KRATOS DEFENSE & SECURITY SOLUTIONS, INC. Q4 FY2024 earnings call

• Achieved 9.1% organic revenue growth in 2024, with Q4 cash flow from operations over $45 million and book-to-bill ratios of 1.5 to 1 (Q4) and 1.2 to 1 (full year). • Forecasts 2025 organic revenue growth of 10% over 2024 and 2026 organic revenue growth of 13% to 15% over 2025. • Prometheus Energetics Joint Venture established with Rafael, a 50-50 partnership to produce solid rocket motors and energetics in Indiana. • Significant hypersonic program wins, including Mach-TB 2.0, positioning Kratos for revenue growth and margin expansion. • Investments in facilities for hypersonic, microwave, and turbine technologies, including a new hypersonic production campus and jet engine test facility. • Positive outlook on government initiatives like DOGE, Iron Dome USA, and hypersonic/unmanned systems focus, aligning with Kratos' capabilities.

In the fourth quarter of 2024, unmanned systems organic revenue growth was 10.3%. KGS revenues are forecasted to be between $975 million to $990 million for FY '25, up from $865 million in '24. Excluding the impact of the recent Norden acquisition, organic revenue growth for KGS is estimated to be approximately 10% to 12%. The hypersonic segment saw significant wins like the Mach-TB 2.0 contract worth approximately $1.5 billion. Turbine Technologies' jet engine and propulsion business is positioned for growth, with a new test and production facility in Oklahoma expected to be completed in late '26 or '27. Microwave Electronics has a record backlog and opportunity pipeline, with facilities in Israel expanding. Unmanned Systems forecast growth for 2025, with tactical drone revenues expected to be $45 million to $50 million, and target drone revenues $240 million to $235 million.

• 2025 revenue guidance includes organic growth range of 9%-11%, excluding the Norden acquisition. • 2025 unmanned systems revenues estimated between $285 million and $295 million, with tactical drone revenues $45M-$50M and target drone $240M-$235M. • KGS revenues forecast $975M-$990M in 2025, excluding Norden acquisition, organic growth 10%-12%. • Prometheus investment majority contemplated in 2026, not included in 2025 guidance. • Cautious about including tactical drone sales in forecast until contracts are secured.

• Execution challenges including difficulty in obtaining and retaining qualified personnel with security clearances. • Supply chain issues and increasing material costs. • Industry operating under continuing resolutions (CRA) with no 2025 defense budget in place, impacting financial guidance and program awards. • Dependence on renewing long-term fixed price contracts to recover inflation-driven cost increases.

Q: Good evening, Eric, Deanna. As Kratos becomes more of a merchant supplier, what does that do to the long-term margin profile or strategy for the company?

A: Yes, that's part of the strategy. The margin profile is going to start to lift now, definitely in '26 and in '27. It's because of the merchant supplier, the margins we're getting on those, and also, as Deanna mentioned, having long-term contracts that get renewed, five-year contracts that get renewed every year is great for predictability, it's great for planning, but if you have an aberration in inflation like we did in 2021, '22, we can't pass that on to the government until we can re-up the contracts. We've started re-upping them this year. We're going to get clear of virtually all of them, and then we'll be in great shape going into '26. So those are the factors on our margin profile going forward.

Q: Okay. Thanks very much, and good afternoon. Lots to ask about. I guess maybe one question just about Mach-TB. When we think about the evolution of this contract, how it ramps up, what drives both revenue and profitability?

A: Yes. So, Seth, the Mach-TB contract is primarily an aerial test contract. There are not enough test assets in the United States of America on the ground and definitely not in the air. And why not in the air? Because Kratos is one of the, if not the only company, that has hypersonic, relevant hypersonic systems flying today. That's us. The industrial base is in trouble, which is one of the great opportunities for us, and the government sees that. The long lead items for SRMs, for the flight vehicles, for these assets, including most of them are ours, is long, up to a year. So, like I said on the call, we're going to get a little bit of revenue this year because we, you know, Kratos, we lean forward. We went out and we bought some solid rocket motors and we bought some hypersonic light vehicle material and we built them, and we're flying them. You saw another one was announced last week. We've now started to order a significant amount of stuff, which we're going to get beginning of next year. We're in close conjunction with the customer on this and the op tempo, which is all laid out. It was specifically laid out when we did this program. So, we've got the roadmap on launches with the customer, our launches, and all the team members underneath us. It's planned to significantly ramp, starting in 2026, ramp even more in 2027 and 2028. And what's happened recently, I couldn't be more happy about, including just today, where underneath the Secretary of Defense, you know, another confirmation individual came out and specifically said we need more hypersonic testing, we need more aerial hypersonic testing. Hank Seth has said that we are in a great position here because there is a dearth of testing capability in the country.