Q2 2024 Kratos Defense & Security Solutions Inc Earnings Call

August 7, 2024

Operator: Good day everyone, and thank you for standing by. Welcome to Kratos Defense and Security Solutions' second quarter 2024 earnings conference call.

Operator: Good day, everyone, and thank you for standing by.

Operator: Good day, everyone, and thank you for standing by. Welcome to Kratos Defense and Security Solutions' second quarter 2024 earnings conference call.

Operator: Welcome to Kratos Defense and Security Solutions, 2nd quarter 2024 earnings conference call.

Speaker Change: Good day everyone and thank you for standing by. Welcome to Kratos Defense and Security Solutions second quarter 2024 earnings conference call.

Operator: 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 11 on your telephone. You will then hear a message advising that your hand is raised. To withdraw your question, simply press star 11 again. Please be advised that today's conference is being recorded. Now, I will pass the call over to the Senior Vice President and General Counsel, Marie Mendoza.

Operator: 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 one-one on your telephone. You will then hear a message advice in your hand. This raised. To withdraw your questions, simply press star one-one again.

Speaker Change: 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-one-one on your telephone. You will then hear a message advising your hand is raised.

Operator: Please be advised that today's conference is being recorded.

Speaker Change: To withdraw your questions, simply press star 11 again. Please be advised that today's conference is being recorded. Now I will pass the call over to the Senior Vice President and General Counsel, Marie Mendoza.

Marie Mendoza: Thank you. Good afternoon, everyone.

Marie Mendoza: Thank you. Good afternoon, everyone, and thank you for joining us for the Kratos Defense and Security Solutions second quarter 2024 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.

Marie Mendoza: Thank you. Good afternoon, everyone, and thank you for joining us for the Kratos Defense and Security Solutions second quarter 2024 conference call.

Marie Mendoza: With me today are 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 notes 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.

Marie Mendoza: And thank you for joining us for the Kratos Defense and Security Solutions second quarter 2024 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.

Speaker Change: With me today is Eric DeMarco, Kratos' President and Chief Executive Officer, and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer.

Marie Mendoza: 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.

Marie Mendoza: Please keep these convergies 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 companies' financial results prepared in accordance with GAAP. With that, I will now turn the call over to Eric DeMarco.

Speaker Change: 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.

Marie Mendoza: This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon.

Marie Mendoza: Please keep these consurgencies 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.

Marie Mendoza: 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 is such a 2-4 financial information presented in compliance with GAAP.

Marie Mendoza: 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.

Eric DeMarco: 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, that I will now turn the call over to Eric DeMarco.

Marie Mendoza: Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the companies' financial results prepared in accordance with GAAP. With that, I will now turn the call over to Eric DeMarco.

Marie Mendoza: accordingly at the end of today's release we have provided a reconciliation of these non-gaap fincial measures to the company's finanancecial results prepared in accordance with gappa that that i will now turn the call over to eric to markco

Eric DeMarco: Thanks, Marie. The successful execution of Kratos' strategy in our position as a leading defense and technology hardware and software company is reflected in our Q2 and year-to-date financial results. Kratos' strategy of making internally funded investments in close collaboration with our partners and customers to rapidly develop engineer field and be first to market with relevant products, systems, and solutions is working for our customers, partners, shareholders, and all of our stakeholders.

Eric DeMarco: The successful execution of Kratos' strategy and our position as a leading defense and technology hardware and software company are reflected in our Q2 and year-to-date financial results. Kratos' strategy of making internally funded investments in close collaboration with our partners and customers to rapidly develop, engineer, field, and be first to market with relevant products, systems, and solutions is working for our customers, partners, shareholders, and all of our stakeholders. Kratos Affordability is a technology which is directly related to our strategy of investing our own money, enabling us to move fast, rapidly developing our products for low-cost mass production in large quantities and As we watch peer adversaries in both potential and active conflict and, at the same time, see adverse DOD budget and program cost impacts.

Eric DeMarco: Successful execution of Kratos' strategy and our position as a leading defense and technology hardware and software company is reflected in our Q2 and year-to-date financial results. Kratos' strategy of making internally funded investments in close collaboration with our partners and customers to rapidly develop, engineer, field, and be first to market with relevant products, systems, and solutions is working for our customers, partners, shareholders, and all of our stakeholders, that Kratos Affordability is a technology which is directly related to our strategy of investing our own money, enabling us to move fast, rapidly developing our products for low cost mass production in large quantities and for affordable mass. As we watch peer adversaries in both potential and active conflict and at the same time see adverse DOD budget and program cost impact.

Eric DeMarco: Thanks, Marie.

Eric: The successful execution of Kratos' strategy and our position as a leading defense and technology

Eric DeMarco: Hardware and Software Company is reflected in our Q2 and year-to-date financial results.

Eric DeMarco: Kratos' strategy of making internally funded investments in close collaboration with our partners and customers to rapidly develop, engineer, field, and be first to market with relevant products, systems, and solutions is working for our customers, partners, shareholders, and all of our stakeholders.

Eric DeMarco: At Kratos' affordability as a technology, which is directly related to our strategy of investing our own money, enabling us to move fast, rapidly developing our products for low-cost mass production in large quantities and for affordable mass. As we watch peer adversaries in both potential and active conflict, and at the same time see adverse DOD budget and program cost impacts, Kratos is focused on solving these challenges with systems that are truly realizable, near-term achievable, and affordable.

Eric DeMarco: That Kratos affordability is a technology which is directly related to our strategy of investing our own money, enabling us to move fast, rapidly developing our products for low cost, mass production, in large quantities, and for affordable mass.

Eric DeMarco: As we watch peer adversaries in both potential and active conflict, and at the same time see adverse DOD budget and program cost impacts.

Eric DeMarco: Kratos is focused on solving these challenges, with systems that are truly realizable, near-term achievable, and affordable. With Kratos, we believe that better is the enemy of good enough, and that someday in the future, maybe having the perfect capability or solution that is studied and modeled and then studied again will be too late, too expensive, and an abject failure. Recent examples of Kratos' successful strategy execution with relevant working systems include Kratos' Erroneous Hypersonic Glide from initial conception to first flight with the Missile Defense Agency and the Navy in approximately 30 months for an approximate $15 million total development cost. Kratos is Zeus' family of soft, solid rocket motors.

Eric DeMarco: Kratos is focused on solving these challenges, with systems that are truly realizable, near-term achievable, and affordable. At Kratos, we believe that better is the enemy of good enough, and that someday in the future, maybe having the perfect capability or solution that is studied and modeled and then studied again will be too late, too expensive, and an abject failure. Recent examples of Kratos' successful strategy execution with relevant working systems include Kratos' Erroneous Hypersonic Glide from initial conception to first flight with the Missile Defense Agency and the Navy in approximately 30 months for an approximate $15 million total development cost. Kratos is Zeus' family of soft, solid rocket motors.

Eric DeMarco: Kratos is focused on solving these challenges with systems that are truly realizable, near-term achievable, and affordable.

Eric DeMarco: At Kratos, we believe that better is the enemy of good enough and that someday in the future, maybe having the perfect capability or solution that is studied and modeled and then studied again is too late, too expensive, and an object failure. Recent examples of Kratos' successful strategy execution with relevant working systems include Kratos' air and his hypersonic glide vehicle from initial conception to first flight with the Missile Defense Agency and the Navy in approximately 30 months for an approximate $15 million total development cost. Kratos' zoo's family of soft, solid rocket motors from conception to successful static fire in three years for an approximate $23 million investment and now positioned for the mock TB program, hypersonic air and knees missions, and several additional customers.

Eric DeMarco: At Kratos, we believe that better is the enemy of good enough, and that someday in the future, maybe having the perfect capability or solution that is studied and modeled and then studied again is too late, too expensive, and an abject failure.

Eric DeMarco: Recent examples of Kratos' successful strategy execution with relevant working systems include

Eric DeMarco: Kratos' Aeronese Hypersonic Glide Vehicle

Eric DeMarco: from initial conception to first flight with the Missile Defense Agency and the Navy in approximately 30 months for an approximate $15 million total development cost.

Eric DeMarco: From conception to successful static fire in three years, for an approximate $23 million investment, and now positioned for the Mach-TB program, hypersonic Aranis missions, and several additional customers. Kratos' Valkyrie runway-enabling trolley system, from conception to first flight in effectively 15 months for a few-million-dollar investment, with Kratos' Ghostworks achieving another important milestone in Valkyrie operational deployment flexibility, which we continue to rapidly mature Each of these relevant Kratos-funded and developed systems is expected to be important contributors to Kratos' business and our future financial growth and profit trajectory, based on specific customer orders and feedback, and are representative of the value Kratos generates for its stakeholders.

Eric DeMarco: From conception to successful static fire in three years, for an approximate $23 million investment, and now positioned for the Mach-TB program, hypersonic Aeronese missions, and several additional customers. Kratos' Valkyrie runway-enabling trolley system, from conception to first flight in effectively 15 months for a few-million-dollar investment, with Kratos' Ghostworks achieving another important milestone in Valkyrie operational deployment flexibility, which we continue to rapidly mature Each of these relevant Kratos-funded and developed systems is expected to be important contributors to Kratos' business and our future financial growth and profit trajectory, based on specific customer orders and feedback, and are representative of the value Kratos generates for its stakeholders.

Eric DeMarco: Kratos' Zeus family of solid rocket motors, from conception to successful static fire in three years, for an approximate $23 million investment, and now positioned for the MACH-TB program, hypersonic Aranis missions, and several additional customers.

Eric DeMarco: Kratos' Valkyrie runway enabling trolley system from conception to first flight in effectively 15 months for a few million dollar investment, with Kratos' Ghost Works achieving another important milestone in Valkyrie operational deployment flexibility, which we continue to rapidly mature and demonstrate. Each of these relevant Kratos-funded and developed systems are expected to be important contributors to Kratos' business and our future financial growth and profit trajectory based on specific customer orders and feedback, and a representative of the value Kratos generates for our stakeholders. In Q2, Kratos' engine and turbine business continued its revenue growth and profit expansion trajectory, beating its forecast, including engines for drones, missiles, aircraft, space, hypersonic, supersonic, and other systems. Kratos' the clear industry leader and independent merchant supplier of engines, propulsion, and subsystems in our areas, and we expect continued future growth based on customer demand.

Eric DeMarco: Kratos' Valkyrie Runway Enabling Trolley System

Eric DeMarco: from conception to first flight in effectively 15 months.

Eric DeMarco: for a few million dollar investment with Kratos' ghost works achieving another important milestone in Valkyrie operational deployment flexibility which we continue to rapidly mature and demonstrate.

Eric DeMarco: Each of these relevant Kratos funded and developed systems are expected to be important contributors to Kratos' business and our future financial growth and profit trajectory.

Eric DeMarco: based on specific customer orders and feedback and are representative of the value Kratos generates for our stakeholders.

Eric DeMarco: In Q2, Kratos' engine and turbine business continued its revenue, growth, and profit expansion trajectory, beating its forecast, including engines for drones, missiles, aircraft, space, hypersonic, supersonic, and other systems. Kratos is the clear industry leader and independent merchant supplier of engines, propulsion, and subsystems in our areas, and we expect continued future growth based on customer demand. We recently announced a Kratos small jet engine partnership with General Electric Aerospace, which is incredibly important to Kratos, with GEA bringing large-scale engine production experience, capital, intellectual property, customer relations, and more.

Eric DeMarco: In Q2, Kratos' engine and turbine business continued its revenue growth and profit expansion trajectory, beating its forecast, including engines for drones, missiles, aircraft, space, hypersonic, supersonic, and other systems. Kratos is the clear industry leader and independent merchant supplier of engines, propulsion, and subsystems in our areas, and we expect continued future growth based on customer demand. We recently announced a Kratos small jet engine partnership with General Electric Aerospace, which is incredibly important to Kratos, with GEA bringing large-scale engine production experience, capital, intellectual property, customer relations, and more.

Eric DeMarco: Kratos is the clear industry leader and independent merchant supplier of engines, propulsion, and subsystems in our areas, and we expect continued future growth based on customer demand.

Eric DeMarco: We recently announced the Kratos' small jet engine partnership with General Electric Aerospace, which is incredibly important to Kratos, with GEA bringing large-scale engine production experience, capital, intellectual property, customer relations, and more, and we are anticipating future production of thousands of low-cost engines in this class for drones and missiles. The GEA partnership is specifically with Kratos' turbine technology business for small turbo-fan jet engines and is not related to Kratos' TDI small turbo jet business, which has separate locations, technology, IP, and target market opportunities. As part of Kratos' arrangement with GEA, where we will be sharing future engine production revenue and profit, Kratos, in coordination with GEA, will be making an investment and standing up a new low-cost small engine manufacturing facility as we begin preparation for expected future production.

Eric DeMarco: And we are anticipating future production of thousands of low-cost engines in this class for drones and missiles. The GEA partnership is specifically with Kratos' turbine technology business for small turbofan jet engines and is not related to Kratos' TDI small turbo jet business, which has separate locations, technology, IP, and target market opportunities.

Eric DeMarco: And we are anticipating future production of thousands of low-cost engines in this class for drones and missiles. The GEA partnership is specifically with Kratos' turbine technology business for small turbo-fan jet engines and is not related to Kratos' TDI small turbo jet business, which has separate locations, technology, IP, and target market opportunities.

Eric DeMarco: We recently announced a Kratos small jet engine partnership with General Electric Aerospace, which is incredibly important to Kratos.

Eric DeMarco: with GEA bringing large-scale engine production experience, capital, intellectual property, customer relations, and more, and we are anticipating future production of thousands of low-cost engines in this class for drones and missiles.

Eric DeMarco: The GEA partnership is specifically with Kratos' turbine technology business for small turbofan jet engines.

Eric DeMarco: and is not related to Kratos' TDI small turbojet business, which has separate locations, technology, IP, and target market opportunities.

Eric DeMarco: As part of Kratos' arrangement with GEA, where we will be sharing future engine production revenue and profit, Kratos, in coordination with GEA, will be making an investment in standing up a new, low-cost, small-engine manufacturing facility as we begin preparation for expected future production. Similarly, we are investing in and expanding our TDI small turbojet engine production capacity and Kratos' overall hardware and manufacturing capability, including additional additive manufacturing, 3D printing, milling, machining, casting, and forging capabilities, which is part of Kratos' vertical integration initiative.

Eric DeMarco: As part of Kratos' arrangement with GEA, where we will be sharing future engine production revenue and profit, Kratos, in coordination with GEA, will be making an investment in standing up a new, low-cost, small-engine manufacturing facility as we begin preparation for expected future production. Similarly, we are investing in and expanding our TDI small turbojet engine production capacity and Kratos' overall hardware manufacturing capability, including additional additive manufacturing, 3D printing, milling, machining, casting, and forging capabilities, which is part of Kratos' Vertical Integration Initiative.

Eric DeMarco: as part of Kratos' arrangement with GEA, where we will be sharing future engine production revenue and profit.

Eric DeMarco: Kratos, in coordination with GEA, will be making an investment in standing up a new low-cost small engine manufacturing facility as we begin preparation for expected future production.

Eric DeMarco: Separately, we are investing and expanding our TDI small turbo jet engine production capacity and Kratos' overall hardware manufacturing capability, including additional additive manufacturing, 3D printing, milling, machining, casting, and forging capabilities, which is part of Kratos' vertical integration initiative. We are establishing new engine production lines related to the many new drone missile and loitering the ignition programs that TDI has, including those that we are designed in on. We are either now in contract negotiations for it, and we are hopeful to receive an initial 1,000 unit order with the potential 10,000 plus opportunity in the near future.

Eric DeMarco: Separately, we are investing and expanding our TDI small turbojet engine production capacity and Kratos' overall hardware and manufacturing capability.

Speaker Change: including additional additive manufacturing three dprinting milling machining casting and forging capabilities which is part of crados's vertical integration initiatativeves

Eric DeMarco: We are establishing new engine production lines related to the many new drone, missile, and loitering munition programs that TDI has, including those that we are designing in on. We are either now in contract negotiations for... And we are hopeful to receive an initial 1,000 unit order with a potential 10,000 plus opportunity in the near future.

Eric DeMarco: We are establishing new engine production lines related to the many new drone, missile, and loitering munition programs that TDI has, including those that we are designed in on.

Eric DeMarco: We are either now in contract negotiations for...

Eric DeMarco: And we are hopeful to receive an initial 1,000 unit order with a potential 10,000 plus opportunity in the near future.

Eric DeMarco: Kratos Turbine Technologies, TDI, and our engine and propulsion system business are currently expected to be some of our company's primary future growth contributors. Kratos' Israeli-based microwave electronics business also exceeded its Q2 forecast, including program supporting multiple air defense systems, including Iron Dome, Iron Sting, Lightning, Arrow, Baroque and others. Kratos' microwave has also a record backlog and opportunity pipeline, and we are making the investments to increase our facilities, hardware, and manufacturing capacity in order to address existing and forecasted increased future demand, including a space-qualified capability as a result of certain new satellite systems awards we've received and opportunities.

Eric DeMarco: Kratos Turbine Technologies, TDI, and our engine and propulsion system business are currently expected to be some of our company's primary future growth contributors. Kratos' Israeli-based microwave electronics business also exceeded its Q2 forecast, including programs supporting multiple air defense systems, including Iron Dome, Iron Sting, Lightning, Aero, Barack, and others. Kratos' microwave has also a record backlog and opportunity pipeline, and we are making the investments to increase our facilities, hardware, and manufacturing capacity in order to address existing and forecasted increased future demand, including a space-qualified capability as a result of certain new satellite systems awards we've received and opportunities. Kratos has deep relationships with Israeli aerospace industries, Rafael, and Elbit. And we expect our Israeli business to be one of Kratos' future year-over-year organic growth leaders as we support our important Israeli and international customers.

Eric DeMarco: Kratos Turbine Technologies, TDI, and our engine and propulsion system business are currently expected to be some of our company's primary future growth contributors.

Eric DeMarco: Kratos' Israeli-based microwave electronics business also exceeded its Q2 forecast.

Speaker Change: including program supporting multipleer defense systems including iron dome iron staying lightning ao barackck and others

Eric DeMarco: Kratos' microwave has also a record backlog and opportunity pipeline, and we are making the investments to increase our facilities, hardware, and manufacturing capacity in order to address existing and forecasted increased future demand.

Speaker Change: including a space qualified capability as a result of certain new satellite systems awards we've received and opportunities.

Eric DeMarco: Kratos has deep relationships with Israeli Aerospace Industries, Rafael and Elvin, and we expect our Israeli business to be one of Kratos' future year-over-year organic growth leaders, as we support our important Israeli and international customers. Global air defense system-related demand, including missile radar, counter unmanned aerial system and space systems, also contributed to Kratos' C5 ISR business, exceeding its Q2 forecast, including Patriot, FAD, Shore RAD, indirect fire or IF pick, IBCS, CUAS, DE, and HPM-related systems. Kratos' C5 ISR programs, backlog and opportunity pipeline is also at record levels, and C5 ISR is expected to be an important future year organic growth contributor, as we support our important partners, including Northrop, Lockheed, Raytheon, Dynetics, and others in their national security missions.

Eric DeMarco: Kratos has deep relationships with Israeli Aerospace Industries, Rafael and Elbit, and we expect our Israeli business to be one of Kratos' future year-over-year organic growth leaders as we support our important Israeli and international customers.

Eric DeMarco: Global air defense system-related demand, including missile, radar, counter-unmanned aerial system, and space systems, also contributed to Kratos' C5ISR business exceeding its Q2 forecast, including Patriot, THAAD, SURE-RAD, Indirect Fire or IFPIC, IBCS, C-U-A-S-D-E, and H-P-M related systems. Kratos' C5ISR program's backlog and opportunity pipeline is also at record levels, and C5ISR is expected to be an important future-year organic growth contributor as we support our important partners, including Northrop, Lockheed, Raytheon, Dynetics, and others in their national security mission.

Eric DeMarco: Global air defense system-related demand, including missile, radar, counter-unmanned aerial system, and space systems, also contributed to Kratos' C5ISR business exceeding its Q2 forecast, including Patriot, THAAD, SURERAD, Indirect Fire or IFPIC, IBCS, C-U-A-S-D-E, and H-P-M related systems. Kratos' C5ISR program's backlog and opportunity pipeline is also at record levels, and C5ISR is expected to be an important future year organic growth contributor as we support our important partners, including Northrop, Lockheed, Raytheon, Dynetics, and others in their national security mission.

Speaker Change: including Patriot, THAAD, SURE-RAD, Indirect Fire or IFPIC, IBCS, CUAS, DE, and HPM related systems.

Eric DeMarco: Kratos' C5ISR Program's Backlog and Opportunity Pipeline is also at record levels.

Speaker Change: and C5ISR is expected to be an important future year organic growth contributor as we support our important partners including Northrop, Lockheed, Raytheon, Dynetics and others in their national security missions.

Eric DeMarco: Kratos' C5 ISR backlog and opportunity pipeline is at a record level, and we are making the investments necessary to support our partners and customers, including expanding our C5 ISR business's hardware and manufacturing capacity, and also including our new Sentinel Program facility. Kratos' training systems business is also growing, with increasing margins, and certain programs we have been awarded ramp-up, and additional new program winds are expected. The global recapitalization of strategic weapon systems, in addition to the weapon system, requires training systems, with Kratos being an industry leader, with representative Kratos' systems, including M1 Abrams, Bradley, Black Hawk, and Air Force Global Strike Command systems. Kratos' training system opportunity pipeline is one of the strongest in our company, as we head into the second half of 2024.

Eric DeMarco: Kratos' C5ISR backlog and opportunity pipeline is at a record level, and we are making the investments necessary to support our partners and customers, including expanding our C5ISR business' hardware and manufacturing capacity, and also including our new Sentinel Program Facility. Kratos' training systems business is also growing with increasing margins as certain programs we have been awarded ramp up, and additional new program wins are expected. Global Recapitalization of Strategic Weapons Systems, in addition to the weapons system, requires training, with Kratos being an industry leader, with representative Kratos systems including M1 Abrams, Bradley, Blackhawk, and Air Force Global Strike Command systems.

Speaker Change: Kratos' C5ISR backlog and opportunity pipeline is at a record level, and we are making the investments necessary to support our partners and customers, including expanding our C5ISR business' hardware and manufacturing capacity.

Speaker Change: and also including our new Sentinel Program Facility.

Speaker Change: Kratos' training systems business is also growing, with increasing margins as certain programs we have been awarded ramp up and additional new program wins are expected.

Speaker Change: The global recapitalization of strategic weapons systems, in addition to the weapons system, requires training systems.

Eric DeMarco: Kratos is an industry leader with representative Kratos systems including M1 Abrams, Bradley, Blackhawk, and Air Force Global Strike Command System. Kratos Training System Opportunity Pipeline is one of the strongest in our company as we head into the second half of 2024. Kratos' cybersecurity business, one of the company's most profitable, is also forecasting future growth, including as the DoD's Cyber Maturity Model Certification Program, or CMMC, initiative progresses, with Kratos having some of the industry's most important and critical cybersecurity-related relationships, relevant past performance qualifications, and customer service.

Speaker Change: with Kratos being an industry leader, with representative Kratos systems including M1 Abrams, Bradley, Blackhawk, and Air Force Global Strike Command systems.

Eric DeMarco: Kratos Training System's opportunity pipeline is one of the strongest in our company as we head into the second half of 2024. Kratos' cybersecurity business, one of the company's most profitable, is also forecasting future growth, including as the DoD's Cyber Maturity Model Certification Program, or CMMC, initiative progresses, with Kratos having some of the industry's most important and critical cyber security-related relationships, relevant past performance qualifications, and customers. As we have communicated previously, Kratos' space and satellite business, our company's largest, is And we are now also assessing the probable upcoming federal fiscal 2025 CRA, which is likely to begin on October 1st.

Speaker Change: Kratos Training System Opportunity Pipeline is one of the strongest in our company as we head into the second half of 2024.

Speaker Change: crados's cybersecurity business one of the company's most profitable is also forecasting future growth

Speaker Change: including as the DoD's Cyber Maturity Model Certification Program, or CMMC, initiative progresses, with Kratos having some of the industry's most important and critical cybersecurity-related relationships, relevant past performance qualifications, and customers.

Eric DeMarco: As we have communicated previously, Kratos' space and satellite business, our company's largest, is being adversely impacted by the previous Extended 2024 CRA, which delayed and pushed certain government programs or existing program funding to the right, including Kratos is, or expects to be under contract on, and we are now also assessing the probable upcoming federal fiscal 2025 CRA, which is likely to begin October 1st. Additionally, our satellite business is also being impacted on the commercial side by the highly publicized technology and other issues being experienced by the manufacturers of software-defined satellites, which is delaying the award and/or deployment of the related satellite system ground communication infrastructure, including Kratos'.

Eric DeMarco: As we have communicated previously, Kratos' space and satellite business, our company's largest, is being adversely impacted by the previous extended 2024 CRA, which delayed and pushed certain government programs or existing program funding to the right, including programs Kratos is or expects to be under contract on. And we are now also assessing the probable upcoming federal fiscal 2025 CRA, which is likely to begin October 1st.

Eric DeMarco: Additionally, our satellite business is also being impacted on the commercial side by the highly publicized technology and other issues being experienced by the manufacturers of software-defined satellites, which is delaying the award and or deployment of the related satellite system ground communication infrastructure, including Kratos. We are now in the process of selection for several DOD, national security, and other program opportunities, certain of which we expect to receive either later this year or early next, which should put Kratos' satellite business back on the growth track, with a large number of LEO, MEO, and GEO constellations and satellites planned for or expected to be launched.

Speaker Change: As we have communicated previously, Kratos' space and satellite business, our company's largest, is being adversely impacted by the previous extended 2024 CRA, which delayed and pushed certain government programs or existing program funding to the right.

Speaker Change: including programs Kratos is or expects to be under contract on.

Speaker Change: and we are now also assessing the probable upcoming federal fiscal two thousand andtwentyfive cra which is likely to begin october first

Eric DeMarco: Additionally, our satellite business is also being impacted on the commercial side by the highly publicized technology and other issues being experienced by the manufacturers of software-defined satellites, which is delaying the award and or deployment of the related satellite system ground communication infrastructure, including Kratos. We are now in source selection on several DOD, national security, and other program opportunities, certain of which we expect to receive either later this year or early next, which should put Kratos' satellite business back on a growth path, with a large number of LEO, MEO, and GEO constellations and satellites planned for or expected to be launched.

Speaker Change: Additionally, our satellite business is also being impacted on the commercial side by the highly publicized technology and other issues being experienced by the manufacturers of software-defined satellites.

Speaker Change: which is delaying the award and or deployment of the related satellite system ground communication infrastructure, including Kratos's.

