Kratos (KTOS) Q1 2026 Earnings Call Transcript

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Date

Wednesday, May 6, 2026 at 5 p.m. ET

Call participants

• President and Chief Executive Officer — Eric M. DeMarco
• Executive Vice President and Chief Financial Officer — Deanna Hom Lund

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Takeaways

• Revenue -- $371 million reported, exceeding guidance range of $335 million to $345 million; excluding the Orbit acquisition, revenue was $357.7 million, also above initial projections.
• Organic revenue growth -- 15.8% consolidated growth, with Defense & Rocket Support up 45.8%, Unmanned Systems up 30.9%, Turbine Technologies up 20.3%, and Microwave Products up 12.3%.
• Adjusted EBITDA -- $38.7 million, surpassing guidance range of $25 million to $30 million, attributed to increased volume and favorable revenue mix, including Orbit acquisition contribution.
• Book-to-bill ratio -- 1.6-to-1 overall and 3-to-1 within the satellite business; backlog reached a record $2 billion.
• Opportunity pipeline -- $14 billion cited, reflecting recent significant contract pursuits and anticipated future growth.
• Unmanned Systems growth -- Segment revenue rose $19.5 million, or 30.9% organically, mainly driven by Valkyrie-related activity.
• KGS segment performance -- Kratos Government Solutions (KGS) revenue up $48.9 million year over year, with $20.6 million of this growth from Nomad and Orbit acquisitions.
• Cash flow used in operations -- $27.4 million during the quarter, reflecting working capital demands from $28.7 million higher receivables, $14.7 million greater inventories, and $26.5 million in prepaid/other assets for long-lead material and development investments.
• Free cash flow -- Usage of $43.1 million calculated after $19.9 million in capital expenditures and $4.2 million in sales proceeds from previously capitalized Valkyries.
• Days sales outstanding (DSO) -- Increased to 130 days from 121 days in 2025, driven by revenue growth, acquisition effects, billing timing, and contract/funding delays due to the federal government shutdown and continuing resolutions.
• Contract mix -- 73% from fixed-price, 23% from cost-plus, and 4% from time-and-material contracts in 2026.
• Customer mix -- 69% of revenue from U.S. federal government contracts, 21% foreign, and 10% commercial customers.
• Q2 2026 guidance -- Revenue of $400 million to $410 million with expected organic growth of 4%-7% over prior year.
• Full-year 2026 guidance -- Revenue projected at $1.7 billion to $1.76 billion, with 15%-19% anticipated organic growth over 2025 actual performance.
• EBITDA margin target -- Management reaffirmed goal of 100 basis point year-over-year increases for 2026-2027 based on scaling and higher-margin mix.
• Hypersonics revenue -- Business projected at $400 million for 2026 and $700 million for 2027, fueled by solid rocket motors and program funding in government reconciliation bills.
• Key contract win -- $447 million U.S. Space Force prime contract awarded for ground systems/software supporting missile warning and tracking in MEO constellation.
• Directed energy weapon award -- New program secured with Kratos as prime, valued at several hundred million dollars, to start ramping in 2027 and accelerate into 2028.
• Production expansion -- Plan in place to reach approximately 40 Valkyrie drones annually by early 2028; preparations underway to ramp small jet engine output to several thousand units annually by 2027, scaling higher in 2028.
• Investment plan -- $50 million earmarked for Prometheus joint venture in 2026, alongside facility expansions for radar, hypersonic integration, and engine manufacturing.

Summary

Kratos Defense & Security Solutions (NASDAQ:KTOS) reported an acceleration in new awards, with a $2 billion backlog and a $14 billion opportunity pipeline highlighting sustained demand in defense and space segments. The first quarter featured substantial organic revenue growth in both legacy and recently acquired businesses, with increased cash requirements tied to working capital and investment for capacity expansion. Management detailed strong visibility into future growth drivers—including Valkyrie drone production, hypersonics, and expanding jet engine output—supported by U.S. Department of Defense multiyear framework agreements and bipartisan congressional backing for higher national security spending. Operational execution benefited from a defensible cost structure, prime contract wins in high-priority domains, and vertical integration in jet engines and drone production, positioning Kratos to capitalize on both defense and dual-use commercial opportunities as the company invests heavily for future scale.

• Management cited an "accelerating growth trajectory" across its main business lines as a response to unprecedented Department of Defense demand signals and market scarcity for qualified suppliers.
• CEO DeMarco said, "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."
• The satellite business posted a 3-to-1 book-to-bill ratio, and management identified OpenSpace software and domain awareness systems as key differentiators, anchoring the $447 million U.S. Space Force win.
• Unmanned Systems revenue included about $20 million in tactical sales, predominantly Valkyrie, with sequential sales expected to fluctuate based on contract timing and configuration requirements.
• A new directed energy weapons program, valued at several hundred million dollars, marks expansion into a technology segment where Kratos will serve as prime, potentially unlocking further scale within counter-UAS markets.
• Leadership reported successful down-selection for multiple high-volume missile and cruise missile engine programs, expecting to ramp engine production at the Auburn Hills facility to 3,000 units in 2027 and 5,000-6,000 units in 2028.
• International revenue, notably in Israel, now approaches 10% of the business and is forecast to grow on the back of ammunition restock programs for major Israeli defense contractors.
• Operating cash usage was connected to investments in inventory and prepayments for materials needed to execute production expansion in rocket, jet engine, and drone businesses, compounded by milestone billing and collection impacts from federal budget delays.
• Free cash outflow is expected to persist as Kratos builds production infrastructure and supplies for anticipated contract awards in high-growth segments such as Valkyrie, hypersonic systems, and Prometheus solid rocket motors.
• Management noted that labor availability remains a bottleneck for some programs, with skilled turbomachinery engineers cited as a particular constraint for further acceleration in the power and propulsion segment.

