Quarter 1
Q2 2026 Earnings Call — August 4, 2026
Analyst Sheila Kyle (Jeffrey): Good afternoon, guys, and thanks so much. Eric and Deanna, great quarter on the growth side. The full-year growth rate still implies a meaningful acceleration in the second half, and maybe I'll hone in specifically on hypersonics. Eric, I think you mentioned $400 million this year, still going to $700 million next year. How do you think about that in the second half? And how does that vote with some of the CapEx changes as well as we think about the growth?
Executive Deanna: Yeah, for the hypersonic business, Sheila, the expectation going from Q2 to Q3 sequentially is approximately 20 to 25 million of increase, and that same 20 to 25, maybe up to 30 million incremental in Q4 from Q2's level. The big piece operationally, Sheila, is our hypersonic system integration facility is operational now in Q3. We have multiple lines, production lines, integration lines, if you will, for the motors that are now coming in and the flyers that will be coming in. We integrate them, and we have the launch manifest that out they'll go. And that op tempo increases Q3, Q4, and then it increases significantly in 2027, which we have the contract for and the funding for.
Analyst Seth Sethman (JP Morgan): Thanks very much and good afternoon. I wanted to start off asking about the engine business. And I think you've spoken a lot about the hypersonics business being sort of the fastest growing piece of the company. It sounds like the engines have a bit of a chance to catch up. And so maybe if you can give a little more color on the phasing of that and maybe the distinction between the turbo fans and the turbo jets, and how the different pieces of that will ramp up, let's say, over the next two to three years and how that will compare to where things are going on hypersonics.
Executive: Yep, very good. So let's talk turbojets first. Turbojets, think 250 pounds of thrust on down. This is our Spartan family, which we build in Michigan. These are not PowerPoints. These are all engines that work, that are flying today. I went through, Seth, the various programs. There are many more that are out there. There are literally, as I said, and you can see in the budget justification docs in the J books, tens of thousands, multiple tens of thousands of low-cost $300,000 cruise missiles that are coming beginning next year. The ones publicly that I can talk about that we're designed in on, and I'm probably going to miss some here, is JDAM LR. Carrera. We're on several with Northrop Grumman, and we're on several more with Lockheed Martin. The big one, of course, is JDAM LR with Boeing. We're designed in on all those, and we're in on many others. We have a build plan that indicates what we need to build in 27 and 28 and 29. We have leaned forward and we have placed the orders now for the components for 3,000 engines to be built in 2027. And we're at least 3,000 more customers. And then we have a build plan where we're going to be ordering, as I mentioned in the remarks, the components for 5,000 more engines for 2028. And I'm not going to give a specific number for 2029, but that could increase significantly. The selling price average for these is $50,000 each.
On the turbofans, these are roughly, and it can adjust 600 pounds of thrust on up. These are much bigger, much more sophisticated. These go in, as I mentioned, JASM and LRASM. I gave you the numbers that have been publicized there on the increase for those two types of cruise missiles. There are several others we cannot talk about here because we're either under an NDA or that factory is going to be up and running, as I said, in the summer of 27 in Oklahoma. It's mapped into missiles coming off the production line in late 27, 28. That will begin LRIP in 2028. That's the partnership with GE. It's a 50-50 partnership. And so any numbers I give financially, just divide them by two because it's 50-50. And as I mentioned, there are thousands of those plans as well. Those are the two biggies for us, those turbo jets and those turbo fans.
Analyst Seth Sethman (JP Morgan): Okay, excellent. And then maybe just one to follow up on the guidance for this year. You mentioned some of the headwinds from the shekel. It seems like that's limiting some of the margin expansion that's happening here in Q2 and Q3. Is there anything else we should be aware of with regard to margin? And then are there some mixed factors that are pushing the margin back up in Q4?
Executive: Seth, you're correct. So the biggest headwind that we're facing is that shekel impact. The impact for the second quarter was about 2.5 million, but the first quarter was much smaller at 300 grand. The estimate that we are forecasting at this point is about 5 to 7 million for the year. So we're expecting that strength, unfortunately, to continue for the second half. So that is some of the headwind. Otherwise, we would have expected to see more margin expansion in the third and fourth quarters. That's the single most significant headwind from a margin perspective.
Analyst: Okay, great. Thanks very much.
Executive: Yeah, and Seth, some of those other platforms we're on, we're on CMMT or Comet, we're on Speed Racer, we're on Carrera, we're on Silver Fox, we're on Gray Wolf, and we're on Lumberjack in addition to JDAM-LR. So those are the public ones I can talk about.
Analyst Peter Arment (Baird): Yeah, thanks. Good afternoon, Eric and Deanna. Nice results. Hey, Eric, you mentioned Taiwan. Maybe you could give us an update on the developments with the Mighty Hornet. It certainly seems like it's well positioned and now sounds like there's some interest in Valkyrie. Maybe you could just give us a Taiwan download here.
Executive: Yep. So on the first one, the Mighty Hornet, which is the derivative of our tactical fire jet, and this is one of the Kratos drones now that has a Kratos engine. So I think it's another first for Kratos. We're the first company under the same roof that's building a plane and building an engine. We have flights coming up with the customer soon. I'm not allowed to give the specific dates. We're going to do some things and we have to hit some things. Assuming they go well, the customer is talking about putting us into production first half of next year on the Mighty Hornet. Those would be produced initially in Oklahoma.
On the Valkyrie derivative, I was very surprised that the customer came out and did the interview that they did and they talked about this. They talked about the reason that they want to do it is because the Valkyrie is flying, it's proven, it's flown with the Air Force, it's flown with the Marine Corps, it's deployed weapons. Very importantly, I believe they also talked about is it's rail launched, but it also is runway capable, so it has incredible flexibility. And they talked about a different propulsion type of aspect they wanted to have with the airplane, and they're talking about making a decision also in the first half of next year. I have to leave it there because that's what they said and I'm under an NDA, but that appears, both of those appear to be progressing very well for us.
