Kratos Defense & Security Solutions(KTOS) - 2025 Q2 - Quarterly Results

Q2 2025 Financial & Operational Highlights This section details Kratos's Q2 2025 financial performance, including revenue growth, net income, adjusted EBITDA, bookings, backlog, and cash flow metrics Key Financial Results Kratos reported strong revenue growth of 17.1% in Q2 2025, reaching $351.5 million, driven by 15.2% organic growth, while Net Income and Adjusted EBITDA declined compared to the prior year Q2 2025 vs Q2 2024 Key Financial Metrics | Metric | Q2 2025 | Q2 2024 | Change | | :--- | :--- | :--- | :--- | | Revenues | $351.5 million | $300.1 million | +17.1% | | Operating Income | $3.7 million | $12.5 million | -70.4% | | Net Income (GAAP) | $2.9 million | $7.9 million | -63.3% | | Adjusted EBITDA | $28.3 million | $29.9 million | -5.4% | | GAAP EPS (Diluted) | $0.02 | $0.05 | -60.0% | | Adjusted EPS | $0.11 | $0.14 | -21.4% | - Total revenue growth was 17.1%, with organic growth accounting for 15.2%, primarily driven by the KGS segment's 27.1% organic growth[2][5] - Q2 2025 Net Income was impacted by $8.6 million in non-cash stock compensation, $10.2 million in R&D expenses, and a $2.0 million legal settlement accrual[3] Bookings and Backlog The company reported a consolidated book-to-bill ratio of 0.7 to 1.0 for Q2 2025, indicating lower bookings than revenues recognized, though the last twelve months ratio remains strong at 1.2 to 1.0 Consolidated Bookings & Backlog (as of June 29, 2025) | Metric | Q2 2025 | LTM | | :--- | :--- | :--- | | Bookings | $257.0 million | $1.401 billion | | Book-to-Bill Ratio | 0.7 to 1.0 | 1.2 to 1.0 | - Consolidated backlog was $1.414 billion at the end of Q2 2025, down from $1.508 billion at the end of Q1 2025[14] - The bid and proposal pipeline increased to $13.0 billion from $12.6 billion at the end of the previous quarter[14] Cash Flow and Capital Expenditures In Q2 2025, Kratos experienced a cash outflow from operations of $10.6 million, primarily due to working capital needs and investments in inventory, resulting in negative free cash flow - Cash Flow Used in Operations was $10.6 million, driven by increased receivables and inventory builds[7] - Free Cash Flow Used in Operations was $31.1 million for the quarter, after funding $20.5 million in capital expenditures[7] Segment Performance This section analyzes the individual financial and operational performance of Kratos's Unmanned Systems (KUS) and Kratos Government Solutions (KGS) segments Unmanned Systems (KUS) The Unmanned Systems (KUS) segment saw a revenue decline to $73.2 million in Q2 2025, primarily due to a large international drone shipment in the prior-year quarter, leading to weaker operating results KUS Segment Performance: Q2 2025 vs Q2 2024 | Metric | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Revenues | $73.2 million | $85.8 million | | Operating Income (Loss) | ($0.3 million) | $3.6 million | | Adjusted EBITDA | $3.6 million | $7.2 million | - The revenue decrease was mainly because Q2 2024 included a $17.4 million international target drone shipment[8] - KUS book-to-bill ratio was 0.9 to 1.0 for Q2 2025 and 1.3 to 1.0 for the last twelve months, with total backlog ending the quarter at $337.6 million[9] Kratos Government Solutions (KGS) The Kratos Government Solutions (KGS) segment delivered robust performance with a 27.1% organic revenue growth, reaching $278.3 million in Q2 2025, driven by strong performance in Defense Rocket Support and C5ISR businesses KGS Segment Performance: Q2 2025 vs Q2 2024 | Metric | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Revenues | $278.3 million | $214.3 million | | Operating Income | $12.6 million | $15.5 million | | Adjusted EBITDA | $24.7 million | $22.7 million | - The segment achieved a 27.1% organic growth rate, with standout performances from Defense Rocket Support (116.6% growth) and C5ISR (25.4% growth)[10] - KGS book-to-bill ratio was 0.7 to 1.0 for Q2 2025 and 1.2 to 1.0 for the last twelve months, with total backlog at $1.076 billion at quarter-end[13] Management Commentary & Outlook This section provides insights from Kratos's CEO on market conditions and strategic initiatives, along with the company's updated financial guidance for 2025 CEO Remarks on Market and Strategy CEO Eric DeMarco highlighted a favorable market environment driven by strategic weapon system recapitalization and increased global defense spending, with Kratos securing prime positions on new programs - Management sees a generational recapitalization of strategic weapon systems, with significant global funding increases from the U.S., NATO, and Asian allies[15] - Recent government actions, including the Presidential Executive Order on "Unleashing American Drone Dominance" and proposed legislation like the FORGED and SPEED Acts, are expected to streamline acquisition and benefit Kratos[15] - Kratos has been selected as prime on a new program codenamed 'Poseidon' with a potential value up to $750 million, and was down-selected with a partner for another large program, 'Deimos'[16] - The company anticipates significant organic growth across virtually all business units and expects EBITDA margins to increase starting in 2026 due to new higher-margin programs and contract renegotiations[17] Financial Guidance Kratos has increased its full-year 2025 guidance for Revenue and Adjusted EBITDA, reflecting continued investments in manufacturing and production facilities for key defense systems