Kratos Defense & Security Solutions, Inc.

Q3 2026 Earnings Call — November 5, 2026

Our first question comes from Colin Canfield with Cantor. Please go ahead. Hey, thanks for the question. Maybe let's start with the funded bookings progression. If you could just kind of walk through, as we think about the building blocks of funded bookings progression in 2027, how do we think about kind of the moving pieces between USCCA, international CCA, and then if there's any kind of initial orders that we should be expecting around expat manufacturing work. Thanks. Right. So on, Colin, I think your first question was on funding and booking progression. A significant amount of our work, I would say a significant majority of our work is tied to large projects program of record or production programs that are underway. And they're funded in the 2026 appropriation, and so they should not be materially impacted by the continuing resolution, which gives us confidence in what we're looking at there. On the CCA side, as I mentioned in my remarks, we definitely believe we're going to receive some additional Valkyrie orders in 2027. including international orders.

As far as the current bookings and backlog on that, also as I said in my prepared remarks, I have received something in writing from the customer. I cannot provide any more detail than what I provided on the production contract we received, the LRIP production contract. I'm sorry, I just can't, but you will see that when we provide the segmentation guidance. And when we report Q4, you're going to see that revenue ramp from that production contract in our guidance. That's what's anticipated. On your question on the expat or other ones like that, I can't comment on things like that at all because of NDAs. Got it. Thank you. Yes, sir.

Thank you.

Our next question comes from Peter Arment with Baird. Please go ahead. Yeah, good afternoon, Eric and Deanna. Nice results. Eric, could you give us an update on, you know, how you're thinking about the hypersonics business scaling up? I think the original plan was, you know, generating close to $400 million in revenues this year and then jumping up considerably next year. You know, how are you thinking about that just given the budget environment? Yep. The business is doing fantastic. Peter. Fantastic. And net-net, we've received approximately $600 million in funding now already. So we are well on our path, as I said, to $700 million in revenue next year. We have a clear path. The risks to that that I see are supply chain. I don't see any flashing yellow lights there right now relative to rocket motors coming in and some of the materials for the glide vehicles coming in and range time. There are a lot of what are called DX rated programs right now that are taking priority even if you have slotted range time.

We haven't seen any hiccups on that yet, but I want to put that out there that if we have a mission scheduled for, I'm making this up for March and it's pushed to May or June, We could have something move on us just because of government priorities on the range. But other than that, the hypersonic business is looking really, really good. And I'm glad you asked. We won all three, Nemesis I, Nemesis II, and Kraken, three new programs that we're already underway on. So, so far, so good. Great to hear. And then just a quick follow-up on the Mighty Hornet, some pretty good. Pretty glowing press reports in Taiwan about the desire for the Mighty Hornet. How are you thinking about the production? You talked about production scaling up significantly in Oklahoma, but I think there's also some production potentially in Taiwan. Maybe you can give us some more details there. You're right. The press has been great. They're talking hundreds of them. That's out there. They're talking hundreds of them or more.

We The plan would be, if this happens, if it goes through, the plan would be the initial ones we will build in the U.S., but we will be, assuming we get State Department approval, I believe we will, with trade compliance, we will stand up a capability for them to be produced over in Taiwan, where Kratos will receive a license fee on the units produced. So that's how I see that one evolving, and we should have some more information for you based on the way things are moving when we report Q4 in February. Great. I'll jump back into Q. Thanks, Eric. Thank you.

Thank you.

Our next question comes from Josh Sullivan with Jones Trading. Please go ahead. Hey, good evening. Eric, Deanna. Good evening, sir. Good evening. So the gap between the public and private defense tech world, you know, Andrew's $90 billion valuation earlier this month, How do you reconcile that? And then if we layer in the current political environment, how do we layer that in as well? That's an excellent and very thoughtful question. First of all, the U.S., because of where the industrial base is, we need more defense product companies and technology companies, including companies like Andral, to be successful. We need them to be successful. As I said in my prepared remarks, I don't know everything that Angel does because they're private. We're public. We have to do things in the light of day. They're not. But based on my understanding and based on I know what we have, like I said in my prepared remarks, Josh, there's no way I'd want to be any other company than Kratos. We, for our size, where we are in our growth trajectories, we have more production contracts, more programs of records. We're in hypersonic systems. People talk about other people's software.

