Karman Space & Defense Third Quarter Fiscal Year 2026 Earnings Conference Call - KARMAN HOLDINGS INC

Financial Performance:

• Q3 2026 revenue reached $202 million, representing a 66% year-over-year (YoY) increase and 11% sequential growth.
• Year-to-date (YTD) revenue for the nine months ended September 30, 2026, totaled $535 million, up 59% YoY.
• Adjusted EBITDA for Q3 was $61 million (30% margin), up 60% YoY; YTD adjusted EBITDA was $160 million, up 55% YoY.
• Gross margin for Q3 was 43%, with gross profit of $86 million, up 73% YoY.
• Net income for Q3 was $21 million (up 174% YoY); adjusted EPS was $0.19.
• Record backlog of $1.7 billion, more than double the year-end 2025 level, driven by $465 million in quarterly bookings.
• Generated $13 million in free cash flow in Q3; targeting $20 million+ in free cash flow for the second half of 2026.
• Net debt was $791 million (up $325 million from year-end 2025); net leverage ratio is approximately 3.2x, expected to decline below 3x by year-end 2026.
• Cash and equivalents stood at $68 million; the $150 million revolving credit facility remains untapped.
• Effective tax rate expected at ~5% for 2026 due to R&D tax credit recognition.

Guidance and Future Outlook:

• Raised full-year 2026 revenue guidance to $755–$760 million and adjusted EBITDA guidance to $225–$227 million (midpoint margin 29.8%).
• Reiterated long-term target of 20–25% annual organic revenue growth and ~30% adjusted EBITDA margins for 2026 and 2027.
• Anticipate 2026 CapEx to run at 5–6% of revenue to support capacity expansion ahead of demand.
• Expect 2027 to feature a steeper production ramp for missile types with finalized quantities, with bookings continuing through 2027 for programs with pending quantity finalization.
• Foresee rebound in Space and Launch revenue in 2027, supported by backlog and the $250 million LTA.
• Project net leverage to continue declining through 2027 despite potential future M&A.
• Management expresses high confidence in sustaining 30% margins through operational leverage and overhead efficiency.

Business Segments and Product Lines:

• Tactical Missiles & IDS: Q3 revenue $68 million (+52% YoY); YTD $176 million (+45% YoY), driven by unmanned systems (UAS) and counter-UAS.
• Hypersonics & Strategic Missile Defense: Q3 revenue $51 million (+40% YoY); YTD $130 million (+28% YoY), led by interceptor production and new surface-to-surface systems.
• Maritime Defense Systems: Q3 revenue $45 million (+30% sequentially); YTD $105 million, driven by submarine and surface vessel programs, including unmanned surface/subsurface vehicles.
• Space and Launch: Q3 revenue $38 million (-7% YoY) due to a shift in ULA's Vulcan schedule; YTD $124 million (+8% YoY). Orders increased for New Glenn.
• Secured a $218 million long-term agreement (LTA) with Lockheed Martin for the THAAD program; two additional LTAs expected in 2026 spanning multiple missile types.
• Expanded capacity with automated production in Salt Lake City, new logistics in Gulfport, new polymer facility in Gulfport for naval coatings, and UAS propulsion expansion in Cedar City.
• Launched "Project Moonshot" AI initiative to leverage engineering knowledge for proposal generation and customer requirement analysis.

Market and Competitive Landscape:

• Carmen serves 150+ prime contractors across 100+ programs; holds positions on 10 of the 14 Munitions Acceleration Council (MAC) programs.
• Strategic focus on second-source initiatives to capture capacity overflow; five opportunities currently active, with two in qualification.
• International expansion via Walker acquisition (now Carmen Europe) provides UK/EU footprint and access to allied defense budgets.
• Management notes customers prioritize "surety of supply" and capacity over price when selecting second sources, reducing competitive price pressure risks.
• No substantive second-source risks identified for existing Carmen business; one customer's internal "insurance" policy represents a negligible percentage of demand.

Risks and Challenges:

• U.S. political uncertainty regarding defense appropriations following midterm elections may delay funding timing, though bipartisan support for priority programs remains.
• Working capital management challenges due to rapid growth; lag between backlog recognition, cash outflows for CapEx/inventory, and customer receipts.
• Ongoing remediation of material weaknesses in internal controls, with testing expected to conclude by mid-2027.
• Integration risks associated with recent acquisitions (Walker, etc.), though integration management is proceeding as planned.
• Potential for capacity constraints if demand outpaces strategic CapEx investments, though management asserts no meaningful supply chain constraints currently.

Management Commentary and Tone:

• Tone is highly confident and optimistic, emphasizing "record" results, "generational demand," and strong execution.
• CEO John Rambo highlighted the company's ability to scale quickly and its position to capture market share through second-source opportunities.
• CFO Chris Boynton (new appointee) expressed strong conviction in the 30% margin target and improved cash generation capabilities.
• Acknowledged departing CFO Mike Willis for building the financial foundation and systems.
• Emphasized "playing offense" on second-source initiatives rather than defending against them.
• Expressed clarity on the path to profitability and cash flow acceleration as working capital improves as a percentage of sales.

Analyst Questions and Answers:

• LTA Scaling & Margins: Management confirmed LTA negotiations will conclude by end of 2026/early 2027; margins will be sustained as deals focus on capacity commitment and price-to-cost rather than pure price cuts.
• Cash Flow Drivers: Improved FCF attributed to better working capital management (DSO/DPO), not one-time items; structural improvements expected to lower working capital as a % of sales.
• Backlog Composition: $218 million of the $1.7 billion backlog is from the THAAD LTA; backlog provides full visibility for 2026 and strong conviction for 2027 organic growth.
• CapEx Outlook: 2026 CapEx at ~5-6% of revenue; expected to remain at this level in 2027 to stay "just ahead" of demand for 2028 production ramps.
• Second-Source Opportunities: Two opportunities in qualification (timeline to impact ~2028); five total opportunities active, with scope varying from modest additions to significant long-term value.
• International Growth: Walker acquisition expected to align with Carmen's growth profile once fully integrated; organic growth in the unit to improve as joint pipeline opportunities are realized.
• Maritime Segment: Performing ahead of plan; growth drivers include manned submarines and emerging unmanned surface/subsurface vehicles.
• Space Mix: Currently launch-skewed but expected to shift toward space vehicles/lunar landers in 2027 as new applications emerge.

Other Key Points:

• Implemented majority of controls to remediate material weaknesses.
• Carmen Europe (Walker) integration focuses on financial reporting, governance, and pipeline expansion.
• Management plans to finalize 2027 planning cycle in the fourth quarter.
• Revenue mix in Q3: Tactical Missiles (34%), Hypersonics (25%), Maritime (22%), Space (19%).
• The company operates as a "merchant supplier," avoiding direct prime competition while enabling prime contractors' success.