyst at RBC Capital Markets]

Okay, that's great. Thanks, Chris. If I could, on sort of what you referred to as the offensive opportunities before, and it sounds like fifth opportunity recently added, can you just update us on timing, when you might be able to announce something on those or when we should expect something that could get announced and anything you can help with framing sort of the scope of those in terms of the opportunity, in terms of revenues?

[Jon Rambeau, CEO at Karman]

Yeah, Ken. This is Jon. I would be happy to give a little bit more insight there. I am hopeful that we will be able to provide some specificity on at least one, if not two of those, if not by the end of the year, certainly early in 2027, as we are continuing to make some positive progress there. The relative size and long-term potential of those is varied, I would say. Some are more modest opportunities for long-term presence, expanded presence on existing platforms that we support today. One in particular has the potential to have much greater long-term value to the company. In both cases, the two that are already in qualification, I would say, we are probably, Jonathan, maybe a year out or so from receiving qualification on those, if not a little bit longer, depending on the complexity.

[Jonathan Beaudoin, COO at Karman]

To completing qualification, yeah.

[Jon Rambeau, CEO at Karman]

To complete qualification, right? And so, I would not expect significant financial impact to the company in 2027, but certainly by the time we are hitting 2028, we should see those qualifications come through, and that is when we really see the benefit of the second source opportunity. So, we have got a number of others that we are continuing to work and hope to make the list longer by the time we talk to you again next quarter. But right now, those are the ones that were selected on and moving along through qual pretty nicely.

[Ken Herbert, Analyst at RBC Capital Markets]

Great. Thanks, Jon.

[Operator]

Your next question comes from the line of Amit Daryanani with Evercore ISI. Your line is open. Please go ahead.

[Amit Daryanani, Analyst at Evercore ISI]

Thanks a lot. I have two as well. Maybe just to start with the free cash flow generation that we saw in Q3, which was fairly impressive despite the organic growth. Can you maybe spend a little bit of time talking about what initiatives are really enabling this uptick in free cash flow generation, if it is one time in nature or something more structural? And sort of how do you think about your cash conversion cycle as you go forward, assuming that organic growth is not a 25% zip code?

[Chris Boynton, CFO at Karman]

Yeah, Amit, thanks for the question. Not one singular driver in the quarter. For us, again, it is driving improvement across all aspects of it, over receipts and disbursements and the timing and the terms that we are agreeing to with our suppliers and with our customers ultimately. So, it really is a mosaic overall. We did see a slight uptick in advances in the quarter, and that is good, and we continue to push for that with our customers, but not one singular driver. As I mentioned, there will be some bumpiness to cash flow, and we do expect there to be, over time, some lumpiness and seasonality as we look out further. But we do expect it to be favorable, positive going forward, and feel good about the working capital improving as a percentage of sales fairly consistently.

[Amit Daryanani, Analyst at Evercore ISI]

Super helpful. Then if I just look at the backlog number, $1.7 billion is up, I think, over 100% year-over-year. Could you just talk about how much of that was perhaps driven by THAAD and the LTA versus everything else? As you look at this backlog today, how much coverage do you have for 2027 revenues at this point? Thank you very much.

[Chris Boynton, CFO at Karman]

Yeah, when we think about the backlog, the THAAD was $218 million.

[Jon Rambeau, CEO at Karman]

$218 million.

[Chris Boynton, CFO at Karman]

Of that $1.7 billion, right, of that LTA. There's a couple big chunks from those LTAs overall, Amit. Sitting here today, as we look at the backlog and we look forward to 2027, we're in range in terms of that conversion and what we'd expect to see tied in. I think, from our point of view, when we look at some of those LTAs, you have to remember that the backlog will convert over years, further years into the future than maybe our typical historic bookings would convert. There's a little bit of a longer tail to them. As we get through the fourth quarter, complete our long-range plan and our AOP, I think we'll be able to give you a little bit more insight in terms of what that conversion looks like and how that backlog will convert into 2027.

