Q1 2026 Kratos Defense and Security Solutions Inc Earnings Call

May 6, 2026

Operator: Good day, and thank you for standing by. Welcome to the Kratos Defense & Security Solutions Q1 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand is raised.

Speaker #1: After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone.

Speaker #1: You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded.

Operator: To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Marie Mendoza, Senior Vice President and General Counsel. Please go ahead.

Speaker #1: I would now like to hand the conference over to your first speaker today, Marie Mendoza, Senior Vice President and General Counsel. Please go ahead.

Speaker #1: Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions first quarter 2026 conference call. With me today is Eric DeMarco, Kratos's President and Chief Executive Officer, and Deanna Lund, Kratos's Executive Vice President and Chief Financial Officer.

Marie Mendoza: Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions Q1 2026 conference call. With me today is Eric DeMarco, Kratos's President and Chief Executive Officer, and Deanna Lund, Kratos's Executive Vice President and Chief Financial Officer. Before we begin the substance of today's call, I'd like everyone to please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential market opportunities, operational outlook, financial guidance, and other forward-looking statements during today's call. Today's call will also include a discussion of non-GAAP financial measures, as that term is defined in Regulation G.

Speaker #1: Before we begin the substance of today's call, I'd like everyone to please take note of a safe harbor paragraph that is included at the end of today's press release.

Speaker #1: 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: 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.

Speaker #1: 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 a substitute for financial information presented in compliance with GAAP.

Marie Mendoza: Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP. Eric.

Speaker #1: 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.

Speaker #1: Eric? Thank you, Marie. KRATOS has balanced business model of making internally funded investments including property, plant, and equipment in the rapid development and fielding of relevant products for the Department of War while also generating organic growth, increased profitability, and value for all KRATOS stakeholders who succeeding.

Eric DeMarco: Thank you, Marie. Kratos's balanced business model of making internally funded investments, including property, plant, and equipment, and the rapid development and fielding of relevant products for the Department of War, while also generating organic growth, increased profitability, and value for all Kratos stakeholders is succeeding. The success is reflected in our Q1 results, including a 1.6 to 1 book-to-bill ratio, a record backlog of $2 billion, an increased opportunity pipeline up to $14 billion, and the $14 billion is after the 1.6 to 1 book-to-bill, reflecting Kratos's accelerating growth trajectory. As Deanna will go through in detail, we significantly exceeded our Q1 forecast across the board, with EBITDA being particularly strong as a result of execution and product delivery mix, with Kratos's microwave electronics, turbine technologies, and unmanned systems businesses each having a particularly strong Q1.

Speaker #1: The successes reflected in our Q1 results including a $1.6 to 1 book-to-bill ratio a record backlog of $2 billion and increased opportunity pipeline up to $14 billion in the $14 billion is after the $1.6 to 1 book-to-bill reflecting KRATOS's accelerating growth trajectory.

Eric DeMarco: The success is reflected in our Q1 results, including a 1.6 to 1 book-to-bill ratio, a record backlog of $2 billion, an increased opportunity pipeline up to $14 billion, and the $14 billion is after the 1.6 to 1 book-to-bill, reflecting Kratos's accelerating growth trajectory.

Speaker #1: As Deanna will go through in detail, we significantly exceeded our first quarter forecast across the board. With EBITDA being particularly strong, as a result of execution and product delivery mix, with KRATOS's microwave electronics turbine technologies and unmanned systems businesses each having a particularly strong Q1.

Eric DeMarco: As Deanna will go through in detail, we significantly exceeded our Q1 forecast across the board, with EBITDA being particularly strong as a result of execution and product delivery mix, with Kratos's microwave electronics, turbine technologies, and unmanned systems businesses each having a particularly strong Q1.

Speaker #1: Based on our current program execution and delivery plans, both KRATOS's Q3 and Q4 are also expected to have particularly strong profitability including KRATOS's open space satellite command and control and telemetry tracking and control software deliveries which are forecasted to be meaningful in both Q3 and Q4.

Eric DeMarco: Based on our current program execution and delivery plans, both Kratos's Q3 and Q4 are also expected to have particularly strong profitability, including Kratos's OpenSpace satellite command and control and telemetry tracking and control software deliveries, which are forecasted to be meaningful in both Q3 and Q4. As I will discuss in detail today, with the current geopolitical and threat environment, Kratos's space and satellite business is incredibly well-positioned, including with our OpenSpace software and our globally owned and operated space domain awareness system. I am not able to provide any details for security and other reasons, but Kratos's satellite business is active across the globe. The business is rapidly accelerating, including as reflected by a 3:1 book-to-bill ratio in Q1 for our satellite business.

Speaker #1: As I will discuss in detail today, with the current geopolitical and threat environment, KRATOS's space and satellite business is incredibly well positioned including with our open space software and our globally owned and operated space domain awareness system.

Eric DeMarco: As I will discuss in detail today, with the current geopolitical and threat environment, Kratos's space and satellite business is incredibly well-positioned, including with our OpenSpace software and our globally owned and operated space domain awareness system. I am not able to provide any details for security and other reasons, but Kratos's satellite business is active across the globe. The business is rapidly accelerating, including as reflected by a 3:1 book-to-bill ratio in Q1 for our satellite business.

Speaker #1: I am not able to provide any details for security and other reasons, but KRATOS's satellite business is active across the globe; the business is rapidly accelerating including as reflected by a $3 to 1 book-to-bill ratio in Q1 for our satellite business.

Speaker #1: There are tens of thousands of satellites planned for orbit in the coming years, both blue and red, and KRATOS's ground systems and software are the gold standard of the industry.

Eric DeMarco: There are tens of thousands of satellites planned for orbit in the coming years, both blue and red, and Kratos's ground systems and software are the gold standard of the industry. There is a generational recapitalization of the US industrial base underway. The Department of War is looking to non-traditional defense technology companies like Kratos to play a significant role, and we are committed to doing our part to ensure that the department and our country are successful. Our industries and Kratos's total addressable market is rapidly expanding. With the fiscal 2027 national security spend currently projected to be $1.5 trillion, an approximate $411 billion increase above 2026.

Speaker #1: There is a generational recapitalization of the US industrial base underway. The Department of War is looking to non-traditional defense technology companies like KRATOS to play a significant role.

Eric DeMarco: The Department of War is looking to non-traditional defense technology companies like Kratos to play a significant role, and we are committed to doing our part to ensure that the department and our country are successful. Our industries and Kratos's total addressable market is rapidly expanding. With the fiscal 2027 national security spend currently projected to be $1.5 trillion, an approximate $411 billion increase above 2026.

Speaker #1: And we are committed to doing our part to ensure that the department and our country are successful. Our industries and KRATOS's total addressable market is rapidly expanding.

Speaker #1: With the fiscal 2027 national security spend currently projected to be $1.5 trillion, an approximate $411 billion increase above 2026. I will emphasize that there are a very limited number of defense technology companies like KRATOS that are qualified today with real existing capability and products to address the significantly and growing market opportunity.

Eric DeMarco: I will emphasize that there are a very limited number of defense technology companies like Kratos that are qualified today with real existing capability and products to address the significant and growing market opportunity. Building military-grade hardware and software products that must work every time is hard, and Kratos's recognized capabilities and affordability are competitive differentiators for our company, which is being reflected in our financial performance. As we have seen, the department is now executing multi-year weapon system production framework agreements, including with several of Kratos's partners on several Kratos-supported programs, including in the missile and air defense system areas, which is good for the country, the industry, and is very good for Kratos.

Speaker #1: Building military-grade hardware and software products that must work every time is hard. And KRATOS is recognized capabilities and affordability are competitive differentiators for our company which is being reflected in our financial performance.

Speaker #1: As we have seen, the department is now executing multi-year weapon system production framework agreements, including with several of KRATOS's partners on several KRATOS-supported programs including in the missile and air defense system areas which is good for the country, the industry, and is very good for KRATOS.

Eric DeMarco: As we have seen, the department is now executing multi-year weapon system production framework agreements, including with several of Kratos's partners on several Kratos-supported programs, including in the missile and air defense system areas, which is good for the country, the industry, and is very good for Kratos.

Speaker #1: These up to seven-year framework agreements certain of which are calling for increased production orders of magnitude greater than today's production levels are providing clear demand signals from the department to industry and what we believe are significant long-term growth opportunities for KRATOS.

Eric DeMarco: These up to 7-year framework agreements, certain of which are calling for increased production orders of magnitude greater than today's production levels, are providing clear demand signals from the department to industry, and what we believe are significant long-term growth opportunities for Kratos. The department's demand signals are real, they are happening, and Kratos, along with our partners, are participating and stepping up to ensure Department of War success. Kratos, along with other successful defense technology companies in the industry, are making defense industrial-based investments now in property, plant, equipment, and facilitization to address this demand and to position our companies for significant future cash flow and additional value generation. Since our last report to you, the department stated that they intend to spend 2025's entire $156 billion reconciliation bill related to defense in fiscal 2026.

Speaker #1: The department's demand signals are real. They are happening. And KRATOS, along with our partners, are participating in stepping up to ensure Department of War success.

Eric DeMarco: The department's demand signals are real, they are happening, and Kratos, along with our partners, are participating and stepping up to ensure Department of War success. Kratos, along with other successful defense technology companies in the industry, are making defense industrial-based investments now in property, plant, equipment, and facilitization to address this demand and to position our companies for significant future cash flow and additional value generation.

Speaker #1: KRATOS, along with other successful defense technology companies in the industry, are making defense industrial-based investments now in property, plant, equipment, and facilitation to address this demand and to position our companies for significant future cash flow in additional value generation.

Speaker #1: Since our last report to you, the department stated that they intend to spend 2025's entire $156 billion reconciliation bill related to defense in fiscal 2026.

Eric DeMarco: Since our last report to you, the department stated that they intend to spend 2025's entire $156 billion reconciliation bill related to defense in fiscal 2026. This bill, as you know, includes funding for Kratos' Hypersonic, Valkyrie CCA, solid rocket motors, jet engines for drones, missiles and loitering munitions, and other Kratos programs. This is very important as only approximately $30 billion of the $156 billion had been obligated into April.

Speaker #1: This bill, as you know, includes funding for KRATOS's hypersonic, Valkyrie CCA, solid rocket motors, jet engines for drones, missiles, and loitering munitions, and other KRATOS programs.

Eric DeMarco: This bill, as you know, includes funding for Kratos' Hypersonic, Valkyrie CCA, solid rocket motors, jet engines for drones, missiles and loitering munitions, and other Kratos programs. This is very important as only approximately $30 billion of the $156 billion had been obligated into April. As a result, we have increased confidence in our business plan and full year 2026 forecast, and we expect to see accelerating future growth throughout 2026 and into 2027 with both the funding and spend timing now both in place. We also have increased confidence in our forecasted year-over-year 100 basis point increase in our EBITDA margins for both 2026 over 2025 and for 2027 over 2026, including as a result of expected increasing production and revenue, the resulting leverage on our fixed manufacturing and other fixed costs, and the mix of higher margin products and software.

Speaker #1: This is very important as only approximately $30 billion of the $156 billion had been obligated into April. As a result, we have increased confidence in our business plan in full year 2026 forecast, and we expect to see accelerating future growth throughout '26 and into '27 with both the funding and spend timing now both in place.

Eric DeMarco: As a result, we have increased confidence in our business plan and full year 2026 forecast, and we expect to see accelerating future growth throughout 2026 and into 2027 with both the funding and spend timing now both in place.

Speaker #1: We also have increased confidence in our forecasted year-over-year 100 basis point increase in our EBITDA margins for both '26 over '25 and for '27 over '26, including as a result of expected increasing production and revenue, the resulting leverage on our fixed manufacturing and other fixed costs, and the mix of higher margin products and software.

Eric DeMarco: We also have increased confidence in our forecasted year-over-year 100 basis point increase in our EBITDA margins for both 2026 over 2025 and for 2027 over 2026, including as a result of expected increasing production and revenue, the resulting leverage on our fixed manufacturing and other fixed costs, and the mix of higher margin products and software.

Speaker #1: Simply stated, as we grow, our profit margins are increasing. Since our last report, we have had several meetings with the Department of War leadership, and we are confident that KRATOS's strategy, business plan, and approach are aligned with the department's objectives.

Eric DeMarco: Simply stated, as we grow, our profit margins are increasing. Since our last report, we have had several meetings with the Department of War leadership, and we are confident that Kratos' strategy, business plan, and approach are aligned with the department's objectives. I have also had several meetings with congressional leadership on both sides of the aisle, and I am confident that regardless of which party controls congressionally, the future United States national security spend is increasing. As it is acknowledged that the global threat profile, it's not partisan and doesn't care who's in charge. It's there, and both sides are familiar and aware of this. National security priorities include hypersonic systems, propulsion systems, space and satellite systems, unmanned systems, drones, air defense, missile, radar, and counter UAS systems, and microwave electronics.

Speaker #1: I have also had several meetings with congressional leadership on both sides of the aisle. And I am confident that regardless of which party controls congressionally, the future United States national security spend is increasing.

Speaker #1: As it is acknowledged at the global threat profile, it's not partisan and doesn't care who's in charge. It's there, and both sides are familiar and aware of this.

Eric DeMarco: As it is acknowledged that the global threat profile, it's not partisan and doesn't care who's in charge. It's there, and both sides are familiar and aware of this. National security priorities include hypersonic systems, propulsion systems, space and satellite systems, unmanned systems, drones, air defense, missile, radar, and counter UAS systems, and microwave electronics.

Speaker #1: National security priorities include hypersonic systems, propulsion systems, space and satellite systems, unmanned systems, drones, air defense, missile, radar, and counter-UAS systems, and microwave electronics.

Speaker #1: Each are primary business areas and core competency areas of KRATOS, and all of which are supported in the planned $1.5 trillion 2027 national security spend.

Eric DeMarco: Each are primary business areas and core competency areas of Kratos. All of which are supported in the planned $1.5 trillion 2027 national security spend. As a result of Kratos' alignment with the department, increasing funding, and our relevant past performance qualifications, the number of opportunities that Kratos continues to successfully receive and the number of new opportunities that are being presented to Kratos continues to increase, including as reflected in our opportunity pipeline, which now exceeds $14 billion. I will emphasize again that there are not enough qualified defense technology companies like Kratos to address the current and expected future weapon system demand of the department. We are extremely fortunate to have the team that we do. The uniqueness and scarcity value of Kratos' capabilities is clearly apparent.

Speaker #1: As a result of KRATOS's alignment with the department, increasing funding, and our relevant past performance qualifications, the number of opportunities that KRATOS continues to successfully receive and the number of new opportunities that are being presented to KRATOS continues to increase including as reflected in our opportunity pipeline which now exceeds $14 billion.

Speaker #1: I will emphasize again that there are not enough qualified defense technology companies like KRATOS to address the current and expected future weapon system demand of the department.

Eric DeMarco: I will emphasize again that there are not enough qualified defense technology companies like Kratos to address the current and expected future weapon system demand of the department. We are extremely fortunate to have the team that we do. The uniqueness and scarcity value of Kratos' capabilities is clearly apparent.

Speaker #1: We are extremely fortunate to have the team that we do, and the uniqueness and scarcity value of KRATOS's capabilities is clearly apparent. KRATOS's affordability as a technology pillar is an increasing differentiator to both our customers and to our partners, as demonstrated in our ability to rapidly design and engineer relevant products upfront for low-cost production at scale.

Eric DeMarco: Kratos' affordability as a technology pillar is an increasing differentiator to both our customers and to our partners, as demonstrated in our ability to rapidly design and engineer relevant products up front for low-cost production at scale. This is a clear department requirement, including as reflected in the framework agreements and also as demonstrated by recent and ongoing conflicts. Additionally, Kratos' better is the enemy of good enough, ready to field today, and our first-to-market pillar is aligned with the Secretary's United States Arsenal of Freedom vision and his advocation for companies like Kratos to deliver 85% of the solution that exists today and now, not a maybe and potentially unachievable someday in the future 100% solution. Operationally, our major programs and initiatives remain on track, including on the Marine Corps MUX TACAIR program.

Speaker #1: This is a clear department requirement including as reflected in the framework agreements and also as demonstrated by recent and ongoing conflicts. Additionally, KRATOS is better as the enemy of good enough, ready to field today, and our first-to-market pillar is aligned with the Secretary's United States arsenal of freedom vision and is advocation for companies like KRATOS to deliver 85% of the solution that exists today and now, not a maybe and potentially unachievable someday in the future 100% solution.

