Q2 2025 Kratos Defense and Security Solutions Inc Earnings Call
Speaker #2: Thank you for standing by and welcome to KRATOS DEFENSE & SECURITY SOLUTIONS' second quarter 2025 earnings conference call. At this time, all participants are on a listen-only mode.
Speaker #2: After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press *11 on your telephone.
Speaker #2: To remove yourself from the queue, you may press *11 again. I would now like to hand the call over to Marie Mendoza, Senior VP General Counsel.
Speaker #2: Please go head.
Speaker #3: Thank you. Good afternoon, everyone. Thank you for joining us for the KRATOS EFENSE & SECURITY SOLUTIONS' second quarter 2025 conference call. With me today is Eric DeMarco, KRATOS' President and Chief Executive Officer, and Deanna Lund, KRATOS' Executive Vice President and Chief Financial Officer.
Speaker #3: Before we begin the substantive of today's call, I'd like everyone to please take note of the Safe bor paragraph that is included at the end of today's press release.
Speaker #3: This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking savings we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential market opportunities, operational outlook, financial guidance, and other forward-looking statements made during today's call.
Speaker #3: Today, the 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.
Speaker #3: 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.
Speaker #3: Eric?
Speaker #2: Thank you, Marie. The annual global defense and national security expenditure in 2024 was approximately $2.5 trillion. This $2.5 trillion figure does not take into account the expected increase in the United States' national security spend to over $1 trillion this year, or planned NATO increases in its defense expenditures, from a historical approximately 2% up to 5% of GDP, and this is also before the recent announcement from non-NATO US allies in the Pacific that they would also be increasing their defense expenditures to 5% of GDP.
Speaker #2: There is truly a generational global recapitalization of weapon systems and related infrastructure currently underway, and we believe that KRATOS is one of the few qualified today defense technology companies positioned now to address it and take advantage of what is truly an industry inflection point.
Speaker #2: The Trump administration, through recent executive orders, is working to streamline the US DOD procurement, purchasing, and deployment processes, to significantly improve efficiency, make the deployment of new systems and technology to the warfighter faster, and prioritize new, rapidly developed, and fast-to-field hardware and systems.
Speaker #2: Additionally, both the Senate, through the FORGED Act, and the House via the SPEED Act, are similarly looking to streamline the defense procurement and acquisition processes, including a focus on first-to-market, relevant technology, hardware products, and systems.
Speaker #2: We are also at the beginning of a rebuild of the US defense industrial base, which is atrophied for several decades, which rebuild, we believe, will require hundreds billions of dollars of investment and take many years to complete.
Speaker #2: KRATOS is realizing the positive impact of these factors, including our Q2 organic revenue growth rate of 15%, our bookings with an LTM book-to-build ratio of 1.2:1, our backlog, our record-level bid and proposal pipeline of $13 billion, and also our previously communicated 2026 forecast base case organic revenue growth of 13 to 15 percent over '25, which is now substantially covered by on-hand programs and contracts.
Speaker #2: Additionally, after our second quarter ended, we were informed by a government customer that we have been successful on a large new program of record opportunity we call Poseidon, which I do not believe that I have previously mentioned, with formal contract award to KRATOS as prime expected shortly.
Speaker #2: Poseidon is expected to be a single award to KRATOS. It's military-grade hardware and system program with an approximate total potential value through production of approximately $750,000,000, which should begin ramping for us in mid '27 once the required program-specific new facility we will be standing up is complete.
Speaker #2: The Poseidon win is expected to provide KRATOS another large steady state future revenue profit and cash flow engine further enabling our aggressive growth pursuit including in the drone, hypersonic, jet engine, microwave, and SATCOM areas, while also generating profitability and cash flow.
Speaker #2: Additionally, KRATOS was also informed after the Q2 close that our team, with a key KRATOS partner, has been one of few companies successfully down-selected on another new program of record opportunity KRATOS code-named DEMOS, with KRATOS contract award expected shortly.
Speaker #2: As a result of these and other expected contract awards, we currently forecast that KRATOS' third quarter bookings could be particularly strong. Since our last report, KRATOS' confidence has increased in our 2026 forecast base case margin or EBITDA rate increase of 100 to 150 basis points, with additional increases expected in '27 and beyond as new higher-margin programs we have recently received begin to ramp up, and certain lower-margin contracts are renewed with the customers at expected higher margin rates.
Speaker #2: In KRATOS' tactical drone business, it was recently reported that both the US Marine Corps and the Office of the Secretary of Defense stated that the Valkyrie is becoming a program of record and will be the first CCA in production and fielded for the Marines.
Speaker #2: Additionally, Airbus recently announced that they have partnered with KRATOS for a European mission-focused Valkyrie and initially specifically targeting the German Luftwaffe with a current expectation for fielding no later than 2029.
Speaker #2: As you ow, KRATOS' base case financial forecast does not include any assumed tactical drone production, which we will only include in our revenue forecast once we have received a contract award, as the potential financial impact to KRATOS when we receive tactical drone awards could be very significant.
Speaker #2: For example, if in 2026 hypothetically KRATOS receives an initial order for 15 Valkyries at $10 million each, we could have an immediate revenue increase over our base case financial model and forecast of $150 million with profit as the Valkyrie is currently in production and we could have 15 aircraft ready to deliver immediately upon contract award in my example.
Speaker #2: Both the Marines and Airbus opportunities were made possible as a result of KRATOS making the investment to begin production of 24 Valkyries several of which have been delivered to customers, as you know, in advance of a program or contract award, with approximately 15 to 20 of which can are or will be completed and available for sale next year.
Speaker #2: KRATOS made the decision to make the investment and begin serial production of 24 Valkyries ahead of contract award so that KRATOS would be first to market and that the potential customers could come to the factory, see their aircraft being built, see the actual cost data for the aircraft, see their aircraft fly, and we believe based on what we expect to occur that this was the correct business decision.
Speaker #2: KRATOS took this same first-to-market approach of making the internal investment to design and develop certain of our product offerings including Air & Ace and Dark Fury, our ypersonic fliers, our Zeus 1, Zeus 2, and Oriel solid rocket motor stacks, our family of jet engines for drones and missiles, our open space C2 and telemetry tracking control satellite system, and many others.
