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Kratos Sales Up 36%, Free Cash Flow Negative: Rapid Earnings Reaction
Key Points
Orders ran more than twice sales, lifting backlog to $2.65 billion.
GAAP operating income turned to a loss even as adjusted EBITDA rose.
The company says heavy investment will keep weighing on free cash flow through 2027.
Kratos Defense & Security Solutions (NASDAQ:KTOS) grew third-quarter revenue 36%, or 23% excluding acquisitions, to $471.8 million, and new orders ran 2.2 times sales. Shares slipped about 0.6% in after-hours trading. Demand is strong, but Kratos is still consuming cash to grow. It used $29.4 million of free cash in the quarter and expects to use $110 million to $120 million this year.
Key Numbers
- Revenue: $471.8 million, up from $347.6 million a year earlier
- Backlog: $2.65 billion, up from $2.08 billion at the end of the second quarter
- GAAP operating income: a loss of $4.9 million, versus income of $7.1 million a year earlier
- Operating cash flow: use of $43.6 million in nine months, versus use of $54.2 million a year earlier
What It Means
Gross profit grew about as fast as sales, so the GAAP loss comes from costs below that line. Selling and administrative costs rose 45%, and amortization of acquired intangibles jumped after recent acquisitions.
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Adjusted EBITDA rose while GAAP operating income fell. The gap is add-backs, and the biggest jump was amortization of capitalized contract and development costs, up tenfold.
Stock sales, not operations, are funding the expansion. Kratos raised $1.35 billion that way in nine months, and the release defers 2027 cash flow guidance until late February.
What to Watch Next
Watch whether the 2027 forecast holds if the continuing resolution runs past March 31, which the release says would force a reassessment. Also look for 2027 operating and free cash flow guidance in late February.
David Kretzmann has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kratos Defense & Security Solutions. The Motley Fool has a disclosure policy.