Kratos Defense & Security Solutions(KTOS) - 2025 Q1 - Quarterly Results

Kratos First Quarter 2025 Financial Performance First Quarter 2025 Financial Highlights Kratos reported strong revenue growth in the first quarter of 2025, with total revenues reaching $302.6 million, a 9.2% increase year-over-year, driven by 7.4% organic growth. Net income attributable to Kratos more than tripled to $4.5 million, and Adjusted EBITDA saw a modest increase to $26.7 million. The company maintained a healthy order momentum with a consolidated book-to-bill ratio of 1.2 to 1. Q1 2025 Key Financial Metrics (vs. Q1 2024) | Metric | Q1 2025 ($) | Q1 2024 ($) | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $302.6 million | $277.2 million | +9.2% | | Operating Income | $6.6 million | $7.0 million | -5.7% | | Net Income (attributable to Kratos) | $4.5 million | $1.3 million | +246% | | GAAP EPS (diluted) | $0.03 | $0.01 | +200% | | Adjusted EBITDA | $26.7 million | $26.0 million | +2.7% | | Adjusted EPS | $0.12 | $0.11 | +9.1% | - Total revenue growth of 9.2% increase was primarily driven by 7.4% organic growth, with notable performance in the Unmanned Systems (6.2% growth) and KGS segments (7.8% growth)[2][5] - Operating income was impacted by $8.7 million in non-cash stock compensation and $10.0 million in company-funded R&D expenses[3] Segment Performance The Kratos Government Solutions (KGS) segment was the primary revenue driver with $239.5 million, showing 7.8% organic growth. The Unmanned Systems (KUS) segment also grew, with revenues of $63.1 million, but faced margin pressure from legacy fixed-price contracts, resulting in a higher operating loss and lower Adjusted EBITDA compared to the prior year. Unmanned Systems (KUS) The KUS segment achieved 6.2% revenue growth to $63.1 million, driven by increased target drone sales. However, profitability declined, with an operating loss of $1.7 million and Adjusted EBITDA of $1.7 million, due to cost pressures on multi-year fixed-price contracts. The segment demonstrated strong demand with a book-to-bill ratio of 1.8 to 1.0 for the quarter. KUS Segment Q1 2025 Performance | Metric | Q1 2025 ($) | Q1 2024 ($) | | :--- | :--- | :--- | | Revenues | $63.1 million | $59.4 million | | Operating Loss | $(1.7) million | $(0.4) million | | Adjusted EBITDA | $1.7 million | $2.9 million | | Book-to-Bill Ratio | 1.8 to 1.0 | N/A | | Backlog | $347.1 million | N/A | - Profitability was negatively impacted by increased material, subcontractor, and labor costs on fixed-price contracts negotiated in 2020 and 2021[7] Kratos Government Solutions (KGS) The KGS segment reported revenues of $239.5 million, an organic growth of 7.8% year-over-year, with strong performance in C5ISR, Defense Rocket Support, and Microwave Products. Operating income and Adjusted EBITDA both increased, reflecting favorable revenue volume and mix. The segment maintained a solid book-to-bill ratio of 1.0 to 1.0 for the quarter. KGS Segment Q1 2025 Performance | Metric | Q1 2025 ($) | Q1 2024 ($) | | :--- | :--- | :--- | | Revenues | $239.5 million | $217.8 million | | Operating Income | $17.0 million | $16.6 million | | Adjusted EBITDA | $25.0 million | $23.1 million | | Book-to-Bill Ratio | 1.0 to 1.0 | N/A | | Backlog | $1.161 billion | N/A | - The most notable growth within KGS came from the C5ISR, Defense Rocket Support, and Microwave Products businesses, with organic growth rates ranging from 13.1% to 18.7%[9] Bookings, Backlog & Pipeline Kratos demonstrated strong business momentum with a consolidated book-to-bill ratio of 1.2 to 1.0 for both the first quarter and the last twelve months. Total backlog grew to $1.508 billion, supported by a robust bid and proposal pipeline of $12.6 billion. Consolidated Bookings & Backlog (as of March 30, 2025) | Metric | Q1 2025 ($) | LTM ($) | | :--- | :--- | :--- | | Bookings | $365.6 million | $1.401 billion | | Book-to-Bill Ratio | 1.2 to 1.0 | 1.2 to 1.0 | - Consolidated backlog increased to $1.508 billion at the end of Q1 2025, up from $1.445 billion at the end of Q4 2024[13] - The bid and proposal pipeline stood at $12.6 billion, indicating a strong pipeline for future