Applied Aerospace Q3 2026 Earnings Call Transcript

Applied Aerospace (NYSE:AADX) reported third-quarter financial results on Wednesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Applied Aerospace reported record third-quarter revenue of $182.1 million, up nearly 49% year over year, with 20% organic growth.

The company is planning $50 million in capital investments for 2026 to support growth in precision strike and next-generation defense aviation programs.

Contract backlog reached almost $1.3 billion, providing significant visibility into future work.

Challenges include increased costs and delayed deliveries due to material constraints and government approval delays.

Management remains confident in the demand outlook and anticipates margins to normalize in the high 20s by the second half of 2027.

M&A activities are ongoing, with three deals completed in 2026 and more expected.

Revenue guidance for 2026 is adjusted to $660-$670 million due to timing issues with rotorcraft aftermarket work.

The company is actively hiring, approaching 1,800 team members, and has appointed a new CIO to enhance enterprise systems and cybersecurity.

Full Transcript

OPERATOR

Greetings and welcome to Applied Aerospace’s third quarter earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Abbott Kusangi, Investor Relations.

Thank you. You may begin.

Abbott Kusangi (Investor Relations)

Thank you and good morning, everyone. Welcome to Applied Aerospace’s third quarter 2026 earnings conference call. With me today are Trip Ferguson, Chief Executive Officer; Chris Rogers, President and Chief Strategy Officer; and Jeff McRae, Chief Financial Officer. Before we begin, I’d like to remind everyone that our remarks may include forward-looking statements about our expectations, plans, outlook, and future performance, which we make pursuant to the safe harbor provisions of federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Please refer to the forward-looking statements disclosure in our earnings materials and our filings with the Securities and Exchange Commission.

We will also discuss certain financial measures that are not presented in accordance with GAAP. Our earnings materials include additional information about these non-GAAP measures, including definitions and reconciliations to the most directly comparable GAAP measures, as applicable. Please also review the discussion of forward-looking non-GAAP measures in those materials. The earnings release and presentation are available on the Investor Relations section of our website.

With that, I’ll turn the call over to Tripp. Tripp.

Tripp Ferguson (Chief Executive Officer)

Thank you, Tom, and good morning, everyone. Before we begin, I want to recognize Veterans Day and thank the men and women who have served our country in uniform. We are grateful for their service and sacrifice, and we’re especially proud of the veterans who are part of the Applied Aerospace team. For those of you who are newer to Applied Aerospace, we help space and defense customers turn demanding requirements into high-performance systems that enable a diverse array of proven and next-generation platforms. We bring together design, engineering, advanced materials expertise, and specialized manufacturing infrastructure, and we focus on mission-critical systems built to perform in extreme environments, working with established primes and newer entrants from development and qualification through production and sustainment.

Today, our customers are not just asking Applied Aerospace to make more, they’re asking Applied Aerospace to do more. The demand signals in both space and defense reinforce the scale of the opportunity for Applied Aerospace’s business model. Customers need qualified capability, manufacturing know-how, and partners that can scale with them. The breadth of that opportunity also makes strategic focus essential. For today’s call, I’ll be summarizing the third quarter’s performance and our current priorities. Chris will walk through the results and customer activity in each of our markets. Jeff will cover our consolidated financial performance and provide updated guidance. I’ll then come back with a few closing thoughts before we take your questions.

Turning to our performance, third quarter revenue reached a record $182.1 million, up nearly 49% year over year, with approximately 20% organic growth. Each of our three market areas delivered double-digit reported revenue growth. Adjusted EBITDA was $39.7 million. Contract backlog reached a record of almost $1.3 billion, approximately 12% above the second quarter, providing substantial visibility into customer work ahead. This level of market demand and customer activity is why we’re continuing to forward-invest in equipment and capacity. We expect capital investment in the range of $50 million in 2026, which includes new equipment and expansions within existing facilities, before returning to more normalized levels in 2027. Much of that work supports our precision strike and next-generation defense aviation programs. We’re also investing in the people and systems behind that capacity.

Applied Aerospace is now approaching 1,800 team members, and we recently welcomed Robert Wingfield as our new Chief Information Officer. Robert’s focus will include strengthening our enterprise systems and cybersecurity infrastructure and using data analytics and AI to help our engineering, business development, and manufacturing teams work together more effectively. The demand is there. We are laser-focused on building the organization and production capability to deliver it. We’re hiring and training team members, bringing equipment online, and moving programs into higher-volume production. Simultaneously, those steps are adding some cost before we capture their full productivity and margin on these high-growth programs. We’re also addressing select material constraints and delays in certain customer and government approvals on established aftermarket work.

