Kratos Defense & Security Solutions, Inc. 2026 Q2 Earnings Call

Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions second quarter 2026 conference call. With me today is Eric DeMarco, Kratos' President and Chief Executive Officer, and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer. Before we begin the substance of today's call, I'd like everyone to please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential market opportunities, operational outlook, financial guidance, and other forward-looking statements during today's call. Today's call will also include a discussion of non-GAAP financial measures, as that term is defined in Regulation G.

Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP.

Eric? Thank you, Marie. Kratos' second quarter results reflect the execution of the Kratos team and that our strategy, including making internally funded investments, be first to market with relevant hardware and software that is engineered upfront for affordable mass production, is aligned with the Department of Defense's priorities.

Representative of this alignment, Kratos' last 12-month book-to-bill ratio of 1.3:1, total last 12-month bookings of $1.99 billion, the number of opportunities for Kratos continuing to increase with the bid and proposal pipeline of $15 billion now, and our business momentum forecast to accelerate into the second half of this year and continuing to 2027. Kratos' second quarter year-over-year organic growth rate was 19.1%. We are forecasting third quarter organic growth of approximately 19%-25%, and we are forecasting fourth quarter year-over-year organic growth of approximately 19%-31%.

We are increasing our forecasted full year 2026 organic revenue growth up to 19%-23%. I am emphasizing that these are all organic growth numbers. Kratos' EBITDA margins also are increasing and are forecast to continue to increase in the second half of 2026 and into 2027 as the business scales, production increases, and we realize financial leverage on our fixed infrastructure cost. We are generating and forecasting for increased margins while we are making significant investments as we pursue large new Department of Defense opportunities that are being presented to us, and also with the recent strength of the shekel adversely impacting our Israeli operations profitability. We begin the second half of 2026 and look forward to 2027. We are more confident than ever in Kratos' future prospects, including for the following reasons.

We have recently received new hypersonic system program awards, including Kraken One, Kraken Two, and Nemesis. We have received a new directed energy CUAS system program award with an initial value of approximately $160 million. We have received a new space domain awareness system production award with an initial value of approximately $100 million. The United States Space Force is now receiving a new EW system that includes Kratos hardware. We have recently received approximately $400 million in new hypersonic and other funding, and we expect to receive significant additional funding in the second half of this year. We hope to announce shortly a successful recent Kratos rocket system flight event directly related to missile defense, and we have been recently informed that we have received a new contract for a missile system program of record.

The Pentagon has requested multi-year procurement authority for multiple munitions and missiles, including PrSM, AMRAAM, JASSM, LRASM, TLAM and MF-T, THAAD, Patriot, low-cost hypersonic strike systems, family of affordable mass missiles, and low-cost containerized cruise missiles. These are all Kratos-supported programs or programs that we are positioning to support in the future. Why is this significant? The family of affordable mass missiles, the FAM program, for example, which the Air Force's Future Years Defense Plan, or FYDP, calls for 27,000 low-cost cruise missiles, has been a top strategic priority of Kratos' jet engine initiative, and it's now happening. The Pentagon is also looking to acquire 10,000 cruise missiles under the low-cost containerized munitions program, another low-cost missile opportunity Kratos has been targeting for our engines.

Other new low-cost cruise missile programs Kratos is supporting or positioned for include ERAM, ETV, Ground Launched Cruise Missile, and JDAM-LR, together representing an estimated potential opportunity for tens of thousands of Kratos small turbojet engines. We believe that JDAM-LR alone, which includes a Kratos engine, could be one of the largest single opportunities for our company, with the potential for tens of thousands of systems by itself. As a result, we are currently placing initial orders with our supply chain for the components for 3,000 small Kratos TDI Spartan turbojet engines we expect to produce for customers in 2027, and we currently plan to order components during 2027 for an additional 5,000 engines expected to produce for customers in 2028. The average selling price of a Kratos Spartan engine, this is a turbojet, is approximately $50,000.

We will produce the Kratos Spartan turbojet engines in our new, now operational state-of-the-art manufacturing facility in Michigan. In addition to these low-cost cruise missile systems, it was reported the Air Force is looking to acquire over 11,000 JASSM and LRASM missiles over the next six or seven years. This is an opportunity Kratos's BladeWorks Turbofan engine family and our partner, General Electric Aerospace, have been pursuing. Kratos's new BladeWorks facility in Oklahoma, where we recently broke ground and where we plan to produce these turbofans, is expected to be operational next summer, which schedule we are closely coordinating with our partner and the customer. We currently plan on turning on our BladeWorks turbofan engine supply chain in either Q4 of this year or Q1 of next so we can meet future customer required delivery schedules.

Additionally, Kratos's partner, GE, has recently revealed a new small turbofan design optimized for the cost profile of the CCA market, sized for a range of mission applications. We are expecting Kratos's engine business to be one of our company's largest and fastest-growing over the coming years. Kratos's hypersonic business, which generated approximately $200 million in revenue in 2025, and we are currently tracking for $400 million in 2026, increasing to at least $700 million in 2027, is positioned to become Kratos's largest business, with significant increased government funding in the hypersonic area expected for the foreseeable future. We expect to begin receiving the first of the 120 solid rocket motors we previously procured in Q3 this year. With Kratos's new hypersonic system integration facility in Indiana operational, we see these as key elements of our hypersonic business' expected future growth trajectories.

Kratos's hypersonic and rocket systems business has several additional large new opportunities we are pursuing, including certain in source selection, which we expect to be awarded by the end of this year. We are confident in our hypersonic business's forecasted growth trajectory, including based on the several hundred million in funding we recently received. Also, it was recently reported that the MACH-TB program funding over the next five years, as reflected in the Department's budget justification documents, is approximately $7 billion. An additional data point on why we believe that Kratos's hypersonic business will be a primary future growth driver for Kratos for the foreseeable future is the threat, as it was recently reported that using U.S. intelligence estimates that China could have approximately 4,000 hypersonic missiles by 2035, and Russia could have 1,000.

There is not only a drone, missile, and space arms race underway, but also a hypersonic arms race, each of which Kratos intends on supporting the Department to win. Kratos's microwave electronics and SATCOM business, headquartered in Israel, is working with the Israeli MOD and our partners, Israel Aerospace Industries, Rafael, and Elbit, to replenish stockpiles of advanced weapons, interceptors, SATCOM, and other assets used in the Iran conflict. Kratos has over 700 employees in Israel, and we are working on and have access to certain of the highest technology, battle-proven systems in the world. Kratos' Israeli employees, business partners, and presence is a clear differentiator for our company globally. Kratos' satellite C2 and space domain awareness business, our company's largest, is also rapidly growing and expecting significant future margin expansion, with space having never been more important for global security and as space increasingly becomes a war-fighting domain.

On the commercial side, Kratos' relationship with our partner, global satellite operator SES, is outstanding, with SES being an industry-leading technology company with a future technology and business roadmap that is truly exciting for SES, its customers, industry, and for Kratos. Kratos' industrial gas turbine business area continues to ramp. It is currently one of the fastest-growing business areas in our company. With certain industrial gas turbines, we are working on being air-cooled, which we believe is truly differentiating in the market. Kratos' unmanned systems business had a solid Q2, and we expect to receive an additional Marine Corps Valkyrie order by the end of this year. It was reported that in recently released Marine Corps budget justification documents, that the Marines plan to spend $1.28 billion on their CCA program over the relevant five-year period.