Kratos Defense Beats Q2 Forecasts, Lifts 2026 Growth Outlook on Hypersonic and Engine Demand

Kratos Defense & Security Solutions (NASDAQ:KTOS) beat its second-quarter 2026 revenue and adjusted EBITDA guidance, with demand across hypersonics, jet engines, space systems, counter-unmanned aircraft systems and unmanned aircraft driving the upside.

Revenue for the quarter reached $458.8 million, above the company's projected range of $400 million to $410 million. Organic revenue rose 19.1% year over year, including 22% growth in the Kratos Government Solutions segment and 8.1% organic growth in Unmanned Systems.

Adjusted EBITDA came in at $38.2 million, exceeding guidance of $30 million to $35 million. Chief Financial Officer Deanna Lund said the results reflected higher revenue and an improved revenue mix.

"Our second-quarter performance exceeded our forecasted revenue and EBITDA targets," Lund said.

The results underscore Kratos' expanding role in the Pentagon's shift toward lower-cost, mass-producible weapons. The company's updated outlook points to a sharp ramp in the second half of the year, with growth driven by hypersonic test programs, small turbine engines and attritable drones.

Chief Executive Officer Eric DeMarco raised the full-year 2026 organic revenue growth forecast to 19% to 23%. He said Kratos expects third-quarter organic growth of about 19% to 25% and fourth-quarter growth of approximately 19% to 31%.

DeMarco also said the trailing 12-month book-to-bill ratio was 1.3-to-1, with $1.99 billion in bookings. The company's bid-and-proposal pipeline, he said, has reached $15 billion.

Management expects margins to improve in the second half of 2026 and into 2027 as production volumes increase and fixed infrastructure costs are leveraged across a larger revenue base. Lund cautioned, however, that the Israeli shekel's appreciation against the U.S. dollar remains a material headwind for Kratos' Israeli microwave electronics and satellite communications operations.

The stronger shekel reduced second-quarter adjusted EBITDA by about $2.5 million. If currency strength persists, Kratos expects a full-year EBITDA impact of roughly $5 million to $7 million.

Kratos Government Solutions revenue climbed $101.4 million year over year, including $40.2 million from recent acquisitions Nomad and Orbit. Within KGS, organic growth was 50.2% in defense rocket support, 43.3% in turbine technologies, 29.5% in microwave products and 8.7% in space, training and cyber.

On hypersonics, DeMarco said the business generated about $200 million in revenue in 2025, is tracking toward $400 million in 2026 and is forecast to deliver at least $700 million in 2027. Kratos recently received awards tied to the Kraken One, Kraken Two and Nemesis programs, as well as roughly $400 million in new hypersonic and other funding.

Lund said hypersonic revenue is expected to rise by about $20 million to $25 million sequentially in the third quarter, followed by another $20 million to $30 million gain in the fourth quarter from second-quarter levels.

Kratos' new hypersonic system integration facility in Indiana is now operational, DeMarco said. The facility will integrate solid rocket motors and flight systems as the company increases launch tempo. Kratos expects to begin receiving the first of 120 previously procured solid rocket motors during the third quarter.

DeMarco also pointed to published Department of Defense budget documents showing roughly $7 billion in planned MACH-TB program funding over five years. He described Kratos' hypersonic franchise as a major long-term growth driver, but did not provide a specific revenue forecast beyond 2027.

Kratos is also positioning for a surge in low-cost cruise missile engine demand. DeMarco said the company has begun ordering components for 3,000 Spartan small turbojet engines slated for customer production in 2027, and it plans to order components during 2027 for an additional 5,000 engines expected to be produced in 2028.

At an average selling price of roughly $50,000 per Spartan turbojet, the program represents a potential multiyear revenue opportunity. The engines will be built at Kratos' Michigan production facility, which is already operational.

Beyond the Spartan line, Kratos is advancing a 50-50 turbofan engine partnership with GE Aerospace. The BladeWorks manufacturing facility in Oklahoma is expected to become operational in summer 2027, with low-rate initial production anticipated in 2028. DeMarco said the turbofan opportunity is tied to systems including JASSM and LRASM, though the larger near-term engine revenue increase is expected to come from smaller turbojets.

Kratos plans to begin ordering turbofan supply-chain components in either the fourth quarter of 2026 or the first quarter of 2027, he said.

Kratos also highlighted recent wins in directed energy and space. DeMarco said the company received a directed-energy counter-UAS award with an initial value of about $160 million and a space-domain-awareness production award with an initial value of about $100 million.

For the Department of Energy's mobile counter-UAS program, Solar Shield, Kratos has already received $30 million to $40 million in funding. DeMarco said the project should contribute to fourth-quarter growth and continue ramping in 2027.

Kratos continues to scale its unmanned aircraft manufacturing footprint. Its Oklahoma facility produces Valkyrie aircraft, Tactical Firejet systems and another classified platform, and the company has approved a roughly 50,000-square-foot expansion at the site.

DeMarco said Kratos expects to reach an average Valkyrie production rate of about 1.5 aircraft per month in 2027, or about 18 aircraft per year. Longer term, capacity could reach roughly 35 to 40 aircraft annually depending on customer configurations.

Kratos also expects an additional Marine Corps Valkyrie-related award by the end of 2026. On international programs, DeMarco said Mighty Hornet, a Tactical Firejet derivative for Taiwan, has upcoming customer flights and could enter production in the first half of 2027 if those activities are successful.

For domestic Valkyrie programs, DeMarco estimated EBITDA margins of 10% to 15% depending on configuration and quantity. International programs, he said, could generate margins of roughly 15% to 20%.

Cash used in operations was $11 million in the second quarter, largely because of working-capital needs tied to growth. Receivables increased by about $59 million, inventory rose by approximately $10 million, and prepaid and other assets increased by roughly $14 million. Free cash flow used in operations was $18.9 million after $17.2 million of capital expenditures.

Kratos said planned investments for 2026 remain approximately $250 million to $270 million, though the company shifted the classification of certain investments between capital expenditures and working capital. Lund said the revised cash-flow outlook reflects the decision to procure materials and equipment needed for 2027 jet-engine production, as well as continued investment in microwave products, rocket systems, hypersonics, jet engines, unmanned systems and space-related capabilities.

Kratos Defense & Security Solutions is a technology-focused defense contractor that provides national security solutions for government and military customers. Its capabilities include unmanned aircraft systems, satellite communications, missile defense, cyber security and directed-energy weapons. Within unmanned systems, Kratos develops high-performance aerial platforms used as target drones, low-cost attritable aircraft and experimental stealth demonstrators.

The company's near-term cash use is the flip side of a manufacturing build-out aimed at securing multiyear positions in high-priority defense programs. With hypersonics, jet engines and attritable drones now at the center of U.S. military planning, Kratos' ability to convert its elevated pipeline into production volume will be key to turning faster growth into durable profitability and free cash flow.