Prepared remarks
Hello, everyone. Thank you for joining us. And welcome to the Karman Space and Defense second quarter fiscal year 26 earnings conference call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. I will now hand the conference over to Steven A. Gitlin, Vice President of Investor Relations. Steven, please go ahead.
Good afternoon, and thank you for joining Karman Space and Defense's Second Quarter Fiscal Year 26 Earnings Conference Call. I am Steven A. Gitlin, senior vice president of investor relations and corporate communications. Joining me today are Jonathan Rambeau, Chief Executive Officer; Michael Willis, Chief Financial Officer; and Jonathan Beaudoin, Chief Operating Officer. Before we begin, please note that many of the statements made on this call are forward-looking. These statements involve risks and uncertainties that may cause actual results to differ materially. We encourage you to review the risk factors discussed in our filings with the SEC. I would also like to note that we will discuss a number of non-GAAP financial measures today that we believe can be useful in evaluating our performance. Such non-GAAP financial measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.
Our earnings release, which we filed today, can also be found under the heading News and Events on the Investors section of our company's website and contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure. The content of this conference call contains time-sensitive information that is accurate only as of today, 08/06/2026. The company undertakes no obligation to make any revision to any forward-looking statements contained in our remarks today, or to update them to reflect events or circumstances occurring after this conference call. We have posted our earnings release and presentation on our website at karmansd.com. Now I will turn the call over to John.
Good afternoon. In the four months I have been with Karman, I have worked intensely and methodically to evaluate our strategy, our operations, and our progress as we continue in our second year as a mid-cap public company. I am very proud of what Karman has accomplished and I am pleased to see our hard work reflected in milestones such as our recent addition to the S&P SmallCap 600 Index. Against all measures of progress, we are seeing positive results. Shown on page 4 of our earnings presentation, highlights in and since the second quarter include sequential revenue growth of 20.4% from the first quarter to the second; year-over-year quarterly organic growth of 24.4% representing revenue growth from businesses we have owned for more than 12 months; record backlog of $1.3 billion; record quarterly bookings of nearly $500 million; initial fit-up of a 200,000-square-foot factory in Salt Lake City with production capability online before the end of 2026; a large long-term agreement executed with a space and launch customer further to the contingent agreement received earlier this year; meaningful progress toward remediating the material weakness previously shared in our public filings.
We anticipate the necessary controls to be fully implemented by the end of 2026, with testing of operating effectiveness expected to continue into early 2027. Selection of and transition to PwC as our new audit firm, moving Karman into the ranks of other established public companies working with a Big 4 auditor. Signed agreement to acquire Walker Precision Engineering, establishing a beachhead position in Europe, with relationships across the spectrum of European defense primes. Additional details on the Walker acquisition can be found on page 5. With these accomplishments as background, today I will summarize our record second quarter performance, highlight the progress we have made, and outline the priorities guiding our next phase of growth. Then Mike will discuss our financial results and guidance, Jonathan will provide updates on demand, integration and capacity expansion, and I will discuss our growth trajectory before we take your questions.
From a performance point of view, as shown on page 6, we delivered another quarter of record financial results. With quarterly revenue of $182 million, non-GAAP adjusted EBITDA of $55 million, and backlog reaching $1.3 billion, giving us 95% visibility to the midpoint of our full-year revenue guidance.
We expect our strong organic growth rate to continue and want to provide additional clarity on why short-term organic growth is not as useful a metric for our integrated business model as it may be for other companies. Some companies manage newly acquired businesses in more of a holding company fashion with minimal operational integration. In contrast, we identify and acquire companies that bring unique and valuable capabilities to Karman—capabilities that allow us to offer greater value to our customers—and we begin the integration process on day one. This means that we seek to exploit these capabilities immediately to the benefit of Karman and our customers regardless of the amount of time they have been a part of the company. For example, if a newly acquired business is better suited to manufacture products for a long-standing program, then we will move production to that site regardless of whether the output is considered organic or inorganic.
