Kratos Defense & Security Solutions, Inc. Q2 FY2025 earnings call

• Eric DeMarco discussed the global defense spending landscape, noting a generational recapitalization of weapon systems. Kratos saw 15% organic revenue growth in Q2, a book-to-bill ratio of 1.2:1, a record bid and proposal pipeline of $13 billion, and a 2026 forecast of 13%-15% organic revenue growth. Won the Poseidon program, with potential value of ~$750 million. Valkyrie program progress, including Marine Corps and Airbus opportunities, and investment in serial production of 24 Valkyries. Other product offerings like hypersonic flyers, jet engines, and space systems were highlighted. - Deanna Lund highlighted second quarter financial highlights, increased full-year 2025 revenue guidance to $1.285B-$1.310B (11%-13% organic growth over 2024) and adjusted EBITDA guidance to $114M-$120M. Third quarter revenue guidance is $315M-$325M. Managed costs, with some expected revenues not included in forecasts until the fourth quarter due to government approvals. Paid off the term loan balance of ~$180 million.

Second quarter revenues were $351.5 million, exceeding the estimated range of $300 million to $310 million. Organic revenue growth was seen across all businesses, with notable growth in defense rocket support (due to hypersonic missions) and C5ISR (116.6% and 25.4% organic growth respectively). Unmanned Systems revenue in Q2 '25 was down $12.6 million compared to the prior year comparable, but tactical drone-related revenues increased. KGS (Kratos Government Services) revenue in Q2 '25 was up $64 million year-over-year from Q2 '24 with organic revenue growth of 27.1% (excluding the impact of the February 2025 acquisition of certain assets of Norden Millimeter). Adjusted EBITDA for Q2 '25 was $28.3 million, above the estimated range of $21 million to $25 million. Cash flow used in operations for Q2 '25 was $10.6 million, primarily due to working capital requirements. Free cash flow used in operations was $31.1 million after capital expenditures. Consolidated DSO decreased from 104 days in Q1 to 103 days in Q2. Contract mix for Q2 '25 was 65% fixed price, 31% cost plus, and 4% time and material. Revenues generated from the U.S. government during Q2 were approximately 71%, with 12% from commercial customers and 17% from foreign customers.

• Increased full-year 2025 revenue guidance from $1.26 billion to $1.285B-$1.310B, reflecting 11%-13% organic revenue growth over 2024. - Adjusted EBITDA guidance increased from $112 million to $114M-$120M. - Third quarter revenue guidance is $315M-$325M, reflecting 12%-15% organic growth over 2024. - Impact of material and subcontractor costs on certain multiyear fixed price contracts in Unmanned Systems target drone business is managed, but some expected revenues from completed products are not included in forecasts until fourth quarter pending government approvals. - Term loan balance paid off, so minimal interest expense in second half of 2025.

• Supply chain risks, particularly with some sole-source suppliers. - Cost growth on certain multiyear fixed price contracts in Unmanned Systems target drone business where cost recovery from customers is not immediate.

Q: On guidance, even with broad-based strength, second half implied revenues down versus first half. Any pull forward?

A: Nothing to read into it; timing of a hypersonic mission originally anticipated later in the year occurred in Q2.

Q: With Valkyrie being a program of record, walk through mechanics of contract award and revenue recognition?

A: When a contract is received, if fully complete, revenue is recorded at contract signing. If partially complete, revenue is recorded based on completion percentage. For example, a hypothetical order for 15 at $10 million each: $150 million if fully complete, or a percentage based on completion.

Q: How does Golden Dome impact target drone business?

A: Golden Dome will need testing with hypersonic, cruise missile, jet drone, ballistic missile targets, and Kratos is the market leader in target drones, so it will be a significant impetus for the company's target drone business.

Q: Should we expect target drones in Europe and higher margins?

A: Yes, as European defense spend increases and Kratos target drones go with strategic air defense systems sold in Europe, margins on these could be significantly higher than in the U.S.

Q: On new facilities in Oklahoma and Israel, any changes to LRIP and full rate production?

A: Build schedule and construction may cause some slip into 2026, but still reflected in 2025 projections.

Q: Comment on Big Beautiful Bill and relevance to Kratos?

A: Kratos is relevant with MACH-TB, low-cost cruise missiles, industrial base for solid rocket motors, and Marine Corps unmanned combat aircraft. Low-cost cruise missiles relate to Kratos low-cost jet engines.

Q: Relevance of Prometheus JV interceptors used in Israel?

A: Interceptors used in Israel are relevant to the Prometheus JV, and indications are they are applicable to the JV's work.

Q: Cash number and investment requirements?

A: Debt paydown used $180 million, cash will still be sizable. Generating interest income, and plans include leveraging capital for growth initiatives like Poseidon, Anaconda, Helios, etc., with expected significant multi-decade programs.