Kratos Defense & Security Solutions, Inc. (KTOS) Earnings

Management highlights

- Core Business Alignment & Market Momentum * Kratos' strategy of internal investment and development of affordable mass-producible defense hardware/software is aligned with U.S. Department of War priorities * Last 12-month book-to-bill ratio is 1.3:1, with total bookings of $1.99 billion; total bid and proposal pipeline now stands at $15 billion and continues growing * Q2 2026 year-over-year organic growth hit 19.1%, with momentum expected to accelerate in the second half of 2026 and into 2027 - Key Program Wins & Strategic Milestones * Received multiple new awards: hypersonic system programs (Kraken 1, Kraken 2, Nemesis), a $160 million initial directed energy counter UAS program, a $100 million initial space domain awareness production contract, and a new missile system program of record * Secured approximately $400 million in new hypersonic and related funding, with additional significant funding expected in H2 2026; expects to announce a successful rocket system flight test related to missile defense shortly * Hypersonic business generated ~$200 million in 2025 revenue, is on track for $400 million in 2026, and is projected to reach at least $700 million in 2027, positioning it to become Kratos' largest business segment * Placed initial supply chain orders for components for 3,000 small TDI Spartan turbojet engines, planned for production in 2027; plans to order components for an additional 5,000 engines for 2028, aligned with expected demand for tens of thousands of low-cost cruise missile engines * The new BladeWorks turbofan engine facility in Oklahoma, developed in a 50-50 partnership with GE Aerospace for JASM/LRASM missile programs, broke ground and is scheduled to be operational in summer 2027, with supply chain activation planned for Q4 2026 or Q1 2027 * The new hypersonic system integration facility in Indiana is already operational, with the first batch of 120 procured solid rocket motors expected to arrive in Q3 2026 * Israeli-based microwave electronics and SATCOM business is supporting Israeli Ministry of Defense stockpile replenishment for assets used in the Iran conflict; Kratos' Israeli presence and partnerships are a key global competitive differentiator * Satellite C2 and space domain awareness, Kratos' current largest business, is rapidly growing and expected to see significant future margin expansion amid the rising importance of space as a war-fighting domain * Unmanned systems had a solid Q2; an additional Marine Corps Valkyrie order is expected by the end of 2026; Valkyrie is deployed in Europe with partner Airbus, and Taiwan is evaluating a new Valkyrie variant alongside Kratos' Mighty Hornet tactical fire jet; the Mighty Hornet program expects a production decision in H1 2027 after upcoming flight tests * Industrial gas turbine business is currently one of Kratos' fastest growing segments, with differentiated air-cooled turbine technology

Guidance

- Full year 2026 organic revenue growth guidance was revised upward to 19% to 23%, from the prior 15% to 20% range - Q3 2026 revenue guidance is $460 million to $480 million, representing 19% to 25% year-over-year organic growth - Q4 2026 year-over-year organic growth is forecast to be 19% to 31% - Full year 2026 guidance still targets a 100 basis point improvement in adjusted EBITDA margin compared to 2025 results - Total 2026 investment spending is forecast to remain at $250 million to $270 million, with only a classification shift between working capital/inventory and capital expenditures on the cash flow statement, with no change to total forecast investment - EBITDA margin is expected to increase in H2 2026 and continue expanding into 2027 as production scales and fixed cost leverage improves - Hypersonic sequential quarterly revenue growth is expected to be $20 million to $25 million from Q2 to Q3, with an additional $20 million to $30 million incremental growth from Q2 to Q4, with significant further growth in 2027 - Microwave segment growth is expected to remain meaningful but may be lower than Q2 2026's 29.5% rate in coming quarters; space, training, and cyber growth is expected to remain near Q2 2026 levels for the foreseeable future

Segment performance

Consolidated Q2 2026 total revenue was $458.8 million, with a 19.1% year-over-year organic growth rate. 1. Kratos Government Solutions (KGS) Segment: Q2 2026 organic revenue growth of 22% year-over-year. Excluding recent acquisitions of Nomad and Orbit (which contributed $40.2 million in revenue), KGS grew $101.4 million year-over-year. Sub-segment organic growth rates include 50.2% for defense rocket support, 43.3% for turbine technologies, 29.5% for microwave products, and 8.7% for space training and cyber. KGS accounts for the majority of consolidated revenue, with approximately 77.4% of total Q2 revenue after excluding the unmanned segment. 2. Unmanned Systems Segment: Q2 2026 organic revenue growth of 8.1% year-over-year, an increase of $5.9 million, driven primarily by Valkyrie-related activity. This segment contributes approximately 22.6% of total Q2 consolidated revenue. Consolidated adjusted EBITDA for Q2 was $38.2 million, above the prior forecast range of $30 to $35 million, driven by higher revenue and favorable revenue mix.

