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

PART I. FINANCIAL INFORMATION Financial Statements The company's financial position strengthened, with total assets increasing to $2.59 billion from $1.95 billion, largely due to a significant rise in cash and cash equivalents from a recent equity offering. However, net income for the quarter and six-month period decreased compared to the prior year, driven by lower gross margins despite higher revenues. Cash flow from operations was negative, reflecting increased working capital needs for inventory and other assets Condensed Consolidated Balance Sheet Highlights (in millions) | Account | June 29, 2025 | December 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 | Condensed Consolidated Statements of Operations Highlights (in millions, except per share data) | Metric | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $351.5 | $300.1 | $654.1 | $577.3 | | 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 | | Diluted EPS | $0.02 | $0.05 | $0.05 | $0.06 | Condensed Consolidated Statements of Cash Flows Highlights (in millions) | Activity | Six Months Ended June 29, 2025 | Six Months Ended 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 | Note 2. Acquisitions On February 4, 2025, the company acquired certain assets of Norden Millimeter, Inc. for a total consideration of $37.0 million, primarily paid in Kratos common stock. This acquisition added $29.9 million in goodwill and is included in the KGS segment, contributing $5.9 million in revenue for the quarter - The company acquired certain assets of Norden Millimeter, Inc. on February 4, 2025, for a total consideration of $37.0 million, primarily consisting of $32.2 million in common stock and a $6.0 million holdback[38][44] Preliminary Purchase Price Allocation for Norden (in millions) | Account | Value | | :--- | :--- | | Total identifiable net assets acquired | $21.6 | | Total identifiable net liabilities assumed | $(14.5) | | Goodwill | $29.9 | | Net assets acquired | $37.0 | - The acquired Norden assets contributed $5.9 million in revenue and $0.4 million in operating income for the three months ended June 29, 2025[43] Note 3. Revenue Recognition The company's revenue is primarily recognized over time using the cost-to-cost method. As of June 29, 2025, remaining performance obligations (a proxy for backlog) stood at approximately $1.41 billion. Revenue is disaggregated by segment, contract type, and customer, with the U.S. Government being the largest customer - Remaining performance obligations totaled $1,413.6 million as of June 29, 2025. The company expects to recognize approximately 36% of this amount as revenue in fiscal year 2025[50] Revenue by Segment and Contract Type - Q2 2025 (in millions) | Segment | Fixed price | Cost plus fee | Time and materials | Total | | :--- | :--- | :--- | :--- | :--- | | Kratos Government Solutions | $170.3 | $94.8 | $13.2 | $278.3 | | Unmanned Systems | $59.2 | $13.1 | $0.9 | $73.2 | | Total Revenues | $229.5 | $107.9 | $14.1 | $351.5 | Revenue by Customer - Q2 2025 (in millions) | Segment | U.S. Government | International | U.S. Commercial & Other | Total | | :--- | :--- | :--- | :--- | :--- | | Kratos Government Solutions | $186.7 | $52.2 | $39.4 | $278.3 | | Unmanned Systems | $62.0 | $9.0 | $2.2 | $73.2 | | Total Revenues | $248.7 | $61.2 | $41.6 | $351.5 | Note 9. Debt As of June 29, 2025, the company had $180.0 million outstanding on its Term Loan A. Subsequent to the quarter's end, on July 2, 2025, the company fully extinguished this debt using proceeds from a recent equity offering. The $200 million revolving credit facility remains undrawn and available - As of quarter-end, total debt was $180.0 million under the Term Loan A, with no borrowings on the $200 million revolving credit facility[88] - On July 2, 2025, subsequent to the quarter end, the company extinguished the entire outstanding Term Loan A balance of $177.5 million using proceeds from its June 2025 equity offering[88][105] - In anticipation of the debt extinguishment, the company terminated its interest rate swap contract on June 30, 2025, receiving a payment of approximately $0.3 million[87][114] Note 10. Segment Information The Kratos Government Solutions (KGS) segment reported a 29.9% revenue increase to $278.3 million in Q2 2025, with operating income of $12.6 million. The Unmanned Systems (US) segment saw a 14.7% revenue decrease to $73.2 million, resulting in an operating loss of $0.3 million Segment Performance Comparison (in millions) | Metric (Q2 2025) | KGS | US | Total | | :--- | :--- | :--- | :--- | | Total revenues | $278.3 | $73.2 | $351.5 | | Total segment operating income (loss) | $12.6 | $(0.3) | $12.3 | | Metric (Q2 2024) | | | | | Total revenues | $214.3 | $85.8 | $300.1 | | Total segment operating income | $15.5 | $3.6 | $19.1 | - For the six months ended June 29, 2025, KGS revenues grew to $517.8 million from $432.1 million year-over-year, while US revenues decreased