Updated 2025 Financial Guidance | Metric | Q3 2025 Guidance | Full Year 2025 Guidance | | :--- | :--- | :--- | | Revenues | $315 million - $325 million | $1,290 million - $1,310 million | | Adjusted EBITDA | $25 million - $30 million | $114 million - $120 million | | Operating Income | $3 million - $7 million | $29 million - $34 million | | Operating Cash Flow | N/A | $50 million - $60 million | | Capital Expenditures | N/A | $125 million - $135 million | | Free Cash Flow Use | N/A | ($75 million) - ($85 million) | - The company is increasing its full-year 2025 Revenue and Adjusted EBITDA guidance[18] - Guidance includes elevated investments for capital expenditures to expand manufacturing facilities for Rocket Systems, Hypersonics, Valkyrie production, Microwave Products, and small jet engines[19] Consolidated Financial Statements (Unaudited) This section presents Kratos's unaudited consolidated statements of operations, segment data, balance sheets, and cash flows for the reported periods Statements of Operations For the three months ended June 29, 2025, Kratos generated $351.5 million in revenue, but higher costs and expenses led to a decrease in operating income to $3.7 million and net income to $2.9 million year-over-year Condensed Statement of Operations (in millions) | Line Item | Q2 2025 | Q2 2024 | Six Months 2025 | Six Months 2024 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $351.5 | $300.1 | $654.1 | $577.3 | | Total Gross Profit | $73.8 | $77.2 | $147.4 | $148.2 | | Operating Income | $3.7 | $12.5 | $10.3 | $19.5 | | Net Income | $2.9 | $7.9 | $7.4 | $9.2 | Segment Data For Q2 2025, the Kratos Government Solutions (KGS) segment was the primary revenue driver with $278.3 million, while the Unmanned Systems (KUS) segment's revenue decreased to $73.2 million, resulting in an operating loss Segment Revenues and Operating Income (in millions) | Segment | Q2 2025 Revenue | Q2 2024 Revenue | Q2 2025 Operating Income (Loss) | Q2 2024 Operating Income (Loss) | | :--- | :--- | :--- | :--- | :--- | | Unmanned Systems | $73.2 | $85.8 | ($0.3) | $3.6 | | Kratos Government Solutions | $278.3 | $214.3 | $12.6 | $15.5 | Balance Sheets As of June 29, 2025, Kratos's total assets significantly increased to $2.59 billion, largely driven by a substantial rise in cash and cash equivalents to $783.6 million from financing activities, while total liabilities remained stable Condensed Balance Sheet Highlights (in millions) | Account | June 29, 2025 | Dec 29, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $783.6 | $329.3 | | Total current assets | $1,428.9 | $872.1 | | Total assets | $2,585.7 | $1,950.9 | | Total current liabilities | $322.4 | $296.7 | | Total liabilities | $625.7 | $597.7 | | Total stockholders' equity | $1,960.0 | $1,353.2 | Statements of Cash Flows For the first six months of 2025, Kratos used $40.9 million in cash from operating activities, while financing activities provided a substantial net cash inflow of $536.3 million, primarily from common stock issuance Condensed Statement of Cash Flows (Six Months Ended, in millions) | Activity | June 29, 2025 | June 30, 2024 | | :--- | :--- | :--- | | Net cash used in operating activities | ($40.9) | ($2.0) | | Net cash used in investing activities | ($43.1) | ($40.8) | | Net cash provided by financing activities | $536.3 | $279.0 | | Net increase in cash | $454.3 | $235.4 | | Cash at end of period | $783.6 | $308.2 | Non-GAAP Financial Measures This section provides reconciliations of Kratos's GAAP financial results to non-GAAP measures such as Adjusted EBITDA and Adjusted EPS, along with explanations of these metrics Reconciliation of Net Income to Adjusted EBITDA The company reconciled its Q2 2025 GAAP Net Income of $2.9 million to a Non-GAAP Adjusted EBITDA of $28.3 million, with key adjustments including depreciation, stock-based compensation, and income tax provision Reconciliation of Net Income to Adjusted EBITDA (Q2, in millions) | Line Item | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Net income | $2.9 | $7.9 | | Interest expense, net | $1.2 | ($0.1) | | Provision for income taxes | $1.7 | $4.8 | | Depreciation | $9.0 | $8.2 | | Stock-based compensation | $8.6 | $6.6 | | Other adjustments | $2.9 | $2.5 | | Adjusted EBITDA | $28.3 | $29.9 | Computation of Adjusted Earnings Per Share (Adjusted EPS) Kratos reported a Q2 2025 GAAP diluted EPS of $0.02, which, after adjustments for non-cash items and a non-GAAP tax rate, resulted in a Non-GAAP Adjusted EPS of $0.11 Reconciliation of GAAP EPS to Adjusted EPS (Q2) | Line Item | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Diluted EPS (GAAP) | $0.02 | $0.05 | | Adjustments (Amortization, Depreciation, Stock Comp, etc.) | $0.15 | $0.12 | | Income taxes on Non-GAAP adjustments | ($0.06) | ($0.03) | | Adjusted EPS (Non-GAAP) | $0.11 | $0.14 | Explanation of Non-GAAP Measures and Other Metrics Kratos utilizes non-GAAP measures like Adjusted EBITDA, Adjusted EPS, and Free Cash Flow to provide a clearer view of its core operating performance, while the Book-to-Bill Ratio indicates future revenue potential - Non-GAAP measures like Adjusted EBITDA and Adjusted EPS are used to exclude items such as stock-based compensation, acquisition costs, and amortization to better reflect ongoing operating performance[26] - The Book-to-Bill Ratio is presented as a key performance indicator, measuring new bookings against revenues to show how the backlog is being utilized or built over a period[27][28]