Speaker #2: Each of which are, and we believe will, be driving KRATOS' future growth and value. In addition to the US Marine Corps and Airbus Valkyrie-related opportunities that have been reported, we have two new additional Valkyrie opportunities with two different customers both of which I believe KRATOS is currently in a sole ource position.
Speaker #2: As a result of recent Valkyrie-related progress, we have now begun the process of pricing out with our already in place and performing qualified suppliers the long lead purchasing and the program planning for an expanded production run of at least 24 additional Valkyries.
Speaker #2: Which would sustain and build on the current learning curve from the initial 24 and would bring the total Valkyrie serial production run to 48 aircraft.
Speaker #2: Across the potential increased Valkyrie production run, we would be producing several variants including Runway Independent, Combined Runway Independent Runway Capable, CTAL, a European-focused variant, and potentially two additional variants all of which are specifically potential customer-focused.
Speaker #2: By maintaining the Valkyrie production line with the potential additional 25 aircraft, we will continue to improve production efficiencies and reduce cost as we continue to come down the manufacturing learning curve further establishing KRATOS' leadership position with actual aircraft and real known cost points.
Speaker #2: I can now also report to you that we expect that by the end of this year we will receive a sole source contract for the KRATOS Airwolf tactical jet drone, which could lead to a production contract in late 2026.
Speaker #2: And I can report that KRATOS' Athena tactical drone very recently had multiple successful flights as we continue to progress with this customer-funded program. KRATOS' ghost works is currently working on a new fifth-generation jet drone with expected first flight in the first half of '26.
Speaker #2: And ghost works is also working with KRATOS' turbines systems Chaos team on a new hypersonic system named Icarus. KRATOS' rail-based microwave electronics business has successfully completed its move into our new manufacturing facility with less operational downtime than we originally expected.
Speaker #2: And we are now positioned for further increased organic revenue growth with the expanded capacity including with our key partners Raphael Israeli Aerospace Industries and Elbit.
Speaker #2: KRATOS' jet engine and propulsion BladeWorks and our rocket systems businesses are certain of our strongest revenue growers and highest operating margin businesses with growth expected to accelerate in the second half of '26 including as ElRIP quantities of certain drones and missile programs increase with additional revenue increases expected in '27 and then also in '28 as ElRIP is expected to transition to full-rate production on certain programs.
Speaker #2: As you would expect, KRATOS' military-grade air defense missile radar and counter-UAS systems business is very strong. And is also expected to be a key KRATOS base case future organic revenue growth driver.
Speaker #2: Including with our incredible partners Northrop Lockheed and Raytheon each of which innovate, develop, and integrate certain of the best weapon systems in the world as is being demonstrated globally in combat.
Speaker #2: KRATOS' space, training, and cyber business is turning . Led by our government and national security offerings, with expected 2026 growth and increased profit margins and accelerating into '27, based on programs and the current new opportunity pipeline.
Speaker #2: The reconciliation bill and the Trump administration's policies position and support for space and satellite capability has now clearly become both evident and significant including for national security which we are seeing in our government satellite business.
Speaker #2: Crisply stated, with the Trump administration's focus on space including Golden Dome and KRATOS' proven expertise in delivering scalable, software-defined ground systems combined with the open architecture approach of open space, this uniquely positions KRATOS to rapidly integrate a diverse set of next-generation satellite constellations and defense capabilities for US government missions.
Speaker #2: KRATOS' track record of cost-effective agile solutions and deep customer partnerships ensures that KRATOS can meet evolving mission requirements faster and more efficiently than other companies in the satellite area.
Speaker #2: KRATOS' space and satellite business are technology in our capabilities are, in my opinion, they're the gold standard of the industry and we're eing that now with KRATOS' space being one of the most valuable businesses in our company.
Speaker #2: KRATOS' Anna Konda, our Helios Nemesis Hermes and certain other initiatives are tracking and we hope to be successful on Anna Konda and Helios by the end of the year.
Speaker #2: KRATOS' Prometheus partnership with Raphael is on track. Certain key energetics-related production equipment has been ordered. Certain key employees including the chief operating officer have now been hired and we remain optimistic that Prometheus will be a billion-dollar-plus business once at full-rate production.
Speaker #2: Similarly, KRATOS' GEK small turbofan initiative with our outstanding partner GE Aerospace is on track. The GEK production facility location has been identified, as you ow, and we expect GEK to also be a billion-dollar business once at full-rate production.
Speaker #2: I want to pass on to our shareholders that we are routinely told by our customers and partners that KRATOS' affordability and our approach, technology, military-grade manufacturing facilities are national security-approved execution facilities products and capabilities are invaluable and basically don't exist in any other defense technology company.
Speaker #2: A primary differentiator that we are routinely being told more and more often, including now in Europe, is that Kratos doesn't run around putting out PR, PR, PowerPoints, and podcasts saying what we're going to do.
Speaker #2: At KRATOS, we've ready done it. For example, Valkyrie has flown with effectively every fighter in the United States inventory. Valkyrie has flown from multiple US sites in multiple scenarios.
Speaker #2: Valkyrie identified by the Office of the Secretary of Defense and the Marines as a CCA has collaboratively operated with multiple manned military aircraft and has collaboratively cooperated with multiple Valkyries, not surrogates, not computer models, not pretty pictures, actual Valkyrie systems.
Speaker #2: All of these flights and events have occurred in coordination and cooperation with our military customers. Valkyrie exists, is flying, and has been flying since 2019.
Speaker #2: The Valkyrie is real. This is why Airbus partnered with KRATOS. Airbus wants to work with the company that has real flying products and aircraft that have flown with the F-35, for example, and flown with the F-32, excuse me, the F-22, not just promises.
Speaker #2: I find it interesting that other companies are routinely making claims of what their systems will be and capabilities it will have. I consistently tell you on these calls what we have done, what we're going to do, we do it.
Speaker #2: What our systems are, our actual successful missions, and our specific customers. We believe that these are key reasons why KRATOS is seeing increased program opportunities bid pipeline, partnership opportunities, and sole source positioning.
