Kratos Defense & Security Solutions, Inc.

Hello, and welcome to CRATO's Defense & Security Solutions Second Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. We ask that you limit yourself to one question and one follow-up. I would now like to hand the conference over to Marie Mendoza, VP, General Counsel. You may begin.

Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions Second Quarter 2026 Conference Call. With me today is Eric DeMarco, Kratos' President and Chief Executive Officer, and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer. Before we begin the substance of today's call, I'd like everyone to please take note of a safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential market opportunities, operational outlook, financial guidance, and other forward-looking statements during today's call. Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP. Eric?

Thank you, Marie. Kratos' second quarter results reflect the execution of the Kratos team and that our strategy, including making internally funded investments, be first to market with relevant hardware and software that is engineered up front for affordable mass production, is aligned with the Department of War's priorities. Representative of this alignment, Kratos' last 12-month book-to-bill ratio of 1.3 to 1 Total last 12-month bookings of $1.99 billion. The number of opportunities for Kratos continuing to increase with the bid and proposal pipeline of $15 billion now. And our business momentum forecast to accelerate into the second half of this year and continuing the 27th. Kratos' second quarter year-over-year organic growth rate was 19.1%. We are forecasting third quarter organic growth of approximately 19 to 25%, and we are forecasting fourth quarter year-over-year organic growth of approximately 19 to 31%. We are increasing our forecasted full year 2026 organic revenue growth up to 19 to 23%. I am emphasizing that these are all organic growth numbers. Kratos' EBITDA margins also are increasing and are forecast to continue to increase in the second half of 26 and into 27 as the business scales, production increases, and we realize financial leverage on our fixed infrastructure costs. We are generating and forecasting for increased margins while we are making significant investments as we pursue large new Department of War opportunities that are being presented to us and also with the recent strength of the shekel adversely impacting our Israeli operations profitability. We begin the second half of 26 and look forward to 27. We are more confident than ever in Kratos' future prospects, including for the following reasons. We have recently received new hypersonic system program awards, including Kraken 1, Kraken 2 and Nemesis. We have received a new directed energy counter UAS system program award with an initial value of approximately $160 million. We have received a new space domain awareness system production award with an initial value of approximately $100 million. The Space Force is now receiving a new EW system that includes Kratos hardware. We have recently received approximately $400 million in new hypersonic and other funding. and we expect to receive significant additional funding in the second half of this year. We hope to announce shortly a successful recent Kratos rocket system flight event directly related to missile defense and we have been recently informed that we have received a new contract for a missile system program of record. The Pentagon has requested multi-year procurement authority for multiple munitions and missiles including PRISM, AMRAAM, JASM, LRASM, TLAM and MST, THAAD, PATRIOT, low-cost hypersonic strike systems, family of affordable mass munitions, and low-cost containerized cruise missiles. These are all CRADO-supported programs or programs that we are positioning to support in the future. Why is this significant? The family of affordable mass missiles, the FAM program, for example, which the Air Force's Future Years Defense Plan, or FIDUP, calls for 27,000 low-cost cruise missiles, has been a top strategic priority of Kratos' jet engine initiative, and it's now happening. The Pentagon is also looking to acquire 10,000 cruise missiles under the low-cost containerized munitions program. Another low-cost missile opportunity Kratos has been targeting for our engines. Other new low-cost cruise missile programs Kratos is supporting or positioned for include ERAM, ETV, Ground Launch Cruise Missile, and JDAM-LR, together representing an estimated potential opportunity for tens of thousands of Kratos small turbojet engines. We believe that JDAM-LR alone, which includes the Kratos engines, could be one of the largest single opportunities for our company with the potential for tens of thousands of systems by itself. As a result, we are currently placing initial orders with our supply chain for the components for 3,000 small Kratos TDI Spartan turbojet engines we expect to produce for customers in 2027. And we currently plan to order components during 27 for an additional 5,000 engines and many more. It was reported the Air Force is looking to acquire over 11,000 JASM and LRASM missiles over the next six or seven years. This is an opportunity