Kratos Defense & Security Solutions, Inc.

Good day, everyone, and welcome to Kratos Defense and Security Solutions Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To participate, you will need to press star 1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 1-1 again. Please note, this conference is being recorded. Now it's my pleasure to turn the call over to the Senior Vice President and General Counsel, Marie Mendoza. You may begin.

Thank you. Good afternoon, everyone. Thank you for joining us for the Creative Defense and Security Solutions fourth quarter and full year 2025 conference call. With me today is Eric DeMarco, Creative Assistant President and Chief Executive Officer, and Deanna Lund, Creative Assistant 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 a 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 they 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.

Good afternoon, everyone. We finished 2025 exceeding our financial objectives for the fourth quarter, generating approximately 20% Q4 year-over-year organic revenue growth, generating a 1.3 to 1 book-to-bill ratio on top of this 20% growth rate, having a record backlog of 1,573,000,000, a record opportunity pipeline of 13.7 billion, and with the opportunity set for Kratos having never been stronger and expected to continue to increase based on recent events. Of note, generating a 1.3 to 1 book-to-bill ratio on top of 20% organic growth while also maintaining a record high backlog and record high opportunity pipeline, we believe is representative of the increasing demand for Kratos' affordable military-grade hardware and software. and that our growth trajectory is accelerating. Kratos is positioned to achieve our previously communicated 2026 and 2027 financial targets, and similar to 2025, our Q1 will be the lowest, including as we come off another CRA, and also this time a government shutdown, both of which are now resolved, and we will ramp throughout the year. Since our last report, The global national security opportunity and funding environment for the industry and for Kratos has continued to improve, including, as I mentioned, both the CRA and U.S. federal government shutdown being resolved, the 2026 NDAA being signed, the fiscal 26 defense appropriations bill being signed, and the president, the chairman of the SASC, the chairman of the SASC, each proposing future defense budget increases of approximately 50%, up to $1.5 trillion. Additionally, discussions have already begun on a second additional 2026 reconciliation bill, including a potential additional $450 billion for defense. There is a generational recapitalization of the defense industrial base underway, driven by geopolitical and related global threat environment, a recapitalization that we believe Kratos is uniquely qualified to address, with defense and national security-related budgets of the U.S. and its allies expected to increase for the foreseeable future. Crisply stated, we now have a $1 trillion annual defense spend that is expected to increase for the foreseeable future, and as a result of the defense industry consolidation, which began with the infamous DOD Last Supper in 1993. There are few qualified companies with proven capabilities to address the required military-grade hardware, software, and weapon systems demand. Kratos is one of the few non-large traditional prime contractors, which in my opinion is qualified to adequately address this demand. With Kratos having the right products at the right time at the right cost points now and today, And this is being reflected in our organic growth rate and our financial results. Also importantly, the Secretary of War has emphasized that he wants industry to bring to the department relevant systems now, systems that can achieve 85% of what is needed today, not a PowerPoint of an exquisite system at maybe some days 100% potential threshold at a ridiculous high cost. As you know, pillars of Kratos' strategy since we founded our company include better is the enemy of good enough and ready to field today and affordability as a technology, both of which I believe are aligned with the Secretary's comments and clear differentiators of Kratos in today's environment. Another Kratos strategy pillar also since our inception is that Kratos makes true internally funded investments ahead of government funding, enabling Kratos to move fast, efficiently, and affordably for manufacturing capability and relevant products for the warfighter. Additionally, Kratos' practice of not paying dividends or buying back our stock, but of investing our capital in the defense industrial base, is also aligned with the vision of the current administration and also the related opportunity environment. which Kratos is realizing the benefit from. Kratos' strategy of being first to market with actual relevant products is clearly a differentiator to our customers and partners, as we are seeing firsthand with the demand for Kratos' jet drones, hypersonic systems, jet engines, satellite-defined software systems, and solid rocket motors. Having products and not PowerPoints is clearly important now more than ever, and I believe that this trend is accelerating. Engineering, manufacturing, and delivering affordable, relevant, military-grade hardware at scale that must work every time is hard, and having this capability does not occur overnight. We have been at this for a long time, and Kratos' customers and partners recognize this. The time for PowerPoints, podcasts, and science projects is over. We are out of time. The country is moving towards wartime footing, and Kratos is ready now for our operational update. We now have 120 Kratos, Zeus, and Oriel solid rocket motors on order, with deliveries of the SRMs to Kratos for system integration expected to begin in Q3 of this year, which SRMs are directly related to either under program, contract, or expected hypersonic and