Skip to content
    KTOS
    Earnings call· Jun 2026(Q2 FY26)

    KRATOS DEFENSE & SECURITY SOLUTIONS Q2 FY26 earnings call KTOS

    Aug 4, 2026 Source

    Executive summary

    Kratos Q2 FY26 — Strong Organic Growth and Accelerating Engine/Hypersonic Programs

    Kratos delivered robust organic growth in Q2 FY26, driven by strong demand in its KGS segment and accelerating programs in hypersonics and jet engines. The company is strategically investing in manufacturing capacity and long-lead materials to meet anticipated demand for low-cost mass munitions and advanced defense systems, positioning for continued growth despite foreign currency headwinds and working capital needs.

    Highlights

    5

    • Q2 FY26 revenue of $458.8 million exceeded estimates, with consolidated organic growth of 19.1%.

    • Last 12-month book-to-bill ratio of 1.3:1 and total bookings of $1.99 billion demonstrate strong demand.

    • Hypersonic business revenue tracking for $400 million in FY26, increasing to at least $700 million in FY27.

    • Received new program awards including $160 million for directed energy counter UAS and $100 million for space domain awareness.

    • Forecasted full-year FY26 organic revenue growth raised to 19% to 23%.

    Concerns

    3

    • Strength of the Israeli shekel adversely impacted Q2 EBITDA by $2.5 million and is expected to have a $5 million to $7 million negative impact for the full year FY26.

    • Q2 cash flow used in operations was $11 million, primarily due to working capital requirements for revenue growth and long-lead material prepayments.

    • Free cash flow used in operations was $18.9 million, reflecting capital expenditures and investments in development initiatives.

    Guidance & targets

    7
    CategoryTargetConfidence
    Q3 FY26 Organic Revenue Growth
    19% to 25%
    high materiality
    High
    Q4 FY26 Organic Revenue Growth
    19% to 31%
    high materiality
    High
    Full Year FY26 Organic Revenue Growth
    19% to 23%
    high materiality
    High
    Full Year FY26 Adjusted EBITDA Margin Performance
    approximately 100 basis points improvement
    high materiality
    High
    Full Year FY26 Shekel Impact on EBITDA
    approximately $5 million to $7 million negative impact
    medium materiality
    Medium
    Full Year FY26 Total Investments
    approximately $250 million to $270 million
    medium materiality
    High
    Q3 FY26 Revenue
    $460 million to $480 million
    high materiality
    High

    Segment performance

    2
    SegmentRevenueYoYQoQMargin
    KGS
    Excludes $40.2 million from recent Nomad and Orbit acquisitions.
    Defense rocket support organic growth: 50.2%Turbine technologies organic growth: 43.3%Microwave products organic growth: 29.5%Space training and cyber businesses organic growth: 8.7%
    		up $101.4 million22% organically——
    Unmanned Systems
    Increase primarily driven by Valkyrie-related activity.
    		up $5.9 million8.1% organically——

    Operational metrics

    62
    Last 12-month book-to-bill ratio
    1.3:1
    LTM
    Last 12-month bookings
    $1.99 billion
    LTM
    Bid and proposal pipeline
    $15 billioncontinuing to increase
    current
    Hypersonic business revenue
    $200 million
    FY25
    Hypersonic business revenue
    $400 million
    FY26

    Currently tracking for this amount.

    Hypersonic business revenue
    $700 million
    2027

    Expected to increase to at least this amount.

    Small Kratos TDI Spartan turbojet engines production
    3,000
    2027

    Expected to produce for customers.

    Small Kratos TDI Spartan turbojet engines production
    5,000
    2028

    Expected to produce for customers.

    Average selling price of Kratos Spartan engine
    $50,000
    current

    Per turbojet engine.

    JASSM and LRASM missiles acquisition
    10,000-11,000
    next 6-7 years

    Air Force looking to acquire.

