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Nov 5, 2026, 4:05 PM ETIndustrials

Kratos Defense & Security Solutions — Third Quarter 2026 Earnings Summary

KTOSKRATOS DEFENSE & SECURITY SOLUTIONS INC
Source

Financial Performance

  • Consolidated revenues for Q3 2026 were $471.8 million, representing a 35.7% year-over-year increase and 23.2% organic growth compared to Q3 2025 revenues of $347.6 million.
  • 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, an increase from $30.8 million in Q3 2025, representing a 10.8% margin.
  • 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 in funded backlog and $582.9 million in unfunded backlog.
  • 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.
  • Q4 2026 revenue guidance is $480 million to $510 million; Adjusted EBITDA guidance is $48 million to $52 million.
  • Initial Full Year 2027 financial forecast projects revenues of $2.1 billion to $2.2 billion and Adjusted EBITDA of $230 million to $240 million.
  • The 2027 forecast reflects approximately 18% to 22% revenue growth over the increased 2026 guidance range.
  • Management expects Q1 2027 to be the lightest fiscal quarter due to the ongoing Continuing Resolution (CR), with significant revenue and Adjusted EBITDA increases expected in Q2, Q3, and Q4 2027 once federal appropriations are in place.
  • The forecast assumes the CR extends at least through December 11, 2026, and potentially into Q1 2027; a CR extending beyond March 31, 2027, would require a reassessment of the 2027 forecast.
  • Management expects to continue significant investments in inventory, property, plant, equipment, and facilities throughout fiscal 2027 to support production ramps and the Department of War's reindustrialization initiatives.

Business Segments and Product Lines

  • Kratos Government Solutions (KGS):
    • Q3 2026 revenues were $397.2 million, a 52.5% increase and 35.8% organic growth compared to Q3 2025 revenues of $260.4 million.
    • KGS Adjusted EBITDA was $46.3 million in Q3 2026, up from $24.4 million in Q3 2025.
    • KGS operating income was $15.1 million in Q3 2026, compared to $13.7 million in Q3 2025.
    • KGS book-to-bill ratio was 2.5 to 1.0 for Q3 2026 and 1.7 to 1.0 for the trailing twelve months.
    • KGS backlog was $2.292 billion as of September 27, 2026, up from $1.710 billion at the end of Q2 2026.
    • Notable 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%).
    • Recent bookings included contract funding modifications on the MACH-TB program and space-related awards.
  • Kratos Unmanned Systems (KUS):
    • Q3 2026 revenues were $74.6 million, down from $87.2 million in Q3 2025, primarily due to a one-time $16.1 million Valkyrie shipment to an international customer in Q3 2025.
    • KUS Adjusted EBITDA was $4.6 million in Q3 2026, down from $6.4 million in Q3 2025.
    • KUS operating loss was $0.9 million in Q3 2026, compared to operating income of $2.7 million in Q3 2025.
    • KUS book-to-bill ratio was 0.8 to 1.0 for Q3 2026 and 1.2 to 1.0 for the trailing twelve months.
    • KUS backlog was $357.4 million as of September 27, 2026, down from $374.6 million at the end of Q2 2026.
  • Strategic Investments and Production:
    • Management expects to produce up to 3,000 turbo jet engines in 2027 and potentially 5,000 additional engines in 2028.
    • The 2027 forecast assumes the sale of approximately 1,500 turbo jet engines, with the majority of deliveries in the second half of 2027.
    • Significant investments are planned for the Prometheus joint venture, Anaconda radar facility, Helios hypersonic facility, Indiana hypersonic integration facility, Birmingham advanced manufacturing facility, and microwave electronics facilities in Israel and the U.S.
    • Kratos expects to continue ordering inventory and components to increase Valkyrie and other jet drone system production throughout 2027.

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 like Kratos.
  • The company aligns with the Department of War's priorities and reindustrialization efforts.
  • The bid and proposal pipeline saw notable increases in space, training, and hypersonic businesses.
  • Kratos intends to pursue program opportunities as the prime contractor when probability of win is high and investment is within capital comfort levels, otherwise partnering with large traditional system integrators.

Risks and Challenges

  • The ongoing U.S. Federal Budget Continuing Resolution (CR) restricts new program starts and production rate increases, potentially delaying revenue recognition.
  • A federal government shutdown would require a reassessment of 2026 guidance and 2027 forecasts.
  • Risks include potential parts shortages, significant cost and price increases, and supply chain disruptions.
  • Increased staffing and investment in bid/proposal activities 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 related to the availability of skilled workforce, inflation, cybersecurity events, and foreign currency exchange rate fluctuations (including the Israeli Shekel) are noted.
  • Potential risks include contract cancellations, bid protests, changes in government procurement laws, and the failure of developed products to become programs of record.

Management Commentary and Tone

  • Eric DeMarco, President and CEO, stated that Q3 results reflect Kratos' position as a leading defense technology company aligned with the Department of War's priorities.
  • Management highlighted "continued acceleration of Kratos' business with notable strength in our hypersonic and space businesses."
  • DeMarco noted that the reported Adjusted EBITDA profit and margin demonstrate the leverage of the business 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 U.S. National Security spend.
  • Management emphasized that the 2027 forecast assumes the CR extends into Q1 2027, with expectations of substantial revenue and EBITDA increases in subsequent quarters once appropriations are in place.

Other Key Points

  • The company reported a consolidated book-to-bill ratio of 2.2 to 1.0 for Q3 2026 and bookings of $1.037 billion.
  • For the trailing twelve months ended September 27, 2026, consolidated bookings were $2.614 billion.
  • Non-cash expenses included $18.1 million in stock compensation, $15.0 million in Company-funded R&D, and $23.3 million in amortization.
  • Cash and cash equivalents increased to $1,404.3 million as of September 27, 2026, from $560.6 million at December 28, 2025.
  • The company acquired Nomad Global Communication Solutions and Orbit Technologies Ltd, the impacts of which were excluded from organic growth calculations.
  • Management expects to provide FY27 operating and free cash flow guidance in late February 2027.
  • The company is making investments in capital drone systems, including a second lot of 12 Valkyrie aircraft, and various hypersonic initiatives (Vulcan, Kraken, Elysium, Nemesis, Hermes).