other launches that we plan to perform. Related to these solid rocket motor orders, Kratos' hypersonic franchise is expected to ramp rapidly beginning now this year. Kratos' Zeus solid rocket motors were specifically designed by Kratos for affordable, rapid, full-rate production to enable national security customers to fly more often, faster, and farther using fewer rocket motor stages at a substantially reduced cost, and demand for Kratos' Zeus SRMs is significant. Our newly opened Maryland hypersonic facility, our soon-to-open Indiana hypersonic system integration facility, and the expansion of our Birmingham Advanced Manufacturing facility for hypersonic systems, along with the solid rocket motor deliveries, are key elements of Kratos' expected near-term and future revenue growth trajectory, and EBITDA increase. These new Kratos facilities are specifically designed and built for identified programs and systems and the related security requirements with specific capabilities identified with our customers and optimized for large-scale integration and production speed, efficiency, and cost. It was recently reported that Kratos has been selected by the Pentagon to develop highly maneuverable Mach 5 plus hypersonic missiles, including advancing in-flight steering and propulsion systems under the Joint Hypersonic Transition Office, another new hypersonic program win for Kratos. And separately, we are now hoping to receive an additional approximate $1 billion plus hypersonic program-related opportunity by the end of this year, which we believe will be sole source to Kratos as prime on an existing national security initiative. We are expecting to approximately double Kratos' hypersonic franchise revenues in 2026 over 2025, up to approximately 400 million, and then potentially increase over 75% again in 27, up to approximately 700 million. Last week, we announced the groundbreaking for the Prometheus facility, our solid rocket motor and energetics partnership with our outstanding partner and defense technology company, Rafael, and we remain on track with the business plan I previously briefed you on. Kratos and I personally have deep long-term relationships with the Rafael Israel executives, including the chairman and CEO, and we are all committed to Prometheus' success and certain other initiatives we are partnering on. Reflecting the Prometheus initiatives coordination with the Department of War, the Department last week also announced the groundbreaking of a new munitions campus where Prometheus is located, and Prometheus will be the primary business presence. Kratos's space and satellite business, our company's largest, recently achieved an important milestone with the successful completion of a factory acceptance testing between Kratos' EPIC command and control software system and Airbus One SAT Next Generation software-defined satellite platform. The Airbus One SAT software-defined satellite platform offers dynamic in-orbit reconfiguration capabilities, significantly increasing satellite mission capabilities and flexibility, which drive new levels of complexity for the ground command and control systems that manage them. The significance of this successful acceptance test with Airbus is that Kratos' epic C2 software is expected to unlock the agility of Airbus' 1SAT platform, enabling operators to instantly reshape coverage and reconfigure the missions in orbit. Kratos' open space software C2 and TT&C system with Airbus OneSat software to find satellites is representative of Kratos' technology and industry-leading position in the space and satellite domain. Kratos' space and satellite business is also representative of the dual national security and commercial use of certain Kratos products, systems, and software. These are not PowerPoints or convenient talking points. We actually do it. In my opinion, Kratos' suite of internally funded and developed software-defined command and control and telemetry tracking and control and other systems, both for commercial and national security spacecraft, reflect certain of the highest technology space capabilities in the world, with Kratos the clear, first-to-market industry leader with software-defined systems and products. Similarly, Kratos' global-owned and operated space demand awareness system with approximately 190 worldwide sensors and more than 20 sites, is a Kratos crown jewel and one of the most valuable technologically advanced dual-use assets of our company. Another critically important Kratos partner is global space solutions company SES, which in my opinion, similar to Kratos, is an industry-leading satellite and space technology company. Kratos and SES are now working together on a number of initiatives, including dual use, both commercial and national security focused. And I am confident that similar to other Kratos partnerships, SES and Kratos will together be providing significant relevant technology and industry leading solutions, generating real tangible value for our respective stakeholders. Key Kratos assets driving our space and satellite business including our open space TT&C software, C2 software, other software, and artificial intelligence, including for Kratos' global space domain awareness system, which is the only such SDA system in the world today. I do not emphasize it often. Kratos' open space satellite and space system focus software is the only software-defined networking solution designed so that virtually every piece of the satellite ground station can now be turned into software, accelerating the reaction time to changing satellite capabilities and space conditions. Kratos OpenSpace is one of the software jewels of our company. As you know, the number of space and satellite opportunities globally, national security-related and commercial, is rapidly increasing, and as a result, Kratos' space and satellite business opportunity pipeline is particularly robust, even after