Kratos Defense & Security Solutions(US:KTOS)2025-05-07 20:26PART I. FINANCIAL INFORMATION Financial Statements The unaudited condensed consolidated financial statements for Q1 2025 report total revenues of $302.6 million, net income of $4.5 million, total assets of $2.005 billion, and negative operating cash flow of $29.2 million Condensed Consolidated Balance Sheets As of March 30, 2025, total assets increased to $2.005 billion, driven by unbilled receivables and goodwill, while total liabilities reached $617.3 million and stockholders' equity grew to $1.388 billion Condensed Consolidated Balance Sheet Highlights (in millions) | Account | March 30, 2025 | December 29, 2024 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $263.7 | $329.3 | | Total current assets | $864.4 | $872.1 | | Goodwill | $597.4 | $568.9 | | Total assets | $2,004.9 | $1,950.9 | | Liabilities & Equity | | | | Total current liabilities | $304.9 | $296.7 | | Long-term debt, net | $172.2 | $174.6 | | Total liabilities | $617.3 | $597.7 | | Total stockholders' equity | $1,387.6 | $1,353.2 | Condensed Consolidated Statements of Operations For Q1 2025, total revenues increased 9.2% to $302.6 million, resulting in $6.6 million in operating income and $4.5 million in net income attributable to Kratos Condensed Consolidated Statements of Operations (in millions, except per share data) | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Total revenues | $302.6 | $277.2 | | Gross profit | $73.6 | $71.0 | | Operating income | $6.6 | $7.0 | | Net income attributable to Kratos | $4.5 | $1.3 | | Diluted EPS | $0.03 | $0.01 | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities for Q1 2025 was $29.2 million, a significant decrease from the prior year, primarily due to increased unbilled receivables, with $22.6 million used in investing activities Summary of Cash Flows (in millions) | Activity | Three Months Ended March 30, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $(29.2) | $0.7 | | Net cash used in investing activities | $(22.6) | $(16.6) | | Net cash provided by (used in) financing activities | $(14.5) | $282.6 | | Net (decrease) increase in cash | $(65.6) | $266.1 | Notes to Condensed Consolidated Financial Statements The notes provide details on accounting policies, the $37.0 million Norden Millimeter acquisition, $1.508 billion in remaining performance obligations, and the U.S. Government as the largest customer, accounting for 68% of total revenue - On February 4, 2025, the company completed an asset acquisition from Norden Millimeter, Inc. for a total consideration of $37.0 million, which included stock and potential future payments, adding $28.5 million in goodwill354042 - As of March 30, 2025, the company had approximately $1.508 billion in remaining performance obligations, with 48% expected to be recognized as revenue in fiscal year 202547 - Sales to the U.S. Government, including foreign military sales, accounted for approximately $205.5 million, or 68% of total revenue, for the three months ended March 30, 202597 - The company operates in two reportable segments: Kratos Government Solutions (KGS) and Unmanned Systems (US), with Q1 2025 revenues of $239.5 million for KGS and $63.1 million for US8285 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 9.2% revenue increase to $302.6 million for Q1 2025, a gross margin decline to 24.3%, a record backlog of $1.508 billion, and ongoing macroeconomic challenges including supply chain disruptions and labor shortages Overview and Industry Update Kratos is making significant capital investments to expand manufacturing capacity for unmanned aircraft and hypersonic systems, while navigating political uncertainties and macroeconomic headwinds such as supply chain disruptions and labor shortages - Kratos is making significant capital investments to expand manufacturing capacity for unmanned aircraft (Valkyrie), hypersonic systems (Zeus, Erinyes), small turbojet engines, and microwave electronics108 - The company identifies significant short and long-term risks from the U.S. political and budgetary environment, including potential impacts from Continuing Resolutions (CRAs), new tariffs, and changes to DoD procurement policies110111 - Ongoing macroeconomic challenges include supply chain disruptions, inflation increasing business costs, and a significant industry-wide shortage of qualified labor, particularly in STEM and cleared personnel, which negatively impacts operating margins113114 Results of Operations Total revenues for Q1 2025 increased 9.2% to $302.6 million, with KGS revenue growing 10.0% to $239.5 million and US revenue growing 6.2% to $63.1 million, though overall gross margin declined to 24.3% Revenues by Segment (in millions) | Segment | Q1 2025 | Q1 2024 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Kratos Government Solutions | $239.5 | $217.8 | $21.7 | 10.0% | | Unmanned Systems | $63.1 | $59.4 | $3.7 | 6.2% | | Total revenues | $302.6 | $277.2 | $25.4 | 9.2% | - The increase in KGS revenue was driven by growth across all business units, including C5ISR, Defense Rocket Support, and microwave products, plus a $4.8 million contribution from the Norden acquisition120 - Gross margin in the US segment decreased to 15.8% from 19.5% in the prior year, primarily due to a less favorable product mix and the impact of increased labor and material costs on multi-year fixed-price contracts123 Backlog Total backlog increased to approximately $1.508 billion as of March 30, 2025, with $1.174 billion funded, driven by new contract awards across various segments, with 48% expected to be recognized in fiscal year 2025 Backlog Comparison (in millions) | Backlog Type | March 30, 2025 | March 31, 2024 | | :--- | :--- | :--- | | Total Backlog | $1,508.1 | $1,272.8 | | Funded Backlog | $1,173.6 | $1,043.9 | - The company expects to convert approximately 48% of its total backlog into revenue during fiscal year 2025, with an additional 25% in fiscal year 2026129 Liquidity and Capital Resources Cash and cash equivalents decreased to $263.7 million due to $29.2 million used in operating activities and $22.6 million in capital expenditures, while total long-term debt was $182.5 million and a $200 million revolving credit facility remains undrawn - Cash and cash equivalents decreased by $65.6 million during the quarter to $263.7 million as of March 30, 202513520 - Net cash used in operating activities was $29.2 million, primarily due to increases in unbilled receivables and inventory, as the company makes advance purchases to mitigate supply chain disruptions137138 - Capital expenditures for Q1 2025 were $22.6 million, with significant investments continuing in the Unmanned Systems business, and full-year 2025 capex is expected to be significant139 Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the company's quantitative or qualitative market risk profile since December 29, 2024 - There have been no material changes in the company's market risk profile since December 29, 2024150 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 30, 2025, with no material changes in internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 30, 2025154 - No changes occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting155 PART II. OTHER INFORMATION Legal Proceedings The company is subject to various legal proceedings in the ordinary course of business, with details in Note 14, and does not anticipate a material adverse impact - Information regarding legal proceedings is detailed in Note 14 of the Notes to condensed consolidated financial statements158 Risk Factors No material changes to the company's risk factors have occurred since their previous disclosure in the Annual Report on Form 10-K - During the period covered by this report, there have been no material changes in the company's risk factors from those previously disclosed159 Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None160 Other Information Marie Mendoza, Senior Vice President and General Counsel, adopted a Rule 10b5-1 trading plan on March 17, 2025, covering a maximum of 24,473 shares - Marie Mendoza, an officer of the company, adopted a Rule 10b5-1 trading plan on March 17, 2025163 Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL data files