Together, these factors are affecting gross margins and the timing of some deliveries. We’re addressing all of these issues head-on, and although we expect some investment in ramp-related costs will carry into the first half of 2027, we remain confident in both the demand outlook and ultimate margin profile of our growing backlog. These factors are reflected in our updated 2026 outlook. Jeff will walk through the specifics later in the call. The strong and multifaceted demand signals that we’re seeing from our customers remain unchanged. The commitment those customers are making, our record backlog, and our high-value positions on important programs make me even more encouraged about Applied Aerospace’s future than when we last spoke in August. The priorities laid out later in August also haven’t changed: first, continuously improve our operations and build Applied Aerospace right; second, strategically prioritize our accelerating new business pipeline; and third, deliver on our high-growth program ramps while continuing to invest in the capacity and capabilities customers need.

M&A is another part of how we’re building Applied Aerospace. We’re actively evaluating a number of opportunities, and you should expect continued activity beyond the three deals that we’ve already completed in 2026 and announcements in the coming quarters. So in summary, I’m excited where we are today. I’m excited about our future, and I couldn’t be more proud of the Applied Aerospace team and our performance this quarter. Chris will take you through what we’re seeing in each market and the customer activity behind our results.

Chris Rogers (President and Chief Strategy Officer)

Thanks, Tripp. We’re seeing great momentum across the entire Applied Aerospace platform, from new orders on existing programs to new customers and development work that will lead to future production. Our third quarter bookings demonstrate this. We booked approximately $254 million in Q3, or 1.4 times our quarterly revenue. Our enterprise business development leaders, program managers, and operational leaders are doing excellent work, collaborating closely and dynamically connecting customer requirements with capabilities across Applied Aerospace.

Let me now take you through each market area’s results and the activity behind them. In space and launch systems, revenue for the third quarter was $39.1 million, up 31.1% from a year ago. Growth reflected our SpaceX and Blue Origin work, along with high levels of demand for our proprietary propellant tanks. Demand from SpaceX remains strong, and we’ve continued to ramp New Glenn work, with revenue increasing in each quarter of the year. Launch is only part of the story.

We also make complex hardware that supports what spacecraft do once they reach orbit. In the third quarter, we received approximately $17 million of high-gain antenna awards, along with an active pipeline in satellite structures and other spacecraft hardware for national security and commercial space missions. As one representative illustration of Applied Aerospace’s new capability set within our space and launch systems market area, I’d like to briefly highlight our proprietary new space propellant tank business in Long Beach. This site is a true global leader, combining the customized engineering and manufacturing capabilities that are needed for specialized propellant tanks and propellant management systems. A tank sounds simple; controlling propellant in zero gravity is anything but.

In orbit, liquid simply doesn’t settle at the bottom of a tank, and every satellite or spacecraft’s propulsion system needs a reliable supply when it is called upon. The internal design manages how the propellant reaches the system, and our tanks use high-performance metals to minimize weight and manage specialty propellants such as hydrazine. Our team brings together materials expertise; vertically integrated and specialized manufacturing techniques such as hot spin forming; and fully integrated, space‑grade testing. Our new space propellant tank product lines are already a meaningful business for Applied Aerospace. Our broader Long Beach operation, which is centered around our new space tanks, is expected to generate over $45 million of revenue in 2026. Our tank output at this site effectively doubled from 2024 to 2025, from approximately 45 to more than 90 units. The depth of our pipeline is why we’re now significantly expanding this facility’s manufacturing capacity.

By the end of 2026, we expect capacity to be closing in on 200 tanks, with plans to double that again to approximately 400 by 2028. This is a great example of how Applied Aerospace is putting capacity in place now to support the generational demand and specific customer requirements that we see ahead for the space economy. Shifting to defense, aviation, and airborne systems, revenue for the third quarter was $94.2 million, up 17.3% from a year ago. Growth was driven by sustained aftermarket demand across military rotorcraft fleets, including Apache, Chinook, and Black Hawk, along with new production activity on Anduril’s CCA Fury program, Bell’s MB75, and a range of other production and development programs. As we look ahead to the fourth quarter, demand remains strong, but customer and government approvals and supplier constraints are selectively affecting where we can complete and ship some work.

For example, on some of our Apache rotor head overhaul work, the hardware is already in house, but government approval of updated technical data packages is taking a bit longer than expected. In another case, rotorcraft aftermarket spares work is being delayed by new customer qualifications and constraints with existing qualified suppliers, particularly on forgings, castings, and certain specialized fasteners that are being seen across the supply chain.

