Long-Term Bets Near Payoff For Acquisitive Kratos

When Kratos Defense & Security Solutions began investing in low-cost, jet-powered uncrewed aircraft and hypersonic technology more than 14 years ago, the market for combat drones and high-speed vehicles looked very different from the one taking shape today

The Pentagon had yet to embrace the idea of fielding large numbers of relatively inexpensive aircraft alongside crewed fighters, and hypersonic weapons remained an expensive, technically demanding frontier. 

• The company’s 2010 pivot to building hardware created a wide-ranging portfolio
• Valkyrie is close to a long-term deal with the U.S. Marine Corps and foreign partners
• Air-breathing hypersonic business set for major announcement

Kratos also looked very different at the beginning of the 2010s. Only a few years had passed since the San Diego company had shed its original brand, Wireless Facilities Inc., and pivoted from commercial telecommunications to the defense market with a brash CEO named Eric DeMarco at the helm.

DeMarco’s initial strategy—a defense company split evenly between providing services and products—proved short-lived, as a wave of acquisition reforms rendered services less attractive. By 2012, Kratos had decided to pivot a second time, betting that the future of defense would belong in part to companies willing to build products.

That bet is becoming harder to dismiss. The company’s Valkyrie collaborative combat aircraft (CCA) is attracting domestic and international interest, its hypersonics business is moving into a new phase of development, and its propulsion technologies are hitting the market amid a historic surge in jet-powered missile production. In 2025, Kratos generated about $1.35 billion in revenue, up 16.6% organically from the previous year and 101.9% overall compared with 2016.

The company’s leadership had made two seemingly unlikely bets about the future of the defense business—not just what technologies the military would need but how those capabilities would have to be built. Rather than relying exclusively on external suppliers, Kratos assembled a portfolio of businesses with complementary capabilities through a decade-long series of mergers and acquisitions.

At the time, the acquisition spree appeared in some ways opportunistic, as the company capitalized on the readiness of small, family-owned business owners to retire or exit. The Valkyrie offers a case in point.

The Valkyrie was developed as an advanced derivative from the family of subsonic target drones made by the former Composites Engineering Inc. (CEi), a Sacramento, California-based company. In 2012, the Pentagon’s long-range acquisition forecasts called for buying thousands of jet-powered drones to deal with a powerful peer adversary by 2020. New entrants in the defense business were focused on immediate demand from counterterrorism operations.

“We took a contrarian view, and we didn’t go after tactical systems to fight terrorists,” DeMarco tells Aviation Week. “No one needed a jet drone to kill a terrorist.”

And he knew that CEi owner Mike Fournier wanted out of the business.

“He wanted to retire, so I bought CEi,” DeMarco says.

The acquisition brought the BQM-167 Air Force Subscale Aerial Target and the BQM-177 Subsonic Aerial Target for the Navy into Kratos’ portfolio. But that was the last piece in the company’s target drone business, not the first.

A year before, Kratos had acquired Herley Industries, a maker of radars, communications and electronic warfare systems. This also came with a small subsidiary based in Fort Walton Beach, Florida, that Herley had bought in 2005:Micro Systems Inc. (MSI), an industry leader in supplying avionics and telemetry for target drones.

“MSI builds all the avionics, all the electronics and all the command and control for every one of my jet drones,” DeMarco says. “So I specifically did that.”

The Valkyrie still depends on an extended supply chain. Williams International provides the turbofan engine for each Kratos CCA. And Kratos partnered with Northrop Grumman to lead the Valkyrie team’s winning bid for the U.S. Marine Corps CCA and integrate the mission and autonomy control systems. Kratos also teamed with Airbus to be the prime contractor and system integrator for the Valkyrie proposed to Germany.

But ownership of the airframe and avionics is still important for Kratos. The company now assembles the family of target drones and the Valkyrie at an eight-year-old factory in Oklahoma City. The plant delivers about 150 per year with a common suite of avionics, a volume that lowers the cost of production.

Not all aspects of the Valkyrie’s future remain within the company’s control, however, including retaining the customer.

A decade ago, the Valkyrie appeared to have a bright future with the U.S. Air Force. The Air Force Research Laboratory (AFRL) awarded a contract to Kratos on July 11, 2016, to begin work on a Low-Cost Attritable Strike Demonstrator (LCASD), which would become the XQ-58A Valkyrie. Like the company’s related target drones, the Valkyrie offered a runway-independent, low-cost companion to crewed fighters and bombers, and its onboard autonomy control software could manage the mission systems rather than a human in a ground control station.

Kratos agreed to invest up to $33.5 million to develop three prototypes, and the AFRL pledged to spend $7.3 million to support flight testing. At the time, the company touted that future orders for the aircraft would be valued at “approximately $100 million.”

The award appeared to establish a new category for uncrewed combat aircraft. The name for the concept would evolve from a “loyal wingman” to a CCA over time, but the idea was the same—and the Valkyrie appeared to be the Air Force’s favorite.

As Kratos completed the first flight of an XQ-58A less than 32 months later on March 5, 2019, the AFRL was already building requirements for what would become the XQ-67 Off-Board Sensing Station, the follow-on to the LCASD program. With the Valkyrie still in flight testing and selected to fly with the AFRL’s Skyborg autonomy system, Kratos offered the Demogorgon aircraft but publicly withheld details of its design.

After the AFRL chose a rival offer from General Atomics Aeronautical Systems Inc. in November 2021, Kratos withdrew from the follow-up competition for the CCA Increment 1. The Valkyrie continued flight-testing under the Skyborg program, but its future with the Air Force looked uncertain.

