Kratos spends its own money to develop drones, rocket engines, and radar electronics ahead of demand, then wins sole-source defense contracts once the Pentagon adopts them — collecting orders for decades once a system is fielded.
How Kratos Defense makes money
Kratos spends its own money upfront to develop weapons components—drones, rocket and missile engines, radar electronics—faster and cheaper than a traditional cost-plus defense program would. Once the Pentagon or an ally adopts that component into a fielded weapons system, Kratos then collects orders for as long as that system stays in service, often decades.
$310M cumulative in UAS
Valkyrie drone, Zeus rocket, GEK800 engine
Converts to production
Simplified. Source: 10-K FY2025, p.9–11.
Where the revenue comes from
Revenue by segment — FY2025
KGS covers electronics, satellites, rocket systems, and training; its FY2025 operating margin was 24.4% versus 17.4% for Unmanned Systems. Source: 10-K FY2025, p.55; Note 13.
Source: 10-K FY2025, p.F-12; Q2 FY2026 earnings call, Aug. 4, 2026.
Customers and competitors
Kratos sells almost entirely to governments, directly or through prime contractors: 68% of revenue is U.S. government-related, 20% is allied foreign governments, and 12% flows through large primes like Lockheed Martin. Unusually for a defense contractor this size, no single contract exceeded 5% of FY2025 revenue — concentration risk here is about the payer (the U.S. federal budget), not any one customer.
- Anduril — a venture-funded competitor raising capital at far higher valuations and moving more aggressively into the same drone and missile markets.
- L3Harris / Northrop Grumman — more than 10 times Kratos's size; simultaneously competitors and, through subcontracting, customers and partners.
- AeroVironment — a publicly traded drone specialist that's Kratos's closest direct comparison by market cap and revenue scale.
Source: 10-K FY2025, p.8, 11, 13–14; Q2 FY2026 earnings call.
The metric that matters most in this sector
Because defense contracts must be won before revenue can be recognized, backlog and book-to-bill (new orders divided by revenue) are the clearest signals of where revenue is headed one to two years out.
Backlog, five-year trend
Trailing-12-month book-to-bill is 1.3x on $1.99B of new orders; the bid pipeline stands at $15B, and 54% of current backlog is expected to convert to revenue in 2026. Source: 10-K FY2021–FY2025 backlog sections; Q2 FY2026 earnings call.
Leadership and ownership
CEO Eric DeMarco joined as COO in 2003 and has run the company as President and CEO since April 2004 — roughly 22 years. He isn't the founder; he previously served as COO and CFO at Titan Corporation. Insider ownership across officers and directors is thin at 1.5%. The largest shareholder is BlackRock at 11.5% (passive institutional). Two rounds of equity raises in 2024–2025 totaling $890M pushed shares outstanding up to roughly 187 million, diluting existing holders in the process.
Source: DEF 14A 2026, p.9, p.106.
Capital returns
Kratos has never paid a dividend and has no plans to. It also hasn't bought back stock — instead, it has raised $890M in two equity offerings over the past two years, moving in the opposite direction of capital return. That capital was used in July 2025 to fully repay outstanding debt ($177M), leaving total debt at zero, but the tradeoff was meaningful dilution of existing shareholders.
Source: 10-K FY2025, p.29 (dividend policy), p.56 (debt repayment).
How this company could fail
- Government shutdown and budget-delay risk — the company weathered two shutdowns in 2025–2026 alone, and reliance on continuing resolutions keeps pushing back the timing of new orders and revenue recognition.
- Cash flow lagging net income — FY2025 net income was a positive $22M, but growth in receivables and inventory drove operating cash flow to -$42.1M; after $95.3M of capex, free cash flow was -$137.4M. The company is burning cash to fund its growth.
- Venture-backed new entrants — Anduril and similar startups are raising private capital at valuations far above Kratos's, competing on price and technology in the same drone and missile markets, a long-term margin risk.
Five-year financials
| FY21 | FY22 | FY23 | FY24 | FY25 | |
|---|---|---|---|---|---|
| Revenue | 811.5 | 898.3 | 1,037.1 | 1,136.3 | 1,346.8 |
| YoY growth | — | +10.7% | +15.5% | +9.6% | +18.5% |
| Operating income | 27.9 | -2.6 | 31.1 | 29.0 | 25.6 |
| Operating margin | 3.4% | -0.3% | 3.0% | 2.6% | 1.9% |
| Free cash flow | -11.2 | -71.0 | 12.8 | -8.5 | -137.4 |
| Total debt | 296.7 | 257.5 | 227.5 | 185.0 | 0.0 |
Source: 10-K FY2021–FY2025, Results of Operations / Liquidity and Capital Resources sections.
What we still don't know
- How much of the Mach-TB 2.0 contract's options (up to $1.45B) will actually be exercised can't be determined from this filing alone.
- When the GEK800/GEK1500 engines being co-developed with GE Aerospace start contributing meaningful revenue requires watching future earnings calls.
- Whether the company's raised FY2026 revenue-growth guidance of 19–23% actually materializes in the back half will be confirmed with Q3 FY2026 results, due November 2026.
Frequently asked questions
What does Kratos Defense do?
Kratos self-funds development of drones, rocket and missile engines, and radar electronics ahead of a contract, then wins sole-source defense orders once its technology is adopted into a fielded weapons system.
Is Kratos profitable?
It reported positive net income in FY2025 ($22M), its third straight profitable year, but free cash flow was deeply negative (-$137.4M) as receivables, inventory, and capex grew faster than earnings.
What is Kratos Defense's market cap?
As disclosed on its Aug. 4, 2026 earnings call, Kratos traded at $46.98 per share, for a market cap of roughly $8.81 billion.