Analyst: Terrific, and then just could you give us an update on kind of overall production or capacity capabilities for Valkyrie now that things are starting to move forward on a number of different fronts? Thanks.
Executive: Yep, yep. And so we're increasing our production rate right now, as I've talked about before. I believe as we get into 27, we'll be up to one and a half planes on average a month. So we'll be getting to 18. I had mentioned a couple of calls ago, I think, that we were looking to get on an average of 40. It's going to depend on the configuration where we ultimately get to that the customers want. So, for example, if the predominant number of the airplanes that the customer want are rail-launched or trolley-launched, we'll be closer to the 40 number. If the type of airplane that the customer wants is conventional takeoff or landing, seat tall, it'll be closer to a 35 number because they're a little bit more sophisticated to make in the factory and the customer will want less of them. And so we're tracking for a ramp in 27. That as we head into 28, we're going to be able to handle our U.S. customer. You know who that is, hopefully the Taiwan customer. And we have two other international customers. I'm hoping we're going to be able to get through State Department, and we're going to be able to announce those very soon. Appreciate all the callers. Thanks, Eric.
Analyst Mike Crawford (B. Riley Securities): Thank you. I believe, Eric, in the beginning you mentioned ERAM, that extended range attack munition, which I think is called the rusty dagger. Is that another one of the derivatives that's coming that's driving some of your engine growth?
Executive: I cannot talk about any of those because of NDAs. The ones that I mentioned to Seth are the ones I can talk about.
Analyst: Okay. Thank you. And then just for the follow-up question, so it's great to see that Valkyrie production rate rise at your expanded facility. In the past, you've also had a number of other CCA-type tactical unmanned aircraft with perhaps greater performance that have been through various phases of development. Are any of those still in the running, or are we distilled now to FireJet and Valkyrie derivatives?
Executive: No, there are two others that are in the running. Both of them now are classified. We are under contract on both of them, and one of them is in the release of weapons phase. So in addition to Tactical FireJet and Valkyrie, there are two others that are under contract.
Analyst Trevor Walsh (Citizens): Great. Hey, Eric and Deanna, thanks for taking the questions. Eric, maybe just a clarification. You called out the new GE engine that's going for some of the, I think, the increment to CCAs, a little higher thrust. It wasn't exactly clear as I read, we read the PR on that as to how you would be partnering with GE on that one. So could you maybe just either confirm or just explain if that's how that is either the same or different maybe than the first GEK engine, if you could?
Executive: Yep. Yep, absolutely. So we have a number of, I'll call them programs, going with GE. The one that's most public and that's most talked about is the GEK partnership, and that's for a range of a certain thrust class think missiles that falls into those programs. Missiles, and that's a 50-50 partnership, and that's the one that I've been talking about. We're moving forward with them on those certain missile systems. We are also working with them in a contractor role, but it's more than a contractor. It's a partnership role, and I have to be careful here because we're under NDA, but everyone that they've talked about we're working on that I'm aware of. If I'm missing any, I apologize. So we are working on them. I would look at Kratos with GE. GE brings incredible depth, breadth, technology, credibility, capability, especially if you're talking building 10,000 jet engines that are going in $2 million cruise missiles. Kratos brings the ability to do very low-cost engineering and NRE, and very low cost mass production of those engines, which makes us a very formidable team. So just think of that on all of these small engines, how we're working with GE.
Analyst Trevor Walsh (Citizens): Great. That's terrific. Appreciate the added clarity there. Deanna, maybe a follow-up for you, but feel free to chime in, too. I appreciate all the call-outs for the KGS growth rates across the different business lines. You know, pretty high double digits for a lot of those. It's probably easy just based on the prepared remarks to understand how durable the defense and rocket support business growth rate is, probably turbine, too. But as far as microwave products and space, I guess I'm just trying to understand as we, you know, think about modeling these out a little bit or just applying them to what we're doing is how much those ladder to, again, the microwave and space, kind of those percentages that you called out for this quarter, if that's sort of a decent kind of, you know, foreseeable future next couple of quarters in the next year type of growth rate or could there be some, you know, flux to those?
Executive Deanna: I think there may be some flux in the microwave one, but it'll still be meaningful. We're still forecasting meaningful growth rates, but they may be a little bit lower than what we just experienced in this last quarter. And I think the space satellite and training in cyber business, that should be probably along the same lines of what we just did in this second quarter.
Analyst Jonathan Sigman (Stiefel): Appreciate the time, Eric and Deanna. Congratulations on strong results. Hoping you could maybe talk a little bit about – you guys have been through a couple cycles with sometimes – when Washington throws a wrench at things, you've expressed a lot of confidence on the outlook, but just how you're thinking about maybe risks of extended time periods, faster than a budget, and any kind of interruptions that Washington might throw at you.
Executive: Yep. Yep. So our forecast basically assumes there's going to be a Q4 CRA. So October, November, December. It'll get settled out sometime in January. That's kind of how we've modeled everything else because that's kind of what we've seen far out of the last five years. A significant amount of our work is program of record based, so it's in the base budget. It's in the base appropriation. We have some work that was in Reconciliation Bill 1 or Big Beautiful Bill 1. A significant amount of that we have received the funding for. The money's been obligated. We've seen it. So we are in pretty good shape on the trillion-dollar spend for fiscal 26, which was 850 plus 150. As we head into 27, we're looking at a $1,150,000,000 base. So it's up 15% on the base, and I think that's pretty bipartisan, and I think that's a minimum of what we're going to get. As we all know, there's a reconciliation two. It's now called reconciliation four for $350 billion to get 27 potentially up to $1.5 trillion.
My tummy tells me we're going to be somewhere between $1.15 trillion and $1.5 trillion, and even if we're not at $1.15, that's significant growth. And within that growth, as I think you can all see, in that bubble where there's only so much money, there's a huge shift going on to lower cost mass munitions. The future force structure for the foreseeable future, look at it like a barbell. On one side, there's going to be a ton of attributable and expendable munitions, drones, missiles, etc. On the other side of the barbell, there's going to be a handful. There's always going to be exquisites of exquisite weapons and munitions. And there's not going to be much in the middle. As you know, we're the merchant supplier to both the new defense technology companies, and we're producing our own low-cost weapon systems as a prime on the left. And on the right-hand side, we are the go-to military-grade hardware supplier to the primes on the exquisites. So we feel pretty good about our spot today. Irrespective of what may happen in the budget dynamics.