Speaker #2: All of which we expect to continue and potentially accelerate. As national security and defense prioritization increases. At KRATOS, we recognize the scarcity value of our company.
Speaker #2: Including for United States national security and to our stakeholders. And we are laser-focused on execution and rebuilding the US industrial base while generating value for our stockholders.
Speaker #2: Deanna?
Speaker #3: Thank you, Eric. Good afternoon. As we have included a detailed summary of the second quarter financial performance as well as the initial third quarter and modifications to full year 2025 financial guidance in the press release.
Speaker #3: We published earlier today. I will focus on the highlights in my remarks today. Revenues for the third, sorry, second quarter were $351.5 million above our estimated range of $3510 million, with overachievement of forecasted revenues across all of our businesses with the most notable growth in our defense rocket support due in part to the timing of hypersonic missions and in our C5ISR businesses.
Speaker #3: With organic revenue growth rates of $116.6% in '25.4% respectively. Adjusted EBITDA for the second quarter of '25 was $28.3 million, also above our estimated range of $21 to $25 million, reflecting the increased volume, offset partially by continued increase of contractor and material costs on certain multi-year firm fixed price contracts in our unmanned systems business.
Speaker #3: And a less favorable mix in our space, training, and cyber business. Unmanned systems second quarter '25 revenue was down $12.6 million due to the prior year comparable including $17.4 million from the shipment of an international target drone delivery, offset partially by increased tactical drone-related revenues.
Speaker #3: KGS second quarter '25 revenue was up $64 million year-over-year from the second quarter of '24 with organic revenue growth of $27.1% excluding the impact of the February 2025 acquisition of certain assets of Norden Millimeter.
Speaker #3: Second quarter '25 cash flow used in operations was $10.6 million, primarily reflecting the working capital requirements related to the revenue growth impact in our ivables by approximately $36 million increases in inventory and other assets of over $18 million primarily reflecting increases in our microwave electronics and rocket systems businesses which related to anticipated future deliveries and ramps in production as well as investments we are making related to certain development initiatives in our unmanned systems business.
Speaker #3: Recash flow used in operations for the second quarter of '25 was $31.1 million after reflecting funding of $20.5 million of capital expenditures. As we planned, we are continuing to make investments to expand and build out certain of our manufacturing and production facilities in our microwave products, rocket system, and hypersonic businesses to meet existing and anticipated customer orders and requirements and investing in related new machinery, equipment, systems.
Speaker #3: Consolidated DSOs or DSLs outstanding decreased from 104 days in the first quarter to 103 days at the end of the second quarter, reflecting the revenue growth and the timing of milestone billings.
Speaker #3: Our contract mix for second quarter of '25 was $65% fixed price, $31% cost-plus, and 4% time and material. Revenues generated from contracts with the US government during the second quarter were approximately 71%.
Speaker #3: Including revenues generated from contracts with the DOD, non-DOD, federal government agencies, MS contracts. In the second quarter of '25, we generated 12% of revenues from commercial customers and 17% from foreign customers.
Speaker #3: An operational priority remains the hiring and retention of skilled technical labor across the company with total KRATOS headcount of 4316 at the end of the second quarter as compared to 4226 at the end of the first quarter.
Speaker #3: Now moving on to financial guidance. The guidance we provided today includes our expectations and assumptions for our supply chain's execution, and for employee sourcing, hiring, retention, and the related cost.
Speaker #3: We have increased our full year '25 revenue guidance from $1.26 billion to $1.285 billion to $1.290 billion to $1.310 billion, reflecting an organic revenue growth rate of 11 to 13 percent over 2024 and increased our adjusted EBITDA guidance from $112 million to $118 million to $114 million to $120 million.
Speaker #3: Our third quarter revenue guidance of $355 to $325 million reflects an estimated organic growth rate of 12 to 15 percent over 2024. Our guidance continues to include the impact of increased material and subcontractor costs on certain of our multi-year fixed price contracts specifically in our unmanned systems target drone business where we have experienced cost growth from certain ancillary materials on our targets and for which we are unable to seek recovery from the customer until the renewal of future production lot contracts occurs.
Speaker #3: We are continuing to aggressively manage costs where we can minimize the impact to our margins. Our forecasted second half of the year ranges include the sale of certain products that are completed and ready to be delivered once we receive certain government approvals.
Speaker #3: Out of an abundance of caution, we have not included the contribution from these expected revenues and the related profits until the fourth quarter. If the necessary government approvals are received earlier, it is possible these contributions could be made in the third quarter.
Speaker #3: Since quarter-end, we have paid off our entire term loan balance of approximately $180 million. Therefore, any interest expense should be minimal in the second half of 2025.
Speaker #3: Our $200 million revolving line of credit remains undrawn except for approximately $10 million of letters of credits outstanding and available to the company. Eric.
Speaker #2: Thank you, Deanna. We'll turn it over to the moderator now for questions.
Speaker #4: Thank you. As a reminder to ask a question, you will need to press *11 on our telephone. To remove yourself from the queue, you may press *11 again.
Speaker #4: Please stand by while we compile the Q&A roster. Our first question. It comes from the line of Michael Chermoli. Of truest securities, please go ahead, Michael.
Speaker #5: Hey, good ing, guys. Thanks for taking the estions. I guess Eric or Deanna, just on the guidance, I mean, even the results, it sounded like ou've got broad-based strength.
Speaker #5: I don't know if there was any pull forward, but the second half implied revenues down versus the first half. I know you just talked to maybe some potential delays, you know, but anything to read into that?
Speaker #3: Nothing to read into it. There was the timing of a hypersonic mission that was originally anticipated later in the year, and that occurred in the second quarter.
Speaker #4: Okay. Got it. And then just if you could, with the Valkyrie being tagged as a program of record, you've got multiple production lots. Can you just walk us through the mechanics of, you know, when you get a contract, what might happen?
Speaker #4: I mean, I don't know if you've disclosed pricing, but presumably you can, you know, take an immediate recognition of revenue and you could good cash tailwind.
Speaker #4: So is that something we should expect in the near term with all the progress that Valkyrie's having?
Speaker #3: I'll address your
Speaker #3: these we're on the second production lot of 12 when we receive a contract, I think the hypothetical example Eric seemingly get a used was a order for 15 at $10 million a piece.
