Kratos Defense & Security Solutions, Inc.

across every cost point, including as related to materials and wages, is also a challenge which has gotten worse since our last report to you and which is impacting our Q3 margins on existing firm fixed-price contracts and on priced options as we cannot pass the increased costs on to our customers. We expect our margins to increase in Q4 as certain new contracts we have recently received have contemplated inflation and increased costs in them and as the mix of our revenue improves, including in our space and satellite business with open space software as we realize increased leverage also on our fixed cost base and revenues increases. Hiring, obtaining, and retaining personnel, including those with security clearances, is also an operational challenge, and we are having to increase compensation to both retain and obtain qualified personnel which is also adversely impacting our near-term profit margins. Our forecasted execution plan and revenue growth includes the assumption that we will be able to increase our workforce to meet the production and delivery requirements of the contract awards that we're executing on and that are included in our backlog. However, irrespective of these challenges, we believe that Kratos' strategy of providing affordable technology for national security is spot on. and that we have the right products at the right price at the right time to meet the U.S. and its allies' national security priorities. Our plan remains to focus internally on organic growth and our 10% 2023 over 2022 base case growth rate and to successfully execute on our potentially transformational tactical drone, space, and satellite opportunities. Deanna?

Thank you, Eric. Good afternoon. As we have included a detailed summary of the second quarter financial performance and financial guidance in the press release we published earlier today, I will focus on the highlights in my remarks today. Kratos reported second quarter 22 revenues of $224.2 million above our estimated range of $205 to $215 million, driven primarily by growth in our space, satellite, and cyber and turbine technology businesses and due in part to the contribution from the recently closed SRE acquisition. Excluding the impact of the contribution from the CTT, COSMIC AES, and SRE acquisitions which contributed $21.5 million and excluding the impact of the reduction in our training solutions business of $8.6 million, revenues grew organically 3.2% as compared to the second quarter of 21. Q2-22 revenues continued to be impacted by continued and increased COVID-related supply chain and other delays, including obtaining and retaining qualified personnel, resulting in approximately 14.5 million in revenues being deferred into future periods, with approximately 2.9 million of associated operating income, including increased inflationary costs. Our Q2-22 consolidated operating loss was 1.9 million, compared to operating income of $3.3 million in the second quarter of 21 with Q222 including a litigation settlement charge of $5.5 million. Net loss was $4.7 million for the second quarter of 22 and a GAAP loss of $0.04 per share compared to net income of $1.1 million in the second quarter of 21 and GAAP EPS of $0.01 per share. Included in second quarter 22 net loss is the $5.5 million litigation settlement charge discussed previously. We generated adjusted EBITDA of $17.7 million for the second quarter, exceeding the higher end of our expected range of $11 million to $14 million, due primarily to a favorable mix in our space, satellite, and cyber and turbine technologies businesses. Our unmanned systems segment reported revenues of $56.4 million in the second quarter of 22 compared to $60.3 million in the second quarter of 21. KGS reported revenues of $167.8 million in the second quarter of 22 compared to $144.8 million in the second quarter of 21, including contribution of $25.1 million from the recently acquired COSMIC AES, SRE, and CTT acquisitions. offset partially by the training solutions business of 8.6 million, which included the loss of an international training services contract, which contributed revenue of 4.5 million in the second quarter of 21. Despite the continued unfavorable impact resulting from supply chain COVID and related delays and disruptions, which impacted current quarter revenues unfavorably by approximately 13.9 million on a pro forma basis, excluding the impact of the training solutions business, KGS revenues grew organically 7.7% in the second quarter of 22. Second quarter 22 operating income and adjusted EBITDA for unmanned systems included a heavier mix of more development-based revenues, which are typically lower in margin due to less leverage on fixed overhead manufacturing, SG&A, and development infrastructure. Our unmanned systems business experienced an increase of 900,000 in SG&A, primarily related to increased headcount, and 1.3 million of R&D in the second quarter of 22 as compared to the second quarter of 21. KGS operating income and adjusted EBITDA included a more favorable revenue mix including software and license-based revenues. Q2 22 cash flow from operations was a use of 21.6 million with the use including an increase in receivables of approximately 27.1 million primarily related to future