Our rotorcraft aftermarket business represents about a quarter of Applied Aerospace’s revenue, and most of this work is sole- or single-source. Our work ensures the mission readiness of large installed fleets, and these fleets are going to remain in service for decades. To maintain readiness, these fleets require Applied Aerospace capabilities for repair, overhaul, and replacement systems. So, no question about the ultimate demand; we are seeing some timing slip into 2027.

Growing rapidly to complement this aftermarket business, we’re executing on large awards for high-priority production programs and building out high-value positions on next-generation defense aircraft. Anduril’s CCA Fury is a great example of how we bring multiple Applied Aerospace capabilities together into one next-generation program. We recently received another sizable work manual, and our work combines complex composite control surfaces, metallic subsystems, and tooling and assembly capabilities across five Applied Aerospace sites.

We are also preparing significant new production square footage in Stockton to support this program. Recent and expected awards from other CCA providers further broaden our exposure to this high-priority capability area for the U.S. Air Force and the other services. And that is how we can help a customer move from an innovative new aircraft design to production at scale. Let me now turn to our third market, our newly renamed Advanced Sensing and Precision Strike Systems. We previously called this C5ISR Precision Strike, but the products and customers included within this market haven’t changed. Revenue for the third quarter in this market area was $48.7 million, an increase of $36.3 million. Organic growth in advanced sensing systems was 14%, with the balance of the end market’s growth attributable to growth in precision strike.

Our Q3 awards provide multiple examples of strong market demand translated into work. We received another $7.5 million order for LTAMs radoms from Raytheon, supporting the Army’s next-generation air and missile defense radar, and a $21.9 million Blu136 add-on. Both of these awards demonstrate excellent customer focus and program execution. Building on our established SOLSTOR program positions, we continue to see a tremendous amount of activity in other areas of our precision strike market, and PRISM shows the full range of capability that we can bring to a single strike program. Cincinnati, Newington, Manchester, and Enfield all contribute different high-value metallic subsystems and assemblies. Santa Ana, White Salmon, and Stockton are now collaborating on other unique composite capabilities relevant to the future of this program.

So, seven Applied Aerospace sites each bringing different capabilities together around the needs of one program. Solid rocket motor cases are another significant opportunity for Applied Aerospace as we head into 2027. Both Billerica and Cincinnati are preparing for substantial production ramps, and we’re investing in the capacity to support them. What stands out is the breadth of the customer demand we’re seeing for solid rocket motor cases. From established defense primes to newer entrants, we’re building the capacity and the capability today that is needed to support this demand across a full range of programs.

Beyond our established positions on priority strike programs such as Prism, SM3, SM6, THAAD, GMLRS, GMT, and others, we’re also pursuing second-source opportunities where customers need additional qualified capacity. Some awards are taking longer as our prime customers wait for funding and firm orders under broader framework agreements. I’d note that significant new development work is also underway within our precision strike area, including, as an example, some of the capabilities that we’re now producing for a prime customer on our Next Generation Interceptor program.

So across all of our market areas, we are seeing a broad base of growing customer demand, and while we’re continuing to watch defense funding closely, it is important to understand that our 2027 at Applied Aerospace will begin with substantial work already on funded purchase orders. As of September 30, approximately $600 million in remaining performance obligations were expected to be recognized as revenue in 2027. Future expected purchase orders under existing contracts will further add to that substantial baseline.

This gives us a remarkably high level of forward visibility, even under extended continuing resolutions. I’ll also note that alongside the substantial organic growth opportunities within our existing business, we have a very active M&A pipeline. CBI is outperforming our investment case and is helping us expand precision strike work across the entire Applied Aerospace platform. We are looking to repeat that model, add a differentiated capability, and make the broader platform even more valuable and more deeply integrated with our customers. We are currently in diligence on several potential targets, and we will stay disciplined on capability relevance, revenue synergy potential, cultural fit, and expected return profile.

We view M&A as a core strategic function within Applied Aerospace, but the objective is never simply more revenue; it is to augment our growth objectives with new capabilities, talent, and specialized infrastructure. With that, I’ll turn it over to Jeff to cover our consolidated results, profitability, cash, and updated outlook.

Jeffrey L. McRae (Chief Financial Officer)

Thanks Chris and good morning everyone. Before I get into my comments, let me take a minute and also provide our thanks to the men and women who have served in our armed forces and personally thank the two gentlemen in the room with me for their service along with many other Applied Aerospace team members. As Tripp highlighted earlier, in the third quarter we delivered record revenue and adjusted EBITDA with sequential quarter-over-quarter growth for the first three quarters of the year and significant growth year over year. We ended the quarter with contract backlog approaching $1.3 billion. Keeping in mind how we define backlog to only include firm funded customer orders and it does not include any value associated with future orders that will be released on existing long term agreements.

