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Thank you for standing by, and welcome to Kratos Defense & Security Solutions Second Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Marie Mendoza, Senior VP, General Counsel. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions Second Quarter 2025 Conference Call. With me today is Eric DeMarco, Kratos' President and Chief Executive Officer; and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer. 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 made 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. Eric?

Thank you, Marie. The Annual Global Defense and National Security expenditure in 2024 was approximately $2.5 trillion. This $2.5 trillion figure does not take into account the expected increase in the United States National Security spend to over $1 trillion this year or planned NATO increases in its defense expenditures from a historical approximately 2% up to 5% of GDP, and this is also before the recent announcement from non-NATO U.S. allies in the Pacific that they would also be increasing their defense expenditures to 5% of GDP. There is truly a generational global recapitalization of weapon systems and related infrastructure currently underway, and we believe that Kratos is one of the few qualified today defense technology companies positioned now to address it and take advantage of what is truly an industry inflection point. The Trump Administration through recent Executive Orders is working to streamline the U.S. DoD procurement, purchasing and deployment processes to significantly improve efficiency, make the deployment of new systems and technology to the war fighter faster and prioritize new rapidly developed and fast-to-field hardware and systems. Additionally, both the Senate through the FORGED Act and the House via the SPEED Act are similarly looking to streamline the defense procurement and acquisition processes, including a focus on first-to-market relevant technology, hardware products and systems. We are also at the beginning of a rebuild of the U.S. defense industrial base, which is [ after feed ] for several decades, which rebuild we believe will require hundreds of billions of dollars of investment and take many years to complete. Kratos is realizing the positive impact of these factors, including our Q2 organic revenue growth rate of 15%, our bookings with an LTM book-to-bill ratio of 1.2:1, our backlog, our record level bid and proposal pipeline of $13 billion and also our previously communicated 2026 forecast base case organic revenue growth of 13% to 15% over '25, which is now substantially covered by on- hand programs and contracts. Additionally, after our second quarter ended, we were informed by a government customer that we have been successful on a large new program of record opportunity we call Poseidon, which I do not believe that I have previously mentioned with formal contract award to Kratos as prime expected shortly. Poseidon is expected to be a single award to Kratos. It's a military-grade hardware and system program with an approximate total potential value through production of approximately $750 million, which should begin ramping for us in mid-'27 once the required program-specific new facility we will be standing up is complete. The Poseidon win is expected to provide Kratos another large steady-state future revenue, profit and cash flow engine, further enabling our aggressive growth pursuit, including in the drone, hypersonic, jet engine, microwave and SATCOM areas, while also generating profitability and cash flow. Additionally, Kratos was also informed after the Q2 close that our team with a key Kratos partner has been one of few companies successfully down selected on another new program of record opportunity, Kratos cold named [ DMOS ], with Kratos contract award expected shortly. As a result of these and other expected contract awards, we currently forecast that Kratos' third quarter bookings could be particularly strong. Since our last report, Kratos' confidence has increased in our 2026 forecast base case margin or EBITDA rate increase of 100 basis points to 150 basis points with additional increases expected in '27 and beyond as new higher-margin programs we have recently received begin to ramp up and certain lower-margin contracts are renewed with the customers at expected higher margin rates. In Kratos' tactical drone business, it was recently reported that both the U.S. Marine Corps and the Office of the Secretary of Defense stated that the Valkyrie is becoming a program of record and will be the first CCA in production and fielded for the Marines. Additionally, Airbus recently announced that they have partnered with Kratos for a European mission-focused Valkyrie and initially specifically targeting the German Luftwaffe with the current expectation for fielding no later than 2029. As you know, Kratos' base case financial forecast does not include any assumed tactical drone production, which we will only include in our revenue forecast once we have received a contract award as the potential financial impact to Kratos when we receive tactical drone awards could be very significant. For example, if in 2026, hypothetically, Kratos receives an initial order for 15 Valkyries at $10 million each, we could have an immediate revenue increase over our base case financial model and forecast of $150 million with profit as the Valkyrie is currently in production and we could have 15 aircraft ready to deliver immediately upon contract award in my example. Both the Marines and Airbus opportunities were made possible as a result of Kratos making the investment to begin production of 24 Valkyries, several of which have been delivered to customers, as you know, in advance of a program or contract award with approximately 15 to 20 of which can, are or will be completed and available for sale next year. Kratos made the decision to make the investment and begin serial production of 24 Valkyries ahead of contract award so that Kratos would be first to market and that the potential customers could come to the factory, see their aircraft being built, see the actual cost data for the aircraft, see their aircraft fly. And we believe based on what we expect to occur that this was the correct business decision. Kratos took the same first-to-market approach of making the internal investment to design and develop certain of our other product offerings, including Erinyes and Dark Fury, our hypersonic flyers, our