An example is what we are doing now in Gulfport where we are transitioning certain products for our space and launch end market from another long-standing business. We categorize this as inorganic even though it is really organic business that we are simply moving to a recently acquired site that is best suited to its delivery. From an operational and customer perspective, what we call that revenue is much less important than making the best business decision for the customer and the enterprise. To provide a second and slightly different example, following the acquisition of our Cedar City, Utah energetics business, we immediately began pursuing new use cases and customers for its capabilities. Having seen rapid success, we created new revenue streams within that recently acquired business that would not have been possible had they remained independent. We aim to continue pursuing this strategy of moving work and combining capabilities across all of our businesses and will not constrain that strategy by managing to a quarterly organic growth metric that could reduce long-term value capture for the enterprise.
With that said, we remain focused on end markets with very strong organic growth vectors, and we remain confident in our ability to deliver 20% to 25% annual organic growth for the foreseeable future. Demonstrated performance supports that growth rate. Quarterly year-over-year organic growth in the five full quarters since our IPO has ranged 19% to 36%, including 24.4% organic growth year-over-year in the most recent quarter. As we move forward, we will periodically share organic growth at a minimum annually while continuing to focus on optimizing the company for maximum shareholder returns over time. Beyond our financial results, we achieved significant commercial milestones that position Karman for sustained profitable growth. As we first announced in May 2026, we secured four large contingent supply agreements, one of which converted to a firm contract in the second quarter with the others expected to close by the end of the year.
Additionally, while protecting our single and sole source positions on Munitions Advisory Council, or MAC, programs remains a top priority, we see this moment as an opportunity to also go on offense in terms of increasing our share as a second source to prime contractors. Not all suppliers have invested as proactively as Karman, positioning us to step in and become a second source where we are not participating today. Here are several examples of the progress we have made. First, separation motors for a major munitions program. Second, expected selection as a second source on a small propulsion system for a widely deployed anti-armor weapon system. Third, an emerging opportunity as a second supplier for large solid rocket motor, or SRM, cases. Fourth, an opportunity to be a second source supplier for a shroud system on a widely recognized interceptor program. And finally, we are also engaging with customers on an opportunity for a future lower-cost interceptor program.
These wins and opportunities reflect growing confidence in Karman's ability to scale, innovate, and deliver critical hardware at speed and at high volume. They also reinforce what industry leaders have recently demonstrated: framework agreements are converting into large production contracts as highlighted by the more than $90 billion in THAAD and PAC-3 interceptor contracts recently awarded to Lockheed Martin. And these large contracts are not limited to missile defense. As the Navy recently awarded an historic $76.6 billion in contracts for five new Columbia and nine new Virginia class submarines—programs that we support extensively through our maritime defense end market—those contract awards underscore the strength of our pipeline and the state of the global security environment that drives our customers' mission every day. The demand environment remains strong with an urgency to replenish depleted munitions and interceptor stockpiles at an unprecedented rate.
In fact, some customers are now citing demand to increase certain annual production buys by as much as a factor of 10x, which would dwarf earlier projections of 2x, 3x, or 4x multiples of current build rates. Karman is purpose-built to respond to this market demand, and we continue to partner with prime contractors to help them deliver reliably and efficiently. Having covered our Q2 highlights, I would like to turn for a moment to my go-forward priorities. First, continue our track record of strong financial performance while capturing generational demand that we see continuing through at least the end of the decade. Second, fully unlock the value of Karman—leveraging differentiated IP, a growing and well-capitalized development and production system, and a talented workforce. Having now visited 17 of our 20 current and expected-to-be-acquired sites, I have confidence the whole will be realized as more than the sum of the parts.
And third, drive operational excellence through technology, capacity, and a rigorous operating rhythm. To support these priorities, we have identified key areas of focus. First, drive disciplined delivery of free cash. While we still view growth and margin performance as top priorities, you will see increased focus on this metric in 2027, and this will be reflected in our executive compensation incentive framework beginning next year. Second, create financial flexibility. As we find opportunities for operational efficiency and operating leverage, this will provide options for price reduction, business reinvestment, or margin improvement in a way that best maximizes long-term shareholder returns. And third, continued expansion of our total addressable market within the high-growth end markets we currently occupy through both organic and inorganic means. I am pleased with the progress we have made at the midpoint of the year and I remain confident that 2026 will be another year of record performance. With that, and to further discuss that performance, I will turn it over to Mike.