Although the program’s original customer seemed in doubt, Kratos doubled down. The company invested in building the first lot of 12 production aircraft, anticipating that demand for a smaller, lower-cost CCA would materialize.

The program finally got a boost two years later. The U.S. Marine Corps had established the Expeditionary and Maritime Aviation - Advanced Development Team (XMA-ADT), seeking to identify technologies that would transform its aviation branch over the next decade. One of the first such technologies to which the Marines turned was the CCA, specifically the XQ-58A.

Over the course of two years, the Penetrating Affordable Autonomous Collaborative Killer-Portfolio program launched by the XMA-ADT performed several flight tests with the Air Force-owned XQ-58A prototypes, experimenting with mission systems and roles that would allow a CCA to complement the crewed Lockheed Martin F-35B fighter.

The Marine Corps was impressed. In July 2025, a Marine official confirmed to Aviation Week that the XQ-58A would enter production to become the service’s first CCA. Six months later, the Marines signed a $231.5 million agreement with Northrop to deliver four of the redesignated MQ-58s, which will become the initial cadre for the Marine Air-Ground Task Force Uncrewed Expeditionary Tactical Aircraft CCA program. In addition to a Northrop-supplied mission system, the MQ-58 also will feature landing gear, providing the option to take off and land from runways.

CCAs are expected to play a significant role in Marine Corps aviation. One service official has said their operations with the Marines could be as transformative as the introduction of rotorcraft into the fleet in the 1950s. The Marine Corps, however, has not committed to buying CCAs beyond the first batch or confirmed how many MQ-58s will be ordered. The service’s next step will depend on the outcome of the fiscal 2027 appropriations bill, which includes a $1.3 billion request from the Navy for CCAs.

In the meantime, Kratos is preparing for success. A second batch of Valkyries is in production in anticipation of orders from U.S. and foreign sources. Production is ramping up to a projected 18 aircraft per year in 2027 from about eight in 2025. Some 35-40 Valkyrie aircraft could be delivered per year in 2028, DeMarco has said on earnings calls.

Kratos is competing for other aircraft programs, too. The company’s secretive Thanatos—a stealthy, uncrewed combat air vehicle—flew for the first time in 2024. At the time, Kratos said it was a contender for a pending contract award, but nothing has been heard about the program since. Taiwan also could be close to ordering a large number of Mighty Hornet IVs, a derivative of the Kratos Tactical Firejet.

But uncrewed aircraft are no longer the largest potential growth driver in the Kratos portfolio. That distinction now belongs to hypersonic vehicles. In August, DeMarco told market analysts that the company’s hypersonics business accounted for $200 million in sales in 2025 and could top $700 million in 2027, thanks to its role in the Pentagon’s Multi-Service Advanced Capability Hypersonic Test Bed (MACH-TB) program.

Kratos’ position in hypersonics came about by accident. In 2007, the company was focused on a services-oriented strategy and acquired Haverstick Consulting, which provided engineering services for the Defense Department, for $90 million. Haverstick had previously acquired a small Virginia-based company named DTI Associates, which had purchased the proprietary rights for the Oriole sounding rocket from Astrotech Space Operations, a subsidiary of Spacehab.

“And that’s my hypersonic business, because they were doing hypersonic launches back in 2010,” DeMarco tells Aviation Week.

As Kratos pivoted to a fully product-oriented strategy in 2010-12, owning the proprietary rights to the Oriole rocket presented an opportunity. The Navy was looking for a cheap vehicle with hypersonic speed and high-altitude capability with which to test the sensors of the Aegis combat system. Kratos adapted the Oriole into the Aegis Readiness Assessment Vehicle (ARAV)-B configuration in 2010 and supplemented the Oriole rocket with Terrier boosters for faster speeds by 2012.

As Kratos developed the more advanced Valkyrie after acquiring the designs of jet-powered target drones, it also looked to build a larger and more useful hypersonic vehicle. The Oriole is powered by the 22-in.-dia. Northrop GEM-22 rocket motor. So Kratos paid Rocketdyne to build a 32.5-in.-dia. solid rocket motor called the Zeus, which flew for the first time on Oct. 24, 2024. Kratos has been developing front-ends for the Zeus motors, including the Erinyes glide body for defensive testing and the Dark Fury vehicle for offensive systems.

The company’s next move in the hypersonic sector could be dramatic—and the result of developing new products through acquisitions.

In 2019, Kratos acquired Florida Turbine Technologies, a manufacturer of small turbojets for target drones and industrial gas turbines. Rebranded as Kratos Turbine Technologies (KTT), the business has developed a new line of engines with thrust exceeding 200 lb., including the GEK800 and GEK1500 turbofans in partnership with GE Aerospace. The KTT acquisition also came with an unheralded expertise in air-breathing hypersonic propulsion, DeMarco says.

“We are one of the leading, if not the leading, companies in the United States on air-breathing hypersonic systems. We just haven’t been talking about it,” he says. “I’m not kidding.”

In December 2022, the AFRL awarded Leidos a contract worth up to $334 million for Mayhem, also known as the Expendable Hypersonic Multi-Mission Intelligence, Surveillance and Strike program. Leidos chose several partners, including Kratos. Secrecy prevented the partners from discussing specific roles, but the only company on the Mayhem team with propulsion experience was Kratos.

The AFRL canceled the Mayhem program in 2024 after completing the conceptual design review. But KTT’s interest in hypersonic propulsion continued, and Kratos could be close to making a new announcement.

“We’ve got something with a partner that’s coming,” DeMarco says. “I don’t have enough money and people to do everything. It’s better to have part of something than all of nothing.”