Eric DeMarco: Additionally, Kratos' better is the enemy of good enough, ready to field today, and our first-to-market pillar is aligned with the Secretary's United States Arsenal of Freedom vision and his advocation for companies like Kratos to deliver 85% of the solution that exists today and now, not a maybe and potentially unachievable someday in the future 100% solution. Operationally, our major programs and initiatives remain on track, including on the Marine Corps MUX TACAIR program.

Speaker #1: Operationally, our major programs and initiatives remain on track including on the Marine Corps MUCSTAC air program, we are currently negotiating contractual terms of the expected receipt of what I will refer to as Valkyrie program LRIP phase one this year, and we are moving forward with our plan to increase Valkyrie annual production up to approximately 40 drones annually by early 2028, receiving new hypersonic program awards, certain of which we have now been verbally informed that we have been successful on.

Eric DeMarco: We are currently negotiating contractual terms of the expected receipt of what I will refer to as Valkyrie program LRIP phase 1 this year, and we are moving forward with our plan to increase Valkyrie annual production up to approximately 40 drones annually by early 2028. Receiving new hypersonic program awards, certain of which we have now been verbally informed we have been successful on. We have received a separate $1 billion-plus sole source hypersonic program expansion verbal award, which we now also believe we will be receiving shortly. Since our last report, we have had several successful Kratos hypersonic system missions. Kratos' hypersonic franchise is expected to be a key growth driver for our company for the next several years.

Speaker #1: We have received a separate $1 billion-plus sole-source hypersonic program expansion verbal award, which we now also believe we will be receiving shortly. And since our last report, we have had several successful Kratos hypersonic system missions.

Eric DeMarco: We have received a separate $1 billion-plus sole source hypersonic program expansion verbal award, which we now also believe we will be receiving shortly. Since our last report, we have had several successful Kratos hypersonic system missions. Kratos' hypersonic franchise is expected to be a key growth driver for our company for the next several years.

Speaker #1: KRATOS's hypersonic franchise is expected to be a key growth driver for our company for the next several years. We expect to begin small jet engine LRIP later this year for cruise missiles and powered munitions, and we are planning to produce several thousand engines in 2027 and further increasing this engine production into 2028.

Eric DeMarco: We expect to begin small jet engine LRIP later this year for cruise missiles and powered munitions, and we are planning to produce several thousand engines in 2027 and further increasing this engine production into 2028. Accordingly, we are pulling together a detailed program plan, including with our suppliers, to ramp up to annual multiple thousand engine production beginning next year, which supply chain we expect to turn on shortly. Kratos small jet engine business is expected to be a significant growth driver for our company, with increased margins for the next several years. We have also now received a new multi-hundred million dollar directed energy weapon system program with Kratos as the prime.

Speaker #1: Accordingly, we are pulling together a detailed program plan including with our suppliers to ramp up to annual multiple thousand engine production beginning next year, which supply chain we expect to turn on shortly.

Speaker #1: KRATOS small jet engine business is expected to be a significant growth driver for our company with increased margins for the next several years. We have also now received a new multi-hundred million dollar directed energy weapon system program with KRATOS as the prime.

Eric DeMarco: Kratos small jet engine business is expected to be a significant growth driver for our company, with increased margins for the next several years. We have also now received a new multi-hundred million dollar directed energy weapon system program with Kratos as the prime.

Speaker #1: As I mentioned earlier, KRATOS's open space software continues to clearly differentiate KRATOS's satellite business with our customers as open space is a distributed virtualized and open capability system that securely enables real-time processing of RF signal and sensor data at scale in a highly distributed cloud ground entry point and edge environments.

Eric DeMarco: As I mentioned earlier, Kratos' OpenSpace software continues to clearly differentiate Kratos' satellite business with our customers as OpenSpace is a distributed, virtualized, and open capability system that securely enables real-time processing of RF signal and sensor data at scale in a highly distributed cloud, ground entry point, and edge environments. Kratos' OpenSpace software platform serves as the core networking capability supporting all Kratos OpenSpace solutions, including satellite C2, earth sensing and observation, space domain awareness, space control, and SATCOM. This is for Kratos' largest business, our space and satellite communication business and our space domain awareness business. Kratos OpenSpace is a crown jewel of our company, and it's analogous to defense technology company Anduril's Lattice software platform.

Speaker #1: KRATOS's open space software platform serves as the core networking capability supporting all KRATOS open space solutions including satellite C2, Earth sensing and observation, space domain awareness, space control, and SATCOM, and this is for KRATOS's largest business.

Eric DeMarco: Kratos' OpenSpace software platform serves as the core networking capability supporting all Kratos OpenSpace solutions, including satellite C2, earth sensing and observation, space domain awareness, space control, and SATCOM. This is for Kratos' largest business, our space and satellite communication business and our space domain awareness business. Kratos OpenSpace is a crown jewel of our company, and it's analogous to defense technology company Anduril's Lattice software platform.

Speaker #1: Our space and satellite communication business and our space domain awareness business. KRATOS open space is a crown jewel of our company and it's analogous to defense technology company Andros Lattice software platform.

Speaker #1: KRATOS satellite business million US Space Force Prime contract for the resilient missile warning and tracking program, a MEO constellation designed to detect and track ICBM launches in addition to dimmer maneuvering hypersonic missiles and threats.

Eric DeMarco: Kratos satellite business recently won a $447 million US Space Force prime contract for the Resilient Missile Warning and Tracking program, a MEO constellation designed to detect and track ICBM launches in addition to dimmer maneuvering hypersonic missiles and threats. This contract award was a significant contributor to the 1.8 to 1 Q1 KGS book-to-bill ratio. This program is part of a broader missile warning and tracking architecture that is built, being fielded across multiple orbits. I encourage you to think Golden Dome. On this new prime program award, Kratos will provide the ground system and software to operate the satellites after launch, including sending commands, receiving sensor data, and processing that information for delivery to military operators.

Speaker #1: This contract award was a significant contributor to the $1.8 to $1 first quarter KGS book to bill ratio. This program is part of a broader missile warning and tracking architecture that is being fielded across multiple orbits and encourage you to think golden dome.

Eric DeMarco: I encourage you to think Golden Dome. On this new prime program award, Kratos will provide the ground system and software to operate the satellites after launch, including sending commands, receiving sensor data, and processing that information for delivery to military operators.

Speaker #1: On this new prime program award, KRATOS will provide the ground system and software to operate the satellites after launch including sending commands, receiving sensor data, and processing that information for delivery to military operators.

Speaker #1: KRATOS space and satellite business is expected to be a primary driver of our expected increased revenue and profit margins in Q3 and Q4 of this year and is also expected for significant growth and margin expansion in 2027 and 2028.

Eric DeMarco: Kratos space and satellite business is expected to be a primary driver of our expected increased revenue and profit margins in Q3 and Q4 of this year, and is also expected for significant growth and margin expansion in 2027 and 2028. Artificial intelligence is also a key element or differentiator of Kratos' space satellite and space domain awareness business, in addition to AI also being key to Kratos' unmanned systems business and our jet drones. Artificial intelligence is helping drive Kratos' business. Additionally, the dual commercial national security use of Kratos' software, hardware, and offerings also continues to differentiate Kratos, including affordability as we spread the research and development over multiple defense and commercial markets. Additionally, Kratos' dual use applications also accelerate our speed to market in both rapid technology development and fielding of relevant products as we move fast and efficiently as we are investing our own money.

Speaker #1: Artificial intelligence is also a key element or differentiator of KRATOS's space satellite and space domain awareness business. In addition to AI, also being key to KRATOS's unmanned systems business and our jet drones.

Speaker #1: Artificial intelligence is helping drive KRATOS's business. Additionally, the dual commercial national security use of KRATOS's software, hardware, and offerings also continues to differentiate KRATOS.

Eric DeMarco: Artificial intelligence is helping drive Kratos' business. Additionally, the dual commercial national security use of Kratos' software, hardware, and offerings also continues to differentiate Kratos, including affordability as we spread the research and development over multiple defense and commercial markets. Additionally, Kratos' dual use applications also accelerate our speed to market in both rapid technology development and fielding of relevant products as we move fast and efficiently as we are investing our own money.

Speaker #1: Including affordability as we spread the research and development over multiple defense and commercial markets. Additionally, KRATOS's dual-use applications also accelerate our speed to market and both rapid technology development and fielding of relevant products as we move fast and efficiently as we are investing our own money.

Speaker #1: A recent dual-use example since our last report: we now expect to receive a separate, new, additional industrial gas turbine program for artificial intelligence-related data centers by the end of this year, with another well-known global industrial technology company.

Eric DeMarco: A recent dual use example since our last report, we now expect to receive a separate new additional industrial gas turbine program for artificial intelligence-related data centers by the end of this year with another well-known global industrial technology company. Our hypersonic system integration facility, new Anaconda radar program facility, Helios hypersonic program facility, GEK turbofan engine facility, and Prometheus solid rocket motor initiatives are each tracking to be online either later this year or next, each of which we expect to contribute to continued future Kratos growth and value generation for all of our stakeholders. In closing, the Department is providing non-traditional defense technology companies like Kratos a generational opportunity in rebuilding the US defense industrial base, building an arsenal of freedom, participating in multi-billion dollar, multi-year programs, and generating significant value.

Speaker #1: Our hypersonic system integration facility new Anaconda radar program facility Helios hypersonic program facility GEK turbofan engine facility and Prometheus solid rocket motor initiatives are each tracking to be online either later this year or next each of which we expect to contribute to continued future KRATOS growth and value generation for all of our stakeholders.

Eric DeMarco: Our hypersonic system integration facility, new Anaconda radar program facility, Helios hypersonic program facility, GEK turbofan engine facility, and Prometheus solid rocket motor initiatives are each tracking to be online either later this year or next, each of which we expect to contribute to continued future Kratos growth and value generation for all of our stakeholders.

Eric DeMarco: In closing, the Department is providing non-traditional defense technology companies like Kratos a generational opportunity in rebuilding the US defense industrial base, building an arsenal of freedom, participating in multi-billion dollar, multi-year programs, and generating significant value.

Speaker #1: In closing, the department is providing non-traditional defense technology companies like KRATOS a generational opportunity in rebuilding the US defense industrial base building an arsenal of freedom participating in multi-billion dollar multi-year programs and generating significant value.

Speaker #1: KRATOS is aggressively participating in the current build and growth phase of the Department of War's rebuild the defense industrial base plan with KRATOS focused on generating an appropriate rate of return for each investment we make and for expected significant future sustained cash flow generation when the critical mass of production programs is achieved on these initiatives.

Eric DeMarco: Kratos is aggressively participating in the current build and growth phase of the Department of War's Rebuild the Defense Industrial Base plan, with Kratos focused on generating an appropriate rate of return for each investment we make and for expected significant future sustained cash flow generation when the critical mass of production programs is achieved on these initiatives. As I mentioned before, based on the current global threat environment in our congressional meetings, we believe there is bipartisan support for continued increasing future national security spends for the protection of the United States and the deterrence of our enemies. Deanna?

Speaker #1: And as I mentioned before, based on the current global threat environment and our congressional meetings, we believe there is bipartisan support for continued increasing future national security spends for the protection of the United States and the deterrence of our enemies.

Eric DeMarco: As I mentioned before, based on the current global threat environment in our congressional meetings, we believe there is bipartisan support for continued increasing future national security spends for the protection of the United States and the deterrence of our enemies. Deanna?

Speaker #1: Deanna. Thank you, Eric. Good afternoon. As we have included a detailed summary of the first quarter 26 financial performance as well as the initial second quarter and updated full year 2026 financial guidance in the press release we published earlier today, I will focus on the highlights in my remarks today.

Deanna Lund: Thank you, Eric. Good afternoon. As we have included a detailed summary of the Q1 2026 financial performance, as well as the initial Q2 and updated full year 2026 financial guidance in the press release we published earlier today, I will focus on the highlights in my remarks today. Revenues for the Q1 were $371 million, above our estimated range of $335 to 345 million, which estimate did not include the recently closed Orbit acquisition. Excluding the impact of the Orbit acquisition, revenues were $357.7 million, above our estimated range, which had included the Nomad acquisition as the transaction was closed at the time we provided our estimate.

Speaker #1: Revenues for the first quarter were $371 million above our estimated range of $335 to $345 million which estimate did not include the recently closed ORBIT acquisition.

Deanna Lund: Excluding the impact of the Orbit acquisition, revenues were $357.7 million, above our estimated range, which had included the Nomad acquisition as the transaction was closed at the time we provided our estimate.

Speaker #1: Excluding the impact of the ORBIT acquisition, revenues were $357.7 million above our estimated range which had included the Nomad acquisition as a transaction was closed at the time we provided our estimate.

Speaker #1: Q1 26 revenues include consolidated organic revenue growth of $15.8% with the largest contributors to the OPRA achievement in our unmanned systems defense and rocket support turbine technologies and microwave products businesses.

Deanna Lund: Q1 2026 revenues include consolidated organic revenue growth of 15.8%, with the largest contributors to the overachievement in our Unmanned Systems, Defense and Rocket Support, Turbine Technologies, and Microwave Products businesses. Notable year-over-year organic revenue growth was reported in our Defense and Rocket Support, Unmanned Systems, Turbine Technologies, and Microwave Products businesses, with organic revenue growth rates of 45.8%, 30.9%, 20.3%, and 12.3% respectively. Adjusted EBITDA for the first quarter was $38.7 million, above the high end of our estimated range of $25 to 30 million, reflecting the contribution from the recently closed Orbit acquisition, as well as the increased volume and a favorable revenue mix. Unmanned Systems first quarter 2026 revenue was up $19.5 million or 30.9% organically, with the increase primarily driven by Valkyrie-related activity.

Speaker #1: Notable year-over-year organic revenue growth was reported in our defense rocket support unmanned systems turbine technologies and microwave products businesses with organic revenue growth rates of 45.8%, 30.9%, 20.3%, and 12.3% respectively.

Speaker #1: Adjusted EBITDA for the first quarter was $38.7 million above the high end of our estimated range of $25 to $30 million reflecting the contribution from the recently closed ORBIT acquisition as well as the increased volume and a favorable revenue mix.

Deanna Lund: Adjusted EBITDA for the first quarter was $38.7 million, above the high end of our estimated range of $25 to 30 million, reflecting the contribution from the recently closed Orbit acquisition, as well as the increased volume and a favorable revenue mix. Unmanned Systems first quarter 2026 revenue was up $19.5 million or 30.9% organically, with the increase primarily driven by Valkyrie-related activity.

Speaker #1: Unmanned systems first quarter 26 revenue was up 19.5 million or 30.9% organically with the increased primarily driven by Valkyrie-related activity. KGS first quarter 26 revenue was up 48.9 million year-over-year from the first quarter of 25 with organic revenue growth of 11.8% excluding the impact of the recent acquisitions of Nomad and ORBIT which contributed and aggregate of 20.6 million.

Deanna Lund: KGS Q1 2026 revenue was up $48.9 million year-over-year from Q1 2025, with organic revenue growth of 11.8%, excluding the impact of the recent acquisitions of Nomad and Orbit, which contributed an aggregate of $20.6 million. Q1 2026 cash flow used in operations was $27.4 million, primarily reflecting the working capital requirements related to the revenue growth impact in our receivables by approximately $28.7 million, and increases in inventory of approximately $14.7 million, and increases in prepaid and other assets of approximately $26.5 million, primarily reflecting prepayment for long lead materials as well as investments we are continuing to make related to certain development initiatives in our unmanned systems, rocket systems, and space and satellite businesses.

Speaker #1: First quarter 2026 cash flow generated and used in operations was $27.4 million, primarily reflecting the working capital requirements related to the revenue growth impacting our receivables by approximately $28.7 million and increases in inventory of approximately $14.7 million.

Deanna Lund: Q1 2026 cash flow used in operations was $27.4 million, primarily reflecting the working capital requirements related to the revenue growth impact in our receivables by approximately $28.7 million, and increases in inventory of approximately $14.7 million, and increases in prepaid and other assets of approximately $26.5 million, primarily reflecting prepayment for long lead materials as well as investments we are continuing to make related to certain development initiatives in our unmanned systems, rocket systems, and space and satellite businesses.

Speaker #1: And increases in prepaid and other assets of approximately $26.5 million primarily reflecting prepayments for long lead materials as well as investments we are continuing to make related to certain development initiatives in our unmanned systems rocket systems and space and satellite businesses.