Thank you, John. Our record second quarter results demonstrate the continued strength and momentum of the Karman business model. Pages 7 and 8 include key financial metrics. Revenue of $182 million, up 58% year-over-year, and 20% sequentially. Gross profit of $78 million, up 66% with a gross margin of 43%. Net income of $14 million, up 106% year-over-year. Adjusted EBITDA of $55 million, up 55% year-over-year. Adjusted EPS of $0.14, 43% above last year. Backlog of $1.3 billion, up 65% compared to the end of fiscal year 2025. Bookings in the quarter totaled nearly $500 million from all end markets, including a large space and launch long-term agreement. Organic revenue grew 24.4% year-over-year in the quarter. As John mentioned, quarterly organic revenue growth since our IPO has ranged between 19% to 36%, supporting our annual 20% to 25% organic revenue growth target. Each of our legacy markets delivered year-over-year quarterly and year-to-date growth.
Tactical missiles and IDS grew 55% to $63 million year-over-year quarterly, and 41% to $108 million year-to-date, led by strength in core production programs including unmanned encounter UAS and emerging programs transitioning into production. Maritime defense systems contributed $34 million in the quarter, and $60 million year-to-date, driven by legacy and next-generation submarine programs. Hypersonics and strategic missile defense grew 24% to $43 million year-over-year quarterly and 22% to $79 million year-to-date, driven by growth in key interceptor program production and increased production associated with a new surface-to-surface missile system. Space and launch grew 6% to $42 million year-over-year quarterly and 17% to $86 million year-to-date, supported by content for both legacy and new launch providers, partially offset by customer order timing associated with shifting launch schedules.
Our second quarter revenue mix was as follows: Tactical Missiles and IDS 35%; Hypersonics and SMD 24%; Space and Launch 23%; and Maritime Defense Systems 18%. For the six months ending June 30, revenue rose to $333 million, up 55% year-over-year. Gross profit increased to $142 million, up 64% year-over-year. Net income grew to $22 million, up from $2 million a year ago. Adjusted EBITDA jumped to $99 million, up 51% year-over-year. And adjusted EPS climbed to $0.25, up 56% year-over-year. Looking now at the balance sheet, we continue to prioritize growth as we make capital allocation decisions, understanding that CapEx and working capital will continue to consume cash through this high-growth cycle. That said, we are also placing increased emphasis on cash management and will include free cash flow metrics in our executive compensation program as John described earlier. Cash and cash equivalents totaled $52 million, up $18 million from year end.
Cash used in operations was $4 million, driven primarily by increases in accounts receivable and contract assets. This reflects the working capital requirements associated with the 58% revenue growth driving our receivables, as well as contract assets from production ramps and investments we are making to expand our capacity. We expect volume and cash generation to accelerate in the second half of 2026, delivering free cash flow of $15 million to $20 million. Accounts receivable growth in the second quarter was a function of timing and our growth, with significant deliveries taking place late in the quarter. Accounts receivable is likely to continue to grow in Q3 and Q4, but we do not expect AR days to grow. CapEx year-to-date was $22 million supporting growth across nozzle capacity, UAS launchers, launch vehicles, maritime programs, and spacecraft manufacturing. This represents a slightly higher run rate than our 5% guidance for the year, implying a step down in CapEx in the second half of 2026.
Our CapEx does not include customer-funded capital. We are investing ahead of orders to strengthen our ability to respond to the generational demand cycle we expect to persist for a number of years. Turning now to leverage. Net debt was $752 million at the end of the second quarter. Our Q2 leverage ratio was roughly 3.7x adjusted EBITDA on a pro forma basis. Subject to regulatory approval of the Walker acquisition, we expect our pro forma leverage ratio to be approximately 3.5x by the end of the year. Since the quarter end, we repriced our term loan B to SOFR plus 2.25%, a 50 basis point reduction, equivalent to a savings of approximately $4 million a year in interest payments. We also previously increased our revolving credit facility from $50 million to $150 million, providing greater strategic flexibility. Now I would like to provide a brief update on M&A and our auditor. We announced the execution of an agreement to acquire Walker with a total consideration of £70 million, or approximately $94 million.