This level of backlog provides great visibility for future periods. As of the end of the third quarter, roughly 75% of our anticipated 2027 revenue is covered under existing firm funded orders, with the balance of 2027 revenue coming from anticipated releases of purchase orders under existing long term agreements and normal course non-LTA book and ship orders. Before getting into the details, a reminder on the basis of presentation: Unless otherwise noted, our results are presented on an as-reported consolidated basis with acquisitions included from their respective closing dates. Where I discuss revenue growth excluding acquisitions completed in 2026 I will identify it separately. Adjusted EBITDA, adjusted EBITDA margin and free cash flow are non-GAAP measures with definitions and reconciliations included in our earnings release.

Now moving into our results for the third quarter, Applied Aerospace’s consolidated third quarter revenue was $182.1 million, an increase of 48.6% from a year ago. Excluding acquisitions completed in 2026, revenue increased $24.7 million or 20.2% organic growth. Turning to profitability, consolidated gross profit was $42.7 million compared with $34.3 million a year ago. Reported gross profit margin was 23.5% compared with 28% in the prior year period.

The quarter did include a $2.4 million cost of sales impact related to the accelerated vesting of incentive shares at the IPO, as well as $600,000 of non-cash expenses resulting from the application of purchase accounting to the CBI transaction. Excluding the impact of these two non-cash expenses, gross profit margin was 25.2%. Gross profit margins in the third quarter reflect both program mix, with an overweighting of efforts supporting development programs and programs preparing for higher production, and our intentional investments to support the future growth of the business. Ensuring we have the right resources, trained personnel, systems and processes in place to support the investments we are making provide us confidence in driving future execution and will provide the framework to drive margin expansion looking forward.

But these startup costs have created some near-term pressure on the overall margin profile across several sites and programs. We are also addressing equipment commissioning delays, supplier constraints and productivity issues in parts of our established operations. Together, those factors are affecting the efficient use of our resources. In the near term, all of these constraints are improving, although the pace of improvement will depend somewhat on equipment readiness, production efficiency and individual customer schedules.

Selling, general and administrative expense for the third quarter were $16 million compared to $12.1 million a year ago. The current year quarter included $4.7 million of transaction, integration and restructuring related expenses versus $800,000 for the prior year period and included a $5 million benefit from reversing the earn-out liability on Nexsol, which we acquired in March of 2025. That earn-out was tied to a certain level of earnings that we do not expect the business to meet.

On an adjusted basis, excluding the impacts noted above, the quarter was in line with our expectations, with year-over-year growth reflecting approximately $1.7 million in expenses relating to our 2026 acquisitions and the balance reflecting expanded operational support and increased public company administration and compliance cost. Net income for the quarter was $30.6 million or $0.18 per diluted share compared with $2.7 million or $0.03 per diluted share in the prior year period. The current quarter included an income tax benefit of $24.2 million compared with a $4.4 million benefit a year ago. Income before taxes was $6.5 million compared with a loss before taxes of $1.6 million in the prior year period. A couple of other items for context: Net interest expense declined to $9.9 million from $17.3 million following the debt repayment associated with our IPO.

Intangible asset amortization was $10.3 million compared with $6.5 million a year ago. Turning to adjusted EBITDA, we generated $39.7 million, up 37.4% from $28.9 million a year ago. Adjusted EBITDA margin was 21.8% compared with 23.6%, reflecting the lower gross margin profile we have discussed. Our reconciliation includes adjustments for $2.5 million of share-based compensation, $1.8 million of transaction cost and $3.5 million of integration and restructuring cost in addition to interest, taxes, depreciation and amortization.

On cash flow, we generated $11.5 million of operating cash compared with a $5.5 million use of cash a year ago. After capital expenditures of $21 million, free cash flow was negative $9.5 million compared with negative $12 million last year. Capital expenditures for the first nine months were $42.6 million. These investments support the capacity and efficiency requirements Tripp discussed earlier. For the full year we expect capital expenditures in the range of $50 million.

As of September 30, 2026, cash and cash equivalents were $11.5 million. Current and long-term debt totaled $409.5 million compared with $643 million at year end and slightly over $1 billion prior to our June IPO. We had $120 million available under our revolving credit facility. Net leverage, based on pro forma trailing twelve months earnings, was approximately 2.7 times. Now to our outlook for the balance of the year. Our year-to-date performance and backlog support our confidence in the opportunity ahead. At the same time, the approval and supplier challenges that Chris described are affecting timing and mix, and the startup cost of new program ramps continue to impact gross profit margins. As a result, we now expect full year 2026 revenue of between $660 million and $670 million. The approval and supplier issues are expected to move between $15 and $20 million of Rotorcraft aftermarket revenue from the fourth quarter into the first half of 2027.