Analyst: Great, and it sounds like we're just starting to see some contributions from the new CapEx. You mentioned the hypersonic facility opening Q3. Is there any other new capacity contributing to 26 that we should be aware of, or is this all at 27?
Executive: Yep, so remember Anaconda, which is our radar program. So the Anaconda facility is underway. It's not ready yet, but because of the demand of what we're doing, we are already starting to work on SPY-1 radars. So that is ramping a little bit in the second half of 26. When this facility comes online middle of next year, this Anaconda anechoic chamber radar facility, radar refurbishment facility, is going to be one of the next legs up for us going into 28. And again, we've got the contract, we've got the program, etc. And the other one is Helios. Helios, we're going to be hopefully breaking ground on that later this year. That'll be up and ready to go end of 27, beginning of 28. This is a hypersonic system arc chamber and laser facility. A lot of the work is classified, but that is going to be another leg for us step up in 2028.
Analyst Andre Madrid (BTIG): Eric, Deanna, thanks so much for taking my question. In the same way that you provided color on kind of the step up in the hypersonics business. Can you provide something similar for KTT? Or maybe, you know, if I could throw some numbers at you and maybe gauge your, you know, read of that, if that's all right. Is it safe to assume, you know, an incremental like 150 mil next year related to the turbo fans? And if so, I know that the base business is pretty small, probably call it barely, you as of now. Excluding this, how should the rest of the KTT business grow into next year?
Executive: Yeah. So the forecasted big jump for 2027 over 2026 on the engines is the turbojets. That's the big jump, the turbojets. And that's the low-cost cruise missiles. And if you guys know, you see what's required next year, the missiles that the air framers have got to put together and deliver next year, 28, 29, and the big step up, 27, 28 is the turbo jets. On the turbo fans, if everything comes together according to plan and according to the funding documents, 20, 28, that's going to begin. And then that steps up big time in 29 and 30. And so 28, 29... is where we will be at significant production rate for both, if the plan holds, for both the turbojets and the turbofans. And KTT is in there, of course. Now, drilling down even more into KTT. We have a lot of engine programs that I don't talk about, but we'd be here for hours. All right? We put out a press release in the past week or two on a critical element engine of a new weapon system. This is in KTT. If this goes into production, which would be second half of 27, beginning of 28, this could be a $200 to $300 million a year run rate program by itself. We don't talk about it because we can't, but we're designed in.
It's ours. There's a space program where we are working on the propulsion system for the prime. If that program's a go, that's going to begin in KTT in 28. We've got some biggies out there that we're designed in on. We're the guy. I think on the first one, we're under an exclusivity arrangement that if it goes, and I think it's going to go, it's in the funding docs, it's going to be another step up for us. So that's kind of the framework on how we're looking at the two.
Analyst: Got it, Eric. That's really helpful. And then I guess now pivoting maybe to unmanned systems, you know, you added that organic growth of 10% to the guide, which is new. Can you provide us with a little more color on how that should progress through the second half and into 27? And I guess on that point with the increase in 26, should we assume some level of growth in the 27 as well?
Executive: I'm pretty sure right now your preliminary 27, Alex, does not really account for much KUS contribution. So we have to be very careful here because of the customer, all right? And so we can't get into much details on this because then it'll give away what they're doing. You could probably tell in today's prepared remarks that I purposely, because it's a fact, tried to focus everybody on where we have very clear line of sight quarterly, yearly, the hypersonics, the engines, and the space business. I mean, those three alone are just, they're ripping. Our space business is ripping and a lot of the work is classified. On the drone side, we're going to be very cautious and we may not be able to report it to you until we ship it and it shows up in the numbers. And then we may not be able to say much about it, but you're going to know what it is. And I'm sorry, I don't like to operate that way, but we have to based on what the customers told us here.
Analyst Clark Jeffries (Piper Sandler): Hello. Thank you for taking the question. Just sort of a clarifying question around that expansion that you did to Oklahoma City. Trying to put in context what you've said earlier in the call around maybe some upside with Mighty Hornet. Just how does this expansion kind of put you on track for expanding the sort of 165 high-performance jet drones? Seems like Mighty Hornet or the tactical fire jet would be early in fiscal 27, but also how much does the expansion explicitly help that 35 to 40% production run rate for Valkyrie in our years. And then one follow-up. Thank you.
Executive: So right now, as you said, I think we're the largest jet drone producer in the world that I'm aware of, maybe outside of the Ukraine, at 165 or 170 a year. The Oklahoma facility, and this ties back to a question Mr. Crawford asked, the Oklahoma facility right now is producing Valkyries, FireJet, Tactical FireJet, and one other. We've just recently approved an expansion of the facility by another 50,000 square feet or so that is happening. That additional 50,000 square feet is going to be needed for, it's a mix now, Valkyrie, FireJet, Target Drones. You can imagine with everything that's going on in the world right now, the target drones are in great demand because so many people are buying missile systems and radars. They've got to exercise the weapon system and train the crew. It's also going to be very important for tactical fire jet and Mighty Hornet. And then very importantly, Mr. Crawford asked about some other drone programs. If one of these goes into production, I think it will second half next year. We're going to build that other one at this facility because it's going to have a classified space.
Analyst: Perfect. And then just you talked about a, you know, about two months ago, maybe a month ago, $150 million single award for Counter UAS, Solar Shield. Just curious what's the expected timeline for that contract and maybe help us think about what the opportunity for like mobile CUS from the Department of Energy might look like long term. Thank you.