[Chris Boynton, CFO at Karman]

But for sure, a $1.7 billion backlog for us does really give us conviction in terms of continuing to hit our organic growth marks of 20%-25%, and the mix and composition of what that backlog looks like does reinforce our 30% adjusted EBITDA as well.

[Amit Daryanani, Analyst at Evercore ISI]

To hit or hopefully exceed your organic growth as you go forward, but congrats on a really good set of numbers in the free cash flow.

[Chris Boynton, CFO at Karman]

Copy that.

[Operator]

Your next question comes from the line of Marni Lysaght with Macquarie Capital. Your line is open. Please go ahead.

[Marni Lysaght, Analyst at Macquarie Capital]

Good afternoon, good evening, or good afternoon, team. Thanks for taking my question. I appreciate there's been quite a fair few questions about free cash flow and also the parsing out the upgrade in guidance. My first question basically pertains to, I appreciate you've given us a lot of detail about CapEx relative to revenues on a run rate basis. How do we think about that going into 2027, and would any potential timing shifts impact that. Now, I know that you've called out free cash flow to be subject to lumpiness each year. Thank you.

[Chris Boynton, CFO at Karman]

Yeah, of course. We see free cash flow or working capital and CapEx, the impact of it in the fourth quarter of CapEx running about 5%-6% of sales. That's about where we see 2027, right in that range overall. Again, as we look at the demand function that we see in the system and look at building out our capacity and our capabilities, that is really driving a rigorous process for us to go evaluate our investments and evaluate our current capabilities and make sure we're putting investments in the right places. We're elevated a little bit from where we thought we were at the beginning of the year. I'd say we feel really good about our growth prospects from where we were as well, and so we continue to see CapEx in that 5%-6% range.

[Jon Rambeau, CEO at Karman]

Yeah, this is Jon. I'll just add on from more of a practical perspective as we look at the business and how things are positioned for the future. You can kind of think about the CapEx investments that we're making this year as positioning us quite well for 2027. As we look to next year's investments, obviously, getting capability and capacity online by 2028 is our priority. Jonathan has, I'll give him a compliment while he's here in the room with me, did a great job, I think, starting to dig in aggressively this year to look a couple years out on the horizon at what our expected demand signals were going to look like and making sure we're putting the plans in place to make those investments so that we're always staying just a little bit out ahead of demand.

[Jon Rambeau, CEO at Karman]

Not too far, but far enough that we're ready to take on that additional workload when it comes available. I'm feeling more and more comfortable as the months tick off here that we've got a good solid plan in place for investment and how we can continue to drive that capacity expansion to support the growth.

[Marni Lysaght, Analyst at Macquarie Capital]

That's understood. Thanks. My second question pertains to obviously retaining the 20%-25% annual organic growth outlook. How does Walker potentially impact that once it annualizes and starts to feed into the organic growth outlook?

[Jon Rambeau, CEO at Karman]

Yeah, I think Walker's organic growth outlook is not that different than call. I think as the base business has come into the portfolio, it's perhaps just a bit below, but still well in double-digit territory. We are in the process of working through a pipeline update for that business, and our anticipation is coming out of that pipeline update when we sort of roll in the additional opportunities we think we can develop jointly between Karman and the legacy Walker team. We'll be able to get the base business to a steeper level of growth that'll be more in line with that full 25% that we're shooting for across Karman. Overall, I like the opportunity, and I think it's going to be very much in family with the rest of the company.

[Chris Boynton, CFO at Karman]

And maybe just for clarification, for next year up until the end of the third quarter, Walker growth will be inorganic, right, as we close in the third quarter of this year. So, we will see that pop into our organic numbers as we get into the last month of the third quarter into the fourth quarter of 2027.

[Marni Lysaght, Analyst at Macquarie Capital]

That is understood. Thanks for answering my questions. I will jump back on the line.

[Operator]

Your next question comes from the line of Anthony Valentini with Barclays. Your line is open. Please go ahead.