Risks & headwinds

- The strength of the Israeli shekel relative to the U.S. dollar is creating a material headwind to Israeli operations profitability: Kratos is paid in U.S. dollars for work performed in Israel, but pays local vendors and employees in shekels * Q2 2026 adjusted EBITDA would have been $2.5 million higher without shekel strength, and full year 2026 EBITDA is expected to see a $5 million to $7 million negative impact from currency movement - U.S. federal budget uncertainty and potential continuing resolution delays: Management modeled forecasts assuming a Q4 2026 resolution of the 2027 budget, consistent with recent historical patterns - Production and supply chain execution risk: Significant production ramps for jet engines, hypersonic systems, and unmanned aerial systems require reliable on-time delivery from multiple suppliers, with any disruptions potentially delaying production ramp and revenue recognition - Classified program constraints: The company is restricted from disclosing details of many large classified programs, which can lead to unannounced step changes in revenue that may not be reflected in investor forecasts - International program approval risk: Potential international unmanned system sales require U.S. State Department approval, which can delay or prevent transaction closing

Analyst Q&A

• Q: How is hypersonic revenue expected to ramp in the second half of 2026, and how does this tie to recent capital expenditure changes? /

  A: Hypersonic revenue is expected to grow by $20M to $25M sequentially from Q2 to Q3 2026, with an additional $20M to $30M incremental growth from Q2 to Q4. The newly operational hypersonic integration facility in Indiana now supports multiple production lines, and incoming solid rocket motors will be integrated for delivery per the existing launch manifest, with operational tempo increasing through H2 2026 and growing significantly in 2027, where full contract funding is already in place.

• Q: Can you explain the phasing of turbojet vs turbofan engine growth over the next 2-3 years, and how this compares to hypersonic growth? /

  A: The Spartan turbojet family (for low-cost small cruise missiles, 250lbs thrust and under) is already production-ready and flying today. Kratos has placed orders for 3,000 turbojet components for 2027 production, with 5,000 more components planned for 2028, serving multiple public programs including JDAM-LR. Average selling price per turbojet is $50,000, so this will drive the majority of 2027 engine growth. The larger BladeWorks turbofan (for JASM/LRASM, 600lbs+ thrust, 50-50 partnership with GE) will begin low-rate initial production in 2028, with large-scale ramps starting in 2029-2030.

• Q: Can you provide an update on Kratos' Taiwan programs (Mighty Hornet and Valkyrie)? /

  A: The Mighty Hornet tactical fire jet, powered by a Kratos-built engine, will complete upcoming customer flight tests soon. If successful, Taiwan expects to approve production in H1 2027, with initial production planned at Kratos' Oklahoma facility. Taiwan has publicly disclosed interest in a Valkyrie derivative, attracted by its proven flight performance, weapons deployment capability, and flexibility for both rail and runway launch, with a decision expected also in H1 2027. Details remain restricted by non-disclosure agreement, but both programs are progressing well.

• Q: What is your outlook for U.S. budget uncertainty, and how is Kratos positioned regardless of budget outcomes? /

  A: Management forecasts assume the 2027 budget will be resolved via a continuing resolution in Q4 2026, consistent with recent patterns. A large share of Kratos' revenue is from base budget, program-of-record work, and most supplemental funding from prior budget bills has already been obligated. 2027 base defense spending is already set for a 15% increase, which is broadly bipartisan. Kratos is positioned to benefit from the market shift toward low-cost mass-produced munitions and drones (the high-volume end of the market's barbell structure) while also serving as a critical supplier for high-end exquisite weapons programs, making it resilient to budget shifts.