Deanna Lund: Free cash flow used in operations for Q1 2026 was $43.1 million after reflecting funding of $19.9 million of capital expenditures and net of $4.2 million in proceeds from the sale of Valkyries, which were previously reported as company-owned capital assets and classified as capital expenditures, and therefore reflected as an inflow in investing activities when sold. 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, hypersonic, and jet engine businesses to meet existing and anticipated customer orders and requirements, and investing in related new machinery, equipment, and systems.

Speaker #1: Free cash flow used in operations for the first quarter of 26 was $43.1 million after reflecting funding of $19.9 million of capital expenditures and net of $4.2 million in proceeds from the sale of Valkyries which were previously reported as company-owned capital assets and classified as capital expenditures and therefore reflected as an inflow in investing activities when sold.

Speaker #1: 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 hypersonic and jet engine businesses to meet existing and anticipated customer orders and requirements and investing in related new machinery equipment and systems.

Deanna Lund: 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, hypersonic, and jet engine businesses to meet existing and anticipated customer orders and requirements, and investing in related new machinery, equipment, and systems.

Deanna Lund: Consolidated DSOs, or days sales outstanding, increased from 121 days during Q4 2025 to 130 days during Q1 2026, reflecting the 22.6% revenue growth impact of the acquisitions, as well as the timing of milestone billings and contractual funding, certain of which were and have been impacted by the extended federal government shutdown and CRA. Our contract mix for Q1 2026 was 73% revenues generated from fixed price contracts, 23% generated from cost plus contracts, and 4% generated from time and material contracts.

Speaker #1: Consolidated DSOs or day sales outstanding increased from $121 days during the fourth quarter of 2025 to $130 days during the first quarter of 26.

Speaker #1: Reflecting the 22.6% revenue growth impact of the acquisitions as well as the timing of milestone billings and contractual funding certain of which were and have been impacted by the extended federal government shutdown and CRA.

Speaker #1: Our contract mix for the first quarter of 26 was 73% revenues generated from fixed price contracts 23% generated from cost plus contracts and 4% generated from time and material contracts.

Speaker #1: Revenues generated from contracts with the US federal government during the first quarter of 26 were approximately 69% including revenues generated from contracts with the non-DOW federal government agencies and foreign military sales contracts and 21% generated from foreign customers and 10% from commercial customers.

Deanna Lund: Revenues generated from contracts with the US federal government during Q1 2026 were approximately 69%, including revenues generated from contracts with the DOW, non-DOW federal government agencies, and foreign military sales contracts, 21% generated from foreign customers, and 10% from commercial customers. Moving to financial guidance. Our financial guidance we provided today includes our expectations and assumptions for our supply chains execution, the impact of employee sourcing, hiring, retention, and related costs. Our Q2 and updated full year 2026 guidance now includes the estimated contribution from the recently closed Orbit acquisition. As Orbit had previously reported its financial results under International Accounting Financial Reporting Standards, we are in the process of aligning its reporting to US Generally Accepted Accounting Principles or GAAP. Accordingly, we have included conservative estimates in our updated guidance at this time.

Speaker #1: Now moving to financial guidance. Our financial guidance we provided today includes our expectations and assumptions for our supply chains execution the impact of employee sourcing hiring retention and related costs.

Deanna Lund: Moving to financial guidance. Our financial guidance we provided today includes our expectations and assumptions for our supply chains execution, the impact of employee sourcing, hiring, retention, and related costs. Our Q2 and updated full year 2026 guidance now includes the estimated contribution from the recently closed Orbit acquisition.

Speaker #1: Our second quarter and updated full-year 2026 guidance now includes the estimated contribution from the recently closed ORBIT acquisition. As ORBIT had previously reported its financial results under International Financial Reporting Standards, we are in the process of aligning its reporting to U.S. Generally Accepted Accounting Principles, or GAAP.

Deanna Lund: As Orbit had previously reported its financial results under International Accounting Financial Reporting Standards, we are in the process of aligning its reporting to US Generally Accepted Accounting Principles or GAAP. Accordingly, we have included conservative estimates in our updated guidance at this time.

Speaker #1: Accordingly, we have included conservative estimates in our updated guidance at this time. Our second quarter 26 guidance reflects the estimated revenue mix and less leverage on elevated administrative manufacturing overhead and bid and proposal costs that we have ramped in the business to support the forecasted full year 26 growth.

Deanna Lund: Our Q2 2026 guidance reflects the estimated revenue mix and less leverage on elevated administrative manufacturing overhead and bid and proposal costs that we have ramped in the business to support the forecasted full year 2026 growth. Our Q2 revenue guidance of $400 to 410 million reflects estimated organic revenue growth of 4% to 7% as compared to Q2 2025. Our updated full year 2026 revenue guidance of $1.7 to 1.760 billion includes the estimated contribution from the Orbit acquisitions and includes an estimated organic revenue growth rate of 15% to 19% over 2025 actual performance. As you may recall, our 2025 actual performance exceeded our original forecast.

Speaker #1: Our second quarter revenue guidance of $400 to $410 million reflects estimated organic revenue growth of 4 to 7% as compared to the second quarter of 25.

Deanna Lund: Our Q2 revenue guidance of $400 to 410 million reflects estimated organic revenue growth of 4% to 7% as compared to Q2 2025. Our updated full year 2026 revenue guidance of $1.7 to 1.760 billion includes the estimated contribution from the Orbit acquisitions and includes an estimated organic revenue growth rate of 15% to 19% over 2025 actual performance. As you may recall, our 2025 actual performance exceeded our original forecast.

Speaker #1: Our updated full year 26 revenue guidance of $1.7 to $1.760 billion includes the estimated contribution from the ORBIT acquisitions and includes an estimated organic revenue growth rate of 15 to 19% over 25 actual performance.

Speaker #1: And as you may recall, our 25 actual performance exceeded our original forecast. Operating cash flow guidance includes a continued use of working capital to fund our organic revenue growth which includes the increase in accounts receivable and the impact of delays in contract funding to enable customer billings and collections and increases in inventory and related prepaid asset balances as we ramp production and procure long lead time materials for our target and tactical drones solid rocket motors and our turbofan and turbojet engines.

Deanna Lund: Operating cash flow guidance includes the continued use of working capital to fund our organic revenue growth, which includes the increase in accounts receivable and the impact of delays in contract funding to enable customer billings and collections, and increases in inventory and related prepaid asset balances as we ramp production and procure long lead time materials for our target and tactical drones, solid rocket motors, and our turbofan and turbojet engines. Kratos' operating cash flow guidance also assumes certain investments in our rocket systems and unmanned systems businesses related to the procurement of rocket and related systems, and our plan to begin producing approximately 40 Valkyries annually beginning by the end of 2027 and into 2028, as well as the completion of certain of our unmanned systems and related derivatives and vehicles.

Deanna Lund: Kratos' operating cash flow guidance also assumes certain investments in our rocket systems and unmanned systems businesses related to the procurement of rocket and related systems, and our plan to begin producing approximately 40 Valkyries annually beginning by the end of 2027 and into 2028, as well as the completion of certain of our unmanned systems and related derivatives and vehicles.

Speaker #1: CRATOS' operating cash flow guidance also assumes certain investments in our rocket systems and unmanned systems businesses related to the procurement of rocket and related systems and our plan to begin producing approximately 40 Valkyries annually beginning by the end of 27 and into 28 as well as the completion of certain of our unmanned systems and related derivatives and vehicles.

Speaker #1: Additional forecasted investments in 26 include our funding of the Prometheus joint venture established last year which we estimate will occur radically throughout 26 for an aggregate for the year of approximately $50 million.

Deanna Lund: Additional forecasted investments in 2026 include our funding of the Prometheus joint venture established last year, which we estimate will occur ratably throughout 2026 for an aggregate for the year of approximately $50 million. Our Anaconda radar program, our Helios hypersonic and Arc Chamber program, our Indiana Hypersonic Integration Facility, our GEK and BladeWorks engine facilities, investments for additional machinery and equipment to enhance throughput and production at our recently acquired Nomad facilities, and our Vulcan, Kraken, Elysium, Nemesis, Hermes investments for certain drone-related opportunities and other initiatives. Eric.

Deanna Lund: Our Anaconda radar program, our Helios hypersonic and Arc Chamber program, our Indiana Hypersonic Integration Facility, our GEK and BladeWorks engine facilities, investments for additional machinery and equipment to enhance throughput and production at our recently acquired Nomad facilities, and our Vulcan, Kraken, Elysium, Nemesis, Hermes investments for certain drone-related opportunities and other initiatives. Eric.

Speaker #1: Our Anaconda radar program our Helios hypersonic and ARC chamber program our Indiana hypersonic integration facility our GEK and BladeWorks engine facilities investments for additional machinery and equipment to enhance throughput and production at our recently acquired no-man facilities and our Vulcan Kraken Elysium Nemesis Hermes investments for certain drone-related opportunities and other initiatives.

Speaker #1: Eric?

Speaker #2: Great. Thank you, Deanna. We'll now turn it to the moderator for any questions.

Eric DeMarco: Great. Thank you, Deanna. We will now turn it to the moderator for any questions.

Operator: To ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile our Q&A roster. Our first question will come from Sheila Kahyaoglu of Jefferies. Your line is open.

Speaker #3: Monitor to ask a question you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Speaker #3: Please stand by while we compile our Q&A roster. Our first question will come from Sheila Kahiaglu of Jefferies. Your line is open.

Sheila Kahyaoglu: Good afternoon, Eric, Deanna. Great quarter. Maybe if I could just talk about if you could elaborate more on the strong start to the year and the fiscal revenue raise. Could you speak to where you see the most strength, Eric? I know you talked about it in the prepared remarks as well, and maybe compare that to early results you're seeing from Orbit and Nomad.

Speaker #4: Good afternoon, Eric Deanna. Great quarter. Maybe if I could just talk about the if you could elaborate more on the strong start to the year and the fiscal revenue raise.

Speaker #4: Could you speak to where you see the most strength, Eric? I know you talked about it in the prepared remarks as well. And maybe compare that to early results you're seeing from ORBIT and NOMAD.

Speaker #2: Yep. So internally, as I said in the remarks, Sheila, our engine business KTT is ripping right now. It is ripping. And you can just think about the number of missile programs that are out there the number of drone programs that are out there the number of space programs that are out there.

Eric DeMarco: Yeah. Internally, as I said in the remarks, Sheila, our engine business, KTT, is ripping right now. It is ripping. You can just think about the number of missile programs that are out there, the number of drone programs that are out there, the number of space programs that are out there. We're involved with many of these, and it's increasing. On the microwave electronic side, as you know, we're headquartered in Israel, and our three big customers, partners, are Israel Aerospace Industries, Rafael, and Elbit Systems. We know the conflicts that's been going on over there. We are designed in on virtually every missile and radar system over there, and all those stocks need to be restored and rebuilt, and we're involved in that. It is very strong.

Speaker #2: We're involved with many, many of these and it's increasing. On the microwave electronics side, as you know, we're headquartered in Israel. And our three big customers partners are Israeli Aerospace Industries, Rafael and Elbit, and we know the conflicts that's been going on over there.

Eric DeMarco: On the microwave electronic side, as you know, we're headquartered in Israel, and our three big customers, partners, are Israel Aerospace Industries, Rafael, and Elbit Systems. We know the conflicts that's been going on over there. We are designed in on virtually every missile and radar system over there, and all those stocks need to be restored and rebuilt, and we're involved in that. It is very strong.

Speaker #2: We are designed in on virtually every missile and radar system over there. And all those stocks are being need to be restored and rebuilt.

Speaker #2: And we're involved in that. And it is very, very strong. And in unmanned systems our unmanned systems business was particularly strong in Q1. This is on the tactical side.

Eric DeMarco: In unmanned systems, our unmanned systems business was particularly strong in Q1. This is on the tactical side that's joining it. We have a lot of stuff going on on the tactical side. We made some important execution milestones in Q1. On the acquisitions, I'll start with Nomad. Nomad is going to be incredibly powerful for us. They are in the Counter-UAS area. They are in the SATCOM area, not C2 and not TT&C, but SATCOM area. They are doing some very interesting things with, let's just say, the missile defense area. As Deanna mentioned in her remarks, we're gonna be making some capital investments over the next 12 to 18 months, and we expect them to be one of our strongest organic growers starting next year.

Speaker #2: This joining it. We have a lot of stuff going on on the tactical side. And we made some important execution milestones. In Q1. On the acquisitions, I'll start with NOMAD.

Speaker #2: NOMAD is going to be incredibly powerful for us. They are in the counter UAS area. They are in the SATCOM area not C2 and not TT&C but SATCOM area.

Speaker #2: And they are doing some very interesting things let's just say in the missile defense area. And as Deanna mentioned in her remarks, we're going to be making some capital investments over the next 12 to 18 months and we expect them to be one of our strongest organic growers starting next year.

Eric DeMarco: They are doing some very interesting things with, let's just say, the missile defense area. As Deanna mentioned in her remarks, we're gonna be making some capital investments over the next 12 to 18 months, and we expect them to be one of our strongest organic growers starting next year.

Eric DeMarco: Orbit is a crown jewel, Sheila. It's in Israel, where we are. Same customers, same programs. Their SATCOM is on unmanned aerial systems, unmanned ground systems, unmanned water systems, manned systems. They are a very unique company, and their growth rate is gonna be consistent with what we see for us. Q1 across the board was particularly strong for us, Sheila.

Speaker #2: And ORBIT is a crown jewel. Sheila, it's in Israel. Where we are, same customers, same programs. Their SATCOM is on unmanned aerial systems, unmanned ground systems, unmanned water systems.

Speaker #2: Manned systems and they are a very unique company and their growth rate is going to be consistent with what we see for us. So Q1 across the board was particularly strong for us, Sheila.

Speaker #4: Great. And maybe just double-clicking on the hypersonic revenue opportunity a little bit more. Tracking to the $400 million this year and stepping up to $700 million next year, I believe still.

Sheila Kahyaoglu: Great. Maybe just double-clicking on the hypersonic revenue opportunity a little bit more, tracking to the $400 this year and stepping up to $700 next year, I believe still. You know, how much of that is coming from the Middle East conflict? You know, what's your visibility on the $700?

Speaker #4: How much of that is coming from the Middle East conflict and what's your visibility on the 700?

Speaker #2: Right. I can't—I'm not allowed—I can't comment on the Middle East. I would think not, go with 'not a lot.' But I can't comment on that.

Eric DeMarco: Right. I'm not allowed to comment on the Middle East. I would think not a lot, but I can't comment on that. The visibility on the $700, let me give you the pieces. In the reconciliation bill, which the department has said they're gonna fully obligate the entire $156 billion this year. There was $400 million in there for the MACH-TB program, which is ours. There's $400 million of the $700 million quick. On the 2027 defense budget that's being asked for, the $300 million is covered plus some. The testing requirements for hypersonic systems, and not just the weapon platform, but guidance system, control system, seeker systems, and communication systems, is incredible.

Speaker #2: The visibility on the 700—let me give you the pieces. In the reconciliation bill, which has now been—now the Department has said they're going to fully obligate the entire $156 billion this year.

Speaker #2: There was 400 million in there for the mock TB program which is ours. So there's 400 million of the 700 million click. On the 2027 defense budget, that's being asked for, the 300 million is covered plus some.

Eric DeMarco: There was $400 million in there for the MACH-TB program, which is ours. There's $400 million of the $700 million quick. On the 2027 defense budget that's being asked for, the $300 million is covered plus some. The testing requirements for hypersonic systems, and not just the weapon platform, but guidance system, control system, seeker systems, and communication systems, is incredible. We're the ones that have the program on it. We feel extremely strong on our forecast on our hypersonic business for the next several years.

Speaker #2: The testing requirements for hypersonic systems and not just the weapon platform but guidance system control system seeker systems communication systems is incredible. And we're the ones that have the program on it.

Eric DeMarco: We're the ones that have the program on it. We feel extremely strong on our forecast on our hypersonic business for the next several years.

Speaker #2: So we feel extremely strong on our forecast and our hypersonic business for the next several years.

Speaker #4: Great. Thank you so much.

Sheila Kahyaoglu: Great. Thank you so much.

Speaker #2: Thank you.

Eric DeMarco: Thank you.

Speaker #3: And our next question will come from the line of Mike Crawford of B. Riley Securities. Your line is open.

Operator: Our next question will come from the line of Mike Crawford of B. Riley Securities. Your line is open.