Industry glossary

• KGS: Kratos Government Solutions, the segment providing space, satellite, microwave, training, C5ISR, and turbine products.
• OpenSpace: Kratos' distributed, virtualized satellite command and control software platform for real-time signal and sensor data processing across cloud and edge environments.
• Valkyrie: Tactical unmanned aerial system (UAS) produced by Kratos, intended for Department of Defense programs, with ramping production targets.
• LRIP: Low Rate Initial Production, an early manufacturing phase for new aerospace systems, preceding full-rate production.
• Prometheus: Joint venture for solid rocket motor production between Kratos and Rafael, supported by Department of Defense funding.
• DAWG: Defense Automated Warfare Group, a Department of Defense program for drones and loitering munitions with substantial projected funding.
• MoTV: Missile program referenced by management as a major hypersonic program with dedicated funding in recent reconciliation bills.
• MEO: Medium Earth Orbit, a satellite orbit classification relevant to Kratos' $447 million missile warning and tracking contract.
• SCAR: Satellite Communications Augmentation Resource, a U.S. Department of Defense recompete program potentially addressable by Kratos' OpenSpace.
• AESA: Active Electronically Scanned Array, an advanced type of antenna technology for electronic beam steering used in Kratos’ microwave and satellite solutions.

Full Conference Call Transcript

Eric M. DeMarco, Kratos Defense & Security Solutions, Inc.'s President and Chief Executive Officer, and Deanna Hom Lund, Kratos Defense & Security Solutions, Inc.'s Executive Vice President and Chief Financial Officer. Before we begin the substance of today's call, I would 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. 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.

Operator: Thank you, Marie.

Eric M. DeMarco: Kratos Defense & Security Solutions, Inc.'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 Defense, while also generating organic growth, increased profitability, and value for all Kratos Defense & Security Solutions, Inc. 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, and an increased opportunity pipeline up to $14 billion, and the $14 billion is after the 1.6-to-1 book-to-bill, reflecting Kratos Defense & Security Solutions, Inc.'s accelerating growth trajectory.

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 Defense & Security Solutions, Inc.'s microwave electronics, turbine technologies, and unmanned systems businesses each having a particularly strong Q1. Based on our current program execution and delivery plans, both Kratos Defense & Security Solutions, Inc.'s Q3 and Q4 are also expected to have particularly strong profitability, including our 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 Defense & Security Solutions, Inc.'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 Defense & Security Solutions, Inc.'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.

There are tens of thousands of satellites planned for orbit in the coming years, both blue and red, and Kratos Defense & Security Solutions, Inc.'s ground systems and software are the gold standard of the industry. There is a generational recapitalization of the U.S. industrial base underway. The Department of Defense is looking to nontraditional defense technology companies like Kratos Defense & Security Solutions, Inc. to play a significant role, and we are committed to doing our part to ensure that the Department and our country are successful.

Our industry and Kratos Defense & Security Solutions, Inc.'s total addressable market are rapidly expanding, 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 Defense & Security Solutions, Inc. 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 Defense & Security Solutions, Inc.'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 multiyear weapon system production framework agreements, including with several of Kratos Defense & Security Solutions, Inc.'s partners on several 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 Defense & Security Solutions, Inc. 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 Defense & Security Solutions, Inc.

The Department's demand signals are real; they are happening; and Kratos Defense & Security Solutions, Inc., along with our partners, are participating and stepping up to ensure the Department of Defense's success. Kratos Defense & Security Solutions, Inc., along with other successful defense technology companies in the industry, are making defense industrial base investments now in property, plant, equipment, and facilities 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.

This bill, as you know, includes funding for Kratos Defense & Security Solutions, Inc.'s hypersonic Valkyrie CCA, solid rocket motors, jet engines for drones, missiles and loitering munitions, and other Kratos Defense & Security Solutions, Inc. 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. Simply stated, as we grow, our profit margins are increasing. Since our last report, we have had several meetings with the Department of Defense leadership, and we are confident that Kratos Defense & Security Solutions, Inc.'s 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 Congress, the future United States national security spend is increasing, as it is acknowledged that the global threat profile is not partisan and does not care who is in charge. It is 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.