generating a fourth quarter and 12-month book-to-bill ratio of 1.2 to 1, and now having a record backlog of 600 million at the end of Q4. Related to the market position of Kratos' technology and first-to-market open space satellite software suite, Kratos has recently been informed that we have been selected for an initial approximate $500 million program award that I will hopefully be able to provide additional information on a future call. Similar to what we typically see at most of Kratos' calendar fiscal year ends, and as we saw again at the end of 25, certain Kratos' satellite and space customers, similar to commercial software companies, historically make software, data, and other Kratos product purchases in the October, November, and December time period. generating higher margins for our company, which we once again expect and forecast to occur in Q4 26. The Department of War has recently established a new acquisition model to expand munitions procurement and production, including delivering long-term demand signal certainty to the industry and incentivizing private investment to increase production. Related to this initiative, The Department of War has executed multiple up to seven-year deals, including with Lockheed and Raytheon for air defense, missile-related and other systems, including several programs that Kratos supports. And Northrop also recently announced that the Integrated Battle Command System, or IBCS, another Kratos hardware-supported program, is moving towards increased production. Kratos is an industry leader in high-volume manufacturing of military-grade hardware and systems, including hardware with high-altitude electromagnetic pulse protection, an important Kratos technology differentiator, and we are a go-to provider of hardware for our national security-related customers and partners. Accordingly, we applaud the Department of War on these long-term production agreements and plans, which clarity provides companies like Kratos, the long-term planning visibility for investment, resource allocation, and financial forecasting confidence. In Kratos Turbine Technologies and our engine business, there are several new low-cost cruise missile, drone, hypersonic, and loitering munition programs and systems that require next-generation new technology engines and propulsion systems. And here again, Kratos is first to market including with our Spartan family of jet engines, which are running and flying today. We continue to win important new engine-related program awards, including what we were able to report this morning, that Kratos and our partner GE Aerospace have now received an award from the Air Force to design an engine for the Expendable Combat Collaborative Aircraft, or CCA. I can now also report that Kratos expects to begin low-rate initial production of small engines in the second half of this year for certain missile programs, and we are also currently responding to a customer-requested rough order of magnitude quote for 15,000 engines for a system that has been specifically designed around a Kratos Spartan jet engine. Directly related to the expected future quantities of low-cost missiles, drones, and powered munitions required, we are now in our new 40,000 engine per year capacity facility in Michigan. The expected ramp in our engine and propulsion system businesses, which can generate certain of our company's highest margins, including from the financial leverage we expect to realize on certain fixed manufacturing, overhead, and other costs as the business ramps, are expected to be contributors to our expected increased overall rate of EBITDA margins as we progress through 26 and into 27. We continue to execute on the new industrial gas turbine, or IGT program I mentioned on our last call, which we are under an NDA on, but there has been important information reported publicly, including on CNBC, which such program, if successful, could be a significant future catalyst opportunity for Kratos. Since our last update call, Kratos Turbine Technologies is now under contract in the high-profile eVTOL area under what we refer to internally as Project Pegasus, where Kratos is designing and is expected to deliver propulsion systems, including for a very well-known eVTOL company. Kratos' technology and propulsion systems in the eVTOL area is another representative example of Kratos being a provider of real dual-use products. Kratos Microwave Electronics is also expected future high-growth business area for our company, including in the U.S., Israel, and elsewhere internationally, both organic and inorganic, that is also currently expected to continue to generate certain of the highest profit margins in our company. As you know, Kratos Microwave has several hundred employees in Israel, where Kratos is working with certain of the most technologically advanced companies in the world. And I recently met in Israel with my very close partners, including the CEOs of Elbit, Rafael, and Israeli Aerospace Industries, each of which Kratos has been working with for decades. Simply stated, virtually every national security system globally needs military-grade microwave electronics, and we are focused on investing in and growing this business area to support our partners. Consistent with our expectations and what we communicated in our Q3 update call, we recently announced that our teammate Northrop received the MUX-TAC-AIR Collaborative Combat Aircraft, or CCA, Program Award, with Kratos Valkyrie as the CCA aircraft equipped with Northrop's mission systems. It was also reported that MUX-TAC Air was a competitive CCA solicitation that Kratos' Valkyrie won and was selected for. As I have mentioned before, Northrop is an incredibly valuable partner of Kratos and one of the most innovative technology companies in the industry, and this includes the new defense technology companies. As reported, this initial MUX-TAC-ERA award is