Kratos Defense & Security Solutions, Inc. Q4 FY2025 Earnings Call

Good day, everyone, and welcome to Kratos Defense & Security Solutions Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. 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 Kratos Defense & Security Solutions Fourth Quarter and Full Year 2025 Conference Call. With me today is Eric DeMarco, Kratos' President and Chief Executive Officer; and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer. Before we begin the substance of today's call, I'd like everyone to please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential market opportunities, operational outlook, financial guidance and other forward-looking statements during today's call. Today's call will also include a discussion of non-GAAP financial measures as that term is defined Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP.

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 1.3:1 book-to-bill ratio on top of this 20% growth rate, having a record backlog of $1.573 billion, 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 1.3:1 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, 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 a few qualified companies with true 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 war fighter. 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 demands 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 Oriole 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+ 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 sourced 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 have 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' 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 OneSat next-generation software-defined satellite platform. The Airbus OneSat 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's OneSat 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-defined 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 OpenSpace 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' OpenSpace satellite and space-system-focused 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 1.2:1 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 OpenSpace 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 in incentivizing private investment to increase production. Related to this initiative, the Department of War has executed multiple up to 7-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 and these long-term production agreements and plans, which clarity provides companies like Kratos the long-term planning visibility for investment, resource allocation and financial forecast and 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 "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 Kratos 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, with 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 e-VTOL 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 e-VTOL company. Kratos' technology and propulsion systems in the e-VTOL 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 Israel 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 TACAIR 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 TACAIR 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 TACAIR award is approximately $230 million and will be split approximately 50-50 between Kratos and Northrop with an approximate 24-month period of performance, also consistent with our previous expectations. As a reminder, there is initial MUX TACAIR 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 Valkyrie 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. And 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 U.S. 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 2 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 in 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 current approximately 8 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 definitized 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 2 years. We have a family of small drones in this class that we have not discussed previously. This is a Phase 1 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 Firejet 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 a 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 are out of time and that they need to field relevant systems now. Kratos' Anaconda radar, Helios hypersonic, system-related Arc Jet, Prometheus 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 at 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 war fighter; and generating a financial return for our investors. As Deanna will discuss, we have closed on a small tuck-in acquisition, Nomad Global Communication 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.

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 million 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 million to $34 million, reflecting the increased volume and revenue mix, offset partially by continued increased subcontractor and material costs on certain multiyear fixed-price contracts in our Unmanned Systems business, revenue mix, and 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 Valkyrie-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 Norden 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 days 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 days 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 execution, the impact of employee sourcing, hiring, retention and the related costs. Our first quarter and full year '26 guidance includes the estimated contribution from the recently closed Nomad Global Communication 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 impact to certain contract awards program and funding. Our first quarter revenue guidance of $335 million 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 million 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 $1.595 billion 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 multiyear fixed-price contracts, specifically in our Unmanned Systems target drone business, where we have experienced cost growth on 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 in tactical drones, solid rocket motors and our turbo fan and turbo jet 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 forecast and investments in '26 include our funding of the Prometheus joint venture established last year, which we estimate will be ratably throughout 2026 for 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 million to $145 million for 2026 includes approximately $30 million 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.

Our first question comes from Josh Sullivan with JonesTrading.

If I could just start off with a question on maybe some of your perspectives on defense tech valuations in the market, reports of annual or quarterly of $60 billion or $8 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 Anduril or any of the other defense tech companies. I want them to all succeed for U.S. national security. Okay. But we are 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 IGT, I know there's an order from Crusoe for 29 units and tie-ins with OpenAI. But what can you say about other customers and backlogs at this point since you've announced?

Thank you for the question. As I mentioned, there was an interview on CNBC with the CEO of Boom, Blake Scholl, where he discussed the opportunities we have. To answer your question, when Kratos acquired Florida Turbine in 2019, the primary focus of Florida Turbine was industrial gas turbines, which is our expertise. We haven't concentrated on this area as we've directed our engineering team towards developing low-cost engines for cruise missiles and drones. The market for industrial gas turbines has now shifted in our favor, and we are moving forward aggressively. Our top priority is to collaborate with our partner in this area of expertise. We are a merchant supplier, and several companies are approaching us for 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?