Mike Crawford: Thank you. Just to continue on the unmanned systems. With the 40 drone annual production rates for Valkyrie, is that primarily in Oklahoma? Can you just remind us where else you're building Mako and Firejet and derivative drones?

Speaker #5: Thank you. Just to continue on the unmanned systems fund—with the 40-drone annual production rates for Valkyrie, is that primarily in Oklahoma? And can you just remind us where else you're building Meco and Firejets and derivative drones?

Speaker #2: Yep. So Valkyrie right now is 100% in Oklahoma for the airframe etc. The avionics and electronics are down in Florida. Meco is in Sacramento, California.

Eric DeMarco: Yep. Valkyrie right now is 100% in Oklahoma for the airframe, et cetera. The avionics and electronics are down in Florida. Mako is in Sacramento, California. The next big one that's gonna probably be ramping, Mike, starting at the end of this year, next year, with the Mighty Hornet program, is the Tactical Firejet. We have moved substantially all of that production to Oklahoma. Mike, on that one, very importantly, we are successfully flying the Tactical Firejets with Kratos jet engines. We are totally vertically integrated on our Tactical Firejet CCA right now. We've driven costs down even more with higher performance. Mike, I'm being told that Kratos is the only company in the world that builds the plane and the engine under the same organization.

Speaker #2: The next big one that's going to probably be ramping Mike starting at the end of this year next year with the Mighty Hornet program is the tactical fire jet.

Speaker #2: We have moved substantially all of that production to Oklahoma. And Mike, on that one, very importantly, we have now successfully we are successfully flying the tactical fire jets with Kratos jet engines.

Eric DeMarco: Mike, on that one, very importantly, we are successfully flying the Tactical Firejets with Kratos jet engines. We are totally vertically integrated on our Tactical Firejet CCA right now. We've driven costs down even more with higher performance. Mike, I'm being told that Kratos is the only company in the world that builds the plane and the engine under the same organization. Those engines, Mike, they're built in Michigan. The Tactical Firejet engines are built in Michigan.

Speaker #2: So we are totally vertically integrated on our tactical fire jet CCA right now. So we've driven cost down even more. With higher performance. And Mike, I'm being told that Kratos is the only company in the world that builds the plane and the engine under the same organization.

Speaker #2: So those engines, Mike, they're built in Michigan. The tactical fire jet engines are built in Michigan.

Eric DeMarco: Those engines, Mike, they're built in Michigan. The Tactical Firejet engines are built in Michigan.

Mike Crawford: Oh, okay. Thank you. Are you able to comment on how well you're competing against Beehive and that one, Cheshire-based company for supplying engines to other tactical jet and crew low-cost cruise missile providers?

Speaker #5: Oh, okay. Thank you. And then are you able to comment on how well you're competing against Beehive and that one Cheshire-based company for supplying engines to other tactical jet and crewed low-cost cruise missile providers?

Eric DeMarco: I believe that we have won the vast majority of the opportunities that have been presented to us, if not every one of them. This is why, Mike, we are Deanna and I right now are working with the team, putting the program plan together with the supply chain, getting ready to turn them on to build, like, 3,000 engines next year. Ramping to maybe 5,000 or 6,000 in 2028. These are all tied to programs.

Speaker #2: I believe that we have won the vast majority of the opportunities that have been presented to us if not every one of them. This is why, Mike, we heard Deanna and I right now are working with the team putting the program plan together.

Speaker #2: With the supply chain getting ready to turn them on to build like 3,000 engines next year. Ramping to maybe 5 or 6 thousand in 2028.

Speaker #2: These are all tied to programs. So we feel real good.

Mike Crawford: And-

Eric DeMarco: We feel real good.

Speaker #5: And that's how Auburn Hills that's GEK is something completely different.

Mike Crawford: That's all Auburn Hills. That's GEK is something completely different.

Eric DeMarco: No, this is 100% Auburn Hills. Think 250 lbs of thrust on down. Okay? Think the Air Force's family of affordable mass missiles, the FAM program. Think that program is for 30,000 missiles over the next few years.

Speaker #2: No. That's one of these are all this is 100% Auburn Hills think 250 pounds of thrust on down. Okay? Think the air force's family of affordable mass missiles.

Speaker #2: The FAM program. Think that program is for 30,000 missiles over the next few years.

Speaker #5: Yeah. Thank you. One final question. I don't know if you can, but could you maybe just provide a little deeper dive into what kind of SATCOM miniaturization IP from ORBIT that you might combine with your pre-existing microwave electronics capabilities to provide a new solution?

Mike Crawford: Yeah. Thank you. One final question. Just, I don't know if you can, but could you maybe just provide a little deeper dive into what kind of SATCOM miniaturization IP from Orbit you might combine with your pre-existing-?

Eric DeMarco: Yep

Eric DeMarco: Yep.

Mike Crawford: microwave electronic capabilities to provide a new solution?

Speaker #2: Yep. Yep. So the vast majority of ORBIT's antennas this is, for example, Mike, right now are parabolic. So think very little parabolic antennas like a direct TV antenna shape.

Eric DeMarco: Yep. Yep. The vast majority of Orbit's antennas, this is, for example, Mike, right now, are parabolic. Think very little parabolic antennas, like a DirecTV antenna shape, but very small, that are on drones and airplanes and unmanned boats and stuff like that. We are going to electronic antennas. We are Kratos, our microwave business, is already building electronic antennas. Think flat panel phased arrays and AESA advanced electronic scanned array antennas. We already have the customers, we have the platform, we have the program. We're going to slowly transition with our microwave electronics business to the electronic antennas, which have far more capability than the parabolics.

Speaker #2: But very small that are on drones and airplanes and unmanned boats and stuff like that. And we are going to electronic antennas. Kratos or microwave business is already building electronic antennas.

Speaker #2: So think flat panel phased arrays and AESAs. Advanced electronic scanned array antennas. So we already have the customers. We have the platform. We have the program.

Eric DeMarco: Think flat panel phased arrays and AESA advanced electronic scanned array antennas. We already have the customers, we have the platform, we have the program. We're going to slowly transition with our microwave electronics business to the electronic antennas, which have far more capability than the parabolics.

Speaker #2: We're going to slowly transition with our microwave electronics business to the electronic antennas which have far more capability than the parabolics.

Speaker #5: Excellent. Thank you.

Mike Crawford: Excellent. Thank you.

Speaker #2: Thank you.

Eric DeMarco: Thank you.

Operator: Our next question will be coming from the line of Peter Arment of Baird. Your line is open, Peter.

Speaker #3: And our next question will be coming from the line of Peter Arment of Baird. Your line is open, Peter.

Operator: Our next question will be coming from the line of Peter Arment of Baird. Your line is open, Peter.

Speaker #6: Yeah. Good afternoon, Eric, Deanna. Nice results. Eric, there recently was a successful flight of the JDAM-LR, the long range, which I guess was renamed from the Power JDAM can you maybe talk a little bit about how you see this ramping up?

Peter Arment: Good afternoon, Eric, Deanna. Nice results. Hey Eric, there recently was a successful flight of the JDAM-LR, the long range, which I guess was renamed from the Powered JDAM. Can you maybe talk a little bit about how you see this ramping up? I know you talked a little bit about a lot of engine production out of TDI. You know, how quickly should we expect the ramp-up on that platform?

Speaker #6: I know you talked a little bit about a lot of engine production. Out of TDI, how quickly should we expect the ramp up on that platform?

Speaker #2: Yeah. You saw that. So that is now the GBU-75. That's the official name. And the program of record is currently for 25,000. It's expected Peter to go much higher.

Eric DeMarco: Yeah. You saw that. That is now the GBU-75. The program of record is currently for 25,000. It's expected, Peter, to go much higher, several tens of thousands more. Now, I have to be careful because I'm not the prime. Boeing is the prime. There was significant funding for that in the reconciliation bill, which is now fully funded with the money being obligated. This ties into our plans getting ready for LRIP next year and then full rate production for the following year.

Speaker #2: Several tens of thousands more. Now, I have to be careful because I'm not the prime Boeing is the prime. There was significant funding for that in the reconciliation bill which is now fully funded with the money being obligated.

Speaker #2: So this ties into our plans getting ready for LRIP next year. And then full rate production for the following year. And so now, without talking about that specific program, I just can't.

Eric DeMarco: Now, without talking about that specific program, I just can't, that program and several of the other ones that you all are aware of, that I've walked you through before. Several of these are expected to go into LRIP later this year, no later than next year. Peter, this is how we're getting to maybe 3,000 engines next year, 5,000 or 6,000 engines in 2028, and even more in 2029. These are platforms.

Speaker #2: That program and several of the other ones that you all are aware of that I've walked you through before several of these are expected to go into LRIP later this year.

Speaker #2: No later than next year. And Peter, this is how we're getting to maybe 3,000 engines next year. 5 or 6 thousand engines in '28.

Speaker #2: And even more in '29. And these are platforms we're designed in on. We're already on them.

Peter Arment: Yes

Eric DeMarco: We are designed in on. We're already on them.

Speaker #6: Yeah, it's incredible. Can you talk a little bit about—alright, what can you say about Florida Turbine's involvement in competing for, I guess, it's the SeaLaunch cruise missile and some of the opportunities there?

Peter Arment: Yeah. I think it's incredible. Can you talk a little bit about, or what can you say about Florida Turbine involvement in, you know, competing for, I guess, it's the Sea Launch cruise missile and some of the opportunities there. I know Kratos is one of a few players there. I don't know what you can say, you're in the engine business now, Eric.

Speaker #6: I know Kratos is one of a few players there. I don't know what you can say, but you're in the engine business now, Eric.

Speaker #2: Yep. Okay. So let's talk about what's publicly out there. We have been Kratos has been selected for the development of the engine for the submarine launch cruise missile nuclear.

Eric DeMarco: Okay. Let's talk about what's publicly out there. Kratos has been selected for the development of the engine for the submarine launch cruise missile nuclear. We've won SLCM-N. Okay? As GE announced, GE and our partner, GE announced we have now been selected for the engine for the next class of attritable and expendable CCAs. We've been down selected on that. All right? We were just informed in the past week that us and GE just won another one. This next one I'm gonna say very carefully. The 7-year framework agreements. You've seen 7-year framework agreements on missile systems. We have been selected as the engine, us GEK, for the expanded production. I think it's going up 4X, I think is what the announcement was.

Speaker #2: So we've won SLCMN. Okay? As GE announced, GE and our partner, GE announced we have now been selected for the engine for the next class of a treadable and expendable CCAs.

Speaker #2: We've been down-selected on that, all right? We were just informed in the past week that we, us and GE, we just won another one.

Speaker #2: Now, this next one I'm going to say very carefully. The seven-year framework agreements. You've seen seven-year framework agreements on missile systems. We have been selected as the engine.

Eric DeMarco: This next one I'm gonna say very carefully. The 7-year framework agreements. You've seen 7-year framework agreements on missile systems. We have been selected as the engine, us GEK, for the expanded production. I think it's going up 4X, I think is what the announcement was. Four times current production for two of those missile platforms already.

Speaker #2: Us, GEK, we have been selected as the engine for the expanded production. I think it's going up 4X. I think is what the announcement was.

Eric DeMarco: Four times current production for two of those missile platforms already.

Speaker #2: Four times. Current production. For two of those missile platforms already.

Peter Arment: Wow. Terrific. Lastly, just staying, I guess, with GEK, should we anticipate the fact that you're moving in that direction of higher thrust, that we could see those starting to be incorporated into future Valkyries? How you're thinking of that?

Speaker #6: Wow. Terrific. Lastly, just staying I guess with GEK, should we anticipate the fact kind of you're moving in that direction and higher thrust that we could see those starting to be incorporated into future Valkyries how you're thinking of that?

Speaker #2: I can't talk about it. I'm getting I can't brother. I can't. I can't talk. I'd like to, but I can't talk about it. I apologize.

Eric DeMarco: I can't talk about it. I can't, brother, I can't. I can't talk. I'd like to, but I can't talk about it, I apologize.

Speaker #6: I appreciate all the details as always. Thanks, Eric.

Peter Arment: Appreciate all the details as always. Thanks, Eric.

Speaker #2: Okay. Thanks.

Eric DeMarco: Okay, thanks.

Speaker #3: Yeah. And our next question will come from the line of Noah Poponak of Goldman Sachs. Noah, your line is open.

Operator: Our next question will come from the line of Noah Poponak of Goldman Sachs. Noah, your line is open.

Noah Poponak: Hey, Eric and Deanna. Good afternoon, good evening.

Speaker #7: Hey, Eric and Deanna. Good afternoon. Good evening. Depending on your location.

Eric DeMarco: Good evening.

Deanna Lund: Hi, Noah.

Noah Poponak: Depending on your location.

Speaker #2: Good morning.

Eric DeMarco: Good morning.

Noah Poponak: Yeah. It all feels the same at the moment. Eric, can you guys size, even if very roughly at this point, annual revenue that is from the hypersonics business and that is from power and propulsion? Obviously there's some degree of overlap between the two, if you could express that as well.

Speaker #7: Yeah. It all feels the same at the moment. Eric, can you guys size even if very roughly at this point annual revenue that is from the hypersonics business and that is from power and propulsion?

Speaker #7: And obviously, there's some degree of overlap between the two if you could express that as well.

Speaker #8: Yeah. So, for the total public information that we've provided for our hypersonic business, which is our defense rocket support business, the expectation for 2026 is $400 million.

Deanna Lund: Yeah. For the total public information that we've provided for our hypersonic business, which is our defense rocket support business, the expectation for 2026 is $400 million. For next year, the expectation is for $700 million.

Speaker #8: And then for next year, the expectation is for $700 million.

Speaker #2: And then, so think of those NOAA as primarily, right now, solid rocket motors for the hypersonic business. Right now, next year, I'll be talking to you about air breathers, but not right now.

Eric DeMarco: And then-

Noah Poponak: Okay

Eric DeMarco: Think of those, Noah, as primarily, right now, solid rocket motors for the hypersonic business right now. Next year I'll be talking to you about air breathers, but not right now. On the cruise missile engines we're talking about, these are air breathers. We're currently on the smaller ones. Our current run rate annually, think, is about $10 million.

Speaker #2: On the cruise missile engines we're talking about, these are air breathers. We're currently on the smaller ones our current run rate annually think is about 10 million.

Noah Poponak: Okay.

Eric DeMarco: We're talking about thousands of engines. Think a selling price, depending on which engine, of $40,000 to 60,000 each.

Speaker #2: And so we're talking about thousands of engines and think of selling price depending on which engine. Of 40,000 to 60,000 each.

Eric DeMarco: We're talking about thousands of engines. Think a selling price, depending on which engine, of $40,000 to 60,000 each.

Speaker #7: Okay. Okay. That's all helpful. I will keep trying to triangulate that. As it's evolving. Can I ask about the two-queue outlook? It would require the strong pace of organic growth that you've been on to slow and a step down in the EBITDA margin and even the absolute dollars.

Noah Poponak: Okay. Okay, that's all helpful. I will keep trying to triangulate that a lot as it's evolving. Can I ask about the Q2 outlook? It would require the strong pace of organic growth that you've been on to slow and a step down in the EBITDA margin and even the absolute $ before then, you know, all of that picking back up in the H2. Can you just detail what's behind that?

Speaker #7: Before then, all of that picking back up in the second half. Can you just detail what's behind that?

Speaker #8: Yeah. So part of it so on the margin piece, part of that's related to the mix that is expected. So we did have quite a favorable mix in the first quarter.

Deanna Lund: Yeah. Part of it, on the margin piece, part of that's related to the mix that is expected. We did have quite a favorable mix in Q1. The other piece of that is we have been ramping infrastructure costs, manufacturing costs, and bid and proposal costs. That it's not being absorbed as much in Q2 just because of the ramp that we're building up for the production and the growth for H2. As far as the revenue step down, if you will, from Q1 to Q2, some of that's in our unmanned system. That's just based on the timing of some production and shipment in Q1 as compared to Q2.

Speaker #8: The other piece of that is we have been ramping infrastructure costs, manufacturing costs, bid and proposal costs. So that it's not being absorbed as much in the second quarter just because of the ramp that we're building up for the production and the growth for the second half.

Speaker #8: As far as the revenue step down, if you will, from Q1 to Q2, some of that's in our unmanned system that's just based on the timing of some production and shipment in the first quarter as compared to the second quarter.