    Solid rocket motors procurement
    120
    Q3 FY26

    First receipts expected in Q3 FY26.

    MACH-TB program funding
    $7 billion
    over 5 years

    As reflected in department's budget justification documents.

    China hypersonic missiles estimate
    4,000
    by 2035

    U.S. intelligence estimates.

    Russia hypersonic missiles estimate
    1,000
    by 2035

    U.S. intelligence estimates.

    Adjusted EBITDA
    $38.2 million
    Q2 FY26

    Above estimated range of $30 million to $35 million.

    Cash flow used in operations
    $11 million
    Q2 FY26

    Primarily reflecting working capital requirements.

    Receivables impact on cash flow
    $59 million
    Q2 FY26

    Increase in receivables impacting cash flow.

    Inventory impact on cash flow
    $10 million
    Q2 FY26

    Increase in inventory impacting cash flow.

    Prepaid and other assets impact on cash flow
    $14 million
    Q2 FY26

    Increase in prepaid and other assets impacting cash flow, primarily for long-lead materials.

    Capital expenditures
    $17.2 million
    Q2 FY26
    Proceeds from sale of Valkyries
    $9.3 million
    Q2 FY26

    Reported as inflow in investing activities.

    Consolidated DSOs
    114 daysdecreased from 130 days
    Q2 FY26

    Primarily reflecting achievement of billing milestone events.

    Contract mix - fixed price
    67%
    Q2 FY26
    Contract mix - cost plus
    29%
    Q2 FY26
    Contract mix - time and material
    4%
    Q2 FY26
    Revenue from U.S. federal government
    69%
    Q2 FY26

    Includes DoW, non-DoW federal agencies, and foreign military sales.

    Revenue from foreign customers
    20%
    Q2 FY26
    Revenue from commercial and state and local entities
    11%
    Q2 FY26
    Shekel impact on EBITDA
    $2.5 million
    Q2 FY26

    Negative impact due to strength of Israeli shekel.

    Shekel impact on EBITDA
    $2.8 million
    H1 FY26

    Negative impact due to strength of Israeli shekel.

    Shekel impact on EBITDA
    $5 million to $7 million
    FY26

    Estimated negative impact for the full year.

    US Federal Government Spend (base)
    $850 billion
    FY26

    Part of $1 trillion total spend.

    US Federal Government Spend (additional)
    $150 billion
    FY26

    Part of $1 trillion total spend.

    US Federal Government Spend (total)
    $1 trillion
    FY26
    US Federal Government Spend (base)
    $1,150 billionup 15%
    FY27

    Base budget for FY27.

    US Federal Government Spend (potential reconciliation)
    $350 billion
    FY27

    Potential Reconciliation 4 bill.

    US Federal Government Spend (potential total)
    $1.15 trillion to $1.5 trillion
    FY27

    Estimated range for FY27 total spend.

    Valkyrie production rate
    1.5 planes/month
    by 2027

    Increasing production rate.

    Valkyrie production rate (potential)
    35-40 planes/month
    out years

    Potential rate depending on customer configuration.

    Unmanned Systems EBITDA margin (domestic)
    10% to 15%
    current

    Depending on configuration and quantity.

    Unmanned Systems EBITDA margin (international)
    15% to 20%
    current

    Typically higher fees for international sales.

    KGS segment organic growth rate
    22%YoY
    Q2 FY26

    Excluding impact of recent acquisitions.

    Unmanned Systems segment organic growth rate
    8.1%YoY
    Q2 FY26

    Driven by Valkyrie-related activity.

    KGS Defense rocket support organic growth
    50.2%YoY
    Q2 FY26
    KGS Turbine technologies organic growth
    43.3%YoY
    Q2 FY26
    KGS Microwave products organic growth
    29.5%YoY
    Q2 FY26
    KGS Space training and cyber organic growth
    8.7%YoY
    Q2 FY26
    Acquisition contribution to KGS revenue
    $40.2 million
    Q2 FY26
    Directed energy counter UAS system program award
    $160 million
    initial value
    Space domain awareness system production award
    $100 million
    initial value
    Hypersonic and other funding received
    $400 million
    recently
    Family of affordable mass missiles (FAM) program
    27,000
    FYDP call

    Low-cost cruise missiles.