Each are primary business areas and core competency areas of Kratos Defense & Security Solutions, Inc., and all of which are supported in the planned 2027 national security spend. As a result of Kratos Defense & Security Solutions, Inc.'s alignment with the Department, increasing funding, and our relevant past performance qualifications, the number of opportunities that Kratos Defense & Security Solutions, Inc. continues to successfully receive and the number of new opportunities that are being presented to Kratos Defense & Security Solutions, Inc. 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 Defense & Security Solutions, Inc. to address the current and expected future weapon system demand of the Department. We are extremely fortunate to have the team that we do, and the uniqueness and scarcity value of Kratos Defense & Security Solutions, Inc.'s capabilities is clearly apparent. Kratos Defense & Security Solutions, Inc.'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 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 Defense & Security Solutions, Inc. 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 his advocation for companies like Kratos Defense & Security Solutions, Inc. 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 MUCSAT-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 we have been successful on. We have received a separate $1 billion-plus sole-source hypersonic probe bandwidth 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 Defense & Security Solutions, Inc. hypersonic system missions.

Kratos Defense & Security Solutions, Inc.'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 increase 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 Defense & Security Solutions, Inc.'s 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-hundreds-of-millions directed energy weapon system program with Kratos Defense & Security Solutions, Inc. as the prime. As I mentioned earlier, Kratos Defense & Security Solutions, Inc.'s OpenSpace software continues to clearly differentiate our 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 highly distributed cloud, ground entry point, and edge environments.

Kratos Defense & Security Solutions, Inc.'s OpenSpace software platform serves as the core networking capability supporting all OpenSpace solutions, including satellite C2, earth sensing and observation, space domain awareness, space control, and SATCOM, and this is for Kratos Defense & Security Solutions, Inc.'s largest business: our space and satellite communication business and our space domain awareness business. Kratos Defense & Security Solutions, Inc. OpenSpace is a crown jewel of our company, and it is analogous to defense technology company Anduril's Lattice software platform. Kratos Defense & Security Solutions, Inc.'s satellite business recently won a $447 million U.S.

Space Force prime contract for the resilient missile warning and tracking program 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 KGS book-to-bill ratio. This program is part of a broader missile warning and tracking architecture that is being fielded across multiple orbits; I encourage you to think golden dome. On this new prime program award, Kratos Defense & Security Solutions, Inc. 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.

Kratos Defense & Security Solutions, Inc.'s 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 Defense & Security Solutions, Inc.'s space, satellite, and space domain awareness business, in addition to AI also being key to Kratos Defense & Security Solutions, Inc.'s unmanned systems business and our jet drones. Artificial intelligence is helping drive Kratos Defense & Security Solutions, Inc.'s business.

Additionally, the dual commercial/national security use of Kratos Defense & Security Solutions, Inc.'s software, hardware, and offerings also continues to differentiate Kratos Defense & Security Solutions, Inc., including affordability as we spread the research and development over multiple defense and commercial markets. Additionally, Kratos Defense & Security Solutions, Inc.'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. 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.

Hypersonic system integration facility, new Anaconda radar program facility, Helios hypersonic program facility, and 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 Defense & Security Solutions, Inc. growth and value generation for all of our stakeholders. In closing, the Department is providing nontraditional defense technology companies like Kratos Defense & Security Solutions, Inc. a generational opportunity in rebuilding the U.S. defense industrial base, building an arsenal of freedom, participating in multibillion-dollar, multiyear programs, and generating significant value.

Kratos Defense & Security Solutions, Inc. is aggressively participating in the current build and growth phase of the Department of Defense's rebuild defense industrial base plan, with Kratos Defense & Security Solutions, Inc. 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. 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. Deanna?

Deanna Hom Lund: Thank you, Eric. Good afternoon. As we have included a detailed summary of the first quarter 2026 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. Revenues for the first quarter were $371 million, above our estimated range of $335 million 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.

Q1 2026 revenues include consolidated organic revenue growth of 15.8%, with the largest contributors to the overachievement in our Unmanned Systems, Defense & Rocket Support, Turbine Technologies, and Microwave Products businesses. 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. Adjusted EBITDA for the first quarter was $38.7 million, above the high end of our estimated range of $25 million 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. KGS first quarter 2026 revenue was up $48.9 million year over year from 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.

First quarter 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, increases in inventory of approximately $14.7 million, and increases in prepaid and other 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 & Satellite businesses.

Free cash flow used in operations for the quarter 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.

Consolidated DSOs, or days sales outstanding, increased from 121 days during 2025 to 130 days during the first quarter 2026, reflecting the 22.6% revenue growth, the 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 CRAs. Our contract mix for 2026 was 73% revenues generated from fixed-price contracts, 23% generated from cost-plus contracts, and 4% generated from time-and-material contracts.

Revenues generated from contracts with the U.S. federal government during 2026 were approximately 69%, including revenues generated from contracts with the Department of Defense, non-DoD federal government agencies, and foreign military sales contracts, and 21% generated from foreign customers and 10% from commercial customers. Now moving to financial guidance. Financial guidance we provided today includes our expectations and assumptions for our supply chain's execution, the impact of employee sourcing, hiring, retention, and related costs. 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 and we are in the process of aligning its reporting to U.S. generally accepted accounting principles, or GAAP, we have included conservative estimates in our updated guidance. Our second quarter 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 second quarter revenue guidance of $400 million to $410 million includes estimated organic revenue growth of 4% to 7% as compared to 2025.

