Kratos Sales Up 36%, Free Cash Flow Negative: Rapid Earnings Reaction
Defense demand keeps building at Kratos, with backlog at a record. We look at how profit and cash flow look once the adjustments are set aside.
Kratos Defense & Security Solutions (KTOS) reported a 36% increase in third-quarter revenue, reaching $471.8 million. New orders accounted for 2.2 times the existing sales. However, the company's shares saw a slight decline of approximately 0.6% in after-hours trading. Kratos is experiencing strong demand but is still using cash to fuel its growth.
During the quarter, the company spent $29.4 million in free cash, and anticipates spending between $110 million to $120 million this year. The gross profit grew at a similar pace as sales, resulting in a GAAP loss, primarily due to costs below the profit line. Selling and administrative expenses rose by 45%, while amortization of acquired intangibles surged following recent acquisitions.
Despite this, adjusted EBITDA increased, while GAAP operating income fell. The gap between the two figures is mainly due to add-backs, with amortization of capitalized contract and development costs increasing tenfold. The expansion is being funded through stock sales; Kratos raised $1.35 billion through nine months of stock sales.
The company has deferred its 2027 cash flow guidance until late February, and investors should monitor whether the 2027 forecast remains valid if the continuing resolution extends beyond March 31. The release indicates that the reassessment could occur later in February. For more informed investment decisions, consider The Motley Fool's premium services.
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