That includes approximately $10 million of Apache Road Ahead overhaul work and between $5 and $10 million of aftermarket spares deliveries. This shift relates to fully funded orders and, given the sole source nature of this work, we view this as a timing issue, not one of ultimate demand. We now expect non-GAAP adjusted EBITDA of $137 million to $142 million, reflecting the lower revenue expectations and related margin together with continuing investments associated with development programs and production ramps. We anticipate gross profit margin to average roughly 26% in the fourth quarter, approximately 200 basis points below our original expectations.

Our midterm view on margin profile has not changed, and we would anticipate returning to a more normalized margin in the high 20s as we get into the second half of 2027, as development programs move into production and we have fully captured the benefits of the investments we are making in team members, equipment, systems and processes to support the revenue growth of the business. Two final items for modeling: we expect our full year 2026 tax benefit to be between $5 million and $10 million. Separately, on share count, we had 172.4 million shares outstanding as of September 30th. Weighted average basic and diluted shares were also 172.4 million for the third quarter and 151.2 million for the first nine months. The market demand and backlog supporting our business give us great confidence in the compelling opportunity set currently in front of Applied Aerospace.

Our focus is now on successfully translating these opportunities into our targeted level of profitability and converting deliveries of our unique capability sets and highly engineered systems into cash. And with that I’ll hand it back to Tripp.

Tripp Ferguson (Chief Executive Officer)

Thanks Jeff. Before we open the call for questions, I want to come back to what we’re building at Applied Aerospace. Our vision is to become the defining advanced manufacturing partner for next generation space and defense. We want to be the company that proven market leaders and bold new entrants turn to when they need to take a demanding idea from development into full scale production and support it through its entire life cycle. We’re building that company around an operator-led culture, deep engineering expertise and manufacturing capabilities that become more valuable when they work together.

That means solving difficult problems for customers, developing proprietary know-how and earning positions on programs where we can contribute for decades. You can see our customers’ confidence in Applied Aerospace reflected in the continued backlog growth I mentioned earlier that is approaching $1.3 billion at the end of Q3. For shareholders, we are focused on compounding the value of those customer relationships and capabilities. That requires choosing the right new business, achieving target returns on our current investments, and adding capabilities through disciplined acquisitions that make the broader Applied Aerospace platform stronger.

We have big ambitions and we’re clear about the work in front of us to deliver on our backlog, bring our program ramps through efficiently and translate growth into compelling profitability and predictable cash flow. That is how we will keep our customers’ trust and drive shareholder confidence. We’re building Applied Aerospace to endure and to grow alongside the customers that are shaping what comes next. Thank you to our teammates for their dedication, customers for their trust, and our shareholders for their support. And on Veterans Day, thank you again to those who have served. Operator, we’re ready for your questions.

OPERATOR

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

The first question is from Myles Walton from Wolfe Research. Please go ahead.

Myles Walton (Analyst)

Thanks. Good morning. Maybe just start off, I think Chris, you mentioned 600 million in orders for 27, and Jeff, you mentioned 75% of the orders for your 27 sales. I just want to make sure those two things are apples to apples. And so you’re implying 100 million plus or minus in sales in 27. Is that the takeaway from those two comments?

Chris Rogers (President and Chief Strategy Officer)

That’s fair, Myles.

Myles Walton (Analyst)

Okay. And then just on the revenue outlook for the medium term, you’re seeing it out of aftermarket, I think in rotorcraft is the takeaway in terms of the pressure point there. And so what visibility did you have that it was going to run into constraints? And I’m less clear as to what the release point is to give you the confidence that it’s going to come back in the next couple quarters.

Jeffrey L. McRae (Chief Financial Officer)

Yeah, the two primary issues. One is on Apache rotor head overhauls, a contract that we had secured in the first half of the year where we are going through a process with the customer, ultimately the U.S. Government, to update the planning documents around those overhaul activities. And that has taken longer than what we had anticipated it would when we first secured that contract. That revenue now is projected to begin in early 2027. The other element is really related to some of the constraints that we’ve been dealing with within the supply chain, primarily around forgings and castings, as well as some specialty fasteners, that’s impacting our ability to deliver on existing firm orders. We would also expect those to start kind of catching up in the first half of next year. We’re in the last steps of approval on the updated technical process, so we have high confidence.

Myles Walton (Analyst)

Okay, thanks. I’ll leave it there. Thank you.

Tripp Ferguson (Chief Executive Officer)

Thanks, Myles.