We have OpenSpace, which is a crown jewel, and I believe we're all going to see this really take off in 2027. We have our propulsion business, obviously our drone business. I believe we're the highest value company, the most valuable company out there. I believe we are. As far as a disconnect between a private company and VC companies, I can't reconcile it. Hopefully, when some of these guys come public, their valuations will come with it. Investors will take a look at their valuations relative to Kratos and their capabilities relative to Kratos, and maybe then it will equalize more and we'll move up and be closer to them, which I think is appropriate based on the capabilities as I understand them. Got it. And then, you know, kind of a related question. You've got a billion forward and cash on the balance sheet. What do you need to execute on all these organic opportunities? And then, you know, what's dry powder for, you know, potential consolidation? All right. So first of all, we are absolutely fully capitalized and there are no more capital raises coming for the, I never say never, but for the foreseeable future. We are totally capitalized.

We are laser focused on internal execution. We are in a significant investment phase right now where we are basically winning virtually everything we're going after. And now is the time to build an incredible company that will have ultimate incredible cash flows. As I say, I see the lines crossing in 2029 when the production programs, the line is going up. It's going to cross the investment line, which should be going down by then. and we're going to be a significant sustained cash flow generator. I would see Kratos doing no significant acquisitions, none. We have no gaps in our gap analysis. When we do routinely every quarter, Deanna and I, with the division presidents, we do a gap analysis. We have no gaps. You will continue to see us do small, what I'll call tuck-ins, tuck-in acquisitions. These are primarily, these are not auctions, there are not bankers involved. Perfect. Thank you. Yes, sir.

Thank you.

Our next question comes from Michael Tremoli with Guggenheim Securities. Please go ahead. Hey, good evening, guys. Thanks for taking my questions. Nice results. Eric, I know we all get kind of caught up here in CCAs and Unmanned and Valkyrie, but maybe I'm just looking. KGS Bookings, $1.9 billion year-to-date. I think you did $2.1 billion in 2025 and 2026 combined. I mean, if we look at what's really the engine of this company in a predictable fashion, I mean, what are you most excited about? I mean, it really seems like you've got a tremendous opportunity in the KGS segment, and obviously we've got the hypersonics, but maybe even just some color on what's driving that booking strength. Yeah. Some of the ones that are driving it, and thank you for saying that, and I really appreciate you taking a look at KGS because it is the flywheel of the company right now with multiple flywheels within it. Our C5ISR business, we are the merchant supplier of military-grade hardware for the Primes for virtually every air defense, missile, and radar system.

So when you Google a Raytheon system or a Lockheed system or a Northrop system, or Patriot or Integrated Battle Command System, or you take a look at Leidos' IFPIC Indirect Fire. We build a lot of that hardware for these guys, and that's really driving it. And that is seeing incredible strength, and it's going to continue to go up and to the right. Next is the space business. Our space business is killing it. It is absolutely killing it. I wish I could show you some of the opportunities we're chasing. I think we're going to win that aren't even in the backlog yet. It's incredible. The team is phenomenal. If there's any question of how technologically rich Kratos is, we're a technology company, take a look at our space team and what they're doing with that software. I mean, that is our lattice, if you will. And it is the crown jewel, and it is helping us run the table. And thirdly, KTT. This is a big deal that the GDK engine has received a classification, a name. This doesn't happen. The Air Force has come out. You will be second source on JASM. Take a look at the number of JASMs that are planning on being built.