Our updated full-year 2026 revenue guidance of $1.7 billion to $1.76 billion includes the estimated contribution from the Orbit acquisition and includes an estimated organic revenue growth rate of 15% to 19% over 2025 actual performance, and as you may recall, our 2025 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-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 Defense & Security Solutions, Inc.'s operating cash flow guidance also assumes certain investments in our Rocket Systems and Unmanned Systems businesses related to the procurement of rocket-related systems and our plan to begin producing approximately 40 Valkyries annually beginning by 2027 and into 2028, as well as the completion of certain of our unmanned systems and related derivatives and vehicles.

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; for 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?

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

Operator: To ask a question, you will need to press star 11 on your telephone and wait for your name. Our first question will come from Sheila Karin Kahyaoglu of Jefferies. Your line is open.

Sheila Karin 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 are seeing from Orbit and NOMAD.

Eric M. DeMarco: 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. We are involved with many, many of these, and it is increasing. On the microwave electronics side, as you know, we are headquartered in Israel, and our three big customers/partners are Israeli Aerospace Industries, Rafael, and Elbit. And we know the conflicts that have 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 are involved in that, and it is very, very strong. And then our Unmanned Systems business was particularly strong in Q1. This is on the tactical side. We have a lot of stuff going on the tactical side, and we made some important execution milestones in Q1. On the acquisitions, I will 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.

And they are doing some very interesting things, let us just say, in the missile defense area. And as Deanna mentioned in her remarks, we are 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. And Orbit is a crown jewel, Sheila. It is in Israel, where we are, same customers, same programs. Their SATCOM is on unmanned aerial systems, on ground systems, unmanned water systems, 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.

Sheila Karin Kahyaoglu: 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. How much of that is coming from the Middle East conflict and what is your visibility on the $700 million?

Eric M. DeMarco: I cannot comment on the Middle East. I would think not a lot, but I cannot comment on that. The visibility on the $700 million, let me give you the pieces. In the reconciliation bill, which the Department has said they are going to fully obligate — the entire $156 billion this year — there was $400 million in there for the MoTV program, which is ours. So there is $400 million of the $700 million click. On the 2027 defense budget that is being asked for, the $300 million is covered plus some. The testing requirements for hypersonic systems — and not just the weapon platform, but guidance systems, control systems, seeker systems, communication systems — is incredible.

And we are the ones that have the program on it. So we feel extremely strong on our forecast in our hypersonic business for the next several years.

Sheila Karin Kahyaoglu: Great. Thank you so much.

Eric M. DeMarco: Thank you.

Operator: And our next question will come from the line of Michael Roy Crawford of B. Riley Securities. Your line is open.

Michael Roy Crawford: Thank you. Just to continue on the unmanned systems front, the 40-drone annual production rates for Valkyrie, is that primarily in Oklahoma? And can you just remind us where else you are building?

Eric M. DeMarco: One hundred percent in Oklahoma for the airframe, etc. The avionics and electronics are down in Florida. Mako is in Sacramento, California. The next big one that is going to probably be ramping, Mike, starting at the end of this year, next year, is the Mighty Hornet program. That is the tactical fighter jet. We have moved substantially all of that production to Oklahoma. And, Mike, on that one, very importantly, we are successfully flying the tactical fighter jets with Kratos Defense & Security Solutions, Inc. jet engines. So we are totally vertically integrated on our tactical fighter jet CCA right now. We have driven cost down even more with higher performance.

And, Mike, I am being told that Kratos Defense & Security Solutions, Inc. is the only company in the world that builds the plane and the engine under the same organization. So those engines, Mike, they are built in Michigan. The tactical fighter jet engines are built in Michigan.

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

Eric M. 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, 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, so we feel real good.

Michael Roy Crawford: And that is all Auburn Hills? That is GEK or something completely different?

Eric M. DeMarco: These are all — this is 100% Auburn Hills. Think 250 pounds of thrust on down. Think the Air Force's Family of Affordable Mass missiles, the FAM program. That program is for 30,000 missiles over the next few years.

Michael Roy Crawford: Thank you. One final question. Could you maybe just provide a little deeper dive into what kind of SATCOM miniaturization IP from Orbit you might combine with your preexisting microwave electronics capabilities to provide a new solution?

Eric M. DeMarco: Yep. So the vast majority of Orbit's antennas, for example, Mike, now are parabolic. So 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. And we are going to electronic antennas. Kratos Defense & Security Solutions, Inc.'s microwave business is already building electronic antennas. So think flat-panel phased arrays and AESAs — active electronically scanned array antennas. We already have the customers. We have the platform. We have the program. We are going to slowly transition with our microwave electronics business to the electronic antennas, which have far more capability than the parabolics.

Michael Roy Crawford: Excellent. Thank you.

Eric M. DeMarco: Thank you.