Thank you, Eric. Good afternoon. As we have included a detailed summary of the second quarter financial performance as well as the initial third quarter and modifications to full year 2025 financial guidance in the press release we published earlier today, I will focus on the highlights in my remarks today. Revenues for the third -- sorry, second quarter were $351.5 million, above our estimated range of $300 million to $310 million, with overachievement of forecasted revenues across all of our businesses with the most notable growth in our defense rocket support due in part to the timing of hypersonic missions and in our C5ISR businesses with organic revenue growth rates of 116.6% and 25.4%, respectively. Adjusted EBITDA for the second quarter of '25 was $28.3 million, also above our estimated range of $21 million to $25 million, reflecting the increased volume, offset partially by continued increase of contractor and material costs on certain multiyear firm fixed price contracts in our Unmanned Systems business and a less favorable mix in our Space, Training and Cyber business. Unmanned Systems second quarter '25 revenue was down $12.6 million due to the prior year comparable, including $17.4 million from the shipment of an international target drone delivery, offset partially by increased tactical drone-related revenues. KGS second quarter ' 25 revenue was up $64 million year-over-year from the second quarter of '24 with organic revenue growth of 27.1%, excluding the impact of the February 2025 acquisition of certain assets of Norden Millimeter. Second quarter '25 cash flow used in operations was $10.6 million, primarily reflecting the working capital requirements related to the revenue growth impacting our receivables by approximately $36 million, increases in inventory and other assets of over $18 million, primarily reflecting increases in our microwave electronics and rocket systems businesses, which related to anticipated future deliveries and ramps in production as well as investments we are making related to certain development initiatives in our Unmanned Systems business. Free cash flow used in operations for the second quarter of '25 was $31.1 million after reflecting funding of $20.5 million of capital expenditures. As we planned, we are continuing to make investments to expand and build out certain of our manufacturing and production facilities in our microwave products, rocket system and hypersonic businesses to meet existing and anticipated customer orders and requirements and investing in related new machinery, equipment and systems. Consolidated DSOs or days sales outstanding decreased from 104 days in the first quarter to 103 days at the end of the second quarter, reflecting the revenue growth and the timing of milestone billings. Our contract mix for the second quarter of '25 was 65% fixed price, 31% cost plus and 4% time and material. Revenues generated from contracts with the U.S. government during the second quarter were approximately 71%, including revenues generated from contracts with the DoD, non-DoD federal government agencies and FMS contracts. In the second quarter of '25, we generated 12% of revenues from commercial customers and 17% from foreign customers. An operational priority remains the hiring and retention of skilled technical labor across the company with total Kratos headcount of 4,316 at the end of the second quarter as compared to 4,226 at the end of the first quarter. Now moving on to financial guidance. The guidance we provided today includes our expectations and assumptions for our supply chain's execution and for employee sourcing, hiring, retention and the related cost. We have increased our full year '25 revenue guidance from $1.26 billion to $1.285 billion to $1.290 billion to $1.310 billion, reflecting an organic revenue growth rate of 11% to 13% over 2024 and increased our adjusted EBITDA guidance from $112 million to $118 million to $114 million to $120 million. Our third quarter revenue guidance of $315 million to $325 million reflects an estimated organic growth rate of 12% to 15% over 2024. Our guidance continues to include the impact of increased material and subcontractor costs on certain of our multiyear fixed price contracts, specifically in our Unmanned Systems target drone business, where we have experienced cost growth from certain ancillary materials on our targets and for which we are unable to seek recovery from the customer until the renewal of future production loss contracts occurs. We are continuing to aggressively manage costs where we can minimize the impact to our margins. Our forecasted second half of the year ranges include the sale of certain products that are completed and ready to be delivered once we receive certain government approvals. Out of an abundance of caution, we have not included the contribution from these expected revenues and the related profits until the fourth quarter. If the necessary government approvals are received earlier, it is possible these contributions could be made in the third quarter. Since quarter end, we have paid off our entire term loan balance of approximately $180 million. Therefore, any interest expense should be minimal in the second half of 2025. Our $200 million revolving line of credit remains undrawn except for approximately $10 million of letters of credit outstanding and available to the company. Eric?

Thank you, Deanna. We'll turn it over to the moderator now for questions.

[Operator Instructions] Our first question comes from the line of Michael Ciarmoli of Truist Securities.

I guess, Eric or Deanna, just on the guidance, I mean, even the results, it sounded like you've got broad-based strength. I don't know if there was any pull forward, but the second half implied revenues down versus the first half. I know you just talked to maybe some potential delays, but anything to read into that?

