Applied Aerospace & Defense (AADX) Q3 2026 earnings review
Applied Aerospace cuts its targets, while its order backlog grows
Applied Aerospace & Defense, a maker of rocket and military aircraft hardware, won more orders but lowered its full-year targets. Sales rose 49% from a year ago, or 20% without the businesses it bought this year. Its order backlog reached $1.26 billion. But Applied cut both targets it set last quarter, and by our math the new plan leaves fourth-quarter sales flat with the third.
| Sales growth without this year's acquisitions | +20.3% +48.6% including them |
|---|---|
| Core profit (before interest, tax, depreciation and one-offs) | $39.7M 21.8% of sales; 23.6% a year ago |
| Order backlog | $1.26B $1.13B in June |
| Full-year outlook | Cut sales target down $15M and core profit target down $13M at the middle of the range |
⚖️ Verdict: 🔴 Bearish
The story got worse because Applied cut its profit target far more than its sales target. So the margin improvement that the old plan implied for the second half did not come. By our math the new plan has the core profit margin slipping to about 20% in the fourth quarter. The good news: new orders were 1.4 times sales.
The question now is why Applied lowered its targets while its backlog grew. Either deliveries moved into next year, or new programmes cost more to start than planned. Fourth-quarter results will tell.
🐂 Bull Case
New Orders Were 1.4 Times Sales
Applied's backlog is the value of signed contracts minus what it has already invoiced. It grew by about $130 million in the quarter. The balance sheet points to no acquisition behind the increase, because goodwill hardly moved.
- Backlog: $1.26 billion, up from $1.13 billion in June
- New orders in the quarter: about $254 million
- Orders against sales: 1.4 times
This matters because most of the first-half increase came with CBI, a business Applied bought in March. Orders now exceed sales without a purchase. But the backlog also counts finished work not yet invoiced, so it overstates future sales.
What to watch: the year-end backlog in the annual report. A second quarter of orders above sales would show that the lower full-year targets reflect timing, not weaker demand.
Sales Grew 20% Without This Year's Acquisitions
Applied bought several businesses this year, so its reported sales growth of 49% overstates the pace. Without those purchases, sales rose 20.3%, above the second quarter's 19.8%. "What distinguishes Applied is the diversity of our growth," chief executive Trip Ferguson said.
- Space and launch: $39.1 million, up 31% from a year ago
- Defense aviation: $94.2 million, up 17%
- Sensing and strike, its missile-defense and munitions market: $48.7 million, against $12.4 million
Quarter to quarter, the picture is narrower. Defense aviation added $15.3 million over the second quarter, while space sales hardly moved and sensing slipped. Applied does not say which market holds the acquired revenue.
What to watch: growth without acquisitions in the fourth quarter. Another reading near 20% would show that demand held even as the sales target fell.
Positives this quarter didn't test
Two standing positives got no new numbers in the release or the slides, so neither one counts for or against Applied this quarter.
- Savings from combining CBI, bought in March, with the other sites: no figure given. Integration and restructuring costs reached $3.5 million. A disclosed savings number would move this.
- Rocket motor cases and other strike hardware built across several sites: Applied is adding capacity "for precision strike and next-generation defense aviation programs". Sales by programme would show the payoff.
🐻 Bear Case
Applied Cut Its Profit Target by $13 Million
"Our third quarter reflected broad-based demand across our end markets," chief executive Trip Ferguson said. The same release lowered the full-year target for core profit, meaning earnings before interest, tax, depreciation and one-off costs.
The sales target fell by $15 million at the middle of the range, and the profit target by $13 million. Profit dropped almost as much as sales, so the cut reflects higher costs and not only lower volume.
- Core profit margin: 21.8% of sales, against 23.6% a year ago
- Cost of making the products: 76.5% of sales, up 4.6 percentage points
- Overhead and selling costs: 8.8% of sales, down 1.1 points
By our math, the old targets implied a core profit margin of about 24% in the second half. The third quarter only matched the second. Even without share awards from its June listing and acquisition accounting, gross margin was 25.2%, the Huntsville company said. A year ago this share of sales left after production costs was 28.0%.
What to watch: the fourth-quarter core profit margin, near 20% under the new target by our math. A higher result would mean Applied left itself room.
The New Plan Shows No Fourth-Quarter Sales Growth
Applied gives a sales target only for the full year, so the fourth quarter is whatever remains. By our math, the new range leaves about $181 million for the last three months. The third quarter brought in $182 million, so the plan shows no growth between the two.
An order book that grew faster than sales would normally point the other way. The release says only that Applied "now expects" a lower figure. It gave no reason and promised details on the earnings call.
