Kratos Defense & Security Solutions, Inc.

Good day, everyone, and welcome to Kratos Defense and Security Solutions Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To participate, you will need to press star 1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 1-1 again. Please note, this conference is being recorded. Now it's my pleasure to turn the call over to the Senior Vice President and General Counsel, Marie Mendoza. You may begin.

Thank you. Good afternoon, everyone. Thank you for joining us for the Creative Defense and Security Solutions fourth quarter and full year 2025 conference call. With me today is Eric DeMarco, Creative Assistant President and Chief Executive Officer, and Deanna Lund, Creative Assistant 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 a 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 they 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.

Good afternoon, everyone. We finished 2025 exceeding our financial objectives for the fourth quarter, generating approximately 20% Q4 year-over-year organic revenue growth, generating a 1.3 to 1 book-to-bill ratio on top of this 20% growth rate, having a record backlog of 1,573,000,000, a record opportunity pipeline of 13.7 billion, and with the opportunity set for Kratos having never been stronger and expected to continue to increase based on recent events. Of note, generating a 1.3 to 1 book-to-bill ratio on top of 20% organic growth while also maintaining a record high backlog and record high opportunity pipeline, we believe is representative of the increasing demand for Kratos' affordable military-grade hardware and software. and that our growth trajectory is accelerating. Kratos is positioned to achieve our previously communicated 2026 and 2027 financial targets, and similar to 2025, our Q1 will be the lowest, including as we come off another CRA, and also this time a government shutdown, both of which are now resolved, and we will ramp throughout the year. Since our last report, The global national security opportunity and funding environment for the industry and for Kratos has continued to improve, including, as I mentioned, both the CRA and U.S. federal government shutdown being resolved, the 2026 NDAA being signed, the fiscal 26 defense appropriations bill being signed, and the president, the chairman of the SASC, the chairman of the SASC, each proposing future defense budget increases of approximately 50%, up to $1.5 trillion. Additionally, discussions have already begun on a second additional 2026 reconciliation bill, including a potential additional $450 billion for defense. There is a generational recapitalization of the defense industrial base underway, driven by geopolitical and related global threat environment, a recapitalization that we believe Kratos is uniquely qualified to address, with defense and national security-related budgets of the U.S. and its allies expected to increase for the foreseeable future. Crisply stated, we now have a $1 trillion annual defense spend that is expected to increase for the foreseeable future, and as a result of the defense industry consolidation, which began with the infamous DOD Last Supper in 1993. There are few qualified companies with proven capabilities to address the required military-grade hardware, software, and weapon systems demand. Kratos is one of the few non-large traditional prime contractors, which in my opinion is qualified to adequately address this demand. With Kratos having the right products at the right time at the right cost points now and today, And this is being reflected in our organic growth rate and our financial results. Also importantly, the Secretary of War has emphasized that he wants industry to bring to the department relevant systems now, systems that can achieve 85% of what is needed today, not a PowerPoint of an exquisite system at maybe some days 100% potential threshold at a ridiculous high cost. As you know, pillars of Kratos' strategy since we founded our company include better is the enemy of good enough and ready to field today and affordability as a technology, both of which I believe are aligned with the Secretary's comments and clear differentiators of Kratos in today's environment. Another Kratos strategy pillar also since our inception is that Kratos makes true internally funded investments ahead of government funding, enabling Kratos to move fast, efficiently, and affordably for manufacturing capability and relevant products for the warfighter. Additionally, Kratos' practice of not paying dividends or buying back our stock, but of investing our capital in the defense industrial base, is also aligned with the vision of the current administration and also the related opportunity environment. which Kratos is realizing the benefit from. Kratos' strategy of being first to market with actual relevant products is clearly a differentiator to our customers and partners, as we are seeing firsthand with the demand for Kratos' jet drones, hypersonic systems, jet engines, satellite-defined software systems, and solid rocket motors. Having products and not PowerPoints is clearly important now more than ever, and I believe that this trend is accelerating. Engineering, manufacturing, and delivering affordable, relevant, military-grade hardware at scale that must work every time is hard, and having this capability does not occur overnight. We have been at this for a long time, and Kratos' customers and partners recognize this. The time for PowerPoints, podcasts, and science projects is over. We are out of time. The country is moving towards wartime footing, and Kratos is ready now for our operational update. We now have 120 Kratos, Zeus, and Oriel solid rocket motors on order, with deliveries of the SRMs to Kratos for system integration expected to begin in Q3 of this year, which SRMs are directly related to either under program, contract, or expected hypersonic and other launches that we plan to perform. Related to these solid rocket motor orders, Kratos' hypersonic franchise is expected to ramp rapidly beginning now this year. Kratos' Zeus solid rocket motors were specifically designed by Kratos for affordable, rapid, full-rate production to enable national security customers to fly more often, faster, and farther using fewer rocket motor stages at a substantially reduced cost, and demand for Kratos' Zeus SRMs is significant. Our newly opened Maryland hypersonic facility, our soon-to-open Indiana hypersonic system integration facility, and the expansion of our Birmingham Advanced Manufacturing facility for hypersonic systems, along with the solid rocket motor deliveries, are key elements of Kratos' expected near-term and future revenue growth trajectory, and EBITDA increase. These new Kratos facilities are specifically designed and built for identified programs and systems and the related security requirements with specific capabilities identified with our customers and optimized for large-scale integration and production speed, efficiency, and cost. It was recently reported that Kratos has been selected by the Pentagon to develop highly maneuverable Mach 5 plus hypersonic missiles, including advancing in-flight steering and propulsion systems under the Joint Hypersonic Transition Office, another new hypersonic program win for Kratos. And separately, we are now hoping to receive an additional approximate $1 billion plus hypersonic program-related opportunity by the end of this year, which we believe will be sole source to Kratos as prime on an existing national security initiative. We are expecting to approximately double Kratos' hypersonic franchise revenues in 2026 over 2025, up to approximately 400 million, and then potentially increase over 75% again in 27, up to approximately 700 million. Last week, we announced the groundbreaking for the Prometheus facility, our solid rocket motor and energetics partnership with our outstanding partner and defense technology company, Rafael, and we remain on track with the business plan I previously briefed you on. Kratos and I personally have deep long-term relationships with the Rafael Israel executives, including the chairman and CEO, and we are all committed to Prometheus' success and certain other initiatives we are partnering on. Reflecting the Prometheus initiatives coordination with the Department of War, the Department last week also announced the groundbreaking of a new munitions campus where Prometheus is located, and Prometheus will be the primary business presence. Kratos's space and satellite business, our company's largest, recently achieved an important milestone with the successful completion of a factory acceptance testing between Kratos' EPIC command and control software system and Airbus One SAT Next Generation software-defined satellite platform. The Airbus One SAT software-defined satellite platform offers dynamic in-orbit reconfiguration capabilities, significantly increasing satellite mission capabilities and flexibility, which drive new levels of complexity for the ground command and control systems that manage them. The significance of this successful acceptance test with Airbus is that Kratos' epic C2 software is expected to unlock the agility of Airbus' 1SAT platform, enabling operators to instantly reshape coverage and reconfigure the missions in orbit. Kratos' open space software C2 and TT&C system with Airbus OneSat software to find satellites is representative of Kratos' technology and industry-leading position in the space and satellite domain. Kratos' space and satellite business is also representative of the dual national security and commercial use of certain Kratos products, systems, and software. These are not PowerPoints or convenient talking points. We actually do it. In my opinion, Kratos' suite of internally funded and developed software-defined command and control and telemetry tracking and control and other systems, both for commercial and national security spacecraft, reflect certain of the highest technology space capabilities in the world, with Kratos the clear, first-to-market industry leader with software-defined systems and products. Similarly, Kratos' global-owned and operated space demand awareness system with approximately 190 worldwide sensors and more than 20 sites, is a Kratos crown jewel and one of the most valuable technologically advanced dual-use assets of our company. Another critically important Kratos partner is global space solutions company SES, which in my opinion, similar to Kratos, is an industry-leading satellite and space technology company. Kratos and SES are now working together on a number of initiatives, including dual use, both commercial and national security focused. And I am confident that similar to other Kratos partnerships, SES and Kratos will together be providing significant relevant technology and industry leading solutions, generating real tangible value for our respective stakeholders. Key Kratos assets driving our space and satellite business including our open space TT&C software, C2 software, other software, and artificial intelligence, including for Kratos' global space domain awareness system, which is the only such SDA system in the world today. I do not emphasize it often. Kratos' open space satellite and space system focus software is the only software-defined networking solution designed so that virtually every piece of the satellite ground station can now be turned into software, accelerating the reaction time to changing satellite capabilities and space conditions. Kratos OpenSpace is one of the software jewels of our company. As you know, the number of space and satellite opportunities globally, national security-related and commercial, is rapidly increasing, and as a result, Kratos' space and satellite business opportunity pipeline is particularly robust, even after