Kratos Defense & Security Solutions

Kratos builds defense hardware that costs less and arrives sooner than the equivalent product from a traditional prime contractor. The company designs and manufactures uncrewed jet aircraft, aerial targets that militaries shoot at during live-fire testing, solid rocket motors, small jet engines, hypersonic flight test vehicles, satellite ground systems, and the microwave electronics that sit inside radars, missiles and electronic warfare pods.

The customer set is almost entirely governmental. Kratos sells to the U.S. Department of War and its service branches, to the Missile Defense Agency and the Space Force, to the Department of Energy, and to allied militaries. The company reports through two segments: Kratos Government Solutions, which contains the rocket, turbine, space, training, cyber, C5ISR and microwave businesses, and Unmanned Systems, which contains the target drone and uncrewed tactical aircraft franchises. In the second quarter of 2026 those segments generated $379.7 million and $79.1 million of revenue respectively, so roughly 83 percent of the company sits inside Kratos Government Solutions.

Uncrewed Tactical Aircraft

The XQ-58A Valkyrie is the flagship: a runway-independent, jet-powered uncrewed aircraft designed to fly alongside crewed fighters at a fraction of a fighter's cost. Kratos also markets the Mako and the Tactical Firejet in the same affordable-mass category. Valkyrie activity drove Unmanned Systems revenue in both quarters of 2026, though segment organic growth slowed from 30.9 percent in the first quarter to 8.1 percent in the second. Kratos plans to produce approximately 40 Valkyries annually beginning by the start of 2028.

Aerial Target Systems

The BQM-167 for the Air Force and the BQM-177 for the Navy are the recurring backbone of the unmanned business. These are the drones that air defense and missile crews train and test against, which makes the line a steady, budget-line-item revenue stream rather than a program-of-record gamble.

Hypersonics, Rocket Systems & Propulsion

Kratos supplies hypersonic flight test vehicles including Erinyes and Dark Fury, solid rocket motors including Oriole and Zeus, and small turbine engines including the GEK and Spartan families that power drones and cruise missiles. Defense Rocket Systems grew organic revenue 50.2 percent in the second quarter of 2026, the fastest of any Kratos business, with Turbine Technologies second at 43.3 percent. Kratos has committed to a jet engine production rate of 3,000 units in 2027 to address demand for small cruise missiles. In July 2026 the company completed a $50 million, 68,000-square-foot hypersonic payload integration facility at Crane, Indiana, capable of preparing six experimental payloads simultaneously in support of programs including the Multi-Service Advanced Capabilities Hypersonic Testbed, and opened a 167,000-square-foot manufacturing plant in York, Pennsylvania.

Space, Training, Cyber & Microwave Electronics

The space business supplies satellite command, control, telemetry and signal-monitoring ground systems. The microwave electronics business supplies frequency converters, transmit-receive modules, amplifiers and multi-functional assemblies that go into radars, electronic warfare systems, missiles and smart munitions. The November 2025 agreement to acquire Israel-based Orbit Technologies for $356.3 million, which closed in the first quarter of 2026, extended this portfolio into satellite communication terminals and broadened the company's international footprint. Kratos now employs over 700 people in Israel. Microwave Products grew organic revenue 29.5 percent in the second quarter of 2026 and Space, Training and Cyber grew 8.7 percent.

Revenue reached $1.347 billion in fiscal 2025, up 18.5 percent in total and 16.6 percent organically over 2024. Second quarter 2026 revenue of $458.8 million grew 30.5 percent in total and 19.1 percent organically over second quarter 2025 revenue of $351.5 million. Kratos Government Solutions contributed $379.7 million, up 36.4 percent in total and 22.0 percent organically. Unmanned Systems contributed $79.1 million, up 8.1 percent organically and down slightly from the $82.6 million it recorded in the first quarter. First half 2026 revenue was $829.8 million against $654.1 million a year earlier.

Growth inside Kratos Government Solutions is concentrated rather than broad. Second quarter organic growth rates were 50.2 percent in Defense Rocket Systems, 43.3 percent in Turbine Technologies, 29.5 percent in Microwave Products and 8.7 percent in Space, Training and Cyber. Rocket systems and jet engines are carrying the company; the space and training franchise is growing at roughly a third of the consolidated rate.

