Kratos Defense & Security Solutions, Inc.

Thank you for standing by and welcome to Kratos Defense and Security Solutions second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. I would now like to hand the call over to Marie Mendoza, Senior VP, General Counsel. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense and Security Solutions Second 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 made 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. Eric?

Thank you, Marie. The annual global defense and national security expenditure in 2024 was approximately $2.5 trillion. This $2.5 trillion figure does not take into account the expected increase in the United States national security spend to over $1 trillion this year or planned NATO increases in its defense expenditures from a historical approximately 2% up to 5% of GDP. And this is also before the recent announcement from non-NATO US allies in the Pacific that they would also be increasing their defense expenditures to 5% of GDP. There is truly a generational global recapitalization of weapons systems and related infrastructure currently underway, and we believe that Kratos is one of the few qualified today defense technology companies positioned now to address it and take advantage of what is truly an industry inflection point. The Trump administration, through recent executive orders, is working to streamline the U.S. DOD procurement, purchasing, and deployment processes to significantly improve efficiency, make the deployment of new systems and technology to the warfighter faster, and prioritize new, rapidly developed, and fast-to-field hardware and systems. Additionally, both the Senate, through the Forged Act, and the House, via the Speed Act, are similarly looking to streamline the defense procurement and acquisition processes, including a focus on first-to-market relevant technology, hardware products, and systems. We are also at the beginning of a rebuild of the U.S. defense industrial base, which has asked for feed for several decades, which rebuild we believe will require hundreds of billions of dollars of investment and take many years to complete. Kratos is realizing the positive impact of these factors, including our Q2 organic revenue growth rate of 15%, our bookings with an LTM book-to-bill ratio of 1.2 to 1, our backlog, our record-level bid and proposal pipeline of $13 billion, and also our previously communicated 2026 forecast base case organic revenue growth of 13% to 15% over 25%, which is now substantially covered by on-hand programs and contracts. Additionally, after our second quarter ended, we were informed by a government customer that we have been successful on a large new program of record opportunity we call Poseidon, which I do not believe that I have previously mentioned, with formal contract award to Kratos as prime expected shortly. Poseidon is expected to be a single award to Kratos. It's a military-grade hardware and system program with an approximate total potential value through production of approximately $750 million, which should begin ramping for us in mid-27 once the required program-specific new facility we will be standing up is complete. The Poseidon Wind is expected to provide Kratos another large, steady-state future revenue, profit, and cash flow engine. further enabling our aggressive growth pursuit, including in the drone, hypersonic, jet engine, microwave, and SATCOM areas, while also generating profitability and cash flow. Additionally, Kratos was also informed after the Q2 close that our team with the key Kratos partner has been one of few companies successfully down selected on another new program of record opportunity, Kratos called name Demos with Kratos contract award expected shortly. As a result of these and other expected contract awards, we currently forecast that Kratos' third quarter bookings could be particularly strong. Since our last report, Kratos' confidence has increased in our 2026 forecast base case margin or EBITDA rate increase of 100 to 150 basis points. with additional increases expected in 27 and beyond as new higher margin programs we have recently received begin to ramp up and certain lower margin contracts are renewed with the customers at expected higher margin rates. In Kratos' tactical drone business, it was recently reported that both the U.S. Marine Corps and the Office of the Secretary of Defense stated that the Valkyrie is becoming a program of record and will be the first CCA in production and fielded for the Marines. Additionally, Airbus recently announced that they have partnered with Kratos for a European mission-focused Valkyrie and initially specifically targeting the German Luftwaffe with the current expectation for fielding no later than 2029. As you know, Kratos' base case financial forecast does not include any assumed tactical drone production, which we will only include in our revenue forecast once we have received a contract award, as the potential financial impact to Kratos when we receive tactical drone awards could be very significant. For example, if in 2026, hypothetically, Kratos receives an initial order for 15 Valkyries at $10 million each. We could have an immediate revenue increase over our base case financial model and forecast of $150 million with profit as the Valkyrie is currently in production, and we could have 15 aircraft ready to deliver immediately upon contract award in my example. Both the Marines and Airbus opportunities were made possible as a result of Kratos making the investment to begin production of 24 Valkyries, several of which have been delivered to customers, as you know, in advance of a program or contract award, with approximately 15 to 20 of which can, are, or will be completed and available for sale next year. Kratos made the decision to make the investment and begin serial production of 24 Valkyries ahead of contract award, so that Kratos would be first to market and that the potential customers could come to the factory, see their aircraft being built, see the actual cost data for the aircraft, see their aircraft fly, and we believe, based on what we expect to occur, that this was the correct business decision. Kratos took this same first to market approach of making the internal investments to design and develop certain of our other product offerings including IRANIS and Dark Fury, our hypersonic flyers, our Zeus 1, Zeus 2, and Oriel solid rocket motor stacks, our family of jet engines for drones and missiles, our open space C2 and telemetry tracking control satellite system, and many others, each of which are and we believe will be driving Kratos' future growth and value. In addition to the U.S. Marine Corps and Airbus Valkyrie-related opportunities that have been reported, We have two new additional Valkyrie opportunities with two different customers, both of which I believe Kratos is currently in a sole source position. As a result of recent Valkyrie related progress, we have now begun the process of pricing out with our already in place and performing qualified suppliers, the long lead purchasing and the program planning for an expanded production run of at least 24 additional Valkyries, which would sustain and build on the current learning curve from the initial 24 and would bring the total Valkyrie serial production run to 48 aircraft. Across the potential increased Valkyrie production run, we would be producing several variants, including runway-independent, combined runway-independent runway-capable, CTOL, a European-focused variant, and potentially two additional variants, all of which are specifically potential customer focused. By maintaining the Valkyrie production line with the potential additional 25 aircraft, we will continue to improve production efficiencies and reduce cost as we continue to come down the manufacturing learning curve, further establishing Kratos' leadership position with actual aircraft and real known cost points. I can now also report to you that we expect that by the end of this year, we will receive a sole source contract for the Kratos Airwolf tactical jet drone, which could lead to a production contract in late 2026. And I can report that Kratos' Athena tactical drone very recently had multiple successful flights as we continue to progress with this customer-funded program. Kratos's Ghostworks is currently working on a new fifth-generation jet drone with expected first flight in the first half of 26. And Ghostworks is also working with Kratos Turbine's Bladeworks and our Rocket Systems Chaos team on a new hypersonic system named Icarus. Kratos's Rayleigh-based microwave electronics business has successfully completed its move into our new manufacturing facility with less operational downtime than we originally expected, and we are now positioned for further increased organic revenue growth with the expanded capacity, including with our key partners, Rafael, Israeli Aerospace Industries, and Elbit. Kratos' jet engine and propulsion systems businesses are certain of our strongest revenue growers and highest operating margin businesses, with growth expected to accelerate in the second half of 26, including as LRIP quantities of certain drones and missile programs increase, with additional revenue increases expected in 27, and then also in 28, as LRIP is expected to transition to full-rate production on certain programs. As you would expect, Kratos' military-grade air defense, missile, radar, and counter-UAS systems business is very strong. and is also expected to be a key Kratos base case future organic revenue growth driver, including with our incredible partners Northrop, Lockheed, and Raytheon, each of which innovate, develop, and integrate certain of the best weapon systems in the world as is being demonstrated globally in combat. Kratos' space, training, and cyber business is turning around. Led by our government and national security offerings, with expected 2026 growth and increased profit margins and accelerating into 27 based on programs and the current new opportunity pipeline. The reconciliation bill and the Trump administration's policies, position and support for space and satellite capability has now clearly become both evident and significant, including for national security, which we are seeing in our government satellite business. Chris Lee stated, with the Trump administration's focus on space, including Golden Dome, and Kratos' proven expertise in delivering scalable software-defined ground systems combined with the open architecture approach of open space, this uniquely positions Kratos to rapidly integrate a diverse set of next-generation satellite constellations and defense capabilities for U.S. government missions. Kratos' track record of cost-effective agile solutions and deep customer partnerships ensures that Kratos can meet evolving mission requirements faster and more efficiently than other companies in the satellite area. Kratos' space and satellite business, our technology, and our capabilities are, in my opinion, they're the gold standard of the industry, and we're seeing that now, with Kratos Space being one of the most valuable businesses in our company. Kratos' Anaconda, our Helios, Nemesis, Hermes, and certain other initiatives are tracking, and we hope to be successful on Anaconda and Helios by the end of the year. Kratos' Prometheus partnership with Rafael is on track. Certain key energetics-related production equipment has been ordered. Certain key employees, including the chief operating officer, have now been hired, and we remain optimistic that Prometheus will be a billion-dollar-plus business once at full rate production. Similarly, Kratos' GEK small turbofan initiative with our outstanding partner GE Aerospace is on track. The GEK production facility location has been identified, as you know, and we expect GEK to also be a billion-dollar business once at full rate production. I want to pass on to our shareholders that we are routinely told by our customers and partners that Kratos' affordability and our approach, technology, military-grade manufacturing facilities, our national security-approved execution facilities, products, and capabilities are invaluable and basically don't exist in any other defense technology company. A primary differentiator that we are routinely being told more and more often including now in Europe, is that Kratos doesn't run around putting out PR, PR, PowerPoints, and podcasts saying what we're going to do. At Kratos, we've already done it. For example, Valkyrie has flown with effectively every fighter in the United States inventory. Valkyrie has flown from multiple U.S. sites in multiple scenarios. Valkyrie, identified by the Office of the Secretary of Defense and the Marines as a CCA, has collaboratively operated with multiple manned military aircraft, and has collaboratively cooperated with multiple Valkyries, not surrogates, not computer models, not pretty pictures, actual Valkyrie systems. All of these flights and events have occurred in coordination and cooperation with our military customers. Valkyrie exists, is flying, and has been flying since 2019. The Valkyrie is real. This is why Airbus partnered with Kratos. Airbus wants to work with the company that has real flying products and aircraft that have flown with the F-35, for example, and flown with the F-32, excuse me, the F-22, not just promises. I find it interesting that other companies are routinely making claims of what their systems will be and capabilities it will have. I consistently tell you on these calls what we have done, what we're going to do, We do it, what our systems are, our actual successful missions, and our specific customers. We believe that these are key reasons why Kratos is seeing increased program opportunities, bid pipeline, partnership opportunities, and sole source positioning, all of which we expect to continue and potentially accelerate as national security and defense prioritization increases. At Kratos, we recognize the scarcity value of our company, including for United States national security and to our stakeholders. And we are laser focused on execution and rebuilding the U.S. industrial base while generating value for our stockholders. Deanna?