Nothing to read into it. There was the timing of a hypersonic mission that was originally anticipated later in the year, and that occurred in the second quarter.

Okay. Got it. And then just if you could, with the Valkyrie being tagged as a program of record, you've got multiple production lots. Can you just walk us through the mechanics of when you get a contract, what might happen? I mean, I don't know if you've disclosed pricing, but presumably, you can take an immediate recognition of revenue and you would seemingly get a good cash tailwind. So is that something we should expect in the near-term with all the progress that Valkyrie is having?

So I'll address your question as far as process and how that would occur. So you're correct. So when we receive a contract award since we have leaned forward and have built these -- we're on the second production lot of 12. When we receive a contract, I think the hypothetical example Eric used was a order for 15 at $10 million a piece. So if all those are fully complete, then revenue would be recorded at contract signing of $150 million. If they're, say, 50% complete or 70% complete, then let's say, they're 50% complete, then $75 million would be recorded. And then as the continued build-out occurs, then the revenue would be recorded until completion.

Okay. Got it. Last one, and I'll jump off. Eric, you didn't mention MACH-TB. I think there was $400 million in the Reconciliation Bill. Does that give you even greater confidence? I know that was kind of anchoring the growth in '26?

Absolutely. And you're correct. There are almost $400 million in the Big Beautiful Bill for MACH-TB. Our hypersonic franchise, including MACH-TB is going to knock it out of the park over the next several years. So we feel great, and we're coordinating now with the supply chain for a very, very significant ramp in '26, accelerating into '27.

Our next question comes from the line of Peter Arment of Baird.

Congrats on all the wins you're stacking up. Eric, can you maybe talk about your target drone business just in the scope of Golden Dome? I know there's an Industry Day going on in Golden Dome, so there's not a lot of details out. But how should we think about how Golden Dome impacts your target drone business?

Yeah. Hi Peter, I'm glad you asked the question. In my opinion, I'm the CEO, I drink the Kool-Aid. There's no company in the country on a relative basis better positioned for Golden Dome than Kratos, including target drones. And let me just summarize why. On the Space segment, we will be involved with the ground command and control and telemetry tracking and control on space. We are already under contracts for projects related directly or tangentially with Golden Dome, and that's going to increase. We are the hardware merchant supplier on radars, battle command systems and interceptors for every prime for virtually every platform. So we're going to be involved there. And now to your question, once Golden Dome is up, it's going to need to be tested. And this is going to take hypersonic targets, cruise missile targets, jet drone targets, ballistic missile targets, all of which Kratos is the market leader. So we are -- if this goes, this is going to be a significant impetus for our company, including in our target drone business.

Appreciate that. And then just last quarter, you kind of stack ranked for us. And you mentioned kind of over kind of a 3-year outlook, you kind of put hypersonics as one and engines franchises as two microwave electronics. And you kind of said tactical drones will wait for customer decisions. But it sounds like those decisions are being made. Does that change how you view where the rankings would be for that?

Right now, the rankings remain our hypersonic franchise, no question. I'm going to go with my base case. Number two, our air defense missiles systems, radars, battle systems, all that hardware, that's moved into # 2 now. It's staggering the orders that we're getting and that are coming. And you can read about the systems in the press. And again, we're the merchant supplier on these. Third is going to be the engines. As I said, we're heading into low-rate initial production for '26 and into full rate production in '27 on lots of engines for new low-cost cruise missiles and drones, okay? If/when tactical drones occur, it could leapfrog and go into one or two, if that happens. But again, that's not in our base case. It's not in our forecast.

Our next question comes from the line of Josh Sullivan of The Benchmark Company.

Clearly, it's been a very strong year for drones between Executive Orders, [indiscernible] memo, industry air shows highlighting low-cost drones and Kratos model obviously lines up nicely with these trends. But one of the big questions we continue to get from investors is just the obvious outlier here continues to be the Air Force. Should we be thinking the Air Force drone posture is just going to more be on the exquisite side and the other branches are going to lead on the low-cost attributable side or is that how it's going to play out or do you sense anything is going to change sooner than later?

I have to be obviously -- and I appreciate the question, we get those questions a lot, too. I have to be very, very careful. I'll never speak for the customer. I can -- I will say that recently, representatives of the Air Force have been saying publicly that maybe less than exquisite, more affordable and in higher quantities is a better way to go than exquisites that haven't even flown yet. So we're seeing some of that out there. I don't want to -- I'm not going to speak for the customer ever, but that's some of the public remarks they've been making.

And I guess maybe a follow-up to just Peter's question on U.S. Golden Dome target needs. But given the investment in Europe, I mean defense posturing over there, should we expect a similar need for target drones in Europe? And then would those carry higher FMS like margins?