Executive: Yeah, so that one we got to, this is a very important program. We received, I forget the number, 30 or 40 million of funding already, right out of the chute. So we have begun on this. This is part of our ramp, by the way, in the Q4 of this year. One of the reasons we're comfortable with our Q4 is because this program, and we got the funding for it. As you probably saw, this is with the Department of Energy, and it's related to securing nuclear assets. It's a mobile and transportable system. We are the prime. We are the prime system integrator. We are responsible for the entire system working, including the direct and energy weapons system. If we're successful, I believe this program is going to grow or this initiative is going to grow significantly because this type of a capability is needed right now, and we're the guy that has it at low, low cost. We're doing these systems in Montana. So that's the backdrop there. It's ramping now. It's going to be big in Q4, and it's going to continue to ramp into 2027.
Analyst Pete Skibitsky (Olympic Global): Yeah, good evening, guys. Just want to review a couple things. Eric, you mentioned the $7 billion in the fit-up for Mach-TB over five years. So I guess, would it be reasonable for us to factor in that business being, you know, a billion-dollar-plus type of run rate starting in 2028 or so? Just on a basic level.
Executive: Brother, yes, that's what's there to go take a look at the justification documents. And I'm not trying to be coy here because Deanna and I, we've got a forecast for this year. We've got an outline for next year. I don't want to get ahead of myself in any of this, but this is one of the reasons for the last couple calls, including today's call. I've been trying, as I said a minute ago, to orient the investors on our hypersonic franchise. You know, it's growing rapidly, and if things come together the way you're indicating, which is there, this could be very, very substantive for the next five years.
Analyst: Yeah, that's great. That's great. Okay. Thank you for that. Just shifting gears to JASM and LRASM, obviously these missiles have been around for a long time, right? So is there a dynamic that's going on that... They want a second source engine supplier, and you guys are filling that role. If that's a dynamic, what do you think your share would be on that when you've got a ramp?
Executive: Yeah, it's a double dynamic. Obviously, the department is trying to foster the industrial base. They have the reindustrialization initiative I mentioned, and they want additional competition. The current provider on JASM and LRASM is outstanding. Thank you for joining us. but GE and Kratos, we're looking at thousands of these, thousands over a period of time.
Analyst Austin Muller (Canaccord): Hi, good afternoon, Eric and Deanna. So it seems like in the Iran war, there's been a pretty significant expenditure of both cruise missiles and rocket artillery. So just given the opportunity there to add turbo jets or guidance kits onto what would be considered dumb bombs, do you have a sense of how many JDAMs, SDBs, or other dumb bombs are out there available for you to add turbo jets or guidance kits to?
Executive: Yeah. Tens and tens and tens of thousands. There are many numbers. It's a great question. There are many numbers floating around on putting a wing kit on and bolting on a small turbojet. And now you have extended range and reach. And it's much more capable. The numbers are staggering. We have an initiative in Kratos that we've had going on. Another one I just haven't talked about because I give you guys so much. You've heard about de-militarization, de-mill. So think of what you just said. You take old ordinance and you burn it or you destroy it or you take stuff out of it and then you dispose of it. It's expensive to de-mill. We have an initiative going in here. We're actually doing it. We're re-milling it where it's less costly to repurpose an existing ordinance for something you just talked about than it is to destroy it. We're doing that under the radar, under the cover, because I don't want anybody else to figure out what we're doing. But it ties exactly into what you're saying because of the amount of ordinance out there that is scheduled to be demilled, but we're remilling it. That's our plan is to remill it.
Analyst: Okay, and there's some large contracts that are starting to go out for the space component of Golden Dome. Do you have a sense on when we might start seeing already appropriated dollars, either from Big Beautiful Bill, which you say a lot of that's gone out, or from the 26th Space Force budget to purchase virtualized or software-defined ground system to support these satellites that are going to be going up?
Executive: That's another great question. So about in the last three weeks, two companies were awarded a multi-billion dollar constellation for exactly what you're talking about. We are the ground for one of them with our software-defined command and control, TT&C, and tracking. We can't talk about it. I don't think we're ever going to be able to talk about it, but it's exactly what you just said, and our team won, and we're the ground. On other programs that we have, two of which we've announced in the last two quarters, we have seen significant funding and it's increasing. As I mentioned in my prepared remarks where I said there's a hypersonic arms race going on, the big dog is the space arms race. And, you know, we've all heard about LEO and MEO and GEO. VLEO is happening now. And VLEO is another major opportunity area for Kratos because of the nature of our software-defined command and control.
Analyst Ken Herbert (RBC Capital Markets): Hey, Eric and Deanna. Good afternoon. Yeah, hey, you continue to call out pretty significant investment, $40 to $45 million for the rocket system inventory build. Can you just update us, Eric, and apologies if I missed it, but update us on what you're seeing on that supply chain, how you're handicapping risk on that supply chain as you think about the ramp of hypersonics and some of your other businesses and sort of your optimism that that supply chain continues to get the kind of improvement and unlock that you need to see the ramp in your business.
Executive: Yep. So our Zoo Solid Rocket Motors L3 Aerojet is building them for us. They are doing an outstanding job for us. We don't have what I'll call a partnership agreement with them, but they're a true partner of Kratos. And they are doing... an incredible job. They have met every milestone on time, on budget. So at least when it comes to Zeus, for us, they're doing a hell of a job. And part of it may be because they see the next five, seven years, what's coming in addition to what we've already done. On the second one, Oriol, this is our partner, Northrop Grumman at Northrop Orbital ATK. Ken, here again, when it comes to us, I can't speak for what I read in the press about other system issues. They are outstanding with us. I mean, we're...
Quarter 2
Q1 2026 Earnings Call — May 6, 2026
Management: More importantly, what's your confidence level that we see sort of the kind of step up they've talked about in drone and counter drone funding and that it actually happens in a timely manner, I guess. Thank you.
