Executive Summary

Strong top-line and bookings momentum; revenue grew 17.1% YoY to $351.5M and exceeded the company’s Q2 guide ($300–$310M) and Street, while Adjusted EPS of $0.11 beat consensus; FY25 revenue and Adjusted EBITDA guidance were raised. Beat drivers were KGS strength (Defense Rocket Systems timing, C5ISR) with a partial offset from KUS cost/mix pressures .
Mix and inflation on multi‑year fixed-price contracts weighed on profitability; Q2 Adjusted EBITDA margin was 8.1% (vs 10.0% prior-year), and operating income fell YoY; management cited higher material/subcontractor costs and less favorable mix in Space/Training/Cyber .
Balance sheet and liquidity materially improved: cash rose to $783.6M at Q2 end (equity raise in late June) and term loan (~$180M) repaid post-quarter; FY25 capex remains elevated ($125–$135M) to fund capacity expansions tied to hypersonics, engines, microwave, and secure space facilities .
Forward catalysts: contract momentum (Poseidon single‑award up to $750M; Deimos down‑select), potential Valkyrie production awards, MACH‑TB 2.0 ramp, and Golden Dome ecosystem exposure; LTM book‑to‑bill 1.2x, backlog $1.414B, pipeline $13.0B .

What Went Well and What Went Wrong

What Went Well
- KGS outperformance: KGS revenue +27.1% organic with standout growth in Defense Rocket Support (+116.6%) and C5ISR (+25.4%); KGS Adj. EBITDA rose to $24.7M despite mix headwinds .
- New business visibility: management disclosed post‑Q2 wins/downsels (Poseidon up to $750M; Deimos) and a record $13B opportunity pipeline; LTM book‑to‑bill 1.2x supports FY/FY+ growth trajectory .
- Strategic positioning and policy tailwinds: CEO highlighted U.S./NATO budget expansion, executive actions to streamline UAS procurement, and Congressional initiatives (FORGED/SPEED Acts) expected to benefit Kratos’ first‑to‑market strategy: “We believe that we are seeing direct positive impact from these actions” .
What Went Wrong
- Margin compression and mix: Total Adj. EBITDA margin fell to 8.1% (vs 10.0% LY), with Space/Training/Cyber mix and fixed‑price inflation pressures weighing; operating income declined YoY .
- KUS softness vs tough comp: KUS revenue $73.2M (vs $85.8M LY, which included a $17.4M international target drone shipment); KUS Adj. EBITDA fell to $3.6M; multi‑year fixed‑price cost growth continues to pressure KUS margins until lot renegotiations .
- Q2 book‑to‑bill below 1.0: Consolidated 0.7x (though LTM remains a healthy 1.2x), and consolidated backlog declined sequentially due to revenue burn; management framed timing and expects strong bookings in 2H on pending awards .

Financial Results

Headline financials (sequential trend)

Metric	Q4 2024	Q1 2025	Q2 2025
Revenue ($M)	$283.1	$302.6	$351.5
GAAP Net Income ($M)	$3.9	$4.5	$2.9
GAAP Diluted EPS ($)	$0.03	$0.03	$0.02
Adjusted EPS ($)	$0.13	$0.12	$0.11
Adjusted EBITDA ($M)	$25.2	$26.7	$28.3
Adjusted EBITDA Margin (%)	8.9%	8.8%	8.1%
Operating Income ($M)	$3.0	$6.6	$3.7

Q2 2025 actual vs S&P Global consensus

Metric	Q2 2025 Actual	S&P Global Consensus	Beat/Miss
Revenue ($M)	$351.5	$305.8*	Beat
Primary EPS ($)	$0.11	$0.093*	Beat

Values marked with * retrieved from S&P Global.