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

Peter J. Arment: Yeah. Good afternoon, Eric, Deanna. Nice results. Eric, there recently was a successful flight of the JDAM-ER, the long range — I guess it 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 at TDI. How quickly should we expect the ramp up on that platform?

Eric M. DeMarco: You saw that. So that is now the GBU-75. That is the official name. And the program of record is currently for 25,000. It is expected, Peter, to go much higher — several tens of thousands more. Now I have to be careful because I am 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. 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 cannot — that program and several of the other ones that you all are aware of that I have walked you through before, several of these are expected to go into LRIP later this year, no later than next year. And, Peter, this is how we are getting to maybe 3,000 engines next year, 5,000 or 6,000 engines in 2028, and even more in 2029. And these are platforms we are designed in on. We are already on them.

Peter J. Arment: Can you talk a little bit about Florida Turbine's involvement in, you know, competing for — I guess it is the Sea-Launched cruise missile — and some of the opportunities there? I know Kratos is one of a few players. I do not know what you can say, but you are in the engine business now, Eric.

Eric M. DeMarco: Yep. So let us talk about what is publicly out there. Kratos Defense & Security Solutions, Inc. has been selected for the development of the engine for the submarine-launched cruise missile nuclear. So we have won SLCM-N. As GE announced — GE and our partner — we have now been selected for the engine for the next class of attributable and expendable CCAs. We have been down-selected on that. We were just informed in the past week that we — us and GE — we just won another one.

Now this next one, I am going to say very carefully: the seven-year framework agreements — you have seen seven-year framework agreements on missile systems — we have been selected as the engine — we, us, GEK — we have been selected as the engine for the expanded production. I think it is going up 4x, I think, is what the announcement was — four times current production — for two of those missile platforms already.

Peter J. Arment: Well, terrific. Lastly, just staying with GEK, should we anticipate the fact you are moving in that direction of higher thrust that we could see those starting to be incorporated into future Valkyries? How are you thinking of that?

Eric M. DeMarco: I cannot talk about it. I am getting — I cannot, brother. I cannot talk about it. I would like to, but I cannot talk about it. I apologize.

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

Eric M. DeMarco: Okay. Thanks.

Operator: And our next question will be coming from the line of Noah Poponak of Goldman Sachs. Noah, your line is open.

Noah Poponak: Hey, Eric and Deanna. Good afternoon. Good evening. Depending on your location.

Deanna Hom Lund: Yeah, it all feels the same at the moment.

Noah Poponak: 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 is some degree of overlap between the two. If you could express that as well.

Deanna Hom Lund: For the total public information that we have provided for our hypersonic business, which is our Defense & Rocket Support business, the expectation for 2026 is $400 million. And then for next year, the expectation is for $700 million.

Eric M. DeMarco: So think of those, Noah, as primarily right now solid rocket motors for the hypersonic business right now. Next year, I will be talking to you about air breathers, but not right now. On the cruise missile engines we are talking about, these are air breathers. Our current run rate annually, I think, is about $10 million. So we are talking about thousands of engines, and think of selling price, depending on which engine, of $40,000 to $60,000 each.

Noah Poponak: Okay. That is all helpful. I will keep trying to triangulate that as it is evolving. Can I ask about the 2Q outlook? It would require the strong pace of organic growth that you have been on to slow, and a step down in EBITDA margin and even the absolute dollars, before then all of that picking back up in the second half. Can you just detail what is behind that?

Deanna Hom Lund: So on the margin piece, part of that is related to the mix that is expected; we did have quite a favorable mix in the first quarter. The other piece of that is we have been ramping infrastructure costs, manufacturing costs, bid-and-proposal costs. So that is not being absorbed as much in the second quarter just because of the ramp that we are building up for the production and the growth for the second half. As far as the revenue step down, if you will, from Q1 to Q2, some of that in our Unmanned Systems is just based on the timing of some production and shipment in the first quarter as compared to the second quarter.

That is primarily the biggest change from sequential quarters.

Eric M. DeMarco: We are trying to be conservative. The issue out there, knowing 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 there is an additional $120 billion that they are trying to get obligated between now and the end of the fiscal year. So we are trying to be conservative. It is all lined up, but if we do not get the awards, if the de-obligations and re-obligations are not done, we cannot execute on it, and we are cognizant of that backlog right now in the government program shops.

Noah Poponak: Okay. That makes sense. Appreciate that. Then maybe talking a little bit more about margins over time. 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 is the latest thinking on where margins go beyond this year and what the potential is over time?

Eric M. DeMarco: I would go with what we put out there for now. We are looking for year-over-year 100 basis point increases: so 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 are pretty confident in this. The balance, as you know, is we have so many opportunities right now. Our bid-and-proposal costs — we are being told if you bid, you are going to win, which we are winning — are significant, millions of dollars.

But we are 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; we bid it; we won it. That was a very expensive bid. So we are balancing those costs against making sure that we hit 100 basis point increases every year.

Noah Poponak: I would think at some point you could achieve some escape velocity of leverage — you have invested so much in the business and then you get the revenue growth. But it sounds like for the time being still just reinvesting back into those opportunities. That makes sense. Thanks so much. I appreciate it.