Eric DeMarco: However, we are now in source selection on several DOD national security and other program opportunities, certain of which we expect to receive either later this year or early next, which should put Kratos' satellite business back on a growth trajectory. With a large number of Leo, Mio, and Geoconstellations in the satellite's plans for or expected to be launched, we remain confident in the future prospects for our satellite business, including our first-to-market virtualized open space software platform, which is a clear competitive differentiator for our company. Increased demand for our target-drone business continued in Q2. With bookings of nearly 130 million and a book-to-bill ratio of 1.5 to 1 for the quarter, and Kratos' unmanned systems bookings being 290 million for the past 12 months.

Speaker Change: However, we are now in forced selection on several DoD, national security, and other program opportunities, certain of which we expect to receive either later this year or early next, which should put Kratos' satellite business back on a growth trajectory.

Speaker Change: yeah

Speaker Change: with a large number of LEO, MEO, and GEO constellations and satellites planned for or expected to be launched.

Eric DeMarco: We remain confident in the future prospects for our satellite business, including our first-to-market virtualized open-space software platform, which is a clear competitive differentiator for our company. Additionally, increased demand for our target drone business continued in Q2, with bookings of nearly $130 million and a book-to-bill ratio of 1.5 to 1 for the quarter.

Speaker Change: We remain confident in the future prospects for our satellite business, including our first-to-market virtualized open-space software platform, which is a clear competitive differentiator for our company.

Speaker Change: Increased demand for our target drone business continued in Q2.

Speaker Change: with bookings of nearly $130 million and a book-to-bill ratio of 1.5 to 1 for the quarter and Kratos' Unmanned Systems bookings being $290 million for the past 12 months.

Eric DeMarco: Kratos' Unmanned Systems bookings were $290 million for the past 12 months. Global weapon, air defense system, and training demand, as I referred to, is contributing to the increased Kratos target drone demand, which is expected to continue both domestically and internationally as air defense systems, missiles, radars, ships, satellites, et cetera, need to be exercised against and warfighters trained against. Threat Representative Target. Kratos' target drone business is expected to be an important future organic growth contributor for our company, on Tactical Drones. As has been increasingly reported over the past few weeks, including just yesterday, budgets are tight and are expected to get tighter. Affordability matters and is going to matter even more in the future.

Eric DeMarco: Kratos' unmanned systems bookings were $290 million for the past 12 months. Global weapon, air defense system, and training demand, as I referred to, is contributing to the increased Kratos target drone demand, which is expected to continue both domestically and internationally as air defense systems, missiles, radars, ships, satellites, et cetera, need to be exercised against and warfighters trained against. Threat Representative Target. Kratos' target drone business is expected to be an important future organic growth contributor for our company, on tactical drums. As has been increasingly reported over the past few weeks, including just yesterday, budgets are tight and are expected to get tighter. Affordability matters and is going to matter even more in the future.

Speaker Change: Global weapon, air defense system, and training demand I referred to is contributing to the increased Kratos target drone demand.

Speaker Change: which is expected to continue, both domestically and internationally, as air defense systems, missiles, radars, ships, satellites, etc. need to be exercised against and warfighters trained against.

Speaker Change: threat representative targets.

Speaker Change: Kratos' target drone business is expected to be an important future organic growth contributor for our company.

Eric DeMarco: On tactical drums, as has been increasingly reported over the past few weeks, including just yesterday, budgets are tight and are expected to get tighter. Affordability matters and is going to matter even more in the future, and we believe that potentially maybe better someday is the enemy of good enough and flying today. Kratos remains confident in our success. Apollo is now under contract, and Athena has been down-selected and is expected to be under contract this quarter. Kratos Valkyrie is now in source selection on certain opportunities, so I am not able to make any specific program opportunity or customer related comments on Valkyrie at this time.

Speaker Change: on tactical drones.

Speaker Change: As has been increasingly reported over the past few weeks, including just yesterday, budgets are tight and are expected to get tighter. Affordability matters and is going to matter even more in the future.

Eric DeMarco: And we believe that potentially, maybe better someday, is the enemy of good enough and flying today. Kratos remains confident in our success. Apollo is now under contract, and Athena has been downselected and is expected to be under contract this quarter.

Eric DeMarco: And we believe that potentially, maybe better someday, is the enemy of good enough and flying today, and Kratos remains confident in our success. Apollo is now under contract, and Athena has been downselected and is expected to be under contract this quarter. Kratos Valkyrie is now in source selection on certain opportunities, so I am not able to make any specific program, opportunity, or customer-related comments on Valkyrie at this time. However, I can say that we have completed our planning for the next serial production run of Valkyries, including with our key suppliers, and we are ready to move forward once we have certain additional information on the potential opportunities, including the final version and capability mix of the aircraft.

Speaker Change: And we believe that potentially, maybe better someday, is the enemy of good enough and flying today. And Kratos remains confident in our success.

Speaker Change: Apollo is now under contract.

Eric DeMarco: Kratos Valkyrie is now in source selection for certain opportunities, so I am not able to make any specific program, opportunity, or customer-related comments on Valkyrie at this time. I can say that we have completed our planning for the next serial production run of Valkyries, including with our key suppliers, and we are ready to move forward once we have certain additional information on the potential opportunities, including the final version and capability mix of the aircraft.

Speaker Change: And Athena has been downselected and is expected to be under contract this quarter.

Speaker Change: Kratos Valkyrie is now in source selection on certain opportunities, so I am not able to make any specific program, opportunity, or customer related comments on Valkyrie at this time.

Eric DeMarco: I can say that we have completed our planning for the next serial production run of Valkyries, including with our key suppliers, and we are ready to move forward once we have certain additional information on the potential opportunities, including the final version and capability mix of the aircraft. We are now planning the expansion of our Oklahoma drone manufacturing capacity, including a potential additional facility, with the expansion being for both tactical and target drones, including as certain of our drone systems are utilized for multiple applications or missions based on mission configuration of the system. With a successful Valkyrie flight from the Kratos Trolley Launch System, Kratos' ghost works is now working on an additional Valkyrie launch capability variant, also in close coordination with the customer.

Speaker Change: I can say that we have completed our planning for the next serial production run of Valkyries, including with our key suppliers, and we are ready to move forward once we have certain additional information on the potential opportunities, including the final version and capability mix of the aircraft.

Eric DeMarco: We are now planning the expansion of our Oklahoma drone manufacturing capacity, including a potential additional facility, with the expansion being for both tactical and target drones, as certain of our drone systems are utilized for multiple applications or missions based on mission configurations of the system. With a successful Valkyrie flight from the Kratos Trolley launch system, Kratos' Ghostworks is now working on an additional Valkyrie launch capability variant, also in close coordination with the customer.

Eric DeMarco: We are now planning the expansion of our Oklahoma drone manufacturing capacity, including a potential additional facility, with the expansion being for both tactical and target drones, as certain of our drone systems are utilized for multiple applications or missions based on the mission configuration of the system. With a successful Valkyrie flight from the Kratos Trolley launch system, Kratos' Ghostworks is now working on an additional Valkyrie launch capability variant, also in close coordination with the customer.

Speaker Change: We are now planning the expansion of our Oklahoma drone manufacturing capacity, including a potential additional facility.

Speaker Change: With the expansion being for both tactical and target drones, including as certain of our drone systems are utilized for multiple applications or missions based on mission configurations of the system.

Speaker Change: With a successful Valkyrie flight from the Kratos Trolley launch system, Kratos' Ghostworks is now working on an additional Valkyrie launch capability variant, also in close coordination with the customer.

Eric DeMarco: The Valkyrie Trolley Launch System funded by Kratos but in close coordination with the customer community establishes Kratos as the only high performance jet drone system provider with rail launched runway independence, traditional runway capability, and soon an additional launch capability. Kratos' ghost works is also looking ahead at new and evolving weapon systems. There are applicability unmanned systems including Valkyrie, the impact of artificial intelligence integration, and the potential game-changing impact of a system like this in a peer conflict. Kratos and Shield continued to successfully execute the strategy, with Shield AI routinely flying Kratos' high performance jet drone systems, including an incredible mission in just the past few days.

Eric DeMarco: The Valkyrie Trolley Launch System, funded by Kratos but in close coordination with the customer community, establishes Kratos as the only high-performance jet drone system provider with rail-launched runway independence, traditional runway capability, and soon an additional launch capability. Kratos Ghostworks is also looking ahead at new and evolving weapons systems, their applicability to unmanned systems, including Valkyrie, the impact of artificial intelligence integration, and the potential game-changing impact of a system like this in a peer conflict. Kratos and S.H.I.E.L. D. continue to successfully execute the strategy with S.H.I.E.L.D. A.I. Routinely flying Kratos' high-performance jet drone systems, including an incredible mission in just the past few days. From my perspective, what S.H.I.E.L.D.

Speaker Change: The Valkyrie Trolley Launch System, funded by Kratos, but in close coordination with the customer community.

Speaker Change: establishes Kratos as the only high performance jet drone system provider with rail-launched runway independence, traditional runway capability, and soon an additional launch capability.

Speaker Change: Kratos Ghostworks is also looking ahead at new and evolving weapon systems, their applicability to unmanned systems including Valkyrie, the impact of artificial intelligence integration, and the potential game-changing impact of a system like this in a peer conflict.

Speaker Change: Kratos and S.H.I.E.L.D. continue to successfully execute the strategy, with S.H.I.E.L.D. A.I. routinely flying Kratos' high-performance jet drone systems, including an incredible mission in just the past few days.

Eric DeMarco: From my perspective, what Shield is doing is potentially transformative and game changes with Shield taking advantage of Kratos having the only high performance jet drones that have performed hundreds of actual flight missions with Shield's artificial intelligence system flying and flying and learning and learning with the highest performance jet drones in the world, Kratos. The Marine Corps Miramar Air Show is coming up this September here in San Diego and in addition to an actual Valkyrie, an actual Air Wolf, a Mako aircraft, etc. We intend on displaying several other high performance Kratos jet drone aircraft at the show and also potentially a new Kratos system if we can.

Eric DeMarco: is doing is potentially transformative and game-changing, with S.H.I.E.L.D. taking advantage of Kratos having the only high-performance jet drones that have performed hundreds of actual flight missions, 's AI System, flying and flying and learning and learning with the highest-performance jet drones in the world, Kratos. The Marine Corps Miramar Air Show is coming up this September here in San Diego.

Eric DeMarco: is doing is potentially transformative and game-changing with S.H.I.E.L.D. taking advantage of Kratos having the only high-performance jet drones that have performed hundreds of actual flight missions with S.H.I.E.L.D. 's AI System, flying and flying and learning and learning with the highest-performance jet drone in the world, Kratos. The Marine Corps Miramar Air Show is coming up this September here in San Diego, and in addition to an actual Valkyrie, an actual Air Wolf, a Mako aircraft, etc., we intend on displaying several other high-performance Kratos jet drone aircraft at the show and also potentially a new Kratos system if we can.

Speaker Change: From my perspective, what S.H.I.E.L.D. is doing is potentially transformative and game-changer. With S.H.I.E.L.D. taking advantage of Kratos having the only high-performance jet drones that have performed hundreds of actual flight missions,

Speaker Change: with shields artificial intelligence system flying and flying and learning and learning with the highest performance jet drones in the world crreosis

Speaker Change: The Marine Corps Miramar Air Show is coming up this September here in San Diego. And in addition to an actual Valkyrie, an actual Air Wolf, a Mako aircraft, etc., we intend on displaying several other high-performance Kratos jet drone aircraft at the show.

Eric DeMarco: And in addition to an actual Valkyrie, an actual Air Wolf, a Mako aircraft, etc., we intend on displaying several other high-performance Kratos jet drone aircraft at the show, and also potentially a new Kratos system, if we can. Defense budgets are increasing globally, including in the areas of air defense, missiles, radar, space, satellite, hypersonic engines, propulsion systems, C5ISR, microwave electronics, drones, cyber, and training, with Kratos being a hardware and software-rich technology company addressing each of these areas and many others. Years of underinvestment in the defense industrial base are and will need to be corrected.

Speaker Change: and also potentially a new KROTE-KRATO system if we can.

Eric DeMarco: Defense budgets are increasing globally, including in the areas of air defense, missiles, radar, space, satellite, hypersonic engines, propulsion systems, C5 ISR, microwave electronics, drone, cyber, and training systems, with Kratos being a hardware and software rich technology company addressing each of these areas and many others. Years of underinvestment in the defense industrial base is and will need to be corrected, and Kratos is participating in this build-up and the recapitalization for the strategic weapons. We are making the investments and vertically integrating selectively where it matters to reduce supply chain risk and to also reduce cyber and physical related security risks, as we need both security and security with our supply chain.

Eric DeMarco: Defense budgets are increasing globally, including in the areas of air defense, missiles, radar, space, satellite, hypersonic engines, propulsion systems, C5ISR, microwave electronics, drones, cyber, and training, with Kratos being a hardware and software-rich technology company addressing each of these areas and many others. However, years of underinvestment in the defense industrial base are, and will need to be corrected. And Kratos is participating in this buildup and the recapitalization for Strategic Weapons. We are making the investments and vertically integrating selectively where it matters to reduce supply chain risk and also reduce cyber and physical-related security risk, as we need both surety and security with our supply chain. Reducing hardware in large quantities for defense and national security applications that must reliably perform at an affordable cost is hard, and it's a key differentiator for Kratos with our partners and our customers.

Speaker Change: defense budgets are increasing globally including in the areas of air defense missiles radar space satellite hypersonic engines propulsion systems cfive sr microwave electronics drone cyber and training systems

Speaker Change: with Kratos being a hardware and software-rich technology company addressing each of these areas and many others.

Speaker Change: Years of underinvestment in the defense industrial base is and will need to be corrected, and Kratos is participating in this buildup and the recapitalization for the strategic weapons systems.

Eric DeMarco: And Kratos is participating in this buildup and the recapitalization for Strategic Weapons. We are making the investments and vertically integrating selectively where it matters to reduce supply chain risk and also reduce cyber and physical-related security risk, as we need both surety and security with our supply chain. Producing hardware in large quantities for defense and national security applications that must reliably perform at an affordable cost is hard, and it's a key differentiator for Kratos with our partners and our customers.

Speaker Change: We are making the investments and vertically integrating selectively where it matters to reduce supply chain risk and to also reduce cyber and physical related security risks as we need both surety and security with our supply chain.

Eric DeMarco: Producing hardware in large quantities for defense and national security applications that must reliably perform at an affordable cost is hard, and it's a key differentiator for Kratos to our partners and our customers.

Speaker Change: yeah

Speaker Change: Producing hardware in large quantities for defense and national security applications that must reliably perform at an affordable cost is hard.

Speaker Change: and it's a key differentiator for Kratos to our partners and our customers.

Eric DeMarco: As you know, the 2024 budget continuing resolution went through March of this year, and another potential 2025 budget continuing resolution is expected to begin October 1st, just two months from now. Irrespective, we remain confident in our 2024 financial guidance, which we affirm today, and we also remain confident in our expected future year-over-year organic growth rate of 10%, with the potential to exceed it. As we reported, Kratos' opportunity pipeline is a record 12 billion, and we are in pursuit of certain new large programs as a prime, including classified opportunities in our unmanned systems business and our space, cyber, and training businesses, which are requiring significant Kratos bid in proposal and related investments, including one opportunity where Kratos' investment in the second half of 24 is expected to be approximate.

Eric DeMarco: As you know, the 2024 Budget Continuing Resolution went through March of this year, and another potential 2025 Budget Continuing Resolution is expected to begin on October 1st, just two months from now. Nevertheless, we remain confident in our 2024 financial guidance, which we affirmed today. And we also remain confident in our expected future year-over-year organic growth rate of 10%, with the potential to exceed it. As we reported, Kratos' opportunity pipeline is a record $12 billion, and we are in pursuit of certain new large programs as a prime, including classified opportunities in our unmanned systems business and our space, cyber, and training businesses, which are requiring significant Kratos bid and proposal and related investment, including one opportunity where Kratos' investment in the second half of 2024 is expected to be approximately $2 million for this one opportunity.

Eric DeMarco: As you know, the 2024 budget continuing resolution went through March of this year, and another potential 2025 budget continuing resolution is expected to begin on October 1st, just two months from now. Irrespective, we remain confident in our 2024 financial guidance, which we affirmed today, and we also remain confident in our expected future year-over-year organic growth rate of 10 percent, with the potential to exceed it. As we reported, Kratos' opportunity pipeline is a record $12 billion, and we are in pursuit of certain new large programs as a prime, including classified opportunities in our unmanned systems business and our space, cyber, and training businesses, which are requiring significant Kratos bid and proposal and related investment, including one opportunity where Kratos' investment in the second half of 2024 is expected to be approximately $2 million for this one opportunity.

Speaker Change: as you know the two thousand and twenty-four budget continuing resolution withdrew march of this year and another potential two thousand and twenty five budget continuing resolution is expected to beg again october first just two months from now

Speaker Change: Irrespective, we remain confident in our 2024 financial guidance, which we affirmed today, and we also remain confident in our expected future year-over-year organic growth rate of 10 percent, with the potential to exceed it.

Speaker Change: As we reported, Kratos' opportunity pipeline is a record $12 billion, and we are in pursuit of certain new large programs as a prime, including classified opportunities in our unmanned systems business and our space, cyber, and training businesses.

Speaker Change: which are requiring significant Kratos bid and proposal and related investments.

Operator: Good day, everyone, and thank you for standing by.

Operator: Welcome to Kratos Defense and Security Solutions, 2nd quarter, 2024 earnings conference call. At this time, all participants are in a listen only mode.

Eric DeMarco: We have approximately 2 million for this one opportunity.

Speaker Change: including one opportunity where Kratos' investment in the second half of 24 is expected to be approximately $2 million for this one opportunity.

Eric DeMarco: We have no significant acquisitions anticipated; only maybe potentially some very small tokens. Operational challenges include the obtaining and retaining of qualified experience personnel, including those willing and able to obtain national security clearances and the related cost of these individuals.

Eric DeMarco: We have no significant acquisitions anticipated, only maybe, potentially, some very small ones. Operational challenges include the obtaining and retaining of qualified, experienced personnel, including those willing and able to obtain national security clearances and the related cost of these individuals.

Operator: After the speaker's presentation, there will be a question and answer session. To participate, you will need to press star one-one on your telephone. You will then hear a message advice in your hand this raised. To withdraw your questions, simply press star one-one again.

Speaker Change: We have no significant acquisitions anticipated, only maybe, potentially, some very small tokens.

Speaker Change: Operational challenges include the obtaining and retaining of qualified, experienced personnel, including those willing and able to obtain national security clearances, and the related cost of these individuals.

Operator: Please be advised that today's conference is being recorded.

Deanna Lund: Ms. 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 affirmation of the four year 2024 financial guidance in the press release we published earlier today, I will focus on the highlights in my remarks today. Revenue for the second quarter were 300.1 million, exceeding our estimated range of 265 to 280 million, which includes higher than expected performance and delivery across most of our businesses, with notable strengths in our unmanned systems, turbine technologies, microwave products, and C5 ISR businesses. We made delivery on an international Middle Eastern drone program during the second quarter, which contributed revenues of 17.4 million, which was originally forecasted to be delivered in Q3.

Deanna Lund: 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 affirmation of the full year 2024 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 $300.1 million, exceeding our estimated range of $265 to $280 million, which included higher-than-expected performance and delivery across most of our businesses, with notable strength in our unmanned systems, turbine technologies, microwave products, and C5ISR businesses.

Deanna Lund: 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 affirmation of the full year 2024 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 $300.1 million, exceeding our estimated range of $265 to $280 million, which included higher than expected performance and delivery across most of our businesses, with notable strength in our unmanned systems, turbine technologies, microwave products, and C5ISR businesses.

Marie Mendoza: Now, I will pass the call over to the Senior Vice President and General Counsel, Marie Mendoza. Thank you. Good afternoon, everyone, and thank you for joining us for the Chris Defense and Security Solutions 2nd quarter, 2024 conference call. With me today's 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 notes of the safe harbor paragraph that is included at the end of today's press release.

Speaker Change: Ms. 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 affirmation of the full year 2024 financial guidance in the press release we published earlier today, I will focus on the highlights in my remarks today.

Speaker Change: Revenues for the second quarter were $300.1 million, exceeding our estimated range of $265 to $280 million.

Speaker Change: which includes higher than expected performance and delivery across most of our businesses with notable strength in our unmanned systems, turbine technologies, microwave products, and C5ISR businesses.

Marie Mendoza: 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-GAP financial measures as that term is defined in regulation G. Non-GAP financial measures should not be considered in isolation from, or as is such a 2-4 financial information presented in compliance with GAP.

Deanna Lund: We made delivery on an international Middle Eastern drone program during the second quarter, which contributed revenues of $17.4 million, which was originally forecasted to be delivered in Q3. As we have discussed on previous calls, revenues under certain international contract awards, due to the contract terms and conditions, are recorded as delivered rather than over time on a percentage of completion basis. As a result, delivery under a contract of size, such as delivery this quarter, can skew the quarterly-of-delivery-over-quarter sequential trend.

Speaker Change: We made delivery on an international Middle Eastern drone program during the second quarter, which contributed revenues of $17.4 million, which was originally forecasted to be delivered in Q3.

Deanna Lund: As we have discussed on previous calls, revenues under certain international contract awards, due to the contract terms and conditions, are recorded as delivered rather than over time on a percentage of completion basis. As a result, the delivery under a contract of size, such as a delivery this quarter, can skew the quarter of delivery over quarter sequential trends. Consolidated organic revenue growth was 16.7% for the second quarter, including the impact of the Sierra Technical Services or SPSX. on a pro-forma basis as it acquired at the beginning of 2023, driven primarily by organic growth in the unmanned systems business of 61.8%, as well as notable growth in the turbine technology's microwave products and see five ISR businesses in our KGS segment.

Speaker Change: As we have discussed on previous calls, revenues under certain international contract awards due to the contract terms and conditions are recorded as delivered rather than over time on a percentage of completion basis.

Speaker Change: As a result, the delivery under a contract of size, such as a delivery this quarter, can skew the quarter of delivery over quarter sequential trends.

Eric DeMarco: Accordingly at the end of today's press release, we have provided a reconciliation of these non-GAP financial measures to the company's financial results prepared in accordance with GAP, that that I will now turn the call over to Eric DeMarco. Thanks, Marie. The successful execution of Kratos' strategy in our position as a leading defense and technology hardware and software company is reflected in our Q2 and year-to-date financial results. Kratos' strategy of making internally funded investments in close collaboration with our partners and customers to rapidly develop engineer field and be first to market with relevant products, systems and solutions is working for our customers, partners, shareholders, and all of our stakeholders.

Deanna Lund: Consolidated organic revenue growth was 16.7% for the second quarter, including the impact of the Sierra Technical Services, or STS, acquisition on a pro forma basis, as if acquired at the beginning of 2023, driven primarily by organic growth in the unmanned systems business of 61.8%, as well as notable growth in the turbine technologies, microwave products, and C5ISR businesses in our KGS6. Adjusted EBITDA for the second quarter of 2024 was $29.9 million, exceeding our estimated range of $20 to $23 million, reflecting the additional revenues as well as a more favorable mix of higher-margin revenues with notable strength in unmanned systems, turbine technologies, microwave products, and our C5ISR businesses as well as higher-margin software and data-related content from our satellite business.

Deanna Lund: Consolidated organic revenue growth was 16.7% for the second quarter, including the impact of the Sierra Technical Services, or STS, acquisition on a pro forma basis, as if acquired at the beginning of 2023, driven primarily by organic growth in the unmanned systems business of 61.8%, as well as notable growth in the turbine technologies, microwave products, and C5ISR businesses in our KGS6. Adjusted EBITDA for the second quarter of 2024 was $29.9 million, exceeding our estimated range of $20 to $23 million, reflecting the additional revenues, as well as a more favorable mix of higher-margin revenues with notable strength in unmanned systems, turbine technologies, microwave products, and our C5ISR businesses, as well as higher-margin software and data-related content from our satellite business.

Speaker Change: Consolidated organic revenue growth was 16.7% for the second quarter, including the impact of the Sierra Technical Services, or STS, acquisition on a pro forma basis, as if acquired at the beginning of 2023.

Speaker Change: driven primarily by organic growth in the unmanned systems business of 61.8 percent, as well as notable growth in the turbine technologies, microwave products, and C5ISR businesses in our KGS segment.

Deanna Lund: Adjusted EBITDA for the second quarter of 2024 was 29.9 million, exceeding our estimated range of 20 to 23 million, reflecting the additional revenues as well as a more favorable mix of higher margin revenues, with notable strength in unmanned systems, turbine technologies, microwave products, and RC five ISR businesses, as well as higher margin software and data-related content from our satellite business. Cash use and operating activities was 2.7 million, which includes the impact of working capital requirements related to increases and related to the revenue growth, increases in prepaid assets resulting from advanced payments or deposits required by key suppliers, and the reduction of deferred revenue balances or prepaid customer deposits as work has been performed and delivered.

Speaker Change: adjusted ebitda for the secondquol

Speaker Change: quarter of two thousand and twenty four was twenty nine point nine million

Speaker Change: exceeding our estimated range of $20 to $23 million.

Speaker Change: reflecting the additional revenues, as well as a more favorable mix of higher margin revenues with notable strength in unmanned systems, turbine technologies, microwave products, and our C5ISR businesses, as well as higher margin software and data-related content from our satellite business.

Deanna Lund: Cash used in operating activities was $2.7 million, which includes the impact of working capital requirements related to increases in receivables related to revenue growth, increases in prepaid assets resulting from advanced payments or deposits required by key suppliers, and the reduction of deferred revenue balances or prepaid customer deposits as work has been performed and delivered. We are seeing a trend in our supply chain where certain of our vendors are requiring prepayments or deposits to secure our position, which is adversely impacting the timing of our working capital requirements to deliver our products and solutions. Free cash flow used from operations for the quarter was $15.4 million after funding of CapEx of $12.7 million.

Speaker Change: Cash used in operating activities was $2.7 million, which includes the impact of working capital requirements related to increases in receivables related to the revenue growth.

Speaker Change: increases in prepaid assets resulting from advanced payments or deposits required by key suppliers, and the reduction of deferred revenue balances or prepaid customer deposits as work has been performed and delivered.

Deanna Lund: We are seeing a trend in our supply chain where certain of our vendors are requiring prepayments or deposits to secure our position, which is adversely impacting the timing of our working capital requirements to deliver our products and solutions. Free cash flow used from operations for the quarter was 15.4 million after funding of CAPEX of 12.7 million. 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 systems, and hypersonic businesses to meet existing and anticipated customer orders and requirements, and investing in related new machinery, equipment, and systems. We are also continuing to manufacture the two production lines of Valkyrie's prior to contract award.

Speaker Change: we are seeing a trend in our supply chain where certain of our vendors are requing prepayments or deposit to secure our position which is adversely impacting the timing of our working capital requirements to to deliver our products and solutions

Speaker Change: Free cash flow used from operations for the quarter was $15.4 million after funding of CapEx of $12.7 million.