to $136.3 million from $145.2 million[94][96] - Corporate assets increased significantly to $782.7 million as of June 29, 2025, from $314.8 million at year-end 2024, primarily due to the increase in cash and cash equivalents from the equity offering[98] Note 12. Stockholders Equity - Common Stock The company conducted two major public equity offerings. In February 2024, it raised approximately $331.2 million in net proceeds. In June 2025, it raised an additional $555.9 million in net proceeds to fund investments, capital expenditures, and debt repayment - On June 27, 2025, the company sold 14.9 million shares of common stock in an underwritten offering, receiving approximately $555.9 million in net proceeds[105] - Proceeds from the June 2025 offering were used to pay off the $177.5 million Term Loan A debt and are intended for investments, capex, potential acquisitions, and general corporate purposes[105] - An earlier offering in February 2024 raised net proceeds of approximately $331.2 million, which was used to strengthen the balance sheet and pay down the revolving credit facility[104] Note 13. Significant Customers The U.S. Government remains the company's most significant customer, accounting for 71% of total revenue in Q2 2025, up from 65% in the prior-year quarter - Sales to the U.S. Government represented 71% ($248.7M) of total revenue for the three months ended June 29, 2025, and 69% ($454.2M) for the first six months of 2025[106] Management's Discussion and Analysis of Financial Condition and Results of Operations Management highlights the company's position as a disruptive technology provider amidst a global recapitalization of weapon systems. While revenue grew 17.1% in Q2 2025, driven by the KGS segment, profitability was challenged by lower gross margins due to product mix and cost pressures from inflation and labor shortages. The company maintains a strong liquidity position following a significant equity raise and has a record backlog of $1.41 billion, signaling future growth potential despite macroeconomic headwinds Overview Kratos positions itself as an innovative and disruptive technology company focused on rapidly developing affordable solutions for defense and national security. Key business areas include unmanned systems, hypersonics, satellite ground systems, and microwave electronics. The company is making significant capital investments to expand manufacturing capacity for programs like Valkyrie, hypersonic systems, and jet engines to meet record backlog and pipeline opportunities - Kratos' strategy is to be a disruptive change agent, focusing on affordability and rapid development of mission-critical solutions for defense, national security, and commercial markets[118] - The company is making significant internally funded investments to expand production capacity for key strategic areas, including unmanned jet aircraft (Valkyrie), hypersonic systems (Zeus, Erinyes), jet engines, and microwave electronics[119] Industry Update Management notes the current political environment, including the FY2026 defense budget request of approximately $962 billion, an 11.8% increase. However, the company faces macroeconomic headwinds, including supply chain disruptions, inflation, and a significant industry-wide shortage of qualified labor, which are adversely impacting costs and margins - The fiscal year 2026 DoD budget request of approximately $962 billion represents an 11.8% increase over FY2025 levels, indicating a favorable spending environment for defense priorities[121] - The company continues to be affected by unfavorable macroeconomic conditions, including supply chain disruptions, inflation, and increased costs for materials and parts, which adversely impact operations and profit margins[126] - A significant industry-wide shortage of qualified labor, particularly in STEM fields and for personnel requiring security clearances, is a major operational challenge impacting execution and margins on fixed-price contracts[127] Results of Operations For Q2 2025, revenues increased 17.1% year-over-year to $351.5 million, driven by a 29.9% growth in the KGS segment, while the US segment declined 14.7%. Overall gross margin fell from 25.7% to 21.0%, primarily due to a less favorable product mix and increased labor and material costs on fixed-price contracts. For the six-month period, revenues grew 13.3% to $654.1 million Q2 Revenue Comparison by Segment (in millions) | Segment | Q2 2025 | Q2 2024 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | KGS | $278.3 | $214.3 | $64.0 | 29.9% | | US | $73.2 | $85.8 | $(12.6) | (14.7)% | | Total | $351.5 | $300.1 | $51.4 | 17.1% | - Q2 2025 gross margin decreased to 21.0% from 25.7% in Q2 2024. This was primarily due to a less favorable mix of products in the US segment and the impact of increased labor and material costs on multi-year fixed-price contracts[135] - For the six months ended June 29, 2025, total revenues increased 13.3% to $654.1 million from $577.3 