The adjusted EBITDA multiple we expect to pay at closing is consistent with the other acquisitions we have made since our IPO. The regulatory review process is underway, and we expect the acquisition to be completed by year end. Our integration of Seemann Composites and MSC is on track, delivering higher-than-expected margin as we prepare to transition space and launch work to the Gulfport location. We are not seeing meaningful changes in valuation expectations across our robust proprietary M&A pipeline; we continue to represent an acquirer of choice for IP-rich first- or second-generation owners seeking long-term growth for the businesses they have created. We engaged PwC as our new auditor this quarter. Their scale and expertise are well aligned with our business model and growth strategy. I will now provide an update on our full-year guidance. Given our strong first half results, record backlog and 95% visibility, we are raising our 2026 outlook shown on page 9.
We now expect full-year revenue of $730 million to $745 million and non-GAAP adjusted EBITDA of $215 million to $222.5 million—29.7% margin at the midpoint. This represents year-over-year revenue growth of 57% and adjusted EBITDA growth of 51% to the midpoint. This outlook does not include the financial results from the Walker acquisition. Importantly, we reaffirm expectations of 25% or higher organic growth in 2026. We expect second-half revenue to increase sequentially with approximately a 47%/53% split between Q3 and Q4. With high visibility, much of our growing record backlog supports our plans for 2027 and beyond. Lastly, for 2026 modeling purposes, we expect a statutory tax rate of 26.5% and capital expenditures of 5% of revenue, roughly $37 million. Now I will turn the call over to Jonathan.
Thank you, Mike. As John stated earlier, integration of acquired businesses is key to our strategy, and enables us to create value that would not exist if these businesses remained stand-alone. Integration of our recent acquisitions continues to move ahead smoothly, including Seemann Composites and MSC, which remains on track for completion this year. We are realizing early benefits, capturing new business pursuits, leveraging our collective capability, along with increasing production of existing Karman products by utilizing available capacity at the newly acquired facilities. For example, our Cedar City, Utah business is helping secure our positions to compete for second source propulsion system opportunities on a MAC interceptor and a key program of record air-to-ground missile system. An additional illustration is our initiative to manufacture space launch vehicle systems at the Gulfport facility, leveraging its large-scale maritime production capabilities to meet the specialized demands of space launch products.
All business development opportunities and pursuits have been incorporated into our company-wide BD systems, allowing us to fully utilize Karman's capabilities to address customer needs. We have started implementing the Karman operating system across all companies acquired since our IPO with progress varying by location. In the second quarter, our machine utilization monitoring system was launched at our Albany, Oregon facility. Given the unprecedented levels of demand, it is imperative to ensure we have sufficient capacity to satisfy our customers' requirements ahead of their need. We are optimizing existing assets by evaluating utilization rates at recently acquired businesses and leveraging the Karman operating system to identify and address output constraints. In addition, we are investing in expanded capacity to accommodate future demand. Installation of advanced equipment is underway to support our significant space launch award with enhanced spacecraft production capabilities slated for deployment in Q4 2026.
We continue to advance our Salt Lake City manufacturing center which will support both Tactical Missile and IDS and Hypersonics and SMD customers. The first production equipment arrived last month and we expect initial production capability in the fourth quarter 2026. The transition of select production from the Seattle area to Salt Lake City will release meaningful capacity to support development, low-rate, and full-rate production at that location. Maintaining strong visibility across our supply chain is necessary to support our growth strategy. As our business continues to grow, so does our customer and program count, now at more than 150. This increased diversification also applies to our supply chain, with no single vendor now making up 10% of our accounts payable. Our customers control the supply of key high-temperature composite materials, ensuring that we have access to the materials required to support them.
In parallel, we are working to qualify our proprietary MG resin as an alternative solution to support the significant expansion in high-temperature material demand. We continue to monitor raw metallic material availability and at this time, we have not experienced any constraints for our products. Turning now to our AI initiatives. We are advancing AI-enabled capabilities across engineering and select business functions with the goal of reducing cycle times and expanding capacity. Our core initiative, what we call Project Moonshot, is focused on securely applying AI to our historical engineering program data, accumulated over several decades, to accelerate design, engineering, and proposal workflows. Over time, we believe these capabilities could improve capture probability and drive growth. We expect to share additional examples of our progress next quarter. Now I will turn it back to John.