Deanna Lund: As planned, we are continuing to make investments to expand and build out certain of our manufacturing and production facilities in our microwave products, rocket systems, and hypersonic businesses to meet existing and anticipated customer orders and requirements, and investing in related new machinery, equipment, and systems. We are also continuing to manufacture the two production lines of Valkyries prior to contract award. Consolidated DSOs, or Day Sales Outstanding, continue to improve from 107 days in the first quarter of 2024 to 103 days in the second quarter of 2020.

Deanna Lund: As planned, we are continuing to make investments to expand and build out certain of our manufacturing and production facilities in our microwave products, rocket systems, and hypersonic businesses to meet existing and anticipated customer orders and requirements, and investing in related new machinery, equipment, and systems. We are also continuing to manufacture the two production lines of Valkyries prior to contract award. Consolidated DSOs, or Day Cells Outstanding, continue to improve from 107 days in the first quarter of 2024 to 103 days in the second quarter of 2021.

Speaker Change: 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 systems, and hypersonic businesses to meet existing and anticipated customer orders and requirements, and investing in related new machinery, equipment, and systems.

Eric DeMarco: Kratos' zoo's family of soft, solid rocket motors from conception to successful static fire in three years for an approximate $23 million investment and now positioned for the mock TB program, hypersonic air and knees missions and several additional customers. Kratos' Valkyrie runway enabling trolley system from conception to first flight in effectively 15 months for a few million dollar investment with Kratos' ghost works achieving another important milestone in Valkyrie operational deployment flexibility which we continue to rapidly mature and demonstrate.

Speaker Change: We are also continuing to manufacture the two production lines of Valkyries prior to contract award.

Deanna Lund: Consolidated DSOs or day sales outstanding continue to improve from 107 days in the first quarter of 2024 to 103 days in the second quarter of 24. Contract mix for the second quarter was 70% fixed price, 24% cost plus contracts, and 6% time and material contracts. Revenue is generated from contracts with the U.S. federal government during the second quarter of 24 was approximately 65%, including revenues generated from contracts with the DOD, non-DOD federal government agencies, and FMS contracts. In the second quarter of 24, we generated 15% of revenues from commercial customers and 20% informed customers.

Speaker Change: Consolidated DSOs or Day Cells Outstanding continue to improve from 107 days in the first quarter of 2024 to 103 days in the second quarter of 2024.

Deanna Lund: Contract mix for the second quarter was 70% fixed price, 24% cost plus contracts, and 6% time and material contracts. Revenues generated from contracts with the U.S. federal government during the second quarter of 2024 were approximately 65 percent, including revenues generated from contracts with the DoD, non-DoD federal government agencies, and FMS contracts. In the second quarter of 2004, we generated 15% of revenues from commercial customers and 20% from foreign customers. An operational priority remains the hiring and retention of skilled technical labor across the company, with a total Kratos headcount of 4,000. 12 at the end of the second quarter as compared to 3986 at the end of the first quarter.

Deanna Lund: Contract mix for the second quarter was 70% fixed price, 24% cost plus contracts, and 6% time and material contracts. Revenues generated from contracts with the U.S. federal government during the second quarter of 24 were approximately 65 percent, including revenues generated from contracts with the DOD, non-DOD federal government agencies, and FMS contracts. In the second quarter of 2024, we generated 15% of revenues from commercial customers and 20% from foreign customers. And operational priority remains the hiring and retention of skilled technical labor across the company, with a total Kratos headcount of 4,000. 12 at the end of the second quarter as compared to 3986 at the end of the first quarter.

Speaker Change: Contract mix for the second quarter was 70% fixed price, 24% cost plus contracts, and 6% time and material contracts.

Speaker Change: Revenues generated from contracts with the U.S. federal government during the second quarter of 24 was approximately 65%, including revenues generated from contracts with the DOD, non-DOD federal government agencies, and FMS contracts.

Eric DeMarco: Each of these relevant Kratos funded and developed systems are expected to be important contributors to Kratos' business and our future financial growth and profit trajectory based on specific customer orders and feedback and a representative of the value Kratos generates for our stakeholders. In Q2, Kratos' engine and turbine business continued its revenue growth and profit expansion trajectory, beating its forecast including engines for drones, missiles, aircraft, space, hypersonic, supersonic and other systems. Kratos' the clear industry leader and independent merchant supplier of engines, propulsion and subsystems in our areas and we expect continued future growth based on customer demand.

Speaker Change: In the second quarter of 2004, we generated 15% of revenues from commercial customers and 20% from foreign customers.

Deanna Lund: An operational priority remains the hiring and retention of skilled technical labor across the company, with total Credos head count of 4,012 at the end of the second quarter as compared to 3,986 at the end of the first quarter.

Speaker Change: An operational priority remains the hiring and retention of skilled technical labor across the company, with total Kratos headcount of 4,012 at the end of the second quarter as compared to 3986 at the end of the first quarter.

Deanna Lund: Moving 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 related costs. We have also taken into consideration in our affirmed fiscal 24 guidance a federal fiscal year 2025 continuing resolution authorization commencing on October 1st, 24 and under such expected CRA, no new program contract awards, no increases in existing production, contract funding, and no transition from program development to production.

Speaker Change: Now moving to financial guidance.

Speaker Change: The guidance we provided today includes our expectations and assumptions for our supply chain execution and for employee sourcing, hiring, retention, and the related costs.

Deanna Lund: A federal fiscal year 2025 continuing resolution authorization commenting on October 1, 24, and under such expected CRA, no new program contract awards, no increases in existing production. and no transition from program development to production.

Eric DeMarco: We recently announced the Kratos' small jet engine partnership with General Electric Aerospace which is incredibly important to Kratos with GEA bringing large-scale engine production experience, capital, intellectual property, customer relations and more and we are anticipating future production of thousands of low-cost engines in this class for drones and missiles. The GEA partnership is specifically with Kratos' turbine technology business for small turbo-fan jet engines and is not related to Kratos' TDI small turbo jet business which has separate locations, technology, IP and target market opportunities.

Speaker Change: We have also taken into consideration in our Affirmed Fiscal 24 Guidance.

Speaker Change: a Federal Fiscal Year 2025 Continuing Resolution Authorization commencing on October 1, 2024, and under such expected CRA, no new program contract awards, no increases in existing production.

Deanna Lund: Our guidance also reflects the impact of certain performance and deliveries made in the second quarter of 24, certain of which had originally been estimated to be executed or delivered in the third quarter of 24. The most notable of which was the delivery of the international drone program in the second quarter, which has skewed the sequential quarter trend in our unmanned systems business. We are affirming our annual guidance with revenues for unmanned systems in the range of 265 to 275 million, up slightly from our previous range of 260 to 270 million, with an organic growth rate of 22% to 27% over 23 on a performance basis with STS as if acquired at the beginning of 23.

Deanna Lund: Our guidance also reflects the impact of certain performance and deliveries made in the second quarter of 24, certain of which had originally been estimated to be executed or delivered in the third quarter of 24, the most notable of which was the delivery of the International Drone Program in the second quarter, which has skewed the sequential quarter trend in our unmanned systems business. We are affirming our annual guidance with revenues for unmanned systems in the range of $265 to $275 million, up slightly from our previous range of $260 to $270 million, with an organic growth rate of 22% to 27% over 23 on a performant basis with STS as if acquired at the beginning of 23.

Deanna Lund: Our guidance also reflects the impact of certain performance and deliveries made in the second quarter of 24, certain of which had originally been estimated to be executed or delivered in the third quarter of 24, the most notable of which was the delivery of the International Drone Program in the second quarter, which eschewed the sequential quarter trend in our unmanned systems business. We are affirming our annual guidance with revenues for our unmanned systems in the range of $265 to $275 million, up slightly from our previous range of $260 to $270 million, with an organic growth rate of 22% to 27% over 23 on a performant basis with STS as if acquired at the beginning of 23.

Speaker Change: Contract Funding and No Transition from Program Development.

Speaker Change: to production.

Speaker Change: Our guidance also reflects the impact of certain performance and deliveries made in the second quarter of 24, certain of which had originally been estimated to be executed or delivered in the third quarter of 24, the most notable of which was the delivery of the International Drone Program in the second quarter, which has skewed the sequential quarter trend in our unmanned systems business.

Eric DeMarco: As part of Kratos' arrangement with GEA where we will be sharing future engine production revenue and profit, Kratos' in coordination with GEA will be making an investment and standing up a new low-cost small engine manufacturing facility as we begin preparation for expected future production. Separately we are investing and expanding our TDI small turbo jet engine production capacity and Kratos' overall hardware manufacturing capability including additional additive manufacturing, 3D printing, milling, machining, casting and forging capabilities which is part of Kratos' vertical integration initiative.

Speaker Change: We are affirming our annual guidance with revenues for unmanned systems in the range of 265 to 275 million up slightly from our previous range of 260 to 270 million with an organic

Speaker Change: growth rate of 22% to 27% over 23 on a performant basis with STS as if acquired at the beginning of 23.

Deanna Lund: Our range for KGS business is 860 to 875 million, slightly down from our previous range of 865 million.

Deanna Lund: Our range for the KGS business is $860 to $875 million, slightly down from our previous range of $865 to $880 million, which reflects increased weakness in our commercial satellite ground equipment business, resulting from the impact of the current industry technical challenges encountered in the manufacture of software-defined satellites that have delayed satellite launches and have had a resulting delay in the deployment of our commercial satellite ground equipment, offset by increasing demand for air defense and related systems in our microwave products Our reaffirmed EBITDA range of $102 to $107 million includes the expected mix, as well as an additional $2 million in costs related to the large proposal in our space, cyber, and training business, which Eric referred to previously.

Speaker Change: Our range for KGS business is $860 to $875 million, slightly down from our previous range of $865 to $880 million.

Deanna Lund: We are going to provide to 880 million, which reflects increased weakness in our commercial satellite ground equipment business, resulting from the impact of the current industry technical challenges encountered in the manufacture of software defined satellites that have delayed satellite launches and have had a resulting delay in the deployment of our commercial satellite ground equipment, offset by increasing demand for air defense and related systems in our microwave products, turbine technologies, and C5 ISR businesses. Our reaffirmed EBITDA range of 102 to 107 million includes the expected mix, as well as an additional 2 million in cost related to the large proposal in our space cyber and training business, which Eric referred to previously.

Speaker Change: which reflects increased weakness in our commercial satellite ground equipment business resulting from the impact of the current industry technical challenges encountered in the manufactured software-defined satellites that have delayed satellite launches and have had a resulting delay in the deployment of our commercial satellite ground equipment.

Eric DeMarco: We are establishing new engine production lines related to the many new drone missile and loitering the ignition programs that TDI has, including those that we are designed in on. We are either now in contract negotiations for it, and we are hopeful to receive an initial 1,000 unit order with the potential 10,000 plus opportunity in the near future. Kratos turbine technologies, TDI, and our engine and propulsion system business are currently expected to be some of our company's primary future growth contributors.

Speaker Change: offset by increasing demand for air defense and related systems in our microwave products, turbine technologies, and C5ISR businesses.

Speaker Change: Our reaffirmed EBITDA range of $102 to $107 million includes the expected mix, as well as additional $2 million in costs related to the large proposal in our space cyber and training business, which Eric referred to previously.

Operator: Thank you, Deanna. We'll pass it to the moderator now for questions.

Operator: All right. Thank you, Diana.

Operator: We'll pass it to the moderator now for questions. Thank you.

Operator: Thank you. And as a reminder, if you do have a question, press star 11 and wait for your name to be announced. To remove yourself, just press star 11 again. One moment for our first question, and it comes from the line of Michael Ciarmoli with Tourist Security.

Speaker Change: all right thank d

Operator: And as I remind there, if you do have a question, press star 11 and wait for your name to be announced. To remove yourself, just press star 11 again. One moment for our first question.

Speaker Change: we'll pass it to the moderator now for questions thank you and a s ry reminder if you do have a question for star one one and wait for your name to be announced to remove yourself just bre star one one again one moment for our first question

Eric DeMarco: Kratos' Israeli-based microwave electronics business also exceeded its Q2 forecast, including program supporting multiple air defense systems, including iron dome, iron sting, lightning, arrow, baroque and others. Kratos' microwave has also a record backlog and opportunity pipeline, and we are making the investments to increase our facilities, hardware and manufacturing capacity in order to address existing and forecasted increased future demand, including a space-qualified capability as a result of certain new satellite systems awards we've received and opportunities.

Michael Ciarmoli: Nikon from the line of Michael Sharmoly with tourist securities. Hey, good evening, guys. Thanks for taking the question. Eric, it sounds like you're making a lot of progress on a lot of programs. I guess just on Valkyrie, you know, you mentioned that one close to source selection; you're moving forward with the second production lot.

Speaker Change: And it comes from the line of Michael Ciarmoli with Tourist Securities.

Michael Ciarmoli: Hey, good evening, guys. Thanks for taking the time to answer the question. Eric, it sounds like you're making a lot of progress on a lot of programs. I guess just on Valkyrie, you know, you mentioned that one close to source selection. You're moving forward with the second production lot. Can you just give us, maybe, some sensitivity? I don't know, for you or Deanna, if you do get those, or if you do get a contract and you put some planes under contract, how that would impact the current guidance, maybe the cash flow, and even the revenue impact?

Michael Ciarmoli: Hey, good evening, guys. Thanks for taking the time to answer the question. Eric, it sounds like you're making a lot of progress on a lot of programs. I guess just on Valkyrie, you know, you mentioned that one close to source selection. You're moving forward with the second production lot. Can you just give us, maybe, some sensitivity? I don't know, To or Deanna, if you do get those, or if you do get a contract and you put some planes under contract, how that would impact the current guidance, maybe the cash flow and even the revenue impact.

Michael Ciarmoli: Hey, good evening guys. Thanks for

Michael Ciarmoli: Eric, it sounds like you're making a lot of progress on a lot of programs. I guess just on Valkyrie, you mentioned that one close to source selection, you're moving forward with the second production lot. Can you just give us maybe some sensitivity?

Eric DeMarco: Can you just give us maybe some sensitivity, I don't know if you or Diana, if you do get those, or if you do get a contract and you put some planes under contract, how that would impact the current guidance, maybe the cash flow and even the revenue impact.

Eric DeMarco: Kratos has deep relationships with Israeli aerospace industries, Rafael and Elvin, and we expect our Israeli business to be one of Kratos' future year-over-year organic growth leaders, as we support our important Israeli and international customers. Global air defense system-related demand, including missile radar, counter unmanned aerial system and space systems, also contributed to Kratos' C5 ISR business, exceeding its Q2 forecast, including patriot, fad, shore rad, indirect fire or if pick, IBCS, CUAS, DE, and HPM-related systems.

Speaker Change: If you do get those, or if you do get a contract and you put some planes under contract, how that would impact the current guidance, maybe the cash flow and even the revenue impact?

Deanna Lund: Sure, Michael, so from a revenue perspective, when the contract is awarded, whatever the number of aircraft that the award is for, those costs that are currently in our PP&E would be transferred to effectively inventory and unbilled receivables, and revenue would be recorded for those systems. So, if it's say five aircraft and the five that are in whatever state of completion, those costs would be transferred, and then the revenue would be recorded accordingly for whatever From a receivable or collection perspective, it will depend on the billing milestones that we are able to negotiate with the customer.

Deanna Lund: Sure. Michael, from a revenue perspective, when the contract is awarded, whatever the number of aircraft that the award is under contract for, those costs that are currently in our PP&E would be transferred to effectively inventory and unbilled receivables, and revenue would be recorded for those systems. So if it's, say, five aircraft and the five that are in whatever state of completion, those costs would be transferred, and then the revenue would be recorded accordingly for whatever percent complete they are at that time.

Eric DeMarco: Sure.

Eric DeMarco: Kratos' C5 ISR programs, backlog and opportunity pipeline is also at record levels, and C5 ISR is expected to be an important future year organic growth contributor, as we support our important partners, including Northrop Lockheed, Raytheon, Dynetics, and others in their national security missions. Kratos' C5 ISR backlog and opportunity pipeline is at a record level, and we are making the investments necessary to support our partners and customers, including expanding our C5 ISR business's hardware and manufacturing capacity, and also including our new Sentinel program facility.

Eric DeMarco: So Michael, so from a revenue perspective, when the contract is awarded, whatever the number of aircraft that the award is under contract for, those costs that are currently in our PP&E would be transferred to effectively inventory and unbuilt receivables, and revenue would be recorded for those systems. So if it's five aircraft and that five that are in whatever state of completion, those costs would be transferred, and then the revenue would be recorded accordingly for whatever percent complete they are. at that time.

Michael Ciarmoli: Sure. So, Michael, so from a revenue perspective, when the contract is awarded, whatever the

Michael Ciarmoli: the number of aircraft that the award is under contract for those costs that are currently in our p would be transferred

Michael Ciarmoli: to effectively inventory and unbilled receivables and revenue would be recorded for those systems. So if it's, say, five aircraft, then that.

Michael Ciarmoli: 5 that are in whatever state of completion, those costs would be transferred and then the revenue would be recorded accordingly for whatever percent complete they are at that time.

Deanna Lund: From a receivable or a collection perspective, it will depend on the billing milestones that we are able to negotiate with the customer. So, depending on if we can get a payment upfront, we obviously always endeavor to do that, but it will depend on what we're able to negotiate.

Deanna Lund: From a receivable or a collection perspective, it will depend on the billing milestones that we are able to negotiate with the customer. So depending on whether we can get a payment up front, we obviously always endeavor to do that, but it will depend on what we're able to negotiate. Okay. And do you think that's a, is that a second?

Michael Ciarmoli: From a receivable or a collection perspective, it will depend on the billing milestones that we are able to negotiate with the customer.

Deanna Lund: So depending on if we can get a payment up front, we obviously always endeavor to do that, but it will depend on what we're able to negotiate. Okay. And do you think that's a, is that a second?

Michael Ciarmoli: So depending on if we can get a payment up front, we obviously always endeavor to do that, but it will depend on what we're able to negotiate.

Deanna Lund: Okay, and do you think that's a second half kind of development in signing, or is it still hard to tell at this point?

Eric DeMarco: Okay, and do you think that's a, is that a second half kind of development and signing, or are still hard to tell at this point? It's possible; second half, it's probable 25. Okay, that's where it sits right now, which is why we're just being cautious and our guidance.

Deanna Lund: Okay, and do you think that's a second half kind of development in signing, or is it still hard to tell at this point?

Speaker Change: Okay and do you think that's a is that a second half kind of development and signing or or still hard to tell at this point?

Eric DeMarco: Kratos' training systems business is also growing, with increasing margins and certain programs we have been awarded ramp-up and additional new program winds are expected. The global recapitalization of strategic weapon systems, in addition to the weapon system, requires training systems, with Kratos being an industry leader, with representative Kratos' systems, including M1 Abrams, Bradley, Black Hawk, and Air Force Global Strike Command Systems. Kratos' training system opportunity pipeline is one of the strongest in our company, as we head into the second half of 2024.

Deanna Lund: It's probable. 25. That's where it sits right now, which is why we're just being cautious in our time.

Deanna Lund: It's probable. 25. That's where it sits right now, which is why we're just being cautious in our guidance.

Speaker Change: It's possible.

Michael Ciarmoli: second half

Speaker Change: It's probable.

Michael Ciarmoli: 25. That's where it sits right now, which is why we're just being cautious in our guidance.

Eric DeMarco: Got it. And Eric, I think you guys have had, you know, you've talked to different variants, different sizes. I know you, in the prepared remarks, you talked about the trolley system. Sounds like you've got landing gear in place for Valkyrie, you know, to kind of, you know, you've secured a vendor maybe there. Can you talk expectations about what maybe the customer's looking for? And, you know, it's kind of runway independence, no longer desired, or do you just want to give the customer options?

Eric DeMarco: Got it. And Eric, I think you guys have had, you know, you've talked to different variants, different sizes. I know you have, in the prepare marks, you talked about the trolley system. Sounds like you've got landing gear in place for, for Valkyrie. You know, to, to kind of, you know, you've secured a vendor maybe there. Can you, can you talk expectations about what maybe the customer's looking for? And, you know, it's kind of runway independence no longer the desired, or do you just want to give the customer options?

Michael Ciarmoli: got it and eric i think you've guys have had you know talkked to different variance different sizes i know in the prepared remarks you talked about the trolle system sounds like you've got landing gear in place for

Speaker Change: for Valkyrie.

Eric DeMarco: Kratos' Cybersecurity Business, one of the company's most profitable, is also forecasting future growth, including as the DOD's Cyber Maturity Model Certification Program, or CMMC Initiative progresses, with Kratos having some of the industry's most important and critical cybersecurity-related relationships, relevant past performance qualifications and customers. As we have communicated previously, Kratos' space and satellite business, our company's largest, is being adversely impacted by the previous Extended 2024 CRA, which delayed and pushed certain government programs or existing program funding to the right, including Kratos is, or expects to be under contract on, and we are now also assessing the probable upcoming federal fiscal 2025 CRA, which is likely to begin October 1st.

Speaker Change: to kind of you your secured endor maybe there can you can you talk expectations about what maybe the customers looking for and you know is kind of runway independence no longer the desirered or do you just want to give the customer options

Eric DeMarco: It's the latter, Mike, where we're definitely giving the different customers who have different priorities, options the path we've taken now, with where we sit today with rail-launched drones flying, runway-launched drones flying with the trolley. As you indicated, very soon, we're going to have a Valkyrie with its own internal gear, which will also have internal weapons, flying, and then we have another one Ghost Works is We will have the entire portfolio flying, demonstrated for the various customer communities.

Eric DeMarco: It's the latter, Mike, where... We're definitely giving different customers who have different priorities, options. Pan, the path we've taken now, with where we sit today with rail-launched drones flying, and runway-launched drones flying with the trolley. As you indicated, very soon we're going to have a Valkyrie with its own internal gear, which will also have internal weapons, flying, and then we have another one Ghost Works is working on coming also. We will have the entire portfolio flying, demonstrated for the various customer communities.

Eric DeMarco: It's the latter, Mike, where we're definitely giving the different customers who have different priorities options. And the path we've taken now with, where we sit today with rail-launched drones flying, runway-launched drones flying with the trolley, as you indicated very soon. We're going to have a Valkyrie with its own internal gear, which will also have internal weapons flying. And then we have another one; Ghost Works is working on coming also. We will have the entire portfolio flying demonstrated for the various customer community.

Michael Ciarmoli: It's the latter, Mike, we're...

Mike: We're definitely giving the different customers who have different priorities options.

Michael Ciarmoli: and...

Mike: The path we've taken now.

Speaker Change: where we sit today with rail-launched drones flying, runway-launched drones flying with the trolley. As you indicated, very soon we're going to have a Valkyrie with its own internal gear, which will also have internal weapons.

Mike: flying, and then we have another one GhostWorks is working on coming also.

Eric DeMarco: Additionally, our satellite business is also being impacted on the commercial side by the highly publicized technology and other issues being experienced by the manufacturers of software-defined satellites, which is delaying the award and or deployment of the related satellite system ground communication infrastructure, including Kratos'. However, we are now in source selection on several DOD national security and other program opportunities, certain of which we expect to receive either later this year or early next, which should put Kratos' satellite business back on a growth trajectory.

Michael Ciarmoli: We will have the entire portfolio flying, demonstrated for the various customer community.

Michael Ciarmoli: Okay, I got it. Last one for me.

Operator: Okay, I got it. Last one for me.

Michael Ciarmoli: Okay. Got it.

Eric DeMarco: Lesson for me. The contract in place with GE Aerospace. I think I can get replaces of a previous joint development, but this one includes kind of full scale engine production.

Speaker Change: Okay, got it. Last one for me. The contract in place with GE Aerospace, I think that replaces a previous joint development, but this one includes kind of a full-scale engine production. Have you spoke to or could you speak to the potential economics there?

Eric DeMarco: The contract in place with GE Aerospace, I think that replaces a previous joint development, but this one includes kind of full-scale engine production. Have you spoken to or could you speak to the potential economics there? You know, just maybe what that program could look like as it ramps up as it gets into full production. Do you have customers secured already?

Eric DeMarco: Have you spoke to or could you speak to the potential economics there? You know, just maybe what that program could look like as it ramps, as it gets into full production. Do you have customer security already?

Speaker Change: You know, just maybe what that program could look like as it ramps, as it gets into full production. Do you have customers secured already?

Eric DeMarco: So, I'll take the last part, on the customers we have, we have multiple. We, us, and General Electric. We have multiple customers that have been working with us for the last several months. They are in the loop, and they are waiting for these entries.

Eric DeMarco: So, I'll take the last part, on the customers we have. We have multiple, we, us, and General Electric. We have multiple customers that have been working with us for the last several months. They are in the loop, and they are waiting for these entries.

Eric DeMarco: So, on, on, I'll take the last part first. On the customers we have, we have multiple; we, us in general electric. We have multiple customers that have been working with us for the last several months. They are in the loop when they are waiting for these engines.

Speaker Change: so on i'll take the last part first on the customers we have we have multiple us and general electctor

Eric DeMarco: With a large number of Leo, Mio, and Geoconstellations in the satellite's plans for or expected to be launched, we remain confident in the future prospects for our satellite business including our first-to-market virtualized open space software platform, which is a clear competitive differentiator for our company. Increased demand for our target-drone business continued in Q2. With bookings of nearly 130 million and a book to bill ratio of 1.5 to 1 for the quarter, and Kratos' unmanned systems bookings being 290 million for the past 12 months.

Speaker Change: We have multiple customers that have been working with us for the last several months. They are in the loop and they are waiting for these engines.

Eric DeMarco: So, that, that is why we, us in GE, we're very excited about this. Because with, with the technical capability and the cost points of these engines, which will be here very soon, we, we are going to be for, and every time I say we, it's us in them, we're going to be first to market with what we believe is a game changing family of systems here.

Eric DeMarco: That is why we, us and GE, are very excited about this because with the technical capability and the cost points of these engines, they will be here very soon. We are going to be first, and every time I say we, it's us and them. We're going to be first to market with what we believe is a game-changing family of systems here. The economics are very attractive. I can't discuss it yet because we're both still under an NDA.

Eric DeMarco: That is why we, us and GE, are very excited about this, because with the technical capability and the cost points of these engines, they will be here very soon. We are going to be first, and every time I say we, it's us and them. We're going to be first to market with what we believe is a game-changing family of systems here. The economics are very attractive. I can't discuss it yet because we're both still under an NDA.

Speaker Change: so that is why we andg po re very excited about this because with the technical capability and the cost point of these engines

Michael Ciarmoli: which will be here very soon. We are going to be first, and every time I say we, it's us and them. We're going to be first to market with what we believe is a game-changing family of systems here.

Eric DeMarco: The economics are very fair.