OPERATOR

The next question is from Ron Epstein from Bank of America. Please go ahead.

Ron Epstein (Analyst)

Yeah, can you talk to some of the supply chain issues that you’re having and maybe why they surprised you, like what’s tight and what gives you confidence that you’re going to get where you need to be to fill the demand that you’re getting as we go into the next couple quarters?

Tripp Ferguson (Chief Executive Officer)

Yeah, Ron. I mean, as we look at it, I mean we’ve been working very closely with a number of suppliers. What I would say, there has been a bit of a disconnect in broad demand, supply availability, uncertainty of our key forgings and castings. We also have been going through processes to qualify additional suppliers. That has kind of taken longer than what we would have anticipated it to take. Both of those we’ve been monitoring over the last few quarters, and we’ve seen progress and we’re seeing positive signs of it freeing up, but it’s just not happening in the time frame that we originally anticipated.

I’d also highlight it’s not across the board. It’s probably targeted a bit more to a few specific programs and some of the requirements on those programs.

Ron Epstein (Analyst)

Gotcha, gotcha. And then Jeff, can you maybe dig in a little bit more into the higher SG&A? Was it driven by transaction-related hangover, the headcount? How should we think about bubbles as we go into next quarter and next year?

Jeffrey L. McRae (Chief Financial Officer)

As we think of kind of the year-over-year growth, a good portion of that is purely acquisition related. So primarily CBI and the additional SG&A costs that they brought into the fold. The balance of the increase is really just us having built out the infrastructure to support public company requirements. I would say as we look at third quarter, on an adjusted basis, that should be pretty close to what I would anticipate the run rate being looking forward.

So, call it that $15 to $16 million a quarter.

Ron Epstein (Analyst)

Gotcha, gotcha, gotcha, gotcha. And then as you think, Jeff, as you think about the business going forward, how should we think about the free cash conversion, kind of on a normalized basis, of net income.

Jeffrey L. McRae (Chief Financial Officer)

Yeah. I’m still confident as we look forward we will see free cash conversion that’s north of net income. So, you know, we are getting closer there. I would say some of the impact we’re seeing in Q3 was a pretty significant level of investment in capital in the quarter versus what I would normally expect in a given quarter. But from an operating cash flow, driving that positive, just offset with capital expenditures.

Ron Epstein (Analyst)

Got it, got it. And then do you guys have any update on any new work with SpaceX on Starship?

Chris Rogers (President and Chief Strategy Officer)

What I could share is—this is Chris. Thanks for the question, Ron. We’re in regular dialogue with senior leadership at SpaceX. I’d say much of that has been focused at our recent level on kind of ’27 and ’28 planning as it relates to Falcon 9. I feel like we got very good line of sight on that. We’re not disclosing kind of a lot of the work that we’re doing outside of Falcon 9 right now, but I’d say it’s fairly broad-based in terms of a range of things that will tie into kind of other SpaceX programs.

Ron Epstein (Analyst)

Got it. Cool. Thank you.

Tripp Ferguson (Chief Executive Officer)

Thanks, Ron. Thanks, Ron.

OPERATOR

The next question is from Jonathan Siegman from Stifel. Please go ahead.

Jonathan Siegman (Analyst)

Good morning. Happy Veterans Day. Thanks. John, just thinking about ’27 and the margin ramp. Can you just talk about the cadence of—can we expect margins to build only if you resolve some of these supply chain issues, or can you do that in the early half with some of these mitigating factors? Thank you.

Jeffrey L. McRae (Chief Financial Officer)

Yeah. John, what I would view 2027 looking like is continued improvement as we go through the first half of the year and getting to what I would expect to be more normalized margin profile as we get into the second half. I think much of what we’re dealing with are near-midterm issues that we’ve got our arms around. We understand what it is. We’re making investments to ensure long-term profile is where we want it to be. So I think you can kind of look at the second half of next year looking like a normalized margin for us.

Jonathan Siegman (Analyst)

And then last quarter you highlighted Fury and V75 moving towards production. Just what are the next milestones on those programs? Thank you.

Chris Rogers (President and Chief Strategy Officer)

Yeah. So, John, I would jump in. So let’s talk Fury first. You know, we are shoulder to shoulder with the Anduril team and really in a badgeless environment. So we’re rapidly moving forward. The room you were in in the past is filling up with hardware and people, which is a great step. And around MV75, we’re continuing to navigate the kind of replan of what the future looks like, but we’re pretty optimistic of where we stand today as a team and our teams are actually still working today. So all in all, positive for the Applied team, and we look forward to having you out to see the progress soon.

Jonathan Siegman (Analyst)

Thank you.

