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?