Kratos Earnings Beat, Stock Falls on Guidance
Kratos earnings topped Q4 estimates but soft Q1 guidance and heavy cash burn pressured traders while record backlog supports full-year targets.
KEY TAKEAWAYS
- Following the filing, Kratos beat Q4 revenue and adjusted EPS expectations with $345M revenue and $0.18 adjusted EPS.
- Management called Q1 the 'lowest quarter' with guidance of $335M-$345M, citing federal shutdown impacts.
- FY2025 free cash flow used was $125M after $95M capex and working-capital drag.
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Kratos Defense & Security Solutions reported fourth-quarter earnings that exceeded expectations in results filed Feb. 23, 2026. The stock fell the next day after management issued soft first-quarter guidance and disclosed elevated cash burn and contract cost pressures.
Fourth-Quarter Results and Cash Flow Challenges
Kratos (NASDAQ: KTOS) posted fourth-quarter revenue of $345 million and adjusted earnings per share of $0.18, reflecting about 20% organic year-over-year growth and beating its prior guidance range, the company said in a Feb. 23 press release. Gross profit was $83 million, with a gross margin near 24.2%. Operating income reached $8 million, while adjusted EBITDA totaled $34 million, or roughly 9.9% of revenue.
The company used $125 million of free cash flow in fiscal 2025 and generated negative $42 million in operating cash flow, driven by higher working capital tied to growth. Capital expenditures totaled $95 million, mainly for pre-award Valkyrie drone production and facility expansion, partially offset by $12 million in proceeds from Valkyrie sales. Working capital increased by about $52 million, including $29 million in receivables, $20 million in inventory, and $3 million in other assets. Days sales outstanding rose to 121 days, which management attributed to rapid revenue growth, milestone billing timing, and payment delays linked to an extended U.S. federal government shutdown.
The Kratos Unmanned Systems segment generated $69 million in revenue, $2 million in operating income, and $6 million in adjusted EBITDA. It recorded a book-to-bill ratio of 1.9:1 and bookings of $128 million for the quarter, driven by Valkyrie-related activity. Management noted that cost overruns on certain multi-year fixed-price contracts in unmanned systems pressured margins.
Soft First-Quarter Guidance and Backlog Strength
Kratos issued first-quarter revenue guidance of $335 million to $345 million, implying 7.5% to 9.5% organic growth, and adjusted EBITDA guidance of $25 million to $30 million. Management described the quarter as the "lowest quarter" of fiscal 2026, citing the extended federal government shutdown as a near-term headwind.
For the full year, the company maintained revenue guidance of $1.6 billion to $1.7 billion and adjusted EBITDA guidance of $157 million to $167 million, implying margins near 9.9% to 10.0%. This outlook includes the recently closed Nomad Global acquisition and excludes pending deals.
Kratos reported a record backlog of $1.6 billion at the end of 2025 and an opportunity pipeline of $13.7 billion. Fourth-quarter bookings totaled $438 million, with last-twelve-month bookings at $1.5 billion, resulting in a company-level book-to-bill ratio of 1.3:1. President and CEO Eric DeMarco said the "opportunity set for Kratos [has] never been stronger and [is] continuing to increase."