generating a fourth quarter and 12-month book-to-bill ratio of 1.2 to 1, and now having a record backlog of 600 million at the end of Q4. Related to the market position of Kratos' technology and first-to-market open space satellite software suite, Kratos has recently been informed that we have been selected for an initial approximate $500 million program award that I will hopefully be able to provide additional information on a future call. Similar to what we typically see at most of Kratos' calendar fiscal year ends, and as we saw again at the end of 25, certain Kratos' satellite and space customers, similar to commercial software companies, historically make software, data, and other Kratos product purchases in the October, November, and December time period. generating higher margins for our company, which we once again expect and forecast to occur in Q4 26. The Department of War has recently established a new acquisition model to expand munitions procurement and production, including delivering long-term demand signal certainty to the industry and incentivizing private investment to increase production. Related to this initiative, The Department of War has executed multiple up to seven-year deals, including with Lockheed and Raytheon for air defense, missile-related and other systems, including several programs that Kratos supports. And Northrop also recently announced that the Integrated Battle Command System, or IBCS, another Kratos hardware-supported program, is moving towards increased production. Kratos is an industry leader in high-volume manufacturing of military-grade hardware and systems, including hardware with high-altitude electromagnetic pulse protection, an important Kratos technology differentiator, and we are a go-to provider of hardware for our national security-related customers and partners. Accordingly, we applaud the Department of War on these long-term production agreements and plans, which clarity provides companies like Kratos, the long-term planning visibility for investment, resource allocation, and financial forecasting confidence. In Kratos Turbine Technologies and our engine business, there are several new low-cost cruise missile, drone, hypersonic, and loitering munition programs and systems that require next-generation new technology engines and propulsion systems. And here again, Kratos is first to market including with our Spartan family of jet engines, which are running and flying today. We continue to win important new engine-related program awards, including what we were able to report this morning, that Kratos and our partner GE Aerospace have now received an award from the Air Force to design an engine for the Expendable Combat Collaborative Aircraft, or CCA. I can now also report that Kratos expects to begin low-rate initial production of small engines in the second half of this year for certain missile programs, and we are also currently responding to a customer-requested rough order of magnitude quote for 15,000 engines for a system that has been specifically designed around a Kratos Spartan jet engine. Directly related to the expected future quantities of low-cost missiles, drones, and powered munitions required, we are now in our new 40,000 engine per year capacity facility in Michigan. The expected ramp in our engine and propulsion system businesses, which can generate certain of our company's highest margins, including from the financial leverage we expect to realize on certain fixed manufacturing, overhead, and other costs as the business ramps, are expected to be contributors to our expected increased overall rate of EBITDA margins as we progress through 26 and into 27. We continue to execute on the new industrial gas turbine, or IGT program I mentioned on our last call, which we are under an NDA on, but there has been important information reported publicly, including on CNBC, which such program, if successful, could be a significant future catalyst opportunity for Kratos. Since our last update call, Kratos Turbine Technologies is now under contract in the high-profile eVTOL area under what we refer to internally as Project Pegasus, where Kratos is designing and is expected to deliver propulsion systems, including for a very well-known eVTOL company. Kratos' technology and propulsion systems in the eVTOL area is another representative example of Kratos being a provider of real dual-use products. Kratos Microwave Electronics is also expected future high-growth business area for our company, including in the U.S., Israel, and elsewhere internationally, both organic and inorganic, that is also currently expected to continue to generate certain of the highest profit margins in our company. As you know, Kratos Microwave has several hundred employees in Israel, where Kratos is working with certain of the most technologically advanced companies in the world. And I recently met in Israel with my very close partners, including the CEOs of Elbit, Rafael, and Israeli Aerospace Industries, each of which Kratos has been working with for decades. Simply stated, virtually every national security system globally needs military-grade microwave electronics, and we are focused on investing in and growing this business area to support our partners. Consistent with our expectations and what we communicated in our Q3 update call, we recently announced that our teammate Northrop received the MUX-TAC-AIR Collaborative Combat Aircraft, or CCA, Program Award, with Kratos Valkyrie as the CCA aircraft equipped with Northrop's mission systems. It was also reported that MUX-TAC Air was a competitive CCA solicitation that Kratos' Valkyrie won and was selected for. As I have mentioned before, Northrop is an incredibly valuable partner of Kratos and one of the most innovative technology companies in the industry, and this includes the new defense technology companies. As reported, this initial MUX-TAC-ERA award is approximately $230 million and will be split approximately 50-50 between Kratos and Northrup with an approximate 24-month period of performance also consistent with our previous expectations. As a reminder, there is initial MUX-TAC-ERA funding of approximately $275 million included in the 2025 reconciliation bill and an additional $58 million included in the 26 appropriations bill. This is expected to be just the beginning for this program. As I have previously communicated in detail, this initial award includes the sale of a number of alkali systems, but this is not yet high rate production, which is expected to come next. There has been a lot of information reported on the Marine Corps program of record and Valkyrie being the first CCA expected to be fielded. I encourage you to take a look at this data as I believe it validates the current favorable competitive positioning of Kratos Valkyrie and the future expectations that we have for this system. Importantly, We have now also successfully received another separate US tactical drone program of record contract award, though we are not allowed to provide any details at this time. Additionally, I believe that we are in a sole source position for two additional tactical drone opportunities, including for Valkyrie, which we will hopefully receive in late Q4 this year. We are also in another competitive CCA solicitation with the Valkyrie and a partner, which we also currently expect to be notified on by the end of this year or early next. As a result of our recent progress, we intend to execute a plan to increase our Valkyrie production from a current approximately eight aircraft annually up to a projected annual production rate of approximately 40 aircraft annually by the end of 28. We currently expect to have definitized with our customers later this year or early next, the production quantities of Valkyrie required to be contractually delivered and the timing of these deliveries, which in part will be related to the 2027 federal budget defense appropriation and when it is approved. At a planned production rate of approximately 40 Valkyries annually, We believe that we will be well positioned to address expected current under program customer required delivery schedules once definitized, while also maintaining an adequate number of whitetail aircraft in inventory to be able to continue to address RDT&E, S&T, and potential new customer requirements. We will continue to include in Kratos' base case financial forecasts as we provided today, only the RDT&E and S&T Valkyrie sales quantity levels until we have definitive production funding and delivery schedules so that we can accurately forecast expected larger quantities by fiscal quarter and fiscal year. In summary, the Marines are expected to field the first CCA. We will not let them down, and we will keep you informed with the progress to the extent we are able to discuss. Kratos recently received a gauntlet award under the Department of War's $1 billion drone dominance plan to acquire small lethal drones over the next two years. We have a family of small drones in this class that we have not discussed previously. This is a phase one award. This program is scheduled to move very rapidly, and if we continue to be successful in future phases, drone dominance could be another meaningful program to our company. Kratos' Mighty Hornet Tactical Fire Jet CCA program initiative continues to progress with the Taiwan NCSIST, and we have certain future flight-related milestones we need to achieve with the potential production decision possible late this year or early next. As was recently reported with the Taiwan NCSIST, the ultimate objective of this program is for very high quantities of affordable mass fleet of Mighty Hornet IV systems to be deployed in Taiwan. Kratos' Athena program and UAS has had additional successful flights under contract with the U.S. customer. As I believe you can see, the tactical drone opportunity is happening real time for Kratos, that this is occurring as a result of the threat and that the customers believe that they're out of time and that they need to field relevant systems now. Kratos' Anaconda radar, Helios hypersonic system-related arc jet, Promethea solid rocket motor and energetics, BladeWorks jet engine, and our new Poseidon program facility are all expected to be coming online over the next 24 months, contributing to the expected future growth, margin, and value increases for the business. New initiatives that Kratos is currently either pursuing or assessing that I can mention include Kraken and Ares, both in the hypersonic area, Vulcan in the rocket system area, and Elysium, which is the largest, and for competitive reasons, I will not get into it this time. Each of these, if successful, have either customer or partner backing. Kratos' business plan remains unchanged. including that we do not buy back stock or pay dividends, but rather we invest our capital in rebuilding our country's defense industrial base, rapidly developing, producing, and delivering affordable, relevant systems to the warfighter and generating a financial return for our investors. As Deanna will discuss, we have closed on a small tuck in acquisition, Nomad Global Communications Solutions, a technology, hardware, and systems company focused on mobile command, control, and communication systems, including as related to unmanned systems, counter UAS, homeland security, and some other systems. NOMAD was a negotiated transaction between Kratos and the NOMAD owners, consistent with the type of opportunities Kratos continues to be approached with. We continue to expect the previously announced acquisition of Israeli-based satellite communications company Orbit Technologies, which forecasted financial performance is not included in the guidance we provided today to close by the end of Q1. Once Orbit closes, we will include them in our forecasting. Deanna?