Yes. The Department of War is advancing with major prime contractors on air defense and missile systems, including Lockheed and Raytheon, with various platforms involved. Northrop mentioned they plan to significantly increase their Integrated Battle Command System platform. Kratos serves as a merchant supplier for each of these companies, providing ground infrastructure for radars, command and control systems, and battle command systems for nearly all missile and radar systems. This is a significant opportunity for Kratos and our business as we establish long-term supplier agreements with the primes, particularly on programs like THAAD, Patriot, and potential involvement in the Integrated Battle Command System and SHORAD. What’s happening here is very important for us.

Our next question comes from the line of Michael Ciarmoli with Truist Securities.

Nice results, and thanks for all 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. And 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 on the terms of color there.

Yes, 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 tried to present what we think is the worst case for 2026.

Yes. And Mike, a data point on that, take a look. Anduril announced yesterday or the day before, they just received another $40 million or $45 million in Title III funding, where Kratos is right in the middle of that on Title III funding, on IVAS 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?

Yes. The hypersonic franchise is progressing well. I was in Indiana this week for the groundbreaking of Prometheus. Nearby, Kratos' hypersonic integration facility is 90% complete. Additionally, we have started construction on Anaconda, and soon we will break ground on Helios. Our hypersonic programs, the expected additional funding, and the substantial demand for testing are significant. In our base case, this will drive our growth and profitability for the foreseeable future.

Okay. 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 4-month continuing resolution, that would be a home run for Kratos.

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

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 committed to success, and if that involves being the prime contractor on some programs, we will embrace that. I mentioned that we've secured another CCA program where we can take on the prime role. When it makes more sense for us to be a subcontractor, we will do that. Northrop Grumman has exceptional mission systems that they have invested in for the Valkyrie for a long time, and they plan to keep advancing these technologies. Our strategy with Northrop concerning the Valkyrie extends well beyond the Marine Corps. Frankly, I believe our chances of success are significantly better with Northrop as the prime than if Kratos were in that position. Furthermore, it alleviates some risks for Kratos regarding the integration of those sophisticated capabilities, even if it doesn’t reduce costs. We do maintain a healthy profit margin on the aircraft. Lastly, I appreciate your question on this; we are essentially becoming the merchant supplier for tactical jet drones, as we are currently the only one with operational flights. Some newer players have conducted a few flights, but ours have been in the air since 2019, and since we're the only active player, mission system companies are approaching us. If those companies want to lead as prime and that allows us to sell more aircraft quickly, we will pursue that route.

Okay. And that makes sense. Eric, I think that you had talked about in the past of 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 the right way to look at it. Instead, consider $10 million per aircraft for Kratos. It could vary slightly based on the configuration. We currently have three different Valkyries, including rail launched, trolley launched, and conventional takeoff and landing. So, depending on the type of aircraft, the cost might differ a bit, but using $10 million gives you a good estimate for Kratos.

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 in 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 0 recompetes of any size for the foreseeable future. We won the last one last year, command and control space segment for 7-plus years. We are in a very fortunate position because we're a hardware company and an intellectual property company.

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

I hope you're doing well in that gauntlet competition that started 5 days ago. And 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, including Class 1 and some Class 2 drones that we've primarily been developing with the United States Army for many years. Honestly, I haven't talked about this before because I wasn't confident we would succeed in the first round, but we did. The process involves different phases, and since we are winners of the initial phase, we can choose when to introduce our suite of airplanes and drones based on the requirements of each phase. I don't want to get ahead of myself, but we feel optimistic about this, especially as the phases advance, as they align more closely with our unique capabilities. That's all I should say for now, as we may be moving forward with Phase 1 very soon.

And then these would be more aggressive.

Yes.

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

I've been focused on the offensive aspect, Mike. In relation to the Drone Dominance Program, our focus is on the offensive side. We are also engaged in various other counter-UAS programs, where we are developing hardware. Additionally, we have initiatives involving tethered drones, distinct from the fiber optic ones and the first-person view fiber optic, that contribute to CUAS capabilities.