Kratos' BladeWorks turbofan engine family and our partner General Electric Aerospace have been pursuing. Kratos' new BladeWorks facility in Oklahoma, where we recently broke ground and where we plan to produce these turbofans, is expected to be operational next summer. which schedule we are closely coordinating with our partner and the customer. We currently plan on turning on our BladeWorks turbofan engine supply chain in either Q4 of this year or Q1 of next so we can meet future customer required delivery schedules. Additionally, Kratos' partner GE has recently revealed a new small turbofan designed optimized for the cost profile of the CCA market for a range of mission applications. We are expecting Kratos' engine business to be one of our company's largest and fastest growing over the coming years. Kratos' hypersonic business, which generated approximately $200 million in revenue in 2025, and we are currently tracking for $400 million in 2026, increasing to at least $700 million in 2027, is positioned to become Kratos' largest business with significant increased government funding in the hypersonic area expected for the foreseeable future. We expect to begin receiving the first of the 120 solid rocket motors we previously procured in Q3 this year. And with Kratos' new hypersonic system integration facility in Indiana operational, we see these as key elements of our hypersonic business expected future growth trajectory. Kratos' hypersonic and rocket systems business has several additional large new opportunities we are pursuing, including certain in-source selection, which we expect to be awarded by the end of this year. We are confident in our hypersonic business's forecasted growth trajectory, including based on the several hundred million in funding we recently received. And also, it was recently reported that the Mock TB program funding over the next five years as reflected in the department's budget justification documents is approximately $7 billion. An additional data point on why we believe that Kratos' hypersonic business will be a primary future growth driver for Kratos for the foreseeable future is the threat. As it was recently reported that using U.S. intelligence estimates that China could have approximately 4,000 hypersonic missiles by 2035 and Russia could have 1,000. There is not only a drone, missile, and space arms race underway, but also a hypersonic arms race, each of which Kratos intends on supporting the department to win. Kratos' microwave electronics and SATCOM business, headquartered in Israel, is working with the Israeli MOD and our partners, Israeli Aerospace Industries, Rafael and Elbit, to replenish stockpiles of advanced weapons, interceptors, SATCOM, and other assets used in the Iran conflict. Kratos has over 700 employees in Israel, and we are working on and have access to certain of the highest technology, battle-proven systems in the world. Kratos' Israeli employees, business partners, and presence is a clear differentiator for our company globally. Kratos' satellite C2 and space demand awareness business, our company's largest, is also rapidly growing and expecting significant future margin expansion. With space having never been more important for global security and as space increasingly becomes a war-fighting domain. On the commercial side, Kratos' relationship with our partner, global satellite operator SES, is outstanding, with SES being an industry-leading technology company with a future technology and business roadmap that is truly exciting for SES, its customers, industry, and for Kratos. Kratos' industrial gas turbine business area continues to ramp. It is currently one of the fastest-growing business areas in our company. With certain industrial gas turbines, we are working on being air-cooled, which we believe is truly differentiating in the market. Kratos' unmanned systems business had a solid Q2, and we expect to receive an additional Marine Corps Valkyrie order by the end of this year. It was reported that in recently released Marine Corps budget justification documents that the Marines plan to spend $1.28 billion on their CCA program over the relevant five-year period. Kratos Valkyries are in Europe with our partner Airbus, and we continue to work with a number of customers on tactical fire jets, including Taiwan. It was recently reported that Taiwan is planning to adopt a new version of the Valkyrie, In addition to its tactical fire jet initiative, Mighty Hornets. Certain Kratos jet drones are now flying with Kratos jet engines, increasing performance, capability, and time to market for our customers. The number of opportunities that Kratos has across our company has never been stronger and continues to increase both in the United States and internationally. The Department of War is looking for companies like Kratos to invest, move rapidly, mass produce, and field a product fast in large quantities at a practical cost, and Kratos is stepping up and executing. Kratos is currently in an investment phase aligned with the department's re-industrialization initiative, which is related to the number of new long-term program opportunities we're receiving. We're focused on organic growth, Thank you, Eric. Good afternoon.