The factory is coming online the second half of next year, right when EMD is going to begin and then LRIP will begin in 28, and that's going to be a new significant growth driver. And then, of course, there's the hypersonic business, which is just, it's unbelievable. And this is the poster child of Kratos being first to market with Aranis, first to market with Dark Fury, first to market with Zeus, being first to market with affordable systems. We're running the table. So those are the ones in KG. Yep, those are the ones. Okay. Just one more. I appreciate the conservatism with 27, still pretty compelling organic growth. Do you need reconciliation funding to accomplish any of those objectives? I know you talked about lame duck, you know, just kind of, we got the CR supply chain. Can you accomplish these growth objectives without reconciliation funding? Yeah, so assuming, so if you take a look at the 27 NDAA, the $1.15 trillion, You take a look at that. You take a look at the components in that, which, of course, we've done. Okay. If there are no material changes to that, to the NDAA, which I believe there's top-line agreement on the 1.15.

There's no material changes on the internals of that. We are in very, very, very good shape for 2027. We do not need a reconciliation bill to achieve our objectives. Got it. Perfect. Thanks, guys. I'll jump back in the queue. Yep.

Thank you.

Our next question comes from Jonathan Sigmund with Stiefel. Please go ahead. Hey, good afternoon. Thanks for taking my question. Maybe just on 27 a little bit more, you really quantified hypersonics. Everything's on track there. That gets you a big chunk of What's your 27 versus 26 revenue build should be? You've given us some breadcrumbs on missiles, but just can you talk a little bit about some of the other pieces that, you know, space and these other programs. Is that more growth that's 28 and beyond? Or is there anything in the portfolio that's dropping off next year that we should be aware of? Thank you. Yeah, there's... There's nothing dropping off. So let me give you the pieces of what we're highly confident in, and this is one of the reasons we were able to take the roll-up, which is very, very high, and guide to what we guided, which I think is very reasonable. Our C5ISR business. We have won numerous programs in the past three months. for missile systems, radar systems, air defense systems, and counter UAS systems. That is going to be a big driver for us in 2027. And we have those, and they're either in production or they're beginning in production.

At the end of last quarter, we received a very large new laser weapon system program with the Department of Energy. That is ramping. That will be a significant driver in 2027. Our space business. Take a look at the last two quarters book-to-bill ratios. We have won several multi-initial value, multi-hundred million dollar new space programs. I think if you take a look at our job request right now on our website, we have hundreds of open recs. Our space business has major program wins that are well funded that is going to drive this business. Next, our Israeli microwave business. This is not tied to the U.S. budget. This is tied to the Israeli Ministry of Defense. We all know they live in a bad neighborhood, and they are rearming. So that business is very, very solid for next year. And as you know, for Rafael and Israeli Aerospace Industries and Elbit and the Ministry of Defense, our microwave electronics are designed in on a substantial number of their missile systems, their radar systems, their air defense systems. So I'll stop there. There's four or five that are just bolted in by program. Thank you very much. Yep.

Thank you.

Our next question comes from Anthony Valentini with Barclays. Please go ahead. Hey, Eric. Thanks for the question. In the past, you guys have put out some guidance where I think you've been conservative on Valkyrie. or in some cases I think it's included actually like no Valkyrie. What are you guys baking into 2027 for Valkyrie? How should we be thinking about it? Yeah, and so today we put out our consolidated guide for next year. We did not put it out by segment. As I said in my remarks, we expect our unmanned systems business where Valkyrie sits to be one of the primary growth drivers next year. There are a number of pieces that are included in there, including the turbojet engines in Q3 and Q4. You know, we're going to build a bunch in the first half and ship them in the second half, but also Valkyrie and also FireJet. So we are starting to include Valkyrie in the guide. We are starting to. But I want to emphasize, this is important, that going back to what Deanna said and what I said, that our guide that we're putting out is extremely conservative-based and comparable to what our internal forecast rolls up to.

If we're anywhere near what our internal forecast rolls up to, okay, which I told you in the guide where you put out today there's Valkyrie, if we get anywhere near to what the internal forecast rolls up to, you could look at Valkyrie as an additive to what we have today, taking in some of that conservatism if we're able to bring it in. Okay, that's helpful. Thank you. Yep.