Thank you, Jonathan. As we look toward the balance of the year, we remain focused on performance and growth. Complementing our strong organic growth, we also expect to continue to pursue our growth strategy through additional acquisitions, with a focus on munitions and space capabilities that complement our current footprint in domestic and international markets. Beyond the current year, we believe that we are well positioned to deliver 20% to 25% annual organic growth for a multi-year period. At that growth rate, revenue could double in three to four years with potential inorganic growth accelerating that timeline. There is no question that this is an exciting time for Karman and we are just getting started. Now let's take your questions.
Questions and answers
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 *1 to raise your hand. To withdraw your question, press *1 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&A roster. Your first question comes from the line of Peter Arment with Baird. Your line is open. Please go ahead.
Yeah. Thanks. Good afternoon, guys. Nice results. Maybe first question, the new long-term agreement within Space and Launch—could you give us a little more color on the timing of when you expect that to start to contribute to the top line?
Sure, Peter. I will start with that one. This is one we had mentioned in our prior quarter earnings call. We talked about a contingent supply agreement that we were actively negotiating in Space and Launch. At that time, I think we had mentioned approximately a $250 million value for that long-term agreement. It did come through just a bit below that number, but not too far from it, and it is a five-year agreement. So you can see that some amount will start to feather in over the balance of this year, following on to some prior-year agreements that had already been in place, and that will burn off at a relatively level rate across the following four and a half or so years.
Okay. Super helpful. As a follow-up, the second half guidance implies a sequential step up on the top line. Should we assume Tactical Missiles and IDS will still be the main driver of the top line? Or any color you could give on markets or segments?
I think end markets are going to continue to be steady from what you saw in the first six months. So we would expect Tactical Missiles and IDS to remain pretty strong in the second half.
Thanks. I will jump back in the queue. Thanks, guys.
Thanks, Peter.
Your next question comes from the line of Louie DiPalma with William Blair. Your line is open. Please go ahead.
Great. John, Michael, Jonathan and Steven, nice work on the strong quarter. On the prior quarter earnings call, you announced that you were in negotiations with several framework agreements. I was wondering if you could provide an update in terms of the progress with those framework agreements and potential timing on when they might become definitized.
Yeah, Louie, happy to answer that. We continue to have active discussions with our prime customers on those three contingent supply agreements. We have made progress on all three and are continuing to anticipate, as we did in the prior quarter, that those would have firm agreements in place between now and the end of the year. I would say we have reasonable confidence that we will see initial contracts coming through as early as Q3. But by the end of the year, we expect those to fall into place. We've been going back and forth—as you might imagine, as the prime contracts come through, we have to have our time in the queue to get to the detailed negotiation with those customers. The conversations are ongoing, and if anything, I think the expectation in terms of the total quantity and volume that we will be seeing coming through those is going to be at or above what was anticipated last quarter.
Great. And across the industry, John, you and many investors have observed how the Department of War is looking for second suppliers for many leading platforms—for instance, Northrop Grumman was added as a second supplier for the PAC-3 system. Overall, in aggregate, do you view this second-supplier trend as having a positive, neutral, or potentially negative impact on Karman's business?
It is an active conversation we are having almost every day. We are well aware of the push for second sourcing. I would call it a net opportunity for Karman. First, we have leaned forward regarding where demand was going to be, getting equipment on order, getting facilities in place. Jonathan talked about our expansion facility that is well underway and we are excited about that. While customers are being asked to consider second sourcing, our commitment is to convince them we have the capacity in place to support the volume, and we will continue to be a reliable and competitive partner. Where second source is requested, we would work with customers to make that more of a contingency plan versus a meaningful diversion of volume from Karman. On the offensive side, we see opportunity where other suppliers have not built confidence with primes that they can meet demand and production ramps. We have had a number of opportunities that have either come through or that we feel reasonably confident will come through for us to be a second source on certain programs and components. In a couple of these instances, those would be meaningful, large, long-term upside opportunities for Karman. We are optimistic based on the conversations we have had so far.
Great. Thanks, John.
Your next question comes from the line of Kenneth Herbert with RBC Capital Markets. Your line is open. Please go ahead.
