Kratos Q2 2026 Earnings: 30.5% Revenue Growth Comes With an Operating Loss

Kratos Defense & Security Solutions (NASDAQ: KTOS) reported Q2 2026 revenue of $458.8 million, up 30.5% from $351.5 million, while GAAP diluted EPS was $0.02, unchanged year over year. Kratos Government Solutions led the expansion, but higher corporate costs, stock-based compensation and amortization contributed to a GAAP operating loss. Operating cash flow was negative as rapid growth increased receivables, inventory and production-related investment.

Core financial results

For the quarter ended June 28, 2026, organic revenue increased 19.1%, indicating that acquisitions were not the only source of growth. Gross profit rose faster than revenue, lifting gross margin by approximately 80 basis points to 21.8%.

That improvement did not carry through to GAAP operating income. Operating expenses increased faster than gross profit, producing a $1.6 million operating loss, although adjusted EBITDA and adjusted EPS both increased.

Adjusted EPS, adjusted EBITDA and free cash flow are non-GAAP measures. Kratos defines free cash flow as operating cash flow less capital expenditures plus proceeds from asset sales.

Business and segment performance

KGS accounted for most of the consolidated growth, while Unmanned Systems posted a smaller revenue increase but improved its adjusted EBITDA margin.

Within KGS, the fastest organic growth came from Defense Rocket Systems at 50.2%, Turbine Technologies at 43.3% and Microwave Products at 29.5%. Space, Training and Cyber grew 8.7%. Acquisitions of Nomad and Orbit also contributed to KGS’s total growth.

KGS adjusted EBITDA increased from $24.6 million to $33.1 million, although its margin edged down from 8.8% to 8.7%. Unmanned Systems adjusted EBITDA rose from $3.7 million to $5.1 million, with margin expanding from 5.1% to 6.4%. Valkyrie-related activity was the primary driver of Unmanned Systems revenue growth.

Order activity remained above recognized revenue. Consolidated bookings were $492.2 million, producing a quarterly book-to-bill ratio of 1.1. The last-12-month ratio was 1.3, and consolidated backlog increased to $2.084 billion from $2.051 billion at the end of the first quarter. The bid and proposal pipeline also rose to $15.0 billion from $14.3 billion.

The backlog movement was concentrated in KGS, where backlog rose to $1.710 billion from $1.676 billion. Unmanned Systems backlog was nearly unchanged at $374.6 million, compared with $375.4 million in the prior quarter.

Revenue growth outpaced GAAP operating profitability and cash generation

The $26.3 million increase in gross profit was more than offset by an approximately $31.6 million increase in operating expenses. SG&A rose to $73.3 million from $54.1 million, R&D increased to $13.6 million from $10.2 million, and intangible asset amortization climbed to $10.1 million from $2.8 million. Stock-based compensation, which is included in GAAP expenses, increased to $16.3 million from $8.6 million. Unallocated corporate expense also doubled to $17.1 million from $8.6 million.

Despite the operating loss, GAAP net income increased to $4.4 million. The main difference below the operating line was $10.2 million of net interest income, compared with $1.2 million of net interest expense a year earlier. Diluted EPS remained at $0.02 partly because weighted-average diluted shares increased to 190.1 million from 157.4 million and because the per-share results rounded to the same amount.

Cash conversion also remained negative. Kratos used $11.0 million of operating cash during the quarter, primarily because rapid revenue growth increased receivables and because the company added inventory for production ramps and development programs. After $17.2 million of capital expenditures and $9.3 million received from the sale of company-owned Valkyries, free cash flow was a use of $18.9 million.

The balance sheet shows substantial liquidity, but the increase did not come from operating cash generation. Cash and equivalents reached $1.438 billion at June 28, up from $560.6 million at the end of fiscal 2025. During the first six months of 2026, Kratos received $1.348 billion from common-stock issuance, used $346.8 million for acquisitions and recorded $38.4 million of operating cash outflow.

Guidance

Kratos raised its full-year revenue outlook, tightened adjusted EBITDA guidance and issued its initial Q3 forecast. Management expects second-half revenue and adjusted EBITDA to exceed first-half levels as production scales and customer contract funding increases.

Kratos expects its full-year 2026 adjusted EBITDA margin to be approximately 100 basis points above its reported 2025 level. It also expects 2027 adjusted EBITDA margin to rise another 100 basis points above the forecast 2026 rate, although full-year 2027 guidance will not be provided until the Q3 2026 report.

The cash flow outlook incorporates $250 million to $275 million of total planned investment. This includes capital expenditures, working-capital investments and funding for the Prometheus joint venture. The assumptions include preparations to produce 3,000 small jet engines in 2027 and begin producing approximately 40 Valkyries annually by the start of 2028.

Management’s view

CEO Eric DeMarco said Kratos expects business momentum to accelerate in the second half of 2026 and into 2027. Management’s margin expansion case depends on higher production, greater scale and improved leverage over the company’s fixed-cost infrastructure.

Near-term margins and cash flow still reflect spending on proposals, staffing, inventory, facilities and new programs. Management also identified the stronger Israeli shekel as a profitability headwind for its Israeli operations. The company’s expected growth areas include hypersonic and rocket systems, missiles, jet engines, space and satellite communications.

Recent insider transactions

The supplied six-month insider summary reported 825,834 shares purchased across 13 transactions and 315,576 shares sold across 47 transactions, resulting in net purchases of 510,258 shares. However, the 10 most recent individual records provided were all direct sales between June 8 and July 27, 2026; the disclosures do not establish the reasons for those transactions.

Risks investors need to watch

• Cash flow pressure from investment: Kratos forecasts a full-year free cash flow use of $85 million to $105 million as it funds facilities, inventory, new programs and production capacity.
• Operating leverage remains unproven on a GAAP basis: Revenue and gross profit increased, but higher SG&A, R&D, amortization and corporate expenses produced an operating loss. The margin outlook depends on future scale offsetting these costs.
• Production and supply-chain execution: Guidance assumes access to long-lead components and successful ramps in rocket systems, jet engines and unmanned aircraft. Parts shortages, cost increases or manufacturing disruptions could affect revenue timing and margins.
• Government funding timing: Kratos’s outlook depends partly on customer contract funding following the late-2025 and early-2026 government shutdown and extended continuing resolution. Additional delays could affect orders, production and cash conversion.
• Foreign-exchange pressure: Management expects the strong Israeli shekel to continue weighing on profitability in the Microwave Products business in Israel.

Summary

Kratos delivered 30.5% revenue growth in Q2 2026, led by KGS, and maintained a book-to-bill ratio above 1.0 while raising its full-year revenue outlook. The central issue is whether higher production and backlog conversion can produce the operating leverage management expects, because GAAP operating income and cash flow remain under pressure from corporate costs, working capital and a large investment program.