Thank you, Eric. Good afternoon. As we have included a detailed summary of the second quarter financial performance, as well as the initial third quarter and modifications to full year 2025 financial guidance in the press release we published earlier today. I will focus on the highlights in my remarks today. Revenues for the second quarter were $351.5 million above our estimated range of $300 to $310 million with overachievement of forecasted revenues across all of our businesses with the most notable growth in our defense rocket support due in part to the timing of hypersonic missions and in our C5ISR businesses with organic revenue growth rates of 116.6% and 25.4% respectively. Adjusted EBITDA for the second quarter of 25 was 28.3 million, also above our estimated range of 21 to 25 million, reflecting the increased volume offset partially by continued increase of contractor and material costs on certain multi-year firm fixed price contracts in our unmanned systems business. and a less favorable mix in our space training and cyber business. Unmanned systems second quarter 25 revenue was down 12.6 million due to the prior year comparable including 17.4 million from the shipment of an international target drone delivery offset partially by increased tactical drone related revenues. KGS second quarter 25 revenue was up 64 million year over year from the second quarter of 24 with organic revenue growth of 27.1%, excluding the impact of the February 2025 acquisition of certain assets of Norton Millimeter. Second quarter 25 cash flow used in operations was 10.6 million, primarily reflecting the working capital requirements related to the revenue growth impact in our receivables by approximately 36 million, increases in inventory and other assets of over 18 million, primarily reflecting increases in our microwave electronics and rocket systems businesses, which related to anticipated future deliveries in ramps and production, as well as investments we are making related to certain development initiatives in our unmanned systems business. Free cash flow used in operations for the second quarter of 25 was $31.1 million, after reflecting funding of $20.5 million of capital expenditures. As we planned, we are continuing to make investments to expand and build out certain of our manufacturing and production facilities in our microwave products, rocket system, and hypersonic businesses to meet existing and anticipated customer orders and requirements and investing in related new machinery, equipment, and systems. Consolidated DSOs or day sales outstanding decreased from 104 days in the first quarter to 103 days at the end of the second quarter, reflecting the revenue growth and the timing of milestone billings. Our contract mix for the second quarter of 25 was 65% fixed price, 31% cost plus, and 4% time and material. Revenues generated from contracts with the U.S. government during the second quarter were approximately 71%, including revenues generated from contracts with the DOD, non-DOD, federal government agencies, and MS contracts. In the second quarter of 25, we generated 12% of revenues from commercial customers and 17% from foreign customers. An operational priority remains the hiring and retention of skilled technical labor across the company, with total credos headcount of 4316 at the end of the second quarter as compared to 4226 at the end of the first quarter. Now moving on to financial guidance. The guidance we provided today includes our expectations and assumptions for our supply chain execution, and for employee sourcing, hiring, retention, and the related cost. We have increased our full year 25 revenue guidance from 1.26 billion to 1.285 billion to 1.290 billion to 1.310 billion, reflecting an organic revenue growth rate of 11 to 13% over 2024. and increased our adjusted EBITDA guidance from $112 million to $118 million to $114 million to $120 million. Our third quarter revenue guidance of $315 to $325 million reflects an estimated organic growth rate of 12% to 15% over 2024. Our guidance continues to include the impact of increased material and subcontractor costs on certain of our multi-year fixed price contracts, specifically in our unmanned systems, target drone business where we have experienced cost growth from certain ancillary materials on our targets and for which we are unable to seek recovery from the customer until the renewal of future production lot contracts occurs. We are continuing to aggressively manage costs where we can minimize the impact to our margins. Our forecasted second half of the year ranges include the sale of certain products that are completed and ready to be delivered once we receive certain government approvals. Out of an abundance of caution, we have not included a contribution from these expected revenues and the related profits until the fourth quarter. If the necessary government approvals are received earlier, it is possible these contributions could be made in the third quarter. Since quarter end, we have paid off our entire term loan balance of approximately $180 million. Therefore, any interest expense should be minimal in the second half of 2025. Our $200 million revolving line of credit remains undrawn except for approximately 10 million of letters of credit outstanding and available to the company. Eric.