    Low-cost containerized munitions program
    10,000
    Pentagon target

    Cruise missiles.

    Kratos small turbojet engines potential opportunity
    Tens of thousands
    future
    JDAM-LR potential opportunity
    Tens of thousands
    future

    Could be one of the largest single opportunities.

    Kratos BladeWorks turbofan engine supply chain activation
    Q4 of this year or Q1 of next
    Q4 FY26 or Q1 FY27

    To meet future customer-required delivery schedules.

    Valkyrie Marine Corps CCA program budget
    $1.28 billion
    over 5 years

    Marines plan to spend on their CCA program, as reported in budget justification documents.

    Anaconda facility operational
    Mid-2027
    mid-2027

    Full ramp of anechoic chamber radar facility, radar refurbishment facility.

    Helios facility operational
    Early FY28
    early FY28

    Full ramp of hypersonic system arc chamber and laser facility.

    Prometheus first fire
    Next year
    FY27

    On track for first fire with partner RAFAEL.

    Prometheus production
    FY27-FY28
    FY27-FY28

    Expected to get into production.

    KTT critical element engine program
    $200 million to $300 million
    annual run rate

    Potential run rate if goes into production.

    Industry KPIs

    5
    MetricValueDetails
    Book to bill ratio1.3:1ratio
    Total company backlog$1.99 billionUSD
    Defense program awards$160 millionUSD
    Program segment backlog$15 billionUSD
    Production rates by program1.5 planes/monthunits

    Orderbook & backlog

    2
    Total last 12-month bookings$1.99 billionLTM
    Bid and proposal pipeline$15 billioncurrent

    continuing to increase

    Product announcements

    6
    ProductTypeDetails
    Kraken 1, Kraken 2, Nemesislaunch
    New EW systemlaunch
    Missile system program of recordlaunch
    Kratos TDI Spartan turbojet engineslaunch
    New small turbofan design (GE)launch
    Mighty Hornetlaunch

    Deals & partnerships

    9
    Department of EnergyDirected Energy Counter UAS System Program$160 million

    Kratos is the prime system integrator for this program related to securing nuclear assets. Initial funding of $30M-$40M received.

    UndisclosedSpace Domain Awareness System Production$100 million

    New production award for space domain awareness system.

    GE AerospaceBladeWorks Turbofan Engine Family

    Partnership for turbofan engines for JASSM and LRASM missiles. New BladeWorks facility in Oklahoma expected operational by summer 2027.

    AirbusValkyrie deployment in Europe

    Kratos Valkyries are in Europe with Airbus.

    RAFAELPrometheus Solid Rocket Motor Facility

    Partnership for solid rocket motors, with first fire expected next year and production in FY27-FY28.

    L3 AerojetZeus solid rocket motors supplier

    L3 Aerojet is building Zeus solid rocket motors for Kratos, meeting milestones on time and budget.

    Northrop GrummanOriole solid rocket motors supplier

    Northrop Orbital ATK is supplying Oriole solid rocket motors, being very accommodating and on time/schedule.

    Northrop GrummanMUX TACAIR program with Marines

    Kratos is partnered with Northrop on this program, expecting an additional award by year-end.

    SESGlobal satellite operator relationship

    Outstanding relationship with SES, an industry-leading technology company.

    Capital programs

    7
    New Spartan Turbojet Engine Manufacturing Facilityoperational

    Benefit: produce 3,000 engines in 2027, 5,000 in 2028

    We will produce the Kratos Spartan Turbojet engines in our new now operational state-of-the-art manufacturing facility in Michigan.

