Kratos Defense & Security Solutions, Inc.

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 Marie Mendoza senior vice president and general counsel please go ahead thank you

Good afternoon, everyone. Thank you for joining us for the Kratos Defense and Security Solutions First Quarter 2025 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, 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. With that, I will now turn the call over to Eric.

Thank you, Marie. Good afternoon. Both the industry and Kratos have received a significant amount of positive news since our last report to you. increasing our confidence for 2025, 2026, and the future. The defense and national security funding and priorities environment has become much clearer, including a full year of government fiscal 2025 CRA and funding now being in place, a potential additional 150 billion defense-related reconciliation bill progressing, and the potential for a $1 trillion 2026 U.S. national security budget all increasing our confidence in Kratos' 2025 and 2026 full-year financial forecasts, including approximately 10% 2025 and 13% to 15% 2026 year-over-year organic revenue growth. Further supporting both our 2025 and future organic growth outlook confidence, Kratos' Q1 book-to-bill ratio was 1.2 to 1, And Kratos' last 12 months' book-to-bill ratio is also 1.2 to 1. And even after all of these Q1 bookings and LTM bookings and conversion from opportunities to backlog, Kratos' opportunity pipeline stands at approximately $12.6 billion, an all-time high for the company. This is representative of the large and increasing number of opportunities that continue to be available to and that are approaching Kratos from both our customers and our partners, which is accelerating. It appears that certain of Kratos' customers have made the decision to go with smaller technology-based companies like Kratos, including in the prime position on large programs, if we are a viable, capable, and credible alternative to a traditional approach. Additionally, as related to government fiscal realities, It appears that if companies like Credo's have made the upfront investment and have real working relevant products and systems that certain customers will procure those existing products rather than incur millions or billions in customer funded R&D over extended periods of time for the so-called maybe someday perfect system. We are also seeing this congressionally where the questions are now being asked if we have something that is working production ready and good enough, why should we be funding this new program effort? We are seeing this trend, and it appears to be accelerating, which may in part also be related to certain aspects of executive orders the President has signed, and possibly even DOGE, where inefficiency and waste is being targeted. For example, if something already exists and is working or flying, why are we spending tons of money to recreate the wheel? As a result, Kratos is currently bidding on a number of large, multi-hundred million dollar single award opportunities, including international and in the drone area, which has increased our bid, proposal, and related efforts in Q2, and we expect to hear on certain of these opportunities later this year. Also related to recent events, Kratos being a military-grade hardware and software company, With substantially all our vendor base and supply chain being U.S. located and sourced, we expect little impact from existing or any currently contemplative tariffs. Integrated air and missile defense and counter UAS are areas where Kratos is an acknowledged industry leader and where we are seeing substantial new and increased opportunities across our entire company, including system hardware, microwave electronics for missiles, radars, and counter UAS systems, target drones to test, exercise, and train the warfighters on these systems, space and satellite systems related to tracking, and hypersonic and related propulsion systems. Air defense is also an area where Kratos is uniquely qualified to support the new Golden Dome opportunity. Importantly, Just under 20% of the DOD's $150 billion reconciliation bill is focused on integrated air and missile defense, which is expected to add to this already large and growing market opportunity for Kratos, and approximately $27 billion is just the initial proposed funding for Golden Dome. Expected near and mid-term future growth areas for Kratos also include our hypersonic franchise, jet drones, jet engines and propulsion systems for missiles and drones, microwave electronics and C5ISR systems for missiles, radar and counter UAS systems. Expected mid and longer term growth areas include the Golden Dome Initiative, strategic systems and our Prometheus, Anaconda, Helios, Vulcan, Ares and other initiatives, the majority of which are with customers or partners and are not, build it and hope they'll come. On Prometheus, we are progressing on schedule with our outstanding partner, Raphael, and also with potential third-party customers with the opportunity, including Raphael's intention for tens of thousands of SRMs and energetics to be manufactured for Raphael by Prometheus, increasing since our last report to you. Anaconda and Helios are each initial multi