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

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Termoli of Truist Securities. Please go ahead, Michael.

Good evening, guys. Thanks for taking the questions. I guess, Eric or Deanna, just on the guidance, I mean, even the results, it sounded like you've got broad-based strength. I don't know if there was any pull forward, but the second half implied revenues down versus the first half. I know you just talked to maybe some potential delays, but anything to read into that?

Nothing to read into it. There was the timing of a hypersonic mission that was originally anticipated later in the year and that that occurred in the second quarter.

Okay, got it. And then just if you could with the Valkyrie being tagged as a program of record. You've got multiple production lots. Can you just walk us through the mechanics of, you know, when you get a contract, what might happen? I mean, I don't know if you've disclosed pricing, but presumably you can, you know, take an immediate recognition of revenue and you could seemingly get a good cash tailwind. So is that something we should expect in the near term with all the progress that Dockery is having?

So I'll address your question as far as process and how that would occur, so you're correct. So when we receive a contract award, since we have leaned forward and have built these, we're on the second production lot of 12, when we receive a contract, I think the hypothetical example Eric used was an order for 15 at 10 million apiece. So if all those are fully complete, then revenue would be recorded at contract signing of 150 million. If they're, say, 50% complete or 70% complete, then let's say if they're 50% complete, then 75 million would be recorded. And then as the continued build-out occurs, then the revenue would be recorded until completion.

Okay. Got it. Last one, and I'll jump off. Eric, you didn't mention Mock TB. I think there was 400 million in the reconciliation bill. Does that give you even greater confidence? I know that was kind of anchoring the growth in 26.

Absolutely. And you're correct. There was $400 million in the big, beautiful bill for Mock TB. Our hypersonic franchise, including Mock TB, is going to knock it out of the park. over the next several years. So we feel great, and we're coordinating now with the supply chain for a very, very significant ramp in 26, accelerating into 27.

Okay, great. Thanks, guys. I'll jump back in the queue. Thank you.

Thank you. Our next question comes from the line of Peter Arment of Baird. Please go ahead, Peter.