Deanna Lund: As far as the revenue step down, if you will, from Q1 to Q2, some of that's in our unmanned system. That's just based on the timing of some production and shipment in Q1 as compared to Q2. That's primarily the biggest change, if you will, from sequential quarters.

Deanna Lund: That's primarily the biggest change, if you will, from sequential quarters.

Speaker #8: That's primarily the biggest change, if you will, from sequential quarters.

Eric DeMarco: Yeah. Yeah. We're trying to be conservative.

Eric DeMarco: Yeah. Yeah. We're trying to be conservative. We are. The issue out there, you know, in the industry right now is on the government side, the program offices and the contracting offices. The amount of money they are trying to get obligated and under contract is incredible. I just told you now there's an additional $120 billion that they're trying to get obligated between now and the end of the fiscal year. We're trying to be conservative. It's all lined up. If we don't get the awards, the DD-254s aren't done, we can't execute on it. We're cognizant.

Speaker #2: Yeah. We're trying to be conservative. We are. The issue out there, Noah, in the industry right now is on the government side, the program offices and the contracting offices.

Deanna Lund: Yeah.

Eric DeMarco: We are. The issue out there, you know, in the industry right now is on the government side, the program offices and the contracting offices.

Eric DeMarco: The amount of money they are trying to get obligated and under contract is incredible. I just told you now there's an additional $120 billion that they're trying to get obligated between now and the end of the fiscal year. We're trying to be conservative. It's all lined up. If we don't get the awards, the DD-254s aren't done, we can't execute on it. We're cognizant.

Speaker #2: The amount of money, the amount of money they are trying to get obligated and under contract is incredible. I just told you now there's an additional $120 billion that they're trying to get obligated between now and the end of the fiscal year.

Speaker #2: And so we're trying to be conservative. It's all lined up. But if we don't get the awards, the DE250s aren't done, we can't execute on it.

Speaker #2: And we're cognizant of that backlog right now in the government program shops.

Noah Poponak: Right

Eric DeMarco: of that backlog right now in the government program shops.

Speaker #7: Okay. That makes sense. Appreciate that. And then I guess just maybe talking a little bit more about margins over time. You have an interesting go-to-market and an interesting model.

Noah Poponak: Okay. That makes sense. Appreciate that.

Noah Poponak: Okay. That makes sense. Appreciate that. Just, you know, maybe talking a little bit more about margins over time. You know, you have an interesting go-to-market and an interesting model that would seemingly allow for your margins to go higher. Over the last few quarters, as the organic growth has accelerated, the margins have tracked. What's the latest thinking, I guess, on where margins go beyond this year and what the potential is over time?

Eric DeMarco: Yeah

Noah Poponak: Just, you know, maybe talking a little bit more about margins over time. You know, you have an interesting go-to-market and an interesting model that would seemingly allow for your margins to go higher. Over the last few quarters, as the organic growth has accelerated, the margins have tracked. What's the latest thinking, I guess, on where margins go beyond this year and what the potential is over time?

Speaker #7: That would seemingly allow for your margins to go higher. And over the last few quarters, as the organic growth has accelerated, the margins have tracked.

Speaker #7: What's the latest thinking, I guess, on where margins go beyond this year and what the potential is over time?

Speaker #2: Yeah. I would go with what we put out there for now. We're looking for year-over-year 100 basis point increases. So 26 over 12, 25, 100 basis points.

Eric DeMarco: Yeah. I would go with what we put out there for now. We're looking for year-over-year 100 basis point increases. 2026 over 2025, 100 basis points. 2027 over 2026, 100 basis points. You can probably pencil in if you want to, 2028 over 2027, 100 basis points. We're pretty confident in this. The balance, as you know, is we have so many opportunities right now. Our bid and proposal costs-

Speaker #2: 27 over 26, 100 basis points. You can probably pencil in if you want to 28 over 27, 100 basis points. And we're pretty confident in this.

Speaker #2: And the balance, as you know, is we have so many opportunities right now. Our bid and proposal costs where we're being told if you bid, you're going to win, which we're winning, are significant, millions of dollars.

Eric DeMarco: where we're being told if you bid, you're gonna win, which we're winning, are significant, millions of dollars. We're putting in the money on the bid and proposal to win these, like this recent space program, $450 million. That we were encouraged to bid it, we bid it, we won it. That was a very expensive bid. We're balancing those costs against making sure that we hit the 100 basis point increases every year.

Speaker #2: But we're putting in the money on the bid and proposal to win these. This recent space program, $450 million. We were encouraged to bid it.

Speaker #2: We bid it. We won it. That was a molt. That was a very expensive bid. And so we're balancing those costs against making sure that we hit the 100 basis point increases every year.

Speaker #7: Okay. Yeah. I would think at some point you could achieve some escape velocity of leverage with you've invested so much in the business and then you get the revenue growth.

Noah Poponak: Okay. Yeah. I would think at some point you would achieve some escape velocity of leverage with, you know, you've invested so much in the business and then you get the revenue growth. Sounds like for the time being, still just reinvesting back into those opportunities. That makes sense. Okay. Thanks so much. I appreciate it.

Speaker #7: But it sounds like, for the time being, still just reinvesting back into those opportunities. So that makes sense. Okay, thanks so much. I appreciate it.

Speaker #2: Okay. Thank you.

Eric DeMarco: Okay. Thank you.

Speaker #1: And our next question will be coming from the line of Ken Herbert of RBC Capital Markets. Your line is open.

Operator: Our next question will be coming from the line of Ken Herbert of RBC. Sam, your line is open.

Speaker #7: Yeah. Hi. Good afternoon. Eric and Deanna. I wanted to follow up on your comment around timing and some of the challenges in actually taking funding levels into contracts.

Ken Herbert: Hi, good afternoon, Eric and Deanna. Wanted to follow up on your comment around timing and some of the challenges in actually taking funding levels into contracts. As we think into heading into fiscal 2027, there's obviously quite a step up more broadly in funding for drones. You think about the Defense Autonomous Warfare Group and funding levels there. How do you see Two questions. How do you see that broadly impacting sort of opportunities across your portfolio, not only for the Valkyrie or other systems, but on the engine and other side? Second, and I guess more importantly, what's your confidence level that we see sort of the kind of step up they've talked about in drone and counter-drone funding, and that it actually happens in a timely manner, I guess? Thank you.

Speaker #7: As we think into heading into fiscal 27, there's obviously quite a step up more broadly in funding for drones. And you think about the Defense Autonomous Warfare Group and funding levels there.

Speaker #7: How do you see two questions. How do you see that broadly impacting sort of opportunities across your portfolio not only for the Valkyrie or other systems, but on the engine and other side?

Ken Herbert: How do you see that broadly impacting sort of opportunities across your portfolio, not only for the Valkyrie or other systems, but on the engine and other side? Second, and I guess more importantly, what's your confidence level that we see sort of the kind of step up they've talked about in drone and counter-drone funding, and that it actually happens in a timely manner, I guess? Thank you.

Speaker #7: But then, second—and I guess more importantly—what's your confidence level that we see the kind of step-up they've talked about in drone and counter-drone funding, and that it actually happens in a timely manner, I guess?

Speaker #7: Thank you.

Speaker #2: Yep. Yep. So on that funding, as you know right now, the placeholders 56 billion. Over five years. That's the program you're talking about, DOG.

Eric DeMarco: Yep. Yep. On that funding, as you know right now, the placeholder is $56 billion over five years. That's the program you're talking about, DAWG. When you talk drones, I'm gonna talk drones and loitering munitions, which both fall underneath it. Our confidence on the engine side, we'll start there, is extremely high. If you triangulate the missiles they're talking about, you know, I named one program with 30,000 of them. You take a look at what's going on in the world and the attrition of our exquisite missiles right now, and how long it takes to rebuild them and how expensive they are. We at Kratos are highly confident that on the small jet drone, jet loitering munition, jet missile side, we have great confidence in our step-up forecast. Very good.

Speaker #2: And when you talk drones, I'm going to talk drones and loitering munitions which both fall underneath it. Our confidence on the engine side we'll start there, is extremely high.

Speaker #2: If you triangulate the missiles they're talking about, I named one program with 30,000 of them. And you take a look at what's going on in the world and the attrition of our exquisite missiles right now and how long it takes to rebuild them and how expensive they are.

Eric DeMarco: You take a look at what's going on in the world and the attrition of our exquisite missiles right now, and how long it takes to rebuild them and how expensive they are. We at Kratos are highly confident that on the small jet drone, jet loitering munition, jet missile side, we have great confidence in our step-up forecast. Very good.

Speaker #2: We are highly, we at Kratos are highly confident that on the small jet drone, jet loitering munition, jet missile side, we have great confidence in our step-up forecast.

Speaker #2: Very good. All right. Now, let's go to the drone side. We are being very careful. We've made the decision that we are going to be the merchant supplier of engines.

Eric DeMarco: All right. Now let's go to the drone side. We are being very careful. You know, we've made the decision we are going to be the merchant supplier of engines, so our plan is to be on every other system provider's missile or drone or loiter munition, be a merchant supplier. What does that mean? We are picking and choosing our spots very carefully where we are going to actually build the entire system, so we're not competing with our merchant supplier partner on the engine side. Okay? There are one or two that we're involved with right now, where we're comfortable we're not competing or gonna cause a problem on the merchant supplier side. Ken, our primary focus is, it's better to have part of something than all or nothing.

Speaker #2: So we are going to be our plan is to be on every other system provider's missile or drone or loitering munition. Be a merchant supplier.

Speaker #2: What does that mean? We are picking and choosing our spots very carefully where we are going to actually build the entire system, so we're not competing with our merchant supplier partner on the engine side.

Speaker #2: Okay? So there are one or two that we're involved with right now where we're comfortable. We're not competing or going to cause a problem on the merchant supplier side.

Eric DeMarco: Okay? There are one or two that we're involved with right now, where we're comfortable we're not competing or gonna cause a problem on the merchant supplier side. Ken, our primary focus is, it's better to have part of something than all or nothing. Our part of something is to be on everybody's engines than to bid on DAWG systems where there are 10 guys bidding. Even though we think we're the best always, we might not win because the government is trying to rebuild the industrial base and rebuild different competitors.

Speaker #2: But Ken, our primary focus is it's better to have part of something than all or nothing. And our part of something is to be on everybody's engines, rather than to bid on DOG systems where there are 10 guys bidding, and even though we think we're the best always, we might not win because the government is trying to rebuild the industrial base and rebuild different competitors.

Eric DeMarco: Our part of something is to be on everybody's engines than to bid on DAWG systems where there are 10 guys bidding. Even though we think we're the best always, we might not win because the government is trying to rebuild the industrial base and rebuild different competitors.

Ken Herbert: That's helpful. If I could, how do you think about the fact that a lot of the funding for DAWG in particular is coming through expected reconciliation relative to base budget? Are you handicapping those any differently as you just think about fiscal 2027?

Speaker #7: That's helpful. And if I could, how do you think about the fact that a lot of the funding for DOG in particular is coming through expected reconciliation relative to base budget?

Speaker #7: And are you handicapping those any differently as you just think about fiscal 27?

Speaker #2: Right. Yeah. So obviously for 26, I'm all happy. That's all bolted in at what, 1 billion, 1 trillion, 150 billion. So as you know, on the 1.5 trillion that the department's going for for 27, the base budget pieces 1 trillion, 150 billion.

Eric DeMarco: Right. Yeah. Obviously for 2026, I'm all happy. That's all bolted in at, what, $1,150 billion. As you know, on the $1.5 trillion that the Department's going for for 2027, the base budget piece is $1,150 billion, and the reconciliation bill is $350 billion. Very importantly, if that makes it, I believe it's going to make it based on my recent meetings, as I talked about on the Hill, the new baseline for the base budget is a $1,150 billion, which never goes down. The only time it ever went down was under Obama and sequestration.

Speaker #2: And the reconciliation bill is 350 billion. Very importantly, if that makes it, I believe it's going to make it based on my recent meetings as I talked about on the Hill.

Speaker #2: The new baseline for the base budget is a trillion, 150 billion. Which never goes down. The only time it ever went down was under Obama and sequestration.

Speaker #2: And so you take that 1 trillion, 150 billion base, and that goes up 3, 5, 6 percent a year. The DOG program will be adequately funded at the new program that we'll be able to successfully execute our business plan even if there are no future reconciliation bills.

Eric DeMarco: You take that 1,150 billion base, and that goes up 3%, 5%, 6% a year. The DAWG program will be adequately funded. It's a new program that we'll be able to successfully execute our business plan, even if there are no future reconciliation bills.

Speaker #7: Great. Thanks, Eric.

Ken Herbert: Great. Thanks, Eric.

Speaker #2: Yep.

Eric DeMarco: Yep.

Speaker #1: And our next question will be coming from the line of Jonathan Siegman of Stifel. Your line is open, Jonathan.

Operator: Our next question will be coming from the line of Jonathan Siegmann of Stifel. Your line is open, Jonathan.

Speaker #7: Thank you, Eric and Deanna. Good afternoon. A lot of progress on a lot of vectors. Maybe one you didn't talk about as much was Prometheus, the solid rocket.

Jonathan Siegmann: Thank you, Eric and Deanna. Good afternoon. A lot of progress on a lot of vectors. Maybe one you didn't talk about as much was Prometheus, the solid rocket JV. Mentioned $50 million of CapEx this year. I was just wondering, there was some earlier Defense Production Act Title III money for that campus. Does that change the level of investment that Kratos and the partner is putting in, or does that represent opportunity to increase the scope of that facility? Thank you.

Speaker #7: JV, mentioned $50 million of CapEx this year. I was just wondering, there was some earlier defense production act Title III money for that campus.

Speaker #7: Does that change the level of investment that Kratos and the partner is putting in? Or does that represent opportunity to increase the scope of that facility?

Speaker #7: Thank you.

Speaker #2: Great question. Yep. So the Department of so we had the Prometheus groundbreaking earlier this year. Just a few months ago. And the day after the groundbreaking, the department came out with its own press release that they're putting in 100 million dollars into the camp, the energetics campus on their own.

Eric DeMarco: Great question. Yep. We had the Prometheus groundbreaking earlier this year, just a few months ago. The day after the groundbreaking, the department came out with its own press release that they are putting in $100 million into the camp, the energetics campus, on their own. Which was great. Right after we put out a groundbreaking press release, the department put that out. Continuing on your question. There is absolute opportunity here for Prometheus, Kratos, and Rafael, with the department for significant additional department funds to be put into Prometheus to both pull production to the left and increase it for existing platforms that we are, quote-unquote, "on," and new platforms they want us on.

Speaker #2: Which was great. So, right after we put out our groundbreaking press release, the department put that out. Continuing on your question, there is absolute opportunity here for Prometheus.

Eric DeMarco: There is absolute opportunity here for Prometheus, Kratos, and Rafael, with the department for significant additional department funds to be put into Prometheus to both pull production to the left and increase it for existing platforms that we are, quote-unquote, "on," and new platforms they want us on.

Speaker #2: Kratos and Raphael with the department for significant additional department funds to be put into Prometheus to both pull production to the left and increase it for existing platforms that we're "on" and new platforms they want us on.

Eric DeMarco: Prometheus, in my opinion, is going to be a grand slam home run for the United States, the energetics business, and for Rafael and Kratos. The department is with us, our customer is with us, we're planning right now, we're gonna have first fire next year. First fire next year.

Speaker #2: Prometheus, in my opinion, is going to be a grand slam home run for the United States, the energetics business, and for Rafael and Kratos.

Speaker #2: The department is with us. Our customer is with us. And we're planning right now we're going to have first fire next year. First fire next year.

Jonathan Siegmann: All right.

Speaker #2: Yeah.

Eric DeMarco: Yeah.

Speaker #7: That's great. That's great.

Jonathan Siegmann: That's great. That's great.

Eric DeMarco: Yep.

Speaker #2: Yep.

Speaker #7: And then maybe I'll just add on one. You touched on it with Orbit Tech just looks like a great acquisition and a really strong final quarter as an independent company.

Jonathan Siegmann: Maybe I'll just add on one. You touched on it with Orbitec. It just looks like a great acquisition and a really strong final quarter as an independent company. If our math is right, your revenue in Israel now is approaching about 10%. Last year, you upgraded your manufacturing facility. Could you maybe talk a little bit about the prospect of the enlarged business there and how much exposure does it have to ammunition restock that will unfold given the conflicts there? Thanks again.

Speaker #7: And if our math is right, your revenue in Israel now is approaching about 10%. And last year you upgraded your manufacturing facility. Could you maybe talk a little bit about the prospect of the enlarged business there, and how much exposure does it have to a munition restock that will unfold given the conflicts there?

