Kratos Defense & Security Solutions, Inc. (KTOS) Business Profile

What it does

Kratos Defense & Security Solutions makes technology, hardware, software and systems for defense, national security and commercial customers. Its products include jet-powered drones, rocket and hypersonic systems, engines, satellite ground systems, microwave electronics and military training systems. Kratos was founded in 2004 and is headquartered in San Diego. Eric DeMarco is its president and chief executive officer.

The company makes target drones that military customers use in training and testing, as well as tactical drones such as Valkyrie. Its rocket and hypersonic products include solid rocket motors and vehicles used in flight-test missions. Its propulsion business develops engines for drones, missiles and other vehicles. Kratos also supplies electronics used in systems such as radar and air defense.

For satellites, Kratos provides ground-based software and systems that command spacecraft, track them and receive information from them. Its training business uses technologies including virtual and augmented reality for military readiness.

Kratos sells directly to government agencies and works as a supplier or partner to larger defense contractors. It also serves commercial customers. The company funds some research, development and manufacturing investments itself, aiming to bring products to market that can be made in quantity at a lower cost. Depending on the opportunity, Kratos seeks a contract as the lead contractor or teams with a larger systems integrator.

How it makes money

Kratos earns revenue from contracts to provide products, systems and services. It operates through two reporting segments: Kratos Government Solutions and Unmanned Systems.

Kratos Government Solutions includes microwave electronics, space and satellite systems, cyber, training, turbine technologies, command and control systems, and defense and rocket support services. Unmanned Systems includes aerial, ground and seaborne unmanned systems and related command, control and communications businesses. The company can sell as the lead contractor or supply products and services to another company that holds the prime contract.

Most sales come from awards under long-term contracts, typically three to five years in duration. Some products are designed into customers’ programs and systems, and Kratos has historically won new and recompete business after establishing those positions. Target-drone programs include sole-source or single-source production arrangements with the U.S. Air Force, Navy and Army.

Fixed-price contracts, most of which are production contracts, represented approximately 69% of 2025 revenue. Cost-plus-fee contracts represented approximately 27% and time-and-materials contracts 4% of 2025 revenue. Contract billing can depend on milestones such as shipments, deliveries or completed flight requirements, so customers do not always pay as quickly as Kratos pays its vendors and employees.

Revenue for the second quarter of 2026 was $458.8 million. Kratos’ MACH-TB 2.0 hypersonic flight-test contract has an estimated value of $1.45 billion, if all options are exercised over a five-year period. Kratos says the average selling price of its Spartan turbojet engine is approximately $50,000.

Customers and how it sells

Kratos’ government customers include the U.S. Air Force, Army, Navy, Marine Corps and Space Force, as well as NASA and other national security agencies. It also sells to foreign governments and domestic and international commercial customers. Its target drones are sold to allied countries as well as the U.S. armed services.

The company serves the U.S. government both directly and as a subcontractor. U.S. government agency customers, including foreign military sales, accounted for approximately 68% of total revenues in 2025. No single contract represented more than 5% of 2025 revenue. In the second quarter of 2026, approximately 69% of revenue came from U.S. federal government contracts, including foreign military sales; 20% came from foreign customers; and 11% came from commercial and state and local entities.

Commercial and contractor customers include Northrop Grumman, Lockheed Martin, Microsoft, Amazon, Airbus and GE Aerospace. Kratos also works with large defense systems integrators as a teammate. Its microwave electronics and satellite communications business headquartered in Israel works with the Israeli Ministry of Defense and local partners. Kratos has over 700 employees in Israel and is expanding microwave electronics manufacturing there.

Suppliers and costs

Kratos buys materials, parts and services from vendors and subcontractors to support its contracts. Northrop Grumman supplies Oriole rocket motors, while L3 Aerojet supplies Zeus solid rocket motors. Kratos also invests in its own manufacturing, including facilities for engines, drones, hypersonic systems and microwave electronics.

Supply-chain disruptions have delayed materials and parts. Kratos has responded by buying some items earlier and in larger lots, increasing its use of working capital. It also makes prepayments for long-lead materials. Kratos has placed orders for components for 3,000 engines to be built in 2027 for customers.