    BladeWorks Turbofan Engine Facilityunderway
    Spent to date: recently broke ground

    Benefit: produce turbofans

    Kratos' new BladeWorks facility in Oklahoma, where we recently broke ground and where we plan to produce these turbofans is expected to be operational next summer

    Hypersonic System Integration Facilityoperational

    Benefit: integration of motors and flyers

    Kratos' new hypersonic system integration facility in Indiana operational, we see these as key elements of our hypersonic business expected future growth trajectory.

    Anaconda Radar Facilityunderway
    Spent to date: underway

    Benefit: anechoic chamber radar facility, radar refurbishment facility

    The Anaconda facility is underway. It's not ready yet. But because of the demand of what we're doing, we are already starting to work on SPY-1 radars... When this facility comes online, middle of next year, this Anaconda, anechoic chamber radar facility, radar refurbishment facility is going to be one of the next legs up for us going into '28.

    Helios Hypersonic System Arc Chamber and Laser Facilityannounced
    Start: later this year

    Benefit: hypersonic system arc chamber and laser facility

    Helios, we're going to be hopefully breaking ground on that later this year. That will be up and ready to go into '27, beginning of '28. This is a hypersonic system arc chamber and laser facility.

    Prometheus Solid Rocket Motor Facilityunderway

    Benefit: military-grade qualified energetics

    Ken, we are on track for first fire next year. We are on track with our partner, RAFAEL... This is going to begin middle of next year. I think we'll get into production, what year is next year, '27, '28, we'll get into production.

    Oklahoma Unmanned Systems Facility Expansionunderway
    Spent to date: happening

    Benefit: additional 50,000 square feet for Valkyrie, Firejet target drones, Tactical Firejet, Mighty Hornet, and classified drone programs.

    We've just recently approved an expansion of the facility by another 50,000 square feet or so that is happening, okay?

    Risks & headwinds

    4
    Israeli Shekel StrengthQ2 FY26, H1 FY26, Full Year FY26

    Negative impact of $2.5 million on Q2 FY26 EBITDA, $2.8 million on H1 FY26 EBITDA, and an estimated $5 million to $7 million negative impact for full year FY26.

    Mitigation: Management is aware and forecasting for continued impact, but no specific mitigation actions were detailed.

    Working Capital RequirementsQ2 FY26

    Q2 FY26 cash flow used in operations was $11 million, primarily due to increased receivables ($59 million), inventory ($10 million), and prepaid assets ($14 million).

    Mitigation: Management is continuing to make investments to expand manufacturing and procure long-lead materials, with total investments for FY26 remaining unchanged at $250 million to $270 million, but with a shift in classification on the cash flow statement.

    Budget Uncertainty/Continuing Resolutions (CRAs)Q4 FY26

    Expectation of a Q4 FY26 CRA (October-December) settling in January.

    Mitigation: A significant amount of Kratos' work is program of record based and in the base budget. The company is positioned for a shift to lower-cost mass munitions, which is a bipartisan priority.

    Supply Chain ExecutionOngoing, particularly for 2027 and 2028 engine production

    Implicit risk in ramping production for engines and hypersonics.

    Mitigation: Kratos is working to ensure all vendors and suppliers are qualified, providing production quantities, and bringing in experts from the auto industry and Department of War to set up lines, manage quality control, and ensure redundancy in the supply chain.

    What to watch in Q3 FY26

    5

    Hypersonic Business Revenue Growth

    Q3 FY26
    CurrentQ2 FY26 revenue increase of $20M-$25M sequentially from Q2 to Q3.
    TargetQ3 FY26 revenue increase of $20M-$25M sequentially from Q2.

    Why it matters

    Hypersonic business is a primary future growth driver, with significant funding and new facilities coming online.

    So for the hypersonic business, Sheila, the expectation going from Q2 to Q3 sequentially is approximately $20 million to $25 million of increase, and that's saying $20 million to $25 million, maybe up to $30 million incremental in Q4 from Q2's level.