Speaker #7: Thanks again.

Speaker #2: Yep. Yep. So Deanna, are we near 10%?

Eric DeMarco: Yeah. Yeah. Deanna, are we near 10%?

Speaker #1: Yeah.

Deanna Lund: Yeah.

Speaker #2: Yeah. Yep. So we're near 10%. We have very large exposure to munition restock. So just think Tamir on Iron Dome. Think Arrow. All right?

Deanna Lund: We're near 10%. We have very large exposure to munition restock. Just think Tamir on Iron Dome. Think Arrow. All right? We're on those. I can keep Think Barak, David's Sling. We're on all of them. It's us, and Orbit's on a lot of stuff, too. We are forecasting and expect significant growth in our Israeli business for the foreseeable future, for the restock and for new systems that our big three partners, Rafael, Elbit, and Israel Aerospace Industries, are working with us on. As I think you know, I believe, I think we're the largest independent merchant supplier of microwave electronics outside of the United States. It is growing rapidly. As I think you also know, in the US, we're back in the game in the microwave business.

Eric DeMarco: We're near 10%. We have very large exposure to munition restock. Just think Tamir on Iron Dome. Think Arrow. All right? We're on those. I can keep Think Barak, David's Sling. We're on all of them. It's us, and Orbit's on a lot of stuff, too. We are forecasting and expect significant growth in our Israeli business for the foreseeable future, for the restock and for new systems that our big three partners, Rafael, Elbit, and Israel Aerospace Industries, are working with us on.

Speaker #2: We're on those. I can keep think Barack. Sling of David. We're on all of them. And it's us and Orbit's on a lot of stuff too.

Speaker #2: So we expect—we are forecasting and expect significant growth in our Israeli business for the foreseeable future, for the restock, and for new systems that our big three partners—Rafael, Elbit, and Israeli Aerospace Industry—are working with us on.

Speaker #2: As I think you know, I believe we're the largest independent merchant supplier of microwave electronics outside of the United States, and it is growing rapidly.

Eric DeMarco: As I think you know, I believe, I think we're the largest independent merchant supplier of microwave electronics outside of the United States. It is growing rapidly. As I think you also know, in the US, we're back in the game in the microwave business.

Speaker #2: And as I think you also know, in the US, we're back in the game in the microwave business. It is growing. Incredibly fast also.

Eric DeMarco: It is growing incredibly fast also. This is where some of our highest margins are because a lot of this is catalog pricing. It's not subject to TINA, which is normal. This is one of the key aspects tying into Noah's question on margin expansion and why in the future, you know, maybe we can do better than 100 basis points as our merchant supplier businesses get bigger relative to the system businesses.

Speaker #2: And this is where some of our highest margins are, because a lot of this is catalog pricing. It's not subject to TINA, which is normal.

Speaker #2: And this is one of the key aspects tying into Noah's question. On margin expansion and why in the future maybe we can do better than 100 basis points as our merchant supplier businesses get bigger relative to the system businesses.

Speaker #7: Thanks for the comments.

Jonathan Siegmann: Thanks for the comments.

Speaker #2: Yep. Thank you.

Eric DeMarco: Yep. Thank you.

Speaker #1: And our next question will be coming from the line of Joe Gomes of Noble Capital. Your line is open, Joe.

Operator: Our next question will be coming from the line of Joe Gomes of Noble Capital. Your line is open, Joe.

Speaker #8: Good afternoon. I apologize. I just joined the call, so I missed a lot of it. I was on another one. And if I ask any questions that have been asked already, I apologize in advance.

Joe Gomes: Good afternoon. I apologize, I just joined the call, so I missed a lot of it. I was on another one. If I ask any questions that have been asked already, I apologize in advance.

Eric DeMarco: No problem.

Speaker #2: No problem.

Joe Gomes: I wanted to ask, you know, kind of start out with you talked about in all the opportunities, Eric, and all the things that you're bidding on, and basically you said, Hey, you know, people are coming on saying if you bid on it, you'll win it. How is that impacting your ability to, you know, employ, get employees, to, for these programs that you're winning? You know, is the labor situation gotten any better? Has it gotten worse? You know, maybe you could provide some color there.

Speaker #8: So I wanted to ask—kind of to start out—you talked about all the opportunities, Eric, and all the things that you're bidding on. And basically, you said, 'Hey, people are coming on saying, if you bid on it, you win it.' How is that impacting your ability to employ, to get employees for these programs that you're winning?

Speaker #8: Is the labor situation getting any better? Has it gotten worse? Maybe you could provide some color

Speaker #2: Yep. Okay. So it's gotten better. In the past year, six months. But it's not great. Especially in turbo machinery engineers for propulsion systems. They don't exist.

Eric DeMarco: Yeah. Okay. It's gotten better in the past year, 6 months, but it's not great, especially in turbomachinery engineers for propulsion systems. They don't exist. It's very hard in the turbomachinery area. You may not have heard. In my prepared remarks, I talked about we've been verbally told we're going to receive another industrial, very large industrial gas turbine program at the end of this year, beginning of next year by another company. This industrial gas turbine area for power generation, it's an incredible opportunity right now. If we had the people, this is an area we could accelerate our growth even more, Joe. We really could. These are the same guys that are working on our cruise missile programs. They're working on our hypersonic air breathing programs.

Speaker #2: It's very hard in the turbo machinery area. We you heard my you may or not have heard. In my prepared remarks, I talked about we've been verbally told we're going to receive another industrial very large industrial gas turbine program at the end of this year, beginning of next year by another company.

Eric DeMarco: This industrial gas turbine area for power generation, it's an incredible opportunity right now. If we had the people, this is an area we could accelerate our growth even more, Joe. We really could. These are the same guys that are working on our cruise missile programs. They're working on our hypersonic air breathing programs.

Speaker #2: This industrial gas turbine area for power generation—it's an incredible opportunity right now. And if we had the people, this is an area we could accelerate our growth even more, Joe.

Speaker #2: We really could. But these are the same guys that are working on our cruise missile programs. They're working on our hypersonic air-breathing programs.

Speaker #2: They're working on our space programs. And I want to say, guys, guys and gals, of course. So our number one operational challenge right now as a company is obtaining and retaining qualified people.

Eric DeMarco: They're working on our space programs. I wanna say guys and gals, of course. Our number one operational challenge right now as a company is obtaining and retaining qualified people. Then if they need to be able to obtain and retain a security clearance, that adds another layer on it, especially in certain states where marijuana is legal to smoke, because you can't get a security clearance if, and I'm not passing judgment here, if, if you like to do that. That's, that's the dynamic. It's not as bad as it was a year and a half ago. It's better, but it's not, it's not great.

Speaker #2: And then if they need to be able to obtain and retain a security clearance, that adds another layer on it, especially in certain states where marijuana is legal to smoke.

Speaker #2: Because you can't get a security clearance if—and I'm not passing judgment here—if you like to do that. So that's the dynamic. It's not as bad as it was a year and a half ago.

Speaker #2: It's better, but it's not great.

Speaker #8: Okay, thanks for that. And then, one more. Obviously, a lot of the questions deal with the military side of things here. But you and I have talked a lot in the past about some of the more commercial—the truck platooning, logistics, automation.

Joe Gomes: Okay. Thanks for that. Then one more. You know, obviously a lot of the questions, you know, deal with the, you know, the military side of things here. You know, you and I have talked a lot in the past about, you know, some of the more, you know, commercial, you know, the truck platooning, logistics automation. I know you had a release or two of that in the last 6 months or so. Just wondering, where does that business stand? Are you gonna be able to grow that business here in the near term with all the focus on the defense side?

Speaker #8: And I know you had a release or two of that in the last six months or so. Just wondering where is that business stand?

Speaker #8: Are you going to be able to grow that business here in the near term with all the focus on the defense side?

Speaker #2: Yep. So our unmanned ground system business is doing great. As you know, we're in the soybean farms, we're in the sugar beet farms, we're on the timber land.

Eric DeMarco: Yeah. Our unmanned ground system business is doing great. As you know, we're in the soybean farms, we're in the sugar beet farms, we're on the timber land. I think we're in 15 states now driving unmanned on the roads. It's doing very, very well. As you said, there's just so much going on on the national security side. It's not a strategic focus area for us. Because our technology is so good and so cost affordable, they're coming to us. Joe, we're in discussions right now with a global farming equipment company. You would know who they are. It's possible by the end of the year, we're gonna get a contract with them, and we're gonna turn their farming equipment into unmanned systems out on the farms.

Speaker #2: I think we're in 15 states now, driving unmanned on the roads. It's doing very, very well. But as you said, there's just so much going on on the national security side.

Speaker #2: It's not a strategic focus area for us. But because our technology is so good and so cost-affordable, they're coming to us. Joe, we're in discussions right now with a global farming equipment company.

Eric DeMarco: Joe, we're in discussions right now with a global farming equipment company. You would know who they are. It's possible by the end of the year, we're gonna get a contract with them, and we're gonna turn their farming equipment into unmanned systems out on the farms. It's happening, but I cannot tell you that it's a major strategic initiative, 'cause it's not, and I apologize.

Speaker #2: You would know who they are. And it's possible, by the end of the year, we're going to get a contract with them. And we're going to turn their farming equipment into unmanned systems out on the farms.

Speaker #2: So, it's happening, but I cannot tell you that it's a major strategic initiative because it's not. And I apologize.

Eric DeMarco: It's happening, but I cannot tell you that it's a major strategic initiative, 'cause it's not, and I apologize.

Joe Gomes: Fair enough. Fair enough. I'll get back to you.

Speaker #8: Fair enough. Fair enough. I'll get back to Q. Thank you, guys. Appreciate it.

Eric DeMarco: Okay.

Joe Gomes: Thank you, guys. Appreciate it.

Speaker #2: Okay. Thank you.

Eric DeMarco: Okay. Thank you.

Speaker #1: And our next question will be coming from the line of Pete Skibitzky, Global. Your line is open.

Operator: Our next question will be coming from the line of Peter Skibitski of Alembic Global. Your line is open.

Peter Skibitski: Hey, good evening, guys. Thanks. Guys, on the growth in KGS in Q1, I'm just trying to figure that out. Was that mostly MACH-TB driving the growth there? The billion-dollar sole source, I think, addition that you mentioned, Eric DeMarco, I think in your opening remarks, was that an increase in the ceiling of MACH-TB, or was that something different?

Pete Skibitski: Hey, good evening, guys. Thanks. Guys, on the growth in KGS in Q1, I'm just trying to figure that out. Was that mostly MACH-TB driving the growth there? The billion-dollar sole source, I think, addition that you mentioned, Eric DeMarco, I think in your opening remarks, was that an increase in the ceiling of MACH-TB, or was that something different?

Speaker #7: Hey, good evening, guys. Thanks. On the growth in KGS in the first quarter, I'm just trying to figure that out. Was that mostly mock TB driving the growth there?

Speaker #7: And then the billion-dollar soul source, I think, addition that you mentioned, Eric, I think in your opening remarks, was that an increase in the ceiling of mock TB?

Speaker #7: Or was that something different?

Eric DeMarco: Oh, go ahead, Deanna.

Speaker #2: Oh, go ahead.

Deanna Lund: Yeah. The organic growth in KGS is partially driven by MACH-TB, but also in our microwave business, as well as our KTT business. It was, it was across those three divisions within KGS.

Speaker #9: Yeah, so the organic growth in KGS is partially driven by mock TB, but also in our microwave business, as well as our KTT business.

Speaker #9: So it was across those three divisions within KGS.

Speaker #7: Okay.

Peter Skibitski: Okay. On the other-

Pete Skibitski: Okay. On the other-

Speaker #2: And then on the other yeah. On the other one, I can't get ahead of the customer until they announce it. But we've got three separate very large initiatives going on the hypersonic side.

Eric DeMarco: On the other one, I can't get ahead of the customer until they announce it. We've got three separate, very large initiatives going on the hypersonic side, two of which we've been verbally told we're winning. The third one, I think we're also gonna get. I wanna wait until the customer comes out on it until I say anything, just 'cause I don't wanna get in front of them. It should be very soon on one or two of these.

Speaker #2: Two of which we've been verbally told we're winning. The third one, I think we're also going to get. I want to wait until the customer comes out on it until I say anything just because I don't want to get in front of them.

Speaker #2: And it should be very soon on one or two of these.

Speaker #7: Okay, fair enough. And I guess last one for me, maybe for Deanna—just on the $160 million in CapEx this year, what's the best guess that you think we should model in, in terms of how that profile is going to look kind of through the midterm?

Peter Skibitski: Okay. Fair enough. Then I guess last one for me, maybe for Deanna. Just on the $160 million in CapEx this year, just, you know, what's the best guess that you think we should model in kind of through the midterm? It seems like a lot of the spending here will continue for some time, just judging from the amount of, you know, initiatives you guys have underway.

Pete Skibitski: Okay. Fair enough. Then I guess last one for me, maybe for Deanna. Just on the $160 million in CapEx this year, just, you know, what's the best guess that you think we should model in kind of through the midterm? It seems like a lot of the spending here will continue for some time, just judging from the amount of, you know, initiatives you guys have underway.

Speaker #7: It seems like a lot of the spending here will continue for some time, just judging from the amount of initiatives you guys have underway.

Speaker #9: I think it would and obviously, we're not giving any guidance for next year. But I think the elevation of CapEx will continue. I don't think it'll be at that level, but it would just with the initiatives we have going on, I think it will be continue to be elevated in 2027.

Deanna Lund: I think it would. Obviously, we're not giving any guidance for next year, but I think the elevation of CapEx will continue. I don't think it'll be at that level, but it would just with the initiatives we have going on, I think it will continue to be elevated in 2027.

Speaker #7: Okay. Thanks, guys.

Peter Skibitski: Okay. Thanks, guys.

Pete Skibitski: Okay. Thanks, guys.

Speaker #9: Sure.

Deanna Lund: Sure.

Speaker #2: Thank you.

Eric DeMarco: Thank you.

Speaker #1: Thank you. And our next question will be coming from the line of Austin Moeller. Okay. And of course, you knew it. Your line is open, Austin.

Operator: Thank you. Our next question will be coming from the line of Austin Moeller of Canaccord Genuity. Your line is open, Austin.

Austin Moeller: Hi, good afternoon, Eric and Deanna. You mentioned the win on the $447 million contract for Resilient Missile Warning and Tracking satellites in MEO. At this point, you now provide ground station capability across all three orbital inclinations, LEO, MEO, and GEO. Should we think that Kratos has a place competing on the re-compete of SCAR with OpenSpace? Do you think there's an opportunity there for both the flat panel phased array antennas and the parabolic?

Speaker #10: Hi. Good afternoon, Eric and Deanna. So, you mentioned the win on the $447 million contract for ground management integration of the missile warning and tracking satellites in MEO.

Speaker #10: So at this point, you now provide ground station capability across all three orbital inclinations: LEO, MEO, and GEO. So, should we think that Kratos has a place competing on the re-competitive SCAR with Open Space?

Speaker #10: And do you think there's an opportunity there for both the flat-panel phased-array antennas and the parabolic?

Eric DeMarco: That's a very, very insightful question. You're exactly right. We are across all three of those orbits, and we're also, I've been learning, Austin, I've been learning a lot about cislunar orbit lately too, because we're now in cislunar orbit also. To your question on SCAR. Obviously we were partnered with AeroVironment on SCAR. We delivered all our stuff out previously. The recent termination for convenience, that didn't impact us at all because we had already delivered out our piece. When it comes out, if it comes out, you know, we will definitely take a look at it to see if it's something we wanna prime or do we wanna partner again with AV or partner with somebody else. We'll look at it.

Speaker #2: That's a very, very insightful question. You're exactly right. We are across all three of those orbits, and also, I've been learning—a lot, Austin—I've been learning a lot about cislunar orbit lately too.

Speaker #2: Because we're now in cislunar, we're now in cislunar orbit also. But to your question on SCAR, so obviously, we were partnered with AeroVironment on SCAR.

Speaker #2: We delivered all our stuff out previously, so the recent termination for convenience didn't impact us at all because we had already delivered out our piece.

Eric DeMarco: The recent termination for convenience, that didn't impact us at all because we had already delivered out our piece. When it comes out, if it comes out, you know, we will definitely take a look at it to see if it's something we wanna prime or do we wanna partner again with AV or partner with somebody else. We'll look at it.