Materials, subcontractors, consultants and labor are among the company’s costs. Inflation has increased input costs and affected margins, while hiring and retaining skilled production employees and workers with security clearances remains a challenge. At its Israeli microwave business, Kratos is paid in U.S. dollars but pays vendors and employees in shekels. The company estimates that shekel strength reduced second-quarter 2026 adjusted EBITDA by $2.5 million.

Competitive position

Kratos competes in both of its segments against large government contractors and newer defense technology companies. Named competitors include Northrop Grumman, Lockheed Martin, General Dynamics, Boeing, Anduril and Shield AI. Smaller government contractors such as Mercury Systems and Viasat also compete with Kratos. Some competitors are also customers or partners on other programs.

Competition involves price, technical performance, past qualifications, customer relationships, staffing and the ability to deliver within budget. Kratos says most companies it competes against have greater financial, technical, marketing and other resources. Government emphasis on low-cost procurement has affected some of its defense support and training services businesses, which it has chosen to deemphasize.

Kratos owns intellectual property and develops proprietary products, sometimes using its own funds before a contract is awarded. It also cites customer relationships and positions where its products are designed into programs as competitive advantages. Its target-drone programs include sole-source or single-source production for military customers.

Our reading: Designed-in positions and established production programs provide a meaningful competitive advantage because customers use Kratos products within longer-running systems, although contracts can still be competed again. Our reading: Proprietary technology and internally funded development support differentiation, but their protection is less certain because competitors can develop alternatives and Kratos must finance development itself.

Growth opportunities

Kratos is investing in production capacity for drones, engines, hypersonic systems and electronics while pursuing government and commercial programs. Its investments include a hypersonic integration facility in Indiana, expanded small turbojet capacity in Michigan, a planned turbofan facility in Oklahoma and additional microwave electronics capacity in Israel. It has also manufactured Valkyries ahead of potential contract awards.

The company reported 19.1% year-over-year organic revenue growth in the second quarter of 2026 and forecast full-year 2026 organic revenue growth of 19% to 23%. It received new hypersonic program awards, including Kraken 1, Kraken 2 and Nemesis, as well as a directed-energy counter-drone award with an initial value of approximately $160 million and a space domain awareness production award with an initial value of approximately $100 million.

Kratos is targeting engine opportunities on low-cost cruise missile programs. The company says the Air Force’s family of affordable mass missiles program calls for 27,000 low-cost cruise missiles and that the Pentagon is seeking 10,000 cruise missiles under a separate low-cost containerized munitions program.

Kratos expects its Oklahoma BladeWorks turbofan facility, developed with GE Aerospace, to be operational in the summer of 2027. It also expects its hypersonic business, which generated approximately $200 million in revenue in 2025, to reach $400 million in 2026 and at least $700 million in 2027.

Structural risks

• Government funding and contracts: Program funding can be delayed, reduced or cancelled. Government contracts can permit the customer to terminate or pause work, decline options and claim rights in certain technologies. Budget uncertainty and shutdowns can affect Kratos’ programs and cash flow.

• Competition and technology: Larger competitors have greater resources and can bid for major contracts or offer lower prices. Competitors may develop technologies that make Kratos’ offerings obsolete, and new products may not achieve market acceptance.

• Supply chain and labor: Delays in materials and parts can disrupt delivery schedules. Shortages of skilled manufacturing workers and employees able to obtain security clearances can affect execution. Higher input and labor costs have hurt margins, particularly on longer-term fixed-price production contracts.

• Cash requirements: Advance inventory purchases, long-lead materials and customer billing milestones tie up working capital. Kratos also invests in facilities and products ahead of some anticipated orders. Net cash used in operating activities was $42.1 million for the year ended December 28, 2025.

• Regulation and international exposure: Government procurement, security and export rules apply to Kratos’ work. Failure to comply can lead to lost business or penalties. The company’s Israeli operation also faces currency exposure because some costs are paid in shekels while revenue is received in U.S. dollars.

Bottom line

Our reading

Kratos combines defense product development with long-term contract production, serving government agencies directly and supplying larger contractors. Its designed-in products and customer relationships support continuity, but contract competition and government funding remain important constraints. [item1] [item1a]

The company is investing ahead of anticipated demand in engines, drones and hypersonics. That creates capacity for potential growth while committing cash before some orders and customer payments arrive. [item7] [call_prepared]