hundred million dollar single award opportunities for Kratos and both of which we now believe Kratos is in the lead position to be successful on with notification potentially by the end of this year. Accordingly, we have now down selected the site location for Anaconda and we are working through the site location process for Helios assuming ultimately we are successful. Vulcan is also progressing, including with our partner, and I hope to be able to share additional information on each of these with you in the fourth quarter. Kratos' affordable hypersonic franchise, including our first-to-market operational and in-production Zeus hypersonic rocket motors and our first-to-market operational and in-production Aranis and Dark Fury hypersonic flyers, are also expected to be key contributors to Kratos' future financial performance. Kratos' hypersonic franchise includes certain of the highest performance hypersonic systems and vehicles of their type in existence flying today at a fraction of the cost of any other systems that we are aware of that are actually available flying products for relevant missions and not just a concept or a PowerPoint. Accordingly, I am reporting today that Kratos' Dark Fury hypersonic vehicle has successfully flown its initial mission at hypersonic speed, achieving all expectations under a customer-funded contract. Dark Fury is truly an incredible system, including its speed, range, and precision characteristics, and at its extremely low-cost point, which is positioned in Kratos, similar to Kratos' jet drone family, to provide affordable mass and quantities. We now have on order long leads for several Aranis and Dark Furies and approximately 70 SRMs, including Zeus, related to upcoming and expected hypersonic-related and other missions, substantially all of which are targeted to a specific customer or program, including MockTB, which provides a data point on the op tempo and related revenue ramp we expect for Kratos' hypersonic franchise beginning later this year and accelerating into 2026. Kratos' air-gapped hypersonic development team, Erebus, is now focused on Kratos' Furies family of new low-cost hypersonic systems, including additional low-cost flight vehicles and drones for certain relevant mission profiles we are targeting, including, of course, in coordination with certain customers. The newest of these flight vehicles of Kratos' Furies family is under the project Ares, which is now in development, and similar to Kratos' Aranis and Dark Fury, we expect our Ares system to be first to initial flight and to market. We expect, under forecasting, Kratos' company-wide hypersonic franchise to be one of our fastest growers, including certain of our highest margins for the foreseeable future. Kratos' target drone business is performing as expected, including with our U.S. Air Force, Navy, and Army customers, and also with our international customers, with demand for target drones directly related to the increased global demand for air defense, counter UAS, missile radar tracking, and other systems, all of which need to be exercised, tested, and the respected operators trained. Kratos' tactical drone business is also tracking as expected, including Valkyrie, Thanatos, and our Apollo, Athena, and other programs. Kratos' decision to make the internal investments, including beginning serial production of 24 Valkyries prior to contract award, has been invaluable for our company, and even though the details are not able to be publicly disclosed, Kratos' Valkyrie continues to routinely fly with multiple customers, expanding mission capabilities and other criteria as we progress towards hope for production. Importantly, Valkyrie customers and partners can come to Kratos' factory, walk the manufacturing floor, see their respective tail numbers in production, see the actual costs for their jet drone system, take delivery, fly, and operate the system. Kratos' tactical jet drone customers don't have to imagine anything from PowerPoints or idle robots sitting around an idle factory. We recently unveiled the version of our Valkyrie featuring internal landing gear, with our Valkyrie family's objective to provide runway flexibility and runway independence to our customers. With the Valkyrie, you can do rocket launch for complete runway independence where fixed airfields or runways are threatened, You can do conventional takeoff and land for training, or where traditional airfields can be used, or you can use a trolley launch off a runway, also for training, and which also allows maximum payload capability to the warfighter. Thanatos, Apollo, and Athena are each under customer-funded contract, and each currently have their next series of flights planned beginning in the second half of this year. Also in the second half of 25, We expect to receive certain new tactical drone-related program and contract awards, including potentially the most important ever for KUAS, and we remain confident that Kratos' tactical drone business will be an important future and value creator for our company. Kratos' air-gapped Ghostworks is currently working on the integration of Kratos' jet engines into certain Kratos jet drones, which we expect to fly this year. and on an additional fifth-generation drone, which