Kratos Defense & Security Solutions, Inc.

Good day and thank you for standing by. Welcome to the Kratos Defense and Security Solutions first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Marie Mendoza, Senior Vice President and General Counsel. Please go ahead.

For the Kratos Defense and Security Solutions first quarter 2026 conference call. With me today is Eric DeMarco, Kratos' President and Chief Executive Officer, and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer. Before we begin the substance of today's call, I'd like everyone to please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential market opportunities, operational outlook, financial guidance, and other forward-looking statements during today's call. Today's call will also include a discussion of non-GAAP financial measures, as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP.

Eric? Thank you, Marie. Kratos' balanced business model of making internally funded investments, including property, plant, and equipment, and the rapid development and fielding of relevant products for the Department of War, while also generating organic growth, increased profitability, and value for all Kratos stakeholders is succeeding. The successes reflected in our Q1 results, including a 1.6 to 1 book-to-bill ratio, a record backlog of 2 billion, and increased opportunity pipeline up to $14 billion, and the $14 billion is after the 1.6 to 1 book-to-bill, reflecting Kratos' accelerating growth trajectory. As Deanna will go through in detail, we significantly exceeded our first quarter forecast across the board, with EBITDA being particularly strong as a result of execution and product delivery mix, with Kratos' microwave electronics turbine technologies, and unmanned systems businesses, each having a particularly strong Q1. Based on our current program execution and delivery plans, both Kratos' Q3 and Q4 are also expected to have particularly strong profitability, including Kratos' open space satellite command and control and telemetry tracking and control software deliveries, which are forecasted to be meaningful in both Q3 and Q4. As I will discuss in detail today, with the current geopolitical and threat environment, Kratos' space and satellite business is incredibly well positioned, including with our open space software and our globally owned and operated space domain awareness system. I am not able to provide any details for security and other reasons, but Kratos' satellite business is active across the globe. The business is rapidly accelerating. including as reflected by a three-to-one book-to-bill ratio in Q1 for our satellite business. There are tens of thousands of satellites planned for orbit in the coming years, both blue and red, and Kratos' ground systems and software are the gold standard of the industry. There is a generational recapitalization of the U.S. industrial base underway. The Department of War is looking to non-traditional defense technology companies like Kratos to play a significant role, and we are committed to doing our part to ensure that the Department and our country are successful. Our industries and Kratos' total addressable market is rapidly expanding. With the fiscal 2027 national security spend currently projected to be $1.5 trillion, an approximate $411 billion increase above 2026. I will emphasize that there are a very limited number of defense technology companies like Kratos that are qualified today with real existing capability and products to address the significant and growing market opportunity. Building military-grade hardware and software products that must work every time is hard. And Kratos' recognized capabilities and affordability are competitive differentiators for our company, which is being reflected in our financial performance. As we have seen, the department is now executing multi-year weapon system production framework agreements, including with several of Kratos' partners on several Kratos-supported programs, including in the missile and air defense system areas, which is good for the country, the industry, and is very good for Kratos. These up to seven-year framework agreements, certain of which are calling for increased production, orders of magnitude greater than today's production levels, are providing clear demand signals from the department to industry, and what we believe are significant long-term growth opportunities for Kratos. The department's demand signals are real, they are happening, and Kratos, along with our partners, are participating in stepping up to ensure Department of War success. Kratos, along with other successful defense technology companies in the industry, are making defense industrial-based investments now in property, plant, equipment, and facilitation to address this demand and to position our companies for significant future cash flow and additional value generation. Since our last report to you, the department stated that they intend to spend 2025's entire $156 billion reconciliation bill related to defense in fiscal 2026. This bill, as you know, includes funding for Kratos' hypersonic, Valkyrie CCA, solid rocket motors, jet engines for drones, missiles and loitering munitions, and other Kratos programs. This is very important as only approximately $30 billion of the $156 billion had been obligated into April. As a result, we have increased confidence in our business plan and full-year 2026 forecast, and we expect to see accelerating future growth throughout 26 and into 27, with both the funding and spend timing now both in place. We also have increased confidence in our forecasted year-over-year 100 basis point increase in our EBITDA margins for both 26 over 25 and for 27 over 26, including as a result of expected increasing production and revenue, the resulting leverage on our fixed manufacturing and other fixed costs, and the mix of higher margin products and software. Simply stated, as we grow, our profit margins are increasing. Since our last report, we have had several meetings with the Department of War leadership, and we are confident that Kratos' strategy, business plan, and approach are aligned with the department's objectives. I have also had several meetings with congressional leadership on both sides of the aisle, and I am confident that regardless of which party controls congressionally, the future United States national security spend is increasing. as it is acknowledged that the global threat profile, it's not partisan and doesn't care who's in charge. It's there, and both sides are familiar and aware of this. National security priorities include hypersonic systems, propulsion systems, space and satellite systems, unmanned systems, drones, air defense, missile, radar, and counter UAS systems, and microwave electronics. Each are primary business areas and core competency areas of Kratos. and all of which are supported in the planned $1.5 trillion 2027 national security spend. As a result of Kratos' alignment with the department, increasing funding, and our relevant past performance qualifications, the number