[Anthony Valentini, Analyst at Barclays]

Hey, guys. Thanks for taking the question here. So, the guide for 2027 on the margins seems to be flat year-over-year. You guys are talking about 20%+ growth going forward. I guess I am curious if you guys can just help bridge a little bit of what are the offsets to maybe some of the overhead absorption, whether that is giving pricing on some of these new missile deals or the dual sourcing or increased investment. If you can just kind of help us bridge how we continue to be flat, that would be helpful.

[Jon Rambeau, CEO at Karman]

Yeah, this is Jon. I will start off, and I will probably let Chris add a couple of comments after. The first thing I would say is that our focus since I have joined the company has been to create financial flexibility. The way I think about that is opportunity to reinvest further in the business, opportunity to offset any pricing pressure we might feel because we might have a strategic reason to want to take a slightly lower margin on a particular job, and we also want to have the opportunity potentially to put more to the bottom line as increased margin performance. So, our priority has been, first off, that financial flexibility, looking at how we can continue to realize operating leverage as the company continues to grow and scale.

[Jon Rambeau, CEO at Karman]

As we look across the breadth of call infrastructure, it would come as no surprise that for a company that was put together as a combination of a number of smaller businesses, there are a number of opportunities for us to continue to capitalize on to become more efficient as we continue to integrate the company. So, those are the two ingredients there. It is increased efficiency and operating leverage. The outputs are those three pieces of, call it optionality, that we are looking for in the back end with the goal to certainly sustain a 30% margin rate and make sure any dividends that come out of that financial flexibility are reinvested in a way that creates the most value for shareholders. So, that is sort of a top-level view. Chris, anything to add to that?

[Chris Boynton, CFO at Karman]

Yeah, and I think when we think about margin for us, it really is that mix, right, of high-value product mix and specialized moats that we have in so many places. Then the operational scaling that is enabled by, frankly, the CapEx that we are doing today and the backlog and the pipeline and the growth that we have should enable us to drive those gross margins in a positive direction. Then SG&A, right? It is about overhead discipline, or sorry, SG&A discipline and leverage, and making sure that as we are scaling, that we are dropping through G&A to the bottom line, but also making sure that we are making the right investments internally to be able to develop the staffing capabilities here to operate as a larger company.

[Anthony Valentini, Analyst at Barclays]

Okay, great. That is super helpful. Then maybe just another one if I think you guys are mentioning that there are two dual sourcing opportunities. Are there any on the opposite end of that that are out there that you know of where you guys might You are on something today, and it might get dual sourced?

[Jon Rambeau, CEO at Karman]

This is Jon. I will comment on that piece, Anthony. The short answer is nothing of substance, nothing of consequence at this point in time from a second source point of view. Having been a prime myself for 30 years and having talked to our customers who are primes, the first priority for them is surety of supply. The dual source initiatives are generally starting with places where there are pressure points in the supply chain, where there is questionable capacity to meet the overall demand for the integrated systems. Because Karman has leaned in and invested ahead of need, we are not generally the priority for second source initiatives.

[Jon Rambeau, CEO at Karman]

We have had, and I have talked about previously, one customer who has a desire to establish an internal insurance policy in the event that for some reason Karman would have a shortage, an inability to deliver at a point in time. It is a very small percentage of the total annual demand. The net increase for Karman is still substantial year-over-year as we look at the future ramp, and we are working collaboratively with that customer to help them establish that internal, call it, insurance policy. Other than that, there has really been nothing else that we are aware of in terms of substantive second source initiatives, and we intend to continue to earn that right to keep that work by delivering, by performing, and being a good partner.

[Jon Rambeau, CEO at Karman]

I think it is a good news story, and we are much more bullish on the second source initiatives as more of an opportunity for us to grow as compared to a need to defend.

[Anthony Valentini, Analyst at Barclays]

Great. Thanks, Jon.

[Operator]

Your next question comes from the line of Patrick McCarthy with Oppenheimer. Your line is open. Please go ahead.