Hi. Good evening. Thank you very much for the time and the question. John, I wanted to follow up on a comment you made at the end of your prepared remarks involving post-2026 20% to 25% organic growth. It does represent a slight slowdown at a headline level from what we are seeing this year. Could you talk about confidence around that, how you see the opportunity to continue with this mid-twenties organic growth framework, and what things you considered in arriving at that longer-term outlook?
Kenneth, I did not intend to communicate a slowdown. We see a very steady trend over time as we look back across the last five or so quarters we've been public. As we look to the foreseeable future, it is a consistent trajectory. Looking at end markets and demand—particularly missiles, interceptors, space and launch, unmanned systems, and counter-UAS—we believe this easily supports continued demand at least through the end of the decade.
If I could, just on the comments around free cash: we appreciate where you are in the investment cycle and supporting growth. Could you remind us again and help us think about conversion in the near term and, importantly, what the business should or could support in the longer term as growth continues and investments in CapEx and working capital start to moderate?
Longer term, we maintain that free cash flow should be in the range of 80% to 90% of net income. In this current growth cycle, we do have a use of cash for both working capital and CapEx. At this level of growth, we certainly see increases in receivables; we are also leaning forward to help support upcoming ramps, so inventory and contract assets are rising. The first half was a bit heavier on CapEx because we pulled things to the left to support the ramp. We expect CapEx to be lower as a percentage of revenue in the second half. Long term, we would still maintain about 5% of revenue on CapEx, which we think is an adequate level to support the growth we see for the rest of the decade.
Great. Thanks, Mike.
Your next question comes from the line of Amit Daryanani with Evercore. Your line is open. Please go ahead.
Thanks. Two questions. First, on operating leverage: your EBITDA margin came in around 29.8% in the first half, and the full-year guide implies it will step down a bit in the back half despite higher sales. What is driving that margin drop—are acquisitions at lower margins, start-up costs, capacity investments? How should we think about normalized EBITDA margin into 2027?
Our full-year EBITDA margin guidance is in line with the margins we guided to a quarter ago. The stronger first half results were due to contract mix and relate somewhat to acquisitions. Seemann Composites and MSC, which we acquired in February, have a higher percentage of cost-plus type contracts; cost-plus contracts naturally carry a lower EBITDA margin than firm-fixed price contracts. In the first half, particularly in Q2, we saw a favorable contract mix where we did not have as much revenue proportionately from those cost-plus contracts. We see that normalizing in the second half but still performing better than what we had expected a quarter ago.
Got it. Second, on the $1.3 billion backlog: can you talk about its duration? How much would convert to sales in the back half of this year versus 2027 and beyond? How much of the uptick is driven by duration versus other factors?
Much of the nearly $500 million in bookings we had in Q2 supports 2027 and beyond, which gives us great confidence for the outlook. We only have about 5% left to book this year; it's really timing of PO placement. Of those bookings—specifically the large long-term agreement in Space and Launch—there is an opportunity that some of that revenue will start in the back half of this year, but most of the bookings are supporting our longer-term plans.
Perfect. That is it for me. Thanks a lot.
Your next question comes from the line of John Godyn with Citi. Your line is open. Please go ahead.
Hey, thanks for taking my question. Great to see organic growth reaccelerate in the second quarter. Could we revisit organic growth in the back half of the year and discuss the shape in a little more detail to level set everyone?
Great quarter in Q2 at 24.4% organic. We believe for the year we will be at 25% or slightly better on organic. We expect to see that continue to increase in Q3 and again in Q4, so you'll see an acceleration in the second half and reach roughly 25% or slightly better for the full year.
You mentioned you are 95% covered for the year. Is there anything between now and year-end that could create upward pressure to that number? What would be a source of upside surprise to organic growth from here?
If the framework agreements convert earlier than the end of the year, there could be additional upside as that work ramps. We are planning for that work to really start hitting us in the first part of 2027, but there is urgency on the part of customers and primes, and we are hopeful for upside, though it's too early to count on it.
One more: you talked about fully unlocking Karman's value and mentioned margin. Some investors think roughly 30% EBITDA margins are the right normalized level. It sounded like you might think there could be upside beyond that. Did I hear that correctly? Can you unpack those comments?