Thank you.

Our next question comes from Mike Crawford with B. Reilly Securities. Please go ahead. Thanks. Could you give an update on progress of getting Prometheus Energetics off the ground? Absolutely. So we, that's in Crane, Indiana, as you know. We're tracking that I believe late in 27 we're going to have first fire of an energetic out there in 2027. And I've said previously that we look to go into production in the late 27 or early 28. I'm just going to keep saying early 28 to be conservative. I can't give you the program, but we have received second source on a very large program. So we've received it. So we have a very significant order. Obviously, we have our partner, Rafael, and what they're going to bring to Prometheus from a production standpoint. So we are tracking, and I continue to believe that we will be the first true, real, next merchant supplier of energetics and solid rocket motors in the United States, with our key differentiator being, Rafael is qualified already. Their systems are qualified.

Their processes are qualified, etc., etc., which takes a long time, which in addition to Rafael bringing their IP, those qualifications are going to jump up, start us to be first to market when the facility is ready. Thank you. And then just one more. You talked about tripling your production line in Oklahoma, but in Sacramento, you're Unmanned Systems President Steve Fendley presented at this Elroy Air Analyst Day in September where you would produce their unmanned hybrid drone when they're talking about commercial demand pipeline and more than 1,400 aircraft. Is that something you could build in Sacramento today or would you have to do some major investment there? We can build. So we can build. We can build. I'm going to use a rough number. We can build the handful of the initial units in Sacramento today, which is what we're doing.

If all the points come together and we go into production on this next year, I believe our current plan, because Elroy is in California, Sacramento is in California, we will build, we will go into production in California and I don't want to get into the investment dynamics because I'm under an NDA on who's going to pay for that, but we would do it in California. That's the plan right now. Okay. Thank you, Eric. Yep.

Thank you.

Our next question comes from Andre Madrid with U.S. Bancorp BGVIG. Please go ahead. Eric, Deanna, good afternoon. Thanks for taking my question. Hi. Hi. You mentioned just earlier that you don't need reconciliation to achieve your 2027 targets. So maybe how should we be thinking about potential upside if that does come through? And then, you know, kind of piggybacking off that, I think you also mentioned that before that even with a blue wave, reconciliation may still be in the cards. And I just wanted to see if you still hold that to be true. Yeah, so I'll answer the second question first and the first question second. Obviously, in the past 24, 48 hours, I've been on the phones doing a lot of videos with current leadership and future leadership in Congress, both the House and the Senate. My opinion, I'm not putting any words in anybody's mouth, my opinion is that if the Republicans can get There are members, both in the Senate and the House, back into Washington for a vote. They fully intend on trying to get a reconciliation bill done.

So the people that lost, the Republicans that lost, they need to get them back to Washington to do a formal vote, and the intent is for a reconciliation bill to pass. That is a focus right now, and that's what's happening. I don't know what's going to happen there. If they're patriots and they want to do what's right for the country, in my opinion, they should do it, but we'll see. The first question, so it was on the difference between the reconciliation and the appropriation. What specifically can I answer on that? If you don't need Reconciled to achieve your 27 targets now, how should we be thinking about potential upside if it does come through? Yeah, well, again, so that ties into the conservative posture we took in putting out our 27 forecast. I would not use the term substantially higher unless it was substantially higher. So if we do get another reconciliation bill and, and, and, and, we get a formal appropriation done by, let's say, the end of March, so we have a six-month CR, okay? I've got to see it. Obviously, I've got to see how the details fall.