Good afternoon, Eric and Deanna. Congrats on all the wins you're stacking up. Eric, can you maybe talk about your target drone business just in the scope of Golden Dome? I know there's an industry day going on in Golden Dome, so there's not a lot of details out, but how should we think about how Golden Dome impacts your target drone business?

Hi, Peter. I'm glad you asked the question. In my opinion, and I'm the CEO, I drink the Kool-Aid, there's no company in the country on a relative basis better positioned for Golden Dome than Kratos, including target drones. And let me just summarize why. On the space segment, we will be involved with the ground command and control and telemetry tracking and control on space. We are already under contracts for projects related directly or tangentially with Golden Dome, and that's going to increase. We are the hardware merchant supplier on radars, battle command systems, and interceptors for every prime for virtually every platform. So we're going to be involved there. And now to your question. Once Golden Dome is up, it's going to need to be tested. And this is going to take hypersonic targets, cruise missile targets, jet drone targets, ballistic missile targets, all of which Kratos is the market leader. So we are, if this goes, this is going to be a significant impetus for our company, including in our target drone business.

Appreciate that. And then just last quarter, you kind of stack ranked for us. And you mentioned, you know, kind of over a, you know, kind of a three-year outlook. You kind of put hypersonics as one and engines franchises as two, microwave electronics. And you kind of said, you know, tactical drones will wait for customer decisions, but Sounds like those decisions are being made. Does that change how you view where the rankings would be for that?

Right now, the rankings remain our hypersonic franchise. No question. I'm going to go with my base case. Number two, our air defense, missiles, systems, radars, battle systems, all that hardware, that's moved into number two now. It's staggering. the orders that we're getting and that are coming. And you can read about the systems in the press. And again, we're the merchant supplier on these. Third is going to be the engines. As I said, we're heading into low-rate initial production for 26 and into full-rate production in 27 on lots of engines for new low-cost cruise missiles and drones. If slash when tactical drones occur, it could leapfrog and go into one or two. if that happens. But again, that's not in our base case. It's not in our forecast.

Appreciate it. Thanks. I'll jump back to Q. Thank you.

Our next question comes from the line of Josh Sullivan of the Benchmark Company. Your line is open, Josh.

Hey, good afternoon, Eric. Hi, Josh. Hi. You know, clearly it's been a very strong year for drones between executive orders, success memo, you know, industry air shows highlighting low-cost drones and Kratos model obviously lines up nicely with these trends. You know, but one of the big questions, you know, we continue to get from investors is just the obvious outlier here continues to be the Air Force. Should we be thinking the Air Force drone posture is just going to more be on the exquisite side and the other branches are going to lead on the low-cost tributal side or Is that how it's going to play out, or do you sense anything's going to change sooner than later?

I have to be obviously – and I appreciate the question. We get those questions a lot, too. I have to be very, very careful. I'll never speak for the customer. I can, I will say that recently representatives of the Air Force have been saying publicly that maybe – Less than exquisite, more affordable, and in higher quantities is a better way to go than exquisites that haven't even flown yet. So we're seeing some of that out there. I'm not going to speak for the customer ever, but that's some of the public remarks they've been making.

And I guess maybe a follow-up to just Peter's question on, you know, U.S. Golden Dome target needs. But given the investment in Europe, you know, I mean, defense posturing over there, should we expect a similar need for target drones in Europe? And then would those carry higher FMS-like margins?

That's an excellent question. The answer is yes, and yes, and they would probably be either FMS or direct commercial because – The Europeans, as we know, their target is to increase their defense spend up to 5% of GDP. I don't know if they're going to get there, but they're definitely increasing it. And they're going to be buying Patriot and FAD and LTAMs and IBCS. And I can go on and on. U.S. systems, because very candidly, their industrial base doesn't do theirs right now. When you see systems like that being sold, Kratos target drones go with those systems. Global recapitalization of strategic air defense systems, missiles, radars, satellites goes. Kratos' target drones are going with them. And our margins on those are significantly higher than they are here in the U.S. because they're, as you mentioned, they're either FMS or the direct commercial. Got it.

Thank you for the time.

Thank you.

Thank you. Our next question. comes from the line of Mike Crawford of B. Reilly Securities. Please go ahead, Mike.

Thank you. If you had to rank certain missile programs that you're on with microelectronics, I mean, is Patriot up there at the top or SM-3 or is it kind of all of the above?

I can't talk specifically, but in Kratos, we are involved with Patriot. We are involved with that. We are involved with indirect fires. We are involved with SHORAD, short-range air defense. All these, when I say we're involved, we build them. Integrated battle command system, we build that. Long-range hypersonic weapon. uh on and on we we are we are involved in in virtually every one of them and the associated radars tippy two tippy six sentinel not not the icbm the radar sentinel etc okay thank you eric and then just with all of these new facilities you're standing up in oklahoma and israel all over the place are

Are all of those still on track as originally guided for LRIP and potential full rate production or any changes there?

It's going to depend on some of the build schedule and the construction. So right now we still have them reflected in our 25 numbers projections. There may be some just depending on construction build out, some of it may slip into 26.

Okay, thanks, Deanne. And then final question is, should we expect you to start another Valkyrie spiral before award, or are we now moving to the point where you're going to get awards before you need to do that again?

I'm not going to comment on that right now. I can't get, I'm not going to get ahead of these two, of the customers.

Okay. All right. Thank you so much.

Yep.

Thank you. Our next question. comes from the line of Jonathan Sigmund of Stifel. Please go ahead, Jonathan.