Speaker #3: So if all those are fully complete, then revenue would be recorded at contract signing of $150 million. If they're, say, 50% complete or 70% complete, then let's say if they're 50% complete, then $75 million would be recorded.
Speaker #3: And then as the continued build-out occurs, then the revenue would be recorded until completion.
Speaker #4: Okay. Got it. Last one, and I'll jump off. Eric, you didn't ion Mach TB. I ink there was $400 million in the reconciliation bill.
Speaker #4: Does give you even greater confidence? I know that was kind of anchoring, you know, the growth in '26.
Speaker #2: Absolutely. And you're correct. There was $400 million in the big, beautiful bill for Mach TB. Our hypersonic franchise, including Mach TB, is going to knock it out of the park.
Speaker #2: Over the next several years. So we feel great. And we're coordinating now with the supply chain for a very, very significant ramp in '26, accelerating into '27.
Speaker #4: Okay. Great. Thanks, guys. I'll jump back in the queue.
Speaker #3: Thanks.
Speaker #4: Thank you. Our next question. It comes from the line of Peter Ahmed of Baird. Please go ahead, Peter.
Speaker #6: Yeah. Good afternoon, Eric and anna. Congrats on all the all the wins you're stacking up. Eric, can you maybe talk about, you ow, your target drone business just in the scope of Golden Dome?
Speaker #6: I know there's an industry day going on at Golden Dome, so there's not a lot of details out, but you know how should we think about how Golden Dome impacts your target drone business?
Speaker #2: Yeah. Hi, Peter. I'm glad you asked the estion. In my opinion, and I'm the CEO, I drink the Kool-Aid. There's no company in the country on a relative basis better positioned for Golden Dome than KRATOS.
Speaker #2: Including target drones. And let just summarize why. On the space segment, we will be involved with the ground command and control and telemetry tracking and control on space.
Speaker #2: We are already under contract for projects related directly or tangentially with Golden Dome, and that's going to increase. We are the hardware merchant supplier on radars, battle command systems, and interceptors for every prime, for virtually every platform.
Speaker #2: So we're going to be involved there. And now to your question. Once Golden Dome is up, it's going to need to be tested. And this is going to take hypersonic targets, cruise missile targets, jet drone targets, ballistic missile targets, all of which KRATOS is the market leader.
Speaker #2: So we are if this goes, this is going to be a significant impetus for our company including in our target drone .
Speaker #6: Appreciate that. And then just last quarter, you kind of stack-ranked for us. And you mentioned, you know, over a, you know, kind of a three-year outlook.
Speaker #6: Do you kind of put hypersonics as one and engines franchises as two, microwave electronics? And you kind of said, you know, tactical drones will wait for customer decisions, but it sounds like those decisions are being made.
Speaker #6: Does change how you view where the rankings would be for that?
Speaker #2: Right now, the rankings remain our hypersonic franchise. No question. I'm going to go with my base case. Number two, our air defense missiles systems radars, battle systems, all that hardware, that's moved into number two now.
Speaker #2: It's staggering. The orders that we're getting and that are coming. And you can read about the systems in the press. And again, we're the merchant supplier on these.
Speaker #2: Third is going to be the engines. As I said, we're heading into low-rate initial production for '26, and into full-rate production in '27. On lots of engines, for new low-cost cruise missiles and drones.
Speaker #2: Okay? If/when tactical drones occur, it could leapfrog and go into one or two. If that happens. But again, that's not in our base case.
Speaker #2: It's not in our forecast.
Speaker #6: Appreciate it. Thanks. I'll jump back in the queue.
Speaker #2: Yep.
Speaker #4: Thank ou. Our next question. It comes from the line of Josh Sullivan of The Benchmark Company. Your line is open, Josh.
Speaker #7: Hey, good afternoon, Eric, Deanna.
Speaker #3: Hi, Josh.
Speaker #7: No clue. It's been very strong a year for drones between executive orders, Hegseth Memo, you ow, industry air shows, highlighting low-cost drones and KRATOS model obviously lines up nicely with these trends.
Speaker #7: You know, but one of the big questions, you know, we continue to get from investors is just the obvious outlier here continues to be the Air Force.
Speaker #7: Should we be thinking the Air Force drone posture is just going to more be on the exquisite side and the other branches are going lead on the low-cost trivial side?
Speaker #7: Or is that how it's going to play out? Do you sense anything's going to change sooner than later?
Speaker #2: I have to be obviously and I appreciate the question. We get the question we get those questions a lot too. I have to be very, very careful.
Speaker #2: I'll never speak for the customer. I can, and I will say that recently representatives of the Air Force have been saying publicly that maybe less than exquisite, more affordable, and in higher quantities is a better way to go.
Speaker #2: Than exquisites that haven't even flown yet. So we're seeing some of that out there. I don't want to I'm not going to speak for the customer.
Speaker #2: Ever. But that's some of the public remarks they've been making.
Speaker #4: Got it. And then, I guess maybe a follow-up to just Peter's question on, you know, U.S. Golden Dome target needs. Given the investment in Europe, I mean, defense posturing over there, should we expect a similar need for target drones in Europe?
Speaker #4: And then would those carry higher FMS-like margins?
Speaker #2: That's an excellent question. The answer is yes. And yes, and they would probably be either FMS or direct commercial. Because the Europeans, as we know, they're ing to be their target is to rease their defense spend up to 5% of GDP.
Speaker #2: I don't know if 're going to get there, but they're definitely increasing it. And they're going to be buying Patriot and FAB and LTAMs.
Speaker #2: And IBCS. And I can go on and on. US systems. Because very candidly, their industrial base doesn't do theirs right now. When you see systems like that being sold, KRATOS target drones go with those systems.
Speaker #2: So as this global recapitalization of strategic air defense systems, missiles, radars, satellites goes, KRATOS's target drones are going with them. And our margins on those are significantly higher than they are here in the US.
Speaker #2: Because they're, as you mentioned, they're either FMS or the direct commercial.
Speaker #4: Got it. Thank you for the time.
Speaker #2: Thank you.