Eric DeMarco: Global weapon, air defense system, and training demand I referred to is contributing to the increased Kratos target-drone demand, which is expected to continue, both domestically and internationally, as air defense systems, missiles, radars, ships, satellites, etc. Need to be exercised against, and warfighters trained against, through representative targets. Kratos' target-drone business is expected to be an important future organic growth contributor for our company. On tactical drums, as has been increasingly reported over the past few weeks, including just yesterday, budgets are tight and are expected to get tighter, affordability matters and is going to matter even more in the future, and we believe that potentially maybe better someday is the enemy of good enough and flying today, and Kratos remains confident in our success.

Eric DeMarco: I can't discuss it yet because we're both still under an NDA. But we are, and I believe they are extremely happy what the economics split is going to be on the engine production.

Michael Ciarmoli: The economics are very fair. I can't discuss it yet because we're both still under an NDA. But we are, and I believe they are, extremely happy with what the economic split is going to be on the engine production. And as you know at Kratos.

Eric DeMarco: But we are, and I believe they are, extremely happy with what the economic split is going to be on the engine production. And, as you know at Kratos, it's better to have a big part of something than all of nothing, and we were confident that with GE, with potential customers, the big airframers, the big missile guys, this significantly increased or assured our probability of success.

Eric DeMarco: And as you know, at Kratos, it's better to have a big part of something than all of nothing. And we were confident that with GE, with potential customers and the big air framers, the big missile guys, the significantly increased or assured our probability of success.

Michael Ciarmoli: It's better to have a big part of something than all of nothing, and we were confident that with GE, with potential customers, and the big air framers, the big missile guys, this significantly increased or assured our probability of success.

Michael Ciarmoli: Got it. Perfect. Thanks guys. I'll get out of the way here.

Operator: Got it. Perfect. Thanks guys. I'll get out of the way here. Yeah.

Michael Ciarmoli: Got it. Perfect. Thanks, guys.

Michael Ciarmoli: Got it. Perfect. Thanks, guys. I'll get out of the way here.

Operator: I'll get out of the way. Yep.

Speaker Change: got the perfect s guyss g to the waer

Peter Arment: Thank you. Our next question is from Peter Arment with Bayard. Good afternoon, Eric and Deanna. Eric, congratulations on the Air and East hypersonic test flight.

Operator: Thank you. Our next question is from Peter Arment with Bayer.

Peter Arment: Good afternoon, Eric and Deanna. Eric, congratulations on the Irenes hypersonic test flight. Could you maybe talk about how you kind of see future subsequent tests or flights and how that, you know, can play out as we get into maybe even 25 as it's turned into a kind of a backlog growth story. And and obviously, you have another vehicle that is also part of that program. Yeah.

Peter Arment: Good afternoon, Eric and Deanna.

Speaker Change: Thank you. Our next question is from Peter Arment with Baird.

Eric DeMarco: Hey Eric, congratulations on the Irenes Hypersonic test flight. Could you maybe talk about how you kind of see future subsequent tests or flights and how that can play out as we get into maybe even 25 as it's turned into kind of a backlog growth story, and obviously, you have another vehicle that is also part of that program?

Peter Arment: Good afternoon Eric and Deanna. Hey Eric, congratulations on the Irenes hypersonic test flight. Could you maybe talk about how you kind of see future subsequent tests or flights?

Eric DeMarco: Could you maybe talk about how you see future subsequent tests or flights and how that can play out as we get into maybe even 25s as it's turned into a backlog growth story and obviously you have another vehicle that is also part of that program. Yep. So Air and East is a hypersonic ride vehicle, and it's at least the current public version as a test bit. And hypersonic testing is something that is in incredibly high demand in the United States. There are not enough test assets. And if you look at some of the government agencies, say they would like to test-fly every week or two.

Eric DeMarco: Apollo is now under contract, and Athena has been down-selected and has expected to be under contract this quarter. Kratos Valkyrie is now in source selection on certain opportunities so I am not able to make any specific program opportunity or customer related comments on Valkyrie at this time. I can say that we have completed our planning for the next serial production run of Valkyries, including with our key suppliers and we are ready to move forward once we have certain additional information on the potential opportunities including the final version and capability mix of the aircraft.

Speaker Change: How that, you know, can play out as we get into maybe even 25 as it's turned into kind of a backlog growth story. And obviously you have another vehicle that is also part of that program.

Eric DeMarco: Yep. So Aeronese is a hypersonic glider vehicle, and it's at least the current, public version of the test bed. And hypersonic testing is something that is in incredibly high demand in the United States. There are not enough test assets, and if you look at some of what the government agencies say, they would like to test fly every week or two.

Speaker Change: Yep.

Speaker Change: Yep, so Aeronese is a hypersonic ride vehicle and it's at least the current public version is a test bed. And hypersonic testing is something that is in incredibly high demand in the United States.

Eric DeMarco: We are now planning the expansion of our Oklahoma drone manufacturing capacity including a potential additional facility with the expansion being for both tactical and target drones including as certain of our drone systems are utilized for multiple applications or missions based on mission configuration of the system. With a successful Valkyrie flight from the Kratos Trolley Launch System, Kratos' ghost works is now working on an additional Valkyrie launch capability variant also in close coordination with the customer.

Michael Ciarmoli: There are not enough test assets, and if you look at some of what the government agencies say, they would like to test.

Eric DeMarco: Well, we now have that vehicle. We've received additional orders since that since that flight. This will be one of our primary growth drivers. This is a new obviously new for us new for the industry. This will be one of our primary growth drivers beginning next year.

Eric DeMarco: Well, we now have that vehicle, and we've received additional orders since that flight. This will be one of our primary growth drivers. This is new, obviously new for us, but also new for the industry. This will be one of our primary growth drivers beginning next year. I believe in the mock TB program and under an additional program that we have. And then we're gonna be talking hopefully maybe a little earlier than this time next year about a second hypersonic vehicle of ours that's gonna fly. That'll be an additional market for us. So this is very important.

Peter Arment: Well, we now have that vehicle, and we've received additional orders since that flight. This will be one of our primary growth drivers. This is new, obviously new for us, but also new for the industry. This will be one of our primary growth drivers beginning next year. I believe it is under the Mach-TB program and under an additional program that we have. And then we're going to be talking hopefully maybe a little earlier than this time next year about a second hypersonic vehicle of ours that's going to fly. That'll be an additional mark. So this is very important for us. I'm really glad you asked the question.

Michael Ciarmoli: fly every week or two.

Michael Ciarmoli: Well, we now have that vehicle, we've received additional orders since that flight.

Michael Ciarmoli: This will be one of our primary growth drivers. This is obviously new for us, new for the industry. This will be one of our primary growth drivers beginning next year. I believe under the MockTB program and under an additional program that we have.

Eric DeMarco: I believe under the mock TV program and under an additional program that we have, and then we're going to be talking hopefully maybe a little earlier than this time next year about a second hypersonic vehicle of ours that's going to fly. That'll be an additional market for us. So this is a very important for us. I'm really glad you asked a question.

Michael Ciarmoli: And then we're going to be talking, hopefully, maybe a little earlier than this time next year, about a second hypersonic vehicle of ours that's going to fly that will be an additional market for us. So this is very important for us. I'm really glad you asked the question.

Eric DeMarco: The Valkyrie Trolley Launch System funded by Kratos but in close coordination with the customer community establishes Kratos as the only high performance jet drone system provider with rail launched runway independence, traditional runway capability and soon an additional launch capability. Kratos' ghost works is also looking ahead at new and evolving weapon systems. There are applicability unmanned systems including Valkyrie, the impact of artificial intelligence integration and the potential game changing impact of a system like this in a peer conflict.

Eric DeMarco: So do you anticipate a ramp-up and test activity next year, and do we have a similar revenue profile? Absolutely.

Eric DeMarco: So do you anticipate a ramp up in test activity next year and have a similar, you know, revenue profile? Absolutely. Right.

Michael Ciarmoli: so

Speaker Change: So, do you anticipate a ramp-up in test activity next year in...

Michael Ciarmoli: and we have a similar, you know, revenue profile.

Peter Arment: And then just on your engine businesses, obviously, there is a lot of excitement around both of them, TDI and Florida Turbine. Can you talk a little bit about how quickly you can scale up? Because I know that the Air Force has kind of put out an RFI and an RFP on the ERAM extended-range attack munition that's specifically for Ukraine, and it feels like that's right in the wheelhouse of TDI. But you've talked about your other partnership with Boeing and jointly developing systems there. Can you maybe talk about how quickly you can scale up some of these opportunities? Yeah, um, and

Eric DeMarco: And then just on your engine businesses, obviously, a lot of excitement around both of them, TDI and Florida Turbine. Can you talk a little bit about how quickly you can scale up? Because I know that the Air Force has kind of put out an RFI and an RFP on the ERAM extended-range attack munition that's specifically for Ukraine.

Eric DeMarco: Great. And then just on your engine businesses, obviously a lot of excitement around both of them TDI and Florida turbine.

Michael Ciarmoli: Absolutely. Absolutely.

Speaker Change: Great. And then just on your engine businesses, obviously a lot of excitement around both of them, TDI and...

Eric DeMarco: Can you talk a little bit about how quickly you can scale up because I know that the Air Force is going to put out an RFI and an RFP on the E-RAM Extender Range Technician that is specifically for Ukraine. And it feels like that's right in the wheelhouse of TDI, but you know you've talked about your other partner with following the jointly developing systems there. You maybe talk about how quickly you can scale up some of these opportunities. Yeah. And in addition to E-RAM. Some of the other publicly available ones are Mace, ETV, Franklin, and Cams. So those are all out there.

Michael Ciarmoli: Florida Turbine. Can you talk a little bit about how quickly you can scale up because I know that the

Eric DeMarco: Kratos and Shield continued to successfully execute the strategy with Shield AI routinely flying Kratos' high performance jet drone systems including an incredible mission in just the past few days. From my perspective, what Shield is doing is potentially transformative and game changes with Shield taking advantage of Kratos having the only high performance jet drones that have performed hundreds of actual flight missions with Shield's artificial intelligence system flying and flying and learning and learning with the highest performance jet drones in the world, Kratos.

Michael Ciarmoli: The Air Force has kind of put out an RFI and an RFP on the...

Eric DeMarco: And it feels like that's right in the wheelhouse of TDI. But you know, you've talked about your other partnership with Boeing and jointly developing systems there. You could maybe talk about how quickly you can scale up some of these opportunities. Yeah, um, and

Speaker Change: ERAM Extended Range Attack Munition that's specifically for Ukraine, and it feels like that's right in the wheelhouse of TDI, but you know, you've talked about your other partner with Boeing and jointly developing systems there. Can you maybe talk about how quickly you can scale up some of these opportunities?

Eric DeMarco: Yeah, and in addition to E-RAM, some of the other publicly available ones are MACE, ATV, Franklin, and CAM. So those are all out there. There's a handful of other ones in addition to those, virtually all of which need propulsion systems, in the family and the affordability class of TDI. And those are, and then, of course, there's Power JDAM.

Eric DeMarco: Yeah, and in addition to ERAM, some of the other publicly available ones are MACE, Franklin, and CAM.

Speaker Change: Yeah, and in addition to E-RAM...

Michael Ciarmoli: Some of the other publicly available ones are Mace.

Eric DeMarco: So those are all out there. There are a handful of other ones in addition to those, virtually all of which need propulsion systems in the family and the affordability class of TDI. And those are, and then, of course, there's Power JDAM.

Michael Ciarmoli: ETV

Eric DeMarco: The Marine Corps Miramar Air Show is coming up this September here in San Diego and in addition to an actual Valkyrie, an actual air wolf, a Mako aircraft, etc. We intend on displaying several other high performance Kratos jet drone aircraft at the show and also potentially a new Kratos system if we can. Defense budgets are increasing globally including in the areas of air defense missiles radar space satellite hypersonic engines propulsion systems C5 ISR microwave electronics drone cyber and training systems with Kratos being a hardware and software rich technology company addressing each of these areas and many others.

Eric DeMarco: There's a handful of other ones that are addition to those, virtually all with which need propulsion systems in the family and the affordability class of TDI. And then, of course, there's power, JDM.

Speaker Change: Franklin

Speaker Change: and CAMS.

Speaker Change: So those are all out there.

Speaker Change: There's a handful of other ones in addition to those.

Speaker Change: virtually all of which need propulsion systems in the family and the affordability class of TDI.

Eric DeMarco: We, uh... We have been working on our production facility and our manufacturing capability so we will be able to make hundreds, if not a thousand or two a year. That's what we're getting ready for. If you take a look at some of those programs I mentioned, the quantities are there. If we just get our fair share of those, which we believe we will, based on our communications with the customers, the airframers, and our designed-in positions on certain. So we've been getting ready for this, and those are the numbers that we're preparing to produce that annually.

Eric DeMarco: We, uh... We have been working on our production facility and our manufacturing capability so we will be able to make hundreds, if not a thousand or two a year. That's what we're getting ready for. If you take a look at some of those programs I mentioned, the quantities are there. If we just get our fair share of those, which we believe we will, based on our communications with the customers, the airframers, and our designed-in positions on search. So we've been getting ready for this, and those are the numbers that we're preparing to produce annually.

Eric DeMarco: We have been working on our production facility and our manufacturing capability. So we will be able to do hundreds, if not a thousand or two, a year. That's what we're getting ready for. And if you take a look at some of those programs, I mentioned, the quantities are there. If we just get our fair share of those, which we believe we will based on our communications with the customers, the air framers, and are designed in positions on certain of these. So we've been getting ready for this, and those are the numbers that we're preparing to produce that annually.

Speaker Change: And those are and then of course there's PowerJDAM.

Speaker Change: we are

Michael Ciarmoli: We have been working on our production facility and our manufacturing capability, so we will be able to do hundreds, if not a thousand or two a year.

Speaker Change: That's what we're getting ready for.

Speaker Change: And if you take a look at some of those programs I mentioned, the quantities are there if we just get our fair share of those, which we believe we will, based on our communications with the customers, the airframers, and our designed-in positions on certain of these.

Eric DeMarco: Years of under investment in the defense industrial base is and will need to be corrected and Kratos is participating in this build-up and the recapitalization for the strategic weapons. We are making the investments and vertically integrating selectively where it matters to reduce supply chain risk and to also reduce cyber and physical related security risks as we need both security and security with our supply chain. Producing hardware in large quantities for defense and national security applications that must reliably perform at an affordable cost is hard and it's a key differentiator for Kratos to our partners and our customers.

Speaker Change: So we've been getting ready for this, and those are the numbers that we're preparing to produce that annually.

Eric DeMarco: That last one for me, could you talk a little bit about your bid pipeline expanded by a billion dollars this quarter and went up to 12 billion. What was driving that? Thanks.

Peter Arment: Got it. Last one for me. Could you talk a little bit about your bid pipeline expanding by a billion dollars this quarter, up to $12 billion? What was driving that?

Eric DeMarco: Got it. Last one for me, just, could you talk a little bit about your bid pipeline expanding by, you know, a billion dollars this quarter went up to 12 billion? You know, what was driving that? Thanks.

Speaker Change: Got it. Last one for me. Could you talk a little bit about your bid pipeline expanded by a billion dollars this quarter, up to $12 billion? What was driving that? Thanks.

Eric DeMarco: Yeah, so that's Peter. It's in our unmanned group as well as our space and training group and our defense rocket systems group. It's across those three businesses. So it's not one specific area; it's across three.

Eric DeMarco: Yeah, so that's Peter, it's in our unmanned group, as well as our space and training group, and our defense rocket systems group. It's across those three businesses. So it's not one specific area, it's across three.

Eric DeMarco: Yeah, so that's Peter. It's in our unmanned group, as well as our space and training group, and our fence rocket systems group. It's across those three businesses. So it's not one specific area. It's across three.

Speaker Change: Yeah, so that's Peter. It's in our unmanned group as well as our space and training group and our defense rocket systems group. It's across those three businesses.

Operator: Thanks, Diana. Thanks, guys. Thank you.

Speaker Change: So it's not one specific area, it's across three.

Operator: Thanks, Deanna. Thanks guys. Thank you. Thank you. Our next question is from the line of Sheila Kahyaoglu with Jeffrey's. Thank you guys and a great quarter. A few questions for you, Eric.

Operator: Thanks, Deanna. Thanks, guys. Thank you. Thank you. Our next question is from the line of Sheila Kahyaoglu with Jefferies. Thank you, guys, and great quarter. A few questions for you, Eric.

Eric DeMarco: As you know, the 2024 budget continuing resolution went through March of this year and another potential 2025 budget continuing resolution is expected to begin October 1st just two months from now. Irrespective, we remain confident in our 2024 financial guidance which we affirm today and we also remain confident in our expected future year over your organic growth rate of 10% with the potential to exceed it. As we reported, Kratos' opportunity pipeline is a record 12 billion and we are in pursuit of certain new large programs as a prime, including classified opportunities in our unmanned systems business and our space, cyber and training businesses which are requiring significant Kratos bid in proposal and related investments, including one opportunity where Kratos' investment in the second half of 24 is expected to be approximate. We have approximately 2 million for this one opportunity.

Operator: Thank you. Our next question is from the line of Sheila Kahyaoglu with Jefferies.

Operator: Thank you. Our next question is from the line of Sheila Kahyaoglu with Jeffrey's.

Sheila Kahyaoglu: Our next question is from the line of Sheila Cahill, Glue with Jeffries. Thank you guys in great quarter. A few questions for you, Eric and Diana, maybe when if we could start on that last subject, Peter, where she's talking about youth and arenas, how could we think about that hypersonic activity pipeline of a billion dollars? How could we think about that progressing over the next five years? Would it be, you know, equally weighted? Or how do we think about that opportunity of materializing? Yeah, if things come together the way we see them coming together. Next year, it could be in 25; it could be an incremental 50 to 100 million.

Deanna Lund: Thanks Deanna. Thanks guys.

Speaker Change: Thank you.

Speaker Change: Thank you. Our next question is from the line of Sheila Kahyaoglu with Jeffries.

Sheila Kahyaoglu: Thank you guys, and great quarter. A few questions for you, Eric and Deanna. Maybe if we could start on that last subject, Peter, which was talking about Zeus and Erinese.

Sheila Kahyaoglu: How could we think about that hypersonic activity pipeline of a billion dollars? How could we think about that progressing over the next five years? Would it be, you know, equally weighted? Or how do we think about that opportunity materializing?

Eric DeMarco: If things come together the way we see them coming together, next year, in 2025, it could be an incremental $50 to $100 million. Then, in 26, it could be an incremental 100 to 150 million, and then it could be $150 to $200 million a year thereafter.

Eric DeMarco: If things come together the way we see them coming together, next year, in 2025, it could be an incremental $50 to $100 million. Then, in 26, it could be an incremental 100 to 150 million, and it could be $150 million to $200 million a year thereafter.

Speaker Change: If things come together the way we see them coming together.

Sheila Kahyaoglu: Next year, in 2025, it could be an incremental $50 to $100 million.

Eric DeMarco: Then in 26, it could be an incremental 100 to 150 million. And then it could be 150 to 200 million a year thereafter. Thank you. That's what the manifest looks like. Thank you for that.

Sheila Kahyaoglu: Then in 26, it could be an incremental 100 to 150 million.

Speaker Change: yeah

Operator: Thank you, Eric. And what is it? Thank you for that.

Eric DeMarco: Thank you, Eric. And what? That's what the manifesto says. Thank you for that.

Speaker Change: and that it could be $150 to $200 million a year thereafter.

Eric DeMarco: We have no significant acquisitions anticipated, only maybe potentially some very small tokens.

Speaker Change: That's what the manifest looks like.

Eric DeMarco: What do you need to see in order for that to happen? Budget, budget in place. No significant changes to the priorities of this customer set. And, and I'm saying this is some might, the sheet, decisiously, and global peace doesn't break out. So, you know, we're, Sheila, we're in a really good position because we're first to market with zoos, aronies, and another system that's not public. yet. We're in a great spot, and these things are flying. Yeah, no, that makes sense.

Eric DeMarco: What do you need to see in order for that to happen? Budget, the budget's in place. No significant changes to the priorities of this customer set, and uh... And I'm saying this semi-facetiously, and global peace doesn't break out. We're, we're, we're, Sheila, we're in a really good position because we're first to market with Zeus, Aeronese, and another system that's not public. We're in a great spot, and these things are flying. Yeah, no, that makes sense. And in addition,

Sheila Kahyaoglu: What do you need to see in order for that to happen? Budget, the budget's in place. No significant changes to the priorities of this customer set. And I'm saying this semi- facetiously, so that global peace doesn't break out. We're, we're, Sheila, we're in a really good position because we're first to market with Zeus, Aeronese, and another system that's not public. We're in a great spot, and these things are flying. Yeah, no, that makes sense. And

Speaker Change: Thank you for that.

Speaker Change: What do you need to see in order for that to happen?

Eric DeMarco: Operational challenges include the obtaining and retaining of qualified experience personnel, including those willing and able to obtain national security clearances and the related cost of these individuals.

Speaker Change: Budget. Budget's in place.

Speaker Change: No significant changes to the priorities of this customer set.

Speaker Change: and

Deanna Lund: Ms. Deanna.

Deanna Lund: Thank you, Eric.

Speaker Change: And I'm saying this semi-facetiously, and global peace doesn't break out.

Deanna Lund: Good afternoon. As we have included a detailed summary of the second quarter financial performance, as well as the initial third quarter and affirmation of the four year 2024 financial guidance in the press release we published earlier today, I will focus on the highlights in my remarks today. Revenue for the second quarter were 300.1 million exceeding our estimated range of 265 to 280 million, which includes higher than expected performance and delivery across most of our businesses with notable strengths in our unmanned systems, turbine technologies, microwave products and C5 ISR businesses.

Speaker Change: chop

Speaker Change: We're, Sheila, we're in a really good position because we're first to market with Zeus, Aeronese, and another system that's not public yet.

Deanna Lund: And in unmanned, your profitability was really good year over year. Is that sort of the level we should expect going forward, or was this one time? It will depend on the mix and the from a development perspective and the leverage off of the fixed infrastructure costs since we did have a sizable international drone delivery. This quarter of 17.4 million, so that did drive some of that leverage off of the fixed infrastructure, but it will also depend on the mix of the programs on a quarterly basis. Got it.

Speaker Change: We're in a great spot and these things are flying.

Speaker Change: Yeah, no, that makes sense. In Unmanned, your profitability was really good year over year. Is that sort of the level we should expect going forward or was this one time?

Deanna Lund: It will depend on the mix from a development perspective and the leverage off of the fixed infrastructure costs since we did have a sizable international drone delivery this quarter of $17.4 million, so that did drive some of that leverage off of the fixed infrastructure, but it will also depend on the mix of the programs on a quarterly basis.

Speaker Change: It will depend on the mix and the, from a development perspective, and the leverage off of the fixed infrastructure costs, since we did have

Deanna Lund: We made delivery on an international Middle Eastern drone program during the second quarter, which contributed revenues of 17.4 million, which was originally forecasted to be delivered in Q3. As we have discussed on previous calls, revenues under certain international contract awards due to the contract terms and conditions are recorded as delivered rather than over time on a percentage of completion basis. As a result, the delivery under a contract of size, such as a delivery this quarter, can skew the quarter of delivery over quarter sequential trends.

Speaker Change: A sizable international drone delivery this quarter of 17.4 million, so that did drive some of that.

Speaker Change: leverage off of the fixed infrastructure, but it will also depend on the mix of the programs on a quarterly basis.

Sheila Kahyaoglu: Thank you so much.

Operator: Thanks.

Operator: Thank you.

Operator: Thank you. Our next question comes from the line of Mike Crawford with B-Riley Securities.

Operator: Thank you. Our next question comes from the line of Mike Crawford with Be Riley Securities. All right.

Mike Crawford: Our next question comes from the line of Mike Crawford with B. Riley Securities.

Speaker Change: got it thank you so much

Speaker Change: Thanks.

Speaker Change: Thank you. Our next question comes from the line of Mike Crawford with Be Riley Securities.

Mike Crawford: Thank you.

Michael Crawford: Thank you. Just a couple of clarifications first. When you're talking about readying for your next serial production spiral of Valkyrie, would that be the third such spiral? Or are you talking about the, you're not talking about the second one you already began, right? The third.

Michael Crawford: Thank you. First, I just want to clarify something. When you're talking about readying for your next serial production spiral of Valkyrie, would that be the third such spiral? Or are you talking about the third one? You're not talking about the second one, you've already begun, right? Right. And then, thank you, and then. You talked about expanding Oklahoma for tactical and target drones, but isn't that also where you're standing up affordable engine production with GE Aerospace?

Mike Crawford: Just a couple of clarifications first. What you're talking about. Redding for your next serial production spiral of Valkyrie. Would that be the third such spiral? Are you talking about the, you're not talking about the second one you already began, right? The third, right.

Deanna Lund: Consolidated organic revenue growth was 16.7% for the second quarter, including the impact of the Sierra technical services or SPSX, on a pro-forma basis as it acquired at the beginning of 2023, driven primarily by organic growth in the unmanned systems business of 61.8%, as well as notable growth in the turbine technology's microwave products and see five ISR businesses in our KGS segment. Adjusted EBITDA for the second quarter of 2024 was 29.9 million exceeding our estimated range of 20 to 23 million, reflecting the additional revenues as well as a more favorable mix of higher margin revenues with notable strength in unmanned systems, turbine technologies, microwave products and RC five ISR businesses, as well as higher margin software and data-related content from our satellite business.

Mike Crawford: Thank you. Just a couple of clarifications first. When you're talking about readying for your next

Mike Crawford: The first serial production spiral of Valkyrie, would that be the third such spiral? You're not talking about the second one you already began, right?

Mike Crawford: And then, thank you.

Eric DeMarco: Right. Amen. Thank you. Amen. You talked about expanding Oklahoma for tactical and target drones, but isn't that also where you're standing up affordable engine production with GE Aerospace?

Eric DeMarco: And then you talked about expanding Oklahoma for tactical and entire drones, but isn't that also where you're standing up affordable engine production with GEL space? Mike, I'm smiling because I saw that report. That news article. We saw our drone manufacturing facilities are in Oklahoma City. And that's where the expansion for the tactical and the target drones will be, both in the existing facility and a brand new facility we've already identified and were moving out on. Outside of Tulsa, Oklahoma, is where our existing engine business is. And it is probable that that is where we will be standing up our one of our low cost on turbofan with the UK.

Speaker Change: The third.

Speaker Change: Right.

Speaker Change: And then, thank you, and then.

Speaker Change: You talked about expanding Oklahoma for tactical and target drones, but isn't that also where you're standing up affordable engine production with GE Aerospace?

Michael Crawford: Mike, I'm smiling because I saw that report, that news article. So our drone manufacturing facilities are in Oklahoma City. And that's where the expansion for the tactical and the target drones will be, both in the existing facility and a brand new facility we've already identified and we're moving out on. Outside of Tulsa, Oklahoma, is where our existing engine business is, and it is probable that that is where we will be standing up one of our low-cost.