Jonathan Sigmundson, Hello, Eric and Deanna. Thanks for taking my question. So, you commented on the big beautiful bill and having Mach TB listed. It also listed a billion and a half for low-cost cruise missiles, 600 million for industrial base for solid rocket motors, and then 270 million for the Marine Corps' unmanned combat aircraft. So it seemed pretty relevant to you guys from my point of view. Just wanted to kind of get your confirmation of that and if there's other competing programs that might have their hands in some of those incremental budget dollars. Thank you.

I confirm exactly what you just said. And on the low-cost cruise missiles, think Kratos low-cost jet engines.

That's really helpful. And then I'll just ask another question on your partner at Prometheus, likely consumed a lot of their missiles in the effective defense in Israel last in June. Just can you give us a sense if the interceptors they used, are they relevant to the JV that you're building?

Without naming any systems, they're absolutely relevant. And the indication from our partner right now is from multiple tens of thousands of motors and energetics that Prometheus will be building for exactly what you just said.

Is there any opportunity to maybe accelerate that capacity or even expand it, given how much demand signals are globally for those programs?

It's slow because we've already ordered most of the main mixing equipment and other equipment that we need. It's coming. As I mentioned, I mentioned the chief operating officer. Prometheus has hired a number of other executives. There is opportunity to accelerate, but it's not significant. I don't want to mislead here. It's not significant. We've got the location. We've got the construction. We've got the ground being broken. It's all going. There is significant opportunity for the business to expand. As I think you know, when we first announced this, the immediate and primary objective is to take care of our partner, Rafael, and to take care of the Israeli needs because we have the backlog. However, because we have that and we've modeled this all out, we will have such a throughput in the factory, our cost rates will be extremely competitive. They will be better competitive than anybody else's. So we have already begun in-person discussions, myself, with Rafael, with Primes, on what Prometheus will be building for them. So that is the second part of the strategy, to be a merchant supplier leveraging off of our big anchor tenant that closes the business case.

Thank you for the comments.

Yes, sir.

Thank you. Our next question comes from the line of Colin Canfield of Cantor Fitzgerald. Please go ahead, Colin.

I think it's the question. Maybe going back to the X58 program lot, Matt, if you think about the kind of variance that you listed, and the awards that are looming between Marine Corps and either Air Force or Navy. The other variant I'm keen to suggest, you know, similar kind of quantities of drones over a multi-year period. So as we think of kind of production scaling, and we take apart the kind of five categories you listed and assume, call it, you know, 10 to 20 drones per category, Is it fair to characterize the X58 production schedule as being able to deliver, you know, call it 100 drones per year over the next five years?

The capability right today, right now, we can deliver 50 a year. We have to get the supply chain and everything, which I mentioned, we're getting ready. Okay. The way we've set the facility up is we have an option. We can pull the trigger and we can expand the facility. We get an additional autoclave and we could get to 100. So that has all been planned out in our program and manufacturing production plan. Yes.

Got it. And then just taking the $10 million price tag that we considered, do you think it's fair to maybe characterize and just assume the other goodness in the business, is it fair to characterize Kratos' revenue as being able to double over the next, call it, three years?

Oh yeah, in our upside case, absolutely. Not the base case, not the upside case, sure.

OK, OK, got it. I appreciate that caller. I'll hop back in the queue. Thank you.

Thank you. Our next question comes from the line of Seth Siffman of JP Morgan. Please go ahead, Seth.

Hey, thanks very much. Good afternoon and nice results. I wanted to ask, Just so we understand in the model, the goodness that came in KGS as a result of the hypersonic event, was that kind of pulled forward from late in the year? It seems a little early for Mock TB, or was that something separate? And then when we think about the increase in the revenue guidance for the year, is that in KGS, or is that in Unmanned?

I'll take the first part, and Deanna will take the second. I cannot comment on the hypersonic mission that we did. I can't do it. I'm sorry. I can't say anything about it. So that's on the first part of your question. Go ahead, Deanna.

Yeah, and on the revenue guide left, that's primarily in KGS.

Okay, okay. Got it, got it. And then just as a follow-up, with the debt pay down, you'll probably end the year with... I don't know, $625 million of cash, something like that. How do we think about what you want to do with that and the investment requirements as we go into 26 and beyond?

Yeah, and your cash number may be a little high, Seth, because we did use $180 million to pay down the debt, and our guidance is the use of $80-plus million this year. But it will still be a fairly sizable number. So right now, we're generating interest income a couple percent, about 4%, the best rate we can get right now.

Yeah, and on the second part, Seth, Anaconda, I believe we're going to win. It'll be sole source. It'll be significant. Helios, I believe we're going to win. It will be sole source. It will be significant. When, God willing, we win these and they're announced and we describe what they are and the facilities we have to build, and these will be multi-decade type programs, you'll understand what we're doing here. Also, Poseidon. The reason I did not talk about Poseidon previously, this is so big. And if it's announced by the customer, you'll understand why we called it Poseidon. It's so binary, and I don't want to call it a flyer, but I wasn't better than 50% confident we'd win, and we won. That's going to take a new facility, and again, if it just comes out what this is, you're going to go, yeah, we see what they're doing here and what's happening here. Those are just some. We had some other ones that we're chasing. I think we're going to get in Q1, Nemesis, Vulcan, Hermes. But, Seth, what is happening here is the government customer, if they have a viable alternative to a traditional that's qualified, they're encouraging us to bid. And we're winning this. Deanna and I just did a bid review yesterday on another multi several hundred million dollar opportunity that we're priming on. We've been encouraged to bid prime by the customer. And so our plan macro level with the capital we raised is exactly what we said. We are taking advantage of what is happening geopolitically and the change in policies And we are going to build this company. And sometime, probably in 27, 28, the production that we're outputting is going to exceed the investments we're making. And then we're going to become a significant multi-decade, multi-year, excuse me, cash flow generator. We're positioning ourselves for that. That's what we're doing. And the opportunities, the number of opportunities even since we did the equity rate, continues to, they continue to approach us. It's really fascinating what's happening here. So that's the plan with the capital.

