Kratos Defense & Security Solutions (KTOS) Q3 2026 earnings review
Kratos won record defense orders, but it burns more cash
Kratos, which builds rockets, drones and satellite systems for the military, signed record orders but kept spending cash. Chief executive Eric DeMarco reported more than $1 billion of new contracts, led by rocket and space work. That lifted signed but undelivered work to $2.65 billion. Sales rose about 36% with two acquisitions, but the gain from businesses it already owned only matched its plan.
| Sales from businesses owned a year ago | +23.2% +35.7% including Nomad and Orbit |
|---|---|
| New orders | $1.04 billion 2.2 times quarterly sales |
| Full-year cash outflow outlook | $110–120 million $85–105 million three months ago |
| 2027 sales outlook | $2.1–2.2 billion middle of the range: about 20% growth |
⚖️ Verdict: 🟢 Bullish
The story got better, because orders now run well ahead of sales and support next year's plan of about 20% growth. The bad news: Kratos expects to burn more cash this year than its previous plan allowed, and DeMarco now places positive cash flow in 2029.
The question now is whether Kratos can turn orders into cash before spending peaks. Either engine and rocket shipments late next year repay the parts it buys now, or budget delays and parts shortages stretch the outflow into 2028. The cash flow plan due in late February will tell.
🐂 Bull Case
Orders Reached Twice the Quarter's Sales
Kratos tracks demand with its book-to-bill ratio: new orders divided by the sales it recorded in the same quarter. A reading above one means the order book is growing. Chief executive Eric DeMarco called the quarter proof of "the continued acceleration of our business".
The defense group signed $1.04 billion of orders, and the ratio reached 2.2, the highest on the chart below. Kratos said the largest included "additional contract funding modifications on our MACH-TB program and space-related awards". MACH-TB is a hypersonic test program.
- Backlog, signed work not yet delivered: $2.65 billion, up $566 million in the quarter
- Backlog added in the same quarter a year ago: $66 million
- Bids Kratos is chasing: $15.5 billion, up from $15.0 billion in June
This matters because the backlog now covers most of next year. Kratos expects to turn half of it into sales in 2027. By our math, that work equals about 62% of next year's sales plan.
What to watch: the fourth-quarter book-to-bill ratio, due in late February. A second quarter well above one would show that demand still runs ahead of what Kratos can build.
Rocket and Hypersonic Sales More Than Doubled
Kratos Government Solutions (KGS), the larger of its two units, makes rockets, jet engines, microwave electronics and satellite software. Excluding two businesses it bought this year, KGS sales rose 35.8%.
Rocket and hypersonic work led, with underlying sales up 149%. Chief executive Eric DeMarco said the unit has received about $600 million of funding. He said "we remain on track to generate approximately $700 million in revenue in 2027".
By our math, that target equals about a third of next year's sales plan, so one unit carries much of next year. DeMarco named rocket motor supply and crowded government test ranges as the risks.
What to watch: the rocket unit's fourth-quarter growth rate, due in late February. A rate well above the company average would keep that target within reach.
Profit Before Non-Cash Charges Rose Faster Than Sales
Kratos judges itself on adjusted EBITDA, operating profit before depreciation, amortization and stock pay. It reached $50.9 million, above the top of its own range. That equals 10.8% of sales, against 8.9% a year ago.
Finance chief Deanna Lund credited "a favorable mix, as well as leverage from the increased volume on our fixed cost infrastructure". By our math, the cash cost of making and delivering its products took 2.5 percentage points less of sales.
This matters because next year's plan needs about one more point of margin. But the measure swings with contract mix and dipped to 8.3% in the second quarter.
What to watch: the fourth-quarter margin, due in late February. A reading near the 10.1% the plan implies by our math would show that scale, not mix, drives the gain.
🐻 Bear Case
Kratos Will Burn More Cash Than Planned
Kratos spends ahead of its orders: it builds plants and buys parts before customers pay. Chief executive Eric DeMarco said "we currently expect to be a substantially larger company and cash flow positive as a result of the investments by 2029".
In the third quarter, free cash flow, the cash left after operations and equipment spending, came to minus $29.4 million. Kratos blamed "the working capital requirements related to the 35.7 percent revenue growth impacting our receivables".
