Defense contractor Kratos Defense & Security Solutions Inc. broke even during its recently completed third quarter, when it saw revenue increase 16%.

For the quarter ended Sept. 29, net income was $2.5 million, or 2 cents per share, on revenue of $184.1 million. In the same quarter one year ago, Kratos delivered net income of $1.7 million, or 2 cents per share, on revenue of $159.4 million.

Revenue from the company’s Unmanned Systems business grew 37% from $33.3 million in the third quarter of 2018 to $45.7 million in the recently ended third quarter.

Analysts expected Kratos to complete the quarter with adjusted earnings of 7 cents per share. However, Kratos emerged with adjusted earnings of 9 cents per share when it announced financial results on Nov. 5.

Delays Possible

The business is looking ahead to more work on its unmanned aircraft systems, though the lack of a defense budget for fiscal 2020 may delay some work, Kratos CEO Eric DeMarco said. The unmanned aircraft business includes target drones for war games as well as unmanned aircraft meant for combat.

The Pentagon is operating under a stopgap spending bill, called a continuing resolution. Because of disagreements between Republicans and Democrats, the Pentagon may end fiscal 2020 under the same sort of bill. Under a continuing resolution, the Pentagon cannot start new programs or increase production on existing programs.

Some 69% of Kratos’ business is with the federal government.

“Though short-term delays may occur as a result of continuing resolutions or delays in DoD budget approvals, we are confident in the long-term growth trajectory and direction of our business based on our existing program portfolio and opportunity pipeline which increased to $7.7 billion,” DeMarco said in a prepared statement.

The business said its financial guidance was unchanged. When the fiscal year ends, Kratos expects annual revenue of $720 million to $740 million, and adjusted EBITDA of $71 million to $77 million. The initials stand for earnings before interest, taxes, depreciation and amortization.

In Pursuit of the Valkyrie Project

One of Kratos’ unmanned aircraft programs is the XQ-58 Valkyrie, which made its third flight in October.

In a call with analysts, DeMarco said he expects a material order for the Valkyrie drone within 90 days after Congress passes the 2020 Pentagon budget. He also said he expects the Valkyrie to become a program of record — that is, a formal acquisition program, with its own line item in the Pentagon budget.

In remarks to analysts, DeMarco said that margins get better as Kratos builds more unmanned aircraft, and goes from low-rate production to full-rate production.

Kratos is making “substantial investments” in its new drone factory in Oklahoma, DeMarco said. He also made reference to a second factory construction project, but did not give its location.

“Our confidence continues to increase that Kratos’ market leading position in affordable, high performance drones, of which we believe Kratos has the only existing systems in the class today, including Valkyrie, Mako and Gremlins, will become a long-term growth driver and value generator for the company,” DeMarco said in a statement distributed with Kratos’ earnings news. n