That's an excellent question. The answer is yes. And yes, and they would probably be either FMS or direct commercial because the Europeans, as we know, they're going to be -- their target is to increase their defense spend up to 5% of GDP. I don't know if they're going to get there, but they're definitely increasing it. And they're going to be buying Patriot and FAD and LTAMS and IBCS. And I can go on and on U.S. Systems because very candidly, their industrial base doesn't do theirs right now. When you see systems like that being sold, Kratos target drones go with those systems. So as this global recapitalization of strategic air defense systems, missiles, radars, satellites goes, Kratos' target drones are going with them. And our margins on those are significantly higher than they are here in the U.S. because they -- as you mentioned, they're either FMS or it's a direct commercial.

Our next question comes from the line of Mike Crawford of B. Riley Securities.

If you had to rank certain missile programs that you're on with microelectronics, I mean, is Patriot up there at the top or SM-3 or is it kind of all of the above?

I can't -- I'm -- I can't talk specifically, but in Kratos, we are involved with Patriot. We are involved with that. We are involved with indirect fires. We are involved with SHORAD, short-range air defense. We are -- all these -- when I say we're involved, we build them. Integrated Battle Command System, we build that, long-range hypersonic weapon, on and on. We are involved in virtually every one of them and the associated radars, TPY-2, TPY-6, Sentinel, not the ICBM, the radar, Sentinel, et cetera.

Okay. And then just with all of these new facilities you're standing up in Oklahoma and Israel, all over the place, are all of those still on track as originally guided for LRIP and potential full rate production or any changes there?

It's going to depend on some of the build schedule and the construction. So right now, we still have them reflected in our '25 numbers projections. There may be some just depending on construction build-out, some of it may slip into '26.

Okay. And then final question is, should we expect you to start another Valkyrie spiral before award or are we now moving to the point where you're going to get awards before you need to do that again?

I'm not going to comment on that right now. I can't get -- I'm not going to get ahead of these two of the customers.

Our next question comes from the line of Jonathan Siegmann of Stifel.

So you commented on the Big Beautiful Bill and having MACH-TB listed. It also listed $1.5 billion for low-cost cruise missiles, $600 million for industrial base for solid rocket motors and then $270 million for the Marine Corps unmanned combat aircraft. So it seemed pretty relevant to you guys from my point of view. I just wanted to kind of get your confirmation of that and if there's other competing programs that might have their hands in some of those incremental budget dollars.

I confirm exactly what you just said. And on the low-cost cruise missiles, think Kratos low-cost jet engines.

That's really helpful. And then I'll just ask another question on your partner at Prometheus, likely consumed a lot of their missiles in the effect of defense in Israel last -- in June. Just can you give us a sense if that -- those -- the interceptors they used, are they relevant to the JV that you're building?

Without naming any systems, they are absolutely relevant. And the indication from our partner right now is from multiple tens of thousands of motors and energetics that Prometheus will be building for exactly what you just said.

Is there any opportunity to maybe accelerate that capacity or even expand it given how much demand signals are globally for that -- those programs?

We are -- it's slow because we've already ordered most of the main mixing equipment and other equipment that we need. It's coming. As I mentioned, I mentioned the Chief Operating Officer, we've offered -- we've hired -- Prometheus has hired a number of other executives. There is opportunity to accelerate, but it's not significant. I don't want to mislead here. It's not significant. We've got the location. We've got the construction. We've got the ground being broken. It's all going. There is significant opportunity for the business to expand. As I think you know when we first announced this, the immediate and primary objective is to take care of our partner, Rafael, and to take care of the Israeli needs because we have the backlog. However, because we have that, and we've modeled this all out, we have such -- we will have such a throughput in the factory, our cost rates will be extremely competitive. They will be better competitive than anybody else's. So we have already begun in-person discussions myself with Rafael, with Primes on what Prometheus will be building for them. So that is the second part of the strategy to be a merchant supplier leveraging off of our big anchor tenant that closes the business case.

Our next question comes from the line of Colin Canfield of Cantor Fitzgerald.

Maybe going back to the X-58 program [indiscernible]. If you think about the kind of the variance that you listed and the awards that are moving between Marine Corps and either Air Force or Navy, the other variants seem to suggest similar kind of quantities of drones over a multiyear period. So as we think of kind of production scaling, and you take apart the kind of 5 categories you listed and assume, call it, 10 to 20 drones per category. Is it fair to characterize the X-58 production schedule as being able to deliver, call it, 100 drones per year over the next 5 years?

The capability right today, right now, we can deliver 50 a year. We have to get the supply chain and everything which I mentioned, we're getting ready, okay? The way we've set the facility up is we have an option, we can pull the trigger and we can expand the facility. We get an additional autoclave and we could get to a 100. So that has all been planned out in our program and manufacturing production plan, yes.

