Kratos Defense & Security Solutions, Inc.

Good day and thank you for standing by. Welcome to the Kratos Defense and Security Solutions first quarter 2023 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 a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Marie Mendoza, Senior Vice President and General Counsel.

Thank you. Good afternoon, everyone, and thank you for joining us for the Kratos Defense and Security Solutions first quarter 2023 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 the 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, and financial guidance 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. With that, I will now turn the call over to Eric DeMarco.

Thank you, Maureen. Kratos completed Q1 on track for 2023 as a transition year to expect its sustained future year-over-year organic growth, increasing profit margins and cash flow as our company realizes the benefits of the investments we have made and we transition from development to production and delivery in certain areas. Kratos is also on track for increased margins and cash flow in Q3 and Q4 of this year as our revenue mix continues transitioning from older firm fixed price contracts, where we were unable to pass on significant inflation and increase costs, to newer, more recent contract award-related revenues, where we negotiated higher rates and costs with our customers, as included in our Q1 and last 12-month 1.1 to 1 book-to-bill ratio. And though the supply chain still has challenges, we have begun to see some stabilization and reduction in lead times and pricing which is also providing confidence in our future forecast. Highlights since our last report to you include the 2024 DoD budget request was released, along importantly with the Future Years Defense Program, or FIDUP, or also referred to as the Five-Year Defense Spend Plan, both which include new or increased funding and growth, including in the space and satellite, hypersonic, missile system and defense, strategic deterrence, microwave electronics, and drone areas. In the drone area, the USAF has requested approximately $6 billion over the fight-up period, reflecting an increased prioritization with it being reported that the Air Force is looking to ultimately procure up to 2,000 drone systems, and that Secretary Kendall commented that drones or uncrewed aircraft are now considered essential to the Air Force's future. It was also reported that the Air Force stated that the expected drone cost would be a fraction of the cost of an F-35, or approximately $20 million per missionized system, and it was reported that an affordable mass concept is a key element behind the Air Force's Advanced Drone Initiative. We believe the Kratos tactical jet drones flying today are recognized as the most capable and affordable in their class, with the key reason being that we lever off of the same supply chain partners, vendors, and teammates, which support the production of approximately 150 made-in-America Kratos jet drone aircraft annually, which also reduces risk to our tactical drone customers. Kratos' disclosed price points for our tactical jet drone systems range from approximately $450,000 for tactical fire jet or airwolf to approximately $6.5 million for a Valkyrie at low quantities. We also believe that Kratos' Ghostworks is the recognized leader in the rapid development and delivery of low-cost tactical jet drones, including Kratos' Valkyrie, where Ghostworks went from a clean sheet of paper to successful first flight in 30 months and additional new systems that Kratos Ghostworks is currently working on. Accordingly, we believe that if a competitor elected to enter this class of affordable tactical jet drones, They're at least three to four years away from first flight and who knows what cost to the customer. Since our last report to you, both the US Navy and the Marine Corps have indicated their increased prioritization for high performance jet drones, including with the Navy reportedly stating that they envision up to 60% of the future Navy air wing being comprised of drones. So it's now clear that the Pentagon is planning a future that includes significant numbers of affordable high performance jet aircraft or systems, and the funding is now being requested to achieve this vision as reflected in the 24 budget request and the fight-up. Since our last report to you, Kratos has received additional tactical drone contract awards, including as related to Kratos Valkyrie, and we are in negotiations for additional contract awards, which we expect to receive in the coming months. Since our last report, it was reported that one mission the Marine Corps Valkyries are focusing on include electronic warfare effects in conjunction with the F-35 and certain assault support platforms, all under the Penetrating Affordable Autonomous Collaborative Killer Program. Kratos has also recently received an additional USMC Valkyrie Contract Award related to sensor payloads, mission system, and subsystem integration. And Kratos is also now under customer-funded contract related to the Valkyrie for the development and testing of autonomy and pilot vehicle interfaces, ground and flight operations, and additional Valkyrie test flight-related events. Since our last report to you, Kratos has continued to have successful tactical drone flights as we evolve the system with our customers. And over the balance of this year, Kratos jet drones are scheduled to perform numerous under-contract customer-funded flights. Kratos is the only company with affordable, high-performance, American-made jet drones flying today, and we are focused on continuing to increase and expand our first-to-market leadership position with our customers. While other companies and potential competitors are imagining things with PowerPoints, renditions, models, and surrogates, Kratos is currently flying and has been flying for several years under U.S. government-funded contracts here in the United States. At the Oklahoma Burns Flat Range Facility, Kratos's unmanned systems and our GhostWorks can fly our drones and exercise systems, including new yet to be disclosed systems that Kratos's GhostWorks is focused on and that the competition or others know nothing about. For example, just this week, Kratos had a very successful test event at the Burns Flat Test Range with a new system, which I am confident that neither our competition or adversaries aware of in any way. We are completing the first serial production run of 12 Block 1 Valkyries in Oklahoma City. We have begun the second production run of 12 additional Block 2 Valkyries, and it now looks like at least half of the Block 2s will be Block 2Bs, incorporating a new additional capability based on very recent specific customer input. Since our last report to you, Kratos' Unmanned Systems was awarded a shared $400 million ceiling IDIQ contract for research and development for the Advanced Aerospace Systems Technology Research Program. This