Three forces drive the next one to three years. First, bookings: second quarter bookings were $492.2 million for a book-to-bill ratio of 1.1 to 1.0, and bookings for the twelve months ended June 28, 2026 were $1.990 billion for a book-to-bill ratio of 1.3 to 1.0. Consolidated backlog reached $2.084 billion at June 28, 2026, split between funded backlog of $1.572 billion and unfunded backlog of $512.7 million. The bid and proposal pipeline, which is opportunity value rather than backlog and carries no contractual obligation, stood at $15.0 billion against $14.3 billion three months earlier. Second, appropriations: management stated that the Department intends to spend the entire $156 billion reconciliation-bill defense allocation during fiscal 2026, funding hypersonics, Valkyrie, solid rocket motors and drone engines. Third, acquisitions: Nomad and Orbit add revenue that is not organic but is real.

Segment backlog splits $1.710 billion to Kratos Government Solutions and $374.6 million to Unmanned Systems. The Unmanned Systems figure is essentially flat against the $375.4 million reported three months earlier, and that segment booked $78.4 million in the quarter for a book-to-bill of 1.0 to 1.0. Readers tracking Valkyrie should note that the unmanned franchise is not currently growing its backlog even as management raised its full-year organic growth expectation for the segment to approximately 10 percent on the strength of recent awards.

Management raised fiscal 2026 revenue guidance on August 4, 2026 to $1.750 billion to $1.810 billion, from the prior $1.700 billion to $1.760 billion, and tightened Adjusted EBITDA guidance to $173.0 million to $176.0 million. Forecast organic revenue growth rose to approximately 18 to 23 percent over 2025. Third quarter guidance is revenue of $460 million to $480 million and Adjusted EBITDA of $40 million to $45 million.

The capital picture is the counterweight to the revenue picture. Kratos guides fiscal 2026 operating cash flow of $30 million to $50 million against capital expenditures of $125 million to $135 million, which produces guided free cash flow use of $85 million to $105 million. The company used $11.0 million of cash in operations during the second quarter and $18.9 million of free cash flow after $17.2 million of capital expenditures and $9.3 million of proceeds from sales of company-owned Valkyries. Kratos is funding a production build-out ahead of the revenue it is designed to capture, and it is doing so from the balance sheet rather than from operations. Cash and equivalents stood at $1.4376 billion at June 28, 2026 against $560.6 million at December 28, 2025, the difference largely reflecting the March 2026 equity offering.

Five items determine whether the thesis holds. Bookings durability is first: the quarterly book-to-bill ratio fell from 1.6 to 1.0 in the first quarter to 1.1 to 1.0 in the second, with the twelve-month figure at 1.3 to 1.0. A ratio above 1.0 still grows backlog, but the first quarter print was not a run rate. Margin conversion is second: revenue grew 30.5 percent while the company recorded an operating loss, weighed down by $16.3 million of non-cash stock compensation, $13.6 million of company-funded research and development and $12.5 million of non-cash amortization. Management forecasts EBITDA margins rising through the second half and into 2027 as fixed-cost leverage arrives. That is a forecast, not a result.

Cash conversion is third, and it is now a guided outcome rather than a quarterly surprise. Capital expenditures of $125 million to $135 million against operating cash flow of $30 million to $50 million is a deliberate choice to build ahead of demand, disclosed as such. Production execution is fourth, and the company has now put dates on it: a ramp to 3,000 jet engines in 2027 to address small cruise missile demand, and approximately 40 Valkyries annually beginning by the start of 2028. These are the first hard rate commitments Kratos has published, and they are the cleanest available test of whether affordable mass is a manufacturing reality or a positioning statement. Appropriations follow-through is fifth: management's growth case rests on the Department spending the full $156 billion reconciliation allocation in fiscal 2026, and that is a stated intention, not an obligation.

For national security, the relevant fact is industrial rather than financial. Between July 15 and July 30, 2026 Kratos opened a 167,000-square-foot plant in York, Pennsylvania, completed a $50 million hypersonic payload integration facility at Crane, Indiana ahead of schedule, and secured an investment casting partner for its turbine engine program. Hypersonic flight-test cadence and small turbine engine output are two recognized bottlenecks in the U.S. defense industrial base. Capacity that did not exist a month ago now does, and it was funded by an equity raise rather than by an appropriation.