Executive Name (Title): Yep, yep. So on that funding, as you know right now, the placeholder is $56 billion over five years. That's the program you're talking about, DOG. And when you talk drones, I'm going to talk drones and loitering munitions, which both fall underneath it. Our confidence on the engine side, we'll start there, is extremely high. If you triangulate the missiles they're talking about, I named one program with 30,000 of them, and you take a look at what's going on in the world and the attrition of our exquisite missiles right now and how long it takes to rebuild them and how expensive they are, we Kratos are highly confident that on the small jet drone, jet loitering munition, jet missile side, we have great confidence in our step-up forecast.
Very good.
All right. Now let's go to the drone side. We are being very careful. You know, we've made the decision we are going to be the merchant supplier of engines, so we are going to be, our plan is to be on every other system provider's missile or drone or loaded munition, be a merchant supplier. What does that mean? We are picking and choosing our spots very carefully where we are going to actually build the entire system, so we're not competing with our merchant supplier partner on the engine side, okay? So there are one or two that we're involved with right now where we're comfortable, we're not competing or going to cause a problem on the merchant supplier side. But again, our primary focus is it's better to have part of something than all or nothing. And our part of something is to be on everybody's engines than to bid on dog systems where there are 10 guys bidding. And even though we think we're the best always, we might not win because the government is trying to rebuild the industrial base and rebuild different competitors.
That's helpful. And if I could, how do you think about the fact that a lot of the funding for DOG in particular is coming through expected reconciliation relative to base budget? And are you handicapping those any differently as you just think about fiscal 27?
Executive Name (Title): Right. Yeah, so obviously for 26, I'm all happy. That's all bolted in at, what, $1,150,000,000. So as you know, on the $1.5 trillion that the department's going for for 27, the base budget piece is $1,150,000,000, and the reconciliation bill is $350,000,000. Very importantly, if that makes it, I believe it's going to make it based on my recent meetings as I talked about on the Hill. The new baseline for the base budget is $1,150,000,000,000, which never goes down. The only time it ever went down was under Obama and sequestration. And so you take that $1,150,000,000,000 base and that goes up 3%, 5%, 6% a year. The DOG program will be adequately funded. It's a new program that will be able to successfully execute our business plan, even if there are no future reconciliation bills.
Great. Thanks, Eric.
Management: Yep. And our next question will be coming from the line of Jonathan Siegmund of Stiefel.
Analyst Name (Firm): Your line is open, Jonathan. Thank you, Eric and Deanna. Good afternoon. A lot of progress on a lot of vectors. Maybe one you didn't talk about as much was Prometheus, the solid rocket. JV mentioned $50 million of CapEx this year. I was just wondering, there was some earlier Defense Production Act Title III money for that campus. Does that change the level of investment that Kratos and the partner is putting in, or does that represent opportunity to increase the scope of that facility? Thank you.
Executive Name (Title): Great questions. Yep, so the department, so we had the Prometheus groundbreaking earlier this year, just a few months ago. And the day after the groundbreaking, the department came out with its own press release that they're putting in $100 million into the camp, the Energetics campus on their own, which was great. So right after we put out a groundbreaking press release, the department put that out. Continuing on your question, there is absolute opportunity here for Prometheus, Kratos and Rafael, with the department for significant additional department funds to be put into Prometheus to both pull production to the left and increase it for existing platforms that we're quote unquote on and new platforms they want us on. Prometheus, in my opinion, is going to be a grand slam home run for the United States, the energetics business, and for Raphael and Kratos. The department is with us. Our customer is with us. And we're planning right now we're going to have first fire next year.
First fire next year.
Yeah. That's great. That's great. Yep. And then maybe I'll just add on one. You touched on it with Orbit Tech. It just looks like a great acquisition and a really strong final quarter as an independent company. And if our math is right, your revenue in Israel now is approaching about 10%. And last year you upgraded your manufacturing facility. Could you maybe talk a little bit about the prospect of the enlarged business there and how much exposure does it have to ammunition restock that will unfold given the conflicts there? Thanks again.
Executive Name (Title): Yeah. Yeah. So, Deanna, are we near 10%?
Management: Yeah.
Executive Name (Title): So we're near 10%. We have very large exposure to ammunition restock. So just think Tamir on Iron Dome. Think Arrow. All right, we're on those. I can keep, think Barack, Sling of David. We're on all of them. And it's us and Orbitz on a lot of stuff too. So we expect, we are forecasting and expect significant growth in our Israeli business for the foreseeable future for the restock and for new systems that our big three partners, Rafael Elbit and Israeli Aerospace Industry, are working with us on. As I think you know, I believe, I think we're the largest independent merchant supplier of microwave electronics outside of the United States. And it is growing rapidly. And as I think you also know, in the U.S., we're back in the game in the microwave business. It is growing incredibly fast also. And this is where some of our highest margins are because a lot of this is catalog pricing. It's not subject to TINA, which is normal. And this is one of the key aspects tying into Noah's question on margin expansion and why in the future, you know, maybe we can do better than 100 basis points as our merchant supplier businesses get bigger relative to the system businesses.
Thanks for the comments.
Management: Yep.
Thank you. And our next question will be coming from the line of Joe Gomes of Noble Capital.
Analyst Name (Firm): Your line is open, Joe. Good afternoon. I apologize. I just joined the call, so I missed a lot of it. I was on another one. If I ask any questions that have been asked already, I apologize in advance.
Executive Name (Title): No problem. So I wanted to ask, kind of start out with, You talked about all the opportunities, Eric, and all the things that you're bidding on, and basically you said, hey, people are coming on saying if you bid on it, you win it. How is that impacting your ability to, you know, get employees for these programs that you're winning? You know, is the labor situation gotten any better? Has it gotten worse? You know, maybe you could provide some color there.
