Kratos Defense & Security Solutions, Inc.

What they do

Kratos develops and produces jet-powered unmanned aerial drone systems (including Valkyrie), hypersonic vehicles and solid rocket motors, small turbojet and turbofan engines, microwave electronic products for missile, radar, air defense and counter-UAS applications, and virtualized satellite ground systems including command & control and telemetry, tracking and control software. It also builds virtual and augmented reality training systems for warfighters. The company self-funds research, development and capital investments to bring low-cost products to market quickly, and operates as either prime contractor or teammate to larger traditional system integrators depending on win probability and capital requirements.

Revenue drivers

• Kratos Government Solutions (KGS) — The largest segment, with Q2 2026 revenue of $379.7 million, up 36.4% year over year (22.0% organic excluding the Nomad and Orbit acquisitions). Growth was led by Defense Rocket Systems (+50.2%), Turbine Technologies (+43.3%), Microwave Products (+29.5%) and Space, Training and Cyber (+8.7%).
• Unmanned Systems (KUS) — Q2 2026 revenue of $79.1 million, up 8.1% organically, driven primarily by Valkyrie-related activity. The segment produced $1.2 million of operating income and $5.1 million of Adjusted EBITDA in the quarter.
• Propulsion and rocket systems — Includes Kratos Zeus solid rocket motors, Erinyes hypersonic flight systems, and small turbojet and turbofan engine production, with investments in Michigan, Oklahoma and a hypersonic fabrication facility in Indiana. Management cited Turbine Technologies and Defense Rocket Systems as two of the fastest-growing KGS businesses in Q2 2026.
• Microwave electronics — Products for missile, radar, air defense, missile defense, space, satellite, counter-UAS, directed energy and communication systems, with manufacturing in Israel including a planned space-qualified facility. Microwave Products grew 29.5% year over year in Q2 2026.

Recent performance

Second quarter 2026 revenue was $458.8 million, up 30.5% from $351.5 million a year earlier and 19.1% on an organic basis, with KGS up 36.4% and KUS up 8.1%. GAAP net income was $4.4 million, or $0.02 per diluted share, versus $2.9 million and $0.02 a year earlier, while operating loss was $1.6 million and Adjusted EBITDA was $38.2 million. The quarter included $16.3 million of non-cash stock compensation, $13.6 million of company-funded R&D and $12.5 million of non-cash amortization. Cash used in operations was $11.0 million and free cash flow used in operations was $18.9 million after $17.2 million of capital expenditures. Consolidated book-to-bill was 1.1 to 1.0 for the quarter and 1.3 to 1.0 for the trailing twelve months, with bookings of $492.2 million and $1.990 billion respectively.

Strategy

Kratos is making significant internally funded capital and R&D investments ahead of expected awards, including Valkyrie unmanned aircraft, a hypersonic fabrication and integration facility in Indiana for Zeus solid rocket motors and Erinyes, long-lead procurement for 60 Oriole and 60 Zeus SRMs, turbojet capacity expansion in Michigan, a planned small turbofan facility in Oklahoma tied to an arrangement with GE Aerospace, and microwave electronics expansion in Israel including a space-qualified facility. The company also cites a new facility for the Sentinel ICBM program, expanded drone manufacturing and additional classified facilities. Investments in the Prometheus venture with Rafael and the Oklahoma turbofan facility are expected to begin ramping up during 2026. Kratos says it pursues prime contracts when win probability is high and required investment is within its capital comfort level, and teams with larger system integrators otherwise.

Risks

• Government budget dependence — The U.S. Government provides a significant portion of revenue, and management lists changes, cutbacks or delays in Department of War spending as a risk that could delay or cancel key contracts.
• Contract protest and award timing — Kratos specifically flags delays or cancellation of projects from competitor protest actions and changes in scope or timing of projects.
• Fixed-price design and manufacturing obligations — Many contracts require innovative design, technological complexity or state-of-the-art manufacturing, and failure to meet these obligations could hurt profitability.
• Customer concentration and contract loss — The loss or delay of one or more of Kratos' largest customers, programs or applications could adversely affect results of operations, and early termination, stop-work orders or penalties are cited risks.

Outlook

Management raised full year 2026 revenue guidance to $1.750 to $1.810 billion, implying forecasted organic revenue growth of approximately 18% to 23% compared with full year 2025. The company reported record backlog and opportunity pipeline and is investing in capacity ahead of expected awards. It expects investments related to the Prometheus venture with Rafael and the Oklahoma turbofan facility to begin ramping up during 2026.