million in the prior year period[141] Backlog As of June 29, 2025, total backlog increased to $1.41 billion from $1.30 billion a year prior. The funded portion of the backlog was $1.13 billion. The company expects to recognize 36% of the total backlog as revenue in the remainder of fiscal 2025 Backlog Comparison (in millions) | Date | Total Backlog | Funded Backlog | | :--- | :--- | :--- | | June 29, 2025 | $1,413.6 | $1,125.0 | | June 30, 2024 | $1,302.7 | $1,070.6 | - The company expects to recognize approximately 36% of its total backlog as revenue in fiscal year 2025, an additional 37% in fiscal year 2026, and the balance thereafter[149] Liquidity and Capital Resources The company's liquidity position is strong, with cash and cash equivalents at $783.6 million as of June 29, 2025, significantly boosted by a $555.9 million net proceed from a June 2025 equity offering. Cash used in operations was $40.9 million for the first six months, driven by working capital needs, including advance inventory purchases. Subsequent to the quarter, the company used offering proceeds to pay off its $177.5 million Term Loan A Summary of Cash Flows (in millions) | Activity | Six Months Ended June 29, 2025 | Six Months Ended 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 | - Cash and cash equivalents increased to $783.6 million at quarter-end, largely due to the $555.9 million in net proceeds from the June 2025 public equity offering[156][162] - On July 2, 2025, the company extinguished all outstanding Term Loan A debt ($177.5 million principal) using proceeds from the June 2025 equity offering. The $200 million revolving credit facility remains undrawn[158] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes in its quantitative or qualitative market risk profile since its Annual Report on Form 10-K for the fiscal year ended December 29, 2024 - There have been no material changes in the quantitative or qualitative aspects of the company's market risk profile since December 29, 2024[174] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of June 29, 2025. No material changes to internal control over financial reporting occurred during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that disclosure controls and procedures were effective at the reasonable assurance level as of June 29, 2025[177] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[178] PART II. OTHER INFORMATION Legal Proceedings The company is subject to various claims and legal actions in the ordinary course of business, including audits by the Defense Contract Audit Agency (DCAA). Management does not currently believe the outcome of these matters will have a material adverse impact on its financial condition or results of operations - The company is subject to routine litigation and other matters arising from the ordinary course of business, the aggregate accruals for which are not material[110] - Contracts with the DoD are subject to audit by the DCAA, which from time to time raises claims about disallowed or disputed costs. The company cannot reasonably estimate the range of loss, if any, from unaudited periods[109] Risk Factors There have been no material changes to the company's risk factors as disclosed in its Annual Report on Form 10-K for the fiscal year ended December 29, 2024 - During the period covered by this Quarterly Report, there have been no material changes in the company's risk factors as previously disclosed in its Annual Report on Form 10-K[181] Unregistered Sales of Equity Securities and Use of Proceeds On February 4, 2025, the company issued 1,095,674 shares of common stock, valued at $32.2 million, to Norden Millimeter, Inc. as part of the consideration for an asset acquisition. The issuance was exempt from registration under Section 4(a)(2) of the Securities Act - On February 4, 2025, the Company issued 1,095,674 shares of its common stock, with a deemed value of $32.2 million, to Norden Millimeter, Inc. as part of the consideration for an asset acquisition[182] - The shares were issued in a private placement, relying on the exemption from registration provided by Section 4(a)(2) of the Securities Act[182] Other Information During the quarter ended June 29, 2025, several company officers and directors, including the President of Unmanned Systems and the CFO, adopted Rule 10b5-1 trading plans for the future sale of company stock Adoption of Rule 10b5-1 Trading Plans by Officers | Name | Title | Action | Adoption Date | | :--- | :--- | :--- | :--- | | Steven Fendley | President, Unmanned Systems | Adopted | 5/12/2025 | | Deanna Lund | EVP, Chief Financial Officer | Adopted | 5/20/2025 | | Thomas Mills | President, C5ISR Systems | Adopted | 6/03/2025 | | David Carter | President, Defense and Rocket Support Services | Adopted | 6/13/2025 | | Stacy Rock | President, Kratos Turbine Technologies | Adopted | 6/16/2025 | Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO as required by the Sarbanes-Oxley Act and the Inline XBRL documents