contract has multiple awardees with the primary objective of the program to conduct research toward the development, demonstration, integration, and transition of new aerospace vehicle technologies designs and integrated systems that will provide advanced capabilities to the Department of the Air Force. The Advanced Aerospace Systems Technology Program Contract Award is yet another example of Kratos and our ghost works continuing to have success competing for and winning certain of the most advanced capability opportunities for U.S. national security. Based on information included in the 2024 DOD funding documents in the FIDUP, statements made by the government customer representatives, additional information we have received, and the progress we continue to make, we remain confident in the future success of Kratos' tactical drone business. Kratos' target drone business is performing well, driven by Kratos' producing and delivering what we consider to be the highest performance threat representative jet drone States Navy, Air Force, and Army. The global recapitalization of strategic weapon systems and the requirement to test and train on these weapon systems is providing a strong macro-level catalyst for Kratos' target drone business. Kratos' space, satellite, and cyber business, our company's largest, continues to receive new program awards, including with Kratos' first-to-market virtualized and software-based open space family of satellite ground communication systems. I encourage you to review today's release on recent milestones and progress Kratos' satellite business and our open space product and system family has achieved, including as disclosed at the recent National Space Symposium. Since our last report to you, Kratos' satellite business as a key team member to our prime partner was notified that the team has been successful on a large new multi-billion dollar satellite constellation program which includes Kratos' OpenSpace, which program could ultimately be worth several hundred million dollars to Kratos. We believe that this is another representative example of Kratos' disruptive, technology-based, first-to-market strategy success and our leadership position with our OpenSpace system. The days of the ground satellite segment trailing space capabilities are ending with a new wave of ground system advances, including Kratos' OpenSpace, that can support multi-orbit constellations and the specifications that both 5G and the new generation of high bandwidth satellites require, and also the interoperability needed for the new breed of flexible low Earth orbit constellations to achieve scale and broad market growth. The ground system segment ecosystem, including electronically steerable antenna and modem companies, integrators and network providers are all leaving legacy siloed standalone ground systems and transitioning to software-defined and based virtualized architectures, which is exactly where Kratos' first-to-market open space systems are positioned and why we are so excited about Kratos' space and satellite business going forward. There are thousands of satellites planned to be placed into orbit into the future, and this is expected to be a key macro and industry catalyst Kratos' space and satellite business, along with our open space software suite. In Kratos' C5ISR business, the Sentinel program, with Kratos' key strategic partner, Northrop Grumman, is expected to be one of Kratos' largest, fastest-growing, and most important programs for the foreseeable future. Additional well-funded priority programs in Kratos' C5ISR business include includes SCAR with the Space Control Network, Patriot, HIMARS, THAAD, IBCS, which has now received full-rate production, SHORAD, Enduring Shield, Titan, certain other space and satellite programs, and counter UAS programs and systems, which are very relevant in what's going on in the world today. Kratos' turbine technology has continued its outstanding performance in Q1, with KTT being one of Kratos' fastest growing and most profitable businesses, with the multi-billion dollar B52 re-engine program being one of our most important. Additional current growth areas for KTT include supersonic and hypersonic propulsion systems and space and launch related propulsion systems. Also, the significant increased funding in the FY24 budget request and FIDUP for drones and also missiles and powered munitions. We expect to be a macro industry growth opportunity and driver for KTT and our engine business. Kratos' rocket systems business is also expecting future growth, including as related to our products, technologies, and systems for hypersonic, missile defense, target, test, and evaluation systems. For example, Our rocket system business customer-funded launch manifest and schedule for the next 24 months is at its strongest in our history and is representative of Kratos' trusted, disruptive position as a go-to, rapid, critical launch and other related system provider. Kratos is internally funded and soon to be first to market Zeus propulsion and Arani hypersonic systems remain on schedule. and we are far enough along now to disclose to you an additional Kratos vehicle, Dark Fury, now also scheduled for flight next year. Kratos' microwave electronics business, which supports space, missile, missile defense, radar, communication, and other systems, also started off 2023 well, continues to have near-record backlogs, and is forecasting future growth and increasing margins. We believe our strategy of making internal investments in technologies, products, and systems to be first to market with relevant offerings that address real needs and requirements now and today for our customers is demonstrating success. As I said before, Kratos doesn't sell renditions, pictures, or hoped-for maybe someday products at who knows what cost, like certain of our competitors with a demonstrated history of doing this and then failing in future executions. Kratos brings real products that actually work with actual costs and pricing to the customer and we believe this strategy is a winner. At Kratos, affordability is a technology and better at some later day, if ever, is the enemy of good enough now. We believe that we are at the beginning of a sustained year-over-year up into the right revenue growth trajectory with increasing profit margins and operating cash flow. With the number of large new programs we have received, Additional programs we expect to receive are backlog and near record opportunity pipeline at approximately 10 billion. We are focused internally on operations and execution. And accordingly, we do not anticipate making any acquisitions of size for the foreseeable future. Our ability to hire, obtain, and retain qualified engineering, technical, manufacturing, and other personnel remains absolutely key to Kratos achieving our objectives. and future financial forecast, and we are laser focused on this and successful execution. With that, I'll turn it over to Deanna.