Speaker #4: Thank you. Our next question. It comes from the line of Mike Crawford of Bee Riley Securities. Please go ahead, Mike.
Speaker #8: Thank you. If you had to rank certain missile programs that you're on with microelectronics, I mean, is Patriot up there at top or SM3 or is it kind of all of you both?
Speaker #2: I can't I'm I can't talk specifically, but in KRATOS, we are involved with Patriot. We are involved with that. We are involved with indirect fires.
Speaker #2: We are involved with shore edge for range air defense. We are all these, when I say we're ved, we build them. Integrated battle command system, we build that.
Speaker #2: Long-range hypersonic weapon, on and on. We are involved in virtually every one them. And the associated radars, TP2, TP6, Sentinel, not the ICBM, the radar, Sentinel, etc.
Speaker #8: Okay. Thank you, Eric. And then just with all of these new facilities you're standing up in Oklahoma and Israel, all over the place, are all of those still on track as originally guided for LRIP and potential full-rate production or any changes there?
Speaker #3: It's going to depend on some of the build schedule and the construction. So right now, we still have them reflected in our 25 numbers.
Speaker #3: Projections may vary depending on construction build-out; some of it may slip into '26.
Speaker #8: Okay. Thanks, Deanna. And then final question is should we expect you to start another Valkyrie spiral before award or are we now moving to the point where you're going to get awards before you need to do that again?
Speaker #2: I'm not going to ment on that right now. I can't get I'm not going to get ahead of these two of the ustomers.
Speaker #8: Okay. All right. Thank you so much.
Speaker #2: Yep.
Speaker #4: Thank you. Our next question. It comes from the line of Jonathan Sigman of Stifel. Please go ahead, Jonathan.
Speaker #9: Hello, Eric and Deanna. Thanks for taking my question.
Speaker #3: Hi, John.
Speaker #9: Hi. So you commented on the big, beautiful bill and having Mach TB listed it also listed a billion and a half for low-cost cruise missiles, $600 million for industrial base for solid rocket motors, and then $270 million for the Marine Corps' unmanned combat aircraft.
Speaker #9: So it emed pretty relevant to you guys from my point of view, just wanted to kind of get your confirmation of that and if there's other competing programs that might have their hands in some of those incremental budget dollars.
Speaker #9: Thank you.
Speaker #2: I confirm exactly what ou just said. And on the low-cost cruise missiles, think KRATOS low-cost jet engines.
Speaker #9: That's really helpful. And then I'll just ask another question. On your partner at Prometheus, they likely consumed a lot of their missiles in the effective defense in Israel last in June.
Speaker #9: Just can you give us a sense if that those the interceptors they used are they relevant to the JV that ou're building?
Yes, sir.
Thank you. Our next question comes from the line of Colin Canfield of Canterford. Gerald, please go ahead.
Hey, thank you for the question.
Maybe going back to the x58 uh, program lot map. If you think about the kind of the variance that you listed.
and the awards that are moving between Marine Corps and, and either Air Force or navy,
The other variants seem to suggest, you know, similar kind of quantities of drones over a multi-year period. So as we think of kind of production scaling
And we take apart the parts that kind of 5 categories you listed and assume call it, you know, 10 to 20.
Drones per category, is it fair to characterize, the x58 production schedule, as being able to deliver, you know, call it a 100 drones per year over the next 5 years.
The capability right today, right now.
We can deliver 50 a year.
We have to get the the supply chain and everything, which I mentioned, we're getting ready.
Okay, the way we've set the facility up is, we have an option, we can pull the trigger and we can, we can expand the facility. We get an additional autoclave and we could get to 100.
So that that has all been planned out in our program and manufacturing production plan. Yes.
Got it. And then just taking the 10 million dollar price tag that we consider.
Do you think it's fair to maybe characterize and just assume the other goodness in the business? Is it fair to characterize Kratos as revenue being able to double over the next, call it, three years?
Oh yeah. And our upside case, absolutely.
About the base case about the upside case. Sure, okay, okay, okay, got it, got it, I appreciate that caller. I'll have you back. Thank you, thank you. Yep.
Thank you.
Our next question.
Comes from the line of Seth fman of JP Morgan. Please go ahead. Seth
Hey, uh, thanks very much, uh, good afternoon and a nice results. Um, I wanted to ask, um, just so we understand in in the model, the, the goodness that came in kgs as a result of the Hypersonic event. Um, it was that kind of pulled forward from late in the year. It seemed a little early for for mock TV or or was that something something separate and and then when we think about the increase in the revenue, guidance for the year, is that more in, is that in kgs, or is, is that in in unmanned?
I'll take, I'll take the first part in the annual. Will take the second.
I cannot comment on the Hypersonic mission.
We did.
I can't do it. I'm sorry. I can't say anything about it.
So that's that's on the first part of your question. Go ahead, do you? Yeah, and on the, on the revenue guide I left that's primarily in kgs
Okay.
Okay. Okay got it. Got it, got it. And then and then just as a follow-up um with the Debt Pay down, you probably end the year with uh I don't know 625 million of cash, something something like that. Um, you know, how do we think about what you want to do with that? And the investment requirements, uh, as we go into 26 and Beyond
Yeah. And and your cash number may be a little high set because we did use 180 million to pay down the debt and our guidance is the use of 80 plus million this year. So but but it'll, it will still be a, a fairly sizable number. So right now it's it's we're you know, generating interest income.
A couple percent for about 4%, um, the best rate we can get right now. So, um,
Yeah, on the second part, it says:
we, uh,
On.
The I believe we're going to win.
It'll be sole source. It'll be significant.
Helios, I believe we're going to win.
It will be sole source. It will be significant when, God willing, we win these and they're announced, and we describe what they are.
And the facilities we have to build and these will be multi-decade type programs.
You'll you'll understand what we're doing here. Also, Poseidon the reason I did not talk about Poseidon previously.
This is so big. And and if it's announced by the customer, you'll understand why we called it Poseidon.
Um, it's so binary and it's a, I don't want to call it a flyer, but I wasn't better than 50%. Confident. We'd win. And we won.
That's going to take a a new facility and again if it's just comes out what this is, you're going to go. Oh yeah we see what what they're doing here and what's happening here and and those are just some we had we had some other ones that were were chasing. I think we're going to get into 1 Nemo Vulcan
Hermes.