Excellent. That's very helpful. Thanks.

Thank you. Our next question comes from the line of Ken Herbert of RBC Capital Markets. Please go ahead, Ken.

Yeah, hey, good afternoon, Eric and Deanna. Hi, Ken. Maybe, Eric or Deanna, just to follow up on that line of thinking, you're obviously using approximately $80 million this year to build out capacity. You just outlined a significant number of new opportunities that seem to be growing almost daily. How do we think about, with the better revenue outlook into 2026 potentially, Is free cash flow a greater use in 26? Can you just directionally sort of talk about how you're looking at investments today and how we should think about maybe the cash flows over the next couple of years to support the growth?

Yeah, so on the CapEx, I think we'll continue to be elevated in 2026. As I mentioned earlier to I think Mike's question related to CapEx, so we guided this year 125 to 135 million Some of that may slip into 26. What is not included in the CapEx or the investments for 25, which will be included in 26, will be the build out of some of these other facilities that we've talked about. If we are successful for Anaconda and for Helios, in addition, the Prometheus JV, as you know, we have a 50% partnership. for a total of 185 million. So that's gonna be, let's call it 85, 90-ish million. That will probably be over a course of two years for 26 and 27. So that addresses the investment side of it. And then on the working capital side, I think working capital will continue to There will be a use because of the growth, as we've seen in this quarter and the prior quarter, but this quarter more so. The increase from inventories and receivables and just leaning forward on that. We negotiate the best payment terms we can with the customer to be able to get that funding as soon as possible. But that initial outlay, especially for growth rates that we're talking about, I believe we'll continue to see that in 26.

Okay, that's helpful. Thank you, Deanna. And as we think about sort of the investments across the board, obviously you're leaning into working capital to help de-risk supply chain to the extent to which you can. But where's your confidence level across your suppliers as you build this up? And are there any particular areas of risk you'd call out that as much as you're de-risking from a working capital and investment standpoint, still really sort of keep you up at night as you think about executing to what could be some pretty aggressive contract terms?

Yep, there are. What's the most important part or subsystem? It's the one you don't have. And so, Ken, I'm using numbers. 99% of our supply chain is good. We have backup sources. We have alternative sources. We have multiple qualified sources. But there is still one or two percent where only one guy does it. And as you know, we've been trying to vertically integrate. We are machining, milling, 3D printing, additive manufacturing, numerous parts for our engines, our hypersonic systems, et cetera, down in Birmingham, Alabama. But there is still a handful or two suppliers to us. that are qualified by the military, the government. They will not or have not to date approved us to go qualify anybody else. They are sole source to us. And thus far, delivery schedules have not been a problem impacting our programmatic and contractually required delivery schedules. However, we have two or three out there that are really expensive. And they are increasing their prices. And it has been impacting our margins. And these are on a couple, three programs that they're coming up for us. We're sole source. We're coming up for another three or five year contract award in the next year or two, where we will present the actuals to the government. And then we'll get reimbursed for those costs going forward. So that's the risk right now. I'm not seeing it that anybody's going to stiff us. But the cost of like two or three is really high because they've got the keys to the kingdom.

Thanks, Eric.

Thank you. Our next question comes from the line of Anthony Valentini of Goldman Sachs. Please go ahead, Anthony.

Hey guys, thanks for the question. Eric, I just want to, if we can talk about the Marine Corps program of record for a second. And in terms of like what exactly needs to happen between where we are today and it actually being an official program of record that you guys have won. And is there any chance that, you know, that does not happen or they bring in another competitor? If you can just kind of give us a little bit of a feel for that, that would be helpful.

Good afternoon, and I hate to give these answers. I cannot comment any further than what has been published publicly. I cannot, and I apologize sincerely. I can't do it. I can't do it.

Okay. No worries. Why don't we focus on some of the other growth vectors? In terms of the GEK business, I think that you mentioned you think it could be a billion-dollar business. Can you just talk about maybe like the timeframe for that and then maybe similarly, I think you made some similar comments on Prometheus in the past. How big can that get and how quickly do you think you guys could get there?

Yeah. So on the first one, on GEK, what's happening is out there with cruise missiles and drones is significant. I was just reading about a new one that's coming out today. GE, the facility will be up and running, think 27, just to be safe, think in 27. We'll get into production late 27. Let's say we get into full rate production 28, 20, full rate 28, 29. That's when it could be material for us. And think 50-50 on that with us in GE. So 28, 29. OK? On Prometheus, think 27. That will ramp very, very quickly because of the previous question I answered. We're doing multiple products across multiple platforms, and we're doing both the solid rocket motor and the energetic. I would think the same type of a thing. I would think 28, 29.

And is that a billion dollars as well, or is there a different value there?

Yeah, no, I'm looking at the valuation on these things, the valuation of at least a billion dollars based on what we're seeing. When I say we, us and our partners are seeing out there, With other companies and the valuations that are being put on them, absolutely. We're looking at a billion-dollar valuation on each once we get into production. Absolutely.

Okay, great. And then maybe the last one. I think around this time last year you made a comment about there are training programs out there that could be pretty large and incremental to where you guys are at. Could you just give us an update on that maybe?

Stand by. Stand by. And I'm saying that very affirmatively. I can't say anything else. Stand by.

Okay. Great. Thank you, Eric. I appreciate your time.

Okay.

Thank you. Our next question comes from the line of Trevor Walsh of Citizens. Please go ahead, Trevor.