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

Yes. In my view, this collaboration represents a significant opportunity for Kratos. They focus on mobile systems, and recent conflicts have shown that being static can be detrimental. There are numerous upcoming programs, including Nomad, among others that we aim to win together in areas such as mobile command and control, mobile counter-UAS, and mobile systems for managing offensive UAVs. I will be cautious when discussing mobile systems related to missiles. This aligns with our business goals for Nomad. Now, I’ll hand it over to Deanna to address the financial aspects.

Yes. So LTM fiscal year revenue is about $75 million, Mike.

Our next question comes from the line of Jon Siegmann with Stifel.

This is Brock on for Jon 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 the final part for Deanna. Regarding the first part, I want to be very clear. We are prepared for flight demonstrations where we need to take action. We believe that if we succeed, we have prior experience in this area. This isn't an experimental situation; a production decision is expected in the second half of this year, specifically in Q4. The Taiwan agency we are collaborating with mentioned during an interview at the Singapore Airshow a few weeks ago that they are seeking to deploy hundreds, if not thousands, of these systems as a deterrent as soon as possible. That's all I can share for now. I want to highlight that our success is due to the fact that our Tactical Firejet and AirWolf small tactical jet drones have been operational for quite some time. Both are in production, and customers can visit the factory to see them being built and understand the cost structure. We provide actual flight performance data, and this is increasingly important to our customers. As I noted earlier, many customers feel they are running out of time and need to begin deploying solutions now to deter threats, which is the current status of the Mighty Hornet project.

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.

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

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 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 1 to 2 years?

Yes, what you said is exactly right. Assuming a normal growth trajectory for our defense budget, let's say around 5% per year, we are well positioned to meet or exceed our forecasts for 2026 and 2027, with potential acceleration in 2028 and 2029. This is based on current funding levels. The reason for this is that funds are shifting from previous priorities to new ones. At Kratos, we are fortunate to be exceptionally well positioned with contracts and programs in some of the highest priority areas. The first priority is the hypersonic sector, which will be a significant growth driver for us. Secondly, our space and satellite business has recently secured a new program worth just under $0.5 billion, and we anticipate discussing this further in the future. Lastly, our involvement in small engines is expected to ramp up later this year, with acceleration in 2027 and significant growth in 2028, as we have been integrated into several new cruise missile programs. We are looking to enter low-rate initial production later this year, potentially moving to full-rate production as early as 2027. Overall, we are in a very strong position given the current funding structure. If the budgets increase from $1 trillion to $1.5 trillion, and if priorities remain the same—which I believe they will due to the ongoing threat environment—this will likely be very beneficial for us. I can foresee our numbers increasing as demand will outstrip supply.

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 had some natural transitions and bureaucratic delays and other issues. But it sounds like now, at least as we flipped the calendar, we're seeing an uptick in contract activity. 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.

Yes. Very recently, in the past 3 weeks, 4 weeks, we've seen an acceleration. Okay? I believe it's because, 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 billion 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.

Our next question is from the line of Colin Canfield with Cantor.

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?

We're aiming for an annual production rate of about 40 units, with a range between 35 and 45. The main factor influencing this is the mix of aircraft types, whether they will be conventional takeoff and landing, have dual capabilities for runway and rail launch, or just be rail launched. Additionally, while I can't disclose any customer details prematurely, we have a solid understanding of the demand expected to arise next year. I'm also optimistic about the potential for additional customers for the Valkyrie, and we anticipate gaining more clarity on this by the year's end. These two factors—the aircraft mix and the clarity on new opportunities regarding different types and quantities of planes—will determine our final annual run rate. Another crucial consideration is the engine, which has a lengthy lead time of about 14 months. We need to keep in mind the timing of the engine purchases and deliveries in relation to the aircraft integration process.

Got it. So it sounds like the 40 is perhaps 2 CCA programs and then expansion beyond that, if you win it, is perhaps third and fourth CCA programs.