Got it. And then just taking the $10 million price tag that we considered, do you think it's fair to maybe characterize and assume the other goodness in the business. Is it fair to characterize Kratos' revenue as being able to double over the next, call it, 3 years?

Oh, yeah. In our upside case, absolutely, not the base case, not the upside case. Sure.

Our next question comes from the line of Seth Seifman of JPMorgan.

Nice results. I wanted to ask, just so we understand in the model, the goodness that came in KGS as a result of the hypersonic event, was that kind of pulled forward from late in the year? It seems a little early for MACH-TB or was that something separate? And then when we think about the increase in the revenue guidance for the year, is that more in -- is that in KGS or is that in unmanned?

I'll take the first part, and Deanna will take the second. I cannot comment on the hypersonic mission that we did. I can't do it. I'm sorry. I can't say anything about it. So that's on the first part of your question. Go ahead, Deanna.

Yeah. And on the revenue guide lift, that's primarily in KGS.

Okay. Okay. Got it. Got it. And then just as a follow-up, with the debt paydown, you'd probably end the year with, I don't know, $625 million of cash, something like that. How do we think about what you want to do with that and the investment requirements as we go into '26 and beyond?

Yeah. And your cash number may be a little high, Seth, because we did use $180 million to pay down the debt. And our guidance is the use of $80-plus-million this year. So -- but it will still be a fairly sizable number. So right now, it's -- we're generating interest income, a couple of percent, about 4%, the best rate we can get right now, so.

Yeah, on the second part, Seth, we -- Anaconda, I believe we're going to win. It will be sole source, it will be significant. Helios, I believe we're going to win. It will be sole source, it will be significant. When God willing, we win these and they're announced and we described what they are and the facilities we have to build, and these will be multi-decade type programs. You'll understand what we're doing here. Also, Poseidon. The reason I did not talk about Poseidon previously, this is so big. And if it's announced by the customer, you'll understand why we called it Poseidon. It's so binary, and it's -- I don't want to call it a flyer, but I wasn't better than 50% confident we'd win and we won. That's going to take a new facility. And again, if it comes out what this is, you're going to go, yeah, we see what they're doing here and what's happening here. And those are just some -- we had some other ones that we're chasing. I think we're going to get in Q1, Nemesis, Vulcan, Hermes. But Seth, what is happening here is the government customer, if they have a viable alternative to a traditional that's qualified, they're encouraging us to bid, and we're winning. Deanna and I just did a bid review yesterday on another multi-several hundred million dollar opportunity that we're priming on, we've been encouraged to bid prime by the customer. And so our plan macro level with the capital we raised is exactly what we said. We are taking advantage of what is happening geopolitically and the change in policies, and we are going to build this company. And sometime probably in '27, '28, the production that we're outputting is going to exceed the investments we're making, and then we're going to become a significant multi-decade -- multiyear, excuse me, cash flow generator. We're positioning ourselves for that. That's what we're doing. And the opportunities -- the number of opportunities even since we did the equity raise continues to -- continue to approach us. It's really fascinating what's happening here. So that's the plan with the capital.

Our next question comes from the line of Ken Herbert of RBC Capital Markets.

Maybe Eric or Deanna, just to follow up on that line of thinking. You're obviously using approximately $80 million this year to build out capacity. You just outlined a significant number of new opportunities that seem to be growing almost daily. How do we think about with the better revenue outlook into '26 potentially, is free cash flow a greater use in '26? Can you just directionally sort of talk about how you're looking at investments today and how we should think about maybe the cash flows over the next couple of years to support the growth?

Yeah. So on the CapEx, I think, we'll continue to be elevated in 2026. As I mentioned earlier to, I think, Mike's question related to CapEx. So we guided this year $125 million to $135 million. Some of that may slip into '26. What is not included in the CapEx or the investments for '25, which will be included in '26 will be the build-out of some of these other facilities that we've talked about if we are successful for Anaconda and for Helios. In addition, the Prometheus JV, as you know, we have a 50% partnership for a total of $185 million. So that's going to be, let's call it, $85 million, $90-ish-million. That will probably be over a course of two years for '26 and '27. And then -- so from a -- so that addresses the investment side of it. And then on the working capital side, I think working capital will continue to -- there will be a use because of the growth as we've seen in this quarter and the prior quarter, but this quarter more so, the increase from inventories and receivables and just leaning forward on that, and we negotiate the best payment terms we can with the customer to be able to get that funding as soon as possible. But that initial outlay, especially for growth rates that we're talking about, I believe we'll continue to see that in '26.