Great. Hey, Eric and Deanna. Thanks for taking the questions. Maybe just to clarify a little bit more on Prometheus. It sounds like the business case, the base case of that is obviously with Rafael, and that makes sense. Is there anything when you go beyond that from a competitive perspective where the upside case there just becomes a little bit more, I guess, more More elements there from just kind of what others in the market might be doing. And can you kind of go through kind of how that maybe looks from what you're seeing? I guess just given in the context of the announcement that came from the particular to the solid rocket motor kind of market.

Yeah. As I mentioned a few minutes ago, us and our partner, Rafael, are looking at this. There are two phases. They're running concurrently. Phase one. is to satisfy Rafael and the Israeli Ministry of Defense's demand for solid rocket motors and energetics. Number two that we're running parallel is to be a merchant supplier of solid rocket motors to certain primes that we have already been engaged with. I've been engaged with some of them for over a year now on this before we did this, which We are in very deep discussions with on what we're going to be doing with them. That's the upside case. You know, there's the base case with our partner. There's the upside case that both our partner and I are going to make. We're going to make it happen. We're going to execute it. And I can assure you that the potential customers are motivated. Don't always believe everything you read out there. There's fact and there's fiction. And as you know, we deal with fact here. And so we're very confident in what Prometheus will be, both base case and as a merchant supplier.

Got it. That's helpful. Maybe just one quick follow-up for the Poseidon announcement. I understand the $750,000. million in total. Can you just give us a sense when that starts to ramp? Is that kind of an annual run rate or what just overall kind of just broad strokes how that looks once it gets going?

Yeah. So we anticipated, we felt confident in this. So we've actually already signed a lease and on the new facility that's going to be built out, this will obviously be, and when this becomes more publicly available, you'll see what it's a military grade secure facility on what we're going to be doing. Facility will be done 27. I think production, it's going to really start to ramp 28, 29 production.

Great. Thanks. Appreciate the questions. Yep.

Thank you. Our next question. comes from the line of Sheila Kaheglu of Jefferies. Please go ahead, Sheila.

Hey, Eric, Deanna. Thank you so much. Great quarter. Eric, maybe if you could talk about, you have so many programs in the hopper. If you could talk about next steps we should think about with the DOD and funding dollars flowing through. And on Poseidon specifically, any sort of comments on how it came about? Was it a competitive RFP process? How you got chosen by the prime? Yeah, you know, how did that work?

Yeah, it was, it was, it was absolutely competitive. It was extreme. And this is on Poseidon, it was absolutely competitive. It was very competitive. And this is why I very candidly, I didn't, I didn't talk about it like I talked about other ones. where I think we have a clear line of sight and we have competitive differentiators that we're going to win. So it was very competitive. We were fortunate enough to pull it off. As I mentioned before, we call it Poseidon for a reason. When it becomes public, you'll see why. And as I mentioned, this will be a big flywheel stability cash generator. This will reduce our rates because of the structure, which will make us more competitive on other bids. Sheila, this is an incredibly strategic win that the team did. The team knocked it out of the park with us. Oh, and let me say something else. I'm really glad you asked this, Sheila. Let me say something else. There are multiple Kratos divisions involved in this, helping to build what we're going to be building. And I believe that's one of the key reasons why we won Because this customer, and again, when this comes out, you'll see who this customer is, this customer was looking for surety. I like to say one neck to choke. And with us, we're very vertically integrated on this because of our capabilities. And I think that was a primary differentiator in our win thesis.

Great. No, that's awesome. And maybe if we could, Eric, if you have any commentary on this, So how we should track, you know, program performance or next steps with the DOD and funding allocation.

And Sheila, are you talking overall at a macro level or this program?

Both decided and, you know, the next three biggest drivers as you're looking at watch items.

Okay. So are these watch items? Again, I want to make sure I answer the right question. Are these watch items that we've won or are these ones that I'm chasing?

know that you've won.

Okay. Yeah. The biggies, let's go to the big beautiful, let's go to the reconciliation bill. Don't quote me on this, but of the $150 billion, I think $118 billion of it is supposed to be spent or obligated in the next 12 months. So in our hypersonic franchise, including Mock TB, I think we should see a significant uptick for Kratos' hypersonic franchise relative to what's in that reconciliation bill and what's supposed to be obligated. Very similar to a drone program that was mentioned that's in the reconciliation bill. I believe that that's going to be obligated and under contract very soon, and it's got to be spent and obligated in the next 12 months. Relative to small drones and engines, I believe we're going to start receiving We're designed in on a number of small cruise missiles. We're designed in. I'm under NDA. I can't tell you which ones yet. I believe we're going to see the money start flowing on small cruise missiles directly related to that $1.5 billion that's in the reconciliation bill that's now law. So those are some you can track directly. Another big one for us is the Sentinel Intercontinental Ballistic Missile with our outstanding partner Northrop, which I've got to give a accolades to. They're doing a hell of a job on Sentinel. Northrop is. Take a look at what Northrop is saying about Sentinel, and you can basically flow that down to us. That's one we don't talk about, but that's a multi-hundred million dollar development program for us that's going to be ramping starting next year in 26 and 27. Then it'll go into production. It'll ramp even further. That's one you can track the funding on as well. So there are four or five where you're going to be able to track the funding flows top level and to Kratos pretty easily.

Awesome. Thank you so much. Appreciate it.

Yep.

Yep. Thank you. Our next question comes from the line of Andre Madrid of BTIG. Please go ahead, Andre.

Good afternoon, Eric and Deanna. Thanks for taking the questions. Good afternoon.

Hi, Andre.