No, don't characterize it that way. Instead, view it as one element alongside the ongoing demonstration airplane. We will continue to invest in science, technology, and research, development, and testing, which will generate yearly sales. Think of having four or five programs planned for this year. Additionally, I want to have a select few whitetails available, as this has been crucial to our success. Consider our partnership with Airbus and the Luftwaffe; we had aircraft in inventory that could be utilized and delivered when needed. These factors are also flexible, but focus on one primary program. If we secure more programs and increase quantity, we may need to adjust our forecast to meet delivery targets in '28 and '29.

Got it. Got it. And then perhaps one follow-up. Just now that we have the 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, we'll call it, the timing of the risk events that you alluded to earlier on the call 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?

We are very aware of cash management. For example, earlier in the Q&A, Josh asked what would happen if we were private and raised $8 billion. We are committed to a balanced approach, focusing on organic growth, meeting customer needs, and generating returns for our investors. If profit wasn't a concern for a few years and we had a couple of billion dollars, Kratos could excel in several drone areas without needing to develop new products since we already have the airplanes ready for production, and customers would purchase them. However, we must remain mindful of cash. We are aligning our investments with customer funding profiles. For items like engines, we need to make upfront deposits, which will require cash. Additionally, the timing of appropriations, such as the anticipated 2027 appropriation, could affect our cash flow until the funding is received and payments are made. In summary, we are continuously managing a complex situation to ensure we meet contractual obligations without advancing too far on capital expenditures. Does that answer your question?

Great.

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

Eric, nice results as always. On the Spartan jet 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?

Yes, we expect to use between 40,000 and 50,000 units in the engine, and we've been informed by two customers who are integrated with our engine platform. They plan to begin low-rate initial production in the second half of this year, potentially for two or three projects. We anticipate starting to build hundreds of engines with deliveries commencing in 2028. If everything aligns as we hope, particularly with the appropriations and timing from 2027, we could see a significant increase in deliveries in late 2028, leading to thousands of engines being built for delivery in 2029. One example that is publicly available is the Powered JDAM, which has recently been renamed to PJDAM-XR, involving collaborations with Boeing. Additionally, we are part of the production for three of Lockheed Martin's low-cost cruise missiles and at least one project with Northrop Grumman, along with several new defense technology companies that have secured contracts. There are many opportunities on the horizon, and I expect significant developments over the next couple of years.

That's great insight, Eric. Just one last question, you've provided a lot of information on the growth opportunities. Aside from hypersonics this year, what are the next one or two main growth drivers for you in 2026?

First, I want to discuss our Microwave Electronics business. I recently visited Israel and met with Israeli Aerospace Industries and Rafael. We are involved in nearly all of their missile systems and radars, such as Iron Dome, Arrow, SPYDER, Sling of David, and BARAK. Additionally, our U.S. microwave business has been competitive, and we've recently received a production award for a significant missile program, although I can't share details due to an NDA. Our microwave business is thriving, as nearly every global system — whether it’s a missile, radar, air defense, or drone — requires microwave electronics, and we are heavily integrated into those systems and gaining even more traction. Moving to our space and satellite sector, particularly in national security, we are experiencing remarkable developments. I mentioned a recent win we were informed about. Almost everything we are bidding on is turning into successes. This is largely due to our software-defined command and control, as well as telemetry tracking and control systems that can connect with the new constellations being launched, including recent low Earth orbit systems. We expect our space business to perform very well in the latter half of this year as we begin to deliver several of these software-defined products. By 2028, I anticipate our space business to achieve outstanding results. To summarize, our focus is on hypersonics, microwave electronics, engines, and space as key areas for growth.

Our last question comes from the line of Seth Seifman with JPMorgan.

Good results. I wanted to ask about the fourth quarter, where the release mentions Valkyrie as a growth driver. We also observed good profitability in the unmanned segment during that time. How did Valkyrie contribute to this? Additionally, what are the implications for Valkyrie in 2026? I understand you are not including production yet, but how should we interpret what is included?

Yes. 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. Okay. And 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.

The growth is primarily driven by the hypersonic business, as well as the microwave and space sectors.

And space business.

Those are the 3 big forces.

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 provided guidance on.

That concludes our question-and-answer session. Eric, you may proceed with your closing remarks.

Yes. I want to thank everyone for joining us today and for your continued interest in Kratos. We look forward to our next update. Thank you.

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