In summary, our second quarter performance exceeded our forecasted revenue and EBITDA targets, and as Eric mentioned, we continue to be on track to meet our previously reported full-year 2026 revenue goal of approximately 15% to 20% of organic revenue growth. and approximately 100 basis point improvement in adjusted EBITDA margin performance from our reported 2025 operating results. Revenues for the second quarter were $458.8 million, above our estimated range of $400 to $410 million, with a consolidated organic growth rate of 19.1%, comprised of an organic growth rate of 22% in our KGS segment and 8.1% in our unmanned systems segment. Notable year-over-year organic revenue growth in our KGS segment included our defense rocket support, turbine technologies, microwave products, and space training and cyber businesses, with organic revenue growth rates of 50.2%, 43.3%, 29.5%, and 8.7%, respectively. Adjusted EBITDA for the second quarter was $38.2 million, above the high end of our estimated range of $30 to $35 million. reflecting the increased revenue and revenue mix. Unmanned Systems' second quarter 2026 revenue was up $5.9 million, or 8.1% organically, with the increase primarily driven by Valkyrie-related activity. KGS' second quarter 2026 revenue was up $101.4 million year-over-year from the second quarter of 25, with organic revenue growth of 22%, Excluding the impact of the recent acquisitions of Nomad and Orbit, which contributed $40.2 million. Second quarter 2026 cash flow used in operations was $11 million, primarily reflecting the working capital requirements related to the revenue growth impacted our receivables by approximately $59 million and increases in inventory of approximately $10 million and increases in prepaid and other assets of approximately $14 million. primarily reflecting prepayments for long-lead materials as well as investments we are continuing to make related to certain development initiatives in our unmanned systems, rocket systems, and space and satellite businesses. Free cash flow used in operations for the second quarter of 26 was $18.9 million after reflecting funding of $17.2 million of capital expenditures and net of $9.3 million in proceeds from the sale of Valkyries which were reported as company-owned capital assets and previously classified as capital expenditures when manufactured and therefore reflected as an inflow in investing activities when sold. As we planned, we are continuing to make investments to expand and build out certain of our manufacturing and production facilities in our microwave products, rocket systems, Hypersonic, and JetEngine businesses to meet existing and anticipated customer orders and requirements and investing in related new machinery, equipment, and systems. Consolidated DSOs, or day sales outstanding, decreased from 130 days during the first quarter of 2026 to 114 days during the second quarter of 2026, primarily reflecting the achievement of billing milestone events. Our contract mix for the second quarter of 26 was 67% fixed price, 29% cost plus, and 4% time and material contracts. Revenues generated from contracts with the U.S. federal government during the second quarter of 26 were approximately 69%, including revenues generated from contracts with the DOW, non-DOW federal government agencies, and foreign military sales contracts. and 20% generated from foreign customers and 11% generated from commercial and state and local entities. Moving on to financial guidance. Our financial guidance we provided today includes our expectations and assumptions for our supply chain's execution, the impact of employee sourcing, hiring, retention and the related cost. Our third quarter 26 revenue guidance reflects an estimated revenue mix and estimated leverage on elevated administrative manufacturing overhead and bid and proposal costs that we have ramped in the business to support the forecasted full-year 26 growth, as well as the estimated impact of foreign currency impacts, including on our microwave products Israeli business, which is being adversely impacted by the strength of the Israeli shekel versus the U.S. dollars, as we are paid in U.S. dollars for work performed, but pay our vendors and workforce in shekels. Simply stated, Kratos' second quarter and six months ended adjusted EBITDA would have been $2.5 million and $2.8 million higher, respectively, if the increase in the shekel over the past six months had not occurred. Further, our forecast for the full year includes an estimated impact of approximately $5 to $7 million negative impact to EBITDA related to the continued estimated impact of the strength of the shekel. Our third quarter revenue guidance of $460 to $480 million reflects estimated organic revenue growth of approximately 19 to 25% as compared to the third quarter of 25. Our revised four-year cash flow guidance has been updated to include the working capital requirements related to the recent decision to commence procurement of the materials and equipment in the third and fourth quarters to ramp our production of jet engines to 3,000 in 2027 to address the demand for engines for small cruise missiles, also includes the shift in timing of construction and procurement of related machinery and equipment, removes certain capital expenditures which are now funded under customer contract, and includes a shift in classification of investments for various drone opportunities, which will be classified as a use of working capital in our operating cash flow as work in process or inventory rather than capital expenditures when incurred. The forecasted total investments for the year effectively remains unchanged at approximately $250 to $270 million. However, the geography of where certain of these investments are reported on our cash flow statement have shifted between inventory or working capital and operating cash flow versus capital expenditures or investing cash flow.

