Good day, ladies and gentlemen, and welcome to the Kratos Defense & Security Solutions First Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Deborah Butera, Senior Vice President, General Counsel, Chief Compliance Officer and Secretary. Ma'am, please begin.

Good afternoon, everyone, and thank you for joining us for the Kratos Defense & Security Solutions first quarter 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 to make some brief introductory comments. Earlier this afternoon, we issued a press release, which outlines the topics we plan to discuss today. If anyone has not yet seen a copy of this press release, it is available on the Kratos' corporate website at www.kratosdefense.com. It is also available on the SEC's website. Additionally, I'd like to remind our listeners that this conference call is open to the media and we are providing a simultaneous webcast of this call for the public. A replay of our discussion will be available on the company's website later today. During this call, we will discuss some factors and matters that are likely to influence our business going forward. Any matters discussed today that are not historical facts, particularly comments regarding our future plans, objectives and expected future performance, and the potential impact of sequestrations, Federal Government shutdowns and the constraints on the Federal budget constitute forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those found in the Risk Factors section of our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, which could cause actual results to differ materially from those suggested by our forward-looking statements. We encourage all listeners to review our SEC filings, including our Annual Report on Form 10-K and any of our other SEC filings for a more complete description of these risks. All forward-looking statements are qualified in their entirety by this cautionary statement, and we undertake no…

Our first question will come from the line of Mike Crawford of B. Riley & Co. Your line is open. Mike Crawford - B. Riley & Co. LLC: Thank you. Eric, you mentioned your new 178 aircraft. I believe that's the fighter (24:13) jet for the Army. Can you talk about what your opportunity is with the Army versus what you're doing with the Air Force on programs like AFSAT and what the Navy with the sea skimming target and other potential programs? Eric M. DeMarco - President, Chief Executive Officer & Director: Yeah. The opportunity with the Army is probably somewhat less than AFSAT with Air Force or SSAT with Navy. However, internationally the opportunity is turning out to be much, much larger. And for example, we recently received a request from an existing customer for a ROM, a rough order of magnitude for over 100 aircraft. So this platform, the 178, at this time appears to have a much larger international potential than as relative to an Army potential and the other platforms relative to the Navy and the Air Force. Mike Crawford - B. Riley & Co. LLC: Okay. Thank you. And then AFSAT, I think they've been doing test flights at a lower cadence than in prior years. Is that... Eric M. DeMarco - President, Chief Executive Officer & Director: Yes because of the budgetary environment the OPTEMPO has slowed down in the last two years on the AFSAT program. It's gone from production of somewhere from 40 units to 50 units annually to somewhere, 20 units to 30 units annually. And that's just with the Air Force, that's not including international. Mike Crawford - B. Riley & Co. LLC: Okay. Thank you. And then just briefly on the satellite side. So one of the products you highlighted today is actually a product that was released last year, but the NeuralStar SQM sounds like a combination of Integral Systems, acquired 2011 and I believe SYS. So is that true? And are these still distinct divisions within the company at all? Eric M. DeMarco - President, Chief Executive Officer & Director: No, that is correct. The original NeuralStar cyber and network management program came – program software came from SYS. The other element came from Integral Systems. The cyber threat is both terrestrial and in space. We have combined those businesses to address certain customer needs. And it has turned into a very, very interesting opportunity for us. And we have recently completed some products specifically pointed to this opportunity. Mike Crawford - B. Riley & Co. LLC: Okay. Thank you. I'd love to ask about the strategic process but I guess you can't talk about it. So thank you. Eric M. DeMarco - President, Chief Executive Officer & Director: Thank you.

Our next question comes from the line of Michael Ciarmoli of KeyBanc Capital. Your line is open.

Hi. It's actually Kevin on for Mike. Good afternoon. Eric M. DeMarco - President, Chief Executive Officer & Director: Hi, Kevin.

Looking at the unmanned revenues, I guess looking into 2Q since AFSAT, seems like it was the biggest driver for the 1Q decline. I mean, should we expect since AFSAT is not expected to kick in until the third quarter that unmanned revenues are likely to kind of be at a similar level to the first quarter? Eric M. DeMarco - President, Chief Executive Officer & Director: No. No, because there's some international opportunities that – other ones that are out there that – look, the one we just landed we were supposed to get in Q4 we just got it. But there are two pretty large ones that can happen any time in the next six months. They could happen next month or they could happen in six months. And if they happen sooner rather than later there could be a pop.