Okay. That's helpful. And as we think about sort of the investments across the board. Obviously, you're leaning into working capital to help derisk supply chain to the extent to which you can. But where is your confidence level across your suppliers as you build this up? And are there any particular areas of risk you'd call out that as much as you're derisking from a working capital and investment standpoint, still really sort of keep you up at night as you think about executing to what could be some pretty aggressive contract terms?

Yes. There are -- what's the most important part or subsystem, it's the one you don't have. And so Ken, I'm using numbers. 99% of our supply chain is good. We have backup sources. We have alternative sources. We have multiple qualified sources. But there is still 1% or 2% where only one guy does it. And as you know, we've been trying to vertically integrate. We are machining, milling, 3D printing, additive manufacturing, numerous parts for our engines, our hypersonic systems, et cetera, down in Birmingham, Alabama. But there is still a handful or two suppliers to us that are qualified by the military, the government, okay? They will not or have not to-date approved us to go qualify anybody else. They are sole sourced to us. And thus far, delivery schedules have not been a problem impacting our programmatic and contractually required delivery schedules. However, we have two or three out there that are really expensive and they are increasing their prices. And it has been impacting our margins. And these are on a couple of three programs that they're coming up for us. We're sole source. We're coming up for another 3- or 5-year contract award in the next year or two, where we will present the actuals to the government, and then we'll get reimbursed for those costs going forward. So that's the risk right now. I'm not seeing it that anybody is going to [ stif ] us, but the cost of like two or three is really high because they've got the keys to the kingdom.

Our next question comes from the line of Anthony Valentini of Goldman Sachs.

Eric, I just want to -- if we can talk about the Marine Corps program of record for a second. And in terms of like what exactly needs to happen between where we are today and it actually being an official program of record that you guys have won? And is there any chance that, that does not happen or they bring in another competitor? If you can just kind of give us a little bit of a feel for that, that would be helpful.

I hate to give these answers. I cannot comment any further than what has been published publicly. I cannot -- and I apologize sincerely. I can't do it. I can't do it.

No worries. Why don't we focus on some of the other growth vectors. In terms of the GEK business, I think that you mentioned you think it could be a $1 billion business. Can you just talk about maybe like the timeframe for that? And then maybe similarly, I think you made some similar comments on Prometheus in the past. How big can that get? And how quickly do you think you guys could get there?

Yeah. So on the first one, on GEK, what's happening out there with these -- with cruise missiles and drones is significant. I was just reading about a new one that's coming out today. The facility will be up and running, think '27, just to be safe, think in '27. We'll get into production late '27. Let's say, we get into full rate production -- full rate '28, '29. That's when it could be material for us and think 50-50 on that with us in GE. So '28, '29, okay? On Prometheus, I think '27, that will ramp very, very quickly because of the previous question I answered. We're doing multiple products across multiple platforms, and we're doing both the solid rocket motor and the energetic. I would think the same type of a thing. I would think '28, '29.

And is that $1 billion as well or is there a different value there?

Yeah. No, I'm looking at the valuation on these things, the valuation of at least $1 billion based on what we're seeing. When I say we -- us and our partners are seeing out there with other companies and the valuations that are being put them on them, absolutely, that's -- we're looking at a $1 billion valuation on each once we get into production, absolutely.

Okay, great. And then maybe the last one. I think around this time last year you'd made a comment about like there are training programs out there that could be pretty large and incremental to where you guys were at. Could you just give us an update on that maybe?

Stand by. Stand by. And I'm saying that very affirmatively. I can't say anything else, stand by.

Our next question comes from the line of Trevor Walsh of Citizens.

Maybe just to clarify a little bit more on Prometheus. It sounds like the business case, the base case of that is obviously with Rafael, and that makes sense. Is there anything when you go beyond that from a competitive perspective where that the upside case there just becomes a little bit more, I guess, more elements there from just kind of what others in the market might be doing? And can you kind of go through kind of how that maybe looks from what you're seeing? And I guess just given in the context of the announcement that came from -- particularly to the solid rocket motor kind of market.

Yeah. As I mentioned a few minutes ago, there -- us and our partner, Rafael are looking at this, there are two phases. They're running concurrently. Phase 1 is to satisfy Rafael and the Israeli Ministry of Defense's demand for solid rocket motors and energetics. Number two, that we're running parallel is to be a merchant supplier of solid rocket motors to certain primes that we have already been engaged with -- I've been engaged with some of them for over a year now on this before we did this, which we are in very deep discussions with on what we're going to be doing with them. That's the upside case. There's the base case with our partner. There's the upside case that both our partner and I are going to make -- we're going to make it happen. We're going to execute it. And I can assure you that the potential customers are motivated. Don't always believe everything you read out there. There's fact and there's fiction. And as you know, we deal with fact here. And so we're very confident in what Prometheus will be, both base case and as a merchant supplier.

