Kratos Defense Reports Record 2025 Financial Results, Strong 2026 Outlook with 15-20% Organic Revenue Growth and Major Defense Program Wins

Kratos Defense & Security Solutions Reports Strong Q4 and FY2025 Results, Eyes Accelerated Growth in 2026-2027

Key Highlights and Financial Performance

Q4 2025 Revenues: \$345.1 million, up 21.9% year-over-year (organic growth 20.0%).
Full Year 2025 Revenues: \$1.347 billion, a 16.6% organic increase from 2024.
Q4 Book-to-Bill Ratio: 1.3 to 1, with bookings of \$438.3 million; full-year ratio of 1.1 to 1 with bookings of \$1.475 billion.
Adjusted EBITDA: \$34.1 million for Q4 2025; \$119.9 million for full year 2025.
Q4 Net Income: \$5.9 million (\$0.03 per share, GAAP); Adjusted EPS of \$0.18 vs \$0.13 in Q4 2024.
Full Year Net Income: \$22.0 million (\$0.13 per share, GAAP); Adjusted EPS \$0.55 vs \$0.49 in 2024.
Backlog: Record \$1.573 billion at year-end; opportunity pipeline at a record \$13.7 billion.

Business Segment Performance

Unmanned Systems (KUS)

Q4 Revenues: \$68.5 million (12.1% organic growth), driven by Valkyrie drone activity.
FY2025 Revenues: \$292.0 million (7.9% organic growth).
Q4 Operating Income: \$1.9 million (vs. \$0.7 million loss in Q4 2024).
Q4 Adjusted EBITDA: \$6.4 million (vs. \$2.6 million in Q4 2024).
Backlog: \$361.7 million at year-end, up from \$302.5 million in Q3.
Book-to-Bill: 1.9 to 1 in Q4 (1.2 to 1 for the year).

Government Solutions (KGS)

Q4 Revenues: \$276.6 million (22.2% organic growth).
FY2025 Revenues: \$1.055 billion (19.3% organic growth).
Key Drivers: Rocket Systems (+47.4%), Microwave Products (+32.4%), Space/Training/Cyber (+22.7% Q4, +13.6% FY).
Q4 Operating Income: \$17.3 million (vs. \$11.0 million in Q4 2024).
Q4 Adjusted EBITDA: \$27.7 million (vs. \$22.6 million in Q4 2024).
KGS Backlog: \$1.212 billion at end-Q4.

Cash Flow, Investments, and Balance Sheet

Q4 Operating Cash Flow: \$12.1 million, impacted by working capital to support revenue growth and inventory investments.
Full Year Operating Cash Flow: Used \$42.1 million, mainly for receivables, inventory, and facility investments.
Full Year Free Cash Flow: Used \$125.4 million after \$95.3 million in capex and \$12 million proceeds from Valkyrie asset sales.
Cash and Equivalents: \$560.6 million at year-end 2025, compared to \$329.3 million in 2024.

Guidance and Outlook for Investors

Fiscal 2026 Revenue Forecast: \$1.595–\$1.675 billion (15–20% organic growth expected over 2025).
Adjusted EBITDA Forecast: \$157–\$167 million (margin improvement of ~100bps over 2025).
2027 Outlook: Organic revenue growth expected at 18–23% over 2026, with Adjusted EBITDA margins up another 100bps.
Capex for 2026: \$135–\$145 million, including major investments in advanced manufacturing for hypersonics, Valkyrie production, engine facilities, microwave electronics, and new program initiatives.
Free Cash Flow Use: Expected to be (\$85–\$95 million) in 2026, mainly due to strategic investments ahead of anticipated customer contracts.
Q1 2026: Expected to be the lowest in revenue and margin due to the prior U.S. government shutdown impacting contract timing.
Stronger 2H 2026 Expected: As delayed contracts and funding flow in, revenue and EBITDA are expected to accelerate in the second half.

Strategic and Program Updates

Valkyrie Tactical Drones: Kratos plans to ramp up Valkyrie drone production to 40 units annually by the end of 2027, following program wins including the CCA award with Northrop Grumman and potential sole-source deals.
Rocket Motor Orders: 120 Zeus and Oriole solid rocket motors on order, with deliveries starting in Q3 2026 and ramping into 2027, supporting hypersonic and other vehicle launches.
Hypersonic Missile Programs: Selected for next-gen hypersonic missile development; Kratos is positioned for a potential \$1 billion sole-source hypersonic contract by year-end—highlighted as a key future growth driver.
Major Investments: Ongoing expansion in hypersonics, C5ISR, microwave electronics, engine test facilities, and satellite/space ground systems.
Recent Acquisitions: Nomad Global Communication Solutions closed; Orbit Technologies acquisition pending (not yet included in forecasts).
Bid and Proposal Pipeline: At a record \$13.7 billion, indicating strong future opportunity set.

Management Commentary

“We finished 2025 exceeding our financial objectives for the fourth quarter, generating approximately 20 percent Q4 year-over-year organic revenue growth, a 1.3 to 1 book-to-bill ratio, record backlog and opportunity pipeline. Kratos is positioned to achieve our 2026 and 2027 financial targets, and we expect our business to accelerate throughout 2026 as several new programs, contracts, and initiatives begin, ramp, and expand.”

— Eric DeMarco, President & CEO

The U.S. defense funding environment has improved materially with the passing of the NDAA and appropriations bill, supporting Kratos’ growth trajectory.
Kratos’ strategy of making investments ahead of government commitments (e.g., Valkyrie, hypersonics, facilities) is now paying off as the defense industrial base undergoes generational recapitalization.
The company remains laser-focused on balancing investment and financial returns, and does not pay dividends or buy back stock in order to reinvest for growth.

Risks and Considerations

Financial forecasts do not include any potential large-scale Valkyrie production until delivery schedules are finalized.
Orbit Technologies acquisition not included in guidance until closing.
Ongoing risks include U.S. government funding/timing, supply chain disruptions, inflation, labor market, global geopolitical tensions, and the timing of new program awards.
Continued significant capex and working capital investments are expected to impact free cash flow into 2027, with the expectation of material revenue/margin acceleration as new programs scale.

Conclusion: Price-Sensitive and Shareholder-Relevant Takeaways

Kratos delivered strong organic growth, record bookings, and backlog, and is guiding for further acceleration in 2026–2027.
Major new contract wins, especially in Valkyrie drones and hypersonics, represent potential game-changing revenue opportunities, with guidance not yet including the upside from large-scale tactical drone production or pending M&A.
The company’s aggressive investment posture underscores management’s confidence in capturing a leading share of next-generation national security programs.
Investors should monitor the timing and scale of Valkyrie and hypersonic contract awards, as well as the integration and financial impact of recent and pending acquisitions.

Disclaimer: This article is based on Kratos Defense & Security Solutions’ official financial report for Q4 and full year 2025. All forward-looking statements are subject to risks and uncertainties, including but not limited to government funding, program timing, supply chain, and macroeconomic factors. This article does not constitute investment advice. Please consult official filings and your financial advisor before making investment decisions.