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

Latest quarter

Kratos reported second-quarter revenue of $458.8 million, up 30.5% from $351.5 million a year earlier and above the $411.7 million consensus. The company reported diluted earnings per share of $0.02, unchanged from a year earlier.

In its filing, Kratos attributed the revenue increase in its Government Solutions business to hypersonic systems, growth in turbine technologies, microwave products, space and training, and contributions from the Nomad and Orbit acquisitions. CFO Deanna Lund said those acquisitions contributed $40.2 million in second-quarter revenue. The filing attributed growth in Unmanned Systems primarily to Valkyrie aircraft production.

Kratos reported gross margin of 21.8%, compared with 21.0% a year earlier, while operating margin fell to −0.35% from 1.05%. Its filing said selling, general and administrative expenses rose in part because of acquisition-related amortization and stock compensation. Free cash flow was −$28.2 million, compared with −$32.2 million a year earlier; Kratos said advance inventory purchases had increased its working-capital needs.

Adjusted EPS is the figure the consensus estimates, not the GAAP EPS above.

What management said on the call

CEO Eric DeMarco said demand for low-cost cruise missiles was driving Kratos’s engine plans. He said the company was ordering components for 3,000 Spartan turbojet engines expected to be produced for customers in 2027 and planned to order components for another 5,000 in 2028. DeMarco put the engines’ average selling price at approximately $50,000 and said the Michigan manufacturing facility was operational.

On hypersonics, DeMarco said Kratos had received awards for Kraken 1, Kraken 2 and Nemesis, along with approximately $400 million in new hypersonic and other funding. CFO Deanna Lund said she expected hypersonic revenue to increase by approximately $20 million to $25 million in the third quarter from the second-quarter level. DeMarco also said Kratos had broken ground on its Oklahoma turbofan facility with partner GE.

Asked about margins, Lund said “the biggest headwind that we’re facing is that shekel impact.” She explained that Kratos is paid in U.S. dollars for work performed in Israel but pays its workforce and vendors in shekels. Lund estimated that the currency’s strength reduced second-quarter adjusted EBITDA by $2.5 million and would affect full-year EBITDA by approximately $5 million to $7 million.

When pressed on the engine supply chain, DeMarco described qualifying suppliers and backups, hiring manufacturing personnel and coordinating quality and delivery schedules. He said Kratos expected to start ordering turbofan components probably in the first quarter of 2027. Asked about drone production, he said Valkyrie output could reach an average of 1.5 planes per month during 2027, with the eventual rate depending on customers’ preferred configurations.

DeMarco said customer restrictions would limit what Kratos could report about some drone work, potentially until shipments appeared in results. He also said that, if funding and plans came together, turbofan production would begin in 2028.

Guidance

Kratos raised its full-year 2026 revenue guidance to $1.750 to $1.810 Billion and its organic growth forecast to approximately 18.0% to 23.0%, according to its results release. On the call, DeMarco gave a full-year organic growth forecast of 19% to 23%, while Lund described the previously reported goal as 15% to 20%.

Lund said the revised cash-flow guidance includes working capital for engine materials and equipment, changes in construction timing and the reclassification of some drone investments. She said forecast total investments for the year remained approximately $250 million to $270 million.