But Seth, what is happening here is...
The government customer if they have a viable alternative.
To a traditional.
That's qualified, they're encouraging us to bid.
And we're winning.
Deian. And I just did a bid review yesterday on another
Multi several hundred million dollar opportunity that we're priming on. We've been encouraged to bid Prime by the customer.
And so, our plan, macro level.
With the, uh, with the capital, we raised. It's exactly what we said, we we are taking advantage of what is happening geopolitically and the change in in policies, and we are going to build this company.
And sometime probably in 2728 the production that we're outputting is going to exceed the Investments, we're making and then we're going to become a significant multi-decade multi-year, excuse me, cash flow generator.
we're positioning ourselves for that, that's what we're doing and and the opportunities, the number of opportunities
Even since we did the equity REITs continues to they continue to approach us.
It it's it's it's really, it's really fascinating what's happening here? So that's the plan with the
Excellent. That's very helpful. Thanks.
Yeah.
Thank you.
Our next question comes from the line of Ken Herbert of RBC Capital markets, please go ahead Ken,
Yeah. Hey, good afternoon. Eric Indiana.
Hi. Um,
Eric Oriana just to follow up on that on that line of thinking you're obviously using, you know, approximately 80 million this year.
To build out capacity, you just outlined a significant number of new opportunities that seem to be growing. You know, almost daily. How do we think about with with the, with the better Revenue Outlook into 26? Potentially is free cash flow. A greater use in 26. Can you just direct Direction? At least sort of talk about how you're looking at Investments today and how we should think about maybe the cash flows over the next couple of years to support the growth?
And earlier today, I think, uh, Mike, uh, Mike Mike's question related to capex. So we guided this year 125 to 135 million. Some of that may slip into 26. What is not included in the capex or the Investments for 25, which will be included in 26 will be the buildout of um some of these other facilities that we've talked about. Um, if we are successful for Anaconda and for Helios um, in addition the Prometheus JV um, as you know, we have a 50% partnership um, for a total of 185 million. So that's going to be, let's call it 85 90- million. Um that will probably be over a course of 2 years for 26 and 2.
27. Um, and then, so, so from a and so that addresses, the the investment side of it and then on the working capital side, I think working capital will continue to. Um, there there will be a use because of the growth as as we've seen in this quarter and and the prior quarter, but this quarter more more. So the increase from um inventories and receivables and um,
Yeah, just leaning forward on that. And did we negotiate the best payment terms? We can with the customer to be able to get that funding as soon as possible, but that, that initial outlay, especially for growth rates that we're talking about, I I believe will will continue to see that in 26.
Okay, that's helpful. Uh, thank you Diana. And as we think about sort of the the Investments across the board, obviously your your leaning into working capital to help, do you know, do risk supply chain to the extent to which you can
But where's your confidence level across your suppliers um as you as you build this up and are there any particular areas of risk you call out that as much as you're de-risking from the working capital and investment standpoint still really sort of keep you up at night as you think about executing to what could be some pretty aggressive contract terms.
Yep. There there are
What's the most important part or subsystem?
It's the 1, you don't have.
and so,
Can 9, I'm using numbers. 99% of our supply chain is good. We have backup sources. We have alternative sources. We have multiple qualified sources.
But there is still 1 or 2%. We're only 1 Guy, does it.
And as you know, we've been trying to vertically integrate, we are Machining Milling 3D printing additive manufacturing, numerous parts for our engines or Hypersonic systems, Etc, down in Birmingham, Alabama.
But there are still a handful or two.
Suppliers to us that are qualified by the military, the government.
Okay, they will not or have not to date approved us to go qualify anybody else?
They are a sole source to us.
And thus far delivery schedules have not been a problem. Impacting, our programmatic, our programmatic and contractually required delivery schedules. However,
We have 2 or 3 out there that are really expensive and they are increasing their prices.
And it's has been impacting, our margins.
And these are on a couple of programs that they're coming up for us. We're, so to say, coming up for another 3 or 5-year contract award in the next year or two, where we will present the actuals to the government and then we'll get reimbursed for those costs going forward.
So that's the risk right now. I'm not seeing that anybody's going to stiff us, but the cost.
Of like 2 or 3.
Is really high because they’ve got the keys to the kingdom.
Thanks Eric.
Yep.
Woodman Sachs please. Go ahead. Anthony
Hey guys, thanks for the question. Um, Eric I just want to if we can talk about the Marine Corps program of record for a second, um, and in terms of like what exactly needs to happen between where we are today and it actually being an official program of record that you guys have won. And is there any chance that, you know, that does not happen or they bring in another competitor if you can just kind of give us a little bit of a, a feel for that. That would be helpful.
um, good afternoon and and
I hate to give these answers. I, I cannot
I cannot comment.
Any further.
Than what has been published publicly. I can't, I cannot, and I, I apologize. Sincerely, I can't do it.
I can't do it. I okay, no, no, no, no worries. Um, why don't we focus on some of the other growth vectors? Um, in terms of the geek business, I think that you mentioned, um, you think it could be a billion dollar business? Can you just talk about maybe like the time frame for that and then maybe similar. Similarly, um, I think you made some similar comments on Prometheus, in the past. Um, how big can that get? And how quickly do you think, uh, you guys could get there?
Yep. So on the first 1 on on geek. What's happening out there with with these with cruise missiles?
And drones is significant. I was just reading about a new 1 that's coming out today.
Um, GE, the facility will be up and running, I think, 27. Just to be safe, thinking 27.
We'll get into production late 27.
Let's say we get into full rate production, 28, 248, 2829.
That's when it could be material for us and think 5050 on that with us in GE so 2829.
Okay.
On. Um,
On Prometheus.
Think 27.
That will ramp very, very quickly because of the previous question I answered.
um,
We're, we're doing a multiple products across multiple platforms, and we're doing both solid rocket motor and the energetic.
I would think the same type of thing. I would think 28.29.
And is that a billion dollars as well, or is there a different value there?
Yeah, no, I'm looking at the valuation on these things. The valuation of a of
At least a billion dollars based on based on what what we're seeing when I say we us and our partners are seeing out there.