Eric M. DeMarco: Okay. Thank you.

Operator: And our next question will be coming from the line of Kenneth George Herbert of RBC.

Kenneth George Herbert: Yes. 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. As we think heading into fiscal 2027, there is obviously quite a step up more broadly in funding for drones, and 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 opportunities across your portfolio, not only for the Valkyrie or other systems, but on the engine and other side?

But then second, and I guess more importantly, what is your confidence level that we see the kind of step up they have talked about in drone and counter-drone funding and that it actually happens in a timely manner?

Eric M. DeMarco: Yep. So on that funding, as you know right now, the placeholder is $56 billion over five years. That is the program you are talking about — DAWG. And when you talk drones, I am going to talk drones and loitering munitions, which both fall underneath it. Our confidence on the engine side — we will start there — is extremely high.

If you triangulate the missiles they are talking about — I named one program with 30,000 of them — and you take a look at what is 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 are highly confident that on the small-jet drone, jet loitering munition, jet missile side, we have great confidence in our step-up forecast. Now let us go to the drone side. We are being very careful.

We have 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 loitering munition as 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 are not competing with our merchant-supplier-plus partner on the engine side. There are one or two that we are involved in right now where we are comfortable we are not competing or going to cause a problem on the merchant supplier side.

But, Ken, our primary focus is it is 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 DAWG systems where there were 10 guys bidding, and even though we think we are the best always, we might not win because the government is trying to rebuild the industrial base and rebuild different competitors.

Kenneth George Herbert: That is helpful. And 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? And are you handicapping those any differently as you just think about fiscal 2027?

Eric M. DeMarco: For 2026, I am all happy; that is all bolted in at $1.15 trillion. As you know, on the $1.5 trillion that the Department is going for 2027, the base budget piece is $1.15 trillion and the reconciliation bill is $350 billion. Very importantly, if that makes it — I believe it is going to make it based on my recent meetings as I talked about on the Hill — the new baseline for the base budget is $1.15 trillion, which never goes down. The only time it ever went down was under Obama and sequestration. So you take that $1.15 trillion base, and if that goes up 3%, 5%, 6% a year, the DAWG program will be adequately funded.

It is a new program. We will be able to successfully execute our business plan even if there are no future reconciliation bills.

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

Jonathan Siegmann: A lot of progress on a lot of vectors. Maybe one you did not talk about as much was Prometheus, the solid rocket JV. You 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 are putting in, or does that represent opportunity to increase the scope of that facility? Thank you.

Eric M. DeMarco: Great question. So we had the Prometheus groundbreaking earlier this year, just a few months ago. On the day of the groundbreaking, the Department came out with its own press release that they are putting in $100 million into the energetics campus on their own, which was great. So 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 Defense & Security Solutions, Inc., 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 on and new platforms they want us on.

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 Defense & Security Solutions, Inc. The Department is with us. Our customer is with us, and we are planning right now. We are going to have first fire next year. First fire next year.

Jonathan Siegmann: That is great. And then maybe just to add on one — you touched on it with Orbit. It 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 conflict there?

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

Deanna Hom Lund: Yeah.

Eric M. DeMarco: Yep, so we are near 10%. We have very large exposure to ammunition restock. So just think Tamir on Iron Dome. Think Arrow. Think Barak. Sling of David. We are on all of them. Orbit is on a lot of stuff too. 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 Industries — are with us on. As I think you know, I believe we are the largest independent merchant supplier of microwave electronics out of the United States, and it is growing rapidly.

And in the U.S., we are back in the game in the microwave business. It is growing incredibly fast also. This is where some of our highest margins are, because a lot of this is catalog pricing. It is 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 maybe we can do better than 100 basis points as our merchant supplier businesses get bigger relative to the system businesses.

Operator: And our next question will be coming from the line of Joseph Gomes of NOBLE Capital. Your line is open, Joe.

Joseph 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. So I wanted to ask — you talked about all the opportunities, Eric, and all the things that you are 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 get employees for these programs that you are winning? Has the labor situation gotten any better? Has it gotten worse? Maybe you could provide some color there.

Eric M. DeMarco: It has gotten better in the past year, six months, but it is not great, especially in turbomachinery engineers for propulsion systems. They do not exist. It is very hard in the turbomachinery area. You may not have heard it in my prepared remarks — I talked about we have been verbally told we are going to receive another 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 is 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.

But these are the same people that are working on our cruise missile programs. They are working on our hypersonic air-breathing programs. They are working on our space programs. I should say people — guys and gals, of course. Our number one operational challenge right now as a company is obtaining and retaining qualified people. 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, because you cannot get a security clearance if — and I am not passing judgment here — if you like to do that. So that is the dynamic.

It is not as bad as it was a year and a half ago. Better, but it is not great.

Joseph Gomes: 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 — and I know you had a release or two of that in the last six months or so. I am just wondering where does that business stand? Are you going to be able to grow that business here in the near term with all the focus on the defense side?

