0001069258-25-000058
SEC filingRevenue growth of 26% driven by KGS and Unmanned Systems, but gross margin compressed 290 bps due to cost pressures.
For the three months ended September 28, 2025, total revenue increased 26.0% to $347.6 million from $275.9 million in the prior year quarter. The growth was driven by a 23.0% increase in the Kratos Government Solutions (KGS) segment and a 35.8% increase in the Unmanned Systems (US) segment. Product sales grew 33.8% to $230.2 million, while service revenues rose 13.0% to $117.4 million.
Gross margin declined to 22.2% from 25.1% in the prior year quarter, a decrease of 290 basis points. The compression was driven by increased labor and material costs, particularly on longer-term firm fixed-price production contracts. Service margins fell to 22.3% from 26.2%, and product margins declined to 22.1% from 24.4%. KGS segment margins decreased to 23.9% from 27.4%, while US segment margins slipped to 17.0% from 17.6%.
SG&A expenses increased $7.2 million to $59.8 million due to higher revenue volume and headcount, but as a percentage of revenue improved to 17.2% from 19.1%. R&D expenses were relatively flat at $10.0 million. Total other income swung to $4.8 million from a $0.7 million expense, primarily due to the reduction of interest expense from the payoff of Term Loan A debt on July 2, 2025, and higher interest income on cash balances following the June 2025 public offering. The provision for income taxes was $3.2 million, compared to $2.6 million in the prior year.
Kratos Government Solutions (KGS): Revenue increased 23.0% to $260.4 million, with product sales up 32.8% to $145.7 million and service revenues up 12.5% to $114.7 million. Growth was broad-based across all business units, with the most notable organic increases in the Defense Rocket Support business (driven by hypersonic systems), space/satellite/cyber, C5ISR, microwave products, and turbine technologies. The acquisition of certain assets from Norden Millimeter contributed $6.3 million in revenue.
Unmanned Systems (US): Revenue surged 35.8% to $87.2 million, driven by an international shipment of tactical Valkyrie aircraft during the quarter. Product sales increased 35.6% to $84.5 million, while service revenues rose 42.1% to $2.7 million.
Management highlighted a record total backlog of $1.480 billion as of September 28, 2025, up from $1.294 billion a year earlier, with $1.234 billion funded. The company expects to recognize approximately 19% of remaining total backlog as revenue in fiscal year 2025, 47% in fiscal year 2026, and the balance thereafter. The company is making significant capital investments across multiple facilities to address its backlog and opportunity pipeline, including expansion of unmanned jet drone manufacturing, hypersonic system facilities, and microwave electronics capacity. Management believes the company is well-positioned for the generational recapitalization of weapon systems occurring globally, with priority areas including jet unmanned aerial drones, rocket and hypersonic systems, C5ISR, and microwave electronics. However, the company continues to face headwinds from supply chain disruptions, inflation, and labor shortages, which are expected to persist and may continue to pressure margins.
Net income for the period was $16.1 million, yet operating cash flow was negative $(54.2) million, indicating significant non-cash or timing-driven working capital consumption. Key working capital drags included a large increase in unbilled receivables ($80.5 million) and a decrease in billings in excess of costs ($14.7 million). These offset positive non-cash items such as depreciation and amortization ($34.1 million) and stock-based compensation ($26.4 million).
Capital expenditures increased sharply to $71.1 million (vs. $44.6 million in the prior year), representing over 440% of net income and 131% of prior-year CFO. This high capex intensity suggests the company is investing heavily in growth or infrastructure, but it has not yet translated into operating cash flow generation.
Free cash flow (CFO minus capex) was $(125.3) million, far above any shareholder returns. The company did not repurchase shares or pay dividends in the period. Financing cash flow was strongly positive ($360.2 million) driven by a large common stock issuance, which replenished cash and funded the operating and investing shortfalls.