Looking at the down select on Valkyrie with the Luftwaffe, it was kind of telegraphed a couple quarters ago, and you mentioned back then that it would be DCS versus FMS. How do you see this impacting the margin profile as that program ramps up? I mean, it is a lot further out, but I'm just curious if you can maybe give some color as to the difference versus what it would look like under FMS.

Yeah, so I envision it's going to be very similar to what we're doing with our target drones. So with our target drones, when they're in full rate production, we make somewhere around 12% or 13% in the U.S. with the U.S. federal government. Internationally, we can make 20% to 25% internationally under a direct commercial. I'm not going to say it's going to be those exact numbers because I don't know yet. We're going through the ROM right now. But trajectory, I believe it's going to be very similar similar to that because it is direct commercial.

Got it, got it. That's very helpful. And then maybe just talking, I know you mentioned fixed price mix earlier in the call. How should we expect that trend through the out years? I know it's been a big focus for this administration. And with the influx of new programs starts, I guess, how do we expect this mix to shift?

There's a couple of large programs that we have that are cost-type contracts. So as those increase, we could see some change between that. But I think predominantly, we're still going to be predominantly fixed price and with cost plus increasing. But I think it's still going to be substantially fixed price.

Got it, got it. If I could squeeze one more in. Norden Millimeter, maybe just explain a little bit more of the logic behind the acquisition and how it fits into the bigger picture.

Yep. So our microwave electronics business is currently headquartered the biggest pieces in Israel. As we've talked about, it's one of our fastest-growing businesses, and it's accelerating because we're helping our partners replenish the missile systems. Up until 2015, Kratos had one of the largest merchant suppliers of microwave electronics in the United States. We sold that business in 2015, because very candidly, we were presented with a price that was very valuable to our shareholders. We were under a non-compete in the US. We could not re-enter the US microwave electronics market until, don't quote me, 2020-ish, something like that, because we had signed that sale agreement. In 2021, 2022, Our prime partners, who, as you know, we work very closely with, started coming to me and saying, you know, we'd really like you to get back into the microwave electronic business and be a merchant supplier for missiles and radars and aircraft, et cetera, et cetera, in the U.S. So we started building a team. We made a couple of small acquisitions, one of them being Norton, and it's accelerating. I believe we are winning a lot. I don't talk about it. We don't talk about it. It's not time yet. But this time next year, I think we're going to be talking with you on programs we've won. And this is one of the highest, as you know, being a merchant supplier, microwave components and subsystems is one of the highest margins businesses out there. And this is an area, the microwave area and the communication area, that if we were to do an acquisition, this is where we're going to do it. It'll be under this Israeli-based U.S. microwave area. Because for all the reasons you can think of, we know the customers, we have the partners, we know the Ministry of Defense, we know the primes here. So this is a strategic thrust for us that we are being strongly encouraged by our customers and partners to go into and that they will give us programs.

Excellent. Excellent. Thank you both for the time. Thank you. Thanks.

Thank you. As a reminder, to ask a question, you may press star 1-1 on your touch-tone telephone to ask a question. Again, that's star 1-1 to ask a question. Our next question comes from the line of Colin Canfield of Cannon Fitzgerald. Please go ahead, Colin.

Thank you for the follow-up. I think we've done a good job kind of going through manufacturing, scaling, and JVs across production. quantities and volumes and dollars, but as we think about the potential of kind of going to market with a services component, how do you think about kind of the X58 as potentially servicing as a good land and expand lever, especially as folks kind of consider force protection, intelligence, and communications as potentially systems and systems opportunities?

Brother, I'm not sure I understand the question. Are you asking how do I think about with the Valkyrie going to market in a service-type structure? Is that what you said?

It's the concept of considering the drone for commercial, because you think about the international exports, right, and also the separate combat brigades. I think there's been a big focus on the U.S. side of doing production order quantities, right, and manufacturing-type work. But at the end of the day, you know, international partners are probably going to want more of a services type offer, right? Like a package deal. So how do you kind of think about the X58 as kind of being that jumping point?

I got it. I got it. I got it. I'm not sure based on what we're seeing and what we're doing with our international customers specifically related to Valkyrie, and Airwolf and another one that I'm not talking about, that that's the case. Right now, what we're seeing, and I think this ties into State Department approvals and MTCR, which no one talks about, but it's very important. I think what they're looking at is acquiring u.s aircraft that are flying today that are ready to go and integrating their mission systems on it okay and they're maintaining it with some of our support internationally that's what we're see what kratos is seeing right now more of a they get a fly away aircraft fly away it flies they want for their specific mission application their mission system or nato's mission system if you will or a certain customer we're working with in the Pacific, their mission system, they want that on it. It'll be integrated and delivered that way. That's what we're seeing.

Got it. Got it. So open source architecture is seemingly preferred.

Correct.

As you think about more kind of industry work, excuse me, company-wide factors, how do you think about kind of maybe going through by each segment engineering around and getting secured supply for rare earth minerals and metals?

That's a great question. So for the past couple of years, and we just did this again in the past couple of weeks, we go through with our six division presidents, and we do, I don't want to say complete, we do as a complete scrub as we possibly can, not just what we're sourcing, but what our critical vendors are sourcing relative to rare earth, and we make an assessment of where our Our inventory is where our safety stock is on those parts and components that are relevant, and also our suppliers. So we're doing the best we can to stay on top of that relevant to our supply chain.

That's an excellent comment.

Thank you. Yep.

Thank you. I would now like to turn the conference back to Eric DeMarco for closing remarks. Sir?

Excellent. Great. Thank you, everybody, for joining us. Great, great questions today. Great interaction. We really appreciate it. And we look forward to chatting with you again when we report Q3.

This concludes today's conference call. Thank you for participating. You may now