    Q&A highlights

    6

    How does the $400M FY26 to $700M FY27 hypersonic growth fit into H2 FY26 acceleration and CapEx changes?

    Hypersonic revenue is expected to increase by $20M-$25M sequentially from Q2 to Q3, and another $20M-$30M from Q3 to Q4. The new hypersonic system integration facility is now operational, enabling increased integration and launch tempo in H3 FY26 and significantly in FY27.

    “The big piece operationally, Sheila, is our hypersonic system integration facility is operational now in Q3. And we have multiple lines, production lines, integration lines, if you will, for the motors that are now coming in and the flyers that will be coming in, we integrate them and we have the launch manifest and out they'll go. And that op tempo increases Q3, Q4 and then it increases significantly in 2027, which we have the contract for and the funding for.”

    asked by Sheila Kahyaoglu · answered by Eric DeMarco

    2 min read6 chapters

    Detailed Narrative

    01

    Strategic Alignment and Investment Phase

    Kratos' strategy of internally funded investments in affordable mass production hardware and software aligns with Department of War priorities, leading to significant program awards and a strong bid pipeline of $15 billion. The company is in an investment phase, focused on organic growth and winning large new programs, supporting the reindustrialization initiative. This approach is expected to drive business momentum into the second half of FY26 and continuing into FY27.

    02

    Engine Business Expansion

    Kratos is rapidly expanding its jet engine business, with plans to produce 3,000 Spartan turbojet engines in 2027 and 5,000 in 2028, primarily for low-cost cruise missiles like JDAM-LR, with an average selling price of $50,000 per engine. The new BladeWorks facility in Oklahoma for turbofan engines (a 50-50 partnership with GE) is expected to be operational by summer 2027, targeting JASSM and LRASM missiles, with LRIP starting in 2028 and significant ramp-up in 2029-2030. Kratos is placing initial orders for components for these engines.

    03

    Hypersonic Business Growth

    The hypersonic business, which generated $200 million in 2025, is tracking for $400 million in 2026 and at least $700 million in 2027. This growth is supported by new program awards (Kraken 1, Kraken 2, Nemesis), $400 million in recent funding, and the operationalization of a new integration facility in Indiana. The MACH-TB program alone represents a potential $7 billion funding over five years, underscoring the significant future growth potential in this area, driven by global arms races.

    04

    International Operations and Space Domain

    Kratos' Israeli microwave electronics and SATCOM business is working with the Israeli MOD to replenish advanced weapons stockpiles, leveraging over 700 employees and battle-proven systems. The satellite C2 and space domain awareness business, the company's largest, is also rapidly growing, with significant margin expansion expected as space becomes a critical warfighting domain. Kratos is the ground system provider for a recently awarded multi-billion dollar constellation.

    05

    Unmanned Systems and Production Capacity

    The Unmanned Systems business had a solid Q2, with expectations for an additional Marine Corps Valkyrie order by year-end. Production rates for Valkyrie are increasing to 1.5 planes per month (18 per year) by 2027, with potential for 35-40 planes per month depending on configuration (rail-launched vs. CTOL). The company is also pursuing opportunities for Tactical Firejet and Mighty Hornet in Taiwan, with potential production in H1 FY27, and has two other classified drone programs under contract.

    06

    Capital Expenditure and Facility Ramps

    Kratos is investing in expanding manufacturing facilities for microwave products, rocket systems, hypersonics, and jet engines. New facilities like the Anaconda radar facility (ramping in H2 FY26, fully operational mid-2027) and the Helios hypersonic arc chamber (breaking ground late FY26, operational early FY28) are tied to specific, funded programs with clear returns on investment. The Prometheus solid rocket motor facility is on track for first fire next year and production in FY27-FY28.

    AI-generated summary of the company’s earnings call. Not investment advice.