With with other companies and the valuations that are being put them on them. Absolutely. That's we're we're looking at a billion dollar valuation on each once we get into production. Absolutely okay great. And then maybe the last 1 I think around this time last year you'd made a comment about um, like their their training programs out there. That could be pretty large and incremental, um, to where you guys were at. Um, could you just give us an update on that? Maybe.
Stand by.
Stand By. And I'm saying that very affirmatively. I can't say I can't say anything else. Stand by
Okay, great. Thank you, Eric. I appreciate your time.
Thank you.
Our next question comes from the line of Trevor Walsh of citizens. Please go ahead, Trevor
Great. Hey, Eric and Deanna thanks for taking the questions. Um, maybe just to just clarify a little bit more on uh Prometheus. Um, it sounds like the just the the business case, the base case of that is obviously with with Raphael. Um, and that makes, you know, makes sense. Is there anything when you go beyond that from a competitive perspective where that, you know, the the upside case there is just becomes a little bit more.
Um, I guess more more elements there from just kind of what other in the market might be doing and can you kind of go through kind of how that maybe looks from what you're seeing? I think it's just given in the context of the announcement that came from uh, the particular to the solid rocket motor, uh, kind of Market. Yep. As I, as I mentioned, as I, I mentioned a few minutes ago,
There. Um, us and our partner Rafael are looking at this, there are 2 phases.
They're running concurrently. They're running concurrently.
Phase Phase 1.
to satisfy Rafael in the Israeli Ministry of Defense's demand.
For solid rocket motors and energetics.
Number 2 that we're running parallel.
Is to be.
A merchant supplier of solid rocket motors.
Already been engaged with for. I've been engaged with some of them for over a year now on this before we did this which which we are in very deep discussions with on what we're going to be doing with them, that's the upside case. You know there's the base case with our partner. There's the upside case that both our partner and I are going to make we're going to make it happen. We're going to execute it and I can assure you that the uh
The potential customers are motivated. Don't always believe everything you read out there. There's fact, and there's fiction. And as you know, we deal with fact here, and so we're very confident in what Prometheus will be, both base case and as an American supplier.
Got it. That's helpful. Maybe just 1 quick follow up. Um for the Poseidon uh announcement. Uh is I I understand the 750 million in total. Can you just give us a sense when that starts to ramp is that in kind of an annual run rate or what? Just overall what kind of just broad Strokes? How that how that looks with it?
Yep. So we
Anticipated. We felt confident in this, so we've actually already signed a lease.
And on, on the new facility, that's going to be built out, this will obviously be and when this becomes more publicly available you'll see what, um, it's a military military grade secure facility and what we're going to be on what we're going to be doing.
this will, uh,
Facility will be done, 27.
Think production; it's really going to start to ramp 2829 production.
Great. Thanks. I appreciate the questions. Yep.
Thank you. Our next question.
Comes from the line of Sheila, Kayaku of Jeffrey's. Please go ahead, Shayla.
Um, hey, Eric DeMarco. Thank you so much, and great quarter. Um.
You could talk about—you have so many programs in the hopper. If you could talk about next steps, we should think about with the DoD and funding dollars flowing through and um...
Deciding specifically any sort of comments on how it came about? Was it a competitive RFP process? How you got chosen by the prime? Um,
Yeah, you know, how did that work?
yep, it was
Absolutely competitive. It was extreme on this. This is on Poseidon. It was absolutely competitive. It was very competitive.
And this is why I very candidly—I didn't talk about it like I talk about other ones where I think we have a clear line of sight and we have competitive differentiators that we're going to win.
um,
So, it was very competitive. We were fortunate enough to, uh, to pull it off.
Um, as I mentioned before, we call it Poseidon for a reason. When it becomes public, you'll see why, and um,
And as I mentioned, this will be a big flywheel.
Stability. Cash generator. This will reduce our rates.
Because of the structure which will make us uh more competitive on other bids. Sheila. This is a this is this is an incredibly strategic win that the team did. The team knocked it out of the park with us. Oh, and let me let me say something else. I'm really glad you asked this, Sheila? Let me say something else. There were multiple creatives divisions involved in this.
Helping to build what we're going to be building, and I believe that's one of the key reasons why we want.
Because this customer—and again, when this comes out, you'll see who this customer is—was looking for Shity.
I like to say, one neck to choke, and with us, we're very vertically integrated on this because of our capabilities.
And I think that was a primary differentiator in our win thesis.
Great. No, that's awesome. And maybe if we could Eric, if you have any commentary on. So how we should track uh, you know, program performance or next steps with the dod and uh finding allocations
And Sheila, are you talking overall at a macro level or this program?
Um, both deciding and, you know, the next three biggest drivers, as you’re looking at watch items.
Okay, so and are these are these watch again. I I want to make sure I answer the question. Are these watch items that we've won or these ones that I'm chasing?
Uh, know that you've won.
Okay. Yeah. The um
The biggies. Let's go to the big beautiful. Let's go to the reconciliation bill.
So, in our Hypersonic franchise, including mock TB.
I think we should see a significant uptick.
For Kratos's Hypersonic franchise, relative to what's in that reconciliation bill, and what's supposed to be obligated—very similar to a drone program that was mentioned that's in the reconciliation bill. I believe that that's going to be obligated and under contract very soon, and it's got to be spent and obligated in the next 12 months relative to small drones and engines. I believe we're going to start receiving.
We're designed in, on a number of small cruise missiles. We're designed in.
I'm under NDA. I can't tell you which ones yet.
I believe we're going to see the money start flowing on small cruise missiles directly related to that $1.5 billion that's in the reconciliation bill. That's now law.
So those are those are some you can track directly. Another big 1 for us is the Sentinel intercontinental ballistic missile with our outstanding partner Northrup, which I got to give a accolades to they're, they're doing a hell of a job on on Sentinel Northrup is um,
Take a look at what Northward is saying about Sentinel, and you can basically flow that down to us. That's number one. We don't talk about it, but that's a multi-hundred-million-dollar development program for us. That's going to be ramping starting next year in 2026 and 2027. Then it will go into production and ramp even further. That's when you can track the funding on as well. So there are four or five where you're going to be able to track the funding flows.