OPERATOR

The next question is from Sheila Kayoglu from Jefferies. Please go ahead.

Sheila Kayoglu (Analyst)

Hi and good morning. Tripp, Chris and Jeff, thank you so much for the time. The headwinds across approval delays, constraints and startup costs appear primarily concentrated on rotor aftermarket within Defense Aviation and Airborne Systems. Looking at your other two segments, have trends accelerated or decelerated versus your last call?

Tripp Ferguson (Chief Executive Officer)

I would say demand signals continue to improve in both space launch as well as Advanced Sensing and Precision Strike. I think you’re seeing it in the growth that we saw in the third quarter. And as we think of continued growth in backlog, definitely present there. Pipeline is also more robust as we go quarter over quarter, I would say.

Sheila Kayoglu (Analyst)

Great. And just as a quick follow up, you noted that capex will return to more normalized levels in 2027 versus $50 million in 2026. What’s a good baseline for 2027? And after reinvesting in the business, how would you rank capital allocation priorities from here?

Jeffrey L. McRae (Chief Financial Officer)

Yes, I view normalized capital in the 4% to 5% of revenue range. Generally I’m thinking 1% to 2% of pure maintenance capital and, call it, 3% to 4% supporting growth. And I think we’ll kind of be in that range as we look at 2027. As we think of priorities, I would say we’ve definitely prioritized around Precision Strike with significant investments there to support broadening opportunities as well as rate increases in front of us. And we continue to support a number of areas around space and space launch to support customer requirements. Defense aviation—you saw much of the investment we’re making around CCA Fury and some of the things we’re doing in Stockton to support growth across some of our defense aviation programs as well.

OPERATOR

Thank you. Thank you. The next question is from Samit Bojange from Guggenheim Securities. Please go ahead.

Samit Bojange (Analyst)

Hi guys. Thanks for taking my question and congrats on the quarter and happy Veterans Day. Just a quick question on hiring and team member training. You called out some constraints there. Is that showing up in any one particular segment more than others, or is that sort of spread throughout the segments?

Tripp Ferguson (Chief Executive Officer)

So we’ve actually had really good reception to Applied Aerospace. Our hiring is very strong. When we talk about training and equipping, it’s how quickly we ramp those folks into full production environments. And what we’ve seen is that we’re retaining at a really high level today and it’s equally spread as we kind of continue to grow, balanced across all of our markets. So it’s an opportunity as you have growth. But for us, we’re excited about it and our leaders are excited to introduce new team members to the team.

Hope that answered your question.

Samit Bojange (Analyst)

Yep, thank you. I’ll turn it over.

OPERATOR

The next question is from Christine Lewag from Morgan Stanley. Please go ahead.

Kyle Benvenuto (Analyst)

Hi, this is Kyle Benvenuto on for Christine. Congrats on the quarter and thanks for taking my question. You mentioned some awards are taking longer as primes wait for funding and firm orders. And under the framework agreements regarding missiles, when do you expect those to convert into orders for you, and is any of that delay reflected in the updated guidance? And on the second source opportunities, which programs are you pursuing and when could those awards land?

Chris Rogers (President and Chief Strategy Officer)

Yeah, thanks for the question. I’ll probably answer it in two parts. I’d say what we’re seeing across the board is probably a pretty bespoke approach that we’re taking on a program-by-program basis. So we’re looking at kind of the needs of the customer, the needs of the program, our own capability and capacity, and then also what’s the funding behind that. In some cases we are seeing a lot of those purchase orders actually drop as folks are very focused on kind of ’27, kind of ’28; also kind of letters of intent for long lead time that will impact kind of ’28 production.

As it relates to other programs, I think our approach has been for some of the multiyears it really has to make sense for us and make sense for the customer, and so there is variation amongst that. But when you look at our Precision Strike and kind of where we have particularly strong content, we have very meaningful ramp-ups kind of going from this year into, I’d say, first half of ’27, then rolling into kind of back half of ’27, probably more of a leveling off as we get into ’28—particularly strong on a lot of the long-range strike and some of the interceptor programs.

And then also on our solid rocket motor cases, our approach as it relates to kind of multiyears also tends to tie into, like, how specific is that capability and that capacity to that program? When it’s very specific we’re going to be more focused on multiyear, and when it’s more modular, like a lot of what we’re doing in solid rocket and rotor cases, we’re much more comfortable with kind of a purchase order approach. What was the second part of your question?

Kyle Benvenuto (Analyst)

The second part was on the second source opportunities. Which programs are you pursuing and when could those awards land?