Executive Name (Title): Yeah, okay. So it's gotten better in the past year, six months, but it's not great, especially in turbo machinery engineers for propulsion systems. They don't exist. It's very hard in the turbo machinery area. You may not have heard him. In my prepared remarks, I talked about We've been verbally told we're going to receive another very large industrial gas turbine program at the end of this year, beginning of next year by another company. This industrial gas turbine area for power generation, it's an incredible opportunity right now. And if we had the people, this is an area we could accelerate our growth even more, Joe. We really could. But these are the same guys that are working on our cruise missile programs. They're working on our hypersonic air breathing programs. They're working on our space programs. And I want to say guys, guys and gals, of course. So our number one operational challenge right now is a company. Our number one operational challenge right now as a company is obtaining and retaining qualified people. And then... if they need to be able to obtain and retain a security clearance, that adds another layer on it, especially in certain states where marijuana is legal to smoke, because you can't get a security clearance if, and I'm not passing judgment here, if you like to do that. So that's the dynamic. It's not as bad as it was a year and a half ago. It's better, but it's not great.
Okay, thanks for that. And then one more. Obviously, a lot of the questions deal with the military side of things here, but you and I have talked a lot in the past about some of the more commercial, the truck platooning, logistics automation. And I know you had a release or two of that in the last six months or so. I'm just wondering where does that business stand? Are you going to be able to grow that business here in the near term with all the focus on the defense side?
Executive Name (Title): Yep. So our unmanned ground system business is doing great. As you know, we're in the soybean farms. We're in the sugar beet farms. We're on the timber land. I think we're in 15 states now driving unmanned on the roads. It's doing very, very well. But as you said, there's just so much going on on the national security side. It's not a strategic focus area for us, but because our technology is so good and so cost affordable, they're coming to us. Joe, we're in discussions right now with a global... farming equipment company. You would know who they are. And it's possible by the end of the year we're going to get a contract with them, and we're going to turn their farming equipment into unmanned systems out on the farms. So it's happening, but I cannot tell you that it's a major strategic initiative because it's not, and I apologize.
Fair enough, fair enough. I'll get back to you. Thank you, guys. Appreciate it.
Management: Okay,
thank you. And our next question will be coming from the line of Pete Skibitsky of Elbic Global.
Analyst Name (Firm): Your line is open. Hey, good evening, guys. Thanks. Guys, on the growth in KGS in the first quarter, I'm just trying to figure that out. Was that mostly MockTB driving the growth there? And then the billion-dollar sole source, I think, addition that you mentioned, Eric, I think in your opening remarks, was that an increase in the ceiling of MockTB or was that something different?
Executive Name (Title): Go ahead.
Executive Name (Title): Yeah, so the organic growth in KGS is partially driven by Mock TB, but also in our microwave business as well as our KTT business. So it was across those three divisions within KGS.
Okay. And then on the other one, I can't get ahead of the customer until they announce it, but we've got – three separate very large initiatives going on the hypersonic side, two of which we've been verbally told we're winning. The third one, I think we're also going to get, I want to wait until the customer comes out on it until I say anything, just because I don't want to get in front of them. And it should be very soon on one or two of these.
Okay. Fair enough. And I guess last one for me, maybe for Deanna, just on the 160 million CapEx this year, Just, you know, what's the best guess that you think we should model in in terms of, you know, how that profile is going to look in kind of through the midterm? It seems like a lot of the spending here will continue for some time, just judging from the amount of, you know, initiatives you guys have underway.
Executive Name (Title): I think it would, and obviously we're not giving any guidance for next year, but I think the elevations of CapEx will continue. I don't think it'll be at that level, but just with the initiatives we have going on, I think it will continue to be elevated in 27.
Okay. Thanks, guys.
Management: Sure.
Thank you. And our next question will be coming from the line of Austin Moeller of Canaccord Genuity.
Analyst Name (Firm): Your line is open, Austin. Hi. Good afternoon, Eric and Deanna. So you mentioned the win on the $447 million contract for ground management integration of the missile warning and tracking satellites in MEO. So at this point, you now provide ground station capability across all three orbital inclinations, LEO, MEO, and GEO. So should we think that Kratos has a place competing on the recompetive SCAR with open space? And do you think there's an opportunity there for both the flat panel phased array antennas and the parabolic?
Executive Name (Title): That's a very, very insightful question. You're exactly right. We are across all three of those orbits, and we're also – I've been learning a lot about cislunar orbit lately, too, because we're now in cislunar orbit also – But to your question on SCAR, so obviously we were partnered with AeroVironment on SCAR. We delivered all our stuff out previously, so the recent termination for convenience didn't impact us at all because we had already delivered out our piece. When it comes out, if it comes out, we will definitely take a look at it to see If it's something we want to prime or do we want to partner again with AV or partner with somebody else, we'll look at it. I just don't know right now enough details on it. But to the next part of your question, on a parabolic antenna versus an AESA antenna or a phased array antenna, here's my opinion. I go back to what the Secretary said on November 7th in the Arsenal of Freedom speech. Bring me 85% of the solution now that I can feel now, not something that I may or may not get two or three years from now. My tummy tells me that parabolics will win there. But I don't know. This is my opinion just based on what's coming out of the department.
Okay. And then if we talk about drone dominance for just a second, on future gauntlets, do you expect other drones in the group two to five category will be requested and procured at scale? And do you think Kratos is in a strong position given your manufacturing scale to ramp production and take greater economics on future production lots for gauntlet one and other gauntlets?
Executive Name (Title): On your first two questions, yes and yes. So yes, yes and yes. We're in source selection right now on something related to that, so I can't get into too many details. But as I think I said on the last call, but if I didn't, I'll say it now, on phase two, we got some real compelling solutions on phase two. And what I understand on future phases, we have some really super compelling solutions. So we'll see, but Chris, we answer your questions yes and yes. Very exciting. Thanks again.
Management:
Thank you. And our next question will be coming from the line of Andre Madrid of VTIG.
Analyst Name (Firm): Your line is open. Good afternoon, Eric and Deanna. Thanks for taking my question.
Analyst: Hi.
Analyst Name (Firm): Deanna, could you maybe provide a split of unmanned system sales between Valkyrie and Target? I know Valkyrie drove the strong growth, but I wanted to see just how much was between the two.
Executive Name (Title): Yeah, the tactical revenue for the quarter was about $20 million.