- Full-year free cash outflow: now $110–120 million, against $85–105 million three months ago
- Unbilled receivables, work done but not yet invoiced: $454 million, up 58% from a year ago
- Days needed to collect payment: 125, against 114 last quarter
This matters because unbilled work rose faster than sales. DeMarco said Kratos is putting $130–140 million of its own money into parts for 3,000 jet engines. Most of those engines ship in the second half of next year, so that cash returns only then. Its $1.40 billion of cash and lack of bank debt cover the gap.
What to watch: the 2027 cash flow outlook, which Kratos plans to give in late February. A plan that still shows an outflow would push the payback onto engine and drone shipments in 2028.
Stock Pay and Deal Costs Erased Operating Profit
Chief executive Eric DeMarco said the quarter showed "leverage of the business as production quantities increase and as Kratos continues to scale". Operating income under standard accounting rules says otherwise: it swung to a $4.9 million loss from a $7.1 million profit. Three costs that adjusted EBITDA leaves out explain the gap.
- Stock pay: up 1.2 percentage points of revenue, to 3.8%
- Amortization of intangible assets from the Nomad and Orbit deals: up 1.6 points of revenue
- Amortization of development costs on hypersonic deliveries: up 2.3 points of revenue
Kratos plans for these charges to continue in the fourth quarter, so the gap matters. It has lowered its full-year operating income outlook three times this year. Taxes added to the hit, because a tax rate of 104% on its mix of countries pushed net income to a small loss.
What to watch: fourth-quarter operating income against the $1–4 million plan, due in late February. A second loss would show that stock pay and amortization still outpace the business.
Drone Sales Fell and the Valkyrie Ramp Slipped
Unmanned Systems, the drone unit, builds the Valkyrie combat drone and the smaller Firejet. Its sales fell 14%, because last year's quarter held a $16.1 million Valkyrie export. By our math, sales rose about 5% without it.
Orders lagged, at 0.8 times sales, and backlog slipped to $357 million. Kratos wrote that "we are extending the timing of our previously planned Valkyrie production ramp of up to approximately 40 aircraft annually", because Firejet needs the same Oklahoma plant.
Chief executive Eric DeMarco cited "a Valkyrie low-rate initial production, or LRIP, contract award" but gave no size. He still calls the unit "one of our strongest organic growers next year".
What to watch: the plan by unit that DeMarco promised for late February, which will show how much revenue the Valkyrie contract carries.
Risks this quarter didn't answer
Kratos itself names several operating risks that got no new numbers this quarter. Each could slow the production ramp behind next year's plan, and the materials give no measure to track them yet.
- Engine parts: chief executive Eric DeMarco said "We are doing everything we can to dual source and triple source"; engine deliveries in the second half of 2027 will show whether parts arrived.
- Skilled and cleared staff: DeMarco said "I do not expect the headwind to abate"; Kratos reports no headcount.
- Israeli shekel: its strength hurts the microwave electronics business in Israel, finance chief Deanna Lund said; she gave no cost figure.
- Bid and proposal costs: Lund named them among the overheads in the fourth-quarter plan; Kratos does not report the amount.
- Fixed-price target drone contracts from 2020 and 2021: costs outran prices until the next lot; the drone unit's margin will show any relief.
👓 Other Themes
Washington's Stopgap Budget Sets the 2027 Timing
The US government runs on a continuing resolution, a stopgap law that holds spending at last year's level and blocks new programs. Chief executive Eric DeMarco expects it to last into next year, "with Q1 2027 currently expected to be our lightest fiscal quarter as a result of the CR". Kratos will revisit next year's plan if the law runs past March 31.
Kratos Engines Picked for Two Missile Programs
Kratos makes small jet engines for missiles and drones. Chief executive Eric DeMarco said its J85 turbojet won the engine role "to power the JDAM-LR munition", a guided weapon with a range above 300 nautical miles. Its GEK800 engine, built with GE Aerospace, became a "second source propulsion system for the Joint Air-to-Surface Standoff Missile". Neither award has a revenue figure yet.
💲 Other KPIs
The share count rose 9.2% from a year ago, after 20.8% in the second quarter, because last June's share sale now sits in both periods. Kratos sold $1.38 billion of stock in February. Chief executive Eric DeMarco said he plans no more raises for the foreseeable future.
