Kratos Defense & Security Solutions, Inc.

Kratos reported second-quarter revenue of $458.8 million, up 19.1% organically year over year, versus guidance of $400 million to $410 million. Adjusted EBITDA was $38.2 million, above the high end of the $30 million to $35 million range. Organic growth was 22% in KGS and 8.1% in Unmanned Systems; KGS revenue was up $101.4 million year over year, excluding acquisitions Nomad and Orbit, which contributed $40.2 million. Cash flow used in operations was $11 million, and free cash flow used in operations was $18.9 million after $17.2 million of capex and $9.3 million of proceeds from Valkyrie sales. DSO improved to 114 days from 130 days in Q1. For full-year 2026, management now expects 19% to 23% organic revenue growth and about 100 basis points of adjusted EBITDA margin improvement versus 2025. Q3 revenue guidance is $460 million to $480 million, implying about 19% to 25% organic growth versus Q3 2025. Management also said the full-year EBITDA forecast includes a $5 million to $7 million negative impact from the stronger shekel, and total 2026 investments remain about $250 million to $270 million.

Eric DeMarco framed the quarter as evidence that Kratos’ strategy of investing ahead of demand in affordable mass systems is aligning with Department of War priorities. He repeatedly pointed to rapid growth in hypersonics, turbojets, turbofans, space, and unmanned systems, and said the company is in an investment phase but expects leverage as production scales. His tone was notably bullish on long-term demand, citing new awards, a $15 billion bid and proposal pipeline, and multiple programs that could translate into large engine and systems opportunities.

Deanna Lund said Q2 exceeded both revenue and EBITDA expectations, and she reiterated that Kratos remains on track to meet its full-year 2026 goals of 15% to 20% organic revenue growth and roughly 100 basis points of adjusted EBITDA margin improvement versus 2025. She quantified the shekel headwind at about $2.5 million in Q2 and $5 million to $7 million for the full year, and said Q2 cash flow used in operations was $11 million due to receivables, inventory, and prepayments for long-lead materials. She also explained that full-year cash flow guidance was revised because Kratos started procuring materials and equipment earlier to support jet engine production, while total annual investments still remain about $250 million to $270 million.

Analysts focused on the pace of the second-half acceleration, especially in hypersonics and engines, and management said hypersonics should rise about $20 million to $25 million sequentially from Q2 to Q3 and another $20 million to $30 million in Q4 from Q2 levels. Questions also centered on engine phasing, where management said turbojets are the bigger 2027 to 2028 ramp and turbofans start later, with significant production not expected until 2028 and beyond. Analysts pressed on margin expansion, but management said the Israeli shekel is the main drag and that without it margins would have expanded more in Q3 and Q4. There were also questions about Valkyrie, Taiwan, and other classified drone programs; management confirmed activity is progressing but declined details because of NDAs and classification.