Great. Thank you, Deanna. I'll turn it over to the moderator for questions.

Thank you. Ladies and gentlemen, as a reminder to ask the question, please press Start11 on your telephone, then wait for your name to be announced. To withdraw your question, please press Start11 again. Please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Sheila Kyle Glue. with Jeffrey. Your line is open.

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?

Go ahead, 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.

And the big piece... Operationally, Sheila, is our hypersonic system integration facility is operational now in Q3. And 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.

Okay, got it. Thank you.

Okay.

Thank you. Our next question comes from the line of Seth Sethman with JP Morgan. Your line is open.

Thanks very much and good afternoon. I wanted to start off asking about the 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.

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. So that's those. on the turbofans. So 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.

Okay, excellent. And then maybe just one to follow up on the guidance for this year. You mentioned some of the headwinds from the Sheckle. 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?

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.

Okay, great. Thanks very much.

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.

Thank you.

Okay.

Thank you. Our next question comes from the line of Peter Arment with Baird. Your line is open.

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.

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.

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.

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. Thank you.

Our next question comes from the line of Mike Crawford with B. Riley Securities. Your line is open.

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?

I cannot talk about any of those because of NDAs. The ones that I mentioned to Seth are the ones I can talk about.

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?

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.

Great, thank you very much.

You're welcome.

Our next question comes from the line of Trevor Walsh with Citizens. Your line is open.

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?

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.

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? Thank you.

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.

Okay, great. Thanks, both. Appreciate it.

Sure.

Thanks.

Our next question comes from the line of Jonathan Sigman with Stiefel. Your line is open.

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. Thank you.

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.

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?

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. Thank you. Yep.

Please stand by for our next question. Our next question comes from the line of Andre Madrid with BTIG. Your line is open.

Eric, Deanna, thanks so much for taking my question.

Sure.

You're welcome. 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?

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.

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? 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.

No, I understand and I appreciate what color you can give. Thanks for that, Eric. I'll leave it there. Yeah, thank you.

Our next question comes from the line of Clark Jeffries with Piper Sandler. Your line is open.

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. 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.

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.

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. Thank you. Yep.

Thank you. Our next question comes from the line of Pete Skibitsky with Olympic Global. Your line is open.

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.

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.

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?

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.

Yeah, okay, that's great, thank you.

Yep, yep.

Please stand by for our next question. Our next question comes from the line of Austin Muller with Canaccord. Your line is open.

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?

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.

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?

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.

Great. Thanks for pointing me in the right direction.

You got it.

Our next question comes from the line of Ken Herbert with RBC Capital Markets. Your line is open.

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.

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 getting ready. We're looking at having to place another order for dozens and dozens more, and they have been very accommodating, and again, they're on time and on schedule. So I can only speak for Kratos, but we do some other ones, but those are the two primary ones. L3 Harris and Chris is great, and Northrop Grumman and Kathy is great, and they're just outstanding.

Okay. Oh, that's excellent, Eric. And Prometheus and where you stand and some of the next major milestones as we think about a facility.

Ken, you broke up a little. When I think about which facility, buddy?

Prometheus. Sorry, the investments there on the motor side.

Yeah, I'm so glad you said that. If you all haven't seen it, a podcast came out this morning on Prometheus with a major publication. And it walks through the entire campus. It walks through the platforms. It walks through the timing. It walks through everything with our partner, Rafael. So go take a look at that for details on what I'm about to say. It's incredible. I didn't know it was coming out this morning, and it did. Ken, we are on track for first fire next year. We are on track with our partner, Rafael. And I've got to tell you, Rafael is outstanding. They are stable, outstanding, and they are bringing proven, military-grade, qualified energetics. This is so far ahead of any of these other guys that are saying they're going to stand up an energetics facility. They got to get qualified, et cetera, et cetera, et cetera. We is. So this is going to begin middle of next year. I think we'll get into production, what year is next year, 27, 28, we'll get into production.