Okay. That quickly even on the revenue line? Eric M. DeMarco - President, Chief Executive Officer & Director: Yes because we have so many opportunities for certain of our aircraft and 90%, 95% of them excluding pay loads are similar that we have built and we are building an inventory of these. So God willing when certain of the orders hit, we will be able to turn them relatively quickly, ship them and book the revenue.

Okay. Perfect. That makes sense. Eric M. DeMarco - President, Chief Executive Officer & Director: Yes sir.

And then looking at the R&D line, it looks like it came down fairly meaningfully sequentially, a little bit year-over-year. I mean, any color you can give on the expectations for the rest of the year on R&D. I mean, was there something specific in Q1 that rolled off maybe? Deanna Hom Lund - Chief Financial Officer & Executive Vice President: Kevin, this is Deanna. We do expect the R&D to increase sequentially from Q1 levels. So that was a temporary sequential decline.

Okay. Was that specific to maybe one or two programs? Or was it just kind of broad based in 1Q that it was down? Deanna Hom Lund - Chief Financial Officer & Executive Vice President: It was a couple of programs that specifically drove that.

Okay. And then, Eric, kind of a big picture one I guess. I mean, any updated thoughts from your side on kind of the budget process and how things are looking to shake out here as we get closer to the end of the government fiscal year? Eric M. DeMarco - President, Chief Executive Officer & Director: Yeah. On that last question you had on the R&D the biggest drop in the quarter was in UCAS. The aircraft are complete and integration has begun. Deanna Hom Lund - Chief Financial Officer & Executive Vice President: And some of the work that we had originally anticipated on the non-recurring IP investment that I spoke of, the $3.5 million, we had thought we would start some of that in the first quarter but that's really going to be ramping much more in the second and third quarter. So that's part of it as well.

Okay. So that'll flow through in the R&D line then? Deanna Hom Lund - Chief Financial Officer & Executive Vice President: Yeah. Eric M. DeMarco - President, Chief Executive Officer & Director: Yeah.

But you'll call that out specifically? Deanna Hom Lund - Chief Financial Officer & Executive Vice President: We will, yes. Eric M. DeMarco - President, Chief Executive Officer & Director: What was the other question?

I was just kind of asking for some updated thoughts from you on the budget process for the 2016 budget and what you're seeing there? Eric M. DeMarco - President, Chief Executive Officer & Director: Right. Well, right now as – right now we are seeing very strong bookings and very strong activity in the satellite communications side, the missile system and radar side, railgun, directed-energy and hypersonics that we are seeing significant activity in those areas right now. Relative to 2016, we are hearing all kinds of things. We are hearing that what the Republicans appear to be looking to present to the President with a base budget somewhere around what the Budget Control Act is, what an $80 billion or $90 billion OCO may get through. I was briefed late last week there is coming together behind the scenes. It's not Murray and it's not Ryan, but a Murray-Ryan II. So I don't know. I have no idea but my tummy tells me that because of what's going on from a national security and threat profile out there that some type of an agreement will be reached so we don't go back to a full sequestration level $500 billion or $496 billion budget.

Okay. Thanks. And then last one for me and I'll jump back in the queue. Just looking at free cash flow I mean is the expectation that we could see kind of flat to negative quarter in 2Q and then a big pickup in the back half of the year? Just programmatically and with the inventory build it kind of sounds like that's the way things will shake out, any color there? Deanna Hom Lund - Chief Financial Officer & Executive Vice President: Yes. Kevin, you're right on. So with the scheduled milestones and the inventory build and those shipments not expected to occur until the second half. As well we have the interest payment on the note in the second quarter. So yes, we do expect to see a use in the second quarter with significant generation in the second half.

Okay. Great. Thanks, Eric and Deanna. Eric M. DeMarco - President, Chief Executive Officer & Director: Yeah, Kevin, on Patriot we are right now building a number of systems. I'm not sure I'm allowed to say how many, a lot. And deliveries are scheduled to begin in Q3 and go for a number of months. So that is one of the, if not the primary drivers that we are building – we are literally building these systems right now.

Thanks for the detail. Eric M. DeMarco - President, Chief Executive Officer & Director: Yes, sir.

Our next question comes from the line of John Nelson of State of Wisconsin Investment Board. Your line is open.