[Patrick McCarthy, Analyst at Oppenheimer]

Great. Thank you. Thanks for taking my question. Chris, thanks for touching on your year-end leverage expectations. That is very helpful. My question is on the tactical missiles business, and I was wondering if you could share with us how that breaks out between your UAS-focused products, your counter-UAS-focused products, and then some of the more traditional missiles like MLRS and AIM-9X and those guys.

[Jonathan Beaudoin, COO at Karman]

Well, I will give it to—

[Chris Boynton, CFO at Karman]

Go ahead, Jonathan.

[Jonathan Beaudoin, COO at Karman]

Yeah. I mean, we are seeing strong growth drivers from all of those product lines. So, those that are MAC or sometimes we call them MAC-adjacent programs where stockpiles have been depleted and they are increasing production rates, we are seeing demand for those systems as well as the proliferation of UAS systems, and then correspondingly counter-UAS systems are all providing really strong growth drivers for us within that market segment.

[Patrick McCarthy, Analyst at Oppenheimer]

Okay. Thank you.

[Operator]

Your next question comes from the line of Clarke Jeffries with Piper Sandler. Your line is open. Please go ahead.

[Clarke Jeffries, Analyst at Piper Sandler]

Hi. Thank you for taking the question. Jon, I just wanted to understand this aspect of 2027 volumes and where they may not be solidified in the ecosystem, and just how that is concentrated within the programs. Is that primarily within the MAC priority programs where you would see a substantial bookings event in 2027 when there is more clarity? Do your customers ever commit to just a minimum level even if they do not know the full sort of uptake or upside scenario? Do they still make a quantity decision at this time at a minimum level? Any context would be helpful there.

[Jon Rambeau, CEO at Karman]

Yeah. I don't anticipate that we'll be booking any speculative minimum quantities this year. What we've done historically and what we'll continue to do is we'll book the firm binding commitments that are coming in. There are some references made in the draft agreements that we're still negotiating to the additional missiles that have not yet been finalized, right, at the prime level, and that there would be an expectation, for example, that those volumes will come through at least as what they've been historically. Of course, we believe those are probably floor or below floor kinds of numbers, but we're not anticipating any bookings on those numbers at this point in time. We'll get as much detail as we can, but realistically speaking, we've certainly got a number of additional missile types that'll continue to roll onto those contracts and show up as bookings in 2027.

[Clarke Jeffries, Analyst at Piper Sandler]

Just one follow-up to that is, are the ones that are the most secure the ones that have already gotten multi-year procurement authority? Is that true? Then just on the maritime segment, I wanted to ask how that performance was versus your plan. It seems like a little bit higher than we were estimating. Thank you.

[Jon Rambeau, CEO at Karman]

Yeah. On the first question, the answer is yes.

[Chris Boynton, CFO at Karman]

Yeah. Secondly, Clarke, that maritime is performing really well ahead of our plans year-to-date and a really strong outlook.

[Clarke Jeffries, Analyst at Piper Sandler]

Perfect. Thank you very much.

[Operator]

Your next question comes from the line of Louie DiPalma with William Blair. Your line is open. Please go ahead.

[Louie DiPalma, Analyst at William Blair]

Jon, Chris, Jonathan, and Steve, good afternoon.

[Jon Rambeau, CEO at Karman]

Hi, Louie.

[Chris Boynton, CFO at Karman]

Hello.

[Louie DiPalma, Analyst at William Blair]

Hi. Jon, you announced how you established the framework agreement for the THAAD system, and on the earnings call, you mentioned how you are on over 150 programs, including 10 of the 14 MAC programs. I was wondering what was so unique about THAAD that resulted in the framework agreement for that program versus the other nine MAC programs that you are on, or even the other 140+ programs that you are on. Do you have, would you say, less visibility or less confidence in your long-term positioning for the other programs that did not result in framework agreements, or are you still negotiating framework agreements for the other MAC programs?