Eric DeMarco: Mike, I'm smiling because I saw that report, that news article. So our drone manufacturing facilities are in Oklahoma City. And that's where the expansion for the tactical and the target drones will be, both in the existing facility and a brand new facility we've already identified and we're moving out on. Outside of Tulsa, Oklahoma is where our existing engine business is, and it is probable that that is where we will be standing up one of our low costs.

Speaker Change: Mike, I'm smiling because I saw that report.

Speaker Change: that news article.

Speaker Change: So our drone manufacturing facilities are in Oklahoma City.

Mike Crawford: And that's where the expansion for the tactical and the target drones will be, both in the existing facility and a brand new facility we've already identified and we're moving out on.

Deanna Lund: Cash use and operating activities was 2.7 million, which includes the impact of working capital requirements related to increases and related to the revenue growth, increases in prepaid assets resulting from advanced payments or deposits required by key suppliers, and the reduction of deferred revenue balances or prepaid customer deposits as work has been performed and delivered. We are seeing a trend in our supply chain where certain of our vendors are requiring prepayments or deposits to secure our position, which is adversely impacting the timing of our working capital requirements to deliver our products and solutions.

Mike Crawford: Outside of Tulsa, Oklahoma is where our existing engine business is.

Mike Crawford: and it is probable...

Mike Crawford: That that is where we will be standing up our

Michael Crawford: Turbofan with GEK. And the primary reason for that is the workforce. We have a very experienced workforce with engines there already. We're networked. We've got the supply chains, and it looks very promising that that's what we're going to do.

Eric DeMarco: Turbofan with GEK. And the primary reason for that is because the workforce. We have a very experienced workforce with engines already in place, we're networked, we've got the supply chains, and it looks very promising that that's what we're going to do.

Eric DeMarco: And the primary reason for that is because the workforce; we have a very experienced workforce with engines there already. There were networked. We've got the supply chains. We, it looks very promising that that's what we're going to do it. And would that workforce also include workers directly, directly supplied from GEL space?

Mike Crawford: One of our low-cost turbofan with GEK.

Mike Crawford: and the primary reason for that is because the workforce. We have a very experienced workforce with engines there already. We're networked. We've got the supply chains. It looks very promising that that's where we're going to do it.

Deanna Lund: Free cash flow used from operations for the quarter was 15.4 million after funding of CAPEX of 12.7 million. 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 systems and hypersonic businesses to meet existing and anticipated customer orders and requirements and investing in related new machinery equipment and systems. We are also continuing to manufacture the two production lines of Valkyrie's prior to contract award.

Eric DeMarco: And would that workforce also include workers directly or indirectly supplied from GE Aerospace?

Eric DeMarco: And would that workforce also include workers, Thank you, directly or indirectly supplied from GE Aerospace?

Speaker Change: And would that workforce also include workers directly or indirectly supplied from GE Aerospace?

Eric DeMarco: I can't get into that yet until the final definitive agreement is executed, and then we will jointly communicate that. I'm sorry.

Eric DeMarco: I can't get into that yet until the final definitive agreement is executed, and then we jointly will communicate that I'm sorry.

Speaker Change: I can't get into that yet until the final definitive agreement is executed and then we jointly will communicate that. I'm sorry. Okay, that's fine. And then, switching gears a little bit, could you...

Mike Crawford: Okay, that's fine.

Michael Crawford: Okay, that's fine. And then, I'm switching gears a little bit. Could you maybe update us on the state of solid rocket motor propulsion, where you stand versus competitors, some of which seem to have claims perhaps above means.

Eric DeMarco: And then switching gears a little bit. Could you maybe update us on the lay in the lay and solid rocket motor propulsion, where you stand versus competitors, some of which seem to have claims perhaps above means. Yep, that's that's actually an excellent question. Rocket motors are hard, and solid rocket motors are extremely hard, and the lay of the land right now is there are two that are qualified in the United States: Aerojet and ATK, North-Ruborbit Lake TK and L3 Aerojet, all right? Neither one of them is a really emergency supplier because they're embedded in a prime.

Deanna Lund: Consolidated DSOs or day sales outstanding continue to improve from 107 days in the first quarter of 2024 to 103 days in the second quarter of 24. Contract mix for the second quarter was 70% fixed price, 24% cost plus contracts and 6% time and material contracts. Revenue is generated from contracts with the U.S, federal government during the second quarter of 24 was approximately 65% including revenues generated from contracts with the DOD, non-DOD federal government agencies and FMS contracts.

Speaker Change: maybe update us on the lay of the land solid rocket motor propulsion where you stand versus competitors some of which seem to have

Eric DeMarco: Yeah, that's a, that's a, that's actually an excellent question. Rocket motors are hard, and solid rocket motors are extremely hard. And the lay of the land right now is that there are two that are qualified in the United States, Aerojet and ATK, North Orbital ATK and L3 Aerojet, all right? But neither one of them is really a merchant supplier because they're embedded in a prime. And as you've indicated, there are a number of guys out there. Some of them are like Ursa Major, or Crossbow, or Adronis, which is part of Androal.

Eric DeMarco: Yeah, that's actually an excellent question. Rocket motors are hard, and solid rocket motors are extremely hard. And the lay of the land right now is that there are two that are qualified in the United States, Aerojet and ATK, or Northrop Orbital ATK and L-3 Aerojet, all right? But neither one of them is really a merchant supplier because they're embedded in a prime. And as you've indicated, there are a number of guys out there, some of them are like Ursa Major or Crossbow or Adronis, which is part of Andruil. There are a couple of other ones that are coming. They've said they're going to get in. But, Mike, this is very hard.

Speaker Change: claims, perhaps above means.

Speaker Change: Yeah, that's a, that's a, that's actually an excellent question.

Speaker Change: Rocket motors are hard.

Speaker Change: and solid rocket motors are extremely hard

Speaker Change: And the lay of the land right now is there are two that are qualified in the United States, Aerojet and ATK, Northrop Orbital ATK and L-3 Aerojet, all right?

Deanna Lund: In the second quarter of 24, we generated 15% of revenues from commercial customers and 20% informed customers. An operational priority remains the hiring and retention of skilled technical labor across the company with total credos head count of 4,012 at the end of the second quarter as compared to 3986 at the end of the first quarter.

Speaker Change: Neither one of them are really a merchant supplier because they're embedded in a prime.

Eric DeMarco: And as you've indicated, there are a number of guys out there; some of them are like some major or crossbow or a drawness, which is part of Android. There's a couple of other ones that are coming; they said they're going to get into this. But Mike, this is very hard, and less the rules change, the qualification rules, it takes years to get qualified, and it takes years to get qualified and designed in on a system, flight testing, etc. And so the demand is definitely there; there are some guys coming.

Speaker Change: And as you've indicated, there are a number of guys out there, some of them are like Ursa Major, or Crossbow, or Adronis, which is part of Andruil, there's a couple of other ones that are coming, they've said they're going to get into this.

Eric DeMarco: There are a couple of other ones that are coming. They've said they're going to get in. But Mike, this is very hard.

Eric DeMarco: And unless the rules change, the qualification rules, it takes years to get qualified, and it takes years to get qualified and designed and on a system flight test. And so, and so the demand is definitely there; there are some guys. I will tell you that because of the nature of our business and our customers... Being a merchant supplier of solid rocket motors in the United States is something we continue to look at very hard, because we would be a true merchant supplier and we're experts in this area. And so that's something we're definitely looking at, relative to our partnerships with the primes.

Eric DeMarco: And unless the rules change, the qualification rules, it takes years to get qualified, and it takes years to get qualified and designed and on a system flight test. And so, and so the demand is definitely there. There are some guys out there, I'll tell you that because of the nature of our business and our customers... Being a merchant supplier of solid rocket motors in the United States is something we continue to look at very hard, because we would be a true merchant supplier and we're experts in this area, and so that's something we're definitely looking at, relative to our partnerships with the primes.

Deanna Lund: Now moving 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 costs. We have also taken into consideration in our affirmed fiscal 24 guidance. A federal fiscal year 2025 continuing resolution authorization commenting on October 1, 24 and under such expected CRA, no new program contract awards, no increases in existing production, and no transition from program development to production.

Speaker Change: But, Mike, this is very hard.

Mike Crawford: And unless the rules change, the qualification rules, it takes years to get qualified, and it takes years to get qualified and designed in on a system, flight testing, etc.

Mike Crawford: And so the demand is definitely there, there are some guys coming.

Eric DeMarco: I will tell you that because of the nature of our business and our customers, being a merchant supplier of solid rocket motors in the United States is something we continue to look at very hard, because we would be a true merchant supplier and we're experts in this area. And so that's something we're definitely looking at relative to our partnerships with the primes. Okay, thank you.

Speaker Change: I will tell you that because of the nature of our business and our customers,

Mike Crawford: You know, being a merchant supplier of solid rocket motors in the United States is something we continue to look at very hard.

Deanna Lund: Our guidance also reflects the impact of certain performance and deliveries made in the second quarter of 24, certain of which had originally been estimated to be executed or delivered in the third quarter of 24, the most notable of which was the delivery of the international drone program in the second quarter, which has skewed the sequential quarter trend in our unmanned systems business. We are affirming our annual guidance with revenues for unmanned systems in the range of 265 to 275 million, up slightly from our previous range of 260 to 270 million, with an organic growth rate of 22% to 27% over 23 on a performance basis with STS as if acquired at the beginning of 23.

Mike Crawford: because we would be a true merchant supplier and we're experts in this area.

Mike Crawford: And so that's something we're definitely looking at relative to our partnerships with the primes.

Michael Crawford: Okay, thank you. And then just one final one, because we haven't really talked about CCA on this call, but at some point, we'll be moving from more of the exquisite to like a realm of something more equitable.

Speaker Change: Okay thank you and then just one final one because we haven't really talked about CCA on this call but

Michael Crawford: And I think another article I read was that Ghost Bat now is not even being designed to carry weapons. So, versus, I think you have multiple platforms that have distributed that ability, right?

Eric DeMarco: And I think another article I read was that Ghost Bat now is not even being designed to carry weapons.

Eric DeMarco: And I think another article I read was that Ghost Bat now is not even being designed to carry weapons. So versus I think you have multiple platforms that have distributed that ability, right? Correct.

Speaker Change: At some point, we'll be moving from more of the exquisite to, like, a realm to something more equitable. And I think another article I read was that Ghost Bat now is not even being designed to carry weapons.

Speaker Change: I think you have multiple platforms that have distributed that ability, right?

Eric DeMarco: Correct. I saw that article that Boeing's Ghost Bat does not have carry weapons capability, which caught my eye, of course. I know it caught industry's eye. Yeah, multiple of our aircraft carry a deployed weapon, including Valkyrie, of course. And as I mentioned in the prepared remarks, we are, and we remain laser focused on affordability, attritability, and uh... and hitting cost points so affordable masks can really be achieved with things that are flying today, not potentially seven years from now.

Eric DeMarco: I saw that article that Boeing's Ghost Bat does not have carry weapons capability, which caught my eye, of course, I know it caught industry's eye. Yeah, multiple of our aircraft carry of deployed weapons and including battery, of course. And as I mentioned in the prepared remarks, we are we all we remain laser focused on affordability, a tritability and hitting cost points of affordable mass can really be achieved with things that are flying today.

Eric DeMarco: Correct. I saw that article that Boeing's Ghost Bat does not have carry weapons capability, which caught my eye, of course. I know it caught industry's eye. Yeah, multiple of our aircraft carry a deployed weapon, including Valkyrie, of course. And as I mentioned in the prepared remarks, we remain laser focused on affordability, attritability, and uh... and hitting cost points so affordable masks can really be achieved with things that are flying today, not potentially seven years from now.

Operator: Okay, thank you. Yep. Thank you. Our next question comes from the line of Seth Seifman.

Mike Crawford: Cool.

Deanna Lund: Our range for KGS business is 860 to 875 million, slightly down from our previous range of 865 million. We are going to provide to 880 million, which reflects increased weakness in our commercial satellite ground equipment business, resulting from the impact of the current industry technical challenges encountered in the manufacture of software defined satellites that have delayed satellite launches and have had a resulting delay in the deployment of our commercial satellite ground equipment, offset by increasing demand for air defense and related systems in our microwave products, turbine technologies and C5 ISR businesses.

Speaker Change: Correct, I saw that article that Boeing's Ghostbat does not have carry weapons capability, which caught my eye of course, I know it caught industry's eye.

Speaker Change: Yeah, multiple of our aircraft carry of deployed weapons.

Mike Crawford: and including Valkyrie, of course.

Mike Crawford: And as I mentioned in the prepared remarks, we remain laser focused.

Mike Crawford: on affordability, attritability,

Mike Crawford: and

Eric DeMarco: Not potentially seven years from now.

Mike Crawford: and hitting cost points so affordable masks can really be achieved with things that are flying today, not potentially seven years from now.

Deanna Lund: Our reaffirmed EBITDA range of 102 to 107 million, includes the expected mix, as well as additional 2 million in cost related to the large proposal in our space cyber and training business, which Eric referred to previously.

Operator: Okay, thank you. Thank you.

Operator: Okay, thank you, Eric. Yep. Thank you. Our next question comes from the line of Seth Seifman.

Operator: Thank you. Our next question comes from the line of Seth Seifman with J.P. Morgan. Good afternoon, this is Rocco on behalf of Seth.

Rocco: Our next question comes from the line of set. Seatman with JP Morgan. Good afternoon. This is Rocco on for Seth. Good afternoon.

Speaker Change: Okay, thank you.

Mike Crawford: Yep.

Speaker Change: Thank you. Our next question comes from the line of Seth Seifman with JP Morgan.

Deanna Lund: All right. Thank you, Diana.

Operator: We'll pass it to the moderator now for questions. Thank you.

Rocco: Looking at the Q3 guide, even X the 17.4 million of international target drone deliveries, the guidance is for sale to decrease next quarter sequentially. What is driving that decline? So primary decline in that. is in the commercial part of our satellite business. As I've mentioned in it, it really hit the press in the last three or four weeks. The manufacturers of the software-defined payload satellites are having some incredible technical difficulties, and the satellites are not going up. So with the satellites, and as you know, Kratos' open space software defined virtualized ground system was specifically designed, in part, to communicate with the software in order to sign satellites on the commercial side.

Mike Crawford: Good afternoon, this is Rocco on for Seth.

Michael Ciarmoli: And as I remind there, if you do have a question, press star 11 and wait for your name to be announced to remove yourself, just press star 11 again, one moment for our first question. Nikon from the line of Michael Sharmoly with tourist securities. Hey, good evening, guys. Thanks for taking the question. Eric, it sounds like you're making a lot of progress on a lot of programs. I guess just on on Valkyrie, you know, you mentioned that one close to source selection, you're you're moving forward with the second production lot.

Rocco: Good afternoon.

Speaker Change: Looking at the Q3 guide, even X the 17.4 million of international target drone deliveries, the guidance is for sales to decrease next quarter sequentially. What is driving that decline?

Seth Seifman: So the primary decline in that is in the commercial part of our satellite. As I've mentioned, and it really hit the press in the last three or four weeks.

Speaker Change: So, the primary decline in that...

Operator: So the primary decline in that is in the commercial part of our satellite. As I've mentioned, and it really hit the press in the last three or four weeks.

Speaker Change: is in the commercial part of our satellite business.

Eric DeMarco: The manufacturers of the software to find payload satellites are having some incredible technical difficulties, and the satellites are not going on. So with the satellites, and as you know, Kratos' open space, software-defined, virtualized ground system was specifically designed, in part, to communicate with these software-designed satellites. I'm talking in the commercial.

Speaker Change: As I've mentioned, and it really hit the press in the last three or four weeks,

Speaker Change: The manufacturers of the software to find payload satellites are having some incredible technical difficulties and the satellites are not going up.

Speaker Change: So, with the satellites, and as you know, Kratos' OpenSpace software-defined virtualized ground system was specifically designed, in part, to communicate with these software-designed satellites. I'm talking on the commercial side.

Michael Ciarmoli: Can you just give us maybe some sensitivity, I don't know if you or Diana, if you do get those, or if you do get a contract and you put some planes under contract, how that would impact the current guidance, maybe the cash flow and even the revenue impact. Sure. So Michael, so from a revenue perspective, when the contract is awarded, whatever the, the number of aircraft that the award is under contract for those costs that are currently in our PP and E would be transferred to effectively inventory and unbuilt receivables and revenue would be recorded for those systems.

Eric DeMarco: And as those satellites are not going up, the operators, and again, there was an incredible article on this just in the past few days that's out there that, of course, we've known, the operators are slowing down their supply chain, including the ground infrastructure. Guys like Kratos, they're going to communicate with them. So we're designed in, we've won the slots, but the operators are making the right business decision by not deploying until the satellites go up. And so we are being very cautious in our assumptions in the commercial side of our space business. It's being offset by the government side, which is doing great, and it's being offset by other businesses in KGS, which are growing 15%.

Eric DeMarco: As those satellites are not going up, the operators, and again, there was an incredible article on this just in the past few days that's out there that, of course, we've known. The operators are slowing down their supply chain, including the ground infrastructure. Guys like Kratos, they're going to communicate with them.

Eric DeMarco: As those satellites are not going up, the operators, and again there was an incredible article on this just in the past few days that's out there that, of course, we've known. The operators are slowing down their supply chain, including the ground infrastructure. Guys like Kratos, they're going to communicate with them.

Speaker Change: And as those satellites are not going up, the operators...

Mike Crawford: And again, there was an incredible article on this just in the past few days that's out there that, of course, we've known.

Michael Ciarmoli: So if it's five aircraft and that five that are in whatever state of completion, those costs would be transferred and then the revenue would be recorded accordingly for whatever percent complete they are, at that time. From a receivable or a collection perspective, it will depend on the billing milestones that we are able to negotiate with the customer. So depending on if we can get a payment upfront, we obviously always endeavor to do that, but it will depend on what we're able to negotiate.

Mike Crawford: The operators are slowing down their supply chain, including the ground infrastructure. Guys like Kratos, they're going to communicate with them. So we're designed in. We've won the slots.

Eric DeMarco: So we're designed in; we've won the slot. But the operators are making the right business decision by not deploying until the satellites go up. So we are being very cautious in our assumptions on the commercial side of our space business. It's being offset by the government side, which is doing great, and it's being offset by other businesses in KGS, which are growing 15 percent. But that's the primary reason we're going to be very cautious there until some of these commercial satellite issues get resolved. Right, that makes sense. Then has the outlook for combat drones and Kratos' position in the market changed meaningfully over the last few months?

Eric DeMarco: So we're designed in, we've won the slot, but the operators are making the right business decision by not deploying until the satellites go up. So we are being very cautious in our assumptions on the commercial side of our space business. It's being offset by the government side, which is doing great, and it's being offset by other businesses in KGS, which are growing 15 percent. But that's the primary reason we're going to be very cautious there until some of these commercial satellite issues get resolved.

Mike Crawford: But the operators are making the right business decision by not deploying until the satellites go up.

Speaker Change: And so we are being very cautious in our assumptions.

Mike Crawford: in the commercial side of our space business.

Mike Crawford: It's being offset by the government side, which is doing great, and it's being offset by other businesses in KGS, which are growing 15 percent. But that's the primary reason we're going to be very cautious there until some of these

Eric DeMarco: But that's the primary reason we're going to be very cautious there until some of these, these commercial satellite issues get resolved. Right, that makes sense.

Eric DeMarco: Right, that makes sense. But has the outlook for combat drones and Kratos' position in the market changed meaningfully over the last few months? Has it changed meaning? I believe we are in a better position. We were, I believe we've been in a great position. I believe we're in a better position today than we've ever been in. Let me tell you why.

Mike Crawford: to help these commercial satellite issues get resolved.

Eric DeMarco: Then has the outlook for combat drones and Kratos' position in the market changed meaningfully over the last few months? Has it changed meaningfully? I believe that we are in a better position. I believe we've been in a great position. I believe we're in a better position today than we've ever been in. Let me tell you why. Jet drones are happening. They are happening. And when you look to the Pacific and the ranges that are going to be involved in survivability or lack of survivability, which will be quantities, Kratos' class of jet drones is the answer.

Speaker Change: Right, that makes sense. Then has the outlook for combat drones and Kratos' position in the market changed meaningfully over the last few months?

Eric DeMarco: I believe we are in a better position. I believe we've been in a great position. I believe we're in a better position today than we've ever been in. Let me tell you why.

Speaker Change: Has it changed meaningfully?

Michael Ciarmoli: Okay, and do you think that's a, is that a second half kind of development and signing or are still hard to tell at this point? It's possible, second half, it's probable 25. Okay, that's where it sits right now, which is why we're just being cautious and our guidance. Got it. And Eric, I think you guys have had, you know, you've talked to different variants, different sizes. I know you have, in the prepare marks, you talked about the trolley system.

Speaker Change: I believe...

Speaker Change: that we are in a better position, I believe we've been in a great position, I believe we're in a better position today than we've ever been in.

Eric DeMarco: Jet drones are happening. They are happening. And when you look at the Pacific and the ranges that are going to be involved in survivability or lack of survivability, which will be quantities, Kratos' class of jet drones is the answer. There are more and more war games that are becoming public, reports that are coming out. The Mitchell Institute just put one out.

Seth Seifman: Jet drones are happening. They are happening. And when you look at the Pacific and the ranges that are going to be involved in survivability or lack of survivability, which will be quantities, Kratos' class of jet drones is the answer. There are more and more war games that are becoming public, reports that are coming out. The Mitchell Institute just put one out.

Speaker Change: Let me tell you why. Jet drones are happening.

Speaker Change: They are happening, and when you look to the Pacific and the ranges that are going to be involved in survivability or lack of survivability, which will be quantities,

Eric DeMarco: There are more and more war games that are becoming public reports that are coming out. The Mitchell Institute just put one out. There was an incredible report that just came out last night on this that quantities will do far better deterring and must be defeating China than exquisites or semi-exquisites. And we have been focusing on expendable and attributable drones. And that's our sweet spot. And they're low, low cost, and they're very lethal, and they're very survivable. And I think we're going to win.

Speaker Change: Kratos' class of jet drones is the answer. There are more and more war games that are becoming public, reports that are coming out. The Mitchell Institute just put one out. There was an incredible report that just came out last night on this, that quantities,

Eric DeMarco: There was an incredible report that just came out last night on this that quantity will do far better deterrence, and it must be defeating China than exquisites or semi-exquisites. And we have been focusing on expendable and attritable drones, and that's our sweet spot, and they're low, low cost, and they're very lethal. They're very survivable, and I think we're going to

Eric DeMarco: There was an incredible report that just came out last night on this, that quantity will do far better deterrence, and it must be defeating China than exquisites or semi-exquisites. And we have been focusing on expendable and attritable drones, and that's our sweet spot, and they're low, low cost and they're very lethal. They're very survivable, and I think we're going to

Michael Ciarmoli: Sounds like you've got landing gear in place for, for Valkyrie. You know, to, to kind of, you know, you've secured a vendor maybe there. Can you, can you talk expectations about what maybe the customer's looking for? And, you know, it's kind of runway independence no longer the desired, or do you just want to give the customer options?

Speaker Change: will do far better deterring and, if must be, defeating China.

Speaker Change: than exquisites or semi-exquisites.

Mike Crawford: And we have been focusing on

Eric DeMarco: It's the latter, Mike, where we're definitely giving the, the different customers who have different priorities, options. And the path we've taken now with, where we sit today with rail launched drones flying, runway launched drones flying with the trolley as you indicated very soon. We're going to have a Valkyrie with its own internal gear, which will also have internal weapons flying. And then we have another one, ghost works is working on coming also.

Speaker Change: expendable and attritable drones and that's our sweet spot and they're low low cost and they're very lethal and they're very survivable and I think we're going to win.

Operator: Great.

Operator: Thank you guys very much.

Ken Herbert: You've got it. Thank you. Our next question is from Ken Herbert with RBC Capital Markets. Yeah, hey, good afternoon, Eric and Deanna. I can. Hey, I wanted to just follow up. Can you give any indication? I would assume it's factored in the CapEx guide, but the investment you're making specifically in the Truro fan engine capacities. You look to scale that up. Yeah, that's, that's roughly about 10 to 12 million to the year. Okay, perfect. And you've obviously had a step up in CapEx this year to reflect some of the incremental investments and opportunity.

Speaker Change: Great, thank you guys very much.

Operator: Thank you. The next question is from Ken Herbert with RBC Capital Markets.

Speaker Change: Thank you. Our next question is from Ken Herbert with RBC Capital Markets.

Kenneth Herbert: Yeah, hey, good afternoon, Eric and Deanna. Thank you. Hey, I wanted to just follow up. Can you give any indication, I assume it's factored in the CapEx guide, but the investment you're making specifically in the turbofan engine capacity as you look to scale that up?

Ken Herbert: Hey, good afternoon, Eric and Deanna.

Deanna Lund: Hi Ken. Hey, I wanted to just follow up. Can you give any indication, I would assume it's factored in the CAPEX guide, but the investment you're making specifically in the turbofan engine capacity as you look to scale that up?

Eric DeMarco: We will have the entire portfolio flying demonstrated for the various customer community. Okay. Got it. Lesson for me. The contract in place with GE Aerospace. I think I can get replaces of a previous joint development, but this one includes kind of full scale engine production. Have you spoke to or could you speak to the potential economics there? You know, just maybe what that program could look like as it ramps as it gets into full production.

Eric DeMarco: Yeah, that's that, that's roughly about 10 to 12 million for the year.

Deanna Lund: Yeah, that's roughly about 10 to 12 million per year.

Kenneth Herbert: Okay, perfect. And you've obviously had a step up in CapEx this year to reflect some of the, you know, incremental investments and opportunity. Is it, can you, can you comment on next year? Does CapEx, based on current plans, step up again next year? Is it contingent upon sort of contract wins? Or can we view this year as sort of the peak CapEx year?

Deanna Lund: Okay, perfect. And you've obviously had a step up in CapEx this year to reflect some of the, you know, incremental investments and opportunity. Is it, can you, can you comment on next year? Does CapEx, based on current plans, step up again next year? Is it contingent upon sort of contract wins, or can we view this year as sort of the peak CapEx year?

Speaker Change: Yeah, that's roughly about 10 to 12 million for the year.

Speaker Change: Okay, perfect. And you've obviously had a step up in CapEx this year to reflect some of the, you know, incremental investments and opportunity.

Deanna Lund: Is it can you can you comment on next year does CapEx based on current plan step up again next year? Is it contingent upon sort of contract wins, or can we view this year as sort of the peak CapEx year? It is contingent on contract wins. However, I believe, you know, there's, there's, I would say in the 70 to 80 million of the CapEx guide for the year, I would say 40 to 50 of that is what I would call, you know, investments that are. I don't want to use the word non-recurring, but that's probably the best word at this point.

Speaker Change: is it

Speaker Change: Can you comment on next year? Does CapEx, based on current plans, step up again next year? Is it contingent upon sort of contract wins or can we view this year as sort of the peak CapEx year?

Deanna Lund: It is contingent on contract wins. However, I believe, you know, there is.