Hi, Eric and Deanna. I was curious about the KPSS win rate, if it has – with your refocus on bigger projects and higher margin projects, has that seemed to change at all versus past experience? Eric M. DeMarco - President, Chief Executive Officer & Director: Yes. John, I don't know exact numbers but I think our win rate is probably increasing because we're not going after most if not all mid to large size security deployments. We're not going after them. And the smaller ones we typically have a very, very high win rate there. But I don't have the numbers at my fingertips but I believe our percentage win rate has probably increased, it's going to continue to increase because we're foregoing the bigger ones and the bigger ones are typically a lot more competitive because that gets the attention of some of the big maybe nontraditional security system deployment guys.

Okay. And then as far as in this latest quarter and to-date if you can talk about it, any new – any recent contracts won that are now being contested and any old contracts being contested that have been resolved? Eric M. DeMarco - President, Chief Executive Officer & Director: Yes. Yes and no. So let me answer the second one first. We still have not heard on that very large radar contract that we won that was protested and then it was determined to be re-procured. It's been re-procured, we've submitted the bid and we're waiting.

Okay. Eric M. DeMarco - President, Chief Executive Officer & Director: Okay. So that one is still out there. In this last quarter the reverse. We lost a contract. We protested it. Now it's on the other side. Oh and very importantly that's related to another one that down in the South we were teamed with somebody, lost, we protested it, our protest was sustained and we're continuing to work on the job.

Okay. Eric M. DeMarco - President, Chief Executive Officer & Director: So the protest environment, the GAO just put something out in the past week how protests are accelerating and they say they're actually going to re-look at the rules or the process, because what we've been experiencing, what others are experiencing is just ruining the procurement process.

Sure. Eric M. DeMarco - President, Chief Executive Officer & Director: But we'll see.

Okay. And then the last question is if you could look out two to three years, what do you think the defense unmanned aircraft markets might look like? And besides you, who else would be major players in it? And just give me a little brainstorming on your part on that. Eric M. DeMarco - President, Chief Executive Officer & Director: The number of high performance unmanned opportunities that we are starting to see in the past three or four months is accelerating rapidly. And these opportunities are from various agencies and it's related to a next or new generation of unmanned aerial system that can perform its mission in fully contested air space over long distances. I believe that this is going to accelerate rapidly and that the Predator, the Reaper will always be there for certain missions but those are going to, in my opinion – replaced is the wrong word, but there's going to be a next generation of jet powered, unmanned – aerial unmanned combat aircraft to do a number of missions. But the current fleets are not – they were not designed to perform in that fully contested environment. Looking out two or three years for us in the unmanned aerial and unmanned drone system area, I think it's going to be fantastic. As we've said we're under contract on what's going to be the largest program in our company's history, we're going to go into LRIP next year and that could be an incremental $100 million a year for us, a year beginning two or three years from now. We have a second one we're under contract on that's confidential, we're going to go into LRIP next year, that's all I can say about that. And then there's a third one that we're on that if it goes it could be equally as big. And those three don't include some of these new ones we're pursuing. So I think that the threat environment is driving this, the market is there and we're fortunate enough that we're on three very large opportunities.

Okay. Thank you. Eric M. DeMarco - President, Chief Executive Officer & Director: Thank you.

Our next question comes from the line of Eric Selle of SunTrust Robinson Humphrey. Your line is open.