Segment performance (Q2 YoY)

Segment	Q2 2024	Q2 2025
KUS Revenue ($M)	$85.8	$73.2
KUS Operating Income (Loss) ($M)	$3.6	$(0.3)
KUS Adjusted EBITDA ($M)	$7.2	$3.6
KUS Adj. EBITDA Margin (%)	8.4%	4.9%
KGS Revenue ($M)	$214.3	$278.3
KGS Operating Income ($M)	$15.5	$12.6
KGS Adjusted EBITDA ($M)	$22.7	$24.7
KGS Adj. EBITDA Margin (%)	10.6%	8.9%

KPIs and backlog/bookings

KPI	Q2 2025	LTM
Consolidated Book-to-Bill (x)	0.7x	1.2x
Consolidated Bookings	$257.0M	$1.401B
Consolidated Backlog	$1.414B	—
Pipeline (B&P)	$13.0B	—
Funded/Unfunded Backlog	$1.125B / $288.6M	—
KUS Book-to-Bill (x)	0.9x	1.3x
KUS Bookings	$63.7M	$359.5M
KUS Backlog	$337.6M	—
KGS Book-to-Bill (x)	0.7x	1.2x
KGS Bookings	$193.3M	$1.041B
KGS Backlog	$1.076B	—

Additional mix and customer metrics: 65% fixed‑price / 31% cost‑plus / 4% T&M; 71% U.S. government, 12% commercial, 17% foreign in Q2 .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenues	FY25	$1.260–$1.285B	$1.290–$1.310B	Raised
Adjusted EBITDA	FY25	$112–$118M	$114–$120M	Raised
Operating Income	FY25	$34–$39M	$29–$34M	Lowered (mix, costs)
R&D	FY25	$40–$42M	$40–$42M	Maintained
Depreciation	FY25	$35–$37M	$35–$38M	Slightly raised
Amortization	FY25	$12–$13M	$12–$14M	Raised (upper end)
Stock‑based Compensation	FY25	$31–$32M	$34–$36M	Raised
Operating Cash Flow	FY25	$50–$60M	$50–$60M	Maintained
Capital Expenditures	FY25	$125–$135M	$125–$135M	Maintained
Free Cash Flow Use	FY25	($75)–($85)M	($75)–($85)M	Maintained
Revenues	Q3 2025	n/a	$315–$325M	Initial
Adjusted EBITDA	Q3 2025	n/a	$25–$30M	Initial
R&D	Q3 2025	n/a	$10–$11M	Initial
Operating Income	Q3 2025	n/a	$3–$7M	Initial

Earnings Call Themes & Trends

Topic	Previous Mentions (Q4’24 and Q1’25)	Current Period (Q2’25)	Trend
Hypersonics (MACH‑TB)	New awards, 2026 growth driver; payload/test facilities investment	Timing of a hypersonic mission aided Q2; ~$400M in reconciliation bill for MACH‑TB; ramp in ’26–’27	Accelerating
Tactical drones (Valkyrie/CCA)	Ongoing production lots ahead of award; not in base case	Marines/OSD comments toward program of record; Airbus partnership for EU variant; revenue recognition mechanics if award hits	Improving line‑of‑sight
Golden Dome ecosystem	Not detailed prior	Strong positioning across space ground, radars, interceptors; target drones for testing; international sales at higher margins	Expanding
Engines/Propulsion (GEK)	Facility plans; 2026–2029 expected ramp	GEK production late ’27; potential billion‑dollar business at scale (50/50 JV with GE)	Building capacity
Microwave/Prometheus JV	Israel facility move; growth and margins	Prometheus energetics JV ramp; base demand with Rafael, merchant supply expansion; 2028–2029 scale potential	Scaling
Supply chain/cost inflation	Fixed‑price pressures, inventory builds	Cost pressure persists on a few sole‑source suppliers impacting margins until lot renewals; vertical integration efforts ongoing	Persistent but managed
Capital allocation/liquidity	FY25 capex elevated; equity raise in 2024	Equity raise (June) boosted cash; term loan repaid; capex ~$125–$135M this year, higher in ’26 for facility buildouts	Strengthened liquidity

Management Commentary

CEO on demand and positioning: “A generational recapitalization of strategic weapon systems is underway… Global Defense and National Security Market is… approximately $2.5 trillion… expected to grow… We believe that we are seeing direct positive impact” .
CEO on awards pipeline: “We have been successful as prime, on a new, single award, potential total value up to $750 million… Poseidon… and… down selected on another large… Deimos” .
CFO on inflation/mix: “Adjusted EBITDA… above our estimated range… offset partially by continued increase of contractor and material costs on certain multi‑year firm fixed price contracts… and a less favorable mix in our Space, Training and Cyber business” .
CFO on cash and debt: “Since quarter end, we have paid off our entire term loan balance of approximately $180,000,000… revolver undrawn except for ~$10M of LCs” .