Thank you, Eric. Good afternoon. As we have included a detailed summary of the fourth quarter and full year 2025 financial performance, as well as the initial first quarter and 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 fourth quarter were $345.1 million above our estimated range of $320 to $330 million with overachievement of forecasted revenues across the majority of our businesses with a revenue organic growth rate of 20% over the fourth quarter of 2024 as compared to our estimated organic growth rate of 14 to 15%. The largest contributors to the overachievement were our space and satellite turbine technologies, C5ISR, and microwave products businesses. Notable year-over-year organic revenue growth was reported in our defense rocket support, microwave products, and space training and cyber businesses with organic revenue growth rates of 47.4% 32.4% and 22.7% respectively. Adjusted EBITDA for the fourth quarter of 25 was 34.1 million, just above the high end of our estimated range of 29 to 34 million, reflecting the increased volume and revenue mix offset partially by continued increased subcontractor and material costs on certain multi-year fixed price contracts in our unmanned systems business, revenue mix, an elevated bid proposal, and other new opportunity pursuit costs. Unmanned Systems' fourth quarter 25 revenue was up $7.4 million, or 12.1% organically, with the increase primarily driven by voucher-related activity. KGS' fourth quarter 25 revenue was up $54.6 million year-over-year from the fourth quarter of 24, with organic revenue growth of 22.2%. excluding the impact of the February 25 acquisition of certain assets of Norton Millimeter Inc. Fourth quarter 25 cash flow generated by operations was $12.1 million, primarily reflecting the working capital requirements related to the revenue growth impacting our receivables by approximately $29 million and increases in inventory of $20 million and increases in other assets of approximately $3 million. primarily reflecting investments we are continuing to make related to certain development initiatives in our unmanned systems business. Free cash flow used in operations for the fourth quarter of 25 was 100,000, after reflecting funding of 24.2 million of capital expenditures, net of 12 million in proceeds from the sale of Valkyries, which were reported as company-owned capital assets and previously 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 day sales outstanding, increased from 111 days in the third quarter to 121 days, reflecting the nearly 22% revenue growth and the timing of milestone billings and contractual funding. The impact of the federal government shutdown and its impact on government program, administrative, and other offices and functions was more significant than we had anticipated. which has resulted in the delay in timing of certain contract funding and certain expected government contract receivable payment dates to be delayed, resulting in an increase in customer accounts receivable day sales outstanding. Our contract mix for the fourth quarter of 25 was 70% of revenues from fixed price contracts, 26% from cost type contracts, and 4% from time and material contracts. Revenues generated from contracts with the U.S. federal government during the fourth quarter were approximately 67%, including revenues generated from contracts with the DOW and non-DOW federal government agencies and FMS contracts. Now moving on to financial guidance. Our financial guidance we provided today includes our expectations and assumptions for our supply chain's execution, the impact of employee sourcing, hiring, retention, and the related cost. Our first quarter and full year 26 guidance includes the estimated contribution from the recently closed Nomad Global Communications Solutions acquisition from the date of acquisition, which closed in mid-February. As Eric mentioned earlier, we have not included the estimated impact of the pending Orbit Technologies acquisition in our guidance and will not do so until it is closed. We expect our first quarter 26 guidance to be the lowest in revenue and adjusted EBITDA, which includes the impact of the extended U.S. federal government shutdown in the fourth quarter of 25 with impacts to certain contract awards program and funding. Our first quarter revenue guidance of $335 to $345 million reflects estimated organic growth of 7.5% to 9.5% as compared to the first quarter of 2025. Our adjusted EBITDA guidance of 25 to 30 million 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 26 growth. Our full year 26 revenue guidance is 1.59 to 1.675 billion, which reflects an organic growth rate of 12.7% to 18.5% over 2025 actual performance, which came in higher than our previous full-year 2025 estimate. Our guidance continues to include the impact of increased material and subcontractor costs on certain of our multi-year 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 lot contracts occurs. We are continuing to aggressively manage costs where we can to minimize the impact to our margins. Our 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 and related prepaid asset balances as we ramp production and procure long-lead materials for our target and tactical drones, solid rocket motors, and our turbofan and turbojet engines. Kratos' operating cash flow guidance also assumes certain investments in our rocket systems and unmanned systems businesses related to the procurement of rocket and related systems and our plan to begin producing approximately 40 Valkyries annually beginning by the end of 2027, as well as the completion of certain of our unmanned systems and related derivatives and vehicles. Additional forecasts and investments in 2026 include our funding of the Prometheus joint venture established last year, which we estimate will be ratably throughout 2026, or an aggregate for the year of approximately $50 million, funding of the pending orbit technologies acquisition, our Anaconda radar program, our Helios hypersonic and arc chamber program, our Indiana hypersonic integration facility, our GEK and BladeWorks engine facilities, and our Vulcan, Kraken, Elysium, Nemesis, Hermes, and other initiatives. Our forecasted capital expenditures of $135 to $145 million for 2026 includes approximately $30 to $35 million, which was originally forecasted for 2025, which has moved to the right.

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

Thank you so much. And as a reminder, to ask a question, simply press star 11 on your telephone and wait for your name to be announced. To remove yourself, press star 11 again. One moment while we compile the Q&A roster. Our first question comes from the line of Josh Sullivan with Jones Trading. Please proceed.

Good evening. Eric, Deanna.

Hey, Josh. Good afternoon.

If I could just start off with a question and leave you some of your perspectives on defense tech valuations in the market, reports of Andrew Roll reportedly at $60 billion, $3 billion in funding. What do you think that means for Kratos? And what would an order of magnitude of nearly $8 billion allow Kratos to accelerate? You just mentioned a number of programs and wins you're working on. And then tied in with the Secretary's comments you also mentioned.