Got it. That's helpful. Maybe just one quick follow-up. For the Poseidon announcement, I understand the $750 million in total. Can you just give us a sense when that starts to ramp? Is that kind of an annual run rate or just overall, kind of just broad strokes, how that looks once it gets done?

Yeah. So we anticipated -- we felt confident in this. So we've actually already signed a lease and on the new facility that's going to be built out, this will be obviously -- and when this becomes more publicly available, you'll see what. It's a military-grade secure facility and what we're going to be doing. This facility will be done '27. I think production -- it's going to really start to ramp '28, '29 production.

Our next question comes from the line of Sheila Kahyaoglu of Jefferies.

Great quarter. Eric, maybe if you could talk about -- you have so many programs in the hopper. If you could talk about next steps we should think about with the DoD and funding dollars flowing through. And on Poseidon specifically, any sort of comments on how it came about? Was it a competitive RFP process, how you got chosen by the Prime? How did that work?

Yeah. It was absolutely competitive. It was -- this is on Poseidon. It was absolutely competitive. It was very competitive. And this is why very candidly, I didn't talk about it like I talk about other ones where I think we have a clear line of sight and we have competitive differentiators that we're going to win. So it was very competitive. We were fortunate enough to pull it off. As I mentioned before, we call it Poseidon for a reason. When it becomes public, you'll see why. And as I mentioned, this will be a big flywheel stability, cash generator. This will reduce our rates because of the structure, which will make us more competitive on other bids. Sheila, this is an incredibly strategic win that the team did. The team knocked it out of the park with us. And let me say something else. I'm really glad you asked this, Sheila. Let me say something else. There are multiple Kratos divisions involved in this helping to build what we're going to be building. And I believe that's one of the key reasons why we won because this customer -- and again, when this comes out, you'll see who this customer is. This customer was looking for surety. I like to say one neck to choke. And with us, we're very vertically integrated on this because of our capabilities. And I think that was a primary differentiator in our win thesis.

Great. No, that's awesome. And maybe if we could -- Eric, if you have any commentary on how we should track program performance or next steps with the DoD and funding allocations.

And Sheila, are you talking overall at a macro level or this program?

Both Poseidon and the next three biggest drivers as you're looking at watch items.

Okay. So -- these watch it -- again, I want to make sure I answer the right question. Are these watch items that we've won or are these ones that I'm chasing?

No, that you've won.

Okay. Yeah. The biggies, let's go to the big beautiful. Let's go to the Reconciliation Bill. Don't quote me on this, but of the $150 billion, I think $118 billion of it is supposed to be spent or obligated in the next 12 months. So in our hypersonic franchise, including MACH-TB, I think we should see a significant uptick for Kratos' hypersonic franchise relative to what's in that Reconciliation Bill and what's supposed to be obligated. Very similar to a drone program that was mentioned that's in the Reconciliation Bill. I believe that that's going to be obligated and under contract very soon, and it's got to be spent -- obligated in the next 12 months. Relative to small drones and engines, I believe we're going to start receiving -- we're designed in on a number of small cruise missiles. We're designed in. I'm under NDA, I can't tell you which ones yet. I believe we're going to see the money start flowing on small cruise missiles directly related to that $1.5 billion that's in the Reconciliation Bill that's now law. So those are some you can track directly. Another big one for us is the Sentinel Intercontinental Ballistic Missile with our outstanding partner, Northrop, which I got to give accolades to. They're doing a hell of a job on Sentinel. Northrop is. Take a look at what Northrop is saying about Sentinel and you can basically flow that down to us. That's one we don't talk about, but that's a multi-hundred-million-dollar development program for us that's going to be ramping starting next year in '26 and '27. Then it will go into production. It will ramp even further. That's one you can track the funding on as well. So there are 4 or 5 where you're going to be able to track the funding flows top level and to Kratos pretty easily.

Our next question comes from the line of Andre Madrid of BTIG.

Looking at the down select on Valkyrie with the Luftwaffe, it was kind of telegraphed a couple of quarters ago, and you mentioned back then that it would be DCS versus FMS. How do you see this impacting the margin profile as that program ramps up? I mean it is a lot further out, but I'm just curious if you can maybe give some color as to the difference versus what it would have looked like under FMS.

Yeah. So I envision it's going to be very similar to what we're doing with our target drones. So with our target drones, when they're in full rate production, we make somewhere around 12% or 13% in the U.S. with the U.S. Federal Government. Internationally, we can make 20% to 25% internationally under a direct commercial. I'm not going to say it's going to be those exact numbers because I don't know yet. We're going through the [indiscernible] right now. But trajectory is, I believe it's going to be very similar to that because it is direct commercial.