Great. Thanks, Eric. Yep.

Our next question comes from the line of Joe Gomes with Noble Capital. Your line is open.

Good afternoon. Thanks for taking my questions.

Hey, Joe.

Good afternoon. So you guys are talking about the $3,000 and then the $5,000 part and starting to add up or starting to get the ordering of the component parts later this year and into the 27th. As you look at the supply chain there, are there any critical suppliers for certain parts or do you have multiple part suppliers for the components there that maybe we need to keep an eye on?

Yep. So, Joe, as you know, we have lots of credo systems here. One of my favorite credo systems is what's the most important part? It's the one you don't have to complete a system. So we got to make sure every one of our vendors and every one of our suppliers including their backup and the backup to the backup is qualified. We're giving them production quantity so they're in production and they're going through quality, through delivery, and through integration. So we are, this is one, obviously I'm not going to say we're bulletproof, but this is so important to the company, to our company. We are going to incredible lengths with the people we're bringing in from the auto industry, from the Department of War, from Primes that are coming in to work with us, to work for Kratos, to set up these lines, work the supply chain, work the quality control and delivery schedules with them in redundancy. This is a huge effort because, as I said, you just said, we're going to do a minimum of 3,000 next year, a minimum of 5,028 It could be $8,000, $10,000, and $29,000 if things come together. And these are just the turbo jets. We have to do the same thing with the turbo fans beginning, as I said. We're going to start ordering for those probably, I said Q4 this year, Q1 next year, probably Q1. We're going to have to start ordering for those, and then we'll make a very big order, Q4 of 27 or Q1 of 28, because the factory will be set.

Okay, thanks for that. And then, Eric, I just want to try and get your views on this or your, you know, point me in the right direction here. So as you know, there's a big private company out there, which I consider a peer in the same space as you guys that's been raising capital here at valuations at multiples of where Kratos is trading at on enterprise value. to EBITDA, or excuse me, revenue basis. And I'm wondering, am I incorrect? They're not a peer. Is there a disconnect somewhere, something there that, you know, we saw a credo stock run up and now it's come back down. And, you know, this private company is now saying there's rumors out there they're raising even more money at even a higher valuation that just, you know, as I sit here, Looking at the two companies kind of shake my head. Am I missing something? I'm just trying to get your view as to what the disconnect there is.

Yeah, Andral is an absolute peer of Kratos. We're peers. They have Lattice, their software that ties everything together. We have OpenSpace, our software that ties together space assets, space vehicles, space grounds, etc., etc., They have unmanned jet drones. Kratos has unmanned jet drones. You may have seen recently now they're getting into the hypersonic area. We're in the hypersonic area. They're in solid rocket motors. They acquired Adronis. They're in solid rocket motors. We're in solid rocket motors with our partners and then also our new facility with Rafael. They are an outstanding company. I want them to succeed. The United States needs them to succeed. We are absolute peers, no question about it. The only difference I see between – and they're partners with us. We work together, and I can't talk about what we're working together on. The only difference I see right now between the two of us is financial because they're private and we're public, and because they're private – They can take different approaches on things and invest more because they're not held to yet. If they get public, then they'll be held to it. They're not held to certain matrices that a public company is held to. So that might be an advantage for them. I have some advantages on them being public because it brings me access to certain things. From a valuation standpoint, I can't speak to that. I think I said on the last earnings call or the one before it, In my opinion, I'm the CEO. I drink the Kool-Aid. Kratos is the most valuable defense company there is. And you listen to our calls. You look at our programs. Look at our growth rates. I mean, we could grow 30% in Q4 and make money. And we're going to keep going in 27 and 28. We're the most valuable one to our investors, and we're the most valuable one to the department, and I'm sure they would say the same thing, that they are.

Okay, great. Thanks for that insight, Eric. I appreciate it.

Thank you. Please stand by for our next question. Our next question comes from the line of Cash & Killer with BNP Paribus. Your line is open.