Analyst Name (Firm): And that $20 million was almost exclusively Valkyrie, or was there some other stuff?
Executive Name (Title): It's predominantly Valkyrie. And I know you built a lot of those Valkyries kind of ahead of schedule. You know, I guess just when we think about Valkyrie sales again or tactical drone sales in isolation, just how should we think about the cadence through the rest of 2026? I mean, is 2Q going to be a step down? I know you kind of already alluded to that a bit, but, like, I mean, just, like, I guess how significant should we expect of a step down and then kind of a rebound through there at the end of the year?
Executive Name (Title): Yeah, there will be a step down. We haven't given guidance for the break between KGS and unmanned, but there will be a step down. As far as the produced units that we've been building as capital-owned assets, it's going to depend on the configuration of what we have built and what the customer is ultimately ordering. So if it's the same configuration and we get the contract for that, then if those are complete units, then that revenue would be recorded immediately. If they're 50% complete, then we would record revenue at 50% at the time of the award and the remaining would be as it is completed. If it's for a different configuration other than what we have in inventory or in fixed assets, then it would be based on that build process and the revenue would be reported accordingly.
Analyst Name (Firm): Got it. Got it. That's helpful. And then one more. I mean, when I, Eric, maybe this one for you, you mentioned this directed energy down selection as a prime. I, you know, historically, I haven't thought of this as an end market that you guys play in directly. Is that true? Is this like a new entry or is this something that has been, you know, you've been actively supporting for some time and has just been more behind the scenes and just not directly addressed?
Executive Name (Title): Kratos has been involved in directed energy weapon systems and laser weapon systems for years and years and years and years and years. I haven't talked about it. Over the past year, internally and tied in with an acquisition we've made, we try to go one plus one equals four. And this is a counter UAS system. It's mobile. We're the prime. It's several hundred million. It's going to start ramping next year. It should be very big in 28. And this is an area where probably now that we've won this one, it will open the door for us to win more.
Analyst Name (Firm): Got it. Got it. That's very helpful. I'll leave it there. Thank you so much.
Management: Okie dokie.
Thank you. And our next question will be coming from the line of Michael Leshock of KeyBank Capital Markets. Michael, your line is open.
Analyst Name (Firm): Hey, good afternoon. Apologies if I missed it, but wanted to ask on the backlog and the significant growth there in the quarter. Did you see any impact from the government shutdown delaying some awards that could have potentially driven your backlog even higher?
Executive Name (Title): Yes, we did. And we're expecting to see them in Q2. Right now, Q2 backlog is looking, bookings, pardon me, is looking real good right now because it's freeing up.
Great. And then one on hypersonics, just given the very strong environment there and the new awards you mentioned, It sounds like the demand is clearly there. Is there anything that could potentially drive revenues above the $700 million target in 27 that you've talked about for that hypersonics franchise, whether that's additional investments or alleviating any bottlenecks, anything there that you could call out to drive even more growth in hypersonics? Thanks.
Executive Name (Title): There is absolutely... the opportunity for us to be well ahead of that in 27. Here's what it is. It's the supply chain. It's the engines and the materials for the glide vehicles and the air breathers. This is it right here. As you know, we have under order now, I think, 120 motors that are starting to come in Q3. And this is also one of the reasons, Noah, why there's a slight dip in Q2. And then we're going to integrate them with the front ends, and then they're going to be launched. And we have the launch manifest for 27 and 28. But what's the most important part? It's the one you don't have. And so all the sub-elements have to come in to be able to get the systems out on the range and get them launched. So the demand is there. The funding is there. The customer intent is there. And this is a great question on why the U.S. Department is rebuilding the industrial base. It's not there to do what they want to do, and that would be the inhibitor for us.
Great. Thanks so much.
Management: Yep. And our next question. We'll be coming from the line of Kashin Keeler of BNP Paribas.
Analyst Name (Firm): Your line is open. Hi, Eric, Diana. Thanks for the question. Just starting on capital deployment, you obviously upped the CapEx guidance a bit and completed some acquisitions, but you also raised a good amount of equity in the quarter. So as you look ahead, how are you thinking about capital deployment here? Is it mainly just going to be focusing on those organic investments or can we expect that it'll be active with M&A moving forward as well?
Executive Name (Title): Yeah. Clearly, let's do the easy one first. Clearly, the growth opportunities we have, we are in a great position now in the eyes of our customers to execute on what we have. and for the additional awards they intend to give us. So think the engines, for example. Probably in Q3, we're going to start placing the orders for the components and the subsystems for a lot of jet engines, which we will have programs for and contracts for, which we'll start selling in 27 and then 28. those are the air breathers. The 120 solid rocket motors I just mentioned to you, we've made some payments on those. We're going to have to continue to make payments on those. Those tie right into the $400 million revenue for hypersonic this year and the 700 next year. Got to have the motors. There's cash going to be deployed. And I can keep going, but I can give you the programs, the customers where the cash for working capital will be deployed, but then we'll get it back in revenue and then receivables when we collect it.
On the M&A side, we are not aggressively pursuing anything, nothing, zero. However, right now, there are a couple, three small companies where they're retiring. This is very similar. They know us. They've come to me. They're thinking about retiring. What they build, it's exactly consistent with what we do. It's not like hand grenades. It's our sweet spots. And we are talking with these gentlemen and their wives, and if it makes sense, we'll do something with them. But these are small. So we have no plans right now, nothing on the radar screen for anything significant. That could change. I never say never, but that's where we're at right now.
Okay. That's helpful. And then on, uh, Valkyrie, there were just some comments in the press out of one of the industry trade shows about, uh, Valkyrie and the Muxtak air program. I think one of them was just, you know, on whether or not they're looking for conventional takeoff and landing, uh, S toll or V toll. So just curious if any of those decisions impact your ability to ramp to, uh, you know, the 40 units a year, or are your production lines fairly modular that you can adapt to those requirements?