of opportunities that Kratos continues to successfully receive and the number of new opportunities that are being presented to Kratos continues to increase, including as reflected in our opportunity pipeline, which now exceeds 14 billion. I will emphasize again that there are not enough qualified defense technology companies like Kratos to address the current and expected future weapon system demand of the department. We are extremely fortunate to have the team that we do, and the uniqueness and scarcity value of Kratos' capabilities is clearly apparent. Kratos' affordability as a technology pillar is an increasing differentiator to both our customers and to our partners, as demonstrated in our ability to rapidly design and engineer relevant products upfront for low-cost production at scale. This is a clear department requirement, including as reflected in the framework agreements and also as demonstrated by recent and ongoing conflicts. Additionally, Kratos is better is the enemy of good enough, ready to field today. and our first-to-market pillar is aligned with the Secretary's United States Arsenal of Freedom vision and his advocation for companies like Kratos to deliver 85% of the solution that exists today and now, not a maybe and potentially unachievable someday in the future 100% solution. Operationally, our major programs and initiatives remain on track, including On the Marine Corps MUXTAC Air Program, we are currently negotiating contractual terms of the expected receipt of what I will refer to as Valkyrie Program LRIP Phase 1 this year. And we are moving forward with our plan to increase Valkyrie annual production up to approximately 40 drones annually by early 2028. receiving new hypersonic program awards, certain of which we have now been verbally informed we have been successful on. We have received a separate $1 billion plus sole source hypersonic program expansion verbal award, which we now also believe we will be receiving shortly. And since our last report, we have had several successful Kratos hypersonic system missions. Kratos' hypersonic franchise is expected to be a key growth driver for our company for the next several years. We expect to begin small jet engine LRIP later this year for cruise missiles and powered munitions, and we are planning to produce several thousand engines in 2027 and further increasing this engine production into 2028. Accordingly, we are pulling together a detailed program plan, including with our suppliers, to ramp up to annual multiple thousand engine production beginning next year, which supply chain we expect to turn on shortly. Kratos small jet engine business is expected to be a significant growth driver for our company with increased margins for the next several years. We have also now received a new multi-hundred million dollar directed energy weapon system program with Kratos as the prime. As I mentioned earlier, Kratos' OpenSpace software continues to clearly differentiate Kratos' satellite business with our customers, as OpenSpace is a distributed, virtualized, and open capability system that securely enables real-time processing of RF signal and sensor data at scale in a highly distributed cloud, ground entry point, and edge environments. Kratos' OpenSpace software platform serves as the core networking capability supporting all Kratos OpenSpace solutions, including Satellite C2, Earth Sensing and Observation, Space Domain Awareness, Space Control, and SATCOM. And this is for Kratos' largest business, our Space and Satellite Communication business and our Space Domain Awareness business. Kratos OpenSpace is a crown jewel of our company, and it's analogous to defense technology company Andros Lattice software platform. Kratos Satellite Business recently won a $447 million U.S. Space Force prime contract for the Resilient Missile Warning and Tracking Program, a MEO constellation designed to detect and track ICBM launches in addition to dimmer maneuvering hypersonic missiles and threats. This contract award was a significant contributor to the 1.8 to 1 first quarter KGS book-to-bill ratio. This program is part of a broader missile warning and tracking architecture that is being fielded across multiple orbits. I encourage you to think Golden Dome. On this new prime program award, Kratos will provide the ground system and software to operate the satellites after launch, including sending commands, receiving sensor data, and processing that information for delivery to military operators. Kratos space and satellite business is expected to be a primary driver of our expected increased revenue and profit margins in Q3 and Q4 of this year and is also expected for significant growth and margin expansion in 27 and 2028. Artificial intelligence is also a key element or differentiator of Kratos space satellite and space demand awareness business. in addition to AI also being key to Kratos' unmanned systems business and our jet drones. Artificial intelligence is helping drive Kratos' business. Additionally, the dual commercial national security use of Kratos' software, hardware, and offerings also continues to differentiate Kratos, including affordability as we spread the research and development over multiple defense and commercial markets. Additionally, Kratos' dual-use applications also accelerate our speed to market and both rapid technology development and fielding of relevant products as we move fast and efficiently as we are investing our own money. A recent dual-use example since our last report, we now expect to receive a separate new additional industrial gas turbine program for artificial intelligence-related data centers by the end of this year, with another well-known global industrial technology company. Our hypersonic system integration facility, new Anaconda radar program facility, Helios hypersonic program facility, GEK turbofan engine facility, and Prometheus solid rocket motor initiatives are each tracking to be online either later this year or next, each of which we expect to contribute to continued future Kratos growth and value generation for all of our stakeholders. In closing, the department is providing non-traditional defense technology companies like Kratos a generational opportunity in rebuilding the U.S. defense industrial base, building an arsenal of freedom, participating in multi-billion dollar multi-year programs, and generating significant value. Kratos is aggressively participating in the current build and growth phase of the Department of War's Rebuild the Defense Industrial Base Plan, with Kratos focused on generating an appropriate rate of return for each investment we make and for expected significant future sustained cash flow generation when the critical mass of production programs is achieved on these initiatives. And as I mentioned before, based on the current global threat environment and our congressional meetings, We believe there is bipartisan support for continued increasing future national security spends for the protection of the United States and the deterrence of our enemies. Deanna.