Executive Summary

Q3 2025 delivered strong top-line and earnings: revenue $347.6M (+26.0% y/y) and Adjusted EPS $0.14; both beat Wall Street consensus (revenue $322.2M, EPS $0.125) with upside driven by KGS and international Valkyrie shipments . Consensus values are from S&P Global.*
Adjusted EBITDA was $30.8M (8.9% margin), above the company’s guidance range ($25–$30M), aided by volume/mix despite continued cost headwinds on multi-year fixed-price contracts in Unmanned Systems .
FY2025 revenue guidance was raised to $1.32–$1.33B (from $1.29–$1.31B), with Q4 2025 revenue guided to $320–$330M; Adjusted EBITDA guidance maintained at $114–$120M, while operating cash flow and capex were reduced and free cash flow use widened due to working capital and timing effects .
Strategic catalysts: Valkyrie shipments to Airbus/Germany and anticipated Marine program of record ramp, Orbit Technologies acquisition ($356.3M, accretive on closing), and 2026–2027 organic growth targets (15–20% and 18–23%) with 100bp annual Adjusted EBITDA margin expansion as contracts transition to higher-margin profiles .

What Went Well and What Went Wrong

What Went Well

Broad-based growth and segment execution: revenue up 26% y/y; KGS organic growth 20% y/y, with Defense Rocket Systems (+47.2%) and Space, Training & Cyber (+21.2%) leading; Unmanned Systems grew 35.8% organically, aided by international Valkyrie shipments .
Bookings and backlog momentum: consolidated Q3 bookings $414.1M (book-to-bill 1.2x), consolidated backlog $1.48B; bid pipeline expanded to $13.5B from $13.0B q/q .
Management confidence and long-term targets: “We are increasing our full year 2026 organic revenue growth forecast up to 15–20% above 2025 … and providing a preliminary 2027 organic revenue growth target of 18–23%,” with EBITDA margin expansion expected in both years .

What Went Wrong

Operating cash flow and FCF usage: operating cash flow used was $13.3M and FCF used was $41.3M in Q3, reflecting working capital build (receivables, long-lead materials) and production ramps; DSOs rose to 111 days (from 103 in Q2) .
Unmanned Systems cost pressure: continued margin drag on multi-year fixed-price target drone contracts negotiated in 2020–2021; KUS book-to-bill of 0.6x and backlog down to $302.5M (from $337.6M) .
Guidance implications: FY2025 operating income guidance cut to $26–$30M (from $29–$34M prior), and operating cash flow lowered to $10–$20M (from $50–$60M), with capex reduced to $105–$115M (from $125–$135M) and FCF use widened to $(95)–$(105)M .

Financial Results

Consolidated results vs prior periods and estimates

Metric	Q3 2024	Q2 2025	Q3 2025	Q3 2025 Consensus	vs Cons.
Revenue ($M)	275.9	351.5	347.6	322.2*	Beat
GAAP Diluted EPS ($)	0.02	0.02	0.05	—	—
Adjusted EPS ($)	0.11	0.11	0.14	0.125*	Beat
Adjusted EBITDA ($M)	24.6	28.3	30.8	—	—
Adjusted EBITDA Margin (%)	8.9%	8.1%	8.9%	—	—

Note: Consensus values marked with * are from S&P Global.

Segment performance

Segment	Metric	Q3 2024	Q2 2025	Q3 2025
Unmanned Systems (KUS)	Revenue ($M)	64.2	73.2	87.2
	Operating Income ($M)	0.4	(0.2)	2.7
	Adjusted EBITDA ($M)	3.6	3.7	6.4
Kratos Government Solutions (KGS)	Revenue ($M)	211.7	278.3	260.4
	Operating Income ($M)	13.5	12.5	13.7
	Adjusted EBITDA ($M)	21.0	24.6	24.4