Okay. So I believe that Kratos is the most valuable defense company in the industry, private or public. I'm taking nothing away from Andrew or any of the other defense tech companies. I want them to all succeed for U.S. national security. But we're the most valuable, and I can go through that if you'd like me to. On the second part of your question, We all have different strategies and business plans. Our business plan is to be balanced as best we can, drive organic growth like we're doing, invest significant amounts to rebuild the industrial base like we're doing, but always be mindful of generating an adequate return on investment for the investors. So that's how I see it, Josh.

Got it. And then I guess just on Kratos partnership with boom and the superpower IGP, you know, I know there's an order from Crusoe for 29 units and tie-ins with open AI, but what can you say about other customers and backlogs at this point, since you've announced.

Right. Um, yeah, so, so thank you for the question. As I mentioned, take a look at the, uh, there was a, there was an interview on, um, CNBC by the CEO of boom. Blake Scholl, where he walked through the opportunity that we have here. Now to your question, Josh. When Kratos acquired Florida Turbine in 2019, the primary business of Florida Turbine was industrial gas turbines. That's our expertise, Kratos'. We have not been focused on it and talking about it because we've put our engineering team on low-cost engines. for cruise missiles and drones. The market has definitely come our way now on the industrial gas turbine area, and we are moving out on this aggressively. Our number one priority is to do it with our partner, but this is an area of expertise for us, and we are a merchant supplier, and there are multiple companies in this area that are coming to us now for our assistance.

And then just one last one on the THAAD order you mentioned. Can you just remind us of Kratos exposure on the ground and infrastructure equipment?

Yeah, so as I alluded to in the remarks, the Department of War moving out with the big primes on the air defense systems and the missile systems, Lockheed and Raytheon, multiple platforms on each one of them, I mentioned Northrop looking to, I think they said they're going to go up 4X on their integrated battle command system platform. Kratos is the merchant supplier to each one of those guys and many others for the ground infrastructure, for radars, command and control systems, battle command systems, et cetera, et cetera, for virtually every missile and radar system. So this is significant for Kratos, for our business, And for our clarity going forward, these long-term, I'll call them supplier commitment agreements the Department of War is doing with the Prime, because we're partnered with the Primes on, as you said, THAAD and Patriot and indirect fires, IFPIC, on integrated battle command system, on SURE-RAD. I could go on and on. This is important for us, what is happening here.

Great. Thank you for your time.

Thank you.

Thank you. Our next question comes from the line of Michael Charmoly with Truist Securities. Please proceed.

Hey, Eric, Diana, good evening. Nice results, and thanks for all of this detail, especially the CapEx bridge. Eric or Deanna, is this the capex peak, do you think? Or are we just getting started here? And I mean, are you comfortable with the balance sheet? I think post-orbit, you'll have roughly $200 million in cash. You know, I think obviously spending your own money, not doing buybacks or dividends, clearly aligned. But have you talked or engaged with the Department of War or even Office of Strategic Capital? I mean, there's been some pretty creative transactions out there. Just curious in terms of color there.

Yeah, Mike, thanks for the question. So the CapEx table that we've included in the press release is on the gross side. So it does not include potential government, whether it be federal or state funding that we may receive that we are working on a parallel path. So we've tried to present what we think is the worst case for 2026.

Got it.

Yeah, and Mike, a data point on that, take a look. ANZRUEL announced yesterday or the day before they just received another $40 or $45 million in Title III funding. Kratos is right in the middle of that on Title III funding, on IBAS funding, et cetera. And as Deanna said, we're throwing the gross number out there, but I believe you'll see a significant number of offsets this year.

Okay, that's good to know. And then, Eric, this one might be a tough one, but of all these initiatives and these CapEx projects, I mean, what in your view offers the most potential for revenue growth EBITDA generation? And I don't know if it's easy to maybe tie it to the $13.7 billion pipeline you talked about, but anything jumping off the page there?

Yep. The hypersonic franchise, Mike. Obviously, I was in Indiana this week. I was at Crane for the groundbreaking of Prometheus. And right next to where we were breaking ground is Kratos's hypersonic integration facility that's 90% complete. Right next to that, we've broken ground on Anaconda. And behind it, we're going to break ground on Helios. Our hypersonic franchise, the programs we have, the additional funding we expect to get, and the demand to test fly, test fly, is so significant. And in our base case, this will drive our growth trajectory and our profitability for the foreseeable future.

Okay, that's helpful. So that $700 million line of sight you talked to, I mean, it sounds like there could be upside to that based on breaking ground.

Absolutely. No question. If we were to get a 27 appropriations bill kind of sort of on time instead of a four-month continuing resolution, that would be a home run for Kratos.

Got it. Okay. Good stuff. I'll get out of the way here. There's a lot of detail there that you've given, but thanks for the call, guys.

Thank you. Thanks, Mike.

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

Hey, guys. Thanks for the question. Eric, I just want to talk on the Marine Corps program for Valkyrie. Can you just give us a little bit of color? I thought it was a little bit surprising that you guys aren't the prime and Northrop is. Can you just talk a little bit why that's the case?

Absolutely. We are in it to win it. And if that means being the prime, like we are on some of the other ones I mentioned, we're going to do that. I mentioned that we've won another CCA program, type program, but we can be the prime. where it makes more sense for us to be the sub, we will be the sub. Northrop Grumman has certain mission systems that are fantastic. And they have been working on these and investing in these specifically related to the Valkyrie for a long, long time. And they expect to continue to do that going forward. We have a strategy here with Northrop relative to the Valkyrie that goes far beyond the Marine Corps. And very candidly, I believe our probability of winning at all is much higher with Northrop as the prime than if Kratos was the prime. Additionally, it reduces risk to Kratos on the integration of those very exquisite capability, but not necessarily in cost, mission systems that Northrop is putting on. It's a risk reduction for Kratos. And we are getting a full-stop profit margin on the aircraft. And last point, I'm really glad you asked this. Last point, we are kind of sort of turning into the merchant supplier of tactical jet drones because we're the only guy that has anything flying right now. You've got some of these new guys that have done a few flights. Ours have been flying since 2019, 2015 on the make-up. And since we're the only guy, the mission system companies are coming to us. And if the mission system guys want to be prime, and that means we can sell more airplanes faster, that's what we're going to do.

Okay, and that makes sense. Eric, I think that you had talked about in the past that being $10 million a copy, is that the right way for us to continue to think about it with Northrop as the prime and 50-50 split of the revenue so you guys are $5 million of content per aircraft?

That's not that is that is no no don't don't look at it that way nope nope ten look at ten million dollars per aircraft for Kratos Okay might be a little less Might be a little more depending on the configuration as you know we have we have three different Valkyries now that are three different ones rail launched trolley launched conventional takeoff and landing So depending on the type of aircraft, it might move around a bit, but if you use 10, you're in good shape for Kratos.

Okay. Okay. That's incredibly helpful. And then the last one for me, Eric, like you've outlined a ton of different opportunities here. Like hypersonics alone, I think is 10% growth. I recognize that you don't have the scaled production of Valkyrie and the numbers yet, but is there anything significant that we should know about that's rolling off over the next couple of years? Because it seems to me like the growth that you're outlining is pretty large, maybe above the 20% that you're talking about.

There is nothing of significance rolling off. We have zero re-competes of any size for the foreseeable future. We won the last one last year, command and control of the space segment, for seven plus years. We are in a very fortunate position because we're a hardware company and an intellectual property company.

Okay, great. Thank you, Eric.

Thank you.

Thank you. Our next question comes from the line of Mike Crawford with B Riley Securities. Please proceed.

Thank you. I hope you're doing well in that gauntlet competition that started five days ago. Can you just talk a little bit more about what you offer with small drones and if you have any capabilities in the counter UAS area?