Executive Name (Title): That's a great question. Good for you. So you saw that. Yeah, that's very relevant to the question asked earlier on the revenue recognition on the Valkyrie. So five years ago, four years ago, because of the war games that were performed, runway independence was it. That was the winner. That was five years ago, the winner six years ago. Had to be runway independent. Chinese are going to blow up all the runways. Valkyries launched off a rail. Go get them. So we started building our Valkyries on a rail, runway independent. Kendall comes in as Secretary of the Air Force. Halfway through his term in 2022, we're going to do the Agile Combat Employment Program, ACE. where we're going to have all these little bitty runways all over the Pacific, so runway independence doesn't matter. We want wheels. So now what you've just seen is, is it moving back to runway independence? Take a look at what Shield AI is doing. They're building the Expat, which is our runway independent, super-duper, pooper-scooper drone. I'm going through all that with you because with our current customers, We have orders, and we're going to receive orders for a certain mix.
We're going to build those, and we're going to deliver them, but along the way, the wind could change. That Marine Corps thing you talked about, it talked about both runway independent and CTOL versions. And so it's still kind of in flux now, and thank God we have three versions that we can build. Rail launched. Take the rail launched one, put it on a trolley, launch it off a runway. So runway capable, rail launched. And then full CTOL, conventional takeoff and landing with the landing gear internal. This is why when I initially said last call that we're, I think I said we're going to do 35 to 45 a year or something like that. I said depending on mix. The 40 that we're going to get up to by the end of 27, beginning of 28, If it's all CTALs, it might be 30. If it's a mix, it'll be 40. It just depends on the mix. And I'm not trying to obfuscate this. I'm telling you that this is happening real time. We have an inventory of a handful left of the RADO-launched ones, the rail-launched ones. We're building right now numerous CTAL ones, numerous, that'll be ready next year. And as the hand of cards comes out, we'll let you know as soon as we can by customer what it looks like.
Okay. Thanks for the details.
Management: You got it. And our next question will be coming from the line of Brian Dobson of Clear Street. Your line is open.
Analyst Name (Firm): Thanks so much for taking my question. So earlier you were describing a generational recapitalization of the U.S. defense industry. You mentioned some conversations that you had on the Hill, but beyond that, what gives you the confidence that this can endure through multiple administration changes and perhaps several budget cycles? And to that point, how do you see Kratos evolving and growing to meet the needs of the Department of War over the next few years?
Executive Name (Title): Yeah. So on the first part of your question, Like I said, I've spent a lot of time on the Hill since our last call, both sides of the aisle, with senior leadership. So the chairman and the ranking members, Hask and Sask, and then on down from there. There is no doubt in my mind national security spends are going to continue to increase because of the threat profile. Is it going to be a trillion five or a trillion three? I don't know. Under the Dems, are there going to be reconciliation bills, or is it all going to be in the base budget? I don't know, but it's probably all going to be in the base budget. But then the Dems, and I'm not saying this negatively, this is policy, they're going to require equal discretionary non-defense to go up to. So there might be just different mixes here, but unless global peace breaks out based on what's going on geopolitically, the trajectory is up and to the right for national security spending.
And now tying into the second part of your question, and I said this twice on the call because it's very, very, very important. You have the five and a half traditional primes, five and a half, okay? Then you've got Kratos. You've got a lot of new defense technology companies that are coming, and they're coming, but there is a massive supply-demand imbalance right now. There is an incredible demand for military-grade hardware, and software. Kratos has military-grade hardware and software, and we're the low-cost guy. And that ain't going to change for multiple years. It's not like we're having to take share from anybody right now. The pie is growing. The total addressable market, 27 over 26, for example, looks like it's going to go up $400 billion. So our primary focus is execution. We must execute, deliver products that work every time at an affordable price in large quantities. And we are going to do fantastic as the financials are showing. We're going to let the financials and the growth rate, the organic growth rates and the margin expansion do the talking. That's our plan.
Excellent. Thanks so much for the call.
Management: Thank you. And
our next question will come from the line of Gavin Parsons of UBS.
Analyst Name (Firm): Your line is open. Thank you. Good evening. Hi. Hi. Eric, Kratos is already pretty fixed price heavy, but I'd love to hear your thoughts on the White House executive order last week on fixed price contracting, if that has any competitive implications.
Executive Name (Title): Right. There are colors of fixed price. So fixed price production contracts are extremely beneficial for the government and for the contractor because as you go down the learning curve, as you're producing, you become more efficient. So you can make more money, and at the same time, you can lower your price to the government. So your margins can go up, and their cost of paying you can go down because you're getting so efficient. Fixed price development contracts, we don't do those. Those are scary. So this is why Boeing got in so much trouble over all the years. They took fixed price development contracts, building something that had never been built before, and if you can't get it to work, you've got to keep going. We don't do fixed price development contracts. We're not big enough to be able to handle it. From our direct discussions with the department on programs, we are clearly the low-cost provider. We are looked at as the low-cost provider. Let me give you an example. We recently had multiple successful ballistic missile target launches. Kratos did. I can't get into details. It wasn't announced, but we had multiple.
Our ballistic missile targets, so these represent adversary's ballistic missile targets, decoys, chaff, flares, all kinds, countermeasures, et cetera. Our most expensive all-in-one, I think, is 15 million a shot. I think the competing one's 100. Now, the competing, now go back to the secretary. I'll take 85% of the capability now at a very reduced cost. So I'm making this up because I don't know what the right thing is. We can do 95% of what the $100 million one can do. So we're looked at very favorably for that. Same with our engines, same with our drones. I can go on and on. So our focus on very capable military-grade systems that are affordable, not exquisites, is... is our sweet spot. Not low cost, not exquisite, but very capable military grade that works. That's our focus.
Thanks, Eric. Appreciate it.
Management: Yep, you got it. And I would now like to turn the conference back to Eric DeMarco for closing remarks.
Executive Name (Title): Great. We appreciate your time and all your questions, and we truly look forward to briefing you in a few months on the second quarter. I think we're going to have a lot more exciting things to update you on. Thank you.
And this concludes today's program. Thank you for participating. You may now disconnect.