milestone and other contractual payments from customers, and an increase in our inventory balances of approximately $10.5 million during the quarter, primarily in our unmanned systems, C5ISR, satellite, and microwave electronic businesses, in anticipation of the ramps in production in the second half of the year, and in part to secure additional safety stock and advance buys in larger lot sizes to gain pricing benefits where possible. and to mitigate the impact of supply chain disruptions. In addition, operating cash flow also includes the continued planned investments in engineering costs in our rocket system and turbine technologies businesses for new products and investments, including the design and development of an affordable hypersonic vehicle and a complementary propulsion system . For the first six months of 22, our operating cash flow uses included $15 million of increases in receivables and increases of $25.8 million in inventories across all of our product-based businesses, including unmanned systems, space and satellite, microwave products, and C5ISR. In addition, we have made approximately $5.6 million in investments in non-recurring engineering costs for these new rocket products during the first six months of 22. Our contract mix for the quarter was 72% of revenues generated from fixed price contracts, 23% from cost plus fixed fee contracts, and 5% from time immaterial contracts. Revenues generated from contracts with the U.S. federal government during the quarter were approximately 70%, including revenues generated from contracts with the DOD, non-DOD federal government agencies, and FMS contracts. In Q2 of 22, we generated 12% of revenues from commercial customers and 18% from foreign customers. Now moving to financial guidance. Our third quarter 22 financial guidance we provided today includes our current forecasted business mix and our assumptions related to the expected continued impact of employee absenteeism, challenges related to obtaining and retaining qualified personnel, supply chain disruptions, inflation, and related expected costs and price increases and other COVID-19 related items that have, are currently, and expected to continue to impact the industry and Kratos. Throughout the first half of the year, Kratos experienced a significant increase in the intensity and effects of COVID-19 and the related impact to our employees, absenteeism, consultants, vendors, suppliers, customers, et cetera, which impact included loss of weeks of manufacturing and production functions in our unmanned system C5ISR and microwave products businesses. We've assumed that these COVID-19 and supply chain-related impacts to our business, including increased inflationary costs, which significantly impacted our first half 22 operations, will continue to impact the third quarter, with an estimated impact of approximately $10 to $14 million in third quarter revenues and $3 to $5 million of our adjusted EBITDA. We are having some success with certain customers on building in cost and inflation escalators on new bids and new upcoming price options, and we expect to begin seeing certain benefit of these efforts in the fourth quarter of this year. However, since our contract is predominantly fixed price with certain of the contracts under longer period of performance terms, it will take some time to transition the contracts to those with increased pricing. As a result of each of these pricing and inflation factors that we are contractually obligated to absorb and the continued delay of our ability to produce and deliver certain products with the most significant impact to our third quarter forecast, which we had originally expected to significantly improve, we are adjusting our fiscal 22 adjusted EBITDA to 80 to 85 million with the most significant impact to the forecasted third quarter margins with improvements expected in the fourth quarter based upon the projected ramp in new large programs, which includes more recent costs, leverage realized on the SG&A and overhead infrastructure, and a more favorable revenue mix, including more software-based revenues, driven largely by the three new open space programs that Eric mentioned earlier. We are forecasting increased revenues in the third and fourth quarters of this year, with the trajectory increasing in the fourth quarter. We are also adjusting our revenue guidance up to 890 to 930 million to reflect the expected contribution from the SRE acquisition, along with forecasted organic growth driven by our bookings and backlog, offset partially by continued revenue delays caused by supply chain disruptions. The growth expected in the fourth quarter of 22 is largely driven by the forecasted execution and delivery schedules of five new programs, four of which have already been awarded, the three satellite program awards, GBSD, and an expected Valkyrie award from a new customer. In order to maintain our fiscal 22 estimated use from free cash flow estimate of 30 to 40 million, we have adjusted our FY22 capital expenditure plan to mitigate, where possible, the additional uses of working capital that we have expended this year to bolster our inventory levels and advance inventory purchases. Eric?

Excellent. Thank you, Deanna. We'll turn it back over to the moderator for any questions.