Deanna Lund: It is contingent on contract wins. However, I believe, you know, there is. I would say in the 70 to 80 million of the CapEx guide for the year, 40 to 50 of that is what I would call investments that are, I don't like to use the word non-recurring, but that's probably the best word at this point. So what I see is our maintenance CapEx is closer to call it 35-ish million a year. But depending on contract awards and opportunities, there could be opportunities in 25 that we would make investments in.

Eric DeMarco: Do you have customer security already? So, on, on, I'll take the last part first. On the customers we have, we have multiple, we, us in general electric. We have multiple customers that have been working with us for the last several months there in the loop when they are waiting for these engines. So, that, that is why we, us in GE, we're, we're very excited about this. Because with, with the technical capability and the cost points of these engines, which will be here very soon, we, we are going to be for, and every time I say we, it's us in them, we're going to be first to market with what we believe is a game changing family of systems here.

Speaker Change: It is contingent on contract wins.

Kenneth Herbert: There's, I would say in the 70 to 80 million of the CapEx guide for the year, I would say 40 to 50 of that is what I would call investments that are, I don't like to use the word non-recurring, but that's probably the best word at this point. So what I see is our maintenance CapEx is closer to call it 35-ish million a year. But depending on contract awards and opportunities, there could be opportunities in 25 that we would make investments in.

Speaker Change: However, I believe, you know, there is, there is...

Speaker Change: Thank you.

Speaker Change: I would say in the 70 to 80 million of the CapEx guide for the year, I would say 40 to 50 of that is what I would call investments.

Deanna Lund: So what I see is our maintenance CapEx is closer to call 35ish million a year. But depending on contract awards and opportunities, there could be opportunities in 25 that we would make investments for. Okay, that's that's very helpful, Deanna. Thanks.

Speaker Change: that are...

Speaker Change: I don't like to use the word non-recurring, but that's probably the best word at this point. So what I see is our maintenance capex is closer to, call it $35-ish million a year.

Speaker Change: But depending on contract awards and opportunities, there could be opportunities in 25 that we would make investments for.

Eric DeMarco: Okay, that's very helpful, Deanna. Thanks. And just maybe Eric, as I look at just such phenomenal growth internationally, I guess specifically in NATO countries, can you just level set us on what percentage of your sales are to maybe NATO countries or outside of the United States more broadly and what kind of growth you're seeing in that this year and potentially in the next year?

Operator: Okay, that's that's very helpful, Deanna. Thanks.

Eric DeMarco: And just maybe, Eric, as I look at just such phenomenal growth internationally, I guess specifically in NATO countries. Can you just level set us on what percentage of your sales are into maybe NATO countries or outside of the United States more broadly? And what kind of growth you're seeing in that this year and potentially in the next year? Yeah, so our international revenues are about 20% for the quarter. And the growth there in Israel and in systems that are going to NATO countries that we build. So these are air defense systems, radar systems, and counter UAS systems. It's very strong.

Eric DeMarco: The economics are very fair. I can't discuss it yet because we're both still under an NDA. But we are, and I believe they are extremely happy what the economics split is going to be on the engine production. And as you know at Kratos, it's better to have a big part of something that all of nothing. And we were confident that with GE, with potential customers and the big air framers, the big missile guys, the significantly increased or assured our probability of success. Got it. Perfect. Thanks, guys. I'll get out of the way. Yep.

Speaker Change: Okay, that's that's very helpful Deanna, thanks. And just maybe Eric, as I look at just such phenomenal growth

Eric DeMarco: And just maybe Eric, as I look at just such phenomenal growth internationally, I guess, specifically in NATO countries. Can you just level set us on what percentage of your sales are to maybe NATO countries or outside of the United States more broadly? And what kind of growth you're seeing in that this year and potentially in the next year?

Operator: Thank you.

Speaker Change: Internationally, I guess specifically in NATO countries, can you just level set us on what percentage of your sales are into maybe NATO countries or outside of the United States more broadly and what kind of growth you're seeing in that this year and potentially in the next year?

Kenneth Herbert: Yeah, so our international revenues are about 20% for the Corps and the growth there.

Eric DeMarco: Yeah, so our international revenues are about 20% for the quarter, and there's growth there.

Eric DeMarco: Yeah, so our international revenues are about 20% for the quarter.

Eric DeMarco: in Israel, and in systems that are going to NATO countries that we build. So these are air defense systems, radar systems, a counter UAS system. It's very strong. So Ken, for a data point,

Eric DeMarco: in Israel, and in systems that are going to NATO countries that we build. So these are air defense systems, radar systems, counter UAS systems. It's very strong. So Ken, for a data point,

Speaker Change: and the growth there.

Speaker Change: in Israel.

Eric DeMarco: and in systems that are going to NATO countries that we build. So these are air defense systems, radar systems.

Peter Arment: Our next question is from Peter Arment with Bayard. Good afternoon, Eric and Deanna. Eric, congratulations on the Air and East hypersonic test flight. Could you maybe talk about how you see future subsequent tests or flights and how that can play out as we get into maybe even 25s as it's turned into a backlog growth story and obviously you have another vehicle that is also part of that program. Yep. So Air and East is a hypersonic ride vehicle and it's at least the current public version as a test bit.

Eric DeMarco: So can for it as a for a data point. And I talked in detail about our space business, putting our space business aside. KGS grew is growing 15% organically. A significant part of that is our C5 ISR business where we work with Ray Pion on Patriot. We work on FAD. We work on a number of counter UAS systems. We're working with Dynetic on indirect fires or enduring shield. All of these air defense systems. And in addition to that, KGS part is where our Israeli business sits where we are supporting Iron Dome, Arrow, Baroque, Lightning, Iron Sting, virtually every missile and radar system.

Eric DeMarco: and Counter UAS Systems.

Speaker Change: It's very strong. So Ken, for a data point...

Kenneth Herbert: And I talked in detail about our space business, putting our space business aside. KGS grew, and is growing 15% organically. A significant part of that is our C5ISR business, where we work with Raytheon on Patriot, we work on THAAD, we work on a number of counter UAS systems, we're working with Dynetic on indirect fires or enduring shield, all of their defense systems. And in addition to that, the KGS part is where our Israeli business sits, where we are supporting Iron Dome and Arrow.

Eric DeMarco: I talked in detail about our space business, putting our space business aside. KGS grew and is growing 15% organically. A significant part of that is our C5ISR business, where we work with Raytheon on Patriot, we work on THAAD, we work on a number of counter UAS systems, we're working with Dynetic on indirect fires or enduring shield, all of these air defense systems. And in addition to that, KGS is where our Israeli business sits, where we support Iron Dome.

Ken Herbert: And I talked in detail about our space business. Putting our space business aside.

Eric DeMarco: KGS

Ken Herbert: grew, is growing 15% organically.

Speaker Change: a significant part of that is our c i usr business where we work with rapbeyond on patriot we work on fad we work on a number of counter s systems we're working with dyetic on indirect fires or enduring shield

Ken Herbert: All of these, they are defense systems.

Peter Arment: And hypersonic testing is something that is in incredibly high demand in the United States. There are not enough test assets. And if you look at some of the government agencies say they would like to test fly every week or two. Well, we now have that vehicle. We've received additional orders since that since that flight. This will be one of our primary growth drivers. This is a new obviously new for us new for the industry.

Ken Herbert: And in addition to that KGS part is where our Israeli business sits, where we are supporting Iron Dome.

Eric DeMarco: Aero, Blah. Lightning, Iron Sting, virtually every missile and radar. So they are very, very strong. The backlog is very strong, and the order book potential for the next two years is not only strong, but it's increased. That's great. So I guess it'd be fair to say that.

Kenneth Herbert: Blah. Lightning, Iron Sting, virtually every missile and radar. So they are very, very strong. The backlog is very strong, and the order book potential for the next two years is not only strong, but it's increased. That's great. So I guess it'd be fair to say that.

Ken Herbert: Erroll.

Ken Herbert: Barack

Eric DeMarco: And so they are very, very strong. The backlog is very strong. And the order book potential for the next two years is not only strong, but it's increasing. That's great. So I guess it'd be fair to say that the international pieces of portfolio probably seems much better growth than sort of the 10% you've talked about for the company over the next few years. Yes, but next year, with our partner, Northrop, which is one of the best partners we have, Sentinel is going to start ramping for us in a big way, very significantly, tens and tens of millions incrementally, which of course is US-based.

Ken Herbert: Lightning, Iron Sting, virtually every missile and radar system.

Ken Herbert: And so they are very, very strong. The backlog is very strong and the order book potential for the next two years.

Peter Arment: This will be one of our primary growth drivers beginning next year. I believe under the mock TV program and under an additional program that we have and then we're going to be talking hopefully maybe a little earlier than this time next year about a second hypersonic vehicle of ours that's going to fly that'll be an additional market for us. So this is a very important for us. I'm really glad you asked a question.

Kenneth Herbert: That's great. So I guess it'd be fair to say that the international piece of the portfolio probably seems to have much better growth than sort of the 10% you've talked about for the company over the next few years organically.

Eric DeMarco: That's great. So I guess it'd be fair to say that the international piece of the portfolio probably seems to have much better growth than sort of the 10% you've talked about for the company over the next few years organically.

Ken Herbert: is not only strong, but it's increasing.

Speaker Change: That's great. So I guess it'd be fair to say that the international piece of the portfolio probably seems much better growth than sort of the 10% you've talked about for for the company over the next few years organically.

Ken Herbert: Yes.

Ken Herbert: but...

Eric DeMarco: Next year, with our partner Northrop, which is one of the best partners we have. Sentinel is going to start ramping up for us in a big way, very significantly, tens and tens of millions of dollars, which of course is U.S. based. And yeah, on the target drones. I was going to say target drones, but you're absolutely right on that. It's a mix of international. And the other one, Ken, is our hypersonic business, our rocket business, as I answered the earlier question.

Speaker Change: Yes, but...

Ken Herbert: next year

Ken Herbert: with our partner Northrop, which is one of the best partners we have.

Peter Arment: So do you anticipate a ramp up and test activity next year and we have a similar revenue profile? Absolutely. Great. And then just on your engine businesses, obviously a lot of excitement around both of them TDI and Florida turbine. Can you talk a little bit about how quickly you can scale up because I know that the Air Force is going to put out an RFI and an RFP on the E-RAM Extender Range Technician that specifically for Ukraine.

Ken Herbert: Sentinel is going to start ramping for us.

Ken Herbert: in a big way.

Ken Herbert: very significantly, tens and tens of millions incrementally.

Eric DeMarco: And on the target drones, I was going to say target drones, but you're absolutely right on that. It's a mix of international.

Ken Herbert: which, of course, is U.S. based.

Peter Arment: And it feels like that's right in the wheelhouse of TDI, but you know you've talked about your other partner with following the jointly developing systems there. You maybe talk about how quickly you can scale up some of these opportunities. Yeah. And in addition to E-RAM. Some of the other publicly available ones are Mace, ETV, Franklin, and Cams. So those are all out there. There's a handful of other ones that are addition to those, virtually all with which need propulsion systems in the family and the affordability class of TDI.

Speaker Change: and the target rones ' going tosay target drones with you butyou'reabsolutely right on that it's a mix of international and the other one can

Eric DeMarco: And the other one can. Our hypersonic business, our rocket business, as I answered earlier question, no later than the second half, next year a significant step up is expected, significant. I went through the numbers. And so 25, definitely 26, 27; that is going to be all US, and it's going to be significant. So my point is the mix may change because of these programs we've won.

Eric DeMarco: are hypersonic business, our rocket business, as I answered the earlier question. No later than the second half of next year, a significant step up is expected. Significant. I went through the numbers. And so, 25, definitely, 26, 27, that is going to be all U.S., and it's going to be significant. So the mix, my point is the mix may change because of these programs we've won.

Speaker Change: Our hypersonic business.

Speaker Change: Our rocket business, as I answered the earlier question.

Eric DeMarco: No later than the second half of next year, a significant step up is expected. Significant. I went through the numbers. And so, 25, definitely, 26, 27, that is going to be all U.S., and it's going to be significant. So the mix, my point is the mix may change because of these programs we've won.

Speaker Change: No later than the second half of next year, a significant step up is expected.

Speaker Change: significant. I went through the numbers.

Ken Herbert: And so 25, definitely 26, 27, that is going to be all U.S. and it's going to be significant.

Ken Herbert: So the mix, my point is the mix may change because of these programs we've won.

Operator: Great, thanks Eric. Very helpful. Thank you.

Eric DeMarco: Great. Thanks, Eric. Very helpful. Thank you. Our next question is from the line of Josh Sullivan with the Benchmire Company. Hey, good evening, Eric, Deanna.

Kenneth Herbert: Great. Thanks, Eric. Very helpful. Thank you. Our next question is from the line of Josh Sullivan with the Benchmire Company. Hey, good evening, Eric, Deanna.

Operator: Thank you. Our next question is from the line of Josh Sullivan with the Benchmire Company. Hey, good evening, Eric, and Deanna. Good evening. As far as

Operator: Thank you. Our next question is from the line of Josh Sullivan with the Benchmire Company. Hey, good evening, Eric, and Deanna. Good evening.

Operator: Our next question is from the line of Josh Sullivan with the Benchmark Company. Good evening, Eric, yeah. Good evening, Josh. As far as the GE relationship, you know, we hear a lot about tightness and forging and other aspects of the aerospace supply chain. Do you see this as a hurdle for the GE partnership engines, or are your designs, just given their lower cost, able to circumvent some of these issues to get to some of these higher volumes? Yet two things. Number one, our designs are definitely able to circumvent some of the issues. However, one of the key attributes in one of the key reasons we were many, we did this with GE, is because they're the big dog; they're the preeminent.

Ken Herbert: Great. Thanks, Eric. Very helpful.

Speaker Change: Thank you.

Speaker Change: Thank you. Our next question is from the line of Josh Sullivan with the Benchmark Company.

Operator: As far as the GEOs go,

Josh Sullivan: Hey, good evening, Eric, Deanna.

Charles: Good evening, Charles.

Josh Sullivan: As far as the GE relationship, you know, we hear a lot about tightness and forging and other aspects of the aerospace supply chain.

Peter Arment: And then, of course, there's power, JDM. We have been working on our production facility and our manufacturing capability. So we will be able to do hundreds if not a thousand or two a year. That's what we're getting ready for. And if you take a look at some of those programs, I mentioned the quantities are there. If we just get our fair share of those, which we believe we will based on our communications with the customers, the air framers, and are designed in positions on certain of these.

Josh Sullivan: Do you see this as a hurdle for the GE partnership engines, or are your designs, just given their lower cost, able to circumvent some of these issues to get to some of these higher volumes?

Operator: Number one, our design is definitely able to circumvent some of the issues. However, one of the key attributes... And one of the key reasons we, there were many, we did this with GE is because they're the big dog, they're the preeminent, and they have priority. We call them kryptonite parts with kryptonite vendors, on very specialized subsystems and components for the NCCS, via their supply chain and their relationships. That's the incredible value they're going to bring us.

Eric DeMarco: Number one, our design is definitely able to circumvent some of the issues. However, one of the key attributes... And one of the key reasons we, there were many, we did this with GE is because they're the big dog, they're the preeminent, and they have priority. We call them kryptonite parts, with kryptonite vendors, on very specialized subsystems and components for the NCCS via their supply chain and their relationships. That's the incredible value they're going to bring us.

Speaker Change: Two things. Number one, our designs.

Charles: are definitely able to circumvent some of the issues.

Charles: However, one of the key attributes and one of the key reasons, there were many, we did this with GE.

Joshua Sullivan: And they have priority; we call them kryptonite parts with kryptonite vendors on very specialized subsystems and components for the engines via their supply chain and their relationships. That's an incredible value they're going to bring us. It not only bring surety to us, but it's bringing surety to the missile guys these engines are going to go in. That if we get a multi-hundred-a-year order, we're going to be able to source it and we're going to be able to build it. And with General Electric behind Kratos or in front of Kratos, or if you want to look at it.

Josh Sullivan: is because they're the big dog, they're the preeminent.

Josh Sullivan: and they have priority.

Peter Arment: So we've been getting ready for this and those are the numbers that we're preparing to produce that annually. That last one for me, could you talk a little bit about your bid pipeline expanded by a billion dollars this quarter and went up to 12 billion. What was driving that? Thanks. Yeah, so that's Peter, it's in our unmanned group as well as our space and training group and our fence rocket systems group. It's across those three businesses. So it's not one specific area. It's across three. Thanks, Diana. Thanks guys. Thank you.

Speaker Change: We call them kryptonite parts, with kryptonite vendors.

Josh Sullivan: on very specialized subsystems and components for the engines.

Eric DeMarco: It not only brings certainty to us, but it's bringing certainty to the missile guys these engines are going to go in, that if we get a multi-hundred-a-year order, we're going to be able to source it, and we're going to be able to build it, and with General Electric behind Kratos or in front of Kratos, wherever you want to look at it. That's what's I got it.

Operator: It not only brings certainty to us, but it's bringing certainty to the missile guys these engines are going to go in, that if we get a multi-hundred-year order, we're going to be able to source it, and we're going to be able to build it, and with General Electric behind Kratos or in front of Kratos, or if you want to look at it, that's what's I got it.

Josh Sullivan: via their supply chain and their relationships.

Josh Sullivan: That's an incredible value they're going to bring us. It not only brings surety to us, but it's bringing surety to the missile guys these engines are going to go in, that if we get a multi-hundred-a-year order, we're going to be able to source it and we're going to be able to build it.

Eric DeMarco: That's what's closed in the deal here. And then just as far as that ordering the initial market, given the increasing use of the battle space, you mentioned you were in contract negotiations, but what's your sense of how quickly this market range? I think it's possible by the end of this year. It's probable. It'll happen next year. We're going to begin to get the initial production orders on turbo jets. So think 200 pounds of thrust and below. And it's probably going to start out at a few hundreds, and then it's going to ramp. If again I went to some of the program names, if you take a look at what they're talking about.

Josh Sullivan: and with General Electric behind Kratos or in front of Kratos or if you want to look at it.

Eric DeMarco: And then just as far as that loitering munition market, you know, given the increasing use in the battle space, you mentioned you were in contract negotiations, but you know, what's your sense of how quickly this market will run? I think it's possible by the end of this year, it's probable, it'll happen next year, we're going to begin to get the initial production orders on turbojets. So think 200 pounds of thrust and below, and it's probably going to start out at a few hundreds, and then it's going to ramp it up again.

Joshua Sullivan: And then just as far as that loitering munition market, you know, given the increasing use in the battle space, you mentioned you were in contract negotiations, but you know, what's your sense of how quickly this market will run? I think it's possible by the end of this year. It's probable it'll happen next year.

Josh Sullivan: That's what's closing the deal here.

Speaker Change: Got it. And then just as far as that loitering munition market, you know, given the increasing use in the battle space, you know, you mentioned you were in contract negotiations, but, you know, what's your sense of how quickly this market ramps?

Sheila Kahyaoglu: Our next question is from the line of Sheila Cahill, glue with Jeffries. Thank you guys in great quarter.

Speaker Change: I think...

Peter Arment: A few questions for you, Eric and Diana, maybe when if we could start on that last subject, Peter, where she's talking about youth and arenas, how could we think about that hypersonic activity pipeline of a billion dollars? How could we think about that progressing over the next five years? Would it be, you know, equally weighted? Or how do we think about that opportunity of materializing? Yeah, if things come together the way we see them coming together.

Eric DeMarco: We're going to begin to get the initial production orders for the turbojets. So think 200 pounds of thrust and below, and it's probably going to start out at a few hundreds, and then it's going to ramp it up again. I went through some of the program names. If you take a look at what they're talking about, it's going to ramp up for us to several hundreds and potentially a thousand or so a year over the next several years.

Josh Sullivan: it'sit

Speaker Change: It's possible by the end of this year, it's probable, it'll happen next year, we're going to begin to get the initial production orders on turbojets. So think 200 pounds of thrust and below.

Eric DeMarco: I went through some of the program names. If you take a look at what they're talking about, it's going to ramp up for us to several hundreds and potentially a thousand or so a year over the next several years. And that just ties into the, I have a list here in front of me, again I went through some of them, the opportunities that are out there, most of which, if not all of which, were either designed in on or we're working with, because we have flying and our cost point is very, very competitive.

Josh Sullivan: And it's probably going to start out at a few hundreds, and then it's going to ramp. Again, I went through some of the program names. If you take a look at what they're talking about, it's going to ramp for us to several hundreds and potentially a thousand or so a year over the next several years.

Joshua Sullivan: It's going to ramp for us to several hundreds and potentially a thousand or so a year over the next several years. And that, that just ties into the I have a list here in front of me. Again, I went through some of them, the opportunities that are out there, most of which, if not all of which, we're either designed in on or we're working with because we have flying engines. And our cost points are very, very competitive. Thanks for the time.

Eric DeMarco: And that just ties into the, I have a list here in front of me, again I went through some of them, the opportunities that are out there, most of which, if not all of which, were either designed in on or we're working with, because we have flying engines, and our cost point is very, very competitive.

Peter Arment: Next year, it could in 25, it could be an incremental 50 to 100 million. Then in 26, it could be an incremental 100 to 150 million. And then it could be 150 to 200 million a year thereafter. Thank you. That's what the manifest looks like. Thank you for that.

Josh Sullivan: And that just ties into the, I have a list here in front of me, again I went through some of them, the opportunities that are out there, most of which if not all of which we're either designed in on or we're working with, because we have flying engines.

Josh Sullivan: and our cost points.

Josh Sullivan: are very, very competitive.

Operator: Thank you. Our next question comes from the line of Joshua Soferl with Noble Capital Markets.

Operator: Thank you. Our next question comes from the line of Joshua Sopfel with Noble Capital Markets.

Joshua Sullivan: Our next question comes from the line of Joshua, so far with a noble capital markets. Good afternoon, guys. I'm still in there for Joe. Okay, so you guys answered pretty much all of my questions, but you know, just kind of mark for a couple housekeeping ones. You know, if you guys talked a little bit about the Hermitius contract, you guys were awarded, you know, is there kind of any progress on that contract? Is still kind of expected to be contracted by the end of the year.

Speaker Change: Thanks for your time.

Josh Sullivan: Thank you. Thank you. Our next question comes from the line of a Joshua Soferl with Noble Capital Markets.

Operator: Hey, good afternoon, guys. I'm filling in for Joe. Okay, so you guys basically answered pretty much all of my questions, but you know, there's kind of more for a couple of housekeeping ones. You guys talked a little bit about the Prometheus contract you guys were awarded. You know, is there kind of any progress on that contract? Is it still kind of expected to be signed by the end of the year?

Operator: Hey, good afternoon, guys. I'm filling in for Joe.

Operator: Okay, so you guys basically answered pretty much all of my questions, but you know, there's kind of more for a couple of housekeeping ones. You know, you guys talked a little bit about the Prometheus contract you guys were awarded. You know, is there kind of any progress on that contract? Is it still kind of expected to be signed by the end of the year?

Joshua Soferl: Hey, good afternoon guys. I'm filling in for Joe.

Joshua Soferl: Okay, so you guys basically answered pretty much all of my questions, but, you know, just kind of more for a couple of housekeeping ones. You know, you guys talked a little bit about the Prometheus contract you guys were awarded. You know, is there kind of any progress on that contract? Is it still kind of expected to be contracted by the end of the year?

Eric DeMarco: So, you know, we're, Sheila, we're in a really good position because we're first to market with zoos, aronies, and another system that's not public, yet. We're in a great spot and these things are flying. Yeah, no, that makes sense.

Eric DeMarco: Yeah, if I said that we had been awarded Hermitius, I'm a spoke and I apologize. I don't remember doing that, but if I didn't, I apologize. So from Hermitius is an opportunity that we are working on. Okay, we are getting there. We're in the red zone football term, but it's not complete yet. So again, I apologize for that misunderstanding. Okay, that's helpful. Thanks for clearing that up.

Eric DeMarco: If I said that we had been awarded Prometheus, I misspoke, and I apologize. I don't remember doing that, but if I did, I apologize.

Speaker Change: Yeah, um...

Deanna Lund: And in unmanned your profitability was really good year over year, is that sort of the level we should expect going forward or was this one time? It will depend on the mix and the from a development perspective and the leverage off of the fixed infrastructure costs since we did have a sizable international drone delivery. This quarter of 17.4 million, so that did drive some of that leverage off of the fixed infrastructure, but it will also depend on the mix of the programs on a quarterly basis. Got it. Thank you so much. Thanks. Thank you.

Speaker Change: If I said that we had been awarded Prometheus, I misspoke and I apologize. I don't remember doing that, but if I did, I apologize. So Prometheus is an opportunity that we are working on.

Eric DeMarco: So Prometheus is an opportunity that we are working on. We are getting there. We're in the red zone, football terminology, but it's not complete yet. So again, I apologize for that misunderstanding.

Speaker Change: Okay, we are getting there.

Speaker Change: We're in the red zone, football term, but it's not complete yet. So again, I apologize for that misunderstanding.

Joshua Sullivan: Okay, that's helpful. Thanks for clearing that up. And, you know, kind of a couple of months ago, Airbus was talking about, you know, in the space satellites, reevaluating the space business. Is there any more impact to that reevaluation that it has on Kratos itself? You know, are satellites being pushed even further to the right due to that?

Eric DeMarco: Okay, that's helpful. Thanks for clearing that up. And, you know, kind of a couple months ago, Airbus was talking about, you know, in the space satellites, reevaluating the space business. Is there any more impact to that reevaluation that it has on Kratos itself? You know, are satellites being pushed even further to the right due to that?

Eric DeMarco: And, you know, kind of a couple months ago, you know, you're mostly talking about, you know, in the space satellites re-evaluate space business. You know, is there any more impact to that re-evaluation that it has on creatives itself, you know? Are satellites being pushed even more further to the right due to that. And I want to make sure, I want to make sure I understand your question: are they being pushed to the right because of what? The Airbus re-evaluating its space business as a whole. Oh, I got it. I got it. Yeah. So what's going on with Airbus is definitely impacting the ecosystem, and it's definitely impacting creatives.

Eric DeMarco: And I want to make sure I understand your question. Are they being pushed to the right because of what?

Speaker Change: Okay, that's helpful. Thanks for clearing that up. And, you know, kind of a couple months ago, you know, Aaron Busch was talking about, you know, in the space satellites, reevaluating space business, you know, is there any more impact to that reevaluation that it has on Kratos itself? You know, are satellites being pushed even more further to the right due to that?

Eric DeMarco: And I want to make sure I understand your question. Are they being pushed to the right because of this?

Mike Crawford: Our next question comes from the line of Mike Crawford with B. Riley Securities. Thank you. Just a couple of clarifications first. What you're talking about. Redding for your next serial production spiral of Valkyrie. Would that be the third such spiral? Are you talking about the, you're not talking about the second one you already began, right? The third, right. And then thank you. And then you talked about expanding Oklahoma for tactical and entire drones, but isn't that also where you're standing up affordable engine production with GEL space?