I've got to see the details on the reconciliation bill, but my tummy tells me that if we get an appropriation by March 31st and we get a reconciliation bill, let's say north of $150-$200 billion additional to a $1.15 trillion 27 NDAA, that could be important upside for us throughout 2027. That's how I see it. Got it, got it. And then you mentioned hundreds of job listings. I've heard you say this before. What needs to be done to fill these seats, and do you expect this headwind really to abate at any point? I do not expect the headwind to abate. This is really hard because there is a generational rebuild, reindustrialization going on, and we're hiring them, Lockheed's hiring them, Northrop's hiring them, Andrel's hiring them, SpaceX is hiring them, and so it's very, very difficult. It's an additive difficulty is when these individuals need a security clearance. Because as you know, in many states now in the United States, smoking marijuana is legal. But federally, it's not. And I'm not passing judgment here. This is what it is. It's business.

And so a lot of very smart people that can be very smart technically and very smart engineers, they don't want to get a security clearance. and they have lots of opportunities commercially, which is straining them off. So this is why I purposely today said that we and what we're doing in our investments, we are building, and I don't talk a lot about this for competitive people. We're not big podcast people like some of these other companies. We are building robotic factories. I say our additive manufacturing and 3D printing capability in place, building stuff today, second to none. Second to none. I think one of our vendors that we just bought a monstrous 3D printing machine from put out a press release in the last two weeks. I think it's the biggest one they ever built. That wasn't our press release, it was theirs. So we are trying to adjust to there being less workers, More robotics, more automation, and training up the kids to be able to work on this stuff. Thank you.

Thank you.

Our next question comes from Sheila with Jefferies. Please go ahead. Hi. Good afternoon, Eric, Deanna. Thank you so much for the time. Maybe on first question on margins, just thinking about Q3, great margin performance, 11.7% up 200 bps year over year, and your initial 2027 outlook implies about 100 basis points of expansion. You know, I guess, how do we think about the puts and takes of the improvement next year, given some programs are in development still and others are ramping in production? Yeah, the puts and takes are, as we Our priming larger system integration projects, those are typically cost-plus, and that's something the government dictates. And those are typically lower margin, just by definition, the way they're set up. So it is going to be dependent on the mix of our programs, but we have won a number of large prime system integration-type programs, which are cost-plus. We will have a ceiling, if you will, on staff margin expansion on that portion of our work, and we're about 30% cost plus now, and that's been growing from about 22%, 23% last year to about 30%.

So it's really just that delicate balance of the fixed price contracts and the time and material contracts where we're ramping into production to get leverage off of our fixed infrastructure costs, and then balancing that with the cost plus side where we're limited structurally from significant margin expansion there. And Sheila, important to note on the cost plus ones, the margins might be less, but because they're cost plus, it's less risky to us. And we won't have exactly a fixed price blow up like you see some other people have. And so that's been part of our calculus and our bid strategies. Okay, now that's helpful. And maybe another one on just the 27 guide, you know, you put out revenues, you put out EBITDA, but you said you're going to wait on cash flow. And then you have, you know, pretty big write up on forecasted internal funded investments in the press release. And I know you're investing in the defense supply chain.

Eric, so I guess, how do we think about, you know, your internal investments as we think about next year, whether it's, you know, R&D, off the balance sheet, or via cash flow? You have a lot going on in terms of investments, and I guess if you could just kind of summarize your key focus areas and how we should be thinking about that. Yep, yep. So the primary investment areas right now, based on the way I see it, is going to be in property, plant, equipment, and facilities. Right now we're building our anechoic chamber, anaconda, for the SPY-1 radars. This program can go through 2053. So that's part of our calculus on building this facility. Helios. This is a hypersonic facility arc chamber with a fiber laser in it. We already have a customer. So we're putting out the CapEx, we're building that facility, and then we're going to start doing stuff with hypersonic systems in that facility. I can go on, but that's how we're doing it, Sheila, is the customer, the department is coming to us. We're working with the department. They say, we have a need.

