Kratos Defense & Security Solutions — Third Quarter 2026 Earnings Summary

Financial Performance:

• Consolidated revenues for Q3 2026 were $471.8 million, a 35.7% increase and 23.2% organic growth compared to $347.6 million in Q3 2025.
• GAAP operating loss was $4.9 million for Q3 2026, compared to operating income of $7.1 million in Q3 2025.
• GAAP net loss was $0.2 million for Q3 2026, compared to GAAP net income of $8.7 million in Q3 2025.
• Adjusted EBITDA for Q3 2026 was $50.9 million (10.8% margin), compared to $30.8 million in Q3 2025.
• Adjusted EPS was $0.24 for Q3 2026, compared to $0.14 in Q3 2025.
• Cash flow used in operations for Q3 2026 was $5.2 million, driven by working capital requirements from revenue growth and inventory increases.
• Free cash flow used in operations for Q3 2026 was $29.4 million after $30.2 million in capital expenditures, net of $0.4 million in asset sale proceeds and $5.6 million in state grants.
• Consolidated book-to-bill ratio was 2.2 to 1.0 for Q3 2026 and 1.6 to 1.0 for the trailing twelve months ended September 27, 2026.
• Consolidated backlog was $2.650 billion as of September 27, 2026, up from $2.084 billion on June 28, 2026, consisting of $2.067 billion funded and $582.9 million unfunded.
• Bid and proposal pipeline was $15.5 billion as of September 27, 2026, up from $15.0 billion on June 28, 2026.

Guidance and Future Outlook:

• Revised Full Year 2026 Revenue guidance is $1,780 million to $1,810 million; Adjusted EBITDA guidance is $176 million to $180 million.
• Initial Full Year 2027 Revenue forecast is $2,100 million to $2,200 million, representing 18% to 22% growth over the revised 2026 guidance.
• Initial Full Year 2027 Adjusted EBITDA forecast is $230 million to $240 million.
• Q1 2027 is expected to be the lightest fiscal quarter due to the ongoing federal Continuing Resolution (CR), with revenue and Adjusted EBITDA expected to increase in subsequent quarters assuming annual appropriations are in place.
• The 2027 forecast assumes the sale of approximately 1,500 turbo jet engines, with the majority delivered in the second half of 2027.
• Production targets include ramping turbo jet engines to 3,000 units in 2027 and potentially 5,000 additional units in 2028.

Business Segments and Product Lines:

• Kratos Government Solutions (KGS) segment revenues were $397.2 million in Q3 2026, a 52.5% increase and 35.8% organic growth compared to Q3 2025.
• KGS Adjusted EBITDA was $46.3 million in Q3 2026, compared to $24.4 million in Q3 2025.
• KGS backlog was $2.292 billion as of Q3 2026, up from $1.710 billion at the end of Q2 2026.
• Notable KGS growth drivers included Defense Rocket Systems (149.0% organic growth), Turbine Technologies (27.1%), Microwave Products (16.6%), and Space, Training and Cyber (11.6%).
• Unmanned Systems (KUS) segment revenues were $74.6 million in Q3 2026, down from $87.2 million in Q3 2025, primarily due to a one-time $16.1 million Valkyrie shipment to an international customer in the prior year quarter.
• KUS Adjusted EBITDA was $4.6 million in Q3 2026, compared to $6.4 million in Q3 2025.
• KUS backlog was $357.4 million as of Q3 2026, down from $374.6 million at the end of Q2 2026.
• Significant investments are being made in Hypersonic, Rocket System, Turbine Technology, and Unmanned Systems businesses, including procurement of rocket motors, jet engines, and UAVs.
• Space and Satellite business has a significant new opportunity pipeline where Kratos could serve as the prime program system integrator.

Market and Competitive Landscape:

• Management describes a "generational recapitalization" of the U.S. and allied military industrial base with a limited number of qualified global companies.
• The company is aligned with the Department of War's priorities and reindustrialization efforts.
• The bid and proposal pipeline saw notable increases in space, training, and hypersonic businesses.
• The company expects to continue making significant investments in inventory, property, plant, equipment, and facilities consistent with the Department of War's National Security Strategy.

Risks and Challenges:

• An ongoing U.S. Federal Budget Continuing Resolution (CR) is expected to remain in place at least through December 11, 2026, and potentially into Q1 2027, restricting new program starts and production rate increases.
• A U.S. Federal Government Shutdown would require a reassessment of 2026 guidance and 2027 forecasts.
• Supply chain disruptions, parts shortages, and potential cost and price increases are impacting the industry and Kratos.
• Significant investments in staffing, production ramp, and inventory are currently adversely impacting profit margins and free cash flow generation.
• Large prime system integrator opportunities may result in reduced Adjusted EBITDA profit margins due to subcontractor and supplier content requirements.
• Risks include potential delays or cancellations of key government contracts, bid protests, changes in procurement laws, and fluctuations in foreign currency exchange rates.

Management Commentary and Tone:

• President and CEO Eric DeMarco stated that Q3 results reflect Kratos' position as a leading defense technology company aligned with national security priorities.
• Management highlighted a record backlog of $2.6 billion and an opportunity pipeline of $15.5 billion, citing strength in hypersonic and space businesses.
• DeMarco noted that Adjusted EBITDA margins of 10.8% demonstrate business leverage as production quantities increase and the company scales.
• The tone is confident regarding the "generational recapitalization" of the defense industrial base and bipartisan support for increased national security spending.
• Management expects to provide FY27 operating and free cash flow guidance in late February 2027 once there is clarity on the CR situation and federal budget appropriations.

Other Key Points:

• GAAP Net Loss and Operating Loss for Q3 2026 included non-cash stock compensation of $18.1 million, company-funded R&D of $15.0 million, and non-cash amortization of $23.3 million.
• The company raised $1,348.4 million from the issuance of common stock net of issuance costs during the nine months ended September 27, 2026.
• Cash and cash equivalents increased to $1,404.3 million as of September 27, 2026, from $560.6 million as of December 28, 2025.
• Total assets increased to $4,187.2 million as of September 27, 2026, from $2,467.2 million as of December 28, 2025.
• Kratos is pursuing large new opportunities in the Space and Satellite business where it could act as the prime program system integrator.
• The company is building a second lot of 12 capital Valkyrie aircraft and expanding facilities for hypersonic systems, microwave electronics, and engine testing.