Eric DeMarco: The Airbus is re-evaluating its space business as a whole. Ah, got it. I got it. Yeah, Yeah So what's going on with the Airbus is definitely impacting the ecosystem, and it's definitely impacting Kratos. And I feel bad for them, and I really hope they get this stuff this stuff figured out. I am highly confident we have taken that into consideration in our financial forecast, and, as Deanna and I tried to articulate today, you know, we're very fortunate here at Kratos that we have.

Joshua Sullivan: The Airbus is re-evaluating its space business as a whole. Ah, got it. I got it. Yeah. Yeah So what's going on with the Airbus is definitely impacting the ecosystem. It is definitely impacting Kratos, and I feel bad for them, and I really hope they get this stuff this stuff figured out. I am highly confident. We have taken that into consideration in our financial forecast.

Speaker Change: And I want to make sure I understand your question. Are they being pushed to the right because of what?

Speaker Change: The Airbus re-evaluating its space business as a whole. Ah, got it. I got it. Yeah, yeah. So what's going on with the Airbus is definitely impacting the ecosystem and it's definitely impacting Kratos. And I feel bad for them and I really hope they get this stuff.

Eric DeMarco: And I feel bad for them, and I really hope they get this stuff figured out. I am highly confident we have taken that into consideration in our financial forecast. And as Deanna and I tried to articulate today, you know, we're very fortunate here at Creatives that we have six divisions and five and a half of them are ripping. And the half that is not as tied to commercial software to find payload satellites right now, which we've taken into consideration. The management team over there and our satellite business, I got to tell you, they have done an incredible job on the resource allocations to our national security programs, our defense programs, and some other things they're working on like our global space demand awareness network to hold court.

Deanna Lund: Figure it out. I am highly confident we have taken that into consideration in our financial forecast and As Deanna and I tried to articulate today, you know, we're very fortunate here at Kratos that we have

Eric DeMarco: Six Divisions, and five and a half of them were ripped. The half that is not is tied to commercial software-defined payload satellites right now, which we've taken into consideration. The management team over there in our satellite business, I've got to tell you, they have done an incredible job on the resource allocations to our national security programs, our defense programs, and some other things they're working on like our global space demand awareness network to hold court, reading other companies' face businesses and what's going on with them, which is tied directly to what your question is.

Eric DeMarco: 6th Division, and five and a half of them were ripped. And the half that is not is tied to commercial software-defined payload satellites right now, which we've taken into consideration. The management team over there in our satellite business, I've got to tell you, they have done an incredible job on the resource allocations to our national security programs, our defense programs, and some other things they're working on like our Global Space Demand Awareness Network to hold court, reading other companies' face businesses and what's going on with them, which is tied directly to what your question is. Our team is far outperforming. And so we've taken it into consideration as soon as these technical issues are resolved.

Deanna Lund: Six Divisions.

Mike Crawford: Mike, I'm smiling because I saw that report. That news article. We saw our drone manufacturing facilities are in Oklahoma City. And that's where the expansion for the tactical and the target drones will be both in the existing facility and a brand new facility we've already identified and were moving out on. Outside of Tulsa, Oklahoma is where our existing engine business is. And it is probable that that is where we will be standing up our one of our low cost on turbofan with the UK.

Speaker Change: and five and a half of them are ripping.

Speaker Change: and the half that is not is tied to...

Speaker Change: Commercial Software-Defined Payload Satellites right now, which we've taken into consideration. The management team over there in our satellite business, I've got to tell you, they have done an incredible job on the resource allocations.

Speaker Change: to our national security programs, our defense programs, and some other things they're working on, like our Global Space Demand Awareness Network, to hold court.

Eric DeMarco: I mean, reading other company space businesses and what's going on with them, which is tied directly to what your question is. Our team is far outperforming them. And so we've taken it into consideration as soon as these technical issues with some of these software defined payload satellites get fixed and the operators can get them and they get launched. We're going to be in fantastic shape.

Speaker Change: reading other companies space businesses and what's going on with them which is tied directly to what your question is

Eric DeMarco: Our team is far outperforming. And so we've taken that into consideration. As soon as these technical issues with some of these software-defined payload satellites get fixed, and the operators can get them, and they get launched, we're going to be in fantastic shape.

Speaker Change: Our team is far outperforming them.

Josh Sullivan: And so we've taken it into consideration. As soon as these technical issues with some of these software-defined payload satellites get fixed and the operators can get them and they get launched, we're going to be in fantastic shape.

Mike Crawford: And the primary reason for that is because the workforce, we have a very experienced workforce with engines there already. There were networked. We've got the supply chains. We, it looks very promising that that's what we're going to do it. And would that workforce also include workers directly, directly supplied from GEL space? I can't get into that yet until the final definitive agreement is executed and then we jointly will communicate that I'm sorry. Okay, that's fine.

Joshua Sullivan: Okay, that's hopefully, I think, for the time, guys.

Joshua Sullivan: Okay, that's helpful. Yeah, thanks for the time, guys.

Eric DeMarco: Okay, that's helpful. Yeah, thanks for the time, guys.

Operator: You've got it. Thank you.

Speaker Change: Okay, that's helpful. Yeah, thanks for the time guys.

Peter Skibitski: Our next question comes from the line of Peter Skibitski with Alembic Global. Yeah, good afternoon, guys.

Operator: Our next question comes from the line of Peter Skibitski with Alembic Global.

Operator: Our next question comes from the line of Pete Skibitski with Alembic Global.

Josh Sullivan: You've got it.

Speaker Change: Thank you.

Operator: Okay, good afternoon guys. We just wondered if you could... Yeah, I was just wondering if you could quantify the size of the Apollo contract. You said it's on contract now, and then I was wondering about timing, if there's the potential for a larger follow-on in the future.

Josh Sullivan: Our next question comes from the line of Peter Skibitski with Alembic Global.

Peter Skibitski: Um, we just want if you could, yeah, we just want if you can quantify the size of the Apollo contract that you said it's on contract now. And then we're going about timing if there's the potential for a larger follow-on in the future. Right. So it's think of a couple tens of millions right now. And that's over a couple of years. And if we're successful and we us and this customer, there's absolutely the opportunity for a larger follow-on here. Okay, okay.

Peter Skibitski: Good afternoon, guys. We're just wondering if you could quantify the size of the Apollo contract. You said it's on contract now, and then I was wondering about timing, if there's the potential for a larger follow-on in the future.

Eric DeMarco: Right, so think of a couple of tens of millions right now, and that's over a couple of years. And if we're successful, and we, and this customer, there is absolutely the opportunity for a larger follow-on.

Pete Skibitski: Right, so think of a couple of tens of millions right now, and that's over a couple of years. And if we're successful, and we, and this customer, there is absolutely the opportunity for a larger follow-on.

Eric DeMarco: And then switching gears a little bit. Could you maybe update us on the lay in the lay and solid rocket motor propulsion, where you stand versus competitors, some of which seem to have claims perhaps above means. Yep, that's that's actually an excellent question. Rocket Motors are hard, and solid rocket motors are extremely hard, and the lay of the land right now is there are two that are qualified in the United States, Aerojet and ATK, North-Ruborbit Lake TK and L3 Aerojet, all right?

Speaker Change: Right, so it's think of a couple tens of millions right now.

Speaker Change: And that's over a couple of years.

Speaker Change: And if we're successful...

Josh Sullivan: And we, us, and this customer, there is absolutely the opportunity for a larger follow-on here.

Eric DeMarco: Okay, thanks for that. My only other one, I think I know the answer to this, but if we do potentially have a change in administration next year and there's less financial support for the effort in Ukraine, I was just wondering, do you guys have any... direct exposure there, or maybe what you consider kind of, you know, near direct exposure?

Eric DeMarco: I think I know the answer to this, but if we do potentially have a change in administration next year and there's less financial support for the effort in Ukraine, I was just wondering, do you guys have any... direct exposure there, or maybe what you consider kind of, you know, near direct exposure?

Peter Skibitski: My only thanks for that. My only other one.

Eric DeMarco: I think I know the answer to this, but you know, if we do have potentially a change in administration next year and there's less financial support for the effort in Ukraine. I was just wondering, do you guys have any direct exposure there, or maybe what you'd consider kind of near direct exposure? So our primary exposure relative to what's going on in the Ukraine has to do with the NATO countries rearming. And I saw the other day that virtually all of them now are over the 2%, and they're increasing, with some of them at 4% or 5%, like Poland.

Speaker Change: Okay, thanks for that. My only other one, I think I know the answer to this, but you know if we do have potentially a change in administration next year and there's less financial support for the effort in Ukraine, I was just wondering, do you guys have any

Speaker Change: Direct exposure there or maybe what you consider kind of, you know, near direct exposure?

Eric DeMarco: Neither one of them are a really emergency supplier because they're embedded in a prime. And as you've indicated, there are a number of guys out there, some of them are like some major or crossbow or a drawness, which is part of Android, there's a couple of other ones that are coming, they said they're going to get into this. But Mike, this is very hard, and less the rules change, the qualification rules, it takes years to get qualified, and it takes years to get qualified and designed in on a system flight testing, etc.

Pete Skibitski: So our primary exposure relative to what's going on in the Ukraine has to do with the NATO countries rearming. And I saw the other day that virtually all of them now are over 2%, and they're increasing, with some of them at 4% and 5% like Poland.

Eric DeMarco: So our primary exposure relative to what's going on in the Ukraine has to do with the NATO countries re-arming. And I saw the other day that virtually all of them now are over 2%, and they're increasing, with some of them at 4% and 5% like Poland.

Speaker Change: So our primary exposure relative to what's going on in the Ukraine

Speaker Change: has to do with the NATO countries rearming.

Speaker Change: And I saw the other day that virtually all of them now are over the 2% and they're increasing with some of them at 4% and 5% like Poland.

Eric DeMarco: My opinion is if the Ukrainian situation gets resolved... that, in the NATO countries' minds, does not address the primary threat, which is Russia. So, I don't believe it impacts us or our customers, our partners, in their defense. The number of air defense systems, surface-to-air missile systems, counter-UAS systems that have been ordered and that are coming down the pipeline, these are just the ones that we're involved in. It's stunning.

Eric DeMarco: My opinion is if the Ukrainian situation gets resolved that that in the NATO countries' minds does not address the primary threat, which is Russia. And so I don't believe it impacts us or our customers or partners on these air defense systems. The number of air defense systems, surface-to-air missile systems, counter UAS systems that have been ordered and that are coming down the pipeline. These are just the ones that were involved in.

Speaker Change: My opinion is if the Ukrainian situation gets resolved...

Speaker Change: That, in the NATO countries' minds, does not address the primary threat, which is Russia.

Eric DeMarco: And so the demand is definitely there, there are some guys coming. I will tell you that because of the nature of our business and our customers, being a merchant supplier of solid rocket motors in the United States is something we continue to look at very hard, because we would be a true merchant supplier and we're experts in this area. And so that's something we're definitely looking at relative to our partnerships with the primes. Okay, thank you.

Speaker Change: And so, I don't believe it impacts us or our customers, our partners, on these air defense systems.

Speaker Change: the number of air defense system surface to air missile systems county s systems that have been ordered that are coming down the pipeline these are just the onesthat were involved in it's stunning to me

Eric DeMarco: It's stunning to me. It's stunning. And so I don't think I don't think a resolution in the Ukraine impacts us because the primary threat or the inherent threat will still be there. Okay. Appreciate it. Appreciate the color. Thanks, guys.

Pete Skibitski: And so I don't think a resolution in Ukraine impacts us because the primary threat, or the inherent threat, will still be there.

Eric DeMarco: So I don't think a resolution in Ukraine impacts us because the primary threat, or the inherent threat, will still be there.

Speaker Change: It's stunning.

Speaker Change: And so I don't think, I don't think a resolution in the Ukraine impacts us because the primary threat or the inherent threat will still be there.

Pete Skibitski: Okay. I appreciate it. Appreciate the call. Thanks, guys. Yeah.

Eric DeMarco: Okay. I appreciate it. Appreciate the call. Thanks, guys. Yeah.

Eric DeMarco: And then just one final one, because we haven't really talked about CCA and this call, but at some point we'll be moving from more of the exquisite to like around to the something more equitable. And I think another article I read was that ghost bat now is not even being designed to carry weapons. So versus I think you have multiple platforms that have distributed that ability, right? Correct. I saw that article that that Boeing's ghost bat does not have carry weapons capability, which which caught my eye, of course, I know it caught industry's eye.

Peter Skibitski: Yep. Thank you.

Speaker Change: Okay, I appreciate it, appreciate the call. Thanks guys.

Andrea Madrid: Our next question comes from the line of Andrea Madrid with BTIG. Hey, everyone. Thanks for taking my question. Looking at the strong man book to bill for the quarter, I mean, with a poll now under contract, how much, if at all, of this contribution for bookings was from tactical drones? It was primarily all on the target drone side. On a relative basis, it was small.

Operator: Our next question comes from the line of Andre Madrid with BTIG.

Operator: Our next question comes from the line of Andrea Madrid with BTIG.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of Andre Madrid with BTIG.

Operator: Hey, everyone. Thanks for taking my question. Looking at the strong unmanned book to build for the quarter, I mean, with Apollo now under contract, how much, if at all, of this contribution for bookings was from tactical drones?

Operator: Hey, everyone. Thanks for taking my question. Looking at the strong un-managed bill for the quarter, I mean, with Apollo now under contract, how much, if at all, of this contribution for bookings was from tax?

Andre Madrid: Hey everyone, thanks for taking my question.

Andre Madrid: Looking at the strong unmanned book to build for the quarter, I mean with Apollo now under contract, how much if at all of this of this contribution for bookings was from tactical drones?

Andrea Madrid: It was primarily all on the target drone side. Yeah, on a relative basis, it was small. But that mix will probably change in either 2.3 or 2.4.

Eric DeMarco: It was primarily all on the target drone side. Yeah, but on a relative basis, it was small.

Speaker Change: It was primarily all on the target drone side. Yeah, on a relative basis it was small. That mix will probably change in either 2.3 or 2.4.

Eric DeMarco: That mix will probably change in either Q3 or Q4. The target drones are doing very well. We're probably going to be in a position relative to that to make an announcement of our largest target drone order ever in the next month or so. We just got it. Gotcha. Gotcha. That's helpful.

Andrea Madrid: That mixed will probably change in either two, three, or two, four. But target drones are doing very well. We're probably going to be in a position relative to that to make an announcement of our largest target drone order ever in the next month or so. We just got it. Got you. That's helpful. And then sticking on the old man's side, I mean, looking at what you got announced with the GEK engine, you know, you guys are saying that's probably going to be in a thrust range or probably less than 3000. According to the RFI, those released on CCA, they're aiming for something between three and eight.

Eric DeMarco: But target drones are doing very well. We're probably going to be in a position relative to that to make an announcement of our largest target drone order ever in the next month or so. We just got it. Gotcha, gotcha, that's helpful.

Eric DeMarco: Yeah, multiple of our aircraft carry of deployed weapons and including battery, of course. And as I mentioned in the prepared remarks, we are we all we remain laser focused on affordability, a tritability and hitting cost points of affordable mass can really be achieved with things that are flying today. Not potentially seven years from now. Okay, thank you.

Speaker Change: but target drones are.

Speaker Change: are doing very well. We're probably going to be in a position relative to that to make an announcement of our largest target drone order ever in the next month or so. We just got it.

Operator: Thank you.

Operator: Gotcha, gotcha, that's helpful. And then sticking on the Oman side, I mean, looking at what you guys announced with the GEK engine, you guys are saying that's probably going to be in the thrust range of probably less than 3,000. According to the RFI that was released by CCA, they're aiming for something between three and eight. I know you guys said you could scale up, but kind of piggybacking off of Peter's question earlier, how easy is it to scale up?

Andrea Madrid: And then sticking on the Oman side, I mean, looking at what you guys announced with the GEK engine, you guys are saying that's probably going to be in the thrust range of probably less than 3,000. But according to the RFI that was released by CCA, they're aiming for something between three and eight. I know you guys said you could scale up, but kind of piggybacking off of Peter's question earlier, how easy is it to scale up?

Andrea Madrid: Gotcha. Gotcha. That's helpful.

Speaker Change: Gotcha

Speaker Change: Gotcha. That's helpful. And then, sticking on the unmanned side, I mean...

Speaker Change: Looking at what you guys announced with the GEK engine, you know, you guys are saying that's probably going to be in the thrust range of probably less than 3,000.

Eric DeMarco: I know you guys said you could scale up, but kind of piggybacking off of Peter's question earlier, how easy is it to scale up? I'm sorry on both of those. I can't comment. I just can't do it. I'm not affirming what you I'm not affirming what you saw. I just can't comment on it. I apologize.

Speaker Change: According to the RFI that was released on CCA, they're aiming for something to between three and eight. I know you guys said you could scale up, but kind of piggybacking off of Peter's question earlier, how easy is it to scale up?

Rocco: Our next question comes from the line of set. Seatman with JP Morgan. Good afternoon. This is Rocco on for Seth. Good afternoon.

Eric DeMarco: I, I, I'm sorry about both of those. I can't comment. I just can't do it. And I'm not affirming what you saw. I just can't comment on that. I apologize.

Eric DeMarco: I'm sorry about both of those. I can't comment. I just can't do it. And I'm not affirming what you saw. I just can't comment on that. I apologize.

Speaker Change: Hello.

Speaker Change: I'm sorry on both of those.

Operator: Looking at the Q3 guide, even X the 17.4 million of international target drone deliveries, the guidance is for sale to decrease next quarter sequentially. What is driving that decline? So primary decline in that, is in the commercial part of our satellite business. As I've mentioned in it, it really hit the press in the last three or four weeks. The manufacturers of the software defined payload satellites are having some incredible technical difficulties and the satellites are not going up.

Speaker Change: I can't comment. I just can't do it. And I'm not affirming what you saw. I just can't comment on it. I apologize.

Eric DeMarco: No, no, no, no, no worries at all. And then my last one is pivoting away towards KGS just a bit. I know you noted hiring at the firm level, but how has that been looking and progressing more specifically on the KDT side, because I know that that was a special pressure point previously. Yeah, that's a good question. It is very.

Andrea Madrid: No, no, no worries at all, no worries at all. And then my last one is pivoting away towards KGS just a little. I know you noted hiring at the firm level, but how has that been looking and progressing more specifically on the KDT side, because I know that was a special pressure point previously. Yeah, that's a good question. It is very...

Andrea Madrid: No, no, no, no, no worries at all.

Deanna Lund: And then my last one is pivoting away towards KGS just up. I know you noted hiring at the firm level, but how has that been looking and progressing more specifically at the on the KTT side? Because I know that that was a special pressure point previously. Yeah, that's a good question. It is very difficult. Turbo machinery engineers, propulsion engineers, as time directly in the discussion we've been having here this afternoon, they are in incredible demand, and many of them don't exist anymore. They retired, and they're efficient. And this is very challenging, and it's very expensive to hire them and keep them both in cash and equity at the executive level.

Speaker Change: No worries at all. And then my last one is pivoting away towards KGS. I know you noted hiring at the firm level, but how has that been looking and progressing more specifically on the KDT side? Because I know that was a special pressure point previously.

Eric DeMarco: Yeah, that's a good question. It is very difficult.

Eric DeMarco: Turbomachinery Engineers, Propulsion Engineers. That's tying directly into the discussion we've been having here this afternoon. They are in incredible demand, and many of them don't exist anymore. They're retired, and they're fishing, and this is very challenging, and it's very expensive, to hire them and keep them. So this is a challenge, it remains a challenge, and I believe it's going to continue to be a challenge for us and the industry.

Eric DeMarco: Turbomachinery Engineers, Propulsion Engineers. That's tying directly into the discussion we've been having here this afternoon. They are in incredible demand, and many of them don't exist anymore. They have retired. They're fishing, and this is very challenging, and it's very expensive to hire them and keep them, both in cash and equity, at the executive level. So this is a challenge, it remains a challenge, and..., and I believe it's going to continue to be a challenge for us and the industry.

Speaker Change: Yeah, that's a good question. It is very difficult.

Speaker Change: Turbo Machinery Engineers, Propulsion Engineers

Operator: So with the satellites, and as you know, Kratos' open space software defined virtualized ground system was specifically designed in part to communicate with the software in order to sign satellites on the commercial side. And as those satellites are not going up, the operators, and again, there was an incredible article on this just in the past few days that's out there that, of course, we've known, the operators are slowing down their supply chain, including the ground infrastructure, guys like Kratos, they're going to communicate with them.

Speaker Change: That's tying directly into the discussion we've been having here this afternoon.

Speaker Change: They are in incredible demand.

Speaker Change: and many of them don't exist anymore. They retired. They're fishing.

Speaker Change: And this is very challenging.

Speaker Change: And it's very expensive.

Speaker Change: to hire them and keep them.

Deanna Lund: So this is a challenge. It remains a challenge. And I believe it's going to continue to be a challenge for us and the industry.

Speaker Change: both in cash and equity.

Speaker Change: at the executive level.

Operator: So we're designed in, we've won the slots, but the operators are making the right business decision by not deploying until the satellites go up. And so we are being very cautious in our assumptions in the commercial side of our space business. It's being offset by the government side, which is doing great, and it's being offset by other businesses in KGS, which are growing 15%. But that's the primary reason we're going to be very cautious there until some of these, these commercial satellite issues get resolved. Right, that makes sense.

Speaker Change: So, this is a challenge, it remains a challenge.

Speaker Change: and I believe it's going to continue to be a challenge for us and the industry.

Operator: Got it. Thank you both. Thank you.

Operator: Thank you. And as a reminder, if you do have a question, simply press star 11 to get in the queue and wait for your name to be announced. One moment for our next question in queue. And it comes from the line of Trevor Walsh with Citizens J&P.

Operator: Thank you. And as a reminder, if you do have a question, simply press star 11 to get in the queue and wait for your name to be announced. One moment for our next question in queue, and it comes from the line of Trevor Walsh with Citizens J&P.

Operator: In a sorry reminder, if you do have a question, simply press star 11 to get in the queue and wait for your name to be announced. One moment for our next question in queue.

Speaker Change: Got it. Thank you both.

Speaker Change: Thank you. And as a reminder, if you do have a question, simply press star 11 to get in the queue and wait for your name to be announced. One moment for our next question in queue.

Trevor Walsh: And it comes from the line of travel world with citizens, JMP. Great. Hi, team. Thanks for taking my questions today. Eric, maybe just to follow up, similar line of questioning for your based on the Ukraine question you got earlier, but maybe applying that to Israel. Sounds like the Israeli businesses was strong in the quarter. Not actually necessarily predict what will happen there, but if things go more towards the kind of positive side around the things those tensions there, what either what prognosis you have around just the, you know, forward looking part of that business either particular to Israel or even similar systems being deployed in other countries, lessons learned around just, you know, making sure there's enough kind of.

Speaker Change: And it comes from the line of Trevor Walsh with Citizens J&P.

Operator: Great. Hi team.

Trevor Walsh: Thanks for taking my questions today. Eric, maybe just to follow up, a similar line of questioning for you based on the Ukraine question you got earlier, but maybe applying that to Israel. It sounds like the Israeli business was strong in the quarter. I'm not asking you to necessarily predict what will happen there, but if things go more towards the kind of positive side around ceasing those tensions there, what prognosis do you have around just the forward-looking part of that business, either particular to Israel or even similar systems being deployed in other countries, lessons learned around just making sure there's enough munitions that are stored and kind of ready Just give it another try; the more positive, thank you.

Eric DeMarco: Thanks for taking my questions today. Eric, maybe just to follow up, a similar line of questioning for you based on the Ukraine question you got earlier, but maybe applying that to Israel. It sounds like the Israeli business was strong in the quarter. I'm not necessarily asking you necessarily to predict what will happen there, but if things go more towards the kind of positive side around ceasing those tensions there, what prognosis do you have around just the forward-looking part of that business, either particular to Israel or even similar systems being deployed in other countries?

Trevor Walsh: Great. Hi, team. Thanks for taking my questions today.

Trevor Walsh: Eric, maybe just to follow up, a similar line of questioning for you, based on the Ukraine question you got earlier, but maybe applying that to Israel. It sounds like the Israeli business was strong in the quarter.

Speaker Change: not asking to necessarily predict what will happen there but if things go more towards the kind of positive side around ceasing of tensions there

Speaker Change: What either, what prognosis do you have around just the, you know, forward-looking part of that, that business, either particular to Israel or even similar systems being deployed in other countries, lessons learned around just, you know, making sure there's enough kind of

Eric DeMarco: Lessons learned around just making sure there's enough kind of munitions that are stored and kind of ready to go if things kind of break out again. Just kind of what's your outlook on that? Just give it another shot, more positive. Thank you.

Eric DeMarco: Munitions that are stored and kind of ready for ready to go for things kind of breakout again, just kind of what's your outlook on that just give it up the again, the more positive.

Eric DeMarco: There are more and more war games that are becoming public reports that are coming out. The Mitchell Institute just put one out. There was an incredible report that just came out last night on this that quantities will do far better deterring and must be defeating China than exquisites or semi-exquisites. And we have been focusing on expendable and attributable drones. And that's our sweet spot. And they're low, low cost and they're very lethal and they're very survivable. And I think we're going to win. Great. Thank you guys very much. You've got it. Thank you.

Speaker Change: munitions that are stored and kind of ready for ready to go for if things kind of break out again just kind of what's your your outlook on that just give it up the again the more positive scenario of things easing

Eric DeMarco: I'll give you my opinion, Eric's opinion. My opinion is that the quantity of munitions that have been expended has been incredible; years' worth of inventory, years and years' worth of inventory have been expended, and that must be replenished in order to maintain a consistent defense posture. So I don't see, in the foreseeable future, years, any abatement in demand if, as you're indicating, and that would be wonderful if resolution would happen, peace broke out. The significant increases we're seeing month over month over month will probably be flattened out, but that is that is an exponentially higher ratio than it was before October of 23.

Eric DeMarco: Yeah, so I'll give you my, this is my opinion, Eric's opinion. My opinion is that the quantity of munitions that have been expended has been incredible, years' worth of inventory have been expended, and that must be replenished in order to maintain a consistent defense posture. So I don't see any abatement in demand in the foreseeable future years. If, as you're indicating, and it would be wonderful if resolution would happen, peace broke out.

Eric DeMarco: Yes, so I'll give you my, this is my opinion, Eric's opinion. My opinion is that the quantity of munitions that have been expended has been incredible, years' worth of inventory have been expended, and that must be replenished in order to maintain a consistent defense posture. So I don't see any abatement in demand in the foreseeable future years. If, as you're indicating, and it would be wonderful if resolution would happen, peace broke out.

Speaker Change: Yeah, so I'll give you my, this is my opinion, Eric's opinion. My opinion is that the quantity of munitions that have been expended

Speaker Change: has been incredible.