KPIs and operating metrics

KPI	Q2 2025	Q3 2025
Consolidated Bookings ($M)	257.0	414.1
Consolidated Book-to-Bill (x)	0.7x	1.2x
Consolidated Backlog ($B)	1.414	1.480
Bid & Proposal Pipeline ($B)	13.0	13.5
KUS Backlog ($M)	337.6	302.5
KGS Backlog ($B)	1.076	1.178
DSOs (days)	103	111
Contract Mix (% of revenue)	65% FP / 31% CPFF / 4% T&M	70% FP / 27% CPFF / 3% T&M
Customer Mix	US Federal 71% / Foreign 17% / Commercial 12%	US Federal 67% / Foreign 17% / Commercial 16%
Cash Flow from Operations ($M)	(10.6)	(13.3)
Capital Expenditures ($M)	20.5	28.0
Free Cash Flow Used ($M)	(31.1)	(41.3)

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue ($M)	Q4 2025	—	320–330	New
Revenue ($M)	FY2025	1,290–1,310	1,320–1,330	Raised
Adjusted EBITDA ($M)	Q4 2025	—	29–34	New
Adjusted EBITDA ($M)	FY2025	114–120	114–120	Maintained
Operating Income ($M)	FY2025	29–34	26–30	Lowered
Operating Cash Flow ($M)	FY2025	50–60	10–20	Lowered
Capital Expenditures ($M)	FY2025	125–135	105–115	Lowered
Free Cash Flow Use ($M)	FY2025	(75)–(85)	(95)–(105)	Lowered
R&D ($M)	Q4/FY2025	Q3 guide: 10–11/Q3; 40–42 FY	10–11 Q4; 40–42 FY	Maintained
Depreciation ($M)	Q4/FY2025	9–10 Q3; 35–38 FY	10–11 Q4; 37–38 FY	Slightly Higher Q4
Amortization ($M)	Q4/FY2025	3–4 Q3; 12–14 FY	3–4 Q4; 13–14 FY	Maintained
Stock-Based Compensation ($M)	Q4/FY2025	8–9 Q3; 34–36 FY	8–9 Q4; 35–36 FY	Maintained

Out-year outlook:

FY2026: Organic revenue growth +15–20% vs FY2025; ~100bp increase in Adjusted EBITDA margin; H2 stronger than H1 .
FY2027: Organic revenue growth +18–23% vs FY2026; additional ~100bp Adjusted EBITDA margin increase .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q1 & Q2)	Current Period (Q3)	Trend
Valkyrie CCA and Marine program of record	Began serial production ahead of awards; routine flights with USAF; customers prefer “products not PowerPoints”	Program “officially underway” with Northrop; shipments of first two Valkyries to Airbus for German variant; capacity can scale to 50–100 per year	Accelerating program readiness and international traction
Hypersonics franchise (Mach-TB, Zeus, Erinyes/Dark Fury)	Hypersonic growth cited as #1 driver; Mach-TB funding in reconciliation bill; prime role and launches	Major facility award “Helios” ($68.3M arc-jet/laser); multiple programs (Poseidon, Deimos) and hypersonic engines ramping; billion-plus franchise by 2028	Strong pipeline, capacity build-out
Small jet engines	“Several hundred” turbojets expected in H2’25; designed into new missiles/drones	Two LRIP turbojet programs expected in 2026–2027; GEK800 altitude/durability tests completed; new Oklahoma facility for 2027	Validated performance, production path
Space/Golden Dome, SDA	Government-side strength; 2:1 book-to-bill in space; OpenSpace differentiation	Golden Dome and missile defense driving demand; KGS growth; C2/TT&C capabilities positioned for defense initiatives	Improving federal demand
Supply chain/costs, fixed-price drag	Target drone fixed-price contracts under pressure from cost inflation	Continued KUS margin drag, overhead absorption; renegotiation expected post current lots	Persistent near-term headwind
Policy tailwinds (MTCR reform, procurement changes)	Executive Orders, FORGED/SPEED Acts supportive	MTCR rule changes enable broader UAS exports; procurement reform seen as structural tailwind	Positive structural shift
M&A/portfolio	Tuck-ins in microwave; capacity build	Orbit acquisition ($356.3M) expected accretive; complements microwave comms; closing targeted by Mar 2026	Strategic expansion