Got it. Got it. That's very helpful. And then maybe just talking -- I know you mentioned fixed price mix earlier in the call. How should we expect that trend through the out years? I know it's been a big focus for this administration. And with the influx of new program starts, I guess, how do we expect this mix to shift?

There's a couple of large programs that we have that are cost type contracts. So as those increase, we could see some change between that. But I think predominantly, we're still going to be predominantly fixed price and with cost plus increasing, but I think it's still going to be substantially fixed price.

Got it. Got it. And if I could squeeze one more in. Norden Millimeter, maybe just explain a little bit more the logic behind the acquisition, how it fits into the bigger picture.

Yeah. So our Microwave Electronics business is currently headquartered the biggest piece is in Israel. It's one of our -- as we've talked about, it's one of our fastest-growing businesses, and it's accelerating because we're helping our partners replenish the missile systems. Up until 2015, Kratos had one of the largest merchant suppliers of microwave electronics in the United States. We sold that business in 2015 because very candidly, we were presented with a price that did a lot -- was very valuable to our shareholders. We were under a noncompete in the U.S. We could not reenter the U.S. microwave electronics market until don't quote me 2020-ish, something like that because we had signed that sale agreement. In 2021, 2022, our prime partners, who, as you know, we work very closely with started coming to me and saying, we'd really like you to get back into the microwave electronics business and be a merchant supplier for missiles and radars and aircraft, et cetera, et cetera, in the U.S. So we started building a team. We made a couple of small acquisitions, one of them being Norton and it's accelerating. I believe we are winning a lot. I don't talk about it. We don't talk about it. It's not time yet. But this time next year, I think we're going to be talking with you on programs we've won. And this is one of the highest, as you know, being a merchant supplier, microwave components and subsystems is one of the highest margins businesses out there. And this is an area, the microwave area and the communication area that if we were to do an acquisition, this is where we're going to do it. It will be under this Israeli-based U.S. microwave area because for all the reasons you can think of, we know the customers, we have the partners, we know the Ministry of Defense. We know the primes here. So this is a strategic thrust for us that we are being strongly encouraged by our customers and partners to go into and that they will give us programs.

[Operator Instructions] Our next question comes from the line of Colin Canfield of Cantor Fitzgerald.

I think we've done a good job kind of going through the manufacturing, scaling and JVs across production, quantities and volumes and dollars. But as we think about the potential of kind of going to market with a services component, how do you think about kind of the X-58 as potentially servicing as a good land and expand lever, especially as folks kind of consider force protection, intelligence and communications as kind of potentially systems and systems opportunity.

Brother, I'm not sure I understand the question. Are you asking how do I think about with the Valkyrie going to market in a service type structure? Is that what you said?

Yeah, it's the concept of considering the drone for commercial as we think about the international exports, right, and also the separate combat [ brigades ]. I think there's been a big focus on the U.S. side of doing production order quantities, right, and manufacturing type work. But at the end of the day, international partners are probably going to want more of a services type offer, right, like a package deal. So how do you kind of think about the X-58 as kind of being that point.

I got it. I got it. I'm not sure based on what we're seeing and what we're doing with our international customers, specifically related to Valkyrie and Air Wolf and another one that I'm not talking about that that's the case. Right now, what we're seeing, and I think this ties into state department approvals and MTCR, which no one talks about, but it's very important. I think what they're looking at is acquiring U.S. aircraft that are flying today that are ready to go and integrating their mission systems on it okay? And they're maintaining it with some of our support internationally. That's what we're -- what Kratos is seeing right now, more of a -- they get a flyaway aircraft. Fly away, it flies. They want for their specific mission application, their mission system or NATO's mission system, if you will, or a certain customer we're working with in the Pacific, their mission system, they want that on it. It will be integrated and delivered that way. That's what we're seeing.

Got it. Got it. And Open-source architecture is seemingly preferred.

Correct.

As you think about more kind of industry -- or excuse me, company-wide factors, how do you think about kind of maybe going through by each segment, engineering around and getting secured supply for rare earth minerals and metals.

That's a great question. So for the past couple of years, and we just did this again in the past couple of weeks, we go through with our 6 division presidents, and we do -- I don't want to say complete. We do as a complete scrub as we possibly can, not just what we're sourcing, but what our critical vendors are sourcing relative to rare earth, and we make an assessment of where our inventory is, where our safety stock is on those parts and components that are relevant and also our suppliers. So we're doing the best we can to stay on top of that relevant to our supply chain.

I would now like to turn the conference back to Eric DeMarco for closing remarks. Sir?

Excellent. Great. Thank you, everybody, for joining us. Great questions today. Great interaction. We really appreciate it, and we look forward to chatting with you again when we report Q3.