we expect to fly in 2026. And the most brilliant drone engineer in Kratos and probably the world is now working on a Mach 5-plus capable drone. KTT and our engine and propulsion system business are well-positioned to take advantage of the DoD's plans for new, lower-cost cruise missiles, drones, loitering munitions, hypersonic space, and other systems at scale produced in mass. Similar to Kratos' drones and hypersonic systems, Kratos' jet engines are running and flying today. They are not PowerPoints, models, or renditions, and we are currently tracking to our plan to produce several hundred small jet engines in the second half of this year, with production quantities expected to substantially ramp in 26 and then again in 27. KTT's air-gapped development grouped blade work. is working closely with General Electric Aviation on the GEK partnership's family of low-cost turbofan jet engines, where we are making rapid progress and we are tracking to our joint production plan. GE, similar to Northrop, Lockheed, Raphael, Raytheon Dynetics, and others, is an outstanding partner of Kratos. Kratos' Blade Works is also working on a new propulsion system for a classified drone program. on a new engine for a next generation aircraft, and on certain hypersonic program propulsion systems. Kratos' blade works has been invaluable to Kratos' overall hypersonic franchise and initiatives. Kratos' national security-focused space and satellite business continues to receive additional funding, program, and contract awards, and along with resource management steps we have and will continue to make, is adding to our confidence for expected overall Kratos increased EBITDA margins in 26. Kratos' national security space and satellite offerings, including our open space software system, is clearly a technological and value add differentiator for our partners and customers, as represented by additional and new contract and program awards. We expect our commercial satellite related business to continue to be adversely impacted by certain macro-level industry issues we have discussed in detail previously, and we have and will continue to aggressively manage our low-cost structure across our entire satellite group to address the impact from this issue and increase our company's margins. Kratos's space, satellite training, and cyber division is our company's largest business, and we expect this business's margins to significantly increase in 26, which would lift the margins of all of Kratos, which is a top priority for our corporation. Kratos' Israeli-based microwave electronics business has a record backlog and a near-record opportunity pipeline, both of which are expected to continue to grow, including as we support our key partners, Israeli Aerospace Industries, Rafael and Elbit, and the Israeli MOD and the State of Israel. As we have been communicating to you over the past few quarters, we will be moving our Israeli microwave production operation into a new and expanded facility over an approximately three-week period beginning in June of this year, which once complete, positions this business for continued expected strong organic growth with certain of the highest EBITDA margins in Kratos. Our U.S.-based microwave business is on track to be one of Kratos' future shining stars with multiple new organic program opportunities, and we are now positioning to take advantage of what we see as one of our company's largest relative total addressable market opportunities with potentially the highest margins among our businesses. The recapitalization of strategic weapons systems and the U.S. defense industrial base is providing significant generational opportunities for Kratos to build one of the most important and valuable national security companies for the United States and for our shareholders. Accordingly, we are focused on making the required investments in our existing core business areas in close coordination with our customers and partners to increase our market share, drive future revenue growth, increase margins, and position the company for sustainable future free cash flow generation. Importantly, as I mentioned before, the vast majority of the property, plant, equipment, and other investments that Kratos makes are not build-it-and-hope-they-come type investments, but rather are made in close coordination with a funded customer, partner, or targeted program where Kratos' upfront capital investment is expected to be recovered successfully via the future program, contract, industrial-based partner, or other funds at an acceptable rate of return for the investment made. This is why Kratos' production, manufacturing, test, integration, and other facilities are planned and constructed with specific customers, partners, programs, products, and systems identified and funded. which is obviously the most cost-effective and efficient way to establish a military weapons-grade facility that may also include certain special customer-specific related security and facility-related requirements. With Kratos' current and existing unique mil-spec hardware and software offerings, capabilities, and positioning, now is the time to build and create long-term sustainable value for United States national security, and for our stakeholders. Deanna.