Eric M. DeMarco: Our unmanned ground business is doing great. As you know, we are in the soybean farms, we are in the sugar beet farms, we are on the timber land. I think we are in 15 states now, driving unmanned on the roads. It is doing very well. But as you said, there is just so much going on the national security side. It is not a strategic focus area for us, but because our technology is so good and so cost affordable, they are coming to us.

Joe, we are in discussions right now with a global farming equipment company — you would know who they are — and it is possible by the end of the year we are going to get a contract with them, and we are going to turn their farming equipment into unmanned systems out on the farms. It is happening, but I cannot tell you that it is a major strategic initiative because it is not, and I apologize.

Joseph Gomes: Fair enough. I will get back in queue. Thank you, guys. Appreciate it.

Eric M. DeMarco: Thank you.

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

Peter Skibitski: Hi, guys. On the growth in KGS in the first quarter, I am just trying to figure that out. Was that mostly MoTV driving the growth there? And then the $1 billion sole source, I think, addition that you mentioned in your opening remarks — was that an increase in the ceiling of MoTV, or was that something different?

Deanna Hom Lund: The organic growth in KGS is partially driven by MoTV, but also in our Microwave business as well as our KTT business. So it was across those three divisions within KGS.

Eric M. DeMarco: On the other one, I cannot get ahead of the customer until they announce it, but we have got three separate very large initiatives going on the hypersonic side, two of which we have been verbally told we are winning. The third one I think we are also going to get. I want to wait until the customer comes out on it before I say anything, just because I do not want to get in front of them, and it should be very soon on one or two of these.

Peter Skibitski: Fair enough. And then, last one for me, maybe for Deanna. Just on the $160 million in CapEx this year: what is the best guess that you think we should model in terms of how that profile is going to look through the midterm? 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.

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

Peter Skibitski: Okay. Thanks, guys.

Deanna Hom Lund: Thank you.

Operator: Thank you. And 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 ground management integration of the missile warning and tracking satellites in MEO. So at this point, you now provide ground station capability across all three orbital inclinations — LEO, MEO, and GEO. Should we think that Kratos Defense & Security Solutions, Inc. has a place competing on the recompete of SCAR with OpenSpace? And do you think there is an opportunity there for both the flat-panel phased array antennas and the parabolic?

Eric M. DeMarco: That is a very insightful question. You are exactly right — we are across all three of those orbits, and I have been learning a lot about cislunar orbit lately too because we are now in cislunar orbit also. But to your question on SCAR, obviously we were partnered with AeroVironment on SCAR. We delivered all our stuff out previously, so the recent termination for convenience did not impact us at all because we had already delivered out our piece.

When it comes out, if it comes out, we will definitely take a look at it to see if it is something we want to prime or do we want to partner again with AV or partner with somebody else — we will look at it. I just do not know right now enough details on it. But to the next part of your question, on a parabolic antenna versus an AESA antenna or phased array antenna, here is my opinion.

I go back to what the Secretary said on November 7 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. My gut tells me that parabolics will win there. That is my opinion, just based on what is coming out of the Department.

Austin Moeller: 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? And do you think Kratos Defense & Security Solutions, Inc. 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?

Eric M. DeMarco: On your first two questions, yes and yes. We are in source selection right now on something related to that. I cannot get into too many details. As I think I said on the last call — if I did not, I will say it now — on Phase Two we have some real compelling solutions. On future phases, we have some really super compelling solutions. We will see. But to answer your questions: yes and yes.

Austin Moeller: Very exciting. Thanks again.

Eric M. DeMarco: Thank you.

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

Andre Madrid: Good afternoon, Eric and Deanna. Thanks for taking my question. Deanna, could you maybe provide a split of Unmanned System sales between Valkyrie and Target? I know Valkyrie drove the strong growth, but I wanted to see just how much was between the two.

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

Andre Madrid: And that $20 million was almost exclusively Valkyrie, or was there some other stuff?

Deanna Hom Lund: It is predominantly Valkyrie.

Andre Madrid: I know you built a lot of those Valkyries ahead of schedule. When we think about Valkyrie sales again or tactical drone sales in isolation, how should we think about the cadence through the rest of 2026? Is 2Q going to be a step down? I know you already alluded to that a bit, but how significant should we expect of a step down and then kind of a rebound through the end of the year?

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

If it is 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.

Andre Madrid: Got it. And then one more — Eric, you mentioned this directed energy down-selection as a prime. Historically, I have not thought of this as an end market that you guys play in directly. Is this a new entry, or is this something that you have been actively supporting for some time and it has just been more behind the scenes?

Eric M. DeMarco: Kratos Defense & Security Solutions, Inc. has been involved in directed energy weapon systems and laser weapon systems for years. I just have not talked about it. Over the past year, internally and tied in with an acquisition we have made — we try to go one plus one equals four — this is a counter-UAS system. It is mobile. We are the prime. It is several hundred million dollars. It is going to start ramping next year. It should be very big in 2028. This is an area where, now that we have won this one, it will open the door for us to win more.

Andre Madrid: Got it. That is very helpful. Thank you so much.