Management Commentary

“Our Q3 financial results are representative of the increasing demand for Kratos’ military grade hardware, systems and software… we are once again increasing our full year 2025 revenue guidance… and… 2026 organic revenue growth forecast up to 15 percent to 20 percent above our expected increased annual 2025 revenue.” — Eric DeMarco, CEO .
“We are now able to report that [MUX TAC Air] is officially underway… we shipped the first two Valkyries to Airbus under this new contract.” — Eric DeMarco .
“We are projecting an approximate 100 basis point EBITDA margin expansion for 2026 above 2025. And another approximate 100 basis point margin expansion again in 2027 over 2026.” — Eric DeMarco .
“Adjusted EBITDA for the third quarter of 2025 was $30.8 million, also above our estimated range of $25-$30 million…” — Deanna Lund, CFO .
“Kratos to acquire Orbit Technologies Ltd for $356.3 million… expected to be immediately accretive across virtually every financial metric.” — Company press release .

Q&A Highlights

Valkyrie ramp and capacity: Management expects eventual “dozens and dozens” annually for Marines as infrastructure builds; current capacity 50/year with option to 100/year .
Margin trajectory and cash flow inflection: EBITDA margins suppressed by bid/proposal capture costs amid expanding opportunity set; line-of-sight to positive cash flow in “a few years,” with step-up expected around 2028 as mix shifts to production and renegotiated contracts .
Prometheus SRM and energetics: Tactical missiles first; potential for tens of thousands of motors; facility operational by 2027; merchant supplier strategy to primes; billion-dollar valuation potential at scale .
Helios facility timeline: Contract $68.3M; site decision imminent; Kratos-owned/operated multi-decade annuity-like program; complements national hypersonic testing infrastructure .
Orbit synergy: Combining microwave and communications technologies expected to create “1+1=5” opportunities, particularly in antennas and miniaturization for unmanned systems .

Estimates Context

Q3 2025 actuals vs S&P Global consensus: revenue $347.6M vs $322.2M; Adjusted EPS $0.14 vs $0.125; both beats. Q4 2025 consensus: revenue $327.6M; EPS $0.147, suggesting modest sequential growth . Consensus values are from S&P Global.*

Metric	Q3 2025 Actual	Q3 2025 Consensus	Q4 2025 Consensus
Revenue ($M)	347.6	322.2*	327.6*
Primary EPS ($)	0.14	0.125*	0.147*

Note: Values marked with * are from S&P Global.

Implications: Street likely raises revenue/EPS for FY2025 and FY2026 to reflect raised top-line guide and out-year margin expansion path; caution remains around KUS margin drag and working capital implications .

Key Takeaways for Investors

Quality beat and raised FY top-line guide; watch for continued book-to-bill >1x and backlog growth as near-term support to estimates .
Structural growth drivers (hypersonics, engines, microwave/space) are transitioning from development to production; margin expansion targeted in 2026–2027 as mix improves .
Tactical Valkyrie is a significant call option: early international shipments and Marine program momentum could deliver step-function upside; capacity already planned to scale .
Orbit acquisition broadens SATCOM and unmanned communications footprint; expect synergy in antennas/miniaturization; accretive on close (target Mar 2026) .
Near-term headwinds: KUS fixed-price cost inflation and elevated DSOs will pressure cash conversion; FY2025 OCF/FCF guidance reset reflects working capital timing and long-lead investments .
Trading lens: Positive catalysts include contract awards (Anaconda, Helios, Poseidon), hypersonic program ramps, policy-driven procurement reforms, and MTCR easing for UAS exports .
Monitor execution milestones: Marine Valkyrie award timing, engine LRIP awards in 2026–2027, Helios site selection/start, Prometheus build-out, and backlog-to-revenue conversion cadence .

*Values retrieved from S&P Global.

KRATOS DEFENSE & SECURITY SOLUTIONS, INC. (KTOS)·Q3 2025 Earnings Summary