approximately $230 million and will be split approximately 50-50 between Kratos and Northrup with an approximate 24-month period of performance also consistent with our previous expectations. As a reminder, there is initial MUX-TAC-ERA funding of approximately $275 million included in the 2025 reconciliation bill and an additional $58 million included in the 26 appropriations bill. This is expected to be just the beginning for this program. As I have previously communicated in detail, this initial award includes the sale of a number of alkali systems, but this is not yet high rate production, which is expected to come next. There has been a lot of information reported on the Marine Corps program of record and Valkyrie being the first CCA expected to be fielded. I encourage you to take a look at this data as I believe it validates the current favorable competitive positioning of Kratos Valkyrie and the future expectations that we have for this system. Importantly, We have now also successfully received another separate US tactical drone program of record contract award, though we are not allowed to provide any details at this time. Additionally, I believe that we are in a sole source position for two additional tactical drone opportunities, including for Valkyrie, which we will hopefully receive in late Q4 this year. We are also in another competitive CCA solicitation with the Valkyrie and a partner, which we also currently expect to be notified on by the end of this year or early next. As a result of our recent progress, we intend to execute a plan to increase our Valkyrie production from a current approximately eight aircraft annually up to a projected annual production rate of approximately 40 aircraft annually by the end of 28. We currently expect to have definitized with our customers later this year or early next, the production quantities of Valkyrie required to be contractually delivered and the timing of these deliveries, which in part will be related to the 2027 federal budget defense appropriation and when it is approved. At a planned production rate of approximately 40 Valkyries annually, We believe that we will be well positioned to address expected current under program customer required delivery schedules once definitized, while also maintaining an adequate number of whitetail aircraft in inventory to be able to continue to address RDT&E, S&T, and potential new customer requirements. We will continue to include in Kratos' base case financial forecasts as we provided today, only the RDT&E and S&T Valkyrie sales quantity levels until we have definitive production funding and delivery schedules so that we can accurately forecast expected larger quantities by fiscal quarter and fiscal year. In summary, the Marines are expected to field the first CCA. We will not let them down, and we will keep you informed with the progress to the extent we are able to discuss. Kratos recently received a gauntlet award under the Department of War's $1 billion drone dominance plan to acquire small lethal drones over the next two years. We have a family of small drones in this class that we have not discussed previously. This is a phase one award. This program is scheduled to move very rapidly, and if we continue to be successful in future phases, drone dominance could be another meaningful program to our company. Kratos' Mighty Hornet Tactical Fire Jet CCA program initiative continues to progress with the Taiwan NCSIST, and we have certain future flight-related milestones we need to achieve with the potential production decision possible late this year or early next. As was recently reported with the Taiwan NCSIST, the ultimate objective of this program is for very high quantities of affordable mass fleet of Mighty Hornet IV systems to be deployed in Taiwan. Kratos' Athena program and UAS has had additional successful flights under contract with the U.S. customer. As I believe you can see, the tactical drone opportunity is happening real time for Kratos, that this is occurring as a result of the threat and that the customers believe that they're out of time and that they need to field relevant systems now. Kratos' Anaconda radar, Helios hypersonic system-related arc jet, Promethea solid rocket motor and energetics, BladeWorks jet engine, and our new Poseidon program facility are all expected to be coming online over the next 24 months, contributing to the expected future growth, margin, and value increases for the business. New initiatives that Kratos is currently either pursuing or assessing that I can mention include Kraken and Ares, both in the hypersonic area, Vulcan in the rocket system area, and Elysium, which is the largest, and for competitive reasons, I will not get into it this time. Each of these, if successful, have either customer or partner backing. Kratos' business plan remains unchanged. including that we do not buy back stock or pay dividends, but rather we invest our capital in rebuilding our country's defense industrial base, rapidly developing, producing, and delivering affordable, relevant systems to the warfighter and generating a financial return for our investors. As Deanna will discuss, we have closed on a small tuck in acquisition, Nomad Global Communications Solutions, a technology, hardware, and systems company focused on mobile command, control, and communication systems, including as related to unmanned systems, counter UAS, homeland security, and some other systems. NOMAD was a negotiated transaction between Kratos and the NOMAD owners, consistent with the type of opportunities Kratos continues to be approached with. We continue to expect the previously announced acquisition of Israeli-based satellite communications company Orbit Technologies, which forecasted financial performance is not included in the guidance we provided today to close by the end of Q1. Once Orbit closes, we will include them in our forecasting. Deanna?