Hi, thanks for the questions. You guys brought up a pair of facilities this year. You're bringing up some more next year. Can you maybe just talk about or quantify any startup costs related to ramping these, what the payback periods look like, and what sort of awards you might need to get to that 100 basis points of margin improvement next year as well?

Thanks. I didn't hear the first part of your question. You said investing in, and then it blipped a little bit. Investing in what?

Yeah, no, you're just bringing up some more facilities next year. Just curious on startup costs related to ramping those and payback periods as well.

Oh, got it. Yeah. So just as a good question, so as a reminder, we don't do a build it and they will come. We don't do that. We built our hypersonic integration facility. because we won the Mock TB program and some other programs, so we knew what the operational tempo would be. We built the facility to satisfy that, plus some other things I think we're going to get. We did not build our new turbojet engine facility in Michigan until I was extremely comfortable that we were going to be designed in to multiple cruise missiles, which I went through today. We've just now broken ground on the facility in Oklahoma. for the Turbo fans with our partner GE. You've heard me talk about the programs. I can't get into much more detail than that, but it is not a build it and hope they come. It is a build it because we have a program or we have a partner or we have a contract and we can model out the quantities, we can model out the profitability, and we can model out the rate of return we're going to get on our investment. Anaconda, which I mentioned, the radar one, I think that that program was announced for us goes through 2053 publicly for the radars. That's on Anaconda. On Helios, we've already got two or three customers signed up who said that if we built that architect facility for the hypersonic test, they would sign up. So everything we do, we've got a customer, a partner, a program, or funding, and we can do a rate of return calculation so we know we're getting an adequate rate of return for our investors.

Thank you.

You're welcome.

Our next question comes from the line of Gabby Floret with Cantor Fitzgerald. Your line is open.

Hi, good evening. This is Gabriel Floret on for Colin Canfield. Can you discuss how your customers are talking about CCA volumes relative to their national security outlook? Specifically, where is Credo seeing customer pricing or production schedule pull to the left? How should we think about that momentum versus U.S. production scaling?

If you can see me, I'm smiling because that program, that is one you haven't heard me talk about that for a long time. I cannot talk about the CCA program with the Air Force. Can't talk about it. It is a classified, super classified program, and we can't say anything. On the Marine Corps CCA program, you saw how I said today it's been reported that the program of record is this much money. It's been reported because that's how I have to talk because I'm not approved to talk about anything. So, again, I'm sorry, but I just can't get into any of that because we do not have approval to discuss it.

Okay. Understood. Thank you. We'll leave it there for this evening.

Okay.

Please stand by for our next question. Our next question comes from the line of Bryant Dobson with Clear Street. Your line is open. Okay.

First of all, congrats on a great quarter, and this is Jonah Henschel speaking on behalf of Brian Dobson here at Clear Street. Given the Valkyrie momentum you've described tonight, I'm curious what kind of updated color you can provide when it comes to the LRIP Phase 1 timing.

L? The what phase?

What were the last few words?

Yeah, the last part. You broke up. The what timing?

Sorry, sorry. The LRIP Phase 1 timing. Oh, LRIP. LRIP.

Low Rate Edition Production. I got it. I got it. So as I said in my prepared remarks, we expect to receive by the end of the year an additional award wherever we're partnered with Northrop on that MUXTAC Air Program with Northrop and the Marines. That's all I can say right now is that we expect something by the end of this calendar year.

Okay, understood. And then just a quick follow-up. When Valkyrie ended up scaling, I'm curious, how can we think about margins in that segment?

Right. Yeah, I think 10% to 15% EBITDA margin, depending on configuration. And that's domestic. Very important, domestic. Because we've got a number of international ones going, and the international ones are typically higher fee for us. because they're international and there are different aspects. And in certain instances, we're not held to TINA, Truth in Negotiation Act, because we're not sole source. So international, think 15 to 20. Domestic, think 10 to 15, depending on configuration and quantity.

Understood, and thanks for the question.

Yep.

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Eric for closing remarks.

Great. Excellent. Thank you for joining us this afternoon, and I look forward to talking to you when we report Q3, I think in the first week of November. Thank you.

That concludes today's conference call. Thank you for your participation. You may now disconnect.