I'm sorry, Mike. We have a family of small drones, Class I drones, some Class II drones that we just haven't been talking about. that we have primarily been working with the United States Army on for multiple, multiple years. And very candidly, you have not heard me talk about this one because I was not sure we were going to be successful in the first round. And we were. And the way this works is In summary, there are different phases, phase one, phase two, phase three, etc. And the winners of the initial phase, which we are, we can pick our spot when we want to bring our suite of airplanes in, our drones in, based on the requirement of the phase. So I don't want to get ahead of myself, but we... we feel pretty good about this, especially as the phases progress. And as they progress, they are more in line with our differentiating capabilities. And that's really all I should say about it because it's literally, as you said, we're going to be going out there very, very soon if we continue with phase one.

And then, Owen, So these would be more offensive drones?

Yes.

And so you're not involved in the counter UAS phase of that competition?

I've been focused on the offensive one, Mike. And so we're focused on the relative to the drone dominance program. We are focused on the offensive one. We are involved in several other counter UAS programs. where we are building hardware, and we have initiatives where Kratos has tethered drones, not the fiber optic ones, not the first person view fiber optic, but tethered drones that are involved in CUAS capabilities.

Okay, thank you. Just one more for me. Can you just go a little bit into... the capabilities that you've gained with Nomad and maybe potential LCM revenue that that business had?

Yeah. So on the business side, in my opinion, this is one of Kratos' one plus one equals fours. They do mobile systems. And as we know from recent conflicts, if you're static, you're dead. And so there are a significant number of programs coming, a number of which Nomad has won, many more of which we intend for them to win with us, for mobile command and control systems, mobile counter UAS systems, mobile systems to control offensive UAVs, and this one I'm going to be careful on, mobile systems relative to And that is the business objective we saw for Nomad. I'll let Deanna comment on the financial piece.

Yeah, so LTM fiscal year revenue is about $75 million, Mike.

Okay, excellent. Thank you very much.

Thank you. Our next question comes from the line of John Sigmund with Stifel. Please proceed.

Hey, guys. This is Brock on for John tonight. Appreciate the question. You touched on it earlier, but you recently announced a successful test of the Mighty Hornet system. I just wanted to know if you had any more details around your timing there and planning capacity in Taiwan for this project and then how you're going to be recognizing revenue from the program.

I'll leave that last part for Deanna. So on the first part, let me be just very, very crisp on this. We have flight demonstrations that we're preparing for where we have to do something. Our understanding is that if we are successful there, we have done something like this before, so this is not a bleeding edge type of a thing, that a production decision will be made in the second half of this year, Q4. I believe the Taiwan agency that we're working with, they did an interview, I think, at the Singapore Air Show a few weeks ago, I think, where I saw this, where they have said that they are looking for hundreds, if not thousands, of these and to be deployed ASAP as a deterrence. So that is the extent of what I can discuss with you right now. I'd like to emphasize the reason why we've won where we are. We are where we are is because our tactical fire jet and our Airwolf small tactical jet drones have been flying for a long time. They are both in production. The customer comes to the factory. They can see them in production. They can actually see the cost buildup so they know what they're gonna cost, and we can give them actual flight performance data. And we're seeing this more and more now. As I mentioned in my remarks, many customers feel that they're out of time and they need to start fielding things now in order to defer, to deter, and that's where we are on Mighty Hornet.

And as far as your question on revenue recognition, that will depend on the contractual terms that are negotiated. So clearly on the services, on the demonstrations, that's going to be as performed. But for aircraft, it's going to depend on the contractual terms of whether it would be percentage completion or at delivery. So it will be dependent on that.

Okay, great. Thanks for the call, guys. I'll go ahead and hand it back over.

Thank you. Our next question comes from the line of Ken Herbert with RBC Capital Markets. Please proceed.

Yeah, hi, good afternoon, Eric and Deanna. Hey, Eric, you talked about the funding backdrop and the supplemental, the $450 billion that sounds like will get requested and debated here this spring. How do we think about your top line organic growth numbers you've put out? Maybe if we are in a $1.5 trillion potential for fiscal 27 relative to a sort of a, you know, maybe low to mid single-digit growth in defense spending all in? I mean, it sounds like you're going to hit your numbers even if defense spending comes in at slight growth relative to fiscal 26 and 27, but how do you think the puts and takes and the budget impact your outlook here in the next one to two years?

Yeah. So, what you just said at the end there is exactly correct. Putting aside, assume a normal growth trajectory for a defense budget, so let's say 5% a year. We are in great shape to achieve, if not exceed, our forecast for 26 and 27, with it potentially accelerating in 28 and 29. This is with current funding, normal growth. Why is that? Because within that funding, money is moving from previous priorities to new priorities. And Kratos, we are very fortunate that we are extremely well positioned with contracts in programs in certain of the highest priority areas there are. And those are going to be, as I mentioned before, number one is going to be the hypersonic area. That is going to be a significant growth driver for us. Number two, and this is very recent, our space and satellite business, as I mentioned, we were just informed that we have won a brand new just under half a billion dollar program. So hopefully we're going to be able to talk more about that going forward, but we were just informed verbally that we received that. So our space business. Number three that's going to be kicking in later this year, and I expect it to accelerate in 27 and seriously in 28, is the small engines. We are designed in on a number of new cruise missiles. I can go through those. I know you guys know who they are. and I expect us to go on LRIP later this year, and we could get into full-rate production as early as 27. So we are in really, really good shape under the current funding construct. If the budgets go from $1 trillion to $1.5 trillion, I believe if the priorities don't change, I don't believe they will because the threat environment is not going to change, in my opinion. That is going to be very good for us, and I could see it meaning that our numbers could – could actually go up from where they are just because there's going to be more demand than supply of stuff.

That's helpful. And is it fair to say you've seen an acceleration maybe in the pace of contracting activity? I mean, obviously we had a shutdown in the calendar fourth quarter. We've got a new administration that's, you know, had some natural transitions and bureaucratic delays and other issues. But it sounds like now, at least as we've flipped the calendar, we're seeing an uptick in contract activity. And I'm curious if you're seeing that in your business and if you expect it to continue to accelerate as we go through the calendar year.

Yeah. Very recently in the past three weeks, four weeks, we've seen an acceleration. Okay. I believe it's because, you know, a month ago or so, the 26 appropriation was signed. So I think that's what's driving the acceleration that we're seeing it. We are starting to see some of the reconciliation money come in. I think there's 120 of the 150 billion is going to be spent in fiscal 26. We're starting to see that come in. I anticipate that's going to be accelerating this quarter, Q1 and Q2. So overall, right now, Ken, the environment is very good and it's improving for us and I believe for the industry.

Great. Thanks, Eric.

Yep.

Thank you. Our next question is from Colin Canfield with Cantor. Please proceed.

Hey, thank you for the question. Maybe if you could talk about the sensitivity of the tactical drone production quantities that you've discussed, and essentially how do we think about kind of the 40 units per year versus the other branch opportunities that you're considering?

Right. So as I mentioned, we're looking at approximately, to get to a run rate, a production rate, an annual production rate of approximately 40 per year. Think 35 to 45, and so the midpoint was the 40. The number one driver on that is the mix of airplanes. So whether it's going to be a conventional takeoff and landing, a CTOL, whether it's going to be a dual capability, so runway and rail launch, or if it's going to be rail launched. So that's the number one that's going to drive that. Number two is this. It's under the program we have, and I can't get ahead of the customer and I never will, we have a very good idea of what that demand is going to look like beginning next year. And as you know, I've been trying to communicate to you that we have some other potential customers that I think we're going to get specifically for the Valkyrie. We're going to get better clarity on that between now and the end of this year. Those two factors, mix and the clarity we're going to get on some of these other opportunities on types of planes and quantities, that's going to drive where we ultimately end up on our annual run rate. And I want to mention the third key factor is the engine. The long lead on that is about 14 months. And so we have to be cognizant on the engine buy and when the deliveries are relative to when the integration process can occur with the aircraft.