[Jon Rambeau, CEO at Karman]

Yeah. Thanks for that, Louie. It is a very simple and very straightforward answer to a very good question. The reason we announced THAAD with Lockheed Martin is because that is a relatively rare instance when we are under contract directly to Lockheed Martin as the prime missile integrator. That long-term agreement was for the shroud that goes on the front end of the missile, and the large majority of what we do across the MAC programs is more at the back end of the missile as parts of the solid rocket motor, typically the nozzle that goes on the back of those motors. Those agreements are being negotiated with the solid rocket motor providers, and I am sure you know who those primary providers are.

[Jon Rambeau, CEO at Karman]

So for each of those companies, we have a number of missile types we support with similar products that go at the back end of the missile, and we are negotiating those as a bundle. That is why the Lockheed Martin agreement came out first, because, A, they had their prime contract before the solid rocket motor providers had theirs, and also because the other two contracts are a bundling of a number of different part numbers across a number of different missiles, so those are naturally going to take a little bit longer. So very good question, and that is the reason why.

[Louie DiPalma, Analyst at William Blair]

Thanks. Are there expectations to establish multi-year agreements with the solid rocket motor providers for the other programs, or should the agreements continue to be the traditional annual agreements that you have had historically?

[Jon Rambeau, CEO at Karman]

The agreements will be seven-year agreements. They are already drafted and we are in the process of negotiating up to this morning, having a chat with one of my counterparts. We are working through both of those. As I said, expect to have the agreement signed this year and be able to book the missile types that are already well-defined from a pricing quantity point of view. It is looking good, and we are expecting full seven years on both of those, Louie.

[Louie DiPalma, Analyst at William Blair]

All right. Thanks, Jon. Thanks, everyone.

[Operator]

Your next question comes from the line of Michael Leshock with KeyBanc Capital Markets. Your line is open. Please go ahead.

[Michael Leshock, Analyst at KeyBanc Capital Markets]

Hey, good afternoon. I wanted to ask, within space and launch, what do you view as the biggest growth opportunities there, outside of maybe just traditional launch or rockets? You mentioned the Vulcan Dynamics and the lunar lander customer. As we look to 2027, is it primarily rockets and propulsion systems that would drive the vast majority of growth within space, or are you finding new opportunities outside of just launch that might be newer programs for Karman that could become pretty meaningful over time, just as the broader space industry continues to evolve?

[Jon Rambeau, CEO at Karman]

Yeah, Michael, I would love to talk a little bit about that with you. First off, I would say the mix today is pretty heavily skewed, as you suggested, toward more of the launch. Think about the launch vehicles and the engines that propel them, right? As time goes on, we anticipate the mix will shift a bit as we see more and more opportunity, whether we are talking about space vehicles, lunar landers, other applications that will be stationed in space versus the things that get them there. We are looking at all opportunities to continue to grow our space and launch business. That includes organic as well as some inorganic opportunities we are continuing to evaluate.

[Jon Rambeau, CEO at Karman]

I think you will continue to see some acceleration in space as we transition into 2027 and start to capitalize on that larger addressable market that we are seeing continue to unfold quite favorably.

[Michael Leshock, Analyst at KeyBanc Capital Markets]

Great. Then shifting to the second source opportunities, what has the competitive environment looked like when you are pursuing those opportunities? Is it kind of a competitive process with multiple players, or is it more so focused on having proven capabilities that are necessary for the customer and qualifying those? Is price a big differentiator? Any color you can provide on how that process looks would be very helpful.

[Jon Rambeau, CEO at Karman]

Yeah, sure. It is a mix. First off, I would say that price is a discriminator, certainly to the extent that they do not want somebody to be more expensive than what they are paying today. Overall, not necessarily the driver. The price is not the driver. It is more about capacity and the surety of supply. In some cases, we have gotten phone calls from customers who have said, "Look, we have seen from Karman previously a proposal for this capability. Is this something you can still provide? How would you be able to provide that? On what timeline?" There were some where we got phone calls and were asked to bid because of prior work we had done with those customers, and they knew about our capabilities.