I don't want to set the expectation that margins will exceed 30% on a continuing basis. However, we are focused on integration and see further opportunities to optimize the enterprise. We're thinking about financial flexibility in three ways: first, ensuring contingency to manage pricing pressure while maintaining margins; second, possibly reinvesting to capture next-generation franchises; and third, if appropriate, delivering additional margin to shareholders. It's a strategy we'll pursue intentionally and update you as we make progress.
Your next question comes from the line of Michael Leshock with KeyBanc Capital Markets. Your line is open. Please go ahead.
Hi, good afternoon. Just a follow-up on margins: do you have a sense of what the margin difference might be between second-source opportunities and legacy Karman sole-sourced programs? You mentioned several second-source opportunities you are pursuing. If that became a bigger piece of revenue over time, what would be the margin impact?
I don't see an appreciable increase or decrease in margins as a result of second-source opportunities. We might be a bit more aggressive initially in pricing to secure long-term franchises, but we would not enter into something significantly dilutive to margins over the long term. We would have an appropriate business case and consider capital investments before making such decisions. For the opportunities where we already have clear visibility, we feel comfortable that Karman-type margins would be in family with these new programs.
Great. And maybe on Space: can you provide any details on the New Glenn anomaly and the impact it had, if any? I would expect it to be minimal, but curious on the longer-term implications given they are a meaningful customer in that segment.
The long-term outlook for Space and Launch overall remains very favorable for us. We talk regularly with Blue Origin; following the mishap, their production posture has remained strong. The conversations we have had indicate things are full steam ahead from a production point of view and have not slowed down. If anything, activity has strengthened over time. I feel very good about our partnership with Blue Origin and our path forward together.
Your next question comes from the line of Alexandra Eleni Mandery with Truist Securities. Your line is open. Please go ahead.
Nice results, and thanks for taking my question. You mentioned working to qualify your MG resin. What are qualification lead times right now? Are there discussions with the Department of Defense to support acceleration of those processes to meet demand more quickly?
We are receiving funding to further develop MG resin for two uses: an ablative material for solid rocket motor nozzles and for carbon-carbon applications—so, two applications of the MG resin system. That funding will further advance development, and we are working with propulsion primes to find a project or platform where we might insert it. At a platform level, full qualification is probably one to two years.
We have a follow-up question from Amit Daryanani with Evercore. Your line is open. Please go ahead.
Thanks for letting me get back on. John, regarding organic growth and how you integrate acquisitions: when you evaluate an acquisition target, you presumably separate the target's standalone organic base and the return from integration synergies. Historically, has that split been formal in underwriting deals and IRR models? Now that you will disclose organic and inorganic less frequently, does that change how you internally look at deals pre- and post-synergies, or is this purely an external reporting decision?
Amit, our approach to evaluating opportunities has remained consistent. When we evaluate an opportunity, we typically make the base investment decision based on the current business plan or projection for that business. We bring the business on as an instant bolt-on and start the integration process, then work the upside opportunities from there. We do consider strategic value and how to bring the portfolio together to unlock additional opportunities, but the base case is typically made on the organic growth resident in that business. Our plan to report organic growth annually does not change how we evaluate targets internally.
There are no further questions at this time. I will now turn the call back to Jonathan Rambeau, CEO, for closing remarks.
Thank you, everyone, for joining the call today. Before we close, I would like to emphasize three key points from today's call. First, Karman continues to deliver 20% to 25% annual organic growth and we reaffirm our expectation of delivering 25% or higher organic growth in 2026. This growth rate varies quarter-to-quarter but has remained consistent on average over the five full quarters since our Q1 2025 IPO. Second, we are strengthening our platform—expanding internationally, adding valuable new capabilities, deepening customer relationships, producing higher operational efficiency, and tightening our focus on cash. Third, we are deploying capital effectively by expanding our capacity to address generational demand and positioning Karman to deliver sustained 20% to 25% organic growth and adjusted EBITDA margins of up to 30% for years, supplemented by inorganic growth. This is only made possible by the efforts of our outstanding Karman employees whose relentless focus on serving our customers continues to inspire. Thank you for joining us today and for your interest in Karman Space and Defense. You can find our SEC filings and relevant news on our website at karmansd.com. We look forward to speaking with you again following our next quarter.
This concludes today's call. Thank you for attending. You may now disconnect.