Chris Rogers (President and Chief Strategy Officer)

Yeah, so we’re not going to walk through kind of program by program some of the second source, but I’d say they’re overwhelmingly captive capacity that’s currently within the primes, where you look kind of at our capability set—and it’s largely how Applied was built—which is we can be at a price point that delivers tremendous value for the customer. We can kind of meet the rate. And so it’s really kind of Applied at its best, when you kind of talk about customers like Lockheed, Raytheon, others, where they’re on a lot of these programs and we can kind of help them augment and kind of ramp from what they’re doing internally to kind of where they’re heading.

Kyle Benvenuto (Analyst)

Thank you. And then on space and launch, you mentioned a good line of sight on Falcon 9 for 2027 and ’28. How do those volumes compare with this year? And when could the broader SpaceX work start to show up in revenue? And then on New Glenn, how should we think about your ramp in 2027 as their launch cadence picks up? Thank you. And with that, I’ll turn it over.

Tripp Ferguson (Chief Executive Officer)

Yeah. Kyle, as we think of Falcon 9, you know, in our modeling, we have volumes moderating as we go through 2027 and 28. We still are of the belief that you’ll see Falcon 9 flying through the end of the decade, but we don’t have the same level of revenue assumed in our modeling for 2027-28 that we saw in 2026. Offsetting that, though, is the ramp that we’ll continue to see on support of New Glenn. So as we think broadly across space launch, we still believe there’s combined Falcon 9 and New Glenn will hold a little above where we were in 2026.

And we continue to augment that end market with a number of the other activities such as propellant tanks that Chris talked about in the commentary.

Kyle Benvenuto (Analyst)

Thank you.

OPERATOR

The next question is from Ken Herbert from RBC Capital Markets. Please go ahead.

Steve Strachouse (Analyst)

Hey, good morning, guys. This is Steve Strachouse on for Ken. I just wanted to maybe touch on margins in the first half of next year. You talked about normalized margins in the back half of the year, but in the back half of ’26, you also talked about a bit of a ramp in margin. So as you kind of push out some of the revenue and EBITDA, how do we think about margins in the first half of next year?

Jeffrey L. McRae (Chief Financial Officer)

Yes. So if you look at Q3 on an adjusted basis, gross profit margins were roughly 25.2%. We’re projecting a slight improvement in the fourth quarter, roughly around 26% gross profit margins. We think that carries into Q1, Q2 with slowly ramping to kind of high-20s gross profit margins as we get into the second half of 2027.

Steve Strachouse (Analyst)

And then maybe just another on free cash. I know last quarter you had talked about generating free cash in the back half of the year. With the cash use this quarter, just how are you thinking about the puts and takes around working capital for the fourth quarter?

Jeffrey L. McRae (Chief Financial Officer)

Yeah, so third quarter was definitely impacted by the magnitude of capital spending. I’m still confident that as we continue out into the fourth quarter, we’ll start seeing positive free cash flow in the fourth quarter. CapEx will moderate a little bit, but we will also start seeing working capital show some improvement as we burn down some of the contract assets that have grown through the first three quarters of the year.

Steve Strachouse (Analyst)

And then just a last question for me on the CBI acquisition. Just as you’re thinking about integrating that business, how much do those revenues ramp kind of organically in 2027 as you think about that program base?

Tripp Ferguson (Chief Executive Officer)

Yeah. So CBI is 100% precision strike. As we think of many of the growth opportunities within precision strike, it’s inherent within that CBI business. So we definitely see kind of the strongest growth as we go forward around precision strike and that end market. And that will be true in 2027.

Chris Rogers (President and Chief Strategy Officer)

I’d just layer on too. I think it’s been a great case study for us in terms of how we want to do acquisitions. So that business, to begin with, out of the two sites at Billerica and Cincinnati, had a pretty phenomenal growth trajectory. We’ve been able to supercharge that. So part of what we’re bringing to bear is all the metallic subsystems capabilities we had at existing Applied Aerospace sites. All those are now getting tapped into different precision strike programs.

And then I’d also highlight there’s a lot of composite capability we have out of White Salmon, out of Stockton, out of Santa Ana. That’s also incredibly relevant to a lot of these strike programs. And so you’re having us now go in one Applied Aerospace, oftentimes multiple sites, multiple capabilities, composite content, metallic content, and that’s exactly the types of things we want to be doing inorganically — that ability to kind of unlock a lot of revenue synergies.

OPERATOR

There are no further questions at this time. I’d like to turn the floor back over to Tripp Ferguson for closing comments.

Tripp Ferguson (Chief Executive Officer)

Thank you, operator, and thank you all for joining us. We look forward to updating you on our progress when we report full year results and provide our initial 2027 outlook. Thank you.

OPERATOR

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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