Got it. So it sounds like the 40 is perhaps, you know, two CCA programs and then expansion beyond that, if you win it, is perhaps the third and fourth CCA programs?

No. No. No, I'm not. No. No, don't characterize it that way. Look at it as one. Plus, we're going to continue to have, I call, demonstration airplanes. So science and technology and RDT&E that are going to be sold every year, I think four or five, like I think we have in our plan for this year. And then on top of that, I want to have a number, think of a handful, and we might not be able to get there, a handful of white towns sitting there because this has been part of the keys to our kingdom. Think about it with Airbus and the Luftwaffe. We had airplanes in inventory. They could come over and check out, and we delivered them. And so those are flex factors also, but think one program. If we have additional programs with quantities, we may have to take that number up if we're going to hit deliveries in 28 and 29.

Got it. Got it. Thank you for the color. And then perhaps one follow-up, just another way to have that kind of construct in place. How do you think about kind of the sensitivity – of cash investment versus that production schedule and then relative to the, uh, we'll call it the timing of the risk events that you alluded to earlier on the call, uh, in terms of kind of customer feedback that their time has run out and the probability of that occurring perhaps this year versus next year.

Right. So on the first one, we are, we are very sensitive and cognizant of, of, of cash. So let me give you a specific example. Earlier in the Q&A, I think Josh asked what happens if you guys were private and raised $8 billion. We have a balanced approach, and we're going to stay balanced. We're going to organically grow the company, we're going to satisfy the customer, and we're going to generate a profit for the investors. If we didn't have to worry about the profit part, for a few years and we had a couple of billion dollars, Kratos could absolutely run the table in many of these drone areas because we don't have to develop anything. We got the airplanes. We'd go into production, the customers would buy them. But we have to be cognizant of cash, like you said. So we are very cognizant of the cash and the investing. We are mapping that into the customer funding profiles that we have. On something like an engine, we're gonna have to, there are deposits required, we're gonna have to make deposits and things like that, so that's gonna be cash out. I mentioned the timing of the appropriation, like the 27 appropriation, God willing it happens on October 1st, it probably won't. So that can impact the cash until the appropriation comes through, the customer gets the money and they can pay us. I'm saying a lot, but we have a major simultaneous equation that we're always managing to make sure that we satisfy the contractual requirements and we don't get too far ahead of ourselves on the capital side. Does that kind of answer it?

Great. No, thank you. I appreciate it. Yeah.

Thank you. Our next question comes from the line of Peter Arment with Baird. Please proceed.

Yeah, good afternoon, Eric Gannon. Eric, nice results as always. Hey, thanks. On the SpartanJet engine opportunity, Eric, what's the best way to kind of frame up when things could start to move into kind of production and scale things up there?

Yep. So use $40,000 or $50,000 an engine, okay, somewhere in there per engine. We... Okay, we have been informed by two customers. These are customers. We're designed in, it's our engine, that that platform has been designed around. It might be three, two or three, that they intend on us beginning to go into LRIP in the second half of this year. So think hundreds of airplanes that we start, hundreds of engines, pardon me, that we start to build. with deliveries beginning in 28. If things work out the way I think they're going to work out, and again, go back to the 27 appropriation and timing, second half of 28, we could see like a step function. We're delivering hundreds of engines, and we're getting ready to build thousands of engines to deliver in 29. So it's... It's coming. Peter, one I can mention to you that's out there, that it's public, that we're the engine on if you pull it up. So you may have seen what happened with the PowerJDAM and the maritime strike version with Boeing. In the last two weeks, it was given a new designation. I believe it's called PJDAMXR. And they talked about some of the things I'm talking to you about here. All right. as we're also, I think it's publicly out there, that we are on a number, I think, three of Lockheed Martin's low-cost cruise missiles. We are, I think it's out there, I think I could say we're on one of Northrop Grumman's, and we are on at least a handful, I don't know the number off the top of my head, of these new defense technology guys that have won ETV, Franklin, and Mace. So there's a lot of them out there that are coming, and that's how I see it playing out over the next couple years.

That's great color. And just one last one on, you know, you've given us a lot of details on the growth opportunities. Outside of hypersonics this year, what is kind of the next one or two that you would highlight as the

next main growth drivers for you in 26. so number one is and i i haven't talked about this a lot it's our microwave electronics business you know i i i mentioned i was in israel very recently um i was with israel on the microwave thing specifically i was with israeli aerospace industries and i was with raphael we we are on virtually every one of both of those guys' missile systems and radars. So this is Iron Dome. This is Arrow. This is Spider. This is Sling of David. This is Barack. I can go on and on. So we do microwave electronics for both of those. Our U.S. microwave business, I don't talk about it a lot. It's competitive. We have recently received a production award on a very large, well-known missile program. I'm under an NDA with the Prime. I can't talk about it. We're on that one. So our microwave business is ripping. And as I said in the prepared remarks, virtually every system globally, whether it be a missile, a radar, an air defense, a drone, et cetera, it needs microwave electronics. We are all over it. We are designed in, and we're getting designed in more. And here's the third one. our space and satellite business, and in particular on the national security side. It is amazing what is happening. I mentioned the win we were informed of very recently. Virtually everything we're bidding on, we're winning. And it's because we have a software-defined command and control and telemetry tracking and control system that can interface with these new constellations that are going up, including, very recently, LEO. And that's where the game is at. So our space business is looking great in the second half of this year when we start delivering a bunch of these software-defined products. And then in 28, I think our space business is gonna knock it out of the park. Those are the three, hypersonics, microwave electronics, engines in space. Those are the four.

Got it. Thanks, Eric. Thanks, Anna.

Thanks, Peter. Thank you. Our next question comes from the line of Seth Seifman with JP Morgan. Please proceed.

Hey, thanks very much and good afternoon and good results. Just wanted to ask, just understanding in the fourth quarter, I think the release talks about Valkyrie being a driver of growth. and we saw some good profitability in the unmanned segment in the fourth quarter. So how did Valkyrie play into that, and then kind of what does that mean for Valkyrie in 26? I know you mentioned you weren't including production yet, but how do we think about what is in there?

Yeah, so the Valkyrie-related activity, that is some of the new contracts we just received, that we've just talked about earlier, and that is expected to continue in 2026. Okay.

If we were breaking down the expected growth between the segments, I know you guys have sometimes talked about that, how do we think about KGS versus unmanned?

The lion's share of the growth is expected in KGS.

driven by the hypersonic business and the microwave and space. Those are the three big horses.

Because as we mentioned earlier, as Eric mentioned in his prepared remarks, we're not including any large production type awards in our unmanned systems business. So that is not contributing as much of the growth. So the lion's share of the growth rate is in KGS that we've provided guidance on.

Got it. If I could sneak in maybe just one more bigger picture. I know we saw the groundbreaking on Prometheus. If you could talk or maybe just update us on how things are going there, the investment levels and how the investment is reflected here. And then since that's a JV when we go forward, is that Is that something that's going to be consolidated into Kratos results, or is it something where we're just going to see maybe your share of the earnings?

It would just be our share of the earnings. So thus far, you can see it on the face of our balance sheet. I believe through 12-28, our year end, there's about $5 million of investment that we put into the venture. And then as there are operating results for Prometheus, it will be Our percentage has 49.9%, so you won't see anything on any of the detailed line items on the income statement, so no revenue, no cost of sales, no SG&A or R&D. It will just be one line. Income or loss in Investee, obviously in the beginning of the startup activity, I would think there's gonna be some operating losses because there's gonna be depreciation that's gonna be, it's gonna be a lot of non-cash losses with depreciation of the facilities but it will just be our percentage of that, whatever the income or loss is on the income statement.