growth[13] Cash Flow The company experienced a cash outflow during the quarter, with Cash Flow Used in Operations at $29.2 million and Free Cash Flow Used in Operations at $51.8 million. This was primarily due to working capital needs for revenue growth, inventory increases for future production, and investments in development initiatives. - Cash Flow Used in Operations was $29.2 million, reflecting working capital requirements from revenue growth, increased inventories, and investments in the Unmanned Systems segment[6] - Free Cash Flow Used in Operations was $51.8 million after funding $22.6 million in capital expenditures[6] Management Commentary and Outlook Management Commentary CEO Eric DeMarco expressed increased confidence in the company's 2025 and 2026 forecasts, citing a clearer defense funding environment and projecting organic revenue growth of approximately 10% in 2025 and 14% in 2026. Key growth areas identified include hypersonics, jet drones, propulsion systems, and C5ISR. The company is also expanding its Israel-based microwave electronics production facilities to support new program awards. - Management is confident in achieving ~10% organic revenue growth in 2025 and ~14% in 2026, bolstered by a clearer defense funding environment and a strong book-to-bill ratio[14] - Key future growth drivers include the hypersonic franchise, jet drones, jet engines, microwave electronics, and C5ISR systems[14][15] - The company is expanding its Israel-based microwave electronics production facility, with a move scheduled for late June 2025 to support new large programs. A temporary impact on Q2 productivity is factored into guidance[14] - Kratos is focused on making strategic investments in its core business areas to increase market share, drive revenue growth, and improve margins[15] Financial Guidance Kratos reaffirmed its full-year 2025 guidance and provided initial guidance for the second quarter of 2025. The company anticipates full-year revenues between $1,260 million and $1,285 million and Adjusted EBITDA between $112 million and $118 million. Guidance includes significant investments in capital expenditures, primarily for expanding manufacturing and production facilities. Q2 2025 and Full Year 2025 Guidance | Metric ($ millions) | Q2 2025 Guidance ($ millions) | FY 2025 Guidance ($ millions) | | :--- | :--- | :--- | | Revenues | $300 - $310 | $1,260 - $1,285 | | Operating Income | $3 - $5 | $34 - $39 | | Adjusted EBITDA | $21 - $25 | $112 - $118 | | Operating Cash Flow | N/A | $50 - $60 | | Capital Expenditures | N/A | $125 - $135 | | Free Cash Flow Use | N/A | ($75) - ($85) | - The company is making elevated investments in capital expenditures to expand facilities for its Rocket Systems, Hypersonic, Microwave Products, and small jet engine businesses[17] Financial Statements Consolidated Statements of Operations For Q1 2025, Kratos generated $302.6 million in total revenues, up from $277.2 million in Q1 2024. Gross profit increased to $73.6 million. Despite higher revenues, operating income slightly decreased to $6.6 million from $7.0 million, primarily due to increased SG&A and R&D expenses. Net income attributable to Kratos significantly improved to $4.5 million. Q1 2025 Income Statement Highlights | Line Item | Q1 2025 ($ millions) | Q1 2024 ($ millions) | | :--- | :--- | :--- | | Total Revenues | $302.6 | $277.2 | | Total Gross Profit | $73.6 | $71.0 | | Operating Income | $6.6 | $7.0 | | Income Before Taxes | $5.4 | $4.0 | | Net Income Attributable to Kratos | $4.5 | $1.3 | Consolidated Balance Sheets As of March 30, 2025, Kratos reported total assets of $2.005 billion, an increase from $1.951 billion at the end of 2024. The increase was driven by growth in unbilled receivables, inventory, and property, plant, and equipment. Total liabilities rose to $617.3 million, while total stockholders' equity increased to $1.388 billion. Balance Sheet Highlights | Line Item | March 30, 2025 ($ millions) | Dec 29, 2024 ($ millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $263.7 | $329.3 | | Total Current Assets | $864.4 | $872.1 | | Total Assets | $2,004.9 | $1,950.9 | | Total Current Liabilities | $304.9 | $296.7 | | Total Liabilities | $617.3 | $597.7 | | Total Stockholders' Equity | $1,387.6 | $1,353.2 | Consolidated Statements of Cash Flows For the three months ended March 30, 2025, net cash used in operating activities was $29.2 million, a significant shift from the $0.7 million provided by operations in the prior-year period. This was mainly due to increases in unbilled receivables and inventory. Investing activities used $22.6 million for capital expenditures, while financing activities used $14.5 million, resulting in a net decrease in cash of $65.6 million. Cash Flow Highlights | Line Item | Q1 2025 ($ millions) | Q1 2024 ($ millions) | | :--- | :--- | :--- | | Net Cash (Used in) Operating Activities | $(29.2) | $0.7 | | Net Cash Used in Investing Activities | $(22.6) | $(16.6) | | Net Cash (Used in) Provided by Financing Activities | $(14.5) | $282.6 | | Net (Decrease) Increase in Cash | $(65.6) | $266.1 | | Cash at End of Period | $263.7 | $338.9 | Non-GAAP Financial Measures Reconciliation of Net Income to Adjusted EBITDA Kratos' Adjusted EBITDA for Q1 2025 was $26.7 million, a slight increase from $26.0 million in Q1 2024. The reconciliation from GAAP Net Income of $4.5 million includes adjustments for interest, taxes, depreciation, amortization, and $8.7 million in stock-based compensation. Reconciliation of Net Income to Adjusted EBITDA | Line Item | Q1 2025 ($ millions) | Q1 2024 ($ millions) | | :--- | :--- | :--- | | Net income attributable to Kratos | $4.5 | $1.3 | | Interest expense, net | $0.9 | $2.8 | | Provision for income taxes | $0.9 | $2.7 | | Depreciation | $8.3 | $7.2 | | Stock-based compensation | $8.7 | $9.2 | | Amortization of intangible assets | $2.1 | $2.1 | | Other adjustments | $1.3 | $0.7 | | Adjusted EBITDA | $26.7 | $26.0 | Computation of Adjusted Earnings Per Share (EPS) Non-GAAP Adjusted EPS for Q1 2025 was $0.12, compared to $0.11 in the prior-year quarter. The calculation starts with GAAP net income and adds back non-cash and certain other expenses like amortization, depreciation, and stock-based compensation, resulting in a Non-GAAP Adjusted Net Income of $18.9 million. Adjusted EPS Calculation | Line Item | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | GAAP Net Income ($ million) | $4.5 | $1.3 | | Total Adjustments ($ million) | $21.3 | $19.2 | | Income Taxes on Non-GAAP measure ($ million) | $(6.9) | $(7.1) | | Non-GAAP Adjusted Net Income ($ million) | $18.9 | $16.1 | | Adjusted EPS | $0.12 | $0.11 | | Diluted Shares Outstanding (millions) | 156.2 | 141.5 | Company Information and Disclosures About Kratos Defense & Security Solutions Kratos is a technology company focused on the defense, national security, and commercial markets. The company emphasizes affordability and rapid development of mission-critical solutions. Its primary business areas include satellite ground systems, unmanned aerial drones, hypersonic vehicles, propulsion systems, C5ISR, microwave electronics, and virtual training systems. - Kratos positions itself as an innovative and disruptive change agent, specializing in designing products for rapid, large-quantity, and low-cost manufacturing[19] - Key business areas include jet-powered unmanned aerial systems, hypersonic vehicles, rocket and propulsion systems, C5ISR, and satellite command and control systems[20] Forward-Looking Statements and Risk Factors This section contains standard legal disclaimers regarding forward-looking statements, which include the company's financial guidance and expectations for future performance. It cautions investors that actual results may differ materially and lists numerous risk factors, such as government spending constraints, contract cancellations, supply chain disruptions, and geopolitical conflicts. - The report includes forward-looking statements concerning future financial performance, including revenue growth expectations for 2025 and 2026, profitability, and cash flow[21] - Key risks identified include dependency on U.S. government spending, changes in procurement laws, competition, supply chain issues, cybersecurity threats, and geopolitical conflicts in Ukraine and Israel[22][23]