Q&A Highlights

2H revenue phasing: H2 implied below H1 due to a hypersonic mission timing pulled into Q2; not demand‑related .
Valkyrie revenue mechanics: If aircraft are complete at award, revenue can be recognized at signing (e.g., 15 units at $10M each = $150M) with partial recognition if incomplete .
Funding catalysts: ~$400M in reconciliation bill for MACH‑TB; additional allocations for low‑cost cruise missiles, solid rocket motors, and Marine UCAVs supportive of engines, hypersonics, and drones .
Supply chain risk: Majority of suppliers stable; a few sole‑source items are costly and pressure margins until renegotiation on next lots; vertical integration ongoing .
Capacity build: Current Valkyrie line can deliver ~50/year; plan in place to expand to 100/year with added autoclave .

Estimates Context

Q2 2025 vs S&P Global: Revenue $351.5M vs $305.8M consensus (Beat); Primary EPS $0.11 vs $0.093 (Beat) (consensus values from S&P Global*).
Q3 2025 setup: Company guides revenue $315–$325M and Adjusted EBITDA $25–$30M vs S&P revenue consensus ~$322.2M* and EPS ~$0.125*; guidance aligns around Street revenue midpoint; no EPS guidance provided.
Forward consensus snapshots: Q4 2025 revenue ~$327.6M*; Q1 2026 revenue ~$346.1M* and EPS ~$0.154*.
Values marked with * retrieved from S&P Global.

Key Takeaways for Investors

Quality beat with upward FY guide: Revenue and Adjusted EPS beat with FY25 revenue and Adj. EBITDA raised; however FY25 operating income range trimmed on mix/inflation, signaling prudent profit cadence while scaling .
KGS driving the bus: Rocket Systems timing and C5ISR strength powered the outperformance; watch for MACH‑TB and air/missile defense programs to sustain KGS momentum .
KUS pressured near term; high‑beta upside with awards: Fixed‑price cost headwinds and mix weighed, but pending Valkyrie/CCA and international opportunities present asymmetric upside not in base case, with potentially favorable DCS margins .
Book‑to‑bill timing masked robust demand: Q2 0.7x reflects timing; LTM 1.2x, near‑record backlog and $13B pipeline underpin 2H bookings and 2026 step‑up .
Liquidity and capacity in place: ~$784M cash at Q2 and term loan repaid; capex focused on propulsion, hypersonics, microwave, and secure space infrastructure to support multi‑year ramps .
Policy tailwinds and strategic wins: Executive/legislative initiatives (FORGED/SPEED, “Unleashing American Drone Dominance”) plus Poseidon/Deimos enhance visibility; management expects margin expansion from 2026 as higher‑margin programs ramp and contracts are renegotiated .
Watch list: Timing of Valkyrie program awards and revenue recognition, MACH‑TB execution cadence, supplier cost renegotiations, and booking conversions (Poseidon, Deimos) into backlog through 2H25–2026 .

Notes on Non‑GAAP and Adjustments

Q2 includes non‑cash stock comp $8.6M, company‑funded R&D $10.2M, $2.0M legal accrual, and a $(1.1)M non‑recurring credit; Adjusted EBITDA of $28.3M reflects these adjustments per company definition .

Other Relevant Q2 Press Releases / Capital Actions

Equity offering priced June 26 (~$483.8M expected net proceeds) to fund capacity/investments, M&A, and debt paydown; reflected in Q2 cash balance and post‑quarter term loan repayment .

KRATOS DEFENSE & SECURITY SOLUTIONS, INC. (KTOS)·Q2 2025 Earnings Summary