That's super helpful. And maybe, Eric, when you think about the growth there, at the time that you did this, I don't know that we knew that all these multi-years were going to be coming. Does that present more opportunities for Rocket Motors to be manufacturing there?

Yes, sir. That's a great question. Last week I was with the Raphael team, and Seth, we were going through the forecast as a result of the new dynamic you just mentioned. The forecast has improved significantly. Let me give you an idea kind of sort of what this looks like. So we're going to be producing, we'll begin in the second half of 2017. And this is a classic high growth model. This is very similar to Kratos. And then when it gets to full rate production, it's projected to be a significant cash generator. Seth, it's going to go something like 100, 200, 400, 1 billion in revenue. Something like that. And so think 2030, 2031 at full rate production. for the first three phases, it's a billion in revenue. Think 20% and divide by two.

Excellent. Thanks very much for all the talk.

Yep.

Thank you. Our next question comes from the line of Pete Skibitsky with Alembic Global. Please proceed.

Hey, good afternoon, guys. A couple of questions. couple questions first one just just to clarify on the 26 growth and unmanned um i want to make sure i understand i thought you guys said your share of mux tech air would be about 120 million and it would be over a couple of years so we should expect unmanned to grow at least 60 million or so in 26 is that a fair assumption just on the mux tech air contract no what what i um in answering

Seth's question, I said it will be relatively flat year over year, so there's not as much growth in unmanned, because as just a reminder, in 2025, we had the Airbus, it was a shipment in 2025, and that was, let's call it roughly 20 million, and it was not on a percent complete basis, so an apple to an apple, so as we move forward, it'll be more on percent complete, so and we have not included a lot of the any production awards in that um forecast so i would i would it's not an incremental 60 million it's roughly i would call it more like flat year over year at what we've assumed in the forecast today got it okay okay fair enough and then last one for me is just um on hypersonics the growth you're going to see over the next couple of years

Um, Eric, I just want to get a sense of which contract vehicles are driving that growth. You know, is mock TB the majority of the growth? And, you know, when you talk about all these Zeus and Oreo SRMs on order, are those all under mock TB? Are those other contract vehicles? And maybe to some extent you could name those other contracts.

Yep. There are, there are others. So number, number one is mock TB. Number two is the Navy program. that's coordinated very closely with the Missile Defense Agency. Very closely. Okay. Number three, it's with the prime. I can't talk about it, but it's with the prime. Hold on. I want to make sure I'm not missing a piece. Those are the big three primaries. MOC-TB, a Navy slash MDA program, Space and Missile Defense Command may be in there somewhere, too, a little bit. And then the Prime, then a big Prime. Okay, got it.

So in Mach-TV will be, you know, Zeus, maybe Orioles, but also all of the other, you know, all of your partners' missiles that they are... Yeah, in Mach-TV, the big drivers for us is Zeus 1 and 2, Air and East,

dark fury, and some other things I can't talk about that we're going to be flying.

Okay. Okay.

Great.

I appreciate the color.

Yep. Thank you. It comes from the line of Andrew Madrid with BTIG. Please proceed.

Diana, thanks for taking my question. Could you maybe provide more color as to what the split between target drone and tactical drone revenue was in the quarter? I mean, was target drones especially impacted and this held the segment back and prevented, you know, I'm just trying to find the puts and takes there because I think I might have expected more from the Muck Tech Air Award than we saw. Maybe just like I said, the puts and takes on the segment.

Yeah, so the tactical revenue for the fourth quarter was roughly 8 to 9 million.

Got it. Got it. Okay, that's helpful. And I guess kind of on the same subject, maybe a little less, but, you know, I'm talking about CCA potential opportunities being the GEK 1500. Are there any anchor customers in place for that platform yet?

I cannot. Sorry, brother, I can't talk about this. I can't talk about it.

No, that's all good. I get it. And then I guess if I may, you know, there was the increment two of CCA that they said that they had selected nine companies for that were in given concept refinement contracts. Can you, you know, disclose whether or not you were one of those companies?

I can absolutely not talk about that.

And then I guess one last one, the drone dominance program, it seems like that's flowing through DRSS as opposed to KUS. Could you maybe just explain the reason why there?

Yep. That's actually a very good question. So in unmanned systems, those are all class four aircraft. They're jets. and then in yep you got and then down in huntsville which is in drss class one one and two very very good question that that's why and obviously because the customers are different the supply chain is different etc etc etc we we left them separate no that makes uh that makes total sense uh all right i'll leave it there thank you both so much thank you

Thank you. Our next question comes from the line of Trevor Walsh with Citizens. Please proceed.

Great, thanks. Hey, Deanna and Eric, thanks for taking the question. Just probably a quick one for me, most of them have been asked already. On the CapEx color that you gave, Deanna, around some of the spend from 25 slipping into 26, which is how we get to that 135, can you just elaborate a little more. Was that a single initiative where it slipped, or was it more broad-based across the spend expected in 25? And then, relatedly, is there anything that could slip kind of into 27 in a similar fashion? Thanks.

Yeah, sure. So, what slipped, it's really two programs. So, it's the Indiana Payload Integration Facility, as well as the Birmingham Advanced Manufacturing Hypersonic Facility. Those were just... construction plans that, as you know, construction takes longer always, so they were originally forecasted for 25, but they slipped in just from a timing perspective in the 26. As far as for 26 moving into 27 right now, since we've just started the year, we believe everything is going to be incurred in 26 that we've forecasted, but some of that's going to be construction related, so some may But at this point, we think that's a good range for 2026.

Perfect. Super helpful. Thank you.

Thank you. Our next question is from the line of Hans Baldo with Noble Capital Markets. Please proceed.

Hello. I'm on the call for Joe Gomes. And so on the second Valkyrie production, the 25 to 28 million in CapEx you're planning for 2026, Can you help us understand the downside protection there? You know, if the contract awards or delivery schedules flip, how exposed Kratos is?

Yeah, right now where we stand right now, I don't believe there's any. There's zero risk. I believe those airplanes will all be spoken for under what we have. I don't. I don't see a risk there.

Okay. Thank you. And with the microwave products, how much is that tied to missile and air defense programs specifically versus other, you know, applications?

Okay. I'm going to at least, at least 50%. Okay. It may be as high as 60. So think 50 to 60. Then think 20% satellite communication, satellites. then think the vast majority of the rest communication systems, comms.

Okay. All right. That's helpful. Thank you. Yep.

Thank you. One moment for our next question. It's from the line of Austin Muller with Canaccord Genuity. Please proceed.

Hi. Good evening. Just my first question here, Eric and Deanna, $400 million incremental for Mach TB, $4.6 billion for space and boost glide interceptors, and $3 billion for hypersonic defense systems was in the big, beautiful bill. Then in the fiscal year 26 appropriations, there was $13.5 billion added specifically for Golden Dome within the Space Force budget. So just thinking about the programs that you're bidding on and the RFP process and when task orders might go out, How much of this funding do you think might be captured in the second half of 26 versus 2027? Right.

So on our related programs, either where we're prime or working with one of the traditionals, the funding on the ones you just went through, it's the vast majority of it is Q2, Q3, and Q4 of this year. And then 27 will be very significant for that funding. That's how we see it.

Okay. And on MUX tax attack air, which you're partnered with Northrop is the prime. I think you alluded to this a little bit earlier, but Northrop is also bidding on the Navy CCA program and the Marine Corps is of course operate off of ships. So, Should we be thinking about potential opportunity for Valkyrie airframes for other agencies within the Navy Department?

What a great question. I cannot talk about that right now. Excellent, excellent question.

Well, great. Thank you very much. You got it.

Our next question comes from Cashin Keller with BNP Paribas. Please proceed.

