Kratos (KTOS) Q2 Revenue Jumps 17% | The Motley Fool

Kratos Defense & Security Solutions (KTOS 0.42%), a technology-focused defense contractor specializing in unmanned systems, hypersonics, and advanced electronic systems, released its Q2 FY2025 results on August 7, 2025. The headline news was strong revenue growth and an earnings beat: GAAP revenue reached $351.5 million, 17.1% above the prior year and well ahead of the GAAP analyst estimate of $306.45 million. Adjusted EPS (a measure of profit excluding one-time items) came in at $0.11, also surpassing consensus. The results were mixed beneath the surface, as GAAP net income and margins declined year over year amid higher investment and legacy contract pressures. Overall, the period showed notable sales progress in key segments but also ongoing challenges in cash flow, backlog, and profit margins.

Source: Analyst estimates provided by FactSet. Management expectations based on management’s guidance, as provided in Q1 2025 earnings report.

About Kratos Defense & Security Solutions

Kratos operates as a defense and national security innovator, focusing on the rapid development and affordable production of unmanned systems, hypersonic vehicles, and advanced electronics. Its customers include the U.S. Department of Defense and allied government agencies.

The company has built its business around agility and “first-to-market” innovation. Areas of emphasis include unmanned aerial systems (drones), hypersonic technology, smart satellites, and ground-based command infrastructure. Key success factors are persistent innovation, robust customer relationships, and effective management of backlog and production scale. Strong industry ties and cutting-edge research and development (R&D) are essential for continued contract wins, especially as defense priorities shift toward more advanced and efficient systems.

Quarter in Review: Sales, Margins, and Underlying Trends

The quarter’s revenue rose 17.1% over the same period last year. This strong performance reflected growth in the core Government Solutions segment (KGS), which reported 27.1% organic revenue growth. Within this segment, Defense Rocket Support (hypersonics) saw organic revenue growth of 116.6%. Sales related to command, control, communications, computers, combat systems, intelligence, surveillance, and reconnaissance (C5ISR) also delivered 25.4% organic growth. These are product families critical to the modernization of defense, offering capabilities like advanced target tracking and missile defense integration.

The Unmanned Systems segment, which includes tactical drones and unmanned aerial targets, posted GAAP revenue of $73.2 million, down from the previous year. The decline mainly reflected the absence of a single significant international shipment from the prior year, as well as fixed-price contract pressures. Margins in this segment narrowed considerably, leading to a segment operating loss of $0.3 million, as legacy contracts signed before recent inflationary pressures have continued to impact profitability. Management stated relief on these contracts is unlikely before cost rebasing in 2027–2028.

Gross profit (GAAP) came in at $73.8 million compared to $77.2 million for Q2 FY2024, as higher costs and investment eroded margins. Adjusted EBITDA, a non-GAAP measure of operating profitability before interest, taxes, depreciation, and non-cash expenses, declined 5.4% year over year. GAAP net income dropped year over year, reflecting both margin compression and increased investment across R&D and production ramp-up. Operating income for Government Solutions fell despite higher sales, mostly due to revenue mix shifts and temporary downtime tied to moving production facilities for the company’s Israeli-based Microwave Electronics business. These microwave products are used in missile and radar systems, with customer programs including the Barak missile family for India and air defense contracts in Israel.

The company’s bookings totaled $257.0 million, with a book-to-bill ratio of 0.7x—meaning new orders lagged shipments in the period. Consolidated backlog at quarter-end stood at $1.414 billion, lower than the $1.508 billion consolidated backlog reported for Q1 FY2025. However, on a trailing twelve-month basis ended June 29, 2025, book-to-bill remained healthy at 1.2x, and the overall contract proposal pipeline increased to a record $13.0 billion as of June 29, 2025, signaling continued strong demand.

Kratos continued to invest heavily for growth, recording $10.2 million in R&D spending. Major projects included building early production lots of the Valkyrie tactical drone ahead of formal contract awards, supporting a “first-to-fly” approach in the drone family. Strategic investments were also made in hypersonics, where internally developed vehicles and rocket motors (such as Zeus, Erinyes, and Dark Fury) are now operational and underpin future contract opportunities. Management emphasized progress on major programs, including a new sole-sourced contract (codenamed Poseidon) with potential total value up to $750 million, as disclosed following the quarter.

Cash flow from operations was negative, and Free cash flow was also negative due to heavy investment in manufacturing, inventory, and R&D ahead of anticipated demand. The balance sheet remains strong, though, supported by a recent equity raise boosting cash reserves to $783.6 million against $169.8 million of debt as of June 29, 2025. Management confirmed that capital expenditures will remain elevated for FY2025 as new programs ramp online.

Financial Outlook and What Lies Ahead

Looking forward, management increased full-year guidance. Expected revenue is now $1,290 to $1,310 million. Adjusted EBITDA is forecast at $114 to $120 million, while projected capital expenditures remain high at $125 to $135 million. For Q3 2025, the company expects revenue of $315 to $325 million and adjusted EBITDA of $25 to $30 million. Full-year free cash flow is forecast to remain negative—between ($75) million and ($85) million—due to continued elevated investment. The guidance assumes persistent industry cost pressures and robust demand, but also signals management’s confidence in both order pipeline and long-term margin potential as new, higher-profit programs enter production in 2026.

Investors should keep an eye on the pace of contract awards and order flow, particularly regarding the book-to-bill ratio and backlog trends if new business intake remains sluggish in future quarters. The company continues to face margin pressure and operating losses in the Unmanned Systems business due to legacy fixed-price contracts. Production investments and contract wins tied to innovations in hypersonics, engines, and advanced electronics will be critical drivers for the company’s future results.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.