Eric M. DeMarco: Okey dokey. Thank you.

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

Michael Leshock: Hey. Good afternoon. Apologies if I missed it, but I 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?

Eric M. DeMarco: Yes. We did. We are expecting to see them in Q2. Right now, Q2 bookings are looking real good because it is freeing up.

Michael Leshock: Great. And then one on hypersonics. 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 have talked about for that hypersonics franchise, whether that is additional investments or alleviating any bottlenecks — anything there that you could call out to drive even more growth in hypersonics?

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

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. 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 is not there to do what they want to do. That would be the inhibitor for us.

Michael Leshock: Great. Thanks so much.

Eric M. DeMarco: Yep.

Operator: And our next question will be coming from the line of Cashen Keeler of BNP Paribas. Your line is open.

Cashen Keeler: Hi, Eric, Deanna. Thanks for the question. 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 going to be focusing on those organic investments, or can we expect that you will be active with M&A moving forward as well?

Eric M. DeMarco: On the growth opportunities, 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 are going to 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 will start selling in 2027 and then 2028 — those are the air breathers. The 120 solid rocket motors I just mentioned — we have made some payments on those; we are 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. You have to have the motors — there is cash going to be deployed. I can give you the programs, the customers, where the cash for working capital will be deployed. But then we will 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. However, right now there are a couple, three small companies where the owners are retiring. They know us; they have come to me. They are thinking about retiring.

What they build is exactly consistent with what we do — it is our sweet spots. We are talking with these gentlemen and their wives, and if it makes sense, we will do something with them. But these are small. We have no plans right now, nothing on the radar screen, anything significant. That could change — I never say never — but that is where we are at right now.

Cashen Keeler: That is helpful. And then on Valkyrie, there were some comments in the press out of one of the industry trade shows about Valkyrie and the MUCSAT-Air program. I think one of them was on whether or not they are looking for conventional takeoff and landing as CTOL or VTOL. Do any of those decisions impact your ability to ramp to the 40 units a year? Or are your production lines fairly modular and can adapt to those requirements?

Eric M. DeMarco: Good for you — you saw that. That is very relevant to the question asked earlier on revenue recognition on the Valkyrie. Five or six years ago, because of the war games that were performed, runway independence was it. That was the winner. The thinking was the Chinese are going to blow up all the runways. Valkyrie is launched off a rail — go get them. We started building our Valkyries on a rail — runway independent. Frank Kendall comes in as Secretary of the Air Force; halfway through his term, in 2022, we are going to do the Agile Combat Employment program, ACE, where we are going to have all these little runways all over the Pacific.

So runway independent does not matter; we want wheels. Now what you have just seen is it moving back to runway independence. Take a look at what Shield AI is doing — they are building the X-plane, which is our runway-independent super-duper drone. I am going through all of that because, with our current customers, we have orders and we are going to receive orders for a certain mix. We are going to build those and deliver them. But along the way, the wind could change. The Marine Corps thing you talked about — it talked about both runway-independent and CTOL versions.

So it is 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 — 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 I think we are going to do 35 to 45 a year or something like that, depending on mix — the 40 that we are going to get up to by 2027–2028, if it is all CTOLs, it might be 30; if it is a mix, it will be 40. It depends on the mix.

I am not trying to obfuscate — I am telling you this is happening real time. We have an inventory of a handful left of the rail-launched ones. We are building right now numerous CTOL ones that will be ready next year. As the hand of cards comes out, we will let you know as soon as we can what, by customer, it looks like.

Cashen Keeler: Thanks for the details.

Eric M. DeMarco: You got it.

Operator: And our next question will be coming from the line of Gavin Parsons of UBS. Your line is open.

Gavin Parsons: Thank you. Good evening. Eric, Kratos Defense & Security Solutions, Inc. is already pretty fixed-price heavy, but I would love to hear your thoughts on the White House executive order last week on fixed-price contracting, if that has any competitive implications.

Eric M. DeMarco: 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 are producing, you become more efficient. You can make more money; at the same time you can lower your price to the government. So your margins can go up and their cost can go down because you are getting so efficient. Fixed-price development contracts — we do not do those. Those are scary. This is why Boeing got in so much trouble over the years — fixed-price development contracts, building something that had never been built before, and if you cannot get it to work, you have to keep going.

We do not do fixed-price development contracts. We are not big enough to handle it. From our direct discussions with the Department on programs, we are clearly the 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 — Kratos Defense & Security Solutions, Inc. did. I cannot get into details — it was not announced — but we had multiple. Our ballistic missile targets — so these represent adversaries' ballistic missiles — decoys, chaff, flares, all kinds of countermeasures, etc. Our most expensive all-in one, I think, is $15 million a shot. I think the competing one is $100 million.

Now go back to the Secretary — I will take 85% of the capability now at a very reduced cost. I am making this up because I do not know the exact number — we can do 95% of what the $100 million one can do. So we are 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 is our focus.

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

Eric M. DeMarco: 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. We are going to have a lot more exciting things to update you on. Thank you.

Operator: Thank you for participating. You may now disconnect.

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