Kratos Defense & Security Solutions NASDAQ: KTOS reported a first-quarter 2026 performance that management said significantly exceeded its internal forecast, driven by strength across several product lines and supported by what CEO Eric DeMarco described as an expanding U.S. and global defense market.
First-quarter results beat expectations
Executive Vice President and CFO Deanna Lund said first-quarter revenue totaled $371 million, above the company’s prior estimated range of $335 million to $345 million. The estimate did not include the recently closed Orbit acquisition, Lund noted. Excluding Orbit, revenue was $357.7 million, still above the forecast range.
Lund said the quarter included consolidated organic revenue growth of 15.8%, with “the largest contributors to the overachievement” coming from Unmanned Systems, Defense and Rocket Support, Turbine Technologies, and Microwave Products. She cited year-over-year organic growth rates of 45.8% in Defense and Rocket Support, 30.9% in Unmanned Systems, 20.3% in Turbine Technologies, and 12.3% in Microwave Products.
Adjusted EBITDA came in at $38.7 million, above the company’s estimated range of $25 million to $30 million. Lund attributed the outperformance to contributions from Orbit as well as increased volume and “a favorable revenue mix.” DeMarco said product delivery mix and execution contributed to particularly strong profitability, calling out Microwave Electronics, Turbine Technologies, and Unmanned Systems.
Bookings, backlog, and pipeline expand
DeMarco said the quarter produced a 1.6-to-1 book-to-bill ratio and a record $2 billion backlog. He also said the company’s opportunity pipeline increased to more than $14 billion, adding that the pipeline figure was “after the 1.6 to 1 book-to-bill.”
DeMarco also said the satellite business posted a 3-to-1 book-to-bill ratio in the quarter. In the Q&A, he acknowledged that the quarter’s backlog growth would have been higher absent delays tied to federal disruptions, telling analysts the company did see an impact from the government shutdown on award timing and expects some delayed awards in the second quarter.
Space and satellite focus highlighted by new Space Force contract
DeMarco described Kratos’ space and satellite operations as “incredibly well-positioned,” pointing to its OpenSpace satellite command-and-control and telemetry, tracking, and control software. He said OpenSpace deliveries are forecasted to be “meaningful” in both the third and fourth quarters and are expected to support stronger profitability in the second half of the year.
He highlighted a $447 million U.S. Space Force prime contract for the Resilient Missile Warning and Tracking program, which he said contributed to a 1.8-to-1 first-quarter KGS book-to-bill ratio. On the award, DeMarco said Kratos will provide the ground system and software to operate satellites after launch, including commanding satellites, receiving sensor data, and processing information for delivery to military operators.
DeMarco said the space and satellite business is expected to be “a primary driver” of increased revenue and profit margins in Q3 and Q4 and is expected to support growth and margin expansion in 2027 and 2028. He also said artificial intelligence is a differentiator for Kratos’ space, satellite, and space domain awareness offerings.
Operational updates: hypersonics, propulsion, Valkyrie, and directed energy
DeMarco reiterated that the company’s strategy includes internally funded investments in property, plant, and equipment, while fielding products quickly. He said Kratos is negotiating contractual terms for “Valkyrie program LRIP phase I” expected this year and plans to increase Valkyrie production to approximately 40 drones annually by early 2028, though later he emphasized output will depend on configuration mix.
During Q&A, DeMarco provided manufacturing location details, stating Valkyrie airframes are produced in Oklahoma, with avionics and electronics in Florida. He said Mako is produced in Sacramento, California, and that Tactical Firejet production has largely moved to Oklahoma. He added that Tactical Firejets are being flown with Kratos jet engines, which are built in Michigan.
On hypersonics, management reiterated previously discussed expectations. Lund said the “defense rocket support” business—where Kratos groups hypersonics—has an expectation of $400 million in 2026 revenue and $700 million in 2027. DeMarco linked hypersonic funding visibility to defense budget actions, including the reconciliation bill, and said Kratos has been verbally informed it has been successful on certain hypersonic program awards. He also referenced a separate “$1 billion plus sole source hypersonic program expansion verbal award” that he said the company believes it will receive shortly, while noting he did not want to get ahead of customer announcements.
On propulsion, DeMarco said Kratos expects to begin small jet engine LRIP later this year for cruise missiles and powered munitions and is planning to produce “several thousand engines” in 2027, with further increases into 2028. He told analysts the company’s current annual run rate in cruise missile engines is about $10 million and described expected unit selling prices of roughly $40,000 to $60,000, depending on the engine.
DeMarco also discussed publicly disclosed selections, saying Kratos has been selected for development of the engine for the submarine-launched cruise missile nuclear (SLCM-N). He added that GE and its partner have been selected for the “next class of attritable and expendable CCAs,” and said Kratos and GEK had also recently “won another one.”
Separately, DeMarco said Kratos has received a new “multi-hundred million dollar” directed energy weapon system program in which Kratos is the prime. In response to a question about the company’s involvement in directed energy, he said Kratos has worked on directed energy and laser weapon systems “for years,” and described the new win as a mobile counter-UAS system that is expected to begin ramping next year and “should be very big in 2028.”
Cash flow, investments, and 2026 guidance
Lund said first-quarter cash flow used in operations was $27.4 million, primarily reflecting working capital requirements tied to revenue growth, including a roughly $28.7 million increase in receivables and about $14.7 million of inventory increase, along with increases in prepaid and other assets driven by prepayments for long-lead materials and continued investments tied to development initiatives.
Free cash flow used in operations was $43.1 million, after $19.9 million in capital expenditures and net of $4.2 million in proceeds from the sale of Valkyries that had previously been classified as company-owned capital assets. Lund said DSOs increased to 130 days from 121 days in the prior quarter, reflecting acquisition-driven growth and timing of milestone billings and contractual funding, which she said were impacted by the extended federal government shutdown and continuing resolution.
For guidance, Lund said second-quarter 2026 revenue is expected to be $400 million to $410 million, representing estimated organic revenue growth of 4% to 7% over the second quarter of 2025. Updated full-year 2026 revenue guidance is $1.7 billion to $1.76 billion, including Orbit and implying estimated organic growth of 15% to 19% over 2025.
Lund said second-quarter margin expectations reflect revenue mix and “less leverage” on elevated overhead and bid-and-proposal costs ramped to support growth. DeMarco said the company was “trying to be conservative,” citing what he described as heavy workload within government program and contracting offices to get funding obligated and under contract.
Looking further out, DeMarco reiterated the company’s expectation for year-over-year EBITDA margin expansion of roughly 100 basis points in 2026 versus 2025 and another 100 basis points in 2027 versus 2026, citing increasing production, leverage on fixed costs, and product/software mix, while also noting higher bid-and-proposal spending tied to pursuing opportunities.
About Kratos Defense & Security Solutions NASDAQ: KTOS
Kratos Defense & Security Solutions, Inc NASDAQ: KTOS is a technology-driven company that specializes in national security and defense solutions for government and military customers. The firm’s core capabilities span unmanned systems, satellite communications, missile defense, cyber security, and directed-energy weapons. Through its integrated approach, Kratos delivers mission-critical products and services designed to enhance operational readiness and support force modernization initiatives.
In the unmanned systems arena, Kratos develops high-performance aerial platforms used as target drones, low-cost attritable aircraft and experimental stealth demonstrators.
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