[Jon Rambeau, CEO at Karman]

There were other cases where we were asked to bid competitively on opportunities to establish a new source, and one of the cases that we were selected was exactly that. It was a competitive process. Again, price was a consideration, but it was more about confidence in capabilities and ability to deliver, to support the demand increase. Whether it is an instance of us going and talking to a customer to explain our capabilities and to look for opportunities, or sometimes picking up the phone, it comes from multiple sort of avenues, and the processes vary each to the next.

[Michael Leshock, Analyst at KeyBanc Capital Markets]

Great. Thanks for all the detail.

[Operator]

As a reminder, if you would like to ask a question, please press star one to raise your hand. To withdraw your question, please press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Your next question comes from the line of Hrishi Kumbhojkar with Guggenheim. Your line is open. Please go ahead.

[Hrishi Kumbhojkar, Analyst at Guggenheim]

Hi. Good afternoon. Quick question on maritime defense. How should we think about the long-term trajectory of that segment, or as a percent of the total end market? Thank you.

[Jon Rambeau, CEO at Karman]

Yeah. This is Jon. I'll offer a little bit of thought there. Certainly, maritime defense is an area where we continue to see very strong demand. It's a place where Karman has established a very strong position on manned submarines, and as you're aware, there have been some very substantive orders in that space in the not-too-distant past here that will continue to push volumes through the shipyards at an accelerated rate, and we're well-positioned to capitalize on that growth trajectory. The other area that we're continuing to see some traction in the maritime defense area is with unmanned systems, both surface and subsurface. As with the Karman model across other end markets, we are continuing with our strategy of being a merchant supplier to multiple providers of unmanned surface and subsurface vehicles. So, that's another vector for growth for us.

[Jon Rambeau, CEO at Karman]

It's an area where I think, particularly the U.S. Navy strategy is somewhat unclear still in terms of where the real volume's going to come from, but the overall commitment to unmanned naval systems continues to grow, and that's an area where I think as a merchant supplier, we'll continue to see demand. So, certainly, I would see long-term growth in the double digits, perhaps not growing quite as fast as, say, tactical missiles or unmanned systems, but certainly strong growth projections for maritime as well.

[Hrishi Kumbhojkar, Analyst at Guggenheim]

Appreciate it. Thank you.

[Operator]

There are no further questions at this time. I'll now turn the call back to Jon Rambeau, CEO, for closing remarks.

[Jon Rambeau, CEO at Karman]

Thank you. Before we close, I just want to offer three points to summarize today's call. First, we again delivered record quarterly results and remain positioned for 20%-25% annual organic growth. Second, we're strengthening the Karman platform through international expansion, new capabilities, deeper customer relationships, and a continuing focus on cash generation. And third, we continue to focus on operational efficiency and operating leverage to sustain adjusted EBITDA margins of about 30%. I remain grateful to our employees for their dedication to serving our customers and delivering strong results for our shareholders. Thank you for joining us and for your interest in Karman Space & Defense. Our SEC filings and company news are available at karman-sd.com. We look forward to speaking with you following our next quarter.

[Operator]

This concludes today's call. Thank you for attending. You may now disconnect.

Participants

Executives

• Steven Gitlin, SVP of Investor Relations and Treasury
• Jon Rambeau, CEO
• Chris Boynton, CFO
• Jonathan Beaudoin, COO

Analysts

• Peter Arment, Analyst at Baird
• John Godyn, Analyst at Citi
• Ken Herbert, Analyst at RBC Capital Markets
• Amit Daryanani, Analyst at Evercore ISI
• Marni Lysaght, Analyst at Macquarie Capital
• Anthony Valentini, Analyst at Barclays
• Patrick McCarthy, Analyst at Oppenheimer
• Clarke Jeffries, Analyst at Piper Sandler
• Louie DiPalma, Analyst at William Blair
• Michael Leshock, Analyst at KeyBanc Capital Markets
• Hrishi Kumbhojkar, Analyst at Guggenheim