Yeah, hi, guys. Thanks for squeezing me in here. So I guess on the organic growth outlook for the year, you know, it's a bit lower than the initial 15% to 20% you laid out last quarter. So is that just mathematically coming in higher for the year on revenues, or is there anything else that's driving that lower?

That's correct. That's correct. As I had said in my prepared remarks, we had originally – forecasted 14% to 15% organic growth for 2025, and we came in at 20%. So it is a mathematical.

Yeah, the business is doing great. As you know, we beat the heck out of the Q4 numbers, and now that we have an appropriations bill and the shutdown is done, hopefully 26 will be really good too.

Got it. Okay. And then just on free cash flow, obviously you have a lot of opportunities in investments, you know, in the pipeline right now. But as we think about free cash flow longer term, is there a timeline when you would expect to be kind of more neutral or positive on free cash flow?

Absolutely. I mentioned this on, I'm glad you're asking. I mentioned on the last call, we, uh, We're starting to see it now on the operating cash flow. The operating cash flow is starting to increase, and it's going to start to ramp in 27 and 28. It's just going to depend on the number of new opportunities that we're presented with from the department. And Deanna went through a list. I went through several, and my prepared remarks were, once again, the government, the customer has come to us. and they have said, here's an opportunity. You can get a very long-term, multi-year, decade program if you'll invest the capital to stand up this very specialized facility to build these things. So we definitely have line of sight on it, but I don't want to give you a time, because you guys are punitive on this, and then the goalpost moves because two new opportunities came that generated significant return for the shareholder. So we're cognizant of it. We see it. But right now, with the budgets increasing, the government trying to rebuild the industrial base, and them providing companies like Kratos, the non-traditionals, with significant large opportunities, we're going to go for these right now and build a hell of a company here.

Got it. Thanks for the call.

Yep. Our next question comes from the line of Clark Jeffries with Piper Sandler. Please proceed.

Hello, thank you for taking the question. I wanted to ask around the guidance of the guidance philosophy for hypersonic, you know, mentioning an expectation to double hypersonic this year and 75% 27. You know, where was that compared to a quarter ago? And just maybe can help us level set on the areas where you're not including in the base case hypersonic revenue versus where you are. That'd be very, very helpful. Yeah.

So the number one is the engines and the motors, the 120 motors that are going to start coming in late Q2, early Q3, and those deliveries are going to ramp throughout 27 and 28. Those are tied to missions and launch manifests. And, you know, our aerojet rocket dying on Zeus and ATK, Oriel they've really stepped up and so we are getting much more comfortable now with with that okay number two the glide vehicles there's there's one there's one company in the United States that that has the carbon carbon material for our systems we've placed the long leads we have a number of vehicle systems worth of materials coming in starting in q3 and I believe in Q3, and then that's going to accelerate into 27 and 28. And then on top of that, and I know I've said it a couple times, we now have an appropriation bill, which was very, very important for us. So taking all that, we are really comfortable for the rest of this year and going into next year with the hypersonic business, and I'll say the middle of the fairway numbers we provided you. Now, where you were going on that. I mentioned I'm hopeful that there's another billion dollar sole sourcer I think we're going to get. And let's say we get that by the end of this year. That could be additive to 27. You know, we'd have to take a look at long leads and things like that, but that could be additive to 27. and could provide upside on it.

Perfect. And then just, you know, the number of tactical drone opportunities that you're talking about that are sort of in the pipeline, just wondering if you could frame, you know, group three versus group four kind of opportunities. And then just generally with the context of drone dominator, you know, how interested are you in group one and two in terms of really putting more investment in capital against those opportunities?

Right. We are very, very interested in Group 5. So Valkyrie, Mighty Hornet, Tactical Fire Jet, Airwolf, Mako. That is our expertise, low-cost, high-performance jet drones. So Group 5 is the sweet spot, and that's where I did most of my talking today because that's where the customers are coming to us. Group 1 and 2, like on... drone dominance. We have a business there. We want a slot. I believe we want it because of our design capability and the capability of the drones. We'll see, but that is, and we will make the investment necessary to satisfy any customer requirement, but that is not the strategic focus of Kratos, including from an investment standpoint.

Perfect. Thank you very much.

Yep. Thank you. Our next question comes from the line of Sheila with Jefferies. Please proceed.

Good evening, Eric and Diana. Eric, maybe if we could just one big picture question and one micro one. If we could just dig into the size of your microwave electronics business, just given the production rate increases we're seeing. Can you size it? What was the growth in 25? How do you think about the growth in 26? And what are some of the larger programs driving it?

Deanna will help me on the numbers.

Yeah, so the growth for the year was about organic 17%.

Big programs are Iron Dome, Tamir, Arrow, Barack, The next two are classified. So those are the big five. Two classified and those three I mentioned.

Perfect. And maybe you've given us so much color on this call. I don't know if it's easy to distill the three upcoming catalysts we look for with Kratos.

Yeah. From my opinion... Number one is, as I mentioned, I'm expecting that we're going to receive a very large potential billion, billion dollar plus hypersonic opportunity. I think we're going to get that. That is looking pretty good. I'm hopeful that a customer is going to let us announce or they will announce that we have received another tactical drone CCA type program award. I can't control that. I'm hopeful that happens. That financially and from a company standpoint is a catalyst. Oh, number three, I think it's possible that one of our customers in the jet engine area could announce a very large production contract for the jet engines. That would definitely be a catalyst because that will be a new growth driver leg for the company.

Understood. Thank you so much.

You're welcome.

Thank you. And our last question comes from the line of Gavin Parsons with UBS. Please proceed. Good evening. Thank you.

Good evening. Thank you.

You guys have a lot to talk about.

A lot going on.

A lot going on. Well, I appreciate the question. Two-part question on the framework you talked about for the primes. I guess the first part, does that accelerate your growth or more so give you better visibility into sustaining it for a longer period of time?

For the near term, it's great visibility and sustainment, and we'll see what happens over the next quarter or two relative to timing of things if that will accelerate for us.

And then the second part, you know, if the primes are finally leaning into investment, right, announcing major increases in capex, doing less buybacks, does that result in more direct competition or are they looking at more dual source as they look to grow faster? What's the risk there?

Yeah, we really don't compete with the traditional primes. We rarely do. It's we partner with them. I went through a little earlier that for every one of the major primes that builds missile, radar, air defense type systems, the ones that are going to be involved in Golden Dome, we build the hardware for them. We partner with them. Look with Northrop. We're delivering them tactical jet aircraft. So what the primes are doing now and leaning forward, This is going to be an accelerator for Kratos, is what it's going to be. I mean, take a look at Northrop, and you know that's one of our closest, if not closest, partner. I mean, they talked about it last week or two weeks ago. They're looking to increase production on integrated battle command system by 4X. We build a significant amount of the hardware on IBCS, That would be incredible for us. Take a look at Leidos Dynetics. I believe Tom or his CFO said in their earnings call in their transcript, I believe they said, check me, that by the end of 29 or 2030, they need to deliver three or 400 indirect fire systems. Kratos builds a significant amount of the hardware for Dynetics. for indirect fires that they get them to do integration work on with the weapon system. I can go on and on. So these companies like Leidos Dynetics and Lockheed and Northrop and Raytheon that are leaning forward, especially including these large multi-year orders, there's nothing bad here for Kratos. There's nothing that comes to mind competitively. This could be an accelerator for us going forward.

Very clear. Thank you.

Thank you.

Thank you so much, and this concludes our Q&A session, and I will turn it back to Eric DeMarco for closing comments.

Great. We appreciate you all joining us and taking the time to ask us the questions sincerely, your interest in the business, and we look forward to chatting with you when we report Q1. Thank you.

This concludes our conference. Thank you for participating. You may now disconnect.