The next verification point is the third quarter 2026 report, expected in early November. It should show whether the forecast second-half margin expansion is arriving, whether Unmanned Systems backlog resumes growth from the $374.6 million where it has now sat flat for two quarters, and whether capital expenditure is tracking to the guided range.

The durable advantage is manufacturing position in categories the primes historically declined to defend. Kratos owns qualified production lines for aerial targets, solid rocket motors, small turbine engines and microwave components. Qualification on defense hardware takes years and carries switching costs, which makes an incumbent supplier difficult to displace once a program is fielded. The BQM-167 and BQM-177 target franchises are the clearest example: recurring, budget-funded, and structurally unattractive for a prime to contest at Kratos price points.

The moat is narrower on collaborative combat aircraft. The XQ-58A gave Kratos an early position, but Anduril, General Atomics and the primes are all competing for the same requirement with substantial capital behind them. Kratos competes there on cost and speed rather than on an entrenched position, and cost advantage is the least defensible form of moat when better-capitalized competitors decide to price aggressively.

Free cash flow risk is the most immediate, and it is now guided rather than incidental. Kratos forecasts fiscal 2026 free cash flow use of $85 million to $105 million, following negative $43.1 million in the first quarter and negative $18.9 million in the second. The company holds $1.4376 billion of cash, so this is a funded plan rather than a liquidity problem, but the plan consumes cash through at least 2027 on management's own guidance. Margin risk follows: the company recorded an operating loss of $1.6 million in the second quarter of 2026 despite 30.5 percent revenue growth, and the fiscal 2025 Form 10-K identifies rising labor cost and difficulty hiring and retaining cleared personnel as an active drag, particularly on longer-term firm fixed-price contracts. Valuation risk is third: trailing GAAP earnings support a multiple above 300 times, which prices in execution the company has not yet demonstrated at scale.

Foreign exchange and geographic concentration risk is newly material and newly disclosed. Kratos now employs over 700 people in Israel following the Orbit acquisition, and management stated in the second quarter 2026 release that Shekel strength is adversely affecting the profitability of those operations. This is a currency exposure with no natural dollar hedge on the cost side, sitting in a region with elevated operational risk. Segment concentration risk sits alongside it: second quarter organic growth was 50.2 percent in Defense Rocket Systems and 43.3 percent in Turbine Technologies against 8.7 percent in Space, Training and Cyber, so consolidated growth depends on two businesses rather than on the portfolio. Unmanned Systems backlog has been flat at roughly $375 million for two consecutive quarters.

Budget and appropriations risk is structural. The 10-K flags continuing resolutions, potential government shutdowns and program funding delays as material threats. Integration risk remains elevated following the Nomad and Orbit acquisitions; the second quarter release restated first quarter Kratos Government Solutions backlog upward by $41 million, a revision consistent with acquisition measurement-period adjustments and a reminder that recently acquired figures can move. Execution risk now attaches to specific published rate commitments, namely 3,000 jet engines in 2027 and approximately 40 Valkyries annually from the start of 2028, which are verifiable and therefore missable. Disclosure risk is worth naming plainly: several 2026 awards are sole-source with the customer and scope withheld, so readers cannot independently confirm scope against public government notices. Dilution risk is realized rather than prospective, with roughly 16.4 million shares added in March 2026.

The company began in 1994 as Wireless Facilities, Inc., a telecommunications network services firm. It renamed itself Kratos Defense & Security Solutions in 2007 and spent the following decade converting itself into a defense contractor through acquisitions, absorbing target drone, rocket support, microwave electronics, satellite ground system and turbine engine businesses that larger primes considered too small to pursue.

That accumulation looked unfocused for years. It stopped looking unfocused when the Pentagon's procurement thesis shifted toward affordable mass, attritable aircraft, hypersonic test capacity and munitions throughput. Kratos already owned the low-cost production lines those priorities require, and the XQ-58A Valkyrie gave the company a credible entry into the collaborative combat aircraft conversation.

The company has since moved to fund a larger production base. Kratos raised approximately $1.38 billion gross in a March 2026 public offering of 16,428,571 shares priced at $84.00, netting approximately $1.349 billion, and completed the acquisitions of Nomad Global Communication Solutions and Orbit Technologies. SEC filings list the principal executive offices in Round Rock, Texas, while Kratos' corporate locations page labels its San Diego site as Corporate Headquarters. The distinction is retained because the company uses both designations in current official materials.