Hi. Good afternoon. Getting to the guidance for the year and doing some quick math here, if EBITDA is flat to slightly down versus 2014, let's cuff that at around $80 million versus $82 million you did in 2014. And if I take the midpoint of guidance on Q2 that means the first half is going to run at about $27 million and you back into kind of $53 million in the back half EBITDA, which is twice the profitability in the first half. Can you guys give us the big drivers of that profit growth? Whether it be the employee savings, whether it be the unleashing of the non-pursuant (40:22) completion contracts? Just kind of what are the big buckets that drive us through that back half with significant growth? Eric M. DeMarco - President, Chief Executive Officer & Director: Right. So let's talk on the revenue side and then the profit side will fall out. So on the revenue side Patriot is a significant driver for us, DDG 1000 is going to be a big driver for us, Littoral Combat Ship, these are all under contract, is going to be a very big driver for us. In the satellite communication area, this is where probably the biggest is coming from, and these are ground command and control signal monitoring and signal intelligence products. Many are classified. We are going to be – we are ramping on a very large training system for our combat platform that we won last year. That is going to ramp up in the second half of this year. And I'm still on revenue, on EW, electronic products, we – as you know, we are on some very big programs, Trident II D5, EA-18G, P-8 Poseidon, SEWIP is going to ramp in the second half of this year as well. Again, these are all under contract. You may be following what's going on with the (42:03) upgrades. We are on SBIR. You may have seen what just came out today, that Northrop looks like they're going to be upgrading the B-1 with SBIR. That is us. So that is going to be driving revenue in the second half of the year and that will drive profitability. And then what will enhance that profitability is the cost cuts that we took in the first quarter of the year and the different bidding strategy we have in our Critical Infrastructure Security business where those margins – we've been running, Eric, since the beginning of the year a weekly and year-to-date gross margin in booking report. And I believe as of last Friday on the small and mid-size deployments, which is where we're focusing on, I believe the booking gross margin year-to-date was 34% or 33%. That's how we see it.

And then what about booking margin compared to last year for the whole? Eric M. DeMarco - President, Chief Executive Officer & Director: Last year I'm going to say it was mid-20% and I'm guessing but I'm going to say mid to low 20s% because we won a lot of large 20% security deployments primarily with some, not mass transit authorities, with some large critical infrastructure building deployments.

And then your guidance I assume does not include protested – so is your all that revenue is – there's no chance that any of that Patriot, DDG, combat ship, satellite, none of that can be protested? That's all beyond that phase? Eric M. DeMarco - President, Chief Executive Officer & Director: Every one that I mentioned is, I believe is, other than maybe one of those SBIR bids is beyond protest.

So you have a lot of confidence in that back half ramp? Eric M. DeMarco - President, Chief Executive Officer & Director: Oh yeah.

And then when we look at the head count cuts, what is the quantity or size of this head count cuts in savings? You paid I think just shy of a $1 million in severance. Is that a good proxy for the ongoing savings or could it be higher than that? Deanna Hom Lund - Chief Financial Officer & Executive Vice President: It's higher than that, Eric. So it's about 100 – it's a little over 100 heads for the quarter and rough order of magnitude it's about a $5 million to $6 million savings on an annualized basis.

That's around $50,000 per person, something like that? Deanna Hom Lund - Chief Financial Officer & Executive Vice President: Roughly. Yeah.

Okay. Okay. And then when we look at the – I know the first quarter was dampened by three programs that were – they weren't percent completion, they are upon delivery. Are all those hitting in the second quarter? And then you're backing? Deanna Hom Lund - Chief Financial Officer & Executive Vice President: No.

They're not. They're not so some of that's in the third quarter. Okay. Cool. Deanna Hom Lund - Chief Financial Officer & Executive Vice President: Yeah. Some of it's starting to – you'll see some of it in the end of the second quarter but not a lot. It's really the big driver you'll seeing in Q3 and Q4.

Okay. Great. And then just a final one, when you said second quarter revenue is slightly up, is that sequentially or year-over-year? Deanna Hom Lund - Chief Financial Officer & Executive Vice President: Sequentially.

Sequentially. So basically revenues stay low but to Eric's comment your gross margin on PSS is going to jump 50% from like 20% to 33%, something like that? Eric M. DeMarco - President, Chief Executive Officer & Director: No. It's going to jump. It is but also our mix on the government side in the missile area, the electromagnetic railgun area, the satellite and the electronic products area has been – is really good, it's really good in our backlog and in the bids. And so those gross margins are therefore going to be higher than we originally expected as well.

Okay. And awesome. And just while I've got you that $5 million to $6 million, 100 people we should get probably a three – that'll be – that's an annualized number so we can probably get $3 million in the back half? Deanna Hom Lund - Chief Financial Officer & Executive Vice President: Yeah. There about. Yeah.

Okay. Hey. Thanks a lot. Deanna Hom Lund - Chief Financial Officer & Executive Vice President: Sure. Eric M. DeMarco - President, Chief Executive Officer & Director: Thank you.

At this time, I would like to turn the call back over to Mr. Eric DeMarco, President and CEO, for closing remarks. Eric M. DeMarco - President, Chief Executive Officer & Director: Excellent. Thank you for joining us this afternoon. We will be chatting with you again soon. Thank you.