We will, if you make an investment and stand up the facility with the right capabilities, et cetera, we will give you a program to do this, this, and this for this number of years. That's how we do our rate of return analysis. Because we're funding it, we can move much faster than the government. So the department is very happy because we get that facility up in a year or a year and a half. So their color of money is different. So instead of using blue money or red money, they're using our money. They give us the program, and they reimburse us for it either through the rates or a direct charge to the contract. And every one of these, as I said in my remarks, We have an internal rate of return hurdle that they've got to achieve or we won't do it. That's how we look at it, and this is one of the reasons I'm so confident that we're going to turn when the production quantities cross the line on the investments, we're going to turn cash flow positive and we're going to sustain cash flow. Because we are not doing build it and hope they come. We're not doing that. They've already come. We're building it and we have that program or that customer or that partner lined up.

Okay, that's super helpful. Thank you. Yep.

Thank you.

Our next question comes from Trevor Walsh with Citizens Capital Markets. Please go ahead. Hi, it's Ethan Frost on for Trevor. Just going back to the robotics and manufacturing, just curious, like, the history there in terms of, like, where KREOS is today and then, like, whether the comments in the prepared remark are something more of, like, a Thank you for joining us. Let's go to where we're building big military-grade hardware. That is a process that we have to go through because the existing process and the existing machinery, doing it with traditional methods, is qualified and certified and signed off by the customer for the weapon system. And we are very cautious about changing something out, a machine or a system, where we have to get requalified. That's more of a long-term process, if you will. We've won a new drone program. I'm not going to talk about what it is yet, but that's a greenfield program. We're going to do that robotically in 3D manufacturing right out of the chute because it's greenfield. There are the three different ways we're looking at it and how it's coming along and evolving in Kratos. Great, thanks.

And then just a smaller piece, talked about smaller acquisitions. With the Jet Set Aeromotive Acquisition, is there anything beyond what was already said that sticks out to you or excites you about that? It's a small tuck-in. The guys were retiring. Our guys knew them forever. It's in engines and propulsion systems, the exact same engines and propulsion systems we do, bringing a new customer set. and probably most importantly, bringing an inventory of engines and parts and subsystems to engines that because of the way we structured the acquisition, we're getting it at a very favorable cost and we're getting it now. This is a one plus one equals three because the demand for these type of engines out there in the market is incredible and it's increasing and this is giving us the channel, the components of the engines and another trusted partner that's now part of Kratos to the industry that we're able to bring forth. So this is like perfect for Kratos because it's low risk, exactly what we do, exactly what we're already doing, and we know the guys. Great. Thank you. Yep.

Thank you.

Our next question comes from Austin Moeller with Canaccord Genuity. Please go ahead. Hi, good afternoon, Eric and Deanna. So, do you expect more mock TB funds in the reconciliation bill if they pass it? I've heard that they might be trying to move it on December 11th. Right, yeah. You know, you see the right stuff, ma'am. Let me answer the question. Okay, I don't know. I don't know. But let me remind, I'm glad you brought this up because it triggered a brain cell. The mock TB FIDUP, the fiscal year defense plan for the five years, is $7.9, it's $8 billion. So that's in the base budget process, not the reconciliation bill. And so this ties into the previous question. Okay, so we have that FIDUP. We know it's in the 2027 appropriation. I hope it gets passed. We've built that into our guidance. If there is a reconciliation bill and there's additional funding from OCTB, that could be an upper force. Okay. And Kratos SRE participated in Gauntlet 1 of the Drone Dominance Program.

How do you view Kratos' scale and competitive positioning versus the other large U.S. drone manufacturers since DOW wants to procure one million drones? Is there anything you would need to do to scale from a CapEx perspective to meet those kind of volumes? Yeah. So as I believe I said a couple three-quarters ago when we won that face one of the drone dominance, okay. Drone dominance is not a strategic priority for Kratos. And I know the quantities. Boston, I get it, but it's not. There are, and I'm not saying this negatively, I'm just saying this factually, there are dozens and dozens of guys that are building Class 1 drones. And even if there's a million of them, if you make a dollar a drone, you've got a million dollars in profit. That is not a priority for us. If there's an opportunity and the government brings it to us and we've got some stuff lying around and we think we can satisfy it, very low investment

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...