Top level and to Kratos, pretty easily.
Awesome. Thank you so much. I appreciate it. Yep, yep.
Thank you. Our next question.
Comes from the line of Andre Madrid, a BT. Please go ahead, Andre.
American Deanna, thanks for taking the questions.
Looking at the, you know, the down select on...
Valkyrie with the luftwaffe.
Just kind of telegraphed a couple quarters ago, and you mentioned back then that it would be DCS versus FMS.
How do you see this impact in the margin profile as that program ramps up? I mean, it is a lot further out, but I'm just curious if you can maybe give some color as to the difference versus what it would have looked like under FMS.
Yep. Um, so I envisioned it's going to be very similar to what we're doing with our target drones. So, with our target drones, when they're in full-rate production, we make somewhere around 12% or 13%.
In the U.S. with the U.S. federal government internationally, we can make 20% to 25% internationally under a direct commercial.
I'm not going to say it's going to be those exact numbers because I don't know yet. We're going through the wrong right now. But the trajectory is, I believe it's going to be very similar to that because it is direct commercial.
Got it, got it. That's very helpful. And then
um, maybe just talking uh,
I know you mentioned fixed price mix earlier in the call. How should we expect that trend to evolve in the out years? I know it's been a big focus for this Administration, and with the influx of new program starts, I guess how do we expect this mix to shift?
We have a cost-type contract. As those costs increased, we could see some, you know, some...
Change between that, but I think predominantly we're still going to be predominantly fixed price and cost, with Cost Plus increasing.
But I think it's still going to be substantially fixed price.
Got it, got it. If I could squeeze one more in, um, Nordon millimeter, uh, maybe just explain a little bit more the logic behind the acquisition, how it fits into the bigger picture.
Yep.
so,
Our microwave electronics business is currently headquartered in the biggest pieces in Israel.
It's one of our, as we've talked about, one of our fastest-growing businesses, and it's accelerating because we're helping our partners replenish the missile systems.
Up until 2015, Cradles had one of the largest merchant suppliers of microwave electronics in the United States.
In 2021 and 2022, our Prime Partners, who, as you know, we work very closely with, started coming to me and saying, "You know, we'd really like you to get back into the microwave electronic business and be a merchant supplier for missiles, radars, aircraft, etc." in the U.S.
So we started building a team. We made a couple of small acquisitions, one of them being Norton.
And um, it's accelerating.
I believe we are winning a lot. I don't talk about it, we don't talk about it; it's not time yet. But this time next year, I think we're going to be talking with you on programs. We've won.
And this is 1 of the highest as you know, being a merchant supplier of microwave, components and subsystems is 1 of the highest margins businesses out there. And this is an area, the microwave area and the communication area that if we were to do an acquisition this is where we're going to do it. It'll be under this Israeli based us microwave area because for all the reasons you can think of we know the customers, we have the partners, we know the ministry of Defense, we know the primes here. So this is a this is a strategic thrusts for us that we are being strongly encouraged by our customers and partners to go into, and that they will give us programs.
Excellent. Excellent. Thank you both for the time.
Thank you.
Thank you as a reminder to ask a question. You may press star 1 1 on your touchtone, telephone to ask a question. Again that's star 1, 1 to ask a question,
Our next question.
Comes from the line.
Of calling Canfield of Can. If it's Gerald, please go ahead, caller.
Hey, thank you for the follow-up. Um, I think we've done a good job kind of going through, uh, like the manufacturing scaling in a JVS across production.
Quantities of volumes and dollars, but as we think about ...
The potential of going to market with a services component.
How do you think about kind of the x58 has potentially serving as a, a good land and expand lever? Especially as, as folks, kind of consider, you know, Force protection intelligence and Communications is not potentially systems of systems opportunity.
Whether I'm not sure, I'm not sure. I understand the question. Are you, are you asking how do I think about with the with the with the valkyrie going going to Market in a service type structure? Is that? Is that what you said?
Yeah, it's it's the it's the concept of of considering um, the Drone.
For commercial, because we think about the international act supports, right? And also the separate combat for days, I think there's been a big focus on the U.S. side of doing production order quantities, right? And manufacturing type work.
But at the end of the day, you know, International partners are probably going to want more of a Services type offer, right? Like pack of a package deal. So how do you kind of think about the x58 as kind of being that, uh, jumping point, right? I got it. I got, I got it. I got it, I got it. Um,
I'm not sure based on what we're seeing and what we're doing with our international customers, specifically related to Valkyrie and Airwolf, and another one that I'm not talking about the fats, the case, right? Right now, right now,
What we are seeing—and I think this ties into State Department approvals and MTCR—which No. 1 talks about. But it's very important. I think what they're looking at is acquiring.
U.S. aircraft that are flying today are ready to go and integrating their mission systems on it.
Okay, and they're maintaining it with some of our support internationally.
That's what we're seeing. What Kratos is seeing right now is more of a FlyAway aircraft. It flies. They want it for their specific mission application, their mission system.
Or NATO's mission system, if you will.
For a certain customer we're working with in the Pacific, their mission system—their requirements are specific, and they want that integrated and delivered that way. That's what we're seeing.
Got it. Got it. So open open source. Architecture is seeing conferred. Correct. As you think about, as you think about more kind of industry work, you need companywide factors. How do you think about, kind of maybe going through by each segment, engineering around and getting secured supply for Rare Earth, minerals and metals.
Down in the past couple of weeks, we went through our six division presidents, and we do, I don't want to say a complete, but we do as complete a scrub as we possibly can. Not just of what we are sourcing, but what our critical vendors are sourcing relative to rare earth. We make an assessment of where our inventory is, where our safety stock is on those parts and components that are relevant, and also our suppliers. So we're doing the best we can to stay on top of that relative to our supply chain.
It's an excellent color. Thank you.
Yep.
Thank you. I would now like to turn the conference back to Eric DeMarco for closing. Remarks sir, excellent, great. Thank you, everybody, for joining us. Great, great questions today. Great interaction. We really appreciate it and we look forward to chatting with you. Again, when we uh, report Q3
This concludes today's conference call. Thank you for participating. You may now disconnect.