What to watch: fourth-quarter sales against the $176 million to $186 million that the new range implies by our math. A result below that band would be a second shortfall against the company's own plan in two quarters.
Applied Books Sales Faster Than It Bills Customers
Applied records sales as it builds hardware, often before it can send an invoice. The unbilled amount sits on the balance sheet as contract assets. That balance reached $245.6 million, up $47.9 million during the quarter.
- Contract assets: up 24% from June, while sales rose 9% from the second quarter
- Cash from operations: $11.5 million, after an outflow of $82.1 million in the first half
- Cash after equipment spending: minus $9.5 million
Last quarter management projected positive cash flow after equipment spending for the second half. By our math, that now requires more than $9.5 million in the fourth quarter. The latest release and slides do not repeat the projection.
What to watch: contract assets at year-end. A falling balance would show that customers are paying Applied for finished work.
Risks this quarter didn't answer
Four standing risks got no new numbers in the release or the slides. Each one stays open until Applied or its filings give a figure.
- Funding and timing of next-generation programmes such as the MV-75 aircraft and the New Glenn rocket: no update. The first targets for 2027 will show what Applied assumes.
- Supplier delays and aluminum prices: not mentioned. The gross margin and any explanation of the lower targets will show their effect.
- Controlling shareholder: AA&D Holdings held about 80% of the shares at the last quarterly filing. A share sale or another debt-funded purchase would show its plans.
- Dependence on a few customers, including SpaceX for the Falcon 9 rocket: no share of sales given. The annual report's customer disclosure will show it.
👓 Other Themes
Applied Ties Demand to Missile Rearmament
Applied said near-term demand in its sensing and strike market should stay supported by "missile and munition rearmament, layered missile defense priorities" and spending on next-generation strike systems. For military aircraft it pointed to "increases in global defense budgets". The release gave no figures for either, and none for how the US budget process affects its programmes.
One Market Has a New Name
Applied renamed its C5ISR and Precision Strike Systems market, which covers military communications, surveillance and strike hardware. The new name is Advanced Sensing and Precision Strike Systems. The company said there were "no changes to the composition of each end market", so earlier figures stay comparable.
💲 Other KPIs
Profit before tax turned positive at $6.5 million, after a small loss a year ago. Net income was far larger, at $30.6 million, because Applied recorded a $24.2 million tax benefit. The benefit reverses most of the $26.0 million tax charge from the first half.
Interest costs fell to $9.9 million from $17.3 million a year ago. The space and defense supplier repaid debt with the money from its June share sale. Interest now takes about 5% of sales.
Net debt, meaning borrowings minus cash, stood at $398.0 million. Applied put that at about 2.7 times the past year's profit before interest, tax, depreciation and one-offs, counting acquired businesses. The multiple matches June's. Cash on hand was $11.5 million, and the credit line had $120 million available.
The share count held at 172.4 million through the first full quarter since the June listing. A year ago the average was 88.6 million, so per-share figures do not compare well. Profit per share was $0.18.
🔮 Guidance
Cut. The plan now has full-year sales about $15 million lower at the middle of the range. By our math, that leaves about $181 million for the fourth quarter, level with the third. Applied set the earlier range in its first report as a listed company. The release gave no reason for the change.
Cut. The target for core profit (earnings before interest, tax, depreciation and one-offs) fell by $13 million at the middle of the range. That is a reduction of about 9%, against 2% for sales. By our math, the plan leaves about $37 million for the fourth quarter, below the third quarter's result. That puts the margin near 20%.
Unchanged. Applied still plans to spend about $50 million on plants and equipment this year. It spent $42.6 million through September. By our math, about $7 million remains for the fourth quarter, roughly a third of the third-quarter amount. The slides say spending then returns to "more normalized levels in 2027".
❓ Key Questions
Why did Applied lower both full-year targets?
The release gave no reason. Deliveries that moved into 2027 would return as later sales. Higher start-up costs on new programmes would not, and they would carry into next year's margin.
How much of sensing and strike sales came from acquisitions?
Acquisitions added about $34.6 million of sales by our math, and sensing and strike sales rose $36.3 million. Without a split by market, nobody outside the company can tell how fast that business grows on its own.
Does Applied still plan positive second-half cash flow?
Management projected it last quarter. Cash after equipment spending was minus $9.5 million in the third quarter, and the company held $11.5 million of cash at the end of September.
How much of the backlog is work not yet done?
The backlog counts contract value that Applied has not invoiced, including work it has already recorded as sales. The amount still to build, and the share due in 2027, would show how much future revenue the orders hold.
How much less do new programmes earn at the start?
Management said last quarter that new programmes earn lower margins until Applied has built the first units. The size of that gap, and the share of sales it affects, would show when the margin can recover.