Speaker #2: When it comes out, if it comes out, we will definitely take a look at it to see if it's something we want to prime, or do we want to partner again with AV, or partner with somebody else?

Speaker #2: We'll look at it. I just don't know right now enough details on it. But to the next part of your question: on a parabolic antenna versus an AESA antenna or a phased-array antenna?

Eric DeMarco: I just don't know right now enough details on it. To the next part of your question, on a parabolic antenna versus an AESA antenna or a phased array antenna. Here's my opinion. Okay? I go back to what the secretary said on 7 November in the Arsenal of Freedom speech. Bring me 85% of the solution now that I can field now, not something that I may or may not get 2 or 3 years from now. My tummy tells me that parabolics will win there. That's what my. I don't know. This is my opinion, just based on what's coming out of the department.

Speaker #2: Here's my opinion. Okay. I go back to what the Secretary said on November 7th in the 'Arsenal of Freedom' speech: Bring me 85% of the solution now that I can field now, not something that I may or may not get two or three years from now.

Speaker #2: My tummy tells me that parabolics, we'll win there. That's what my— but I don't know. This is my opinion, just based on what's coming out of the department.

Speaker #10: Okay. And then, if we talk about drone dominance for just a second, on future Gauntlets, do you expect other drones in the Group 2 to 5 category will be requested and procured at scale?

Austin Moeller: Okay. If we talk about drone dominance for just a second. On future Gauntlets, do you expect other drones in the group 2 to 5 category will be requested and procured at scale? Do you think Kratos is in a strong position, given your manufacturing scale, to ramp production and take greater economics on future production lots for Gauntlet 1 and other Gauntlets?

Speaker #10: And do you think Kratos is in a strong position, given your manufacturing scale, to ramp production and take greater economics on future production lots for Gauntlet One and other Gauntlets?

Eric DeMarco: On your first 2 questions, yes and yes. Yes. Yes and yes. We, I, we're in source selection right now on something related to that, so I can't get into too many details. As I think I said on the last call, but if I didn't, I'll say it now. On phase 2, we got some real compelling solutions on phase 2. What I understand on future phases, we have some really super compelling solutions. We'll see. Chris, we answer your questions yes and yes.

Speaker #2: On your first two questions, yes. And yes. So yes. Yes and yes. We're in source selection right now on something related to that, so I can't get into too many details.

Speaker #2: But as I think I said on the last—I think I said on the last call. But if I didn't, I'll say it now.

Speaker #2: On Phase Two, we got some real compelling solutions. On Phase Two. And what I understand on future phases, we have some really super compelling solutions.

Speaker #2: So we'll see. But to crisply answer your questions: yes, and yes.

Austin Moeller: Very exciting. Thanks again.

Speaker #10: Very exciting. Thanks again.

Speaker #2: Thank you.

Eric DeMarco: Thank you.

Speaker #1: And our next question will be coming from the line of Andre Madrid of VTIG. Your line is open.

Operator: Our next question will be coming from the line of Andre Madrid of BTIG. Your line is open.

Speaker #11: Good afternoon, Eric and Deanna. Thanks for taking my question.

Andre Madrid: Good afternoon, Eric and Deanna. Thanks for taking my question.

Eric DeMarco: Hi.

Speaker #2: Hi.

Speaker #9: Hi.

Deanna Lund: Hi.

Andre Madrid: Deanna, could you maybe provide a split of unmanned system sales between Valkyrie and Target? I know Valkyrie drove the strong growth, but I wanna see just how much was between the two.

Speaker #11: Deanna, could you maybe provide a split of unmanned system sales between Valgreen and Target? I know Valgreen drove the strong growth, but I want to see just how much was between the two.

Speaker #9: Yeah, the Tactical revenue for the quarter was about $20 million.

Deanna Lund: Yeah. The tactical revenue for the quarter was about $20 million.

Speaker #11: And that $20 million was almost exclusively Valgreen, or was there some other stuff?

Andre Madrid: That $20 million was almost exclusively Valkyrie.

Deanna Lund: No.

Andre Madrid: Was there some other stuff?

Deanna Lund: It's predominantly Valkyrie.

Speaker #9: It's predominantly Valgreen.

Andre Madrid: I know you built a lot of those Valkyries kind of ahead of schedule. You know, I guess just when we think about Valkyrie sales again, or tactical drone sales, in isolation, just how should we think about the cadence through the rest of 2026? I mean, is Q2 gonna be a step down? I know you kind of already alluded to that a bit, but, like, I mean, just, like, I guess how significant should we expect of a step down and then kind of a rebound through there the end of the year?

Speaker #11: And I know you built a lot of those Valgreens kind of ahead of schedule. I guess just when we think about Valgreen sales again, or tactical drone sales, in isolation, just how should we think about the cadence through the rest of 2026?

Speaker #11: I mean, is Q2 going to be a step down? I know you kind of already alluded to that a bit. But I mean, just, I guess, how significant should we expect of a step down, and then kind of a rebound through there at the end of the year?

Speaker #9: Yeah, the step—there will be a step down. We haven't given guidance for the break between KGS and Unmanned, but there will be a step down.

Deanna Lund: Yeah. There will be a step down. We haven't given guidance for the break between KGS and unmanned, but there will be a step down. As far as the produced units that we've been building as capital-owned assets, it's going to depend on the configuration of what we have built and what the customer is ultimately ordering. If it's the same configuration and we get the contract for that, if those are complete units, that revenue would be recorded immediately. If they're 50% complete, we would record revenue at 50% at the time of the award, and the remaining would be as it is completed.

Speaker #9: As far as the produced units that we've been building as capital-owned assets, it's going to depend on the configuration of what we have built and what the customer is ultimately ordering.

Speaker #9: So, if it's the same configuration and we get the contract for that, then if those are complete units, that revenue would be recorded immediately.

Deanna Lund: If it's the same configuration and we get the contract for that, if those are complete units, that revenue would be recorded immediately. If they're 50% complete, we would record revenue at 50% at the time of the award, and the remaining would be as it is completed. If it's for a different configuration other than what we have, in inventory or in fixed assets, then it would be based on that build process and the revenue would be re-reported accordingly.

Speaker #9: If they're 50% complete, then we would record revenue at 50% at the time of the award, and the remaining would be as it is completed.

Speaker #9: If it's for a different configuration, other than what we have in inventory or in fixed assets, then it would be based on that build process, and the revenue would be reported accordingly.

Deanna Lund: If it's for a different configuration other than what we have, in inventory or in fixed assets, then it would be based on that build process and the revenue would be re-reported accordingly.

Speaker #11: Got it. Got it. That's helpful. And then one more. I mean, when I—Eric, maybe this one for you. You mentioned this directed energy down selection as a prime.

Andre Madrid: Got it. Got it. That's helpful. Then one more. I mean, when I, Eric, maybe this one for you. You mentioned this directed energy down selection as a prime. I, you know, historically, I haven't thought of this as an end market that you guys play in directly. Is that true? Is this like a new entry, or is this something that has been, you know, you've been actively supporting for some time and has just been more behind the scenes and just not directly addressed?

Speaker #11: Historically, I haven't thought of this as an end market that you guys play in directly. Is that true? Is this like a new entry, or is this something that you have been actively supporting for some time and has just been more behind the scenes and not directly addressed?

Eric DeMarco: Kratos has been involved in directed energy weapon systems and laser weapon systems for years and years. I haven't talked about it. Over the past year, internally, and tied in with an acquisition we've made, you know, we try to go 1 plus 1 equals 4. This is a Counter-UAS system. It's mobile. We're the prime. It's $several hundred million. It's gonna start ramping next year. It should be very big in 2028. This is an area where probably now that we've won this one, it will open the door for us to win more.

Speaker #2: Kratos has been involved in directed energy weapon systems and laser weapon systems for years and years and years and years and years. I haven't talked about it.

Speaker #2: Over the past year, internally and tied in with an acquisition we've made, we try to go one plus one equals four. And this is a counter-UAS system.

Speaker #2: It's mobile. Where the prime is several hundred million. It's going to start ramping next year. It should be very big in '28. And this is an area we're probably, now that we've won this one, it will open the door for us to win more.

Speaker #11: Got it. Got it. That's very helpful. I'll leave it there. Thank you so much.

Andre Madrid: Got it. Got it. That's very helpful. I'll.

Eric DeMarco: Yeah.

Andre Madrid: I'll leave it there. Thank you so much.

Speaker #2: Okie dokie. Thank you.

Eric DeMarco: Okie dokie. Thank you.

Speaker #1: And our next question will be coming from the line of Michael Leshak of KeyBanc Capital Markets. Michael, your line is open.

Operator: Our next question will be coming from the line of Michael Ciarmoli of KeyBanc Capital Markets. Michael, your line is open.

Speaker #12: Hey, good afternoon. Apologies if I missed it, but I wanted to ask about the backlog and the significant growth there in the quarter. Did you see any impact from the government shutdown delaying some awards that could have potentially driven your backlog even higher?

Michael Ciarmoli: Hey, good afternoon. Apologies if I missed it, but wanted to ask on the backlog and the significant growth there in the quarter. Did you see any impact from the government shutdown delaying some awards that could have potentially driven your backlog even higher?

Speaker #2: Yes, we did. And we're expecting to see them in Q2. Right now, Q2 backlog—bookings, pardon me—is looking real good right now because it's freeing up.

Eric DeMarco: Yes, we did. We're expecting to see them in Q2. Right now, bookings, pardon me, is looking real good right now because it's freeing up.

Michael Ciarmoli: Great. One on hypersonics, just given the very strong environment there and the new awards you mentioned. It sounds like the demand is clearly there. Is there anything that could potentially drive revenues above the $700 million target in 2027 that you've talked about for that hypersonics franchise, whether that's additional investments or alleviating any bottlenecks? Anything there that you could call out to drive even more growth in hypersonics? Thanks.

Speaker #12: Great. And then one on hypersonics, just given the very strong environment there and the new awards you mentioned. It sounds like the demand is clearly there.

Speaker #12: Is there anything that could potentially drive revenues above the $700 million target in ’27 that you’ve talked about for that hypersonics franchise, whether that’s additional investments or alleviating any bottlenecks?

Speaker #12: Anything there that you could call out to drive even more growth in hypersonics? Thanks.

Eric DeMarco: There is absolutely the opportunity for us to be well ahead of that in 2027. Here's what it is. It's the supply chain. It's the engines and the materials for the glide vehicles and the air breathers. This is it right here. As you know, we've have under order now, I think 120 motors that are starting to come in Q3. This is also one of the reasons, Noah, why there's a slight dip in Q2. Then we're gonna integrate them with the front ends, and then they're gonna be launched. We have the launch manifest for 2027 and 2028. What's the most important part? It's the one you don't have.

Speaker #2: There is absolutely the opportunity for us to be well ahead of that in '27. Here's what it is: it's the supply chain. It's the engines.

Speaker #2: And the materials for the glide vehicles and the air breathers. This is what this is, right here. As you know, we have under order now, I think, 120 motors.

Speaker #2: Those are starting to come in Q3, and this is also one of the reasons, NOAA, why there's a slight dip in Q2. And then we're going to integrate them with the front ends.

Eric DeMarco: This is also one of the reasons, Noah, why there's a slight dip in Q2. Then we're gonna integrate them with the front ends, and then they're gonna be launched. We have the launch manifest for 2027 and 2028. What's the most important part? It's the one you don't have.

Speaker #2: And then they're going to be launched, and we have the launch manifest for '27 and '28. But what's the most important part? It's the one you don't have.

Speaker #2: And so, all the sub-elements have to come in to be able to get the systems out on the range and get them launched. So, the demand is there.

Eric DeMarco: All the sub-elements have to come in to be able to get the systems out on the range and get them launched. The demand is there, the funding is there, the customer intent is there. This is a great question on why the U.S. Department is rebuilding the industrial base. It's not there to do what they want to do, and that would be the inhibitor for us.

Speaker #2: The funding is there. The customer intent is there. And this is a great question on why the U.S. Department is rebuilding the industrial base.

Speaker #2: It's not there to do what they want to do, and that would be the inhibitor for us.

Speaker #12: Great. Thanks so much.

Michael Ciarmoli: Great. Thanks so much.

Speaker #2: Yep.

Eric DeMarco: Yep.

Speaker #1: And our next question will be coming from the line of Kashin Keeler of BNP Paribas. Your line is open.

Operator: Our next question will be coming from the line of Cashen Keeler of I'm sorry, BNP Paribas. Your line is open.

Speaker #2: Yeah. Hi, Eric. Deanna, thanks for the question. Just starting on capital deployment—you obviously upped the CapEx guidance a bit and completed some acquisitions.

Cashen Keeler: Hi, Eric, Deanna. Thanks for the question. Just starting on capital deployment. You obviously upped the CapEx guidance a bit and completed some acquisitions, but you also raised a good amount of equity in the quarter. As you look ahead, how are you thinking about capital deployment here? Is it mainly just gonna be focusing on those organic investments or, you know, can we expect that it'll be active with M&A moving forward as well?

Speaker #2: But you also raised a good amount of equity in the quarter. So, as you look ahead, how are you thinking about capital deployment here?

Speaker #2: Is it mainly just going to be focusing on those organic investments, or can we expect that it’ll be active with M&A moving forward as well?

Eric DeMarco: Yeah. On the, clearly, let's do the easy one first. Clearly, the growth opportunities we have, we are in a great position now in the eyes of our customers to execute on what we have and for the additional awards they intend to give us. Think the engines, for example. Probably in Q3, we're gonna start placing the orders for the components and the subsystems for a lot of jet engines, which we will have programs for and contracts for, which we'll start selling in 2027 and then 2028. Those are the air breathers. The solid, the 120 solid rocket motors I just mentioned to you, we've made some payments on those. We're gonna have to continue to make payments on those.

Speaker #13: Yeah, on the—clearly, let's do the easy one first. Clearly, with the growth opportunities we have, we are in a great position now in the eyes of our customers to execute on what we have.

Speaker #13: And for the additional awards they intend to give us. So think the engines, for example. Probably in Q3, we're going to start placing the orders for the components and the subsystems for a lot of jet engines.

Speaker #13: Which we will have programs for and contracts for. Which we'll start selling in '27 and in '28. Those are the air breathers. The 120 solid rocket motors I just mentioned to you.

Eric DeMarco: Those are the air breathers. The solid, the 120 solid rocket motors I just mentioned to you, we've made some payments on those. We're gonna have to continue to make payments on those. Those tie right into the $400 million revenue for hypersonic this year and the $700 million next year. Gotta have the motors. There's cash gonna be deployed. I can keep going, but I can give you the programs, the customers, where the cash for working capital will be deployed, we'll get it back in revenue and then receivables when we collect it.

Speaker #13: We've made some payments on those. We're going to have to continue to make payments on those. Those tie right into the $400 million revenue for hypersonic this year and the $700 million next year.

Eric DeMarco: Those tie right into the $400 million revenue for hypersonic this year and the $700 million next year. Gotta have the motors. There's cash gonna be deployed. I can keep going, but I can give you the programs, the customers, where the cash for working capital will be deployed, we'll get it back in revenue and then receivables when we collect it. On the M&A side, we are not aggressively pursuing anything. Nothing. Zero. All right? However, right now there are a couple, three small companies where they're retiring. This is very similar. They know us. They've come to me. They're thinking about retiring. What they build is exactly consistent with what we do. It's not like hand grenades. It's our sweet spots.

Speaker #13: Got to have the motors, there's cash going to be deployed. And I can keep going, but I can give you the programs, the customers, where the cash for working capital will be deployed.

Speaker #13: But then we'll get it back in revenue and then receivables when we collect it. On the M&A side, we are not aggressively pursuing anything.

Eric DeMarco: On the M&A side, we are not aggressively pursuing anything. Nothing. Zero. All right? However, right now there are a couple, three small companies where they're retiring. This is very similar. They know us. They've come to me. They're thinking about retiring. What they build is exactly consistent with what we do. It's not like hand grenades. It's our sweet spots.

Speaker #13: Nothing. Zero. All right? However, right now, there are a couple, three small companies where they're retiring. This is very similar—they know us. They've come to me.

Speaker #13: They're thinking about retiring. What they build is exactly consistent with what we do. It's not like hand grenades. It's in our sweet spots. And we are talking with these gentlemen and their wives.

Eric DeMarco: We are talking with these gentlemen and their wives, and if it makes sense, we'll do something with them. These are small. We have no plans right now, nothing on the radar screen for anything significant. That could change. I never say never, but that's where we're at right now.