Inventory climbed 35.8% from a year ago, about as fast as sales. Raw materials, the parts the group buys for engines and drones, reached $142.8 million against $109.4 million in December. Kratos plans to keep buying ahead of production through 2027, which ties up cash before shipments.
Cost-plus contracts, where the government pays Kratos' costs plus a fee, made up 31.6% of sales, against 26.6% a year ago. Finance chief Deanna Lund said this work carries lower margins but less risk. She added that it puts "a ceiling" on margin gains for that part of the business.
🔮 Guidance
New. The plan has fourth-quarter sales about 43% above a year ago at the middle, helped by the Nomad and Orbit deals. By our math, the full-year plan of three months ago pointed to about $480 million for the quarter. The new middle therefore sits higher, at $495 million.
Cut. The range now tops out at 26%, against 31% three months ago. Its middle of about 22% sits just below the third quarter's pace. Finance chief Deanna Lund gave the range on the call; the release has no figure for it.
Raised slightly. Kratos lifted the bottom of the range, so the middle points to about 33% growth. It is the third increase this year. Each step is smaller than the last: +$95 million, +$50 million, +$15 million.
New. The plan has fourth-quarter profit before non-cash charges about 47% above a year ago at the middle. By our math, that is a margin near 10.1%, below the third quarter's 10.8%. Lund cited the mix of work, overhead built for growth and the strong Israeli shekel.
Raised. By our math, the middle of the range means a margin near 9.9%, about one point above last year. Kratos promised that gain at the start of the year. The steps this year were +$11 million, +$1.5 million and +$3.5 million.
Cut. The middle of the range fell to about $4.5 million from $19 million. Higher amortization from the Nomad and Orbit deals and larger stock pay explain most of the drop. It is the third cut this year; at the start of 2026 the plan called for $55–60 million.
Cut. The plan now has operations roughly breaking even on cash, against about $40 million of inflow three months ago. Kratos blamed later billing milestones and inventory for engines and drones. Operations used $43.6 million so far this year, so by our math the fourth quarter must bring in about that much.
Lowered. Kratos now plans $25 million less spending on plants and equipment at the middle. Spending so far leaves about $38 million for the fourth quarter by our math. The company said some drone spending may move between this line and inventory.
Cut. Kratos now expects to burn about $115 million at the middle, $20 million more than its previous plan. Weaker operating cash flow outweighs the lower equipment spending. By our math, that leaves an outflow of about $24 million in the fourth quarter, smaller than the third quarter's.
Raised. Stock pay for the year now runs about $5 million above the plan of three months ago. By our math, that is nearly double the 2025 level. Kratos leaves this cost out of adjusted EBITDA, but it lowers operating income.
Raised. Amortization moved the most, to about $56.5 million at the middle from $44.5 million. Revised values for Orbit's intangible assets and deliveries on hypersonic programs drive it. Both charges sit outside adjusted EBITDA but reduce operating income.
Raised slightly. Company-funded research now runs about $2 million above the earlier plan for the year, much of it at Orbit. At about 3% of sales, the spending stays close to last year's share.
Unchanged in substance. The first dollar plan for next year means about 20% growth, inside the 18–23% Kratos sketched a year ago. Chief executive Eric DeMarco said the internal forecast adds up to considerably more. The plan assumes the stopgap budget ends by March 31 and puts most growth in the second half.
Unchanged. By our math, the middle means about 32% growth and a margin near 10.9%. That keeps the one-point margin gain Kratos promised in each update this year. Kratos will give its 2027 cash flow plan in late February.
❓ Key Questions
How much cash will Kratos use in 2027?
Kratos held back its 2027 cash flow plan until late February. Engine parts, drone builds and new plants all draw cash before shipments, so next year's outflow decides how far the backlog carries the business.
How large is the new Valkyrie production contract?
DeMarco said customer rules stop him from giving details. The contract decides whether the drone unit can grow as he says next year, after a quarter in which its orders lagged its sales.
Why did the fourth-quarter growth range move lower?
Kratos trimmed the top of its range for growth from businesses it owned a year ago, while new orders hit a record. Readers need to know whether timing, the stopgap budget or parts supply caused it.
What happens to 2027 if the stopgap lasts past March?
Kratos said it would revisit its 2027 plan in that case. It has not said which programs would slip first, or how much of the plan depends on new starts that the stopgap law blocks.