Speaker Change: Years worth of inventory.

Speaker Change: Years and years worth of inventory have been expended.

Speaker Change: and that

Speaker Change: must be replenished in order to maintain a consistent defense posture.

Speaker Change: so i don't see in the foreseeable future

Ken Herbert: Our next question is from Ken Herbert with RBC capital markets. Yeah, hey, good afternoon, Eric and Deanna. I can. Hey, I wanted to just follow up. Can you give any indication? I would assume it's factored in the in the CapEx guide, but the investment you're making specifically in the Truro fan engine capacities. You look to scale that up. Yeah, that's that's roughly about 10 to 12 million to the year.

Speaker Change: years.

Speaker Change: any abatement in demand. If, as you're indicating, and that would be wonderful, if resolution would happen, peace broke out.

Eric DeMarco: The significant increases we're seeing month over month over month will probably flatten out, but that is at an exponentially higher ratio than it was before October 23, so that's specific to there, outside of there, and internationally.

Speaker Change: The significant increases we're seeing month over month over month will probably flatten out, but that is at an exponentially higher ratio than it was before October of 23.

Eric DeMarco: So that's specific to there. Outside of their internationally, the lessons learned, the lessons learned is that you look at the first potential strike that I ran try to do on Israel. I mean, it came out that there were 300. It was actually over 500 munitions, missiles, and drones; ballistic crews and drones were fired at Israel and that one garage. In the Ukraine, over 10,000 drones on one side are being shot down a month. The vast majority of those are not in our class; they're class one, two, or three, but a significant number of them are jets.

Speaker Change: So that's specific to there.

Trevor Walsh: The lessons learned, the lessons learned, are that look at the first potential strike that Iran tried to do on Israel. I mean, it came out that there were 300, it was actually over 500 munitions, missiles, and drones, ballistic crews, and drones fired at Israel in that one barrage in the Ukraine. Over 10,000 drones on one side are being shot down a month. The vast majority of those are not in our class, they're class 1, 2, or 3, but a significant number of them are JETs.

Eric DeMarco: The lesson learned, the lesson learned, is that look at the first potential strike that Iran tried to do on Israel. I mean, it came out that there were 300. It was actually over 500 munitions, missiles, and drones, ballistic crews, and drones were fired at Israel in that one barrage in the Ukraine. Over 10,000 drones on one side are being shot down every month. The vast majority of those are not in our class; they're class 1, 2, or 3, but a significant number of them are JETs.

Speaker Change: outside of there, internationally.

Speaker Change: The lessons learned, the lessons learned.

Deanna Lund: Okay, perfect. And you've obviously had a step up in CapEx this year to reflect some of the incremental investments and opportunity. Is it can you can you comment on next year does CapEx based on current plan step up again next year? Is it contingent upon sort of contract wins or can we view this year as sort of the peak CapEx year? It is contingent on contract wins. However, I believe, you know, there's, there's, I would say in the 70 to 80 million of the CapEx guide for the year, I would say 40 to 50 of that is what I would call, you know, investments that are.

Speaker Change: is that, look at the first potential strike that Iran tried to do on Israel. I mean, it came out that there were 300, it was actually over 500 munitions, missiles and drones.

Speaker Change: Ballistic crews and drones were fired at Israel in that one barrage.

Speaker Change: Thank you.

Speaker Change: in the Ukraine.

Speaker Change: Over 10,000 drones on one side are being shot down a month.

Speaker Change: The vast majority of those are not in our class, they're class 1, 2, or 3, but a significant number of them are jets.

Trevor Walsh: The lesson learned from there is quantities have a quality all of their own, and those quantities can offset the lack of defense budget of countries that can't afford exquisite systems. So their exquisite systems will be thousands of, And we're seeing that. We're seeing that in direct orders, and we're seeing that in orders with our prime partners, where we build major subsystems. So, as I've said several times, this is likened to the Reagan buildup. This is 1981. We're in the second inning.

Eric DeMarco: The lesson learned from there is quantities have a quality all of their own, and those quantities can offset the lack of defense budget of countries that can't afford exquisite systems. So their exquisite systems will be thousands of, And we're seeing that.

Eric DeMarco: The lesson learned from there is quantities have a quality all of their own, and those quantities can offset lack of defense budget of countries that can't afford exquisite systems. And so their exquisite system will be thousands of something. And we're seeing that; we're seeing that in direct orders and we're seeing that in orders with our prime partners where we build major subsystems. So, as I've said several times, this is like into the Reagan buildup. This is 1981. We're in the second inning. And the difference is that there has been such a consolidation in the defense industry; there are just very few of us left that can do it.

Speaker Change: The lesson learned from there is quantities have a quality all of their own.

Speaker Change: and those quantities can offset

Deanna Lund: I don't want to use word non-recurring, but that's probably the best word at this point. So what I see is our maintenance CapEx is closer to call 35ish million a year. But depending on contract awards and opportunities, there could be opportunities in 25 that we would make investments for. Okay, that's that's very helpful, Deanna.

Speaker Change: Lack of defense budget of countries that can't afford exquisite systems.

Eric DeMarco: We're seeing that in direct orders, and we're seeing that in orders with our prime partners where we build major subsystems. So, as I've said several times, this is likened to the Reagan buildup. This is 1981. We're in the second inning.

Speaker Change: And so their exquisite systems will be thousands of something.

Speaker Change: And we're seeing that. We're seeing that in direct orders and we're seeing that in orders with our prime partners where we build major subsystems.

Speaker Change: So I, as I've said several times, this is likened to the Reagan buildup.

Eric DeMarco: And the difference is that there has been such a consolidation in the defense industry; there are just a few of us left that can do it. And as I said in my prepared remarks, Building hardware for defense or national security applications is hard, building it in mass production is even harder, and experienced guys like Northrop and Lockheed and Raytheon and Boeing and Kratos. We know how to do it, and that stuff's got to work, which I believe is one of the reasons, and a shitty situation for the foreseeable future, our business is going to be very strong.

Eric DeMarco: And the difference is that there has been such a consolidation in the defense industry; there are just a few of us left that can do it. And as I said in my prepared remarks, Building hardware for defense or national security applications is hard. Building it in mass production is even harder, and experienced guys like Northrop and Lockheed and Raytheon and Boeing and Kratos. We know how to do it, and that stuff's got to work, which I believe is one of the reasons, and a shitty situation for the foreseeable future. Our business is going to be very strong.

Speaker Change: This is 1981.

Eric DeMarco: Thanks. And just maybe Eric, as I look at just such phenomenal growth internationally, I guess specifically in NATO countries. Can you just level set us on what percentage of your sales are into maybe NATO countries are outside of the United States more broadly? And what kind of growth you're seeing in that this year and potentially in the next year? Yeah, so our international revenues are about 20% for the quarter. And the growth there in Israel and in systems that are going to NATO countries that we build.

Speaker Change: We're in the second inning.

Speaker Change: And the difference is...

Speaker Change: that there has been such a consolidation in the defense industry, there are just very few of us left that can do it.

Eric DeMarco: And, as I said in my prepared remarks, building hardware for defense or national security applications is hard. Building it in mass production is even harder. And the experienced guys, like Northrop and Lockheed, Raypion and Boeing and Kratos, we know how to do it and that stuff's got to work, which I believe is one of the reasons in a shitty situation for the foreseeable future. Our business is going to be very strong. Got it. Really appreciate the color.

Speaker Change: And as I said in my prepared remarks,

Speaker Change: Building Hardware

Speaker Change: for defense or national security applications is hard.

Speaker Change: Building it in mass production is even harder.

Speaker Change: and the experienced guys like Northrop and Lockheed and Raytheon and Boeing and Kratos. We know how to do it and that stuff's got to work, which I believe is one of the reasons.

Eric DeMarco: So these are air defense systems, radar systems and counter UAS systems. It's very strong. So can for it as a for a data point. And I talked in detail about our space business, putting our space business aside. KGS grew is growing 15% organically. A significant part of that is our C5 ISR business where we we work with Ray Pion on Patriot. We work on FAD. We work on a number of counter UAS systems.

Speaker Change: and a shitty situation for the foreseeable future, our business is going to be very strong.

Trevor Walsh: Got it. I really appreciate the call.

Deanna Lund: Got it. I really appreciate the call.

Deanna Lund: Then T&O, maybe one quick follow-up for you. Services revenues looks like it stayed pretty flat quarter over quarter, but then margin had a nice little bump up about 200 basis points. Just wondering if there was anything in particular that drove the improvement there on the margin side.

Deanna Lund: Deanna, maybe one quick follow-up for you. Services revenues look like they stayed pretty flat quarter over quarter, but then margins had a nice little bump up about 200 basis points. Just wondering if there was anything in particular that drove the improvement there on the margin side. Thank you.

Speaker Change: Got it. Really appreciate the call. Deanna, maybe one quick follow-up for you. Services revenues looks like it stayed pretty flat quarter over quarter, but then margins had a nice little bump up about 200 basis points. Just wondering if there was anything in particular that drove the improvement there on the margin side. Thanks.

Deanna Lund: Thank you. Nothing in particular. It was just what the mix was for that order. That drove that margin expansion. Got it. Okay.

Operator: Nothing in particular; it was just what the mix was for that quarter that drove that margin expansion.

Trevor Walsh: Nothing in particular; it was just what the mix was for that quarter that drove that margin expansion.

Deanna Lund: Nothing in particular, it was just what the mix was for that quarter that drove that margin expansion.

Deanna Lund: Got it. Okay. That's all from me. Appreciate it. Thanks.

Operator: Got it. Okay. That's all for me. I appreciate it. Thanks.

Eric DeMarco: We're working with Dynetic on indirect fires or enduring shield. All all of these air defense systems. And in addition to that KGS part is where our Israeli business sits where we are supporting iron dome, arrow, baroque, lightning, iron sting, virtually every missile and radar system. And so they are very, very strong. The backlog is very strong. And the order book potential for the next two years is not only strong, but it's increasing.

Operator: That's all from me. Appreciate it. Thanks.

Operator: Thank you. And our last question comes from the line of Pete Skibitski with Alembic Global.

Speaker Change: yeah

Peter Skibitski: In our last question, comes from the line of Peter Skibitski with Alembic Global. Yeah, guys, sorry to extend the call. But Eric, I just wanted to de-conflict something you said a little while ago about a month from now that you're largest target drone contract hour. I don't know if we've talked about this before, but earlier in the year, I think you've discussed an announcement about a potential target order from Korea for their ships. It wasn't just BQM. It wasn't just BQM-177. It was also coyotes, but it's talked about like $170 million order. Are we talking about the same thing, or is that different?

Speaker Change: Got it. Okay. That's all from me. Appreciate it. Thanks.

Pete Skibitski: Thank you. Thank you. And our last question comes from the line of Pete Skibitski with Alembic Global.

Operator: Yeah, guys, sorry to extend the call, but Eric, I would just want to clarify something you said a little while ago about a month from now, your largest target drone contract ever. I don't know if we've talked about this before, but earlier in the year, I think Diska had an announcement about a potential target order from Korea for their ships. It wasn't just BQM-177s; it was also Coyotes. It talked about a $170 million order. Are we talking about the same thing, or is that different?

Operator: Yeah, guys, sorry to extend the call. But Eric, I would just want to clarify something you said a little while ago about a month from now, your largest target drone contract ever. I don't know if we've talked about this before, but earlier in the year, I think Diska had an announcement about a potential target order from Korea for their ships. It wasn't just BQM-177s, it was also Coyotes, but they talked about like a $170 million order. Are we talking about the same thing, or is that different?

Pete Skibitski: Yeah, guys, sorry to extend the call, but, uh, Eric, I would just want to de-conflict something you said a little while ago about, uh, a month from now, your largest...

Speaker Change: Target Drone Contractor.

Speaker Change: I don't know if we've talked about this before, but earlier in the year, I think UDISCA had an announcement about a potential target order from Korea for their ships.

Speaker Change: It wasn't just BQM-177s, it was also Coyotes, but it talked about a $170 million order. Are we talking about the same thing, or is that different?

Eric DeMarco: That's great. So I guess it'd be fair to say that the international pieces of portfolio probably seems much better growth than sort of the 10% you've talked about for the company over the next few years. Yes, but next year with our partner, Northrop, which is one of the best partners we have, Sentinel is going to start ramping for us in a big way, very significantly, tens and tens of millions incrementally, which of course is US-based.

Eric DeMarco: You know, Pete, that's a great question. You are on top of your game.

Pete Skibitski: You know, Pete, that's a great question. You are on your game. It's a separate order, it's a separate order and a separate customer, and it's a different platform.

Eric DeMarco: You know, Peter, that's a great question. You are on your game. It's a separate order. It's a separate order and a separate customer, and it's a different platform. Okay. Any, I know Diska does things way in advance. Any, any time frame on that particular opportunity? I, I hope, you know, we want, we got it, sole source. I'm hopeful that we will be able to announce it next 30, 60 days. I'm hopeful, but we've, we've received it. Okay. That's great.

Eric DeMarco: It's a separate order and a separate customer, and it's a different platform.

Speaker Change: You know, Pete, that's a great question.

Pete: You are on your game.

Speaker Change: It's a separate order and a separate customer, and it's a different platform.

Eric DeMarco: Okay. I know DSCA does things way in advance. Any time frame on that particular opportunity?

Speaker Change: Okay. I know DSCA does things way in advance. Any time frame on that particular opportunity?

Pete Skibitski: I hope, you know... We've won. We got it. I'm hopeful that we will be able to announce that in the next 30-60 days. I'm hopeful, but we've received it.

Eric DeMarco: I hope, you know... We've won. We got it. I'm hopeful that we will be able to announce that in the next 30-60 days. I'm hopeful, but we've received it.

Speaker Change: I hope, you know...

Speaker Change: We've won. We got it. Sole source.

Speaker Change: I'm hopeful that we will be able to announce it next 30, 60 days. I'm hopeful. But we've received it.

Eric DeMarco: That's great. Congratulations. Thanks, guys. Okeydoke.

Operator: That's great. Congratulations. Thanks, guys. Okeydoke.

Operator: Congratulations. Ladies, guys, okay. Thank you.

Pete Skibitski: Thank you. That's a good question. Thank you.

Operator: Thank you. That's a good question. Thank you.

Operator: Good question. Thank you.

Speaker Change: Okay.

Operator: Thank you. And this concludes the Q&A session. I will turn the call back to Eric DeMarco for final remarks.

Eric DeMarco: Thank you. And this concludes the Q&A session. I will turn the call back to Eric DeMarco for final remarks.

Eric DeMarco: In this concludes the Q&A session, I will turn the call back to elect the marker for final remarks. Great.

Speaker Change: That's great. Congratulations. Thanks, guys. Thank you.

Eric DeMarco: And on the target drones, I was going to say target drones, but you're absolutely right on that. It's a mix of international. And the other one can, our hypersonic business, our rocket business, as I answered earlier question, no later than the second half, next year a significant step up is expected, significant. I went through the numbers. And so 25, definitely 26, 27, that is going to be all US, and it's going to be significant. So my point is the mix may change because of these programs we've won.

Speaker Change: Thank you. Good question. Thank you. And this concludes the Q&A session. I will turn the call back to Eric DeMarco for final remarks.

Eric DeMarco: Great. Thank you all for joining us, and we'll chat with you at Q3.

Operator: Great. Thank you all for joining us, and we'll chat with you at Q3.

Eric DeMarco: Thank you all for joining us, and we'll chat with you at Q3.

Operator: And thank you all for participating in today's conference. You may now disconnect.

Eric DeMarco: Great, thank you all for joining us and we'll chat with you at Q3.

Operator: And thank you all for participating in today's conference. You may now disconnect. Thank you.

Speaker Change: And thank you all for participating in today's conference. You may now disconnect.

Eric DeMarco: Great, thanks Eric, very helpful.

Eric DeMarco: Thank you.

Joshua Sullivan: Our next question is from the line of Josh Sullivan with the benchmark company. Good evening, Eric, yeah. Good evening, Josh. As far as the GE relationship, you know, we hear a lot about tightness and forging and other aspects of the aerospace supply chain. Do you see this as a hurdle for the GE partnership engines or are your designs just given their lower cost able to circumvent some of these issues to get to some of these higher volumes?

Joshua Sullivan: Yet two things. Number one, our designs are definitely able to circumvent some of the issues. However, one of the key attributes in one of the key reasons we were many, we did this with GE, is because they're the big dog, they're the preeminent. And they have priority, we call them kryptonite parts with kryptonite vendors on very specialized subsystems and components for the engines via their supply chain and their relationships. That's an incredible value they're going to bring us.

Joshua Sullivan: It not only bring surety to us, but it's bringing surety to the missile guys these engines are going to go in. That if we get a multi hundred a year order, we're going to be able to source it and we're going to be able to build it. And with general electric behind Kratos or in front of Kratos, or if you want to look at it.

Joshua Sullivan: That's what's closed in the deal here. And then just as far as that ordering the initial market, given the increasing use of the battle space, you mentioned you were in contract negotiations, but what's your sense of how quickly this market range? I think it's possible by the end of this year. It's probable. It'll happen next year. We're going to begin to get the initial production orders on turbo jets. So think 200 pounds of thrust and below.

Joshua Sullivan: And it's probably going to start out at a few hundreds and then it's going to ramp if again I went to some of the program names if you take a look at what they're talking about. It's going to ramp for us to several hundreds and potentially a thousand or so a year over the next several years. And that that just ties into the I have a list here in front of me again I went through some of them the opportunities that are out there most of which if not all of which we're either designed in on or we're working with because we have flying engines. And our cost points are are very very competitive. Thanks for the time. Thank you.

Joshua Sullivan: Our next question comes from the line of Joshua so far with a noble capital markets. Good afternoon, guys. I'm still in there for Joe. Okay, so you guys answered pretty much all of my questions, but you know, just kind of mark for a couple housekeeping ones. You know, if you guys talked a little bit about the Hermitius contract, you guys were awarded, you know, is there kind of any progress on that contract is still kind of expected to be contracted by the end of the year.

Joshua Sullivan: Yeah, if I said that we had been awarded Hermitius, I'm a spoke and I apologize, I don't remember doing that, but if I didn't, I apologize. So from Hermitius is an opportunity that we are working on. Okay, we are getting there. We're in the red zone football term, but it's not complete yet. So again, I apologize for that misunderstanding.

Eric DeMarco: Okay, that's helpful. Thanks for clearing that up. And, you know, kind of a couple months ago, you know, you're mostly talking about, you know, in the space satellites re-evaluate space business. You know, is there any more impact to that re-evaluation that it has on creatives itself, you know, are satellites being pushed even more further to the right due to that. And I want to make sure, I want to make sure I understand your question, are they being pushed to the right because of what?

Eric DeMarco: The Airbus re-evaluating its space business as a whole. Oh, I got it. I got it. Yeah. So what's going on with Airbus is definitely impacting the ecosystem and it's definitely impacting creatives. And I feel bad for them and I really hope they get this stuff figured out. I am highly confident we have taken that into consideration in our financial forecast. And as Deanna and I tried to articulate today, you know, we're very fortunate here at creatives that we have six divisions and five and a half of them are ripping.

Eric DeMarco: And the half that is not as tied to commercial software to find payload satellites right now, which we've taken into consideration. The management team over there and our satellite business, I got to tell you, they have done an incredible job on the resource allocations to our national security programs, our defense programs, and some other things they're working on like our global space demand awareness network to hold court. I mean, reading other company space businesses and what's going on with them, which is tied directly to what your question is.

Eric DeMarco: Our team is far outperforming them. And so we've taken it into consideration as soon as these technical issues with some of these software defined payload satellites get fixed and the operators can get them and they get launched. We're going to be in fantastic shape.

Eric DeMarco: Okay, that's hopefully I think for the time, guys. You've got it. Thank you.

Peter Skibitski: Our next question comes from the line of Peter Skibitski with Alembic Global. Yeah, good afternoon, guys. Um, we just want if you could, yeah, we just want if you can quantify the size of the Apollo contract that you said it's on contract now. And then we're going about timing if there's the potential for a larger follow on in the future. Right. So it's think of a couple tens of millions right now.

Peter Skibitski: And that's over a couple of years. And if we're successful and we us and this customer, there's absolutely the opportunity for a larger follow on here. Okay, okay. My only thanks for that. My only other one.

Eric DeMarco: I think I know the answer to this, but you know, if we do have potentially a change in administration next year and there's less financial support for the effort in Ukraine. I was just wondering, do you guys have any direct exposure there or maybe what you'd consider kind of near direct exposure? So our our primary exposure relative to what's going on in the Ukraine has to do with the NATO countries rearming.

Eric DeMarco: And I saw the other day that virtually all of them now are over the 2% and they're increasing with some of them at 4% or 5% like like Poland. My opinion is if the Ukrainian situation gets resolved that that in the in the NATO countries minds does not address the primary threat, which is Russia. And so I don't believe it impacts us or our customers or partners on these air defense systems.

Eric DeMarco: The number of air defense systems surface to air missile systems, counter UAS systems that have been ordered and that are coming down the pipeline. These are just the ones that were involved in. It's stunning to me. It's stunning. And so I don't think I don't think a resolution in the Ukraine impacts us because the primary threat or the inherent threat will still be there. Okay. Appreciate it. Appreciate the color. Thanks, guys. Yep. Thank you.

Andrea Madrid: Our next question comes from the line of Andrea Madrid with BTIG. Hey, everyone. Thanks for taking my question. Looking at the strong man book to bill for the quarter, I mean, with a poll now under contract, how much if at all of this of this contribution for bookings was from tactical drones? It was primarily all on the target drone side. On a relative basis, it was small. That mixed will probably change in either two, three or two, four. But target drones are doing very well.

Andrea Madrid: We're probably going to be in a position relative to that to make an announcement of our largest target drone order ever in the next month or so. We just got it. Got you. That's helpful. And then sticking on the old man's side, I mean, looking at what you got announced with the GEK engine, you know, you guys are saying that's probably going to be in a thrust range or probably less than 3000.

Andrea Madrid: According to the RFI, those released on CCA, they're aiming for something between three and eight. I know you guys said you could scale up, but kind of piggybacking off of Peter's question earlier, how easy is it to scale up? I'm sorry on both of those. I can't comment. I just can't do it. I'm not affirming what you I'm not affirming what you saw. I just can't comment on it. I apologize. No, no, no, no, no worries at all.

Deanna Lund: They retired and they're efficient. And this is this is very challenging and it's very expensive to hire them and keep them both in both in cash and equity at the executive level. So this is a challenge. It remains a challenge. And I believe it's going to continue to be a challenge for us and the industry. Got it. Thank you both. Thank you. In a sorry reminder, if you do have a question, simply press star 11 to get in the queue and wait for your name to be announced. One moment for our next question in queue.

Trevor Walsh: And it comes from the line of travel world with citizens, JMP. Great. Hi, team. Thanks for taking my questions today. Eric, maybe just to follow up, similar line of questioning for for your based on the Ukraine question, you got earlier, but maybe applying that to Israel sounds like the Israeli businesses was strong in the quarter. Not actually necessarily predict what will happen there, but if things go more towards the kind of positive side around the things those tensions there, what either what prognosis you have around just the, you know, forward looking part of that that business either particular to Israel or even similar systems being deployed in other countries, lessons learned around just, you know, making sure there's enough kind of.

Trevor Walsh: Munitions that are stored and kind of ready for ready to go for things kind of breakout again, just kind of what's your outlook on that just give it up the again, the more positive. I'll give you my opinion, Eric's opinion. My opinion is that the quantity of munitions that have been expended has been incredible, years worth of inventory, years and years worth of inventory have been expended and that must be replenished in order to maintain a consistent defense posture.

Trevor Walsh: So I don't see, in the foreseeable future, years, any abatement in demand if as you're indicating and that would be wonderful if resolution would happen, peace broke out. The significant increases we're seeing month over month over month will probably be flattened out, but that is that is an exponentially higher ratio than it was before October of 23. So that's specific to there. Outside of their internationally, the lessons learned, the lessons learned is that you look at the first potential strike that I ran try to do on Israel.

Trevor Walsh: I mean, it came out that there were 300. It was actually over 500 munitions, missiles and drones, ballistic crews and drones were fired at Israel and that one garage. In the Ukraine, over 10,000 drones on one side are being shot down a month. The vast majority of those are not in our class, they're class one, two or three, but a significant number of them are jets. The lesson learned from there is quantities have a quality all of their own, and those quantities can offset lack of defense budget of countries that can't afford exquisite systems.

Trevor Walsh: And so their exquisite system will be thousands of something. And we're seeing that, we're seeing that in direct orders and we're seeing that in orders with our prime partners where we build major subsystems. So I, as I've said several times, this is like into the Reagan buildup. This is 1981. We're in the second inning. And the difference is that there has been such a consolidation in the defense industry, there are just very few of us left that can do it.

Trevor Walsh: And as I said in my prepared remarks, building hardware for defense or national security applications is hard. Building it in mass production is even harder. And the experienced guys, like Northrop and Lockheed, Raypion and Boeing and Kratos, we know how to do it and that stuff's got to work, which I believe is one of the reasons in a shitty situation for the foreseeable future. Our business is going to be very strong.

Trevor Walsh: Got it. Really appreciate the color. Then T&O maybe one quick follow up for you. Services revenues looks like it stayed pretty flat quarter over quarter, but then margin had a nice little bump up about 200 basis points. Just wondering if there was anything in particular that drove the improvement there on the margin side. Thank you. Nothing in particular. It was just what the mix was for that order. That drove that margin expansion. Got it. Okay. That's all from me. Appreciate it. Thanks. Thank you.

Peter Skibitski: In our last question comes from the line of Peter Skibitski with Alembic Global. Yeah, guys, sorry to extend the call. But Eric, I just wanted to de-conflict something you said a little while ago about a month from now that you're largest target drone contract hour. I don't know if we've talked about this before, but earlier in the year, I think you've disc ahead an announcement about a potential target order from Korea for their ships.

Peter Skibitski: It wasn't just BQM. It wasn't just BQM177. It was also coyotes, but it's talked about like $170 million order. Are we talking about the same thing, or is that different? You know, Peter, that's a great question. You are on your game. It's a separate order. It's a separate order and a separate customer, and it's a different platform. Okay. Any, I know Diska does things way in advance. Any, any time frame on that particular opportunity? I, I hope, you know, we want, we got it, sole source. I'm hopeful that we will be able to announce it next 30, 60 days. I'm hopeful, but we've, we've received it. Okay. That's great.

Operator: Congratulations. Ladies, guys, okay. Thank you. Good question. Thank you.

Eric DeMarco: In this concludes the Q&A session, I will turn the call back to elect the marker for final remarks. Great. Thank you all for joining us and we'll chat with you at Q3. And thank you all for participating in today's conference. You may now disconnect.

Operator: Thank you.

Q2 2024 Kratos Defense & Security Solutions Inc Earnings Call

Request a DemoDemo

KTOS

Kratos Defense and Security Solutions

Earnings