Speaker #13: And if it makes sense, we'll do something with them. But these are small, so we have no plans right now—nothing on the radar screen.

Speaker #13: For anything significant, that could change. I never say never, but that's where we're at right now.

Speaker #2: Okay, that's helpful. And then on Valkyrie, there were just some comments in the press out of one of the industry trade shows about Valkyrie and the Muksat Air Program.

Cashen Keeler: Okay. That's helpful. Then on, Valkyrie, there were just some comments in the press out of one of the industry trade shows about, Valkyrie and the MUX/TACAIR program. I think one of them was just, you know, on whether or not they're looking for conventional takeoff and landing, STOL or VTOL. Just curious if any of those decisions impact your ability to ramp to, you know, the 40 units a year, or are your production lines fairly modular that you can adapt to those requirements?

Speaker #2: I think one of them was just on whether or not they’re looking for conventional takeoff and landing, STOL, or VTOL. So, just curious if any of those decisions impact your ability to ramp to the 40 units a year?

Speaker #2: Are your production lines fairly modular, so that you can adapt to those requirements?

Speaker #13: That's a great question. Good for you. So you saw that. Yeah. That's very—and that's very relevant to the question asked earlier on the revenue recognition on the Valkyrie.

Eric DeMarco: That's a great question. Good for you. You saw that. Yeah. That's very relevant to the question asked earlier on the revenue recognition on the Valkyrie. Five years ago, four years ago, because of the war games that were performed, runway independence was it. That was the winner. That was five years ago. The winner six years ago. Had to be runway independent. Chinese are gonna blow up all the runways. Valkyries launched off a rail. Go get 'em. We started building our Valkyries on a rail, runway independent. Kendall comes in as Secretary of the Air Force.

Speaker #13: So, five years ago, four years ago, because of the war games that were performed, runway independence was it. That was the winner. That was five years ago.

Speaker #13: The winner six years ago had to be runway independent. Chinese are going to blow up all the runways. Valkyries launched off a rail. Go get them.

Eric DeMarco: The winner six years ago. Had to be runway independent. Chinese are gonna blow up all the runways. Valkyries launched off a rail. Go get 'em. We started building our Valkyries on a rail, runway independent. Kendall comes in as Secretary of the Air Force.

Speaker #13: So we started building our Valkyries on a rail—runway independent. Kendall comes in as Secretary of the Air Force. Halfway through his term, in 2022, we're going to do the Agile Combat Employment program, ACE.

Eric DeMarco: Halfway through his term in 2022, we're gonna do the Agile Combat Employment program, ACE, where we're gonna have all these little bitty runways all over the Pacific, so runway independence doesn't matter. We want wheels. Now what you've just seen is it moving back to runway independence. Take a look at what Shield AI is doing. They're building the XBAT, which is our runway independent super-duper, pooper-scooper drone. I'm going through all of that with you because with our current customers, we have orders, and we're going to receive orders for a certain mix. We're gonna build those, and we're gonna deliver them. Along the way, the wind could change. If that Marine Corps thing you talked about, it talked about both runway independent and CTOL versions. It's still kind of in flux now.

Speaker #13: We're going to have all these little bitty runways all over the Pacific, so runway independence doesn't matter—we want wheels. So now, what you've just seen is, is it moving back to runway independence?

Speaker #13: Take a look at what Shield AI is doing. They're building the XBAT, which is our runway-independent, super-duper pooper scooper drone. I'm going through all of that with you because with our current customers, we have orders and we're going to receive orders for a certain mix.

Eric DeMarco: I'm going through all of that with you because with our current customers, we have orders, and we're going to receive orders for a certain mix. We're gonna build those, and we're gonna deliver them. Along the way, the wind could change. If that Marine Corps thing you talked about, it talked about both runway independent and CTOL versions. It's still kind of in flux now.

Speaker #13: We're going to build those, and we're going to deliver them. But along the way, the wind could change. That Marine Corps thing you talked about, it talked about both runway-independent and CTOL versions.

Speaker #13: And so it's still kind of in flux now. And, thank God, we have three versions that we can build. Rail-launched. Take the rail-launched one, put it on a trolley, launch it off a runway.

Eric DeMarco: Thank God we have three versions that we can build. Rail-launched. Take the rail-launched one, put it on a trolley, launch it off a runway. Runway capable, rail-launched. Full CTOL, conventional takeoff and landing with the landing gear internal. This is why when I initially said last call that I think I said we're going to do 35 to 45 a year or something like that. I said depending on mix. The 40 that we're going to get up to by the end of 2027, beginning of 2028, if it's all CTOLs, it might be 30. If it's a mix, it will be 40. It just depends on the mix. I'm not trying to obfuscate this. I'm telling you that this is happening real time. We have an inventory of a handful left of the rail-launch ones, the rail-launched ones.

Speaker #13: So runway capable, rail launched. And then full CTOL, conventional takeoff and landing with the landing gear internal. This is why when I initially said last call that we're I think I said we're going to do 35 to 45 a year or something like that.

Speaker #13: I said depending on mix. The 40 that we're going to get up to by the end of '27, beginning of '28—if it's all CTOLs, it might be 30.

Eric DeMarco: The 40 that we're going to get up to by the end of 2027, beginning of 2028, if it's all CTOLs, it might be 30. If it's a mix, it will be 40. It just depends on the mix. I'm not trying to obfuscate this. I'm telling you that this is happening real time. We have an inventory of a handful left of the rail-launch ones, the rail-launched ones. We're building right now numerous CTOL ones that'll be ready next year. As the hand of cards comes out, we'll let you know as soon as we can what by customer, what it looks like.

Speaker #13: If it's a mix, it'll be 40. It just depends on the mix. And I'm not trying to obfuscate this. I'm telling you that this is happening real time.

Speaker #13: We have an inventory of a handful left of the RADO launch ones—the rail-launched ones. We're building right now numerous CTOL ones. Numerous.

Eric DeMarco: We're building right now numerous CTOL ones that'll be ready next year. As the hand of cards comes out, we'll let you know as soon as we can what by customer, what it looks like.

Speaker #13: That'll be ready next year. And as the hand of cards comes out, we'll let you know as soon as we can, what by customer, what it looks like.

Cashen Keeler: Okay. Thanks for the details.

Speaker #2: Okay. Thanks for the details.

Speaker #13: You got it.

Eric DeMarco: You got it.

Speaker #2: And our next question will be coming from the line of Brian Dobson of Clear Street. Your line is open.

Operator: Our next question will be coming from the line of Brian Dobson of Clear Street. Your line is open.

Speaker #14: Thank you so much for taking my question. Earlier, you were describing a general recapitalization of the U.S. defense industry. You mentioned some conversations that you had on the Hill.

Brian Dobson: Thanks so much for taking my question. Earlier, you were describing a generational recapitalization of the US defense industry. You mentioned some conversations that you had on the Hill. Beyond that, what gives you the confidence that this can endure through multiple administration changes and perhaps several budget cycles? To that point, how do you see Kratos evolving and growing to meet the needs of the Department of War over the next few years?

Speaker #14: But beyond that, what gives you the confidence that this can endure through multiple administration changes and perhaps several budget cycles? And to that point, how do you see Kratos evolving and growing to meet the needs of the Department of War over the next few years?

Speaker #13: Yeah. So, on the first part of your question, like I said, I spent a lot of time on the Hill since our last call.

Eric DeMarco: On the first part of your question, like I said, I've spent a lot of time on the Hill since our last call, both sides of the aisle with senior leadership. The chairman and the ranking members, HASC and SASC, then on down from there. There is no doubt in my mind defense national security spends are going to continue to increase because of the threat profile. Is it gonna be a $1.5 trillion or a $1.3 trillion? I don't know. Under the Dems, are there gonna be reconciliation bills, or is it all gonna be in the base budget? I don't know, but it's probably all gonna be in the base budget.

Speaker #13: Both sides of the aisle with senior leadership, so the Chairman and the Ranking Members, task and task, and then on down from there. There is no doubt in my mind national security spends are going to continue to increase because of the threat profile.

Speaker #13: Is it going to be a trillion five or a trillion three? I don't know. Under the Dems, are there going to be reconciliation bills?

Eric DeMarco: Is it gonna be a $1.5 trillion or a $1.3 trillion? I don't know. Under the Dems, are there gonna be reconciliation bills, or is it all gonna be in the base budget? I don't know, but it's probably all gonna be in the base budget.

Speaker #13: Or is it all going to be in the base budget? I don't know. But it's probably all going to be in the base budget.

Speaker #13: But then they're going to—but then the Dems, and I'm not saying this negatively, this is policy—they're going to require equal discretionary non-defense to go up too.

Eric DeMarco: Then the Dems, and I'm not saying this negatively, this is policy, they're gonna require equal discretionary non-defense to go up too. So there might be just different mixes here. I, I, unless global peace breaks out based on what's going on geopolitically, the trajectory is up and to the right for national security spending. Now tying into the second part of your question, and I said this twice on the call because it's very important. You have the 5.5 traditional primes. 5.5, okay? You've got Kratos. You got a lot of new defense technology companies that are coming, and they're coming. There is a massive supply-demand imbalance right now. There is an incredible demand for military-grade hardware and software. Kratos has military-grade hardware and software, and we're the low-cost guy.

Speaker #13: So, there might be just different mixes here. But unless global peace breaks out, based on what's going on geopolitically, the trajectory is up and to the right for national security. Second part of your question—and I said this twice on the call because it's very, very, very important.

Speaker #13: You have the five and a half traditional primes—five and a half, okay? Then you've got Kratos. You've got a lot of new defense technology companies that are coming.

Eric DeMarco: You have the 5.5 traditional primes. 5.5, okay? You've got Kratos. You got a lot of new defense technology companies that are coming, and they're coming. There is a massive supply-demand imbalance right now. There is an incredible demand for military-grade hardware and software. Kratos has military-grade hardware and software, and we're the low-cost guy.

Speaker #13: And they're coming, but there is a massive supply-demand imbalance right now. There is an incredible demand for military-grade hardware and software. Kratos has military-grade hardware and software, and we're the low-cost guy.

Speaker #13: And that isn't going to change for multiple years. It's not like we're having to take share from anybody right now. The pie is growing.

Eric DeMarco: That ain't gonna change for multiple years. It's not like we're having to take share from anybody right now. The pie is growing. The total addressable market, 2027 over 2026, for example, looks like it's gonna go up $400 billion. Our primary focus is execution. We must execute, deliver products that work every time at an affordable price in large quantities. We are going to do fantastic as the financials are showing. You know, we're gonna let the financials and the growth rate, the organic growth rates, and the margin expansion do the talking. That's our plan.

Speaker #13: The total addressable market, 27 over 26, for example, looks like it's going to go up $400 billion. So our primary focus is execution.

Speaker #13: We must execute, deliver products that work every time at an affordable price, in large quantities. And we are going to do fantastic, as the financials are showing.

Speaker #13: We're going to let the financials and the growth rate, the organic growth rates, and the margin expansion do the talking. That's our plan.

Speaker #14: Excellent. Thanks so much for the color.

Brian Dobson: Excellent. Thanks so much for the color.

Speaker #13: Thank you.

Eric DeMarco: Thank you.

Operator: Our next question will come from the line of Gavin Parsons of UBS. Your line is open.

Speaker #2: And our next question will come from the line of Gavin Parsons of UBS. Your line is open.

Operator: Our next question will come from the line of Gavin Parsons of UBS. Your line is open.

Speaker #15: Thank you. Good evening.

Gavin Parsons: Thank you. Good evening.

Speaker #13: Hi.

Eric DeMarco: Hi.

Deanna Lund: Hi.

Speaker #2: Hi.

Gavin Parsons: Eric, Kratos is already pretty fixed price heavy, but I'd love to hear your thoughts on the White House executive order last week on fixed price contracting, if that has any competitive implications?

Speaker #15: Eric, Kratos has already pretty fixed price, heavy. But I'd love to hear your thoughts on the White House executive order last week on fixed price contracting, if that has any competitive implications.

Speaker #13: Right. There are colors of fixed price. So, fixed price production contracts are extremely beneficial for the government and for the contractor because, as you go down the learning curve, as you're producing, you become more efficient.

Eric DeMarco: Right. You know, there are colors of fixed price. Fixed price production contracts are extremely beneficial for the government and for the contractor because as you go down the learning curve, as you're producing, you become more efficient, you can make more money, and at the same time, you can lower your price to the government. Your margins can go up, and their cost of paying you can go down because you're getting so efficient. Fixed price development contracts, we don't do those. Those are scary. This is why Boeing got in so much trouble over all the years. They took fixed price development contracts, building something that had never been built before. If you can't get it to work, you gotta keep going.

Speaker #13: So you can make more money. And at the same time, you can lower your price to the government. So your margins can go up.

Speaker #13: And their cost of paying, you can go down because you're getting so efficient. Fixed price development contracts—we don't do those. Those are scary.

Eric DeMarco: Fixed price development contracts, we don't do those. Those are scary. This is why Boeing got in so much trouble over all the years. They took fixed price development contracts, building something that had never been built before. If you can't get it to work, you gotta keep going.

Speaker #13: So this is why Boeing got in so much trouble over all the years. They took fixed-price development contracts, building something that had never been built before.

Speaker #13: And if you can't get it to work, you got to keep going. We don't do fixed-price development contracts. We're not big enough to be able to handle it.

Eric DeMarco: We don't do fixed price development contracts. We're not big enough to be able to handle it. From our direct discussions with the department on programs, we are clearly the low-cost provider. We are looked at as a low-cost provider. Let me give you an example. We recently had multiple successful ballistic missile target launches. Kratos did. I can't get into details. Wasn't announced. We had multiple. Our ballistic missile targets, so these represent adversaries' ballistic missile targets, decoys, chaff, flares, all kinds of countermeasures, et cetera. Our most expensive all-in-one, I think, is $15 million a shot. I think the competing one's $100. Now go back to the secretary. I'll take 85% of the capability now at a very reduced cost.

Speaker #13: From our direct discussions with the department on low-cost provider, we are looked at as the low-cost provider. Let me give you an example. We recently had multiple successful ballistic missile target launches.

Speaker #13: Kratos did. I can't get into details. It wasn't announced. But we had multiple—our ballistic missile targets, so these represent adversaries; ballistic missile targets, decoys, chaff, flares, all kinds of countermeasures, etc.

Eric DeMarco: Our ballistic missile targets, so these represent adversaries' ballistic missile targets, decoys, chaff, flares, all kinds of countermeasures, et cetera. Our most expensive all-in-one, I think, is $15 million a shot. I think the competing one's $100. Now go back to the secretary. I'll take 85% of the capability now at a very reduced cost.

Speaker #13: Our most expensive all-in-one, I think, is $15 million a shot. I think the competing one's $100 million. Now, the competing now, go back to the Secretary.

Speaker #13: I'll take 85% of the capability now at a very reduced cost. So, I'm making this up because I don't know what the right thing is.

Eric DeMarco: I'm making this up because I don't know what the right thing is. We can do 95% of what the $100 million one can do. We're looked at very favorably for that. Same with our engines, same with our drones. I can go on and on. Our focus on very capable military-grade systems that are affordable, not exquisite, is our sweet spot. Not low cost, not exquisite, but very capable military grade that works. That's our focus.

Speaker #13: We can do 95% of what the $100 million one can do, so we're looked at very favorably for that. Same with our engines.

Speaker #13: Same with our drones. I can go on and on. So, our focus on very capable military-grade systems that are affordable, not exquisites, is our sweet spot.

Speaker #13: Not low-cost, not exquisite, but very capable, military-grade that works. That's our focus.

Speaker #14: Thanks, Eric. Appreciate it.

Gavin Parsons: Thanks, Eric. Appreciate it.

Speaker #13: Yep. You got it.

Eric DeMarco: Yep, you got it.

Speaker #2: And I would now like to turn the conference back to Eric DeMarco for closing remarks.

Operator: I would now like to turn the conference back to Eric DeMarco for closing remarks.

Speaker #13: Great. We appreciate your time and all your questions. And we truly look forward to briefing you in a few months on the second quarter, when we're going to have a lot more exciting things to update you on.

Eric DeMarco: Great. We appreciate your time and all your questions. We truly look forward to briefing you in a few months on Q2. I think we're gonna have a lot more exciting things to update you on